M/I Homes Inc (MHO) 2011 Q3 法說會逐字稿

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

Thank you very much for joining us today. Joining me on the call is Bob Schottenstein our CEO and President; Tom Mason our Executive Vice-President; Paul Rosen, President of our mortgage company; Ann Marie Hunker, our VP and Corporate Controller; and Kevin Hake, Senior VP.

First to address regulation for disclosure we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant non public information with you directly. And as to forward-looking statements, I want 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.

Thank you, Phil. Good afternoon, everyone and thank you for joining us to review our third quarter results. As everyone knows, general economic conditions remain challenging with continued high levels of unemployment, weak job growth, concerns with the global economy, and depressed levels of consumer confidence. All of these continue to contribute to a weak housing market and historically low levels of demand for new homes.

Despite these challenging conditions we believe we are making real progress in our return to profitability. We reported a pre tax loss from operations of $3 million for the third quarter of 2011 compared to a pre tax loss of $2.2 million from operations in last year's third quarter. The principal reason for the slight increase in our operating loss for this quarter relates to higher interest expense, and Phil will address that in more detail in a few moments.

On an EBIT basis our home building operations are showing tangible progress and the pre tax contribution for the third quarter from our home building operations improved over last year. Prior to the impact of impairments and also the recovery of drywall related charges which we took in last year's third quarter. The number of homes delivered for the quarter increased 13% compared with a year ago and revenues increased by 4%.

Our operating gross margin improved 90 basis points sequentially, going from 17% in the second quarter to 17.9% in this third quarter. Since last year's fourth quarter our operating gross margins have increased by 180 basis points.

Our new contracts for the quarter improved by 20% compared to last year's third quarter and our backlog at quarter's end was 16% higher than a year ago. Our new communities have significantly contributed to our improved new contracts, increase in backlog and improving adjusted gross margin, with 60% of homes delivered during the quarter coming from new communities.

Year-to-date we have opened 37 new communities and plan to open ten additional communities by the end of this year. About two thirds of our active communities are what we call new. That is, communities that have opened for sale since January 1, 2009. Clearly our new communities are an important part of our return to profitability. Generally, because of better sales pace and much better operating margins.

Our pre tax loss from operations in the third quarter equals about 2% of revenue and improved from a $3.5 million loss in the second quarter and improved further from a $5.8 million pre tax loss from operations in the first quarter. Clearly the trend is in the right direction. We have made progress through better performing communities and reduced expenses even though the housing environment has not really improved. Though we are not satisfied with continuing to report losses, even on a small percentage basis, we are firmly focused on continuing taking the steps necessary to return to profitability.

Now, I would like to talk a little bit more about our specific regional housing markets and their performance. First the Midwest region. We have experienced a modest falloff in sales conditions in our Columbus market over the past few months while Cincinnati continues to be challenging for us with respect to both sales and margins. As a result of very well located and very well priced and well purchased communities, Chicago continues to be a very strong performer for us despite otherwise difficult market conditions in the Chicago market.

Indianapolis is largely holding steady and we are generally pleased with our performance there. Our deliveries in the Midwest region declined 7% for the third quarter compared to last year while new contracts in the Midwest were up only 1% for the quarter. We ended the quarter with 60 active communities representing a 5% decrease from the end of last year's third quarter. This decrease is in line with our strategy.

We have grown our investment in communities by design in Chicago which as I said is one of our best performing divisions while at the same time we have continued to reduce our investment levels and manage in a much more defensive and cautious fashion in Columbus and Cincinnati. As to Indianapolis as I said it is holding steady for us.

Next the southern region. This is comprised of our operations in Florida, which are in Tampa and Orlando, and Texas where we operate in both Houston and San Antonio. We entered the Houston market in 2010 and we closed our acquisition of a San Antonio builder at the start of the second quarter of this year.

In Florida market conditions and demand for new homes continue to be challenging in both the Tampa and Orlando markets, though we have seen some improvement recently in these markets, particularly Tampa. Our new contracts in the southern region increased 60% in the third quarter compared with last year primarily due to our new Texas operations. We delivered 162 homes in the southern region for the quarter, more than double last year's volume. Our backlog is also nearly double the level from last year. Again, largely as a result of our San Antonio acquisition and Houston startup.

We ended the quarter with 25 active communities in our southern region, our total lots under control is up 40% from last year.

Finally, the mid Atlantic region, which is Charlotte and Raleigh, North Carolina, and the greater Washington, DC, market. No question this continues to be our strongest performing region in terms of margins and profitability. Though very competitive, Washington, DC,remains one of the strongest housing markets in the nation. Raleigh is also a very good performing market at this time, relatively speaking, and it continues to be one of our best performing divisions.

Our Charlotte division is also selling well though with slightly lower margins than either Washington, DC, or Raleigh. Total new contracts in this region were up 26% for the third quarter compared with 2010 and deliveries were flat, though our backlog is up 18% in units.

We ended the quarter with 35 active communities in our three mid Atlantic markets, representing a 46% increase from last year, all as a result of our continuing strategy to shift more of our geographic focus primarily away from the Midwest and into the mid Atlantic region. Our total lots under control in the mid Atlantic is up 15% from last year.

Now, before I turn the call over to Phil, I would like to just make a couple of concluding comments. Broadly speaking, we don't anticipate much improvement in the overall housing environment in the near term. From an operating standpoint, we have adopted somewhat of a "we'll know it when we see it" approach in terms of improved conditions. In other words, while we strongly believe housing conditions will improve in the future, until such time as we see tangible sustainable evidence of improving conditions we will continue to manage in a somewhat cautious and defensive fashion.

At the same time as I have previously stated, we are absolutely convinced that we are taking all the right steps needed to return to profitability. We continue to grow market share in nearly every one of our markets. Our product and product quality is very strong. We continue improving our merchandising, our customer service scores are the highest in Company history and our management teams are very solid. We are very excited about our future. And with that I will turn it over to Phil.

Thanks, Bob. New contracts for the third quarter increased 20% to 587 with a net absorption rate of 1.7 sales per community per month. By region, contracts were up 1% in the Midwest, up 60% in the south, and up 26% in the mid Atlantic.

Our cancellation rate for the third quarter was 19% compared to 2010's 22%. Our traffic for the quarter increased 9%. Our sales were down 4% in July while traffic was up 9%. Sales were up 26% in August, and traffic was up 12%. And our sales were up 43% in September and traffic was up 6%. And about 50% of our third quarter sales were from specs.

Our active communities increased 11% from 108 last year to 120. And the breakdown by region is 60 in the Midwest, 25 in the South and 25 in the mid Atlantic. During the quarter, we opened 11 new communities while closing six. Our current estimate is to end the year with about 125 communities, up about 15% from the beginning of the year.

And as of September 30, nearly 65% of the communities that we are selling out of are new, and again we define new communities as those opened since January of 2009. We delivered 582 homes in the third quarter, up 13% when compared to 2010's 515 deliveries and 60% of our third quarter deliveries were from new communities compared to the 50% in the second quarter.

We delivered 70% of our backlog this quarter, compared to 69% a year ago. Our backlog of 838 homes is 16% higher than a year ago, and our average sale price in backlog of $266,000 is 2% higher.

In the third quarter we recorded pre tax charges for impairments of $1.7 million, the majority of these inventory charges were from our older Midwest assets. Our gross margins, exclusive of the impact of impairments, was 17.9% for the quarter, up 90 basis points over 2011 second quarter.

G&A expenses for the quarter were $13.9 million, increasing $800,000 when compared to 2010's third quarter. This increase is primarily due to about $1 million of additional spend related to our entry into our two Texas markets.

Selling expenses for the quarter were $11 million, down 4% from a year ago. And in total, SG&A expenses remained unchanged at $25 million which was 17.7% of revenue in 2011 third quarter and this compares to 18.3% in last year's third quarter.

Interest expense increased $1.4 million for the quarter and $4.7 millionfor the first nine months compared to last year. This increase was due to the impact of our senior notes, which were issued in the fourth quarter of 2010.

We had a $3 million pre tax loss from operations in the quarter, compared to a loss of $2.2 million, again primarily due to higher interest expense, and we generated our ninth effective quarter of positive EBITDA, producing $5 million for the quarter, and $19 million of EBITDA for the trailing four quarters. We have $20 million in capitalized interest on our balance sheet compared to $21 million a year ago which is about 3% of our total assets. We reported a non-cash, after tax charge of $1.3 million in the third quarter, for a valuation allowance related to our deferred taxed assets. And at September 30, 2011, our gross deferred tax asset is $140 million, and it is fully reserved. Now, Paul Rosen will address our mortgage company results.

Thanks, Phil. Our mortgage and title operations pre tax income decreased from $1.5 million in 2010's third quarter to $776,000 in the same period for 2011.

Loans originated increased from 399 in 2010 to 435 in 2011. Lower income is primarily a result of lower revenue from the sale of servicing rights from mortgage loans along with additional reserves for investor put-back inquiries. Our investor put-back reserve at September 30, 2011, was $2.1 million which is a slight increase from June 2011's $1.9 million reserve.

We continue to see a shift towards more conventional financing. The loan to value ratios on our first mortgages for the third quarter was 86% in 2011 compared to 87% in 2010's third quarter. 57% of the loans closed were conventional and 43% were FHA VA. This compares to 42% and 58% respectively for 2010 same period.

Over 90% of our communities are eligible for FHA financing. Overall, our average mortgage amount was $213,000 in 2011's third quarter compared to $223,000 in 2010's third quarter. The average borrower credit score on mortgages originated by M/I Financial was 734 in the third quarter of 2011, the same as 2011 second quarter. These scores compare to 731 for the third quarter of 2010 and 732 for the second quarter of 2010.

Our mortgage operation captured approximately 84% of our business in the third quarter compared to 2010's 82%. On September 30, 2011, M/I Financial had $26.4 million outstanding under the $50 million M/I F credit agreement and $5.3 million outstandingunder the $10 million repurchase facility.

M/I F's mortgage warehousing agreement expires on March 31, 2012, and provides a maximum borrowing availability of $50 million. In the normal course of business we receive inquiries concerning underwriting matters on specific mortgages investors have purchased from us. In 2011 we have received 19 such inquiries from investors. We thoroughly review and respond to each inquiry and 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 loan. As I mentioned previously our reserve force at September 30, 2011, with respect to these matters is $2.1 million. M/I Financial has not repurchased any loans this year. Now, I will turn the call back to Phil.

Thanks, Paul. As far as the balance sheet, lots owned and controlled as of September 30, 2011, totalled 10,200 lots. 71% of which were owned and 29% under contract. We own 7,200 lots, of which 56% are in the Midwest, 20% are in the South, and 24% in the mid Atlantic.

Total home building inventory at September 30, 2011, was $491 million, an increase of $3 million above September 30, 2010 levels. Our unsold land investment is currently $242 million which is 7,200 lots, compared to $263 million or 7,800 lots, a year ago. And compared to a year ago, raw land and land under development decreased 25% and finished unsold lots increased 10%.

At September 30 we had $100 million of raw land and land under development and $142 million of finished unsold lots. Our finished unsold lots total 2,900 lots with an average cost of $48,000 per lot. And this $48,000 average lot cost is 18% of our $266,000 backlog average sale price. And the market breakdown of our $242 million of unsold land is $106 million in the Midwest, $37 million in the South and $99 million in the mid Atlantic.

During the 2011 third quarter, we spent $20 million on land and $13 million on land development. And year-to-date we have spent $57 million on land purchases and $33 million on land development for a total of $90 million. As to the type of our 2011 land purchases, year-to-date about 80% have been finished lot pickups under option contracts. 15% have been bulk finished lot purchases. And about 5% have been raw land transactions.

At end of the quarter we had $81 million invested in specs with 254 that are completed and 384 specs in various stages of construction. This translates into about five specs per community and of the 638 total specs, 276 are in the Midwest, 173 are in the southern region, and 189 are in the mid Atlantic.

And at September 30, 2011, we had 630 specs with an investment of $77 million and June 30, 2011, we had 542 specs with an investment of $58 million.

We continually focus on our capital structure, cash and liquidity. We ended the quarter with $93 million of cash which includes $47 million of unrestricted cash. Our restricted cash decreased by $23 million during the third quarter.

In order to free up more cash and enhance our liquidity, during the quarter we moved about $20 million of previously issued letters of credit out of our letter of credit facilities that required cash collateral and renewed them under our revolving bank credit facility.

At September 30, the Company had no borrowings under our $140 million credit facility which is available until June, 2013. Our borrowing availability under this facility, net of outstanding letters of credit, was $33 million at quarter end based on the value of current pledged properties and this availability can be increased.

The remaining $41 million of senior notes mature in April of 2012. We may seek to repurchase some or all of these notes prior to maturity. We have various alternatives to repay the notes at maturity including using our available cash and borrowing under our credit facility.

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

(Operator Instructions). Our first question is from the line of Dennis McGill from Zelman and Associates.

Hello, thanks, guys.

Hi, Dennis.

Hi. Phil, just a quick question on the last point you made on the debt coming due. Just to understand this correctly, if you wanted to free up more capacity under the line you would pledge more of your assets and then you would have an increasing amount of flexibility there if you wanted to just take out the debt with the line?

That's true. We can secure more assets and the availability is $140 million.

Okay. And availability currently looks like it went up relative to the second quarter taking into account that you moved some of the letters of credit. I guess that was a function of pledging more during the quarter?

Well, we also have -- Dennis, this is Kevin. We also have $25 million worth of cash pledged as part of the borrowing base in that facility.

Okay.

So there is a total of about $53 million of availability and we have about $20 million in letters of credit so $33 million net of what we are using it for.

Okay. Appreciate it. As it relates to margin, I'm trying to remember the comments you made last quarter but it seemed, I think that given that demand hasn't really materialized much beyond sort of the normal seasonality, you had talked about it still being competitive with pricing and margin also being difficult to hold the line but you had a nice sequential increase here. Can you just talk to how much of that is either mixed by geography or mixed by new versus old communities versus sort of apples to apples improvement?

Well, this is Bob Schottenstein, Dennis. Let me take a crack at it, and then others can chime in. I think that most of the increase in margins is due to a greater proportion of closings coming from new communities. I don't know if that is 75% of it or 95% or 60% but it is -- I know it is a substantial majority and others here may have more detail on that. Our new communities on average are producing sales and closings in excess of 19%. Some higher. But -- and it is our legacy communities that, after everything comes through the mix, result in the net margin for the quarter being at the 17.9%.

I guess when you think about that and you know what you have in backlog it sounds like most of that is sustainable as we look into the fourth quarter and next year?

Well, I mean if things stay about -- as I said we are not counting on any near term improvement in conditions broadly speaking. We are also not counting on any near term deterioration in conditions. We're saying assuming things stay the same, the reason that we feel we are very much on the right track is because the percentage of closings and the percentage of sales coming from new communities continues to increase week-by-week and month by month as we sell out of and close up the older communities and continue to bring on new communities and so as a result even at these current low levels we have been able to see margin improvement and that gives us confidence about our ability to get back to levels of profitability. Obviously we would like to see more volume, too, and we continue to gain market share but some of that volume may have to -- some of it will be brought on by additional new communities in the right markets to be sure. But what we all really would like to see is a greater level of demand.

And the only other comment I would make, Dennis, is that as we have said about half of our sales are coming from specs and, of course, in general spec sales are a little lower margins. We are trying to manage a lot of things. We are trying to get back to profitability. We are also trying to work through some of legacy communities and generate some cash. But it also depends from a margin standpoint on how many specs we sell and those type things. We are trying to watch that very carefully.

What would that percentage be in a more normalized market, the percentage that would be spec?

I would like to think it was more like a third as opposed to a half type situation. But we haven't seen "normal" in a pretty good while.

All right. Okay, just a last question for me. Assuming again that conditions kind of stay steady as you look out to next year from a community standpoint and a supply standpoint, what would your footprint, your net community count look like based on what you already know today and what you are planning on putting out there today regardless of what sort of happens with demand?

Our best guess today is it will be up a little bit. That is about all the color we can give you at this time because obviously that depends on land spend and a lot of other things. We talked about ending the year this year with 125. Our current view is it would be up a little bit because we are opening some more communities in Texas. Our business is growing in the DC and the Carolina marketplace, as Bob said, the Midwest has been a little challenged. Our best estimate today is that it would be up a little bit next year, Dennis.

And the variability to that would largely be driven by actions over the next quarter or two, once you get into the middle part of next year it is probably too late to get it in?

Well, it'd be actually the next couple of quarters. You could still be buying things the first quarter of next year and getting them open. Maybe even the second quarter if it was a finished lot deal. But it's definitely a next couple of quarter impact.

Perfect. Thanks for the help.

Our next question is from the line of Michael Smith from JMP Securities.

Afternoon, guys. Thanks for taking my question. A couple -- first of all, Phil, just a real quick house keeping thing. Did I hear you right when you said about $1 million of the SG&A spend, or the G&A spend this quarter was on the entry into the Texas market?

Yes, it's about $1 million of the increase, Michael, that's right.

So when can we and how quickly can we expect that to kind of fall off? Or is that -- am I thinking of that as sort of initial outlays that are kind of one or two-time in nature or is that sort of a run rate what it costs to kind of keep the Texas markets open now that you have got them open?

It's more of a consistent run rate. It could go up a little bit depending upon how much our business grows there but wouldn't be moving up substantially in the next few quarters.

Sure, and it's not going to fall off either in the sense it was sort of an initial push, or anything like that, it's sort of this is just what it costs to keep them open and running is kind of the right way to think about it?

Yes, and again, remember that we did buy a San Antonio builder the second quarter of this year. So that number came on at a fairly high level all of a sudden with no comparison from last year. But -- that's right.

Okay. No, that helps. Thanks, Phil. And then the next question I guess is I'm just wondering, it seems like you guys could use a little bit more size just as leveraging the SG&A and assuming going forward that we do kind of keep in the same demand environment, that it doesn't get a whole lot worse but it doesn't get a whole lot better, what kind of strategic things would you guys consider doing to try to get a little bigger to better leverage your G&A as far as entering new markets or expanding product offerings or even entering sort of new lines of business? Anything along those lines that you guys might consider doing?

A couple of things I would say about that. First, we believe that without adding any additional markets and without market improvement, and also market deterioration, that we have the capacity within the markets we are in to increase our volume to a level sufficient to allow us to return to profitability. We believe that. If we didn't believe that we would have a very significant strategic step that we would need to take in another direction.

So we do not need to open up in any new markets. We have and will continue to look at a number of markets. But at this point we have no plans that it would be appropriate to discuss because there is nothing imminent or nothing that is immediately on the horizon. Having said all that, and I think we may have said this before, I think over time we will add additional markets. But we will only do so when we think it makes sense from both a balance sheet standpoint and obviously things that would be accretive. But as far new product, we are looking, beginning to look at urban product. More urban product, I should say. Not urban high rises, but urban attached town homes. There's nothing yet to report on that, other than it is something that we're looking at very seriously as a possible new business initiative for us.

And Michael, keep in mind we entered this year with about 110 communities. We expect to end the year with about 125. Now about half of that increase is our two new Texas markets, and obviously we're not closing a significant amount of homes yet in Houston and San Antonio, but we expect closings to increase as we go forward. In addition when you look, Bob talked about the community count kind of staying flat in the midwest, but if you look in particular at Charlotte, Raleigh, and DC, I mean our market presence continues to grow there. So we think we've already taken a number of initiatives to get more volume through the Company to leverage our SG&A. It just takes a little while to make the investment, get the subdivisions open, get sales and then get closings. So we think we've already done quite a few of those things, and the benefits should be coming in the near future.

So you guys kind of look at it from this point of just once everything that's been put in motion kind of gets firmly established, plus the market share gains as (inaudible) guys continue to fall away a little bit and you guys perform well in the markets you're already in, you think you can get to profitability just based on those steps kind of coming to fruition over the next year, something like that, year to 18 months maybe?

Well, let me say this. Without putting a time frame on it, without a doubt we know we can get to profitability in the markets we're in. Keep in mind that Houston is a start up, as Phil just said, and San Antonio was an acquisition that's less than nine months old. And we're very excited about both those decisions. Both of those are -- the ink is still wet on them, as we've said before. And we -- job one, right now, as it relates to footprint, is to get those, particularly the Houston startup, up and running at levels that justify the decision to go there. And we're on the way to doing that, and we want to see that happen before we start to invest further, in other new markets.

I mean, if you look at us today, I mean we're the number two or three builder in Raleigh. We're a top five builder in Charlotte, we're a top ten builder in DC. We have the highest ranking market position in those markets we've ever been, and we've been in those markets since the mid 1980's. So again, we think tweaking our investment and putting more dollars in the right place, that we've done the last year or so, I mean we do expect in the next few quarters to get that benefit.

Great. Congratulations, guys, on the margins. That was good to see and thanks for answering my questions. I appreciate it.

Thank you, Mike.

Thanks, Mike.

Our next question from the line of Jay Mccanless from Guggenheim.

Hi, good afternoon. My questions have been answered. Thanks.

Thanks, Jay.

Thanks, Jay.

The next question from the line of [Alex Varon] from HRS.

Hi, guys.

Hi, Alex.

I was just curious about the way you are thinking about your capital over the next year or so. First of all, given the stock fell to almost $5 recently, I know it has kind of come back, any thoughts of a stock repurchase here or if not, why not?

Alex, we think we are in pretty good shape. Obviously we wish the stock and think the stock should be performing a lot better than it has. The first order of business is kind of to make sure that we have the money we need to invest and grow the business. And we think we are in pretty good shape there. We have been buying the last few quarters about $20 million of land. We have almost 8,000 lots owned and almost 3,000 finished so we think we are in pretty good shape there. We have the $41 million to fund coming up in the second quarter of next year which we think we have a lot of alternatives with that. So again we think about all of those things. We think we are in pretty good shape and the bank line's out to the middle of 2013. Those are just things we have to balance off all the time.

Okay. Yes, I guess that was going to be my second question. How were you -- were you just going to pay off the notes in 2012 with just your cash on the books?

Yes, we have a variety of alternatives, Alex, that we may consider. We may consider opportunities to look at buying some or all the notes back earlier. At maturity we could consider other alternatives but absent doing anything new on a debt side we would use cash on hand combined with the potential to draw under our revolving credit.

Okay. And the other question I had was, I guess why aren't we seeing the -- when I look at your debt versus your inventory balance, why are we still seeing a pretty high level of interest being expensed below the operating line as opposed to capitalizing and having more of that interest flow through the cost of goods sold line? When is that going to start to happen?

It is all a matter of mix. I mean we have less land under development. If you buy finished lots, which we are buying more of, you can't capitalize interest until the house starts building on them. So our land development is less so we are capitalizing less interest.

And if you look from a balance sheet standpoint, I mean compared to a year ago, that the capitalized interest really hasn't moved much, it is still about $20 million so overall it hasn't moved much. I know there is a question about where does it go through the P&L but the capitalized amount really hasn't moved much.

Right, and that is definitely a good thing.

I think it's a good thing.

Just my last question, are you guys starting to see any of the -- or hearing from your sales people whether any of the buyers that are coming through the sales office are the same people that might have bought and defaulted four or five years ago and they are kind of starting to get interested in buying a new home and qualifying for a mortgage again?

I'm looking at Paul Rosen who is closer to that than me, Alex. This is Bob Schottenstein talking. Through Paul's management of the mortgage company I think the short answer is no.

Okay. Great. Thanks.

(Operator Instructions) Our next question is from the line of Vad Yazvinsky with Jordan Capital.

Good morning. I guess good afternoon, gentlemen and ladies. Great quarter. I had a question more of sort of a continuation of the question that was just asked by a previous caller. I mean, one, just to (inaudible), you can't really do a stock buy back until your profit (inaudible) is up, correct?

We were going to add that clarification. I'm not sure we exactly -- we just asked about the press. But we are --

But I'm thinking you cannot buy back common shares until your current -- I mean until you start paying the dividend on (inaudible), just to make it clear. Correct?

Well, no, I don't think that's the answer. But we are blocked right now by provisions in our senior notes that prevent us from paying dividends on either the common or the preferred, and prevent us from buying back those shares.

Correct.

Having said that, Phil's answer was that right now, we have other things that we're focused on in terms of our capital structure and probably regardless of any blockage, wouldn't be focused on doing share buy backs currently. So it's a two level answer is what I'm trying to say. But there's nothing that says we have to first pay a preferred dividend before we do other share buy backs.

Then the second question would be, given your capital structure today, and given that your common is trading roughly, as of this particular second, 90% of your book value, and your (inaudible) is trading at 50% or 60% of the book, have you guys or the board considered actually swapping one for another? Using that opportunity? Obviously in the past you had opportunities to do it even at a better ratio, some probably actually increase the common book by taking it at $0.70 or $0.80 on the dollar, generating some gains. I mean why wouldn't you as a board, and as a management team, not consider (inaudible) the capital structure that way?.

Right now, we think it's felt that our capital structure is in pretty good shape. We wish we had more equity. We are comfortable with our leverage level. We are always open and considering to ideas where we might do things within our capital structure to, as you suggest, common for preferred. We always consider and look at those kind of things. But we're first and foremost focused on the business, and taking the capital that we have an investing it prudently, and making good results, and that's really what we're focused on.

I understand. Obviously, your job as the management is twofold. One is to generate positive operating results, which you have done fairly actually well compared to most of your competitors. And the second part is obviously deploy that capital and optimize the capital structure. It just -- it seems interesting to me that when the stock is, or was at $14 or $16, way above par, that you wouldn't use the opportunity to swap something that is trading at 150% of book for something that was trading at 75% of book. It's just we have interest in both common and [preferred] so we -- from our standpoint it would benefit either one but it is just it is interesting for me to hear your thoughts why that does not make sense for the shareholders.

Appreciate your thoughts.

My thoughts are when the opportunity is correct your capital structure is not -- I guess you presented saying hey, our net debt to equity is 30% or 40%. Reality of it is the shareholder equity is mostly -- I mean not mostly, but 45% of that equity belongs to the pref shareholders not necessarily to the benefit of the common shareholders. So is it?

Hey Vad?

Yes.

If you have any further questions please go ahead, otherwise we would just as soon move on and talk about the results for the quarter.

All right. I'm good. Thanks so much.

Thanks, Vad, appreciate it.

We have no further questions.

Thank you very much for joining us. Look forward to talking to you next quarter.

This concludes today's conference call. You may now disconnect.