M/I Homes, Inc. Q4 2007 Earnings Call Transcript

Feb.17.08 | About: M/I Homes, (MHO)

M/O Homes, Inc. (NYSE:MHO)

Q4 2007 Earnings Call

February 7, 2008 4:00 pm ET

Executives

Phillip Creek – CFO

Ann Marie Hunker - Corporate Controller

Bob Schottenstein – CEO

Paul Rosen – Sr. VP, Chief Exec.

Analysts

Alex Barron – Agency Trading Group

Dennis McGill – Salman & Associates

Lee Brading – Wachovia

Eric Landry – Morningstar

Thomas Herring – Pine River Capital

Jim Wilson -- JMP Securities

Operator

At this time, I would like to welcome everyone to the M/I Homes Yearend Earnings Conference call.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Mr. Phil Creek, sir, you may begin your conference.

Phillip Creek

Thank you for joining us from Columbus, Ohio. Joining me on the call today call today is Bob Schottenstein, our CEO and President, Paul Rosen, the President of our mortgage company, and Ann Marie Hunker, our Corporate Controller.

First to address regulation for disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because as you know, we are prohibited from discussing significant non-public items with you directly. As to forward-looking statements, this presentation includes forward-looking statements as characterized by the Private Securities Litigation Reform Act of 1995. Any statements that are not historical in nature are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

Please refer to our most recent 10-K, 10-Q, and our earnings press releases for other factors that could cause results to differ. Be advised that the company undertakes no obligation to update any forward-looking statements made during this call. The audio of which will be available on our website through February 2009.

I will now turn the call over to Bob.

Bob Schottenstein

Conditions continue to be challenging in most of our markets, and we believe we are likely to remain so throughout 2008. For nearly two years now, we have been engaged in what we refer to as a predominantly defensive operating mode, focusing on improving our balance sheet, rightsizing our operation, reducing our own lots, our operating cost, and reducing our debt levels.

Market conditions are clearly difficult. Demand is weak, fire confidence is low, and the difficulty surrounding the used-home market continue to serve as a major barrier for new home purchases. In the face of what many feel are unprecedented industry conditions, we believe that M/I Homes has made significant progress on a number of fronts during the past year, all of which will serve to better position our company as we look towards the future.

First of all, we successfully reduced our own lots during 2007 by nearly 30%, generating cash for land sales of $89 million and net cash from home building operations of an additional $113 million.

In addition, as a result of our land sales, we were able to monetize the lots on sale using carry-backs for federal income tax purposes and expect to receive a $50 million check from the federal government during the first quarter of this year.

Second, during 2007’s First Quarter, we successfully completed the issuance of $100 million of preferred stock which we believe improved our capital structure significantly.

The results of these first two points that I have made was that our net at the cap now stands at 0.33 versus 0.44 a year ago. We plan to further reduce our inventory of owned lots with additional land sales throughout 2008, along with limiting our land and lot purchases and land development spending.

We expect to generate positive cash flow during the year, which should completely payoff the debt our home building credit facility by the end of 2008. The only other debt which our company has is senior notes, and these notes are not due until 2012. We have also been successful in reducing our overhead structure and aligning it in accordance with today’s demand.

We have, since our people have avulsed in early 2006 reduced our company-wide workforce by over 40%. And, before impairments and other special charges, I do want to point out that we were profitable during every quarter of 2007.

We continue to make progress on a number of strategic initiatives which we believe are important to our company’s future success. This relates to the customer experience, and they relate primarily to the customer experience where we have implemented a number of systems to streamline of our business processes, and give us more visibility into customer trends.

With our net worth and assets of $580 million and minimal off-balance sheet exposure, we believe that M/I is very well positioned to manage through this current difficult cycle. In the meantime, we will remain focused on those key operational aspects of our business, namely premier locations, building quality homes, and taking care of our customers.

Before I turn things back over to Phil, let me just think a few comments about our three regions. First, the Midwest, conditions on the Midwest continue to be challenging due primarily to very poor job growth. Three of our Midwest markets, Columbus, Cincinnati, and Indianapolis continue to be down in Single Family Permits this year.

New contracts in homes delivered in our Midwest operations were down around 20% when compared to the same periods in 2006. We anticipate that new contracts will continue to be challenging in 2008. At the end of 2007, we own just over 6,400 lots in the Midwest versus approximately nearly 7,400 lots a year ago, which would represent a 14% decrease. We continue to work towards reducing our Midwest investment levels.

Presently, our gross margins on sales in the Midwest range from 12% to 15%. In our folder region, the market continue to soften in 2007 with new contracts and homes delivered decreasing approximately 10% and 40% respectively for the year. There continues to be significant pricing pressures and cancellation rates continue to be high in our two-floor markets.

At December 31, 2007, we owned just over 5,300 lots in Florida versus 9,000 lots at the beginning of 2007. This will correspond to our lot count reduction of nearly 41%. The reduction was the primary result of our publicized land sales of over 3,000 lots and included substantially all of our West Palm Beach assets which represented approximately 550 lots.

We have been quite successful in reducing our Florida investment levels, and this bulk land sale represented a meaningful and important reduction in our land holdings in the Florida region. At the present time, our gross margins on new orders in the Florida region stand at around 12%.

Finally, the Mid-Atlantic region, new contracts and homes delivered in this region increased approximately 10% and 25% respectively for the year when compared to the same periods in 2006. Our Charlotte Raleigh markets continue to fair better than our other market, while the D.C. market, as a whole, remains challenged.

At the end of ’07, we owned just over 2000 in the Mid-Atlantic region versus 3,000 lots at the beginning of ’07, which would correspond to a 30% decrease. Our margins on new orders ranged between 16% and 18% in Charlotte and Raleigh, and there are about 12% in the greater D.C. market.

At this time, I will turn the call over to Phil to review the financial highlight.

Phillip Creek

As we announced in December of ’07, we sold substantially all of our West Palm Beach asset and expect to exit the market by June of ’08. The results of operations of our West Palm Beach division have been classified as Discontinued Operations in the quarters with statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, and prior periods had been reclassified to conform with the current year presentation. Unless otherwise noted, the information included in this conference call excludes Palm Beach and focuses on our results from our continuing operations.

First, new contracts. New contracts for the ’07 Fourth Quarter decreased 23%. Our cancellation rate in the fourth quarter was 49%, compared to 59% in the ’06 Fourth Quarter and 37% in the ’07 Third Quarter. Our traffic for the quarter decreased 25%. Our sales were down 34% in October, while traffic was down 27%. Sales were up 28% in November while traffic was down 17%, and our sales were down 46% in December and traffic was down 29%. Overall gross new contracts were down 38% for the quarter.

For the year, our new contracts declined to 2452 or 12%, and our gross new contracts declined 18%. Our annual cancellation rate was 33% in ’07, compared to 37% in ’06. Our active communities decreased 12% from our peak of 166 at 09/30/06 to 146 today. Our breakdown today by a region is 76 in the Midwest, 34 in Florida, and 36 in the Mid-Atlantic. Our projection for 2008 is to be at about 144 by yearend, broken down by a region, 79 in the Midwest which includes opening a couple of communities in Chicago, 29 communities in Florida, and 36 in the Mid-Atlantic.

We delivered 70% of our backlog this quarter, compared to 55% in ’06. Revenue in the fourth quarter declined 23% primarily due to a 23% decline in homes delivered, and an average sale price decrease of 7% to $298,000.00. This decrease is partially offset by a $12.1 million increase in third-party land sales when compared to the prior year quarter. Revenue for the quarter decreased 20%, primarily due to a 19% decline in homes delivered and an average sale price decrease of 4%, $296,000.00, and that was partially offset by a $9.5 million increase in third-party land sales.

Our results for the ’07 Fourth Quarter include pretax charges which includes discontinued operations of $108 million related to home building market conditions, including the company’s rationalization of its land portfolio, as we implemented our plan to reduce owned inventory and work our way through today’s challenging environment.

The impairment charges consisted of $83.5 million related to land and home building assets sold of which $43 million was related to the West Palm Beach assets, $19.9 million related to ongoing inventory, and $4.3 million related to our investment in joint ventures. With respect to continuing operations, we impaired over 5,000 lots in 34 communities in the fourth quarter. Some had been previously impaired, and this impairment encompassed both open communities and communities to be opened in the future.

Results for the year include pretax charges including discontinued operations of $207 million. The impairment charges consisted of $153 million related to inventory sold or held for sale, of which $59 million related to West Palm Beach assets, $42 million related to ongoing inventory, and $13 million related to the company’s investment in joint ventures. With respect to continuing operations for the year, we impaired almost 7,000 lots in 85 communities.

Over the last year and a half, we have incurred pretax charges including discontinued operations of $279 million, and $64 million relates to discontinued operation. The impairment charges consisted of $155 million related to inventory sold or held for sale of which $64 million related to West Palm Beach asset, $109 million related to ongoing inventory, and $15.5 million related to our investment and joint ventures. And, with respect to total impairments to date, approximately $165 million reversed in ’07. Keep in mind that some occurred and reversed in ’07, and approximately $140 million of the reversal for the year related to land sales.

At 12/31/07 of our 140 active communities, we have impaired 57 or 40% of our current actives communities. We continue to analyze our housing inventory and investments every quarter. It is possible depending on market conditions that the company will incur additional impairment charges in the future. Our gross margin, exclusive of the impact of the aforementioned inventory and investment impairment charges was 13% for the quarter, and 18% for the 12 months ended 12/31/07. This compares to 23% and 24% for the quarter and the year last year.

Our estimated gross margin and backlog is about 12% and we continue to see pressure on our margins.

During the quarter and for the year prior to land impairment charges, the company reported profit of $178,000.00 and $2.7 million on land sales, and corresponding ’07 revenue was $42.8 million and $58.3 million. This compares to profit in 2006, this fourth quarter of $6.3 million and $11 million for the year, with revenues of $31 million and $49 million respectively.

We currently have $8.5 million of land held for sale on our balance sheet with $6.4 million under contract. We also had revenue from land sales in discontinued operations of $31 million for the year, primarily occurring in the fourth quarter.

G&A cost in ’07’s Fourth Quarter decreased $4.7 million and as the percent of revenue was 6.7%, exclusive of severance and abandonment charges totaling $4.5 million for the quarter, the percent of revenue was 5.3%. For the year, G&A cost decreased $5.2 million and as the percent of revenue was 9.2%, exclusive of severance, abandonment, and intangible write-off, the percent of revenue for the year was 8.3%.

The dollar decrease for the year is primarily attributable to a $4.4 million decrease related to reduction and personal cost, as well as a $7.7 million reduction in the level of profit-based incentive compensation expense. There was a $1.9 million decrease in the write-off for abandoned land transactions.

Those decreases were offset in part by $4.9 million of higher cost related to our investment in land such as real estate taxes, site maintenance, and home owner’s association dues. Also, $5.2 million of intangible write-offs related to charges taken in ’07’s Second Quarter.

We continue to work very hard on G&A reductions. As we stated, approximately 20% of our G&A is land-related. Selling expenses for the quarter and the 12 months ended 12/31/07 increased 60 and 80 basis points to 6.6 and 7.7 in revenue from a dollar perspective selling expenses for the 12 months decreased $10.3 million. This decrease was primarily due to lower volume levels.

Overall, our fourth quarter SG&A expense decreased $8.9 million and with $13.2 million of revenue, exclusive of severance, abandonment, and intangible write-offs, the percents of revenue was 12% in the Fourth Quarter of ’07, and 16% for the year. We continue to work on reducing at expenses and have had additional workforce reductions in January and February of this year. Our headcount peaked at about 1,200. We currently employ about 700 people down about 40%.

Interest expense decreased to $1.1 million for the fourth quarter and decreased $464,000.00 for the 12 months of ’07 compared to last year. The decrease in the fourth quarter was primarily due to a decrease in weighted average borrowings from $694 million in ’06 to $465 million as of 12/31/07. This decrease was partially offset by a $3.1 million decrease in capitalized interest as we have had less land under development when compared to the Fourth Quarter of ’06.

Our quarterly weighted average borrowing rate remained relatively unchanged at 7.5%. Interest incurred was $8 million in the quarter versus $13 million in ’06 this fourth quarter.

We have $29.2 million in capitalized interest on our balance sheet as of yearend, compared to $35.2 million at 12/31/06, which is less than 3% of our total assets. We continue our policy of expensing interest when land is raw and when lots are developed. We capitalize interest when land is under development and when houses are being built.

Our overall income tax rate was 39% for the fourth quarter and for the 12 months ending 12/31/07, compared to 41% and 35 % for the same periods in ’06.

Now, Paul Rosen will cover our mortgage results.

Paul Rosen

Mortgage and title operations pretax income decreased from $4.7 million in 2006’s Fourth Quarter to $1 million in the same period with 2007. The change was partially the result of an 11% decrease in loans originated from $908.00 in 2006 to $812.00 in 2007. Additionally, enhanced financing programs are being offered to M/I Homes customers. Competitive market conditions also contributed to low margins.

Loan to value on our first mortgages for the fourth quarter was 85% in 2007, compared to 81% in 2006’s Fourth Quarter due to fewer second mortgages. For the quarter, 90% of our loans were conventional with 10% being FHAVA. This compares to 91% and 9% respectively with 2006 same period. The FHA mortgage limits in the markets that we operate range from 200,000 in Indiana and North Carolina to 363,000 in Virginia and Maryland.

The 2008 trend indicates that FHA financing has increased to approximately 30% of our business. Approximately 3% of our fourth quarter closings were adjustable rate mortgages. This compares to 29% in the fourth quarter of 2006. 19% of first, 12% of our second, and 7% of our third, and 1% fourth quarter 2007 applications for adjustable rate mortgages.

The mortgage is closed by M/I Financial during the fourth quarter, 3% for interest-only loans. This compares to 11% in 2007’s Third Quarter and 17% in 2007’s Second Quarter. The percentage of customers that received down payment assistance in the fourth quarter decreased to 5% versus 6% for the same period in 2006.

Overall, our average total mortgage amount was $253,000.00 in 2007’s Fourth Quarter. Active borrower credit score on mortgages originated by M/I Financial with 728 in the Fourth Quarter of 2007, compared to 726 in 2007’s Third Quarter. This scores compared to 733 in 2006’s Fourth Quarter and 732 in 2006’s Third Quarter.

We sell our mortgages along with their servicing rights to member of secondary market investors. The loans are sold on the best efforts on mandatory basis. Base on loan volume, our main investors in the fourth quarter were Chase 41%, CitiMortgage 26%, Wells Fargo 19%, and Huntington 6%.

In conjunction with these sales, we also went to an agreement to guarantee certain purchases that we will repurchase a loan if certain conditions occur. Primarily, the mortgager does not meet those conditions of the loan within the first six months of sale of the loan.

Loans totaling approximately $175 million were covered under the above agreement as of December 31, 2007. A portion of the revenue pay to M/I Financial for providing the guarantees on the above loans was deferred at December 31, 2007 and will be recognized as income as M/I Financial release from our obligation under the guarantees. In 2007, we repurchased one loan.

In the ordinary course of business, we have provided indemnification to third-party issuers on certain loans. A total of these indemnified loans were approximately $1.9 million as of December 31, 2007.

The company has accrued management’s best estimate of the possible loss on the above loan.

Our mortgage operations captured approximately 86% of our business in the fourth quarter, compared to 2006’s 78%. Unfortunately, increased capture rate can be attributed to an enhanced fourth quarter financing promotion. However, we believe that there will be continued pressure on our capture rate due to increased competition as the mortgage business, overall, remains slow. We continue to put programs in places that we believe will help our capture rate and help so homes.

Next, to address sub-prime and alternative mortgages. We defined sub-prime mortgages as conventional loans with a credit score below 620, or government loans with a credit score below 575. Alternative loans are those that do not fit in the conforming category due to a variety of regions such as documentation, residency, or occupancy.

In the Fourth Quarter of 2007, 5% of our closings are still in the Sub-Prime category. Approximately 5% of our fourth quarter closings were in the Alternative category with the majority of these brokered. We do not have statistics on the percentage of sub-prime and alternative loans in the 14% that we did not capture on our mortgage operations.

Phillip Creek

As far as the balance sheet total home building inventories of 12/31/07 decreased $295 million or 27% below last year, total building sites owned and controlled as of 12/31/07 decreased 28% from a year earlier. With respect to our lots under contract that we do not own, we have approximately $9 million at risk and deposited letters of credit and pre-acquisition cost at 12/31/07. Our total unsold land investment at 12/31/07 is $484 million, compared to $773 million a year ago. Compared to a year ago, raw land decreased 44%, land under development decreased 55%, and finished unsold lots decreased 22%.

At 12/31/07, we have $127 million of raw land, $95 million of land under development, and $262 million of finished unsold lots. Also, the $262 million of finished unsold lots represents about 4,800 lots. The market breakdown of our $484 million of unsold land is $202 million in the Midwest, $132 million in Florida, and $150 million in the Mid-Atlantic region.

In the fourth quarter, we purchased $4 million of land. Our current estimate for ’08 land acquisitions is approximately $30 million, compared to $23 million in ’07. A majority of the ’07 actual and ’08 plan land purchases are in our Carolina market. As to land development expenditures, we currently estimate that we will spend about $35 million in ’08, compared to approximately $100 million last year.

At 12/31/07, we have $40 million invested in joint ventures with approximately $25 million of these being in Florida. These JVs are for land acquisition and development purposes only, and all are with home building partners. We are 50/50 partners in three joint ventures with non-recourse financing, and our partners are large public builders. These three ventures have a total debt of $75 million with equity of $43 million or 37% equity and 63% debt. We have one joint venture that has financing on it that requires loan devalued maintenance. The outstanding debt balance on this JV is $15 million.

We recently made a $1.5 million capital contribution related to that requirement. Also, during the quarter, we recorded $4.3 million for impairment charges related to our joint ventures. At the end of the quarter, we have $118 million invested in specs, 309 of which were completed, and 323 specs in various stages of construction for a total of 632 specs. This translates into about four specs per community. Of these 632 specs, 384 are in the Midwest, 181 are in Florida, 167 in the Mid-Atlantic. We had 717 specs at the end of the Fourth Quarter of ’06.

At 09/30/07, we have 584 specs with an investment of $101 million. As we previously mentioned, we expect to receive a $50 million tax refund in the first quarter as we carried back tax losses incurred in ’07 to recover taxes that we paid in ’05.

We currently have a $68 million deferred tax asset on our books. We believe this tax asset is fully recoverable and therefore, have not recorded a valuation allowances. Also, for your information, we paid about $45 million in taxes in ’06.

Our $500 million home building credit facility matures on October 2010. We have $115 million outstanding at 12/31/07, and $45 million of letters of credit. The excess borrowing base capacity at yearend was $170 million.

We projected our borrowings under this facility will be zero by the end of ’08. Cash flow that we expect to generate in 2008 includes our tax refund, cash from additional sales, primarily in Florida, as we continue the strategic focus reducing our own lot inventory especially finished lots, and reducing our spec levels.

Our most restricted debt covenant currently is minimum net worth. Our current “cushion” is approximately $40 million. Our rolling 12 month interest coverage for the quarter was 1.6 times EBITDA, and our quarterly interest coverage was 1.7 times EBITDA.

We currently estimate that we will be in compliance with the interest coverage covenant through 2008. We are having our semiannual bank meeting in March.

Under the restricted payment specs with our public senior notes at December of ’07, we had about $95 million of cushion. We did not repurchase any treasury shares in ’07. At yearend, we had $3.6 million shares in treasury. We currently have about $7 million of repurchased authority. In summary, we continue to see challenging market conditions and anticipate this environment to continue this year. We continue to be very focused on reducing our inventory levels, expense levels, and debt levels.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Alex Barron – Agency Trading Group

I know you gave the percentage of communities’ impaired total. I think you said 57%. I was wondering if you had a breakdown by region.

Phillip Creek

On the press release, we disclosed impairments on dollar amounts, Alex. We have not given that as far community count by region but if you want to give us a call later, we will try to give you an estimate of that.

Alex Barron – Agency Trading Group

In terms of SG&A, I guess you guys mentioned some efforts to reduce that, but I was wondering if you could elaborate on that a little bit. What specific things you think you could do this year, maybe that are different or going to continue to do, and give us some sense of how much you think you can reduce SG&A.

Phillip Creek

Obviously, we are not going to estimate any number specifically but we talked about, in the past year, to about 20% of our G&A has been related to land. So, as we reduce our owned land inventory, that will bring down our G&A. Also, as we talked, unfortunately, we continued to reduce our headcounts. We have continued that reduction in January and February. Those are the tight things we are doing to bring G&A down along with the normal, only spend dollars absolutely when we have to in general. We made all of our company very aware of that. We have been making quite a bit of progress and expect to continue that, Alex.

Alex Barron – Agency Trading Group

Phil, I do not know if you mentioned the cancellation rate for the quarter. I think I got the one for the year but I do not know if you mentioned the one for the quarter.

Phillip Creek

Yes, I though I did. Our cancellation rate for the quarter was 49%, compared to 37% in the third quarter, and it was 59% in ’06’s First Quarter, Alex.

Alex Barron – Agency Trading Group

I know you guys have a program that helps people, I guess, to get a lower rate. I guess you guys are buying down the rate. So, where does that incentive—how does that get accounted? Is that just kind of increases costs to good sold?

Phillip Creek

In the revenue line, we build a certain amount in our houses to cover financing. A part of that that is there, if we do spend some other amounts that would go to the cost of sales line, it is all in the margin line, some in the revenue line, some in the cost of sales line.

Operator

Your next question comes from Dennis McGill of Salman & Associates

Dennis McGill – Salman & Associates

I just want to take on two numbers real quick that you had mentioned to make sure that I wrote them down correctly. What was the gross margin on orders in the Midwest running right now?

Phillip Creek

We said 12% to 15% on new order.

Dennis McGill – Salman & Associates

To be clear with that, that includes interest, right?

Phillip Creek

What that includes is interest while we are actually building the house. Yes, it does.

Dennis McGill – Salman & Associates

The other number you had mentioned, I think you said you reversed about $165 million of the impairments this year and just to make sure I am comparing that to the right number you have incurred about a total of $265 or so through ’06 and ’07?

Phillip Creek

Yes, since day 1, that is right.

Dennis McGill – Salman & Associates

So, the difference between the two is basically the balance of what you have on the books right now?

Phillip Creek

That is right, round figures.

Dennis McGill – Salman & Associates

On the land sales that you guys are looking for ’08, you mentioned you had $6 million or so under contract. Is that the only thing that has been agreed to sale so far this year?

Phillip Creek

The $6 million represents what was under contract above 12/31/07, we are obviously working on other transactions but that is all that was under contract as of 12/31/07.

Dennis McGill – Salman & Associates

Anything else that has gone final so far on the first month?

Phillip Creek

Nothing we could talk about there, Dennis.

Dennis McGill – Salman & Associates

I guess, I realized it is kind of a moving target. The last couple of years being around $50 million or $60 million before West Palm and land sales, is that a fair assumption for ’08?

Phillip Creek

I am not giving any projections on this like that, Dennis, but we are continued to focus on land sales especially in Florida.

Dennis McGill – Salman & Associates

You have mentioned on the senior notes, I believe you said you have restricted payment cushion of $95 million. Could you just talk about what that relates to?

Phillip Creek

You have a restricted payments basket and that basket is used as far as allowing you to do things such paid dividends, buyback stock, and those types of things.

Dennis McGill – Salman & Associates

Assuming you did not want to buy back any stock or pay any dividend in addition to the preferred, there is nothing that would trip that covenant?

Phillip Creek

Right now, there is $95 million in that basket so theoretically, we could spend $95 million. You go through a calculation every quarter, the basket goes up by income, it goes down by losses, and those types of things.

Dennis McGill – Salman & Associates

Maybe those losses include impairments?

Phillip Creek

Yes, it does.

Dennis McGill – Salman & Associates

Is there anything else on the senior notes that you would have to worry about operationally, as far as covenant violation would go?

Phillip Creek

No.

Dennis McGill – Salman & Associates

On the revolver, tangible net worth covenant where you have a $40 million cushion, I assume that you would be proactive in talking with your banks in March ahead of any violation there?

Phillip Creek

Absolutely. We meet with our banks twice a year. We think we have a very, very good bank group. We have been led by JPMorgan and Wachovia for a number of years. We do not anticipate any significant issues with them. Again, we do meet with them twice a year, the upcoming meetings in March, and we will talk to how things look, get their input, and so forth.

Dennis McGill – Salman & Associates

So, you really expect to have some resolution prior to announcing first quarter results, one way or another?

Phillip Creek

I would not say that. I am not going to predict when and if we are going to have any issues, or we just said at their most restrictive covenant we have is minimum net worth. There is $40 million in there and again, that depends on how the first and second quarter go over next year and so forth. But, we will work through that on a perspective basis like we try to any issues.

Dennis McGill – Salman & Associates

I appreciate all the color, guys, I just wanted the number. I wanted to verify on the developments spend in ’08. Did you say $35 million?

Phillip Creek

Yes, that is the approximate number we have of ’08. Last year, we spend about $100 million, Dennis.

Dennis McGill – Salman & Associates

For acquisition and development combined, you are going to be somewhere around 65 versus almost 125 on ’07.

Phillip Creek

That is the current estimate, yes.

Operator

Your next question comes from Lee Brading of Wachovia.

Lee Brading – Wachovia

I want on the pre-cash flow, if you can give any quarterly kind of guide. It sounds like with the tax refund here in coming Q-1 and I imagined it is typically a drawdown period for you guys. Are you looking to be positive cash flow here in Q-1 and then sequentially going forward as well?

Phillip Creek

I do not really give quarterly-type estimates. Obviously, the first quarter, with our backlog simply going in, probably, will not be doing a whole lot of cash flow in the first quarter due primarily just to those low level of closings but like you say, we do expect to get that cash taxed and refund in. We are working on land sales. Who knows when some of them will happen? The only projection we really gave is that we do plan to have the home building line down to zero by the end of the year. A lot of it, it depends on housing sales, how our sales are, as well as land sales.

Lee Brading – Wachovia

On the tax line item, you mentioned 68, I think or so on the deferred tax asset?

Phillip Creek

That is right.

Lee Brading – Wachovia

I was wondering on the timing of that. If you have any kind of guidance on that, because you mentioned also in ’06, you paid for $45 million. An assumption that we should be able to go back, I guess by ’09, get the refund for taxes paid on ’08 or something that regard to that for tax asset.

Phillip Creek

The reason I gave you the $45 million that we paid in ’06 under current law, I am not sure what is happening exactly this minute with the new legislation, but we paid $45 million in cash taxes in ’06. So, right now, there is a two-year carry-back. So, whatever we do in ’08 from a tax loss standpoint, we can go back to the ’06 number and get the 45. Just like in ’07, we are going back to ’05 and get into 50. That is the reason I gave you the $45 million we paid in ’06.

As far as the deferred tax asset turning, you also have a 20-year carryforward to recover those deferred taxes. We have not really given any projections, Lee, as far as when we are going to be able to recover the whole 68 but obviously, we expect to recover it all.

Lee Brading – Wachovia

I missed the breakout of the region on the community count, I guess you mentioned the Midwest, Florida, Mid-Atlantic for the 146. I apologize, I missed that.

Phillip Creek

On the community count?

Lee Brading – Wachovia

Right. Where you are is ’07, I got the ’08 forecast, but adhere the ’07 where you are.

Phillip Creek

In ’07, 76 in the Midwest, 34 in Florida, and 36 in the Mid-Atlantic for the 146.

Lee Brading – Wachovia

Can you give any comment you can make on January. I know there is probably not much that you can really give from a visibility from January. But any comments on January as we start the year?

Phillip Creek

As far as January, we sold about 160 homes which were better than the three months individually of the Fourth Quarter of ’07. So, we did have about 160 net sales in January of ’08 but that was about 40% below January of last year. You may recall that in the first quarter of last, we actually had pretty good sales.

Lee Brading – Wachovia

Right. On the Florida margin, I got the other margin in region and areas but I missed Florida. 15, is that right?

Phillip Creek

12 to 15.

Operator

Your next question comes from Eric Landry of Morningstar.

Eric Landry – Morningstar

Did you say there were 4,800 finished lots?

Phillip Creek

That is right.

Eric Landry – Morningstar

And the total owned lots was around 14,000, is that correct?

Phillip Creek

Yes.

Eric Landry – Morningstar

So, that is 30 some percent. Did you not say that last quarter, about 705 of your owned lots were finished?

Phillip Creek

No, what I said was it was about 30% was finished lots.

Eric Landry – Morningstar

My next question is about dominion, do you plan on any different type of behavior? I know you do not see him head to head a lot, but basically, Columbus has done it to you folks and a bunch of smaller guys, do you anticipate any different type of behavior now that they are going to be private?

Phillip Creek

No. Our approach towards this market has not changed for over 20 years. We feel very good about our market position. We wish this market were larger. It is a contracting market but in the phase of that contraction, our market share today stands at over 30% as the highest at any time and company history and we have a very strong reputation to this market and we feel, about as good as we could feel about what we do and we do it here.

Eric Landry – Morningstar

I agree. I guess I am relatively positive about Columbus. I think it was in 2003, it topped at over 12,000 permits and now it is down to about a third of that, basically the same on permits as in mid 80s. If you had to guess, would you bet that Columbus turns around before Florida or vice versa? I am just trying to sort of gauge where your biggest market is.

Phillip Creek

I do not know. First of all, I am not sure how do you define turnaround.

Eric Landry – Morningstar

How long can long can Columbus stock along with 4,500 permits annually?

Phillip Creek

I do not know. It could be a long time. There are really a number of questions on that point. For one thing, the job growth prospects in Columbus are not nearly as strong on a relative basis as they are in either Tampa or Orlando. Number two, even if Columbus were to remain at this 3,000 to 4,000 permit level for the foreseeable future, the question is what will happen to pricing and will it be an opportunity, perhaps as the market begins to gain a little bit more confidence in itself as opposed to maybe outright demand and as the used home inventory begins to reduce itself, it has reduced itself somewhat. Will there be a little bit more pricing opportunity for new home builders like us so that we can begin to move back towards a more respectable level of profitability.

It is very difficult for us to know or what to project whether the Midwest markets will come back before Florida. They never enjoyed the same level of price appreciation even though they had fallen on a relative basis. They have not fallen as far but I do not know that I could really project that with any level of confidence and it will just be a guess anyway.

Eric Landry – Morningstar

But I would argue that the pricing is much more realistic there than Florida, Arizona, California, or anywhere else.

Phillip Creek

I do not know about Arizona or California but I hope that you are right. I think you might be. I think we might be closer to a more long-term equilibrium here than in some other places but I am not sure.

Eric Landry – Morningstar

Last question, Phil, you mentioned that there was a component in the revenue line to make up for that subsidized 30-year mortgage, is that correct?

Phillip Creek

What I said was when we price a home; we build in the price of our home a certain amount for financing.

Eric Landry – Morningstar

Did this reflect an average sale price?

Phillip Creek

Yes, it is.

Operator

(Operator Instructions)

You have a follow up question from Alex Barron of Agency Trading Group.

Alex Barron – Agency Trading Group

I think in the press release that you put at the end of the year, I though you said you were going to get like $82 million from the land sales and I think you only booked $42 million. Is that just the delay in that revenue?

Phillip Creek

No, when we had our land sales in the fourth quarter, Alex, we got almost all of that cashed in the fourth quarter. Some of it, a little bit one over in the first quarter or so.

Anna Marie Hunker

That there is $43 million in the discount line and he is looking at the $42 million from continuing operations. That is why you are missing the 83.

Phillip Creek

I think it is an issue of what is in the discontinued operations line, Alex, I think is the difference that now, from a cash standpoint, we realize that all those entire $80 million in cash in the fourth quarter.

Alex Barron – Agency Trading Group

Okay, so a part of it went through discontinued operations?

Phillip Creek

Yes. Like we said, when you look at our land sales in the fourth quarter, when we sold almost 4,000 of lots, about 500 of the lots were Palm Beach. So, the Palm Beach is in discontinued operations but the others are not.

Also, when you look at the land sales on the fourth quarter, there was about 2/3 rolling, 1/3 finished lots. You can not really compare “Was Palm Beach more finished lots or roll out?” You got to again look through it that way, but again, we got almost all the cash in the fourth quarter.

Alex Barron – Agency Trading Group

Okay, got it. Now, I think you mentioned that you felt comfortable with your interest coverage covenant and you said that the more restrictive was the attended. Can you remind me what those two are?

Phillip Creek

The minimum net worth coverage today, we have about $40 million of cushion in there. And again, that goes up by income, it goes down by losses and dividends you pay and those types of things. In interest coverage covenant, we actually tweak that covenant last August with our bank group. When we checked our line from 650 to 500 and did some other things, when we think we are going to be okay today, our best estimate is we are going to be okay in the interest coverage covenant through ’08.

Alex Barron – Agency Trading Group

What is the covenant thing?

Phillip Creek

There is a rolling 12-month covenant and then there is also a quarterly covenant, Alex, I do not have what exactly those numbers are in front of me. But again, we think we will be okay with those two ’08 and again, we are meeting with our banks in March for our semiannual meeting.

Alex Barron – Agency Trading Group

I have a question on the preferred equity. Are those dividends cumulative?

Phillip Creek

No, they are not.

Operator

Your final question comes from Thomas Herring of Pine River Capital.

Thomas Herring – Pine River Capital

Could you discuss any covenants that you may have on your bank and/or bond, any covenants that may restrict your ability pay dividends on the preferred stock?

Phillip Creek

What we said in the presentation part was “Our most restricted debt covenant currently is minimum net worth and our current cushion in minimum net worth is about $40 million. As far as interest coverage, our rolling 12-month coverage for the quarter was 1.6 times and our quarterly interest coverage was 1.7. We currently estimate that we will be in compliance with the interest coverage covenant through 2008. We are having our semiannual bank meeting in March where we get all of our banks together.

Under our public senior notes, the most restrictive issue is the restricted payments basket but at the end of ’07, we had $95 million of cushion there.

Operator

Your next question comes from Jim Wilson of JMP Securities.

Jim Wilson -- JMP Securities

What are your pre-impairment gross margins looked like, and then if you could give a little color on how they compare originally.

Phillip Creek

There were about 13% for the quarter, and I would say that the color that Bob gave on new orders today is pretty much the same color as far as the higher ones and the lower ones.

Bob Schottenstein

What we said, Jim, was in the Midwest on sales today, we are running 12% to 15% gross margins. In Florida, we are running a little closer to 12 and in the Mid-Atlantic and Charlotte and Raleigh were in the 16% to 18% range and in D.C., it is close to the 12% range.

Jim Wilson -- JMP Securities

So, obviously, I guess the question to follow is as you can in the future, your strategic reallocation of assets will keep moving towards the Mid-Atlantic in a little one more stable markets.

Bob Schottenstein

We are just trying to make certain that every house we sell is strictly in Charlotte and Raleigh. No, but seriously, Phil passed on restoring his remarks. It was schedule to buy about $30 million worth of land this year and the large bulk of it is in Charlotte and Raleigh.

Jim Wilson -- JMP Securities

Okay, that makes sense. Alright, very good, thanks.

Phillip Creek

Thanks Jim.

Operator

There appears to be no further questions at this time. I am mounting the floor back over to the management for any finishing remarks.

Phillip Creek

Thank you very much for joining us. We look forward to speaking to you with our first quarter results.

Operator

This does conclude today’s M/I Homes Conference Call, you may now disconnect.

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