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Executives

Larry Nicholson - Chief Executive Officer

Gordon Milne - Executive Vice President & Chief Financial Officer

Dave Fristoe - Senior Vice President & Controller

Drew Mackintosh - Vice President of Investor Relation

Analysts

Alex Barron - Agency Trading Group

Josh Levin - Citi

Dan Oppenheim - Credit Suisse

Michael Rehaut - Jpmorgan

David Goldberg - UBS

Joshua Pollard - Goldman Sachs

Ivy Zelman - Zelman & Associates

Nishu Sood - Deutsche Bank

Adam Rotger - Wells Fargo Securities

Jim Wilson - JMP Securities

Buck Horne - Raymond James

The Ryland Group Inc. (RYL) Q3 2009 Earnings Call January 29, 2009 12:00 PM ET

Operator

Good day and welcome to the Ryland Group Incorporated third quarter 2009 earnings conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Drew Mackintosh, Vice President Investor Relations. Please go ahead, sir.

Drew Mackintosh

Good morning and welcome to Ryland’s third quarter 2009 earnings conference call. Today’s call is being transmit live over the Internet and can be accessed through Ryland’s Investor Relations section of the website at www.ryland.com. In a moment I will be turning over the conference call to Larry Nicholson, Ryland’s Chief Executive Officer. Also joining us today are 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 and profitability of sales, changes in economic conditions, mortgage lending markets, costs and pricing and interest rates, consumer confidence and general housing market 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’ll now turn the call over to Larry Nicholson.

Larry Nicholson

Thanks Drew. Good morning and thank you for joining us today. Our results for the third quarter of 2009 provide further evidence that housing is on demand and that after four years of decline we are seeing signs of stabilization in several markets. Our sales per community showed another improvement versus last year and gross margins came in above 10%.

These factors combined with lower overhead expense levels and diminished impairment charges give us a road map of profitability in the you future. The trends that we’ve seen over the last six months gives us confidence the goals we have set for ourselves as a company are achievable. I will go into more detail about some of those goals in a minute, but first here are the details behind our company’s performance during the third quarter.

For the period ending September 30, 2009 we recorded a loss of $1.20 per share, compared to a loss of $1.54 in the same period in 2008. Inventory impairments and other valuation adjustments of $39 million or $0.89 per share were the main factor behind the loss. Home building revenues came in at $316 million, a 40% decrease compared to last year.

Unit closings of 1323 homes were down 34% from a year ago period. In our average sales price of $238,000 was 6% lower than last year. The divisions with the biggest contribution to this quarter’s closings included Houston, Central Texas, Washington, DC and Indianapolis. For the second quarter in a row, we achieved an increase in absorptions per community over the prior year.

Net sales came in at 1270 homes, slightly less than the 1284 homes from the third quarter of last year. On a sales per community basis, however, that total represented a 54% improvement over last year. The cancellation rate was 22% of sales, or 14% of beginning backlog. As with the second quarter this cancellation rate was much lower when compared to a year ago and was the main driver behind the improvement in absorption pace.

The key contributors to unit sales in the period were Houston, Central Texas, Las Vegas and Tampa. Housing gross profit margins averaged 10.8%, a 300 basis point sequential improvement from the second quarter of 2009. Part of the margin increase can be attributed to the overall housing fundamentals in some markets getting better an part can be attributed to our increased focus on profitability.

Now that the sales pace has rebounded and liquidity concerns have subsided, we have moved our emphasis away from cash flow and more toward margin improvement. That means scaling back on sales incentives, holding firm on sales price and generally maximizing the value of each lot. To that end incentives as a percentage of sales price dropped to 14.7% in the third quarter compared to 18% in the first six months of this year.

Margins in the quarter were also aided by fewer community closeouts and fewer speck sales as a percentage of overall closings. We thing this gross margin improvement will continue into the fourth quarter. Of course, any increase to gross margins can be nullified by overhead expenses so we continue to work hard at pending down our cost structure.

Selling, general and administrative costs were down $22 million in the third quarter compared to last year. At 12.3% of revenue, our SG&A expense is still higher than we would like it to be, but it is headed in the right direction compared to the first and second quarters of this year. Corporate expense was down by $10 million from the third quarter of last year reflecting a significant reduction in executive compensation and a favorable gain in the market value of investments.

On an absolute dollar basis, our combined SG&A and corporate expense run rate has not been this low in over 10 years. We feel like we are in an excellent position to really leverage this streamlined cost structure when we see sales volume pick up.

Our financial service segment posted a pretax loss of $618,000, compared to a gain of $6 million for the same period in 2008. This decrease was attributable to a higher loan indemnification expenses compared to last year and a 32% decline in the number of mortgages originated. The mortgage company was able to improve on the previous quarter’s already high capture rate, originating 86% of the loans that closed in the period.

The average FICO score for the mortgage we originated was 715 and the combined loan to value was 92%. FHA, VA loans continue to be the mortgage product of choice, 67% of the buyers that used our mortgage company opted for a government loan with the remaining 33% securing a prime loan.

Turning to the balance sheet, we ended the period with cash and marketable security balance of $744 million, debt of $857 million and equity of $547 million for a net debt to total cap ratio of 17%. Cash flow from operations totaled $41 million in the period. We capitalized $10 million in interest in the quarter, expensed $5 million and amortized $14 million in interest to the cost of sales.

Total inventory at the end of the period stood at $857 million. We control 20,721 lots, with a breakdown of 16,754 opened, and 3967 optioned. We are actively discussing land transactions with sellers and working to tie up lots. Since the end of the second quarter, we secured additional land in Indianapolis, Atlanta, Houston, San Antonio, Las Vegas and Baltimore. All of these projects are either option deals with minimal deposits or bulk land for high quality finished lot projects in places with above average absorption paces. Both types of these deals were approved with an IRR north of 30%.

Our ability to blend new projects such as these with our existing land supply will go a long way toward improving our returns and profitability. Admittedly the pace, at which deals are coming to the market are still below what we had hoped for at this point in the cycle. However, we continue to be diligent in our residential projects to set our business model.

In conclusion, we feel good about our company’s position as we head into the end of the year and look into 2010. With $744 million in cash and cash equivalents and no public debt maturities due until 2012, our balance sheet remains strong, which means we have the ability to be more aggressive on the land acquisition front as markets improve or withstand another downturn if things soften up again.

We were encouraged by the improved sales pace we experienced if the quarter. Our divisions have done an excellent job of responding to the market and repositioning our company to maximize sales in each community. I’m also pleased that we are able to do this while adhering to be built business model. Our people in the field deserve the credit as their tireless work and ethic, work ethic and persistence in the face of adversity are what make this company great. I sincerely appreciate their efforts

As we reach stability in the industry, achieving profitability is the number one goal of this company. We’ve made great strides since the first quarter of this year, but we still have a ways to go. The other goal is to grow our community count in an effort to rebuild our business. This mandate has been communicated to each of our divisions who are actively contacting sellers to evaluate the performance of their land and communities

To this end, we are pursuing more deals than at any time in the past several years. I expect to see our inventories level start to stabilize at some point next year. Based on the trends in the third quarter, we are optimistic that the housing market is on the mend and that 2010 will be better than 2009. I’m confident that we have the right people and the right strategy in place to be successful.

That concludes my prepared remarks and I’ll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alex Barron - Agency Trading Group.

Alex Barron - Agency Trading Group

I was curious about your community count. I noticed it’s been going down quite a lot in the last few quarters. Can you talk about how much of that is from actual community closeouts versus mothballing communities?

Larry Nicholson

The majority would be from closeouts and I think we’ve said on previous calls, we worked through a lot of those communities and that was part of the issues we had with margins in the first quarter. So we’ve worked our way through that and see that pace slowing down as we move into the fourth quarter.

Alex Barron - Agency Trading Group

Then as far as impairments, do you have the benefit to gross margin from previous impairments and also wanted to know when you guys do an impairment of a community, is it for all the remaining lots in the community or just the ones in the next few phases?

Gordon Milne

It’s for all the remaining lots in the communities, but I won’t give you a percentage for the benefit, I’ll give you the dollar amortization $45 million for the quarter.

Alex Barron - Agency Trading Group

Do you have that for last quarter also?

Gordon Milne

Not handy. I have it year-to-date. It’s 94.

Operator

Your next question comes from Josh Levin - Citi.

Josh Levin - Citi

Larry, you talked about you how based on recent sales activity, the past you few months. You think the housing market is on the mend. How can you be sure that’s a genuine up tick or a genuine uptrend in demand versus demand being pulled forward by the home buyer tax credit?

Larry Nicholson

I think when we say on the mend, we don’t see any great leaps forward. We see inventories continue to decrease. We see price stabilization. We see a lot of things we haven’t seen for a period of time. So I don’t want to sound like we’re overly optimistic. We just see some of the things that have been eroding for a long time have ceased to erode.

Josh Levin - Citi

Just one separate question, you mentioned for the lots you’re looking at purchasing you gave us your target IRRs. How do those IRRs translate into kinds of gross margins you expect to get on the lots you’re looking to take down?

Larry Nicholson

18% gross margins.

Operator

Your next question comes from Dan Oppenheim - Credit Suisse.

Dan Oppenheim - Credit Suisse

Wondering in terms of the land buying plans that you have, how much of your 2010 community count is turned on buying land in the remainder of this year or in 2010?

Larry Nicholson

Almost nothing.

Dan Oppenheim - Credit Suisse

Then secondly, as talking about the count for 2010 in terms of optimistic, question about the tax credit, what trends do you see during the quarter in terms of sequential order trend during the months and also what have you seen into October?

Larry Nicholson

We’ve got the order trend; we thought it’s fairly positive. Let me give you the three months in order. So July sales, 447, August, 432 and September, 391, which I think seasonality that be a pretty normal trend for those three months, no big drop off in September. I think going into November, the same type of seasonality would show you having less sales in every October than you had in every September, normal basis, so but nothing unusual.

Operator

Your next question comes from Michael Rehaut - Jpmorgan.

Michael Rehaut - Jpmorgan

First question, just you had mentioned that, your goal is to work now more on gross margins and decreasing the incentives. The incentive number that you gave was for the closings per quarter. Is it safe to say that, as you’ve booked orders over the past couple of quarters, that trend has continued and that we should see that 14, 7 continue to come down?

Larry Nicholson

Yes.

Michael Rehaut - Jpmorgan

Could you just remind us what the historical norm is for incentives for you guys?

Larry Nicholson

5%.

Michael Rehaut - Jpmorgan

I guess second question, just on the investments. I wasn’t sure if you gave a total amount spent or lots tied up. You had kind of run through the different markets that you’ve been able to make some investments in, but I was wondering if you had that number for us.

Larry Nicholson

No, we don’t. A lot of the deals are option deals, where there weren’t that much money put up front and so no, we don’t have an exact number of lots or dollars spent but, it wasn’t significant as far as dollars spent.

Michael Rehaut - Jpmorgan

Maybe to ask another way, because this is ultimately the more important question, is given the fact that you are ramping now and trying to find better opportunities today on the ground. Can you give us a sense for what you might expect the percent of homes closed over the next let’s say by the time you get to 4Q, 2010? What that might be from the fresher land deals that you’re putting through the pipe, versus where you are today?

Larry Nicholson

Before I said, almost nothing on the community counts. It’s because a lot of these deals can be continuation there, might be less than 5% and that’s probably a good estimate, 5% to 10% by mid to late 2010, but it will ramp up specifically in other words, it will be buying a lot of deals, but don’t they become active communities until late in the year and early 2011.

Michael Rehaut - Jpmorgan

How would you characterize the competition for the deals right now vis-à-vis, other publics or perhaps even some private equity led outfits in terms of finding deals that do meet your hurdle rates.

Larry Nicholson

I think it’s competitive, obviously, and I’m sure you’ve listened to everybody else’s call. Everybody is in need of lots, especially in certain markets, so it is competitive. The one thing I think is as we’ve seen some run-ups in some markets already. We’re trying to maintain our disciplined approach that we’ve always had and we have a lot of great relationships that will bring lots to us and we think that we’re in a great position, but it is very competitive.

Operator

Our next question comes from David Goldberg - UBS.

David Goldberg - UBS

The first question is as we look to start growing the community count again, trying to get an idea how the current liquidity position, how much growth that can support if you thing about maybe even in closing volumes. Is there a way for us to kind of think about that, how much you could grow the business as you look forward, given the amount of liquidity you have right now?

Larry Nicholson

We’ve got plenty of liquidity. Our projections show we can run for several years here with the current liquidity we’ve got without borrowing more money or issuing equity. Most of the deals we’re doing right now are contemplating or takedown deals that the money isn’t upfront. There is a few of those upfront deals, but a lot of them don’t have big money to go in and they’re more takes. As we deliver homes, we take down more lots again, not capital intensive at this point.

David Goldberg - UBS

I would guess, maybe I’m not asking the question the right way, but I would guess it is the build cycle maybe it’s three months, six whatever the build cycle is going to be. It’s going to require you to increase your working capital too. I know you have lots of liquidity. I guess, I’m trying to understand is, you would need a higher working capital balance I would assume, if you’re delivering more lots. What kind of growth can you achieve without changing the capital structure?

Larry Nicholson

Well, like I said, the numbers we’re looking at, we can grow for several years here without adding any capital. $744million in cash is a lot of cash to have when we’re doing mainly option deals.

David Goldberg - UBS

I guess my second question here, somewhat of a follow-up to Mike’s question before. Not so much about the bidding environment, but what do you guys really think differentiates you when you win deals. I know a lot of the deals are getting taken down on terms. Is it what you’re willing to pay on terms? Is it just the relationships you were talking about, Larry, that you know certain people don’t have relations within the market. I mean, if all the builders are bidding on similar lots, I guess what differentiates you guys when you win?

Larry Nicholson

I think it’s a relationship business and I think at the end of the day, that carries a lot of weight. I think most guys are willing to pay the numbers. I think it really just comes, I think the relationships pushes the ball over the goal line.

Operator

Your next question comes from Joshua Pollard - Goldman Sachs.

Joshua Pollard - Goldman Sachs

Can you talk a bit more about the components of the gross margin improvement? You talked about closeouts having less of a downward factor. You also talked a bit about the capitalization of write-down payment, but could you talk about how much sticks and bricks are down? Or how much land costs are down in your gross margin and which one of those three or four or however many components you want to outline are leading to the next step of gross margin improvement for Ryland?

Larry Nicholson

It’s many of those things. It’s the incentives that we mentioned before. It’s our direct costs are down year-over-year as well as price stabilization and increases in certain markets, so it’s all those things.

Joshua Pollard - Goldman Sachs

Could you quantify any of those things and could you also talk about, which markets you’ve been able to raise prices and by how much?

Larry Nicholson

I think quantifying Josh would at the back year on that. As far as markets, I think most of the markets in we’ve tried to raise prices. I think we just have come to the conclusion that you’re never going to know if you can unless try and it’s time to try and we’ve had pretty good success in most markets.

Joshua Pollard - Goldman Sachs

Where you’ve tried to raise prices, in how many of your markets have those price increases actually took hold?

Gordon Milne

I would say 75%.

Joshua Pollard - Goldman Sachs

Your payables jumped up a bit this quarter and I personally wasn’t modeling that. Did something unusual happen in your payables or should we expect as you guys try to manage your working capital for your payables to stay high.

Larry Nicholson

It’s an anomaly. It has to do with the timing of payments and timing of starts. We had a few more starts than typical because of our backlog and then to happen, timing of them so those two things were contributing to that.

Joshua Pollard - Goldman Sachs

It’s a bit more theoretical. Can you give your thoughts on being a home builder that has both positive earnings and positive cash flow, when you look at Ryland a little bit further past the dark days of this downturn, do you look at that as a goal or do you think that that’s impossible?

Larry Nicholson

Well, if you look back to our history from 2000 to 2006, I think we achieved that. We didn’t grow quite as fast as other builders because of it but we did put $1 billion into share buybacks during that period. So, we weren’t using all our cash plus borrowing money to grow.

We were returning money to shareholders. Obviously now is not the right time, but our philosophy wasn’t to grow with all the capital we could borrow, it was to have some money being returned to shareholders and, gave us a little slower growth, but it didn’t hurt our margins. So, I mean, hopefully get back to there.

Operator

Your next question comes from Ivy Zelman - Zelman & Associates.

Ivy Zelman - Zelman & Associates

All this talk about you guys buying land and trying to buy deals and what still just puzzles me is you have based on closings on an annualized level that you’re running at right now, you’ve got roughly a four year supply of land and I wonder, given that you’ve impaired that land appropriately, why would you need land, because historically, you guys thought me as a business that you don’t want to really have more than two to three years’ worth of owned land. I know that a significant portion now is owned. So what’s the rush it’s not like sales are running at a pace that would suggest you’re going to run out any time soon?

Larry Nicholson

I think it’s a market by market case. You look at the aggregate. I mean there’s still markets that we need lots to continue to operate, so we go out and do it and we look at it on an opportunity basis, if it meets all the hurdle rates and we think it adds to our business, we’ll go out and buy it.

Ivy Zelman - Zelman & Associates

Even at the expense of having too much land where you’re not generating any returns sitting there, because that land that you’re not using, albeit it may not be in good locations and where the demand is today, that land sits there without generating a return and I think what we’re all focused on is generating returns and I’m not criticizing Ryland I’m criticizing the industry, because realizing that there’s a lot of land that sitting on the balance sheets of home builders.

It just seems as is that everybody is going out to buy finished lots right now and lot prices are being bit up, but we’re not getting the gross margins that would justify sort of the rate returns that maybe the market is expecting you to generate so realizing you’re saying a gross margin of 18%, a lot can happen if the economy and the market doesn’t improve.

I mean, you talk about seasonally slowing. You guys are running at a pace that would be it definitely seasonally slower like you said, but you’re running call at 50% below normal. According you said that it’s seasonally slower; it’s starting from a basis that’s at tough level. So, it’s concerning to me that builders are buying lots when they already have so many lots and demand is still so tapped?

Larry Nicholson

Yes, I mean, I think we’re buying them a couple reasons. I think the biggest one is the lots always in the right places where you want to be building and obviously the more successful markets you’re running shorter of land in those markets you are in the markets that aren’t recovering. That’s not where we’re buying land. First thing we are got; we’re doing these with 30% returns. Cash is now earning 1% to 1.5%.So, the returns of buying the new land; certainly look more significant than just keeping cash.

Ivy Zelman - Zelman & Associates

Can you hear me?

Gordon Milne

Sorry.

Ivy Zelman - Zelman & Associates

I lost you guys. Can you hear me?

Gordon Milne

Yes. Did you hear me?

Ivy Zelman - Zelman & Associates

No, I didn’t hear you Gordon, I’m sorry. You said you have lots that are not in at this point the demand markets, but I’m questioning, “What’s going to happen to those lots? So they just going to sit on the balance sheet? Are you going to try to sell them?”

Gordon Milne

We’re working through them slower and then we’re trying to buy communities in areas where we’re selling lots of homes and we need replacement communities in those areas. The second part of it was, I’m earning on the cash 1% to 1.5%. We’re earning on the land we’re buying today pro forma 30% IRR. It’s hard just to leave the money in cash and pass on land deals, because I want to make one and half instead of 30.

I’d like to get better increase on margin, some of the deals are penciling out better than that, but a lot of more are option deals, so 18% is pretty good. We’re not putting a lot of capital into it. Just seems to be the right thing to do.

Ivy Zelman - Zelman & Associates

Gordon, when you look at your margins right now that you generated in third quarter, I think Larry you said that, you expect margins to continue to improve, but without the benefit of any new communities that you’re able to close homes on for fourth quarter in 2010. Give us an expectation of margins from third to fourth quarter? Is it kind of in the significant type of jump-up from 11 to 15, again another several hundred basis points or are you looking at more modest improvements sequentially?

Gordon Milne

I think, hopefully we can continue to modest improvements. You’ve seen from when you go from the first quarter, I think it was 6% to 10.7% in the third quarter, that’s pretty significant improvement and we see those continuing. I don’t think you’ll see on existing communities a move from 10% to 15% in one quarter, but I think you’ll see continuing improvement on existing and obviously, when you can factor in new projects, if we can get them opened, that will help even more.

Ivy Zelman - Zelman & Associates

What percent of your business right now for the closings that you generated in the third quarter were on speculative units that you started without a sale?

Gordon Milne

Hang on a second, I can tell you that. Spec for us includes things we start without a sale, but most of it’s from homes that were cancelled and we resold.

Larry Nicholson

Alright, 484 specs in the quarter, 839 non-specs.

Ivy Zelman - Zelman & Associates

How many specs do you have remaining in total in inventory?

Larry Nicholson

About 430.

Gordon Milne

447.

Operator

Your next question comes from Nishu Sood - Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. So I wanted to ask about the statement you guys were saying there’s not land deals haven’t come to the market as fast pace as you might have expected or hoped. I wanted to dig into that a little bit to understand that a little bit. Obviously, that’s always going to ultimately come down to a question of price, but beyond that what are the kind of more qualitative factors that are making these deals, that’s leading to the shortage of deals.

We know that during the boom there was an enormous amount of land that was entitled and much of it pushed to the development process. So there’s certainly a lot of land out there. So I’m just thinking of a couple different things, maybe you can help me understand this better. Is it the location? Is it the state of development? Is it a terms issue of not wanting to lay down a lot of cash versus optioning it?

Is it difficulty in terms of the sellers, since obviously a lot of it is moving through different channels, distressed channels than it normally is. Why aren’t the deals coming around as fast as you had expected or hoped?

Larry Nicholson

The banks, I mean, unequivocally the banks have been slow to move through things through the pipeline and I would say that’s the one major reason. The developers that have stuff today, we can get to an end of a deal in a timely fashion, but unfortunately, with the banks it has not been the same. So we continue to meet with them and discuss opportunities, but there it’s a slow process.

Nishu Sood - Deutsche Bank

Is there some aspect of this as well that it’s everyone seems to be targeting the same types of deals. I mean, that everyone seems to want something under 200 lots, that’s developed and can be taken down on option terms. Is that part of it? Does that restrict the available universe as well?

Larry Nicholson

No, I would tell you that I just think there isn’t enough lots coming to the market, period. It’s not that everybody’s picking off the 50 or 100 lot deals, it’s just there’s not enough flow coming to the market to have a substantial impact right now.

Nishu Sood - Deutsche Bank

I also wanted to ask about the corporate expense. That’s been pretty volatile the past few quarters and I know there’s been some movements in terms of compensation or market values of plans or assets, but where should we expect that to go from here?

Larry Nicholson

It will trend closer to what it’s in the third quarter than in prior quarters, but not quite as low as the third quarter.

Operator

Your next question comes from Adam Rotger - Wells Fargo Securities.

Adam Rotger - Wells Fargo Securities

Most of my questions have been answered, but I wanted to ask you about the markets where you secured land and looks like a pretty diverse group, both geographically and in terms of what I suspect is supply demand dynamics in each of those markets.

I wonder if you could talk about, maybe give a couple of examples per market, what the real drivers were of the decision was it purely price or was it something in your demographic models telling you that those were a good place to buy land. Maybe use Vegas as an example, what you’re buying land there for.

Larry Nicholson

Well, in Vegas, obviously it’s a land constrained market due to how land comes to the market and fortunately our sales have been good in Vegas over the last couple of quarters. So, we burnt through some lots so we saw an opportunity to replace. I think we bought two communities in Vegas, two different lot sizes in a master plan community that we thought was a great opportunity.

So that was a great one Indianapolis we bought numerous option deals. We’ve entered some lower price points in the market than we have had in the past. Atlanta was kind of just continuations, picking off some lots in submarkets that we were doing well that we were running out of lots. San Antonio, kind of the same thing, we picked up a couple of additional communities in submarkets that we weren’t in that we had run out of lots.

So I think it’s everything that we’ve bought, the great thing about it is we can turn it timely. We can get on it and an example, like in Houston, we bought a community and within 47 days we had the model open for sales. So those are the kind of things we’re looking to do that we can have, get impact back to the bottom line quickly. So in most of these places, all these deals were timely that we could get them to the market quick.

Adam Rotger - Wells Fargo Securities

Even if they are that timely, I think before you said maybe 5% or so next year of closings might be from these newer communities. Even though they’re timely, they’re really not going to have a big impact next year.

Larry Nicholson

We have 197 communities open today. The ones we added there were 5 to 10 from the stuff we bought. So, it’s not significant yet. We need to keep buying.

Adam Rotger - Wells Fargo Securities

If you could characterize the sellers, are they distressed builders or are they banks or?

Larry Nicholson

It’s been across the whole game, but I would say we’ve bought some lots from developers, we’ve bought some lots from some banks, smaller institutions, local institutions, regional institutions and I don’t think we’ve bought any rollout from a builder, actually.

Operator

Your next question comes from Jim Wilson - JMP Securities.

Jim Wilson - JMP Securities

Most of my questions have been answered, but I guess just thinking about margins again and the potential for continued improvement over the course of the next year or so. Prior to new communities really coming on line, do you think the price efforts of being able to bump prices as you’ve mentioned is probably the most significant incremental opportunity in the next few quarters or are there a few cost initiatives still that are working their way through the P&L?

Larry Nicholson

I think the biggest issue right now is taking the incentives down from 18 to 147 and continuing that push to move incentives down which request to increased in price. We’re still fighting hard on price decreases and having some successes on that, but I think most of the increase is going to come from sales incentives dropping.

Gordon Milne

Another factor is smaller communities with lower margins dropping off, fewer units?

Operator

Your next question comes from Buck Horne - Raymond James.

Buck Horne - Raymond James

Could you provide the number of finished lots you had in inventory as well as the finished speck count?

Gordon Milne

447 on speck.

Larry Nicholson

Yes, we got 144 that are finished, 303 that are unfinished.

Buck Horne - Raymond James

On rough percentage of finished lots in your owned lot inventory?

Larry Nicholson

75%.

Buck Horne - Raymond James

Where do you guys expect community count to be at year end, if you can give any guidance on that and kind of…

Gordon Milne

We think just down about 10 communities from where we ended the third quarter. It’s down 10 communities from where we ended the third quarter.

Operator

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

Alex Barron - Agency Trading Group

I was curious to know of the deliveries you had this quarter, roughly what percentage or what amount came from optioned lots versus owned lots?

Gordon Milne

We own them all before we turn them into before we sell the house and so we don’t track whether it was originally an optioned lot or whether it was an owned lot because they’re all owned at the time they’re sold.

Alex Barron - Agency Trading Group

I figured maybe in certain markets like Texas or something would be predominantly optioned lots.

Gordon Milne

Well, they were initially, but like I say, we take them down before we build the house on them, generally.

Alex Barron - Agency Trading Group

Like how far in advance, like a year in advance or something?

Larry Nicholson

No, hopefully just in time to start the house.

Alex Barron - Agency Trading Group

Then I guess my other question was do you have a rough number for how much in cash flow you guys generate from the lots that you’ve owned for a while as opposed to the option lots?

Gordon Milne

No, we don’t. Sorry.

Operator

Your final question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

I was wondering if you could just give to get a sense of the growth throughout the quarter. You had been good enough to give orders by month, Gordon. What the year ago numbers were?

Gordon Milne

If not, I get them to you right after the call, but I don’t think I’ve got them in the room here.

Operator

It appears we have no further questions in the queue at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Larry Nicholson

Thanks for joining us. We appreciate it and we appreciate all the good questions and we’ll look forward to you and Drew you want to say.

Drew Mackintosh

No, that’s it. We’ll speak to you soon. Thanks.

Operator

That does conclude today’s conference. Thank you for your participation.

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Source: The Ryland Group Inc. Q3 2009 Earnings Call Transcript
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