M/I Homes Inc (MHO) 2010 Q3 法說會逐字稿

Good afternoon. My name is Shanelle, and I will be your conference operator today. At this time I would like to welcome everyone to the M/I Homes third-quarter earnings conference call. (Operator Instructions). Thank you, Mr. Phil Creek, you may begin your conference.

Thank you very much, and thank you for joining us. Joining me on the call is Bob Schottenstein, our CEO and President; Tom Mason, our EVP and Corporate Counsel; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, our Vice President and Corporate Controller; and Kevin Hake, our Vice President and Treasurer.

First, to address regulation and fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I would like to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the Company undertakes no obligation to update any forward-looking statements made during this call.

With that, I will now turn the call over to Bob.

Thanks, Phil. Good afternoon, everyone, and thank you for joining us. Housing market conditions during our third quarter continue to be challenging. Demand for new homes in each of our markets was adversely affected primarily by continued economic uncertainty, a lack of meaningful job growth, and generally low levels of consumer confidence. These conditions, combined with tighter consumer and mortgage credit, are also creating challenges for potential buyers and selling their existing home in the current market and are offsetting the current level of affordability, which is very high, along with the historically low mortgage rates that would ordinarily propel a much greater level of demand for new homes.

Demand for new homes during our third quarter was also adversely affected by the expiration of the federal homebuyer tax credit on April 30, which drove levels of new contracts in the first four months of this year.

During the first four months of 2010, most housing markets exhibited or at least began to exhibit some signs of stabilization. However, the rate of new single-family homes sales in the United States declined 32% in May from the prior month following the expiration of the tax credit, and the annual pace of new home sales has remained at these lower levels ever since with approximately 288,000 new single-family sales reported in the United States for the most recent month of August. This compares to 375,000 new home sales for all of 2009, which was at that time the lowest year on record, and represents a 71% decline from the peak of nearly 1.3 million new homes sold in 2005.

In line with these conditions, a number of homes that we at M/I Homes delivered, along with our new contracts for the third quarter, each declined by more than 20% when compared to the third quarter of 2009. Despite the challenging conditions and lower volume levels, our third quarter did contain a number of positives. Our net loss declined $2 million from $21 million in last year's third quarter as we continue to improve our results and take steps needed to return to profitability, even at these current lower volume levels. We incurred a $2.2 million operating loss from the quarter, an improvement from a $5.3 million pretax loss from operations in last year's third quarter, and our EBITDA was $7.2 million, which represents our fifth consecutive quarter of positive EBITDA.

Our operating gross margin for the quarter was 18%, the highest level in three years. Sequentially our margins improved by over 200 basis points, primarily due to a higher gross margin contribution from new communities, which Phil will talk about a little later in the call, as well as the benefits we are realizing from our hard cost reduction efforts and the value engineering of our homes.

We also achieved a decline in our total selling, general and administrative expenses for the quarter when compared with the prior year. We continued to focus and -- closely focus on and closely monitor all of our overhead and selling expenses, and given the persistence of difficult conditions in the market and a lower sales pace, we continue to aggressively focus on areas where we can cut costs, including the further reduction in headcount where appropriate to match current volume levels.

As we managed through the current weak market conditions, we have continued to focus on our core business strategies -- reinvesting cautiously in the replenishment of our land inventories and maintaining tight controls on expenses while continuing to operate with low leverage and strong liquidity on our balance sheet.

We ended the quarter with $92 million of cash, zero outstanding borrowings under our $140 million home building credit facility, and a 30% net debt to capital ratio. Additionally we have undertaken efforts to refinance our senior notes, which will further improve our financial flexibility by substantially extending the duration of that debt.

I'm also pleased to report that during the quarter we achieved exceptionally high J.D. Power rankings in both customer satisfaction and new home quality. Specifically we were ranked number one in the DC market in both categories. We also were very pleased with our superior results in Florida and Charlotte. In Tampa, M/I Homes ranked number one in new home quality and placed second among all builders in customer satisfaction. Orlando we ranked third out of all builders. These are very impressive results in these highly competitive markets and represent the highest scores we have ever achieved.

As those familiar with our Company know, customer service and new home quality are deeply embedded core values of M/I Homes and have been an intrinsic part of our mission since our founding in 1976.

As housing markets begin to recover, these competitive strengths will increasingly become differentiated factors that we believe will be positively reflected in both our sales and profitability. Although we remain cautious about the immediate future, we believe that we are on a path to achieving profitability and that we have well positioned our Company to capitalize on opportunities that will occur as housing markets begin to recover.

However, it should be noted that the timing and the degree of a market recovery remain uncertain, and we will thus continue to manage both cautiously and conservatively.

Let me take a minute to briefly review our markets before turning things back over to Phil. First, the Midwest region where we operate in Columbus, Cincinnati, Indianapolis and Chicago. The housing markets throughout the Midwest remain challenging; however, there is increasingly less competition in these markets as a number of sizable competitors have either exited the markets or gone out of business. This is particularly true in Chicago where we are making very decent returns. Sales and closings for the quarter in our Midwest markets were down approximately 25% when compared to last year's third quarter. We opened four new communities during the quarter, mainly in our Indianapolis market. Additionally we were able to close out six older communities which had lower than average margins. Our third-quarter gross margins on our newest communities in both Chicago and Indianapolis were above our target of 20%. At quarter's end we owned approximately 4200 lots in the Midwest versus 4400 a year ago.

Florida, where we operate in Tampa and Orlando, market conditions also continue to be challenging. New contracts and closings in this region were each down approximately 25% quarter over quarter. Third-quarter gross margins on our new communities in Tampa were over 20%. At quarter's end we owned approximately 1500 lots in Florida versus approximately 1600 lots a year ago.

The mid-Atlantic region where we operate in Charlotte, Raleigh and DC -- our new contracts and closings in the mid-Atlantic region were down approximately 15% compared to last year's third quarter. At the end of the quarter, we owned approximately 2100 lots in the mid-Atlantic region versus 1300 lots a year ago or an increase of 800 lots. We feel very good about this increase, and we feel very good about our land position in the mid-Atlantic region. The region continues to show some slight but nonetheless encouraging signs of improvement. Third-quarter gross margins on new communities in both Charlotte and DC met or exceeded our goal of 20%, and our new communities in Raleigh are also performing very close to plan. Our market share throughout the entire mid-Atlantic region increased during the quarter.

Finally, just a brief word about our newest market, Houston, where we previously announced that we were entering the Houston market earlier this year. We currently own lots in one community or are in the process of negotiating the purchase of finished lots in several additional communities, and let me just say that we are very optimistic about our future in the Houston market.

And with that, I will turn it over to Phil to review our financial highlights.

Thanks, Bob. New contracts for the third quarter decreased 21% to 489 with a net absorption rate of 1.5 sales per community per month. Contracts were down 23% in the Midwest, down 25% in Florida, and down 14% and the mid-Atlantic, and our cancellation rate for the third quarter was 22% compared to 2009's 20%.

Our traffic for the quarter increased 3%. Our sales were down 14% in July, and traffic was down 2%. Sales were down 29% in August, and traffic was up 1%, and our sales were down 20% in September, and traffic was up 13%. Our active communities increased 3% from 105 last year to 108 at the end of the quarter. And the breakdown by region is 63 in the Midwest, 21 in Florida and 24 in the mid-Atlantic.

During the quarter we opened nine new communities while closing 10. At September 30 about 40% of our active communities are new communities, and we define new communities as those open since January of 2009. We delivered 515 homes in 2010's third quarter, down 23% when compared to last year, and we delivered 69% of our backlog this quarter compared to 60% last year. Our backlog of 722 homes is 32% lower than a year ago; however, our average sale price and backlog of $261,000 is 5% higher.

Turning to impairments, in the third quarter, we recorded pretax charges of $1.8 million with about 85% of the impairment in Florida. For the nine months ending September 30, 2010, total charges were $11 million, and this compares to $32 million for the nine months ended 9/30/09. Our gross margin, exclusive of the impact of impairment and imported drywall, was 18.1% for the quarter and represented our highest level in three years. Our new communities are contributing gross margin that is about 400 basis points higher than our older communities.

G&A expenses for the quarter were $13 million, decreasing 9% from last year's level. We reduced our headcount by 8% in 2010's third quarter.

Selling expenses for the quarter were flat at $12 million compared to a year ago, even though our sales and closing volumes were lower. Our selling expenses continued to include increased promotional and advertising expenses due to market conditions and investments made to open new communities. Interest expense increased $650,000 for the third quarter and decreased $130,000 for the first nine months of 2010 compared to last year. The increase in the third quarter was primarily due to less capitalization of interest as a result of having fewer communities that are in the active stages of land development. Interest expense was 1.4% of revenue for the quarter, and interest incurred was $3.9 million.

We generated our fifth consecutive quarter of positive EBITDA, producing $7 million of EBITDA and covering interest 1.9 times for the trailing four quarters. We had $21 million in capitalized interest on our balance sheet at September 30, 2010, compared to $25 million a year ago, about 3% of our total assets. And we have recorded a non-cash after-tax charge of $763,000 in the third quarter for a valuation allowance related to our deferred tax assets. At September 30, 2010, our gross deferred tax asset is $123 million and is fully reserved.

Now Paul Rosen will address our Mortgage Company results.

Thanks, Phil. Our mortgage and title operations pretax income decreased from $2 million in 2009's third quarter to $1.5 million in the same period of 2010. The decrease was primarily the result of a decrease in loans originated from 564 in 2009 to 399 in 2010, along with enhanced financing being offered to M/I Homes customers to help generate sales, lowering our overall margins on originations.

As a result of increased use of conventional financing, the loan to value on our first mortgages for the third quarter was 87% in 2010 compared to 89% in 2009's third quarter. 58% of the loans closed were FHA/VA and 42% were conventional. This compares to 66% and 34% respectively for 2009's same period.

Over 90% of our communities are eligible for FHA financing. Overall our average total mortgage amount was $223,000 in 2010's third quarter compared to $199,000 in 2009's third quarter. The average borrower credit score on mortgages originated by M/I Financial was 731 in the third quarter of 2010 compared to 732 in 2010's second quarter. These scores compared to 729 in 2009's third quarter and 723 in 2009's second quarter.

Our mortgage origination operation captured 82% of our business in the third quarter compared to 2009's 88%. At September 30, 2010, M/I Financial had $24 million outstanding under the $45 million MIS credit agreement.

Recently much attention has been given to put-backs in the markets industry. With respect to M/I Financial, we believe we have consistently operated within all regulatory requirements, administrative guidelines and requirements of the government-sponsored entities and other purchases of our loans.

In the normal course of our business, we received inquiries concerning underwriting matters, and in 2010 we have received 20 such inquiries. We thoroughly review and respond to each inquiry. Even though we are not required to do so, we routinely engage an independent third-party to review the files and information related to the origination of each mortgage. Many of these inquiries are without merit, and approximately half of the inquiries in 2010 are resolved in our favor. The

balance of the inquiries were resolved through negotiations or are pending. Our reserve at September 30, 2010, with respect to these matters was $1.2 million. Our comparable reserved at December 31, 2009, was $1 million. M/I Financial has not repurchased any loans in 2010.

Now I will turn the call back over to Phil.

Thanks, Paul. As far as our balance sheet, we continually focus on our capital structure, cash and liquidity. We ended the quarter with $92 million of cash, which includes $48 million of restricted cash. This compares to a year ago total of $103 million of cash, which included $78 million of restricted cash. Our operating cash flow for the quarter was $26 million prior to land purchases of $36 million and land development spending of $15 million. We estimate that our cash balance at year-end will be approximately the same as our cash balance at September 30.

Included in this estimate is a planned reduction in our spec homes during the fourth quarter and also a lower amount of expenditures on land in the fourth quarter. Lots owned and controlled as of 9/30 totaled 9657 lots, 81% of which were owned and 19% under contract. We owned 7808 lots, of which 54% are in the Midwest, 20% are in Florida and 26% in the mid-Atlantic. A year ago 61% of our owned lots were in the Midwest, and 17% were in the mid-Atlantic, an indication of our new community acquisitions being weighted toward DC and North Carolina over the past year.

Total homebuilding inventory at 9/30/2010 was $488 million, a decrease of $6 million below prior year levels. Our unsold land investment at 9/30 is $263 million, which represents 7808 lots, and that is compared to $260 million, which was 7300 lots at 9/30/09. Compared to a year ago, raw land and land under development decreased 11% and finished unsold lots increased 18%.

At September 30, 2010, we had 134 million of raw land and land under development and $129 million of finished unsold lots. Our unsold finished lots total 2964 lots with an average cost of $43,000 per lot, and this $43,000 average lot cost is 16% of our $261,000 backlog average sale price. And the market breakdown of our $263 million of unsold land is $117 million in the Midwest, $40 million in Florida and $106 million in the mid-Atlantic region.

Year-to-date we have spent $94 million on land and $30 million on land development. About 30% of our land purchases have been in the Midwest, about 10% in Florida and 60% in the mid-Atlantic. And, as to the type of our 2010 land purchases year-to-date, about 50% have been bought, finished lot purchases, about 30% had been raw land deals, and 20% had been finished lot pickups under option contracts.

At the end of the quarter, we had a $77 million investment in specs, 306 specs that were completed, and 324 specs in various stages of construction. This translates into 5.8 specs per community. And of the 630 total specs, 319 are in the Midwest, 112 were in Florida and 199 are in the mid-Atlantic. At September 30, 2009, we had 388 specs with an investment of $42 million, and at June 30, 2010, we had 576 specs with an investment of $59 million.

At 9/30 the Company had no borrowings under its $140 million credit facility. Our borrowing availability under this facility is currently $34 million based on the value of current mortgage properties. The availability can be increased by pledging additional properties. During the quarter we added an additional $9 million of secured letter of credit facility, bringing us to a puddle of $54 million of availability under five separate facilities. The total cash pledged to secure letters of credit under these facilities was $36 million at September 30, comprising a significant portion of our $48 million of total restricted cash.

Finally, to comment on our $200 million of senior notes that matured March of 2012. As we announced on October 14, we had commenced a tender offer to refinance these senior notes with a new issuance that will extend the maturity of our debt and further improve our financial flexibility. The tender offer is contingent upon various items, including the placement of new senior notes. As stated in our release, the early tender deadline is October 27, and the tender offer expires on November 10.

This completes our presentation. We will now open the call for any questions or comments.

(Operator Instructions). Joel Locker, FBN Securities.

Good quarter. I had a question on the community count. I remember at the end of the second quarter you said probably 115 by year-end, but I guess it dipped down a little bit, and I was wondering if you are still comfortable with that?

Yes, if you look at our community count so far, we ended last year at 101 at the end of 2009. I think we had talked this year about being up about 10% by year-end. That is kind of what we had talked about. And we ended 9/30 at 108, and that is kind of what it still looks to us to be probably in that 10% increase range for the year.

Right. Got you. And then the land developments, that has grown a little bit in the last couple of quarters. I just wanted to see where you were developing most of the land. Was it specific to a certain region?

It has really gone up a little bit due to seasonality, and that is primarily been fit in our mid-Atlantic region, DC in particular, also some in Charlotte and Raleigh.

Charlotte and Raleigh. And just the last question and I will jump in the queue, is just on your senior debt issuance, what duration are you looking at? Are you looking more like five years, eight years, 10 years, or are you still exploring all the options, or have you narrowed it down?

We are going to look at different options and make that decision when we move forward after we understand what we've got in the tender offer.

Ivy Zelman, McGill, Zelman & Associates.

It is actually Alan on for Ivy. Congrats on the quarter. A question on the margin. The detail there was really helpful, and obviously the sequential improvement was definitely stronger than we were looking for. I'm just curious when you look out into your backlog and obviously the new communities coming online and the change in market conditions you have seen over the past few months, where do you think that goes from here? Is the benefit from the communities enough to offset whatever type of tick up you have seen on the incentive front coming down the pike in the next few quarters?

Phil, why don't I take a crack at that, and then you can maybe -- you or the others can add something.

First of all, that is a really hard question to answer. Because for all the reasons that we talked about and just some of our general comments, there is just so much uncertainty. There has been a little discounting in the market by some builders and probably a slight amount by us in some cases. Although in many instances I'm not sure it does anything to further incent demand. So I'm not sure how much more of that we will see. We being us within our own company.

It is very hard to know whether looking out ahead, it is hard for us to provide, I think, much clarity or visibility on margins. Phil, I don't know if you have anything you want to add to that.

Not really. It is just very difficult. We are working on a lot of different areas to try to totally improve our margins. But, as we have said, things continue to be very choppy and demand week.

We have made tremendous progress with our sticks and bricks costs, our house plans, the efficiency of our plans, finding ways to improve margins, a 1/10th here, 1/10th there without sacrificing quality. We are going to continue to look at that as well, although I think probably most of the low fruit has been picked when it comes to that item. But it is just a hard question to answer -- (multiple speakers)

I understand it is always tough to take the crystal ball out. I guess just to --

If we knew the answer to that, we would probably provide earnings guidance.

Got you. So I guess a follow-up on that, though, is just on the spec count. It looks like the finished spec count did go up a bit sequentially. I'm just curious about something that you guys had planned heading into the year or maybe the cancellations got that number of little bit higher than you were looking for? And thinking about the margin differential on those homes versus the to be built, if you can quantify that for us, that would be helpful.

The only thing I will say before Phil enters it in more detail is that quite often what we have seen is that the margins on our spec homes are slightly lower than on the to be builts.

Phil, I don't know if you got anything else you want to add in terms of the number of specs.

The comment on the number is that we are at actually a little below our internal quote at September 30 taking into account our communities and a lot of different things we are balancing. We did say in the call that it is our plan to reduce those spec levels by year-end, but that's the only comment I would add.

Josh Levin, Citi.

Thank you for the color on the mortgage put-backs. It is very helpful. You have said you have had 20 such inquiries in 2010 so far year-to-date. How does that break down among the quarters? Has it accelerated in the third quarter versus the second and first quarter, or was it evenly split up?

You know I looked at a lot of different numbers, and I don't know if I specifically looked at the flow that came in each quarter. But it doesn't -- if there is a difference, it would be very, very slight. I think the flow through the year has been relatively even.

Okay. Thank you. And, on a separate note, you talked about how credit has been tightening for buyers. We know that some of the banks have raised their FICO scores may be 620 to 640. Is there anything beyond that that you are referring to in terms of tighter credit?

No. I mean we have moved to a 620, 640 credit score on our loans with the marketplace. But beyond that, no, there really has not been any additional tightening.

And just the follow-up there, 620 to 640 did you find that 20-point difference really squeezed a material number of buyers out of the market? Can you measure that?

Yes, we actually can measure it because we go right back into our pipeline and run what we have at 620 to 640. It was about 3% or 4% of our buyer selling to that category. But some of that is not really a total loss. Within a couple of months, someone can certainly move up 5, 10, 20 points with a little bit of work on their credit. So those buyers may not be completely lost from the marketplace. It just may take them an extra 30 or 60 days to purchase a home.

Alex Barron, Housing Research.

I wanted to ask you regarding your SG&A, I thought I heard you say that you reduced the headcount by 13%. Was that quarter-over-quarter or year-over-year?

No, what I said was that G&A expenses for the quarter were $13 million, which was a decrease of 9% from last year's, and we reduced our headcount by 8% in 2010's third quarter.

Okay. So that 8% -- I'm sorry I got the wrong number. That 8% is year-over-year?

8% is what we reduced it in the third quarter.

Okay. Versus second quarter then?

Versus the second quarter.

Now can you give me an idea of where you guys are finding -- where those cuts are coming from? What type of areas?

You know, Alex, they really come across the board. We pretty much cut our headcount almost everywhere. Bob went through the markets. Our better markets tend to be our mid-Atlantic. So less of the cuts came from there. But where our business is down -- Midwest, Florida -- obviously that affects Corporate and Mortgage Company, so it has kind of been cuts across the board unfortunately, Alex.

Okay. Yes, I was just trying to figure out, I guess, where we could expect -- what line item the savings might come from going forward. But obviously that is unfortunate.

And then, as far as the debt refinance, any sense as to what the interest rate might be, or you guys don't know until you actually price it?

We don't really know until we actually get out in the market to price that.

Okay. Is there any chance that you could just fund it with the line of credit in the meantime, and then if you don't like whatever the market is at in the near term just come back at a later date?

We are not going to really comment on different alternatives and strategies. I mean right now we have put out an announcement that we are doing a tender offer, and we tend to issue new notes to finance the proceeds that we will need for that tender offer.

Jay McCanless, Guggenheim Securities.

I wanted to ask on the ASP, with the discussion that you all had about the mid-Atlantic, it sounds like potentially more communities going there. Should we expect an upward trend for the ASP going into 2011, or what are you thinking on that issue?

We don't give any projections on that. I mean if you look at September of 2009, the retail price in backlog was 248. If you look at the retail price at September 30, 2010, it was 260. And when you look at the breakdown of the 260, you are exactly right. The mid-Atlantic is 315, the Florida area is 220 and the Midwest is 248. We are buying more land, developing more ground in the mid-Atlantic, but it is just really hard to make a projection based on market conditions.

Okay. And then my other question, just going back to the specs for a second, I think you said the spec count worked out to roughly 5.8 per community. What is a level that you all are comfortable with with specs, and will that level flex up or down depending on how many communities you open next year?

You know, if you look at us, we were 5.4 at the end of 2009. We were 5.3 at the end of 2010 -- at the end of June 2010. Now we are at 5.8. Depending on the marketplace, we could be in the 4 to 6 range. But, again, we do have a plan in place to bring that level down in the fourth quarter from where it is right now.

Michael Smith, JMP Securities.

Just real quick, I'm wondering if you can give any color on what you have been seeing in the land market over the last maybe six to 12 months? We have been hearing that since the sales slowed down, prices have come down quite a bit, and they were up pretty significantly in the first maybe four or five months of the year. I'm wondering if that is your sense as well, and just anything you can tell us about what has been going on really since, say, May would be real helpful.

Well, I will take a crack at part of that. Number one, every market is different. And number two, our knowledge is predicated upon how involved we have been in looking for land in a particular market. There are certain markets where we have really not been looking for new deals because we have got enough on our plate already.

Having said that, for the first three or four, five months of this year, particularly in DC, things were extremely competitive. They may be slightly less so now. But that has probably been one of the more competitive markets for land deals. I'm not sure that I could give an instance where a price has dropped in an kind of a fashion.

I think that the appetite for land in some of the other markets, though, at least where we have been looking has slowed. Clearly I would say that in Orlando and in one or two instances on some deals that we were looking at where we know that builders have walked away or decided not to go forward with deals that they had the right to go forward on.

I think that there is a lot more caution. I think if you wanted to paint it with a broad brush, even though every market is different, the brush would look like a lot more caution, a lot less certainty, a lot less visibility with regard to being able to achieve expected hurdle rates given the drop-off in volume and all of the macro conditions that we are trying to understand as we go through this period of time. So I think things have clearly slowed down, and from a macro standpoint, the markets that I mentioned are the ones that we would have the most knowledge about.

Phil, I don't know if you want to add anything.

NO, not really.

You guys, just one real quick follow-up. Do you have a sense that it is more public or private guys that are walking away from some of the deals, say, in Orlando that you were talking about?

Well, I don't know that I have all that detail, but I know in some instances where the publics have; I know of some instances where we have decided not to go forward with deals. I think the publics have the greatest access to capital and have probably been the most in play when it comes to looking at deals. But I just think there is a lot more caution right now, and it stands to reason.

Jim Wilson, JMP Securities.

Sorry for the multiple JMP questions here. Just one follow-up. Good quarter.

I'm surprised that you're not getting ready for the World Series.

No, that will be a couple of days. Pricing trends, when you talked about it as a whole, that pricing trends regionally as far as what you have seen lately, is pricing holding up better in the greater DC area, or is it the impact of all of the various economic and tax being equal felt across geographies?

I think that pricing is still very challenging as we open new communities. We are trying to do a much better job of having the right products in the right location with the best sales reps. So we are trying to do all we can to get the best price and the highest margin that we can. In general, are things better in the mid-Atlantic than in the Midwest or Florida? The answer is yes. And, as we said, our margins are about 400 basis points better in our new communities, but there is not that many communities where you have a lot of pricing power. Demand continues to be very choppy.

And I would just add one other. The industry numbers how much your traffic was up in September, 13%, although it did not look like the actual order pace was any different particularly than the prior months. Anything, people getting out to shop or looking but still not following through? Is that the best way to describe it or anything you could tell from the better traffic pattern?

You know, Jim, like you said, our traffic was up 13% in September versus being down 2% in July and up 1% in August. We did spend a little bit of time and money focused on a payment promotion in September based on the low mortgage rates that are out there. And maybe the promotion that we had in September probably helped us a little bit. But like you said, from a sales standpoint, our sales did not move a whole lot. We continue to be very, very focused on a subdivision basis to what makes the most sense, but again, conditions continue to be very challenging.

Joel Locker, FBN Securities.

Just on the -- do you have a number for impairment reversals that came through in the third quarter?

It is not something that I have handy. That is something we can get back to you off line.

And then on the other one, on the $4.3 million income tax receivable, is that -- were you getting that in the fourth quarter, or was that more down the line?

We filed the return to receive, and it is not all -- it is not the entire $4.2 million. Some of that will fall into 2010, but we filed the return to get the money. So it is just a matter of when the IRS gives it back to us.

Right. Got you. And just the last thing, on October sales have you seen anything meaningful difference than, say, September?

We are not making any comments on that at this stage.

Alex Barron, Housing Research.

I guess you mentioned that people are walking away from deals, and the market has slowed a little bit. I'm just kind of curious as far as your underwriting criteria. What is the minimum sales pace and margins you guys would be willing to underwrite a deal to?

You know, Alex, our bizarre hurdle rates really have not changed as far as we try to get 20% gross margin. We try to get 2.5 sales per month out of our new communities, and we try to get an ROI of 20% in that community, which includes interest being built in. And, as Bob commented as he went through the regions, in the majority of our communities that are new, we are achieving those returns. So those are the ones that we are still trying to get in our new deals.

And then as far as the [returns], I guess you mentioned a little bit. But in some Western markets were you guys don't operate, I have seen some builders get pretty competitive recently. They have offered, like, rate buydowns of 3.75% for 30 years and broker commissions of 5% to 7%. Have you guys seen similar deals or things that competitive over there or not as much?

I don't even think that is that competitive. We have seen mortgage buydowns and mortgage programs offered, and they just don't seem to make that much of a compelling difference.

So have you found what does drive more traffic then?

Jobs.

Okay. Thanks.

There are no further audio questions.

Well, thank you very much for joining us, and we look forward to speaking to you with year-end results. Thank you.

This does conclude today's conference call. You may now disconnect.