What Ryland Tells Us About Housing and Taxes

Brief notes from homebuilder Ryland Group’s Q3’08 Conference Call. The speaker is Ryland’s (RYL) Chairman and CEO Chad Dreier:

 

On the impact on housing-related industries:

[We now] leverage the size and scale of our operation to maximize volume discounts where possible, and ensure the best price via competitive bidding… Not only the direct materials that go into a house, but also indirect purchasing categories such as telecommunications… For 2008 we expect to receive roughly $20 million in rebates from the people with which we do business.

On incentives:

Stuff that maybe a couple of years ago we would have included in the base house, we're taking out and putting that into an option… Are incentives effective? …Right now I think… buyer uncertainty or uncertain economic conditions probably trumps incentives. 

On cash flow, debt:

We ended the quarter with $345 million in cash, $784 million in debt and no borrowings on our bank revolver, resulting in a net debt-to-capital ratio of 36%.

Our total land-related expenditures for the first nine months of the year [was] $185 million, which means that we will probably come in significantly below the $280 million that we had previously estimated for the full year. As a result, we expect to generate positive cash from operations in the fourth quarter and end the year with roughly $100 million more in cash than we had at the beginning of the year, after having reduced debt by $80 million and having paid $20 million in dividends.

Tax rebates from losses offset previous and future profitability? 

We recorded a non-cash tax charge of $17 million for the valuation allowance related to our deferred tax assets in the third quarter. This brings our total tax valuation allowance to $216 million or over $5.00 per share. While this asset no longer shows up on our balance sheet, it represents a significant tax shield for the company once we return to profitability.

More layoffs: 

Headcount at the end of the third quarter stood at 1,589, down more than 50% from our peak.

 On higher cancellation rates

I've always thought can rates should be as a percentage of backlog and not as a percent of current sales… October has had a weak start. That means people aren't exactly out buying lots of houses. So if you have a couple cancellations, your percentage is high… Traffic and sales… were difficult.

On which products are more profitable: 

Chris Hussey - Goldman Sachs

Are you finding that the margins on specs are materially lower than the rest of your business? 

Chad Dreier

Hey, our margins are so crappy everywhere, it doesn't make much difference.

 On market share: 

The banks are hardly - well, they're not even polite to us, and we don't owe them any money. They're not really dealing with the smaller guys, so you're going to see a lot more of the smaller private guys gone. 

And we’ll end with Dreier’s wry parting shot:

I look forward to the day when the majority of our operational highlights no longer consist of our effectiveness in shrinking the company.

 

 

Comments

[Hedged In:]

What does Ryland Group do?

2008 Oct 24 10:17 AM

[Jackson Cash:]

It tells us that d-d-d-deflation is occurring even as the call progresses.

2008 Oct 24 10:25 AM

[Rough Housing:]

As a consultant on the public builders' operations/financial health, I can tell you with Ryland had looked ok with their debt ratio up to this point, but number indicator on how builders are doing is their ability to generate cash. Unfortunately, Ryland is falling behind and if their current performance continues, they will have less than $100 million in cash by the end of 2009 based on their debts that are coming to maturity over this period.

There are three general actions need to do in order to get cash: 1) borrow it (which will only make them highly leveraged) 2) sell assets (which this late in the game could sell as low as 60% of original value) or 3) generate it through their operations (refer to comments about margins - conversely, Lennar actually increased their margins in the past quarter to 18%). Ryland is doing none of these things well. Also keep in mind, that nearly 50% of their liquidity is from available credit lines according to documented sources

These are important considerations to keep in mind.

2008 Oct 25 05:39 PM

[MarvinMBA:]

Going bankrupt would be a good idea. MarvinMBA

2008 Oct 26 02:06 AM