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Executives

Phil Creek - EVP and CFO

Bob Schottenstein - CEO and President

Tom Mason - EVP

Ann Marie Hunker- Corporate Controller

Analysts

Ivy Zelman - Zelman & Associates

Alex Barron - Agency Trading Group

David Frank - Wanger Asset Management

Eric Landry - Morningstar

Lee Brady- Wachovia

M/I Homes Inc. (MHO) Q2 2008 Earnings Call July 31, 2008 4:00 PM ET

Operator

Good afternoon. My name is [Pei] and I'll be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes second quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) Thank you.

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

Phil Creek

Thank you very much, and thank you for joining us. On our call is Bob Schottenstein, our CEO and President; Tom Mason, our Executive Vice President; and Ann Marie Hunker, our Corporate Controller.

First, to address regulation fair 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 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 July 2009.

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

Bob Schottenstein

Thanks Phil, and good afternoon, everyone. As stated in today's release, market conditions remain difficult for the home building industry. Demand is weak, consumer confidence at or near a record low, and margins remain under considerable pressure. In many of our markets, conditions frankly have further deteriorated since the beginning of the year. Obviously no one knows when the current cycle will end or when things will begin to turn.

We do believe however, that conditions will remain challenging for the balance of 2008, and in all likelihood through much, if not all, of 2009. And conditions may well deteriorate even further in some markets before we hit bottom. In the face of these extremely challenging, and for the most part unprecedented conditions, we have been engaged in a predominately defensive operating strategy for nearly two and a half years, focused on strengthening our balance sheet, reducing our debt levels, and rightsizing our operations.

We continue to make meaningful and tangible progress on these various defensive minded initiatives, all of which will ensure that M/I Homes is well positioned to take advantage of the future opportunities that will occur once housing conditions began to improve.

During the quarter, we generated $11 million in cash from operations and further reduced our homebuilding bank borrowings. Note at the beginning of 2008, we owed our banks over $115 million on our unsecured revolver. At the end of the second quarter, the balance had been reduced to $10 million and we fully expect that balance to be reduced to zero by year end.

We also were successful during the quarter in reducing our inventory levels. Our total lots owned decreased by 36% in the second quarter. Recurring SG&A is down by nearly 20%, when compared to a year ago, and our headcount, which we have been reducing for more than two years, for the second quarter it was more than 30% below where we stood at last year at this time. At quarters end, our stockholders equity was $466 million and our debt-to-capital ratio is 31%, which is one of the lowest debt levels in the homebuilding industry.

Finally, I want to briefly comment on the recently enacted Federal Legislation in support of housing. While it is by no means a sliver bullet or magic wand, it is clearly a positive and a step in the right direction, which should, and hopefully will, help stabilize things within our industry. As we look ahead, we are confident that we are positioned to weather the current downturn.

Before I turn things back over to Phil, let me just briefly review the situation in our three regions. First, the Midwest region. The Midwest economy remained stagnant, and continues to be challenging. Local housing markets are soft, single-family permits continue to be down. We continue to price competitively, and continue to offer incentives and promotions largely aimed at increasing and promoting consumer confidence.

New contracts and homes delivered for the quarter were down around 25% when compared to 2007. At the end of the quarter, we owned approximately 6,000 lots in the Midwest versus 6,800 lots one year ago. Presently, our gross margins on new orders in the Midwest range from 10% to 15%. I should also note that we had our grand opening in our first community in Chicago this past week, and are very excited about our long range future in Chicago.

The Florida region. Market conditions continued to be challenging there as well, with housing starts and home prices declining. New contracts in Florida are flat when compared to the prior year. There continues to be significant pricing pressures in both Tampa and Orlando. However, cancellation rates for us have normalized and are now under 20%. At the end of the quarter, we own 3,500 lots in Florida versus 8,000 lots a year ago. Our gross margins on new orders in Florida range from 12% to 15%.

Finally, the Mid-Atlantic region. Raleigh is feeling better than Charlotte, but both markets are still off when compared to last year. We continue to experience downward pressure on prices and continue to experience a tightening and deterioration in both Charlotte and Raleigh. The DC market as a whole continues to remain challenging.

New contracts and homes delivered in Mid-Atlantic region were down approximately one-third in the first half of 2008, when compared to last year. At quarter’s end, we owned 1,800 lots in the Mid-Atlantic region versus 2,400 lots one year ago. Our margins on new orders are approximately 15% in Charlotte and Raleigh, about 12% in Washington DC.

And with that, I'll turn things over to Phil to review our financial performance.

Phil Creek

Thanks, Bob. New contracts for the second quarter decreased 22% to $530 and our cancellation rate for the second quarter was 22% down from 23% last quarter and down from 28% in the second quarter of '07. Our traffic for the quarter decreased 29%. Our sales were down 22% in April, while traffic was down 24%. Sales were down 20% in May, while traffic was down 30%, and our sales were down 25% in June with traffic down 34%. Overall our gross new contracts were down 28% for the quarter.

Our active communities decreased 14% from our prior year second quarter of 161 to 138 communities at quarters end. The breakdown by a region is 80 in the Midwest, 25 in Florida and 33 in the Mid-Atlantic. Our current estimate for year end '08 is to have about 135 active communities.

Homes delivered in '08 second quarter were 466, declined 37% when compared to '07 738, and we delivered 58% of our backlog this quarter compared to 43% in '07. Revenue in the second quarter declined 38% when compared to '07, primarily due to a 37% decline in homes delivered and an average sale price decrease of 8% to $272,000. This decrease is partially offset by a $6.2 million increase in third-party land sales when compared to last year’s second quarter.

We sold about 600 lots in the quarter, primarily in Florida. The company's results for the '08 second quarter included pretax charges of $39.9 million, impairments consisting of $17.8 million related to land that we intend to build homes on, and the $17.8 is broken down by $9.9 million in the Midwest, $1.5 in Florida and $6.4 million in the Mid-Atlantic.

We also impaired $10.9 million related to land that we sold to third-parties, and the $10.6 is broken down by $400,000 in the Midwest and $10.2 million in Florida. We also wrote down $11.5 million related to our investment in joint ventures, which was $200,000 in the Midwest and $11.3 million in Florida.

This quarter’s write-downs impacted approximately 3500 lots in 36 communities with nearly 60% of our impairments in Florida. Some of the impaired communities in the second quarter were previously impaired and that the $17.8 million impairment related to land that we intend to build on, $16.3 million relates to open communities and $1.5 million relates to communities to be opened.

And for the six months ended June 30th of '08, total charges were $62.2 million representing $61 million for impairments and $1.2 million of write-offs of deposits and pre-acquisition costs for land and lot deals that we no longer intend to pursue. Over the last two years, we have incurred pretax charges, totaling $340 million of impairments, and we currently have about 40% of our total home lots impaired. With respect to impairments taken to-date, approximately $5 million reversed into housing gross margins in the second quarter of '08.

At June 30, '08, of our 138 active communities, we have impaired about 45%. We continue to evaluate our asset each quarter, as applied to the standards of FAS 144, and it is possible, depending on market conditions that, we'll incur additional impairment charges in the future.

Our gross margins, exclusive of the impact of the aforementioned inventory and investment impairment charges, were 13.3% for the quarter and 14.6% for the six month ended June 30th of '08. G&A cost in the second quarter decreased $8.8 million, when compared to the prior year, and we had about $1 million of severance and abandonment charges for the quarter. Year-to-date, G&A cost decreased $12 million compared to the prior year.

Selling expenses for the quarter and six months ended June 30th increased a 190 basis points to 9%, and from a dollar perspective, selling expenses for the six month decreased $9.1 million primarily as a result of volume decreases, reduction in advertising, and media cost and payroll related decreases.

Overall our second quarter SG&A expenses decreased $14.5 million. However, as a percent of revenue they increased to $21.4 in the second quarter and increased to $20.7 year-to-date. We continue to work on reducing our expenses and we have had additional workforce reductions this quarter. We currently employ about 630 people, which is down about 35% from a year ago.

Interest expense decreased $650,000 for the second quarter and $240,000 for the first six months of '08 compared to last year. The decrease in the second quarter was primarily due to a decline of $4.1 million, interest incurred to $4.4 million, which is primarily due to a reduction in our weighted average borrowings from $483 million last year to $251 million this year.

Our quarterly weighted average borrowing rate was 7.7% compared to 7.5% a year ago. We have $28.1 million in capitalized interest on our balance sheet at June 30th, '08 compared to $32.9 million at June 30, '07, which is about 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.

During the second quarter, as required by FAS 109 Accounting for Income Taxes, we recorded a non-cash after-tax charge of $58 million for valuation allowance related to our deferred tax assets. We evaluate our deferred tax assets quarterly. We asses whether valuation allowance should be established based on the consideration of all available evidence using a more likely than not standard as further described in the tax footnote in our 10-K.

Given the continued downturn in the homebuilding industry during the first half of this year, the company now anticipates being in a four year cumulative pretax loss position for the years '05 to '08. The $7.6 million of deferred tax assets remaining on our balance sheet is expected to be realized through net operating loss carry backs to tax year '06 or through subsequent reversals of existing taxable temporary differences. Because of our valuation allowance situation, we do not expect to record any additional tax benefits for the remainder of the year.

We currently expect to receive a $36 million tax refund in the first quarter of '09 as a result of carrying back 2008 taxable losses to the 2006 tax year. Year-to-date, we have paid cash dividends totaling $5.6 million on our common and preferred stock. The indenture governing our senior notes contain a restrictive payment basket covenant that limits the ability of the company to pay dividends on common and preferred shares among other things when such basket falls below zero.

At June 30th of '08 this basket was a negative $13 million. As a result we are currently restricted from paying any dividends. In addition, this covenant also prohibits the repurchase of shares. These restrictions do not affect our compliance with any of the covenants contained in the credit facility.

And on financial, which includes our mortgage and title operations, pretax income decreased from $2.2 million in '07 second quarter to $1 million in the same period this year. The change was partly the result having 26% decrease in loans originated from $515 in '07 to $382 in '08, and an 8% decrease in the average loan amount.

Additionally, enhanced financing is being offered to M/I Home customers to help generate sales, which lowers our overall margins. Loan-to-value on our first mortgages for the second quarter was 85% compared to 84% in '07 second quarter. For the quarter, 66% of our loans were conventional with 34% being FHA and VA, and this compares to 89% and 11% for last year’s period. About 85% of our communities are now eligible for FHA financing.

The percentage of closings in the second quarter, where customers received down-payment assistance was 18% versus 7% last year. Overall, our average total mortgage amount was 4230,000 million in '08 second quarter. The average borrower credit score of mortgages originated by M/I Financial was 716 in the second quarter of '08, compared to 707 in' 08s first quarter. We sell our mortgages along with their servicing rights to a number of secondary market investors. Our main investors in the second quarter were CitiMortgage, Wells Fargo, Chase, and Countrywide, and we have not repurchased any mortgages this year.

Our mortgage operation captured about 85% of our business in the second quarter, compared to last year's 74%. As far as the balance sheet, total homebuilding inventories at $630, '08 decreased $330 million, or 32% below prior year levels. Total building sites owned and controlled as of June 30, '08 decreased 32% from a year earlier. We now own 11,300 lots and have an additional 1700 lots controlled. For the six months ended June 30, '08, we reduced our total building sites owned and controlled by approximately 3,200 lots.

With respect to our lots under contract, we have approximately $7 million at risk and deposits of letters of credit and pre-acquisition cost at June 30th. Our total unsold land investment at June 30, '08 is $396 million, which is 9,250 lots compared to $663 million, which is 15,400 lots a year ago. Compared to a year ago, raw land decreased 54%, land under development decreased 41% and finished unsold lots decreased 32%. At June 30, '08 we had $84 million of raw land, $83 million of land under development and $229 million of finished unsold lots and the finished unsold lots represent 4,185 lots.

The market breakdown of our $396 million of unsold land is a $177 million in the Midwest, $81 million in Florida and a $138 million in the Mid-Atlantic region. In the second quarter, we purchased $3 million of land. Our current estimate for '08 land acquisition is approximately $25 million. As to land development expenditures, we currently estimate that we'll spend about $35 million in '08.

At June 30, '08, we have $26 million invested in joint ventures, down 48% from $50 million a year ago approximately $13 million of our current investment represents joint ventures in our Florida region. Our joint ventures are for land acquisition and development purposes only, and are all with homebuilding partners. We are 50/50 partners in two joint ventures with third-party non-recourse financing, and our partners are large public builders. These two ventures have debt of $41 million and equity of $22 million.

At the end of the quarter, we had $93 million invested in specs, 174 of which were completed units and 406 specs in various stages of construction for a total of 580 specs. This translates into about 4 specs per community. Of the 580 specs, 293 of these units are in the Midwest, 138 are in Florida, and 149 are in the Mid-Atlantic. At March 31, '08, we had 571 specs with an investment of $99 million.

Our unsecured $250 million homebuilding credit facility, which matures in October 2010 has excess borrowing base capacity at June 30, '08 of $173 million. And at June 30,'08 we had $33 million in letters of credit outstanding. Our current minimum net worth cushion under our credit facility is about $120 million.

As Bob mentioned, we generated cash flow from operations of approximately $11 million for the quarter. It was our seventh straight quarter of positive operating cash flow. We remain on target that our borrowings under this facility will be zero by the end of this year.

Net debt to cap improved to 31% versus 40% a year ago and in May, M/I Financial entered into a secured credit agreement. This credit agreement provides our mortgage company with $30 million of borrowing capacity. The credit agreement, which expires in May of '09 is secured by certain mortgage loans. We did not repurchase any treasury shares during the quarter, and we continually focus on our liquidity and capital needs.

In summary, we continue to see challenging market conditions and are very focused on reducing our inventory expense and debt levels, and being positioned when the markets improve.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ivy Zelman of Zelman & Associates.

Ivy Zelman - Zelman & Associates

Good afternoon. I really appreciate all the details that was excellent. When you were talking about your unsold land at $396 million and then looking at the breakdown you said $229 million was finished unsold lots, I think 4,185 does I got it right. What are you expecting, I think you gave it as well, but I did not catch it, just quickly land spend to be maybe for this year and then '09 given you have all that finished inventory?

Phil Creek

Yes. Ivy, you are right. At end of June, we had 4,185 finished lots. The land spend in the quarter was only $3 million and our current estimate for '08 is about $25 million.

Ivy Zelman - Zelman & Associates

Assuming roughly the same or low on '09 or at this point, it is too hard to say?

Bob Schottenstein

Hi Ivy, how are you doing?

Ivy Zelman - Zelman & Associates

Good, Bob. How are you doing?

Bob Schottenstein

I am doing, good. Too hard to say but very selective, very limited and only deals that make sense.

Ivy Zelman - Zelman & Associates

Got it. Bob, you have been always very frank and straight forward about the challenging market environment and clearly the reason, it seems like another leg down in terms of trends with respect to absorptions. Can you tell strategically how you move forward from here in an environment, where its getting even tougher to sell homes because of whether it would be tighter mortgage credit or as the fact that unemployment rising are you going to be more aggressive on pricing if necessary or do you sit back and mothball what is M/I's strategy?

Bob Schottenstein

Well that is a great question. There was a magic answer. First of all to subdivision business every subdivision is different even within the same market. If it makes sense to mothball a project, we would. We do not have any at this point that we have. Where we have excess inventories we maybe more aggressive. We are trying to move through our land position.

I think things are going to be very tough this year. I think things may even be tougher next year. I would like to believe and nobody knows but based on some of the things that you produced and what others have said that '10 maybe the year, where things begin to turn. We just want to make certain that when they do because I think prices still have a little bit of room to fall in most markets. That we are not sitting here with a lot of projects that are overpriced even though they maybe well located, if they are way overpriced. We want to make sure; we work through most of them now. We feel very good about most of our land position it is just that we do not feel good about it right now.

So, we have got to figure out what the hell we are going to do to have the right subdivisions when the market turns and it is going to and I mean that to be perfectly blunt the goal is just to get through this because this time we will pass and you know while we are playing defense 90% of the time, we are not playing defense all the time.

I think there is a lot of things in our company that are being strengthened now. It is tough to promote improvement when you reporting a $100 million loss or nearly $100 million loss. The fact is our company is improving. I think, we are getting smarter. I think we are getting better. I think that when things do turn we will be in very good shape to compete. Right now, we are looking at every subdivision on an individual basis and trying to figure out what the right strategy is.

Ivy Zelman - Zelman & Associates

That is very helpful. One of the things that you had explained to me I think so you had explained on the cash flow basis, when we look at even, where you are loosing money on a per unit basis obviously you are recovering the investment and some cost of the money spent on land to develop those lots. So, looking at some parts of the country, we are told that even it is difficult to recover that cash cost for the some cost of land?

Are you in a situation, where you could be losing 10% of house and still be generating enough cash to just by building it or are you talking with one of the CEOs in the industry that indicated that even if they are losing significantly they will key building because at least they are getting the cash recovery? Is there like a breakeven point in some markets where you can even get the cash back on land and therefore you will not keep building it and obviously in some markets the lights do not stay on for that reason because it does not make sense to do it for fun.

Bob Schottenstein

Yes.

Ivy Zelman - Zelman & Associates

Shall I stump you.

Bob Schottenstein

I lost you for a minute.

Ivy Zelman - Zelman & Associates

Okay.

Tom Mason

Ivy that is a great question and the answer again is it depends on every subdivision. At onetime, we had almost 6000 finished lots we work that down. As Bob said, we are in the subdivision business, so we look at every sub division. In some subdivisions we could be selling things at a little bit of a loss and still be generating some cash but again it depends.

We have been able to the last couple of quarters to bring our spec investment down some and one time that was a little over $100 million now it is down to $93 million. We are only spending $3 million on land in the quarter and then also not spending much on land development; it is all of those things. We look at every subdivision about what makes the most sense. Again we are always trying to generate cash every quarter. We want to make sure; we continue to improve our liquidity as best we can that is very important to us.

Ivy Zelman - Zelman & Associates

All right. Well, I appreciate it. Thanks a lot. Good luck.

Tom Mason

Thank you.

Bob Schottenstein

Okay.

Operator

Your next question comes from Alex Barron of Agency Trading Group.

Alex Barron - Agency Trading Group

Hello. How are you doing?

Bob Schottenstein

Hi, Alex.

Alex Barron - Agency Trading Group

I wanted to ask you this is more of a general impairment methodology question. Roughly at what point in the gross margins does impairment get triggered? Then after you impair it what is the gross margin reset back up to in a given community?

Tom Mason

Alex, we look at every subdivision. In general when you get to that 10% gross profit level you tend to try to look at it very carefully. As far as when it gets reset to again it depends to some degree on what is your selling expense is and other things are. It is not like once you impair it you create some 15% to 20% margins. I do not want to mislead you there. Again, the simple answer is when you get down to that 10% range, you will start getting very close to an impairment.

Alex Barron - Agency Trading Group

Okay. I think I heard you say there was like 44% or 45% of your communities have been impaired so far?

Tom Mason

Of the active communities at the end of the second quarter, yes, about 45%.

Alex Barron - Agency Trading Group

Right. So, do you have like a breakdown by region of what that percentage is by region?

Tom Mason

Alex that is not anything we have disclosed. Obviously we have that. If you look at the majority of our impairment my region, the biggest part of our impairments has been Florida. We have had impaired a lot of communities in Florida. We have also impaired a lot of communities in the Mid-Atlantic more in DC than it has been the Carolina's. Then the smallest amount impairments since we started by region, the Midwest. We did impaired I think about $10 million of the impairment from the second quarter were in the Midwest. So, again, we have impaired in almost half of our communities companywide.

Alex Barron - Agency Trading Group

What is the difference about the Midwest that maybe does not trigger many impairments or is it just a fact that you never hence they were paid for the land to begin with?

Tom Mason

I think there is a couple of thing Alex. One thing is that our biggest part of the Midwest is Columbus. In the Midwest in general they did not have the huge price run up that a lot of other markets have. Also there is not the large builder competition in the Midwest therefore you do not have as much competition doing large impairments either with drop in prices. So, I think it is a couple of those different things Alex.

Alex Barron - Agency Trading Group

Got it. Thank you so much. Again, your disclosure is very helpful.

Bob Schottenstein

Thank you, Alex. Next question?

Operator

Your next question comes from David Frank of Wanger Asset Management.

David Frank - Wanger Asset Management

Hello gentlemen.

Bob Schottenstein

Hi David.

David Frank - Wanger Asset Management

First of on covenants, do I understand correctly that the primary covenant to look is the net worth covenant where you see, you have a $120 million of cushion?

Bob Schottenstein

David, when you look at the credit facility that is the covenant we close with the $120 million of net worth. When you get over to the dividend issue that is from the $200 million of public senior notes.

David Frank - Wanger Asset Management

Okay. Basically I am trying to understand this, if you do not go through that $120 million net wroth cushion then your borrowing base of approximately $130, $140 million should remain available to you?

Bob Schottenstein

The $250 million unsecured bank line matures in October of 2010 and as long as minimum net worth is not trapped and as long as depending on the asset you have in place at the time the borrowing base is the calculation of that. Yes, that line would be available to us.

David Frank - Wanger Asset Management

Is there are certain advanced rates on different kinds of assets that play a roll in the borrowing base?

Bob Schottenstein

Yes, there is.

David Frank - Wanger Asset Management

Do you disclose that?

Bob Schottenstein

No, we do not. Bank credit agreements are filed as part of the public documents. I mean, we have figures, the backlogs at 90% or 95% that is the highest.

David Frank - Wanger Asset Management

Right.

Bob Schottenstein

You go down to the lowest which is raw land, which is the lowest advanced rate, but if you want that detail we can give that to you offline.

David Frank - Wanger Asset Management

Okay. Then in terms of cash flows I think I heard you said you expect $36 million rebates from the government in Q1 '09?

Bob Schottenstein

We expect to get about $36 million tax refund by the first part of next year. That is right.

David Frank - Wanger Asset Management

Okay. That is just based on what is the recovering '06 taxes paid?

Bob Schottenstein

That is right.

David Frank - Wanger Asset Management

Okay. Then on last question in the financing area you noted that about 18% of your closings in Q2 utilized down-payment assistance I understand that FHA has seized allowing the down-payment assistance program to operate does that mean that 18% goes away?

Bob Schottenstein

Well, down-payment assistance is going to go away. I do not know exactly when that will take effect in sometime in the next couple of months…

Tom Mason

October 1.

Bob Schottenstein

October 1. Thank you, Tom. Well that have an impact in the short-term. I think it will. I do not think it will be significant that the risk of sounding I do not know maybe idealistic. I think it is a good thing that is its going away. In other words in recent Housing Stimulus Act that brought back sub prime financing. I think people would be up in arms and I think that down-payment assistance is largely been something to help or maybe accelerated as getting into this.

People can not save a few bucks I am not sure they ought to be buying a house. So, there are some ways to mitigate against it. Basically, I think it is probably a small short-term negative. We are not terribly concerned about it. It is never going to… but the issue is not how many people have used it, it is how many people have used it by necessity.

David Frank - Wanger Asset Management

Right.

Bob Schottenstein

Because some people are led to use it even though they do not have to. So, I guess the short answer to your question is probably a negative but not a very significant one and I think in the long run its healthy for the economy.

David Frank - Wanger Asset Management

That is helpful. Thank you for that.

Bob Schottenstein

Okay.

Operator

Have a follow-up question from Alex Barron of Agency Trading Group.

Alex Barron - Agency Trading Group

Yes. Thank you. I am sure you probably mentioned that Phil the cash flow from operations for the quarter I missed that?

Phil Creek

It is about 10 million.

Alex Barron - Agency Trading Group

Positive.

Phil Creek

Positive.

Alex Barron - Agency Trading Group

Okay. I thought I also heard you say something about you were restrictive from paying dividends, is that on the common stock or is that on the preferred?

Phil Creek

It is on both. Again, Alex that is a restricted basket covenant on our $200 million of public senior note. That basket is now negative by about $13 million and that prevents cash dividend payments being made.

Alex Barron - Agency Trading Group

So, starting next quarter they will stop is that what you are saying?

Phil Creek

That is right.

Alex Barron - Agency Trading Group

Okay. All right. Just wanted to confirm. Thank you.

Phil Creek

Thanks.

Operator

Your next question comes from Eric Landry of Morningstar.

Eric Landry - Morningstar

Hi, thanks. Phil did you mentioned land gross profit if you did I missed it.

Phil Creek

No. We did not discuss that. What we did discuss within the quarter that we sold about 600 lots primarily in Florida and we also disclosed what the impairment was on those lot, but nothing from a gross profit standpoint.

Eric Landry - Morningstar

Okay. Is there a reason, because you use to break it out?

Phil Creek

I think that was a long time ago before all these impairments made it up the information.

Eric Landry - Morningstar

Okay. All right, thanks. That is all I have.

Tom Mason

Thanks, Eric.

Eric Landry - Morningstar

No, problem.

Operator

Your next question comes from Lee Brady of Wachovia.

Lee Brady - Wachovia

It's Lee Brading.

Tom Mason

Hi, Lee. How you are doing?

Lee Brady - Wachovia

All right. I missed I think some of the information, I did miss on the sales, you gave some monthly information, I basically got May, June, but I missed the April trend from a traffic and sales standpoint?

Phil Creek

No problem. Our traffic for the quarter decreased 29%. Our sales were down 22% in April, while traffic was down 24%. Then sales were down 20% in May with traffic down 30% and our sales were down 25% in June, Lee with traffic down 34%.

Lee Brady - Wachovia

Okay, great. So, it seems pretty consistent, and you see a little acceleration on the traffic side in June but fairly consistent on the sales side throughout the quarter looks like, okay.

On the land side, you did a good job obviously of only spending about $3 million from purchasing the land and looking at $25 million this year. Just curious, where is that $25, is that aspect that you are having to takedown somewhat you think or is it a matter that you see areas are running out of land that you need to purchase on?

Tom Mason

Lee, if you look at the $25, we are currently projecting there is probably about $10 million over or so again, these are estimates at this time. In Chicago, I think, we have opened our first community and we are being very careful there. We are looking at a few opportunities there. The next biggest purchase will probably be in the Carolina's. So, those will be between Chicago, Raleigh and Charlotte that will be the biggest part of the $25.

Lee Brady - Wachovia

Okay that is helpful. At what point do you start running out of land in certain pockets and in Florida or Midwest and other areas somewhere or not that in Chicago that you need to purchase land as you entered that market, are the areas that you are going to need to say in early '09.

Tom Mason

If you look at the 11,300 we own at June 30th, Bob talked about the 6,000 in the Midwest so other then Chicago we have a pretty good land supply in the Midwest. Florida, we have taken it down a lot but we still have about 3500 lots and then in the Mid-Atlantic we are down to 1800 lots. So, again we are buying a few things in the Carolina's and as DC gets on the upswing there will be more purchases there so that is the breakdown, Lee.

Lee Brady - Wachovia

Okay. Then last one here, just on the specs I think you said you had about 4 per community? What would be a comfortable level for you or a target that you would more of an ideal selling you would target.

Tom Mason

I think that is the number. We were like three to five range.

Lee Brady - Wachovia

Okay.

Tom Mason

We look at by subdivision units we also look at dollars we have invested and then we also look at the specs that our complete. We obviously do not have to have too many specs complete. We do have that investment now under a $100 million and we are continuing to work that down to generate some cash.

Lee Brady - Wachovia

Great, okay. Thanks very much.

Bob Schottenstein

Thank you.

Phil Creek

Thanks, Lee.

Operator

(Operator Instructions) There appears to be no more questions at this time. I would now like to turn the floor back over to your host for any closing comments.

Phil Creek

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

Bob Schottenstein

Thanks.

Operator

Thank you. This concludes today's M/I Homes conference call. You may now disconnect.

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Source: M/I Homes Inc. Q2 2008 Earnings Call Transcript
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