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The Ryland Group, Inc. (NYSE:RYL)

Q4 2008 Earnings Call

January 29, 2009 12:00 pm ET

Executives

Drew Mackintosh - VP, IR

Chad Dreier - Chairman and CEO

Dave Fristoe - SVP and Controller

Larry Nicholson - President and COO

Gordon A. Milne - EVP and CFO

Analysts

Ivy Zelman - Zelman & Associates

Michael Rehaut - JPMorgan

Megan McGrath - Barclays

Josh Levin - Citigroup

Nishu Sood - Deutsche Bank

Rob Stevenson - Fox-Pitt Kelton

Jay McCandless - FTN Midwest Securities

Carl Reichardt - Wachovia

Susan Berliner - JPMorgan

David Goldberg - UBS

Timothy Jones

Alex Barron

Operator

Good morning ladies and gentlemen, and thank you for participating in the Ryland Group's 2008 Fourth Quarter Earnings Results Conference call. The company will first share its prepared comments followed by a question-and-answer session. (Operator Instructions).

At this time, we would like to turn the call over to Mr. Drew Mackintosh, Vice President, Investor Relations. Mr. Mackintosh, please begin.

Drew Mackintosh

Thank you. Good morning and welcome to Ryland's fourth quarter 2008 Earnings Call. Today's call is being transmitted live over the internet and can be accessed at Ryland's Investor Relation section of the website at ryland.com.

In a moment, I'll be turning over the conference call to Chad Dreier, Ryland's Chairman and Chief Executive Officer. Also joining us today are, Larry Nicholson, President and Chief Operating Officer; Gordon Milne, Executive Vice President and Chief Financial Officer; and Dave Fristoe, Senior Vice President and Controller.

Before we begin, please be aware that certain statements in this conference call are forward-looking statements based on assumptions and uncertainties that include the completion in profitability of sales, changes in economic conditions, mortgage lending markets, cost and pricing and interest rates, consumer confidence and general housing mark conditions, and general economic business and competitive factors, as well as the factors set forth in the company's press release. These factors and others may cause actual results to differ from the statements made in this conference call.

With that out of the way, I will now turn over the call to Chad Dreier.

Chad Dreier

Thank you Drew. Good morning and thank you for joining us. By now hopefully you have had a chance to review our release that we issued after the close of business yesterday.

2008 proved to be another tumultuous year for the housing industry. Ryland and other homebuilders face mounting obstacles to selling homes including stricter lending standards for homebuyers, rising unemployment, and over supply of new and resale homes and declining consumer confidence.

Though the year continued to be challenging, Ryland achieved several goals during the year. These achievements went a long way towards keeping our company financially sound and forays to take advantage of future opportunities.

First and foremost we bolstered the strength of our balance sheet. Our primary focus during the year was to generate cash from operations, a difficult task in today’s market. This meant maximizing revenue from selling houses, paring down our land position and working as efficiently as possible.

The entire organization really worked together to improve the financial condition of the company. As a result we are able to end the year with $180 million more cash than we had at the end of 2007, even after paying our $21 million in dividends and repaying $54 million in senior notes

Second, we responded to the changes in the market. As the business of selling homes evolved so did Ryland. Our divisions work tirelessly to define the right combination of quality and value to attract the highest number of homebuyers in each of our markets. We achieved this by utilizing all of our resources as a homebuilder and mortgage finance company.

We retold our four plans, offered unique incentives to new homebuyers, and provided an array of financing alternatives. These initiatives enhanced our ability to compete successfully in this difficult housing market.

Third, we reduced our overheads. Ryland proved in 2008 that we could efficiently scale down our cost structure to a level more appropriate for today's market. This required our team to make some tough decisions about how we run the business.

We consolidated our operations, curtailed expenses and challenged ourselves to work harder and smarter. We asked our employees to do more with less and they rose to the challenge. The cumulative impact of these efforts resulted in our SG&A expense being 29% lower in 2008 than it was in 2007.

Finally, we positioned Ryland for the future. The silver lining to any downturn is the opportunity that exists once things improve. As this housing slowdown progresses, more and more homebuilders are finding it difficult to survive. Several competitors who thrived in the good times do not have the financial or strategic wherewithal to endure these difficult times.

Thanks to our seasoned management team, dedicated employees and sound financial condition, Ryland is poised to take advantage of opportunities that will inevitably arise as a result of this downturn.

Now, here are some of the details from the quarter ending December 31, 2008. Ryland recorded a loss per share of $1.40 for the period. This figure included inventory valuation and joint venture impairment charges totaling $46 million, losses from land sales of $20 million, option deposit and feasibility write offs of $6 million, and a goodwill impairment charge of $3 million.

Attracting new homebuyers remains a challenge given the lack of confidence that is affecting the entire economy. As a result, sales were even tougher to achieve in this seasonally slow quarter.

Revenue from the sale of homes came in at $484 million compared to $823 million in the fourth quarter of last year. We closed 1,964 units in the quarter, a 36% decline from the same period last year. This decline was basically in line with our lower community count which now stands at 275 communities, 32% lower than the fourth quarter of 2007.

The average closing price declined 9% to 246,000, and gross profit margins on homes closings excluding inventory valuation adjustments and write-offs average 10.2%, while SG&A as a percent of homebuilding revenue came in 11.7%.

We generated $30 million in revenue from land sales in the quarter. These land sales allowed us to exit several locations that no longer made strategic or financial sense for us and to take advantage of the tax carry back provision. We generated 554 home sales in the period, a decline of 65% compared to last year.

I must say that I joined homebuilding in April of 1977, so I have been in the business almost 32 years and October and November were two of the slowest months I have ever experienced.

The cancellation rate as a percent of sales in the fourth quarter spiked to 55% in the period. On the basis of backlog, however the cancellation rate was 30%, a lower percentage than the 37% rate we experienced in the fourth quarter of 2007. The combination of fewer sales and persistent cancellations left us with a backlog of 1,559 homes, 46% lower than the end of 2007.

We have made some progress in replenishing this backlog, as first quarter sales are off to a better start than they were in the fourth quarter. In fact January's net sales are already double the amount they were in October, and the cancellation rates so far in this quarter is down to more a manageable 20% of gross sales.

Fortunately, Ryland has been able to strengthen its balance sheet in the midst of this industry contraction. We ended the year with a net debt to capital ratio of 34%, thanks to our $423 million cash balance. Cash flow from operations during the fourth quarter of 2008, contributed $79 million to this total.

Our cash balance will get another boost when we collect a tax refund later this quarter of over $160 million. Debt at the end of the year totaled $790 million, which included $22 million borrowed against our mortgage warehouse line. Since the close of the fourth quarter, we have reduced our debt by roughly $47 million, by buying back portions of our bond issues at prices significantly below par.

We amended the terms on our bank revolver to give us more room under the tangible net worth covenant. In return for this amendment, we agreed to lower the capacity of the bank agreement to $200 million. We have no borrowings outstanding on this bank facility and given the size of our cash balance, have no plans to tap into it any time soon.

Not only is our balance sheet strong, it's one of the more transparent ones in the industry. Our joint-venture exposure now consists of six joint-ventures, with a combined $12 million in equity and only $1 million in debt.

We continue to pare down our inventory levels during the quarter. We ended the year with 23,555 lots under control with a breakdown of 19,239 owned and 4,316 optioned. Our owned lots are 73% developed on average, so development costs should remain reasonably low in 2009.

We continue to keep our speculative inventory in check. We had 639 speck units at the end of the quarter, 22% fewer than last year. We also reduced our model inventory by $59 million compared to the same period last year.

Turning to the Financial Services segment, which provides mortgage origination, title, escrow and insurance services for our homebuyers. We generated $5 million in profits in the fourth quarter. 81% of the buyers in the quarter choose Ryland's Mortgage Company.

The loan characteristics of these buyers remains constant. Average FICO score of 711, a combined loan to value of 90% with 56% opting for a Government insured loan and 44% going with the prime loan.

Earlier this month we increased our warehouse line of credit with [Guarantee Bank] and a syndicate of other lending institutions to $60 million. This will give us additional flexibility to find buyers for our mortgages.

In conclusion, in spite of the many obstacles we faced we strengthened our organization in 2008. We showed an ability to adapt and rise to the challenge of these tough economic times, demonstrating that Ryland's entrepreneurial spirit is alive and well. In addition our ability to generate cash showed that our flexible business model is effective in good times and bad. The numerous economic factors that are impacting the housing market make it difficult to determine when business will improve.

Based on our current projections however, we do expect to be cash flow positive for the year, in addition to the tax refund. We face the future with an optimism that housing will recover and that we will persevere as a stronger and more efficient homebuilder.

We made great strides in 2008 to make Ryland a better company. None of this progress is possible without Ryland's dedicated employees, our subcontractors, suppliers and customers, the Board of Directors and our shareholders. I thank them for their support and for their valuable role in insuring Ryland's success.

This concludes our prepared remarks and we will now be happy to take questions.

Question-and-Answer Session

Operator

Thank you sir.(Operator Instructions). Our first question or comment is from the line of Ivy Zelman. Your line is open.

Ivy Zelman - Zelman & Associates

Good afternoon, Chad. In a relative world they said you may be one of the taller midgets, I guess, with respect to your balance sheet which I am sure you guys feel great about.

Chad Dreier

Is that a compliment?

Ivy Zelman - Zelman & Associates

Yes.

Chad Dreier

All right. I appreciate it.

Ivy Zelman - Zelman & Associates

Thinking about 2009, can you help us understand what we should expect given the challenges in 2009 with backlog being down and obviously the market is very challenged. How do you expect cash flow to look for the year and then maybe tell us how you get there?

Gordon Milne

Ivy, this is Gordon. What we are looking at is very little being spent on new land and development costs. We are still going to close a significant number of homes which still generates cash. We got our SG&A down to a level that we think we can be cash flow positive. I think our thoughts are, we hate to put a number on it, but we are fairly comfortable there will be significant positive number this year without giving an exact number.

Ivy Zelman - Zelman & Associates

Is there from a land spend knowing it will be minimal, can you give us a frame or reference what we should expecting?

Gordon Milne

We think 175 for the year.

Ivy Zelman - Zelman & Associates

175, okay. Would that compare to what was it in 2008, I'm sorry?

Gordon Milne

I think we are now about the same level.

Ivy Zelman - Zelman & Associates

Okay. Are there markets where you would say you're running out of finished lots and you might be more interested in acquiring distressed finished lots and others that you might want to highlight?

Chad Dreier

Well, I don't know that we would be that specific right now. I mean, I think our business plan still remains the same, and if we can find lots that make financial sense we will go after them. So --

Ivy Zelman - Zelman & Associates

Do you….

Chad Dreier

I think you are supposed to just get one question.

Operator

(Operator Instructions). Our next question is from the line of Michael Rehaut. Your line is open.

Michael Rehaut - JPMorgan

Yes, Thanks. First question just on January, you mentioned that the sales were double the level of October, but at the same time, October was one of the worst months that you have experienced. So, just trying to get a better context of what that January comment meant, if we could kind a get it more relative to December or year-over-year?

Chad Dreier

I will probably get in trouble with my lawyers, but the 554 in the fourth quarter was like 165 in October, 161 in November and 228 or 9 or whatever the arithmetic is in December. So, that's the magnitude of the numbers of the 554. January, then, the comment was twice October, so October was 165 and for you arithmetically challenged, twice that is 330. So our first, our sales in January are better than 330.

Michael Rehaut - JPMorgan

Thanks, Chad for that. As a follow-up, did you make any adjustments to pricing in terms of the improvement in January and I guess along those lines, we continue to be surprised that you've had been able to navigate with lesser impairment charges the last couple of quarters and I think you've kind of taken it on the chin in terms of orders on the quarter. Was there any pricing adjustments made in January and do you anticipate, if not do you anticipate any to get that volume up a bit?

Chad Dreier

I would say we have not made any significant pricing changes. I mean, the fact of the matter if average prices were 300 two years ago and they're 246 or whatever arithmetic was today, and mortgage rates for 30 year fixed at 5%. That's a great deal. There is still in spite of what people think, a number of people that just want to buy a house because it's the right thing to do and I think we are seeing that. Without going too much off into a tangent, they think that the year is over, and there was the inauguration and there's lots of hope and I think its just marked somewhat better from that point of view.

The second question on the impairments at least as I heard it. I think we talked over the years that we had less land exposure in California and Nevada and joint-ventures in some of those other things. So I think that's coupled with that.

Michael Rehaut - JPMorgan

Great. One last question.

Chad Dreier

Again you got to get back in the queue.

Operator

(Operators Instructions) Our next question or comment is from the line of Megan McGrath, with Barclays. Your line is open.

Megan McGrath - Barclays

Thanks. A bit of a follow-up on the competitive environment. We have been seeing and hearing that in the fourth quarter banks may have gotten a little bit more aggressive on the pricing of the REO homes they had in inventory. Just curious as you saw that and heard that from your sales folks in this field, and did you need to react to that at all during the quarter?

Chad Dreier

The REO thing is, it is what it is, and I actually was having discussion with a homebuyer like last week, and she said they went to look at the REO's and they were horrible, awful, terrible, crappy, that's the polite way of saying what she said. You know we still sell new homes with the windows in and the lights working and all that. So there is a lot of REO's, there is a lot of problems, there is a lot of challenge on that, but if somebody wants to buy a new home they are going to buy one.

Megan McGrath - Barclays

Okay thanks. Quick follow-up. A few of your competitors have publicly announced programs offering below market interest rates. Have you done that?. Can you give us any details if so?

Chad Dreier

I want to ask Larry to respond to that.

Larry Nicholson

Yes, we have done it in numerous markets around the country. We have 399 in a couple of markets and four and half, so its a market-by-market decision based on the temperature in the market.

Megan McGrath - Barclays

Fine, thank you.

Chad Dreier

Okay, thanks.

Operator

Our next question or comment is from the line of Josh Levin from Citi. Your line is open.

Josh Levin - Citigroup

Good morning everybody. You are talking about being cash flow positive for the year, and [seeing] the $175 million for land spend. I wonder, is there a number you could give us of closings that would make you breakeven cash flow? Is that what we could sort of narrow it down a little bit?

Chad Dreier

No.

Josh Levin - Citigroup

All right, so noted. Different question, do you have a sense of what's happening to rents in your core markets?

Chad Dreier

I don't, not really. We would have to do some research and you probably got more research than we do on that.

Josh Levin - Citigroup

All right.

Chad Dreier

Next.

Operator

Thank you. Our next question or comment is from the line of Nishu Sood from Deutsche Bank. Your line is open.

Nishu Sood - Deutsche Bank

Thanks. First I had an accounting question. Your land sales, obviously they picked up a bit in the fourth quarter.

Chad Dreier

Yes.

Nishu Sood - Deutsche Bank

Revenues of 30, a loss, I think it was of negative 20.

Chad Dreier

Right.

Nishu Sood - Deutsche Bank

Some times you see, land sale kind of breakeven implying that the asset has been impaired down to basically what you are going to sell it for. In other cases, like your fourth quarter you see a loss. What's going to determine in the impairment process, whether you end up with, the loss showing up as an impairment or as a loss in your income statement?

Chad Dreier

Well, a lot of it just had to do with timing. if you are doing a ? we do that every quarter, and if economic conditions change from say like September to December, and then we actually execute a transaction, you will see it as a loss on our land sale as opposed to an additional impairment.

Nishu Sood - Deutsche Bank

Got it. Okay.

Operator

Our next question or comment is from the line of Rob Stevenson with Fox-Pitt Kelton. Your line is open.

Rob Stevenson - Fox-Pitt Kelton

Good afternoon, guys. If you were to renegotiate the line of credit this time around, how much more difficult or time consuming was it this time around than the previous times?

Gordon Milne

I won't say it’s any different than the previous times. We had good support. JPMorgan is our lead bank and did a good job for us. We got a very high approval on this, not 100% but close on banks approving. The original deal went out, I am trying to remember, but I don't think it was modified and closed right on the time that we had said when we started it. So the banks, I think are really happy with how it happened and the timing of it.

Rob Stevenson - Fox-Pitt Kelton

Okay. A follow-up. When you guys look at the perspective five year tax carry back. What's it worth to you guys in terms of cash and when you would expect to get the money if it passes?

Chad Dreier

Yes, that's a good question. Obviously we don't know the exact answer, but as we go through 2009, our first preliminary cut will probably be at least 50 million this year and may be more depending on how many houses we close and if we get other land sales on land and stuff that was impaired, as we execute those transactions that will create a bigger carry forward or carry back I guess however you want to say that. So it will be certainly a positive event for us.

Operator

Thank you. Our next question or comment is from the line of [Alex Byrant]. Your line is open.

Unidentified Analyst

Thanks guys. I was wondering if Gordon maybe you had the number for the benefit from previous impairments for the quarter?

Gordon Milne

I'll give it to you, one second.

Chad Dreier

Dave Fristoe has. Why don't we let him look for it and the --

Gordon Milne

198 million.

Chad Dreier

A 198 million.

Unidentified Analyst

That's for your quarter.

Gordon Milne

Yes.

Unidentified Analyst

Okay. Just quickly I was wondering in terms of, you know, I know you have already cut tons of people and all of that, but if the current sales rates persist into '09, what else can you do, I guess to manage your SG&A?

Chad Dreier

Well, its a good question, and trust me we have the discussion on a daily or weekly basis. At the end of the year we are down to about 1,300. I think if we, if you really had another huge decline in sales you would probably have to think about things like merging more divisions or rethinking your regional structure or stuff like that. We actually feel pretty good where we are especially based on the early January sales, but it’s a good question and I am not sure I have great answers for you.

Unidentified Analyst

Okay. Thanks. I'll get back in the queue.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment is from the line of Jay McCandless. Your line is open, sir.

Jay McCandless - FTN Midwest Securities

Good morning.

Chad Dreier

Hi.

Jay McCandless - FTN Midwest Securities

First question I had is, could you give us a segment breakdown of the lots under control?

Chad Dreier

You mean, like how many in the west and how many in the north and all that?

Jay McCandless - FTN Midwest Securities

Exactly.

Chad Dreier

Do you have that Larry?

Larry Nicholson

Yes.

Chad Dreier

Okay.

Larry Nicholson

7100, I am rounding. 7100 in the North, 8700 in the South, 5300 in Texas, and then 2400 in the West give or take.

Jay McCandless - FTN Midwest Securities

Okay, great. Then my follow-up question, which vintage of debt did you all repay after the quarter and do you all have a target for where you want net debt cap to be?

Gordon Milne

What we have done is as pieces are offered to us of our existing bond deals, the 12s, 13s and 15s. If the price was attractive we bought pieces of all of them. I mean, the 15s traded the biggest discount, the 12s are the first maturity and 13s are the highest coupons. So, there's a rational for buying each of them. Actually the yield on all of them is about the same, what we bought it in the quarter.

As far as more I mean opportunistically we will just look as the year goes on. We just felt with the extra cash we had at the end of the year and with the bigger tax refund we had some extra cash and seemed like a good return on our money to buy some back. I think our net debt to capital of low 30s is a good place to be with the extra cash coming in it will even be lower and should be at the end at the first quarter.

Jay McCandless - FTN Midwest Securities

Great. Thank you.

Chad Dreier

Okay. Thanks.

Operator

Our next question or comment is from the line of [Ron Reichardt]. Your line is open.

Chad Dreier

Is that supposed to be Carl?

Operator

Sir, if you are speaking your line is open.

Carl Reichardt - Wachovia

I don't know. Can you hear me, Chad?

Chad Dreier

Is this Carl.

Carl Reichardt - Wachovia

That's my new name is [Ron] , I guess.

Chad Dreier

I think that we got something lost in the signals there but I think its Carl Reichardt of Wachovia.

Carl Reichardt - Wachovia

It is.

Chad Dreier

Okay.

Carl Reichardt - Wachovia

Thanks. I have a question about your specs. Gordon of the 639 you had how many were finished?

Gordon Milne

About 420 some.

Carl Reichardt - Wachovia

420 some, okay, thanks and then Chad, you made a comment about some of your peers not having, I think you said the strategic wherewithal to continue to compete. It is an interesting turn of phrase. I am curious what do you mean by that? Can you expand on that?

Chad Dreier

Well, different companies have different strategies and might think ours is better than some of theirs.

Carl Reichardt - Wachovia

From the capital management perspective you mean.

Chad Dreier

Or maybe.

Carl Reichardt - Wachovia

Or some other way.

Chad Dreier

Management, strategy, finance et cetera.

Carl Reichardt - Wachovia

Okay. Thanks, guys.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment is from the line of Susan Berliner with JPMorgan. Your line is open.

Susan Berliner - JPMorgan

My first question is you had mentioned you had exited some markets, can you tell us which ones?

Chad Dreier

Well, I think we're down to like half a dozen lots in Cincinnati and I will say for the record our people in Cincinnati have just done a fabulous job of working through that difficult challenge, and in Northern California we are pretty well down to the end.

Susan Berliner - JPMorgan

Great. My other question is you had mentioned potentially buying some distressed land. Are you seeing the banks taking down land prices enough to or I guess what is the difference between kind of the bid/ask spread, are people getting more rational on land prices?

Chad Dreier

Well, first of all I think as one of the questioners that asked me if we were going to take down distressed land. I don't think I said that with all due respect.

Susan Berliner - JPMorgan

Okay.

Chad Dreier

The second half of your question is we haven't really seen a whole lot of banks dropping their asking price. So I think the bid/ask price is still pretty wide in terms of how we can make money used and if you said, today's business price is $246,000. I mean that's a hard, we are not seeing land that we can buy then lets just make that kind of deal yet. So we will see what happens in 2009.

Susan Berliner - JPMorgan

Great. Thank you.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment is a follow-up from the line of Michael Rehaut. Your line is open once again, sir.

Michael Rehaut - JPMorgan

Thanks. First question just on the rates buy down. If you could help me with the math there, a little more difficult than the 165 times too. So on an average selling price, what is that amount to in terms of a --

Chad Dreier

If we are selling like a 399 and the market is five or something like that figure?

Michael Rehaut - JPMorgan

Right. Just, what does that -- I mean is that kind of, do you kind of look at that as an incremental incentive and how does that get worked through, is it just taken out?

Chad Dreier

I don't know that I would call them incremental incentive because I think, we all still have an array of incentives, some buyers want a interest rate by down. Others would want more improvements in their house, or free carpeting or those kind of things, so I still think we operate with a bucket that says we'd like to give X.

Now as I said I am really an old guy, but in the old days one point of mortgage some 5 to 4 say was like six points of cost. So, I mean if we are selling the house lets use 300, a near scenario 399 buy down would be $18,000. Is that kind of the question?

Michael Rehaut - JPMorgan

Yes, I guess I was thinking more even on a monthly payment as well, but that's fine. I can work on that later. The other question just on the, you had mentioned refueling floor plans as one of actions that you have taking and you know KB Home is still making a lot of noise about more I think systematic effort in terms of reducing their type of house being offered.

I was wondering if you could give us any more detail in terms of your efforts if its more of case-by-case, if you are kind of taking or look at a community or group of communities that you are doing that for, and if that has any positive impact on the margins?

Larry Nicholson

Hey Mike, it's Larry. Yes, we looking at the community level, we go community-by-community. I think that some cities obviously have been more of a drastic shift based on what's happened in those markets. You know you do expect to pick up some margin, because obviously you are gaining on the cost side. But to say that we have done it wholesale from that what we have heard from some of our competitors, we leave it to the local guys in the market, and we think our product was market driven originally.

In some markets we have to make a lot of change, some we have to make very few changes, maybe just take some features out. Others we have just, I mean we've have stripped the product line out and put a whole new product line in. So it's not a one size fit's all, I guess its the best way of putting it.

Michael Rehaut - JPMorgan

Okay. And just lastly, the $198 million benefit, that's a full year number just to verify?

Gordon Milne

No. That's a quarter, full year is 306.

Michael Rehaut - JPMorgan

Okay. Thank you.

Chad Dreier

Okay. Thanks.

Operator

Thank you. Our next question or comment is from the line of David Goldberg with UBS. Your line is open.

David Goldberg - UBS

Thanks. Good morning guys.

Chad Dreier

Hello David.

David Goldberg - UBS

I got a follow-up question on [Lon's] question before. Question was. Chad you are kind of talking about some of the distress, I think that you are seeing out there. I am wondering if you kind of handicap where you think we are in terms of that process. Do you think the builders are gaining market share or some of them publics or maybe even you guys in your market. How long do you think we have to go through this process before we have dumped out some of the weaker players?

Chad Dreier

I think the facts are, in 2008 you saw quite a few players either file bankruptcy or go away. I don't really want to name names, I think you know all of the names. I think we are continuing to see smaller private builders just get hammered, to use a technical term by their banks and lending institutions I think you are just going to see more and more of those be challenged. I think obviously the public, some of us have better financial structures than the other.

I think 2009 will be an interesting year, whether or not the stimulus thing from the new administration goes through, and how it goes through, and who are the winners and the losers, you know well how the banks or lending institutions have taken back land and whether they end up selling distressed deals. Whether or not certain homebuilders, mostly public, will have relationships or strategic wherewithal to answer [Lon's] question, on how to take advantage of that. And I think we'll see a lot of that play out in 2009.

David Goldberg - UBS

Maybe I can get a follow-up, because I think and I don't want to put words into your mouth, but we can assume that the stress is going keep increasing through the selling season. I am trying to get an idea of how you think that impacts the market. Does it create an opportunity for market share gains as you move through spring or is it more you see more inventory coming into the market and maybe discounted prices and so it’s causing prices to keep going down?

Chad Dreier

Well, that answers about six questions. Ultimately, whenever this thing turns around and I did try to talk about silver linings in my speech, twice actually I did that. It is that the big builders will come out with a bigger market share. Right now the pie is getting smaller so that's a challenge, but I think we'll see bigger market share.

Second, the REO thing, one of the other of your colleagues asked a question. That is a challenge and that does have some issues and it has appraisal issues and all of those other kind, so that's a challenge. But sooner or later if you got back to one of my comments, house prices have really gotten low. Interest rates are very low, at least in my lifetime 32 years in homebuilding, I have never seen 5%, 30 year fixed rate loans.

So I think sooner or later it will stabilize. I think its good news. I was driving to work this morning they said it's the lowest home starts since I don't know 1963 or something like that. I think that's good, that's less inventory. So I think, you can be a glass that's half full or glass that's half empty. We are kind of glass that's half empty, half full and I really feel, I have more hope than Obama. I think things are going to get better.

David Goldberg - UBS

I hope you're right.

Chad Dreier

Okay.

David Goldberg - UBS

Thanks so much.

Operator

Thank you. Our next question or comment is a follow-up from the line of Megan McGrath your line is open once again.

Megan McGrath - Barclays

Just a really quick accounting modeling follow-up. On the debt you repurchased after the end of the quarter, since you said you purchased it at a discount. I assume that it’s going to be some type of equity gain in the quarter. Any chance of quantifying that for us?

Gordon Milne

Let's just say, so far we are up around somewhere $10 million to $15 million in that range.

Megan McGrath - Barclays

Okay, great. One other quick accounting one. The cash benefit that you received last quarter from the termination of the deferred comp plan, did that reverse in the quarter?

Chad Dreier

Yes

Megan McGrath - Barclays

And that went through --

Chad Dreier

Yes, it did.

Megan McGrath - Barclays

That went through cash and up. Okay, thank you.

Chad Dreier

Thanks.

Operator

Thank you. Our next question or comment is from the line of Timothy Jones. Your line is open, sir.

Timothy Jones

Hi, Chad.

Chad Dreier

Hey, finally, at least one guy has been around longer than me.

Timothy Jones

41 years my boy.

Chad Dreier

All right.

Timothy Jones

Anyways, I like those figures you gave us on the sales for the last four months. Two questions, first could you give me the cancellation rate for each month. Second get an idea of the gross sales. Secondly could you put more flavor on -- normally the worst two months for a builder are January and December. I mean, put more flavor on what caused this tremendous rebound here? Was it in a certain price range? Was it in certain markets or did you discount more? Give me a more flavor on that.

Chad Dreier

Yes. Hey. First of all on the first one I'm going to ask Drew to call you back and give you the gross sales on that.

Timothy Jones

No problem.

Chad Dreier

Okay. The second one I actually don't think we've done anything specifically different in January, which is usually is really a crappy month. I just think when the year turned and the President got inaugurated and lots of stuff, as whether you like it or don't like it there's going to be a stimulus bill. I think people are feeling better about that and then I go back to my earlier comment which just sounds silly.

But if you are a 35 year old couple with a kid and you need to buy a house, "Hey, this is as good time as we have ever had", you know, for us the average price $246,000 at a 5% interest rate, that's got to be a monthly payment less than 1,000 bucks or something like that.

I think its, if you are going to buy a house and you are not flipping it and we are not seeing a lot of speculators right now. You are going to be in a house or five or seven or ten years. I think its all time, great time to buy a house.

Having said that geographically, we have actually had a fairly good month in the Mid-Atlantic, and I don't know if you would attribute that to the government and people coming to DC or Virginia or Baltimore whatever that's really been pretty good. But I will also say in Houston, which is a long way from Baltimore, that's been a pretty strong market too, and that's a much lower price point.

So it’s not like we sold 100 houses in one community at a distress sale or something. I mean, it has been pretty well spread around the country and we feel pretty good about it.

Timothy Jones

Thank you, Chad.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment is a follow-up from the line of Alex Barron. Your line is open once again.

Alex Barron

Yes, thanks. Hey, Chad I was wondering if you could comment on what's going on in Texas and also in your west division. I guess those two, I'm trying to understand what's happening in the orders I think in Northern California you said it sounds like you're exiting so I thought maybe some of that decline was because of that. But I was wondering if in Texas things are just kind of starting to slowdown a lot like they had in other markets?

Chad Dreier

Well, I think in Texas I think it slowed down last year, but as I have talked to our people and actually other, my other contacts, Houston has done pretty well and I don't know if that's an oil thing or not. San Antonio is doing pretty well for us. In the west, basically I said we are out of northern California, substantially, we've only had a couple of sales there. In Phoenix, Denver and northern California we have hardly any inventory, and we're not just real active. So, I mean none of the numbers that I am talking about are coming out of there. In southern California, I don't think it is any better or any worse than it was three or four months ago. Las Vegas I would say is still pretty slow.

Alex Barron

Okay. And do you have any plans on exiting any of your current markets that maybe you hadn't announced before?

Chad Dreier

No, I mean we're three weeks into the year, let's sort of see what's going on here.

Alex Barron

All right. Thanks.

Chad Dreier

Okay.

Operator

(Operator Instructions). Our next question in queue is from the line of Jay McCandless. Your line is open once again.

Jay McCandless - FTN Midwest Securities

Just a quick follow-up on the commentary earlier about appraisal pressure from REO's. How much power do you have as the builder to push back on the appraisals and keep the values as high as possible?

Chad Dreier

Not much. I think that's a pretty transparent world nowadays and most of the appraisers feel a lot of heat. So I think I would say minimal of any.

Jay McCandless - FTN Midwest Securities

Has there been any progress on, I think it is called Home Valuation Code of Conduct, where the appraisers are going to have to be treated as an arms length transaction for all the brokers, and have you all discussed that what impact that might have on Ryland?

Chad Dreier

You know, I mean I think that is how we do now, so I'm not intimately familiar with what you just asked, but I would say it wouldn't change how we deal with our appraisers because I think we treat him at arms length now.

Jay McCandless - FTN Midwest Securities

Okay thank you.

Chad Dreier

Okay, next.

Operator

Thank you. Our final question in queue is a follow-up from the line of Mr. Rehaut your line is open once again sir.

Michael Rehaut - JPMorgan

Thanks. Mike Rehaut. Any ability just to quantify, you gave us the community countdown 32% overall, but given the sharp decline in Texas I just mentioned before and obviously California or I am sorry the West. A breakdown on that 32% by region will be extremely helpful if you are willing to give that out.

Chad Dreier

Actually I am not, so we'll go from there.

Michael Rehaut - JPMorgan

All right, thank you.

Chad Dreier

Okay.

Operator

Thank. At this time I would like to turn the presentation over to you for final remarks, gentlemen.

Chad Dreier

Well thanks for being here, we are all kind of glad 2008 is over. I am sure all of you and your institutions have the same challenges. We are all hopeful that 2009 will be better and we look forward to talking to you in April. Thanks a lot. Bye, bye.

Operator

Ladies and gentlemen, this does conclude today's conference. We again thank you for your participation. Good day.

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Source: The Ryland Group, Inc. Q4 2008 Earnings Call Transcript
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