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The Ryland Group Inc. (NYSE:RYL)

Q4 2009 Earnings Call

January 29, 2010 12:00 pm ET

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

Megan McGrath - Barclays Capital

Josh Levin - Citigroup

Michael Rehaut - JP Morgan

Joshua Pollard - Goldman Sachs

Ivy Zelman - Zelman & Associates

David Goldberg - UBS

Carl Reichardt - Wells Fargo Securities

Nishu Sood - Deutsche Bank

James McCanless - FTN Eqity

Alex Barron - Housing Research Center

Wayne Cooperman - Cobalt Capital Management

Dan Oppenheim - Credit Suisse

Kenneth Zener - Macquarie

Operator

Good day, and welcome to the Ryland Group fourth quarter earnings conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I’d like to turn the conference over to Drew Mackintosh, Vice President of Investor Relations.

Drew Mackintosh

Thanks and good morning and welcome to Ryland’s fourth quarter 2009 earnings conference call. Today’s call is being transmitted live over the internet and can be accessed through Ryland’s Investor Relation section of the website at www.ryland.com. In a moment I’ll be turning over the conference call 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 certain statements in this conference call are forward-looking statements based on assumptions and uncertainties that include 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 turn the call over to Larry Nicholson.

Larry Nicholson

Thanks Drew. Good morning and thank you for joining us today. It gives me great pleasure to report the first quarterly gain for Ryland in three years. Earnings for the fourth quarter of 2009 were $39 million or $0.88 per share compared to a loss of $60 million or $1.40 per share for the same period in 2008. While the company still recorded a loss for all of 2009, the sequential improvement we saw throughout the year in both sales and margin gives us encouragement for the future.

As a result we begin 2010 with a renewed sense of optimism for the recovery of the economy as a whole and the homebuilding industry in particular. Concerns over cash flow, liquidity, and shrinking the business have given way to more positive issues such as improving profitability, capital deployment, and expansion.

To be sure, there are still headwinds that can impede the housing recovery, but in general, there is more optimism about the future performance of our business as we begin 2010 than there was at the start of 2009.

With that, here are some of the details for the quarter: Revenue for the homebuilding segment came in at $405 million, a 21% decline from the fourth quarter of 2008. This decline was mainly due to a 15% drop in closings and a 4% reduction in average closing price.

Land sales contributed $10 million to the overall revenue figure. We posted our third consecutive quarter of sequential margin improvement in the period. If you recall the first quarter of 2009, we made a strategic decision to close out a number of our communities for the dual purpose of reducing our overhead and repositioning the company for future strategic land acquisitions.

Discounting the remaining home sites in a number of communities and selling an above average number of specs. The move had a negative near term effect as margins hovered in the single digits for two consecutive quarters. With this repositioning now behind us, housing gross profit margins have rebounded to 14.2%, excluding inventory and other valuation adjustments.

This represents a 400 basis point improvement compared to a year ago and 820 basis point improvement from the first quarter of 2009. Incentives as a percentage of the sales price, which peaked at around 18% during the first half of the year, were down to 12% in the fourth quarter.

The positive effect of the strategic initiatives from earlier in the year can be seen in our SG&A run rate for the quarter, which on an absolute basis is at its lowest level in over 10 years. As a percentage of sales, SG&A at 9.3% is the lowest level it’s been since 2006.

Next to the cost reductions and the gross margin improvement, we were able to generate $5 million in profit from homebuilding operations in the quarter, excluding impairments and the income tax benefit. We’ve worked extremely hard to create one of the most streamlined cost structures in the industry and believe it will be a key to the future profitability.

Unit sales for the period totaled 969 homes, representing a 75% increase over the fourth quarter of 2008. This jump in sales is even more impressive when you consider that we ended the period with 34% fewer communities than we had at the end of last year. The sales improvement was a broad base as each of our regions posted year-over-year increases.

The biggest contributors to this quarter sales improvement were Central Texas, Houston, Las Vegas, and Indianapolis. Keeping cancellations to a minimum really helped drive the higher net sales total also. The cancellation rate was 22% of gross sales or 14% of backlog compared to 56% of gross sales or 30% of backlog in the fourth quarter of 2008. As a result, we entered 2010 with a unit backlog 11% higher than it was last year.

Our financial services segment posted a pretax profit in the quarter of $776,000 compared to earnings of $5 million last year. This decrease was attributable to a higher loan indemnification expense versus last year and a 7% decline in the number of mortgages originated. Our capture rate remained at a historically high level of 86% of all home buyers in the period. Of those mortgages we originated, 64% opted for a government insured loan, while 36% secured a prime loan. The average FICO score for our buyers inched up to 720 and the cumulative loan to value stood at 92%.

Turning to the balance sheet. We ended the year in excellent financial condition with $856 million in debt, $850 million in cash and marketable securities, and $582 million in equity for a net debt to total cap ratio of 7%. Our cash balances will get another boost this quarter as we anticipate a refund of nearly $100 million thanks to the recently enacted tax legislation.

We still have an additional $221 million in off balance sheet deferred tax valuation allowances that we can monetize once we return to profitability. Housing inventories at the end of the quarter were $667 million. We controlled 19,917 lots with a breakdown of 15,881 owned, and 4,036 optioned.

Our community count stood at 182 communities open for sale compared to 275 at the end of 2008. We expect to see that number stabilize and start to increase as the year progresses. The pace of activity on the land acquisition front has picked up a bit in the quarter and we spent $70 million on land purchases. All of our divisions are actively looking for land to refill the pipeline and expand their presence in the marketplace.

We had 429 specs on the ground, with a breakdown of 198 finished and 231 started, but unfinished. This works out to about one finished per community. While keeping a focus on our to be built homebuilding model, we plan to increase our spec inventory in the first quarter so we can capture many sales as possible while the federal tax credit remains in place.

We took a $66 million pretax charge to inventory valuation adjustments and option write-offs in the quarter. The majority of the impairments were taken in Chicago, and we currently expect that charges related to valuation adjustments should be considerably smaller in 2010 than they were in 2009.

In conclusion, we are extremely pleased with how we ended the year. We were able to post strong improvements to unit sales, backlog and margins, generate a profit for the quarter, and begin the New Year with the highest cash balance in the history of the company. Hopefully we are aided by a stronger economy and some job creation in 2010.

Regardless of when the recovery happens, I am confident we have the right strategy and people in place to take advantage of the eventual upturn in housing. These last few years have been extremely challenging for Ryland and the homebuilding industry as a whole. Cyclical downturns are never pleasant, but they do give you an opportunity to reevaluate and right size your organization.

At Ryland, we empowered our people to rethink the way they do business so that we emerge from this downturn a smarter, leaner, and more efficient home builder. Our results for the fourth quarter suggest that we are starting to see the fruits of our labor. I want to thank all of our employees for their hard work and perseverance during 2009. It has not been an easy year, but it is your spirit and determination that will make this company great in the future.

That concludes our prepared remarks and we’ll be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Megan McGrath - Barclays Capital.

Megan McGrath - Barclays Capital

Wanted to ask first about the margin in terms of the sustainability of that fourth quarter margin as we look into 2010 on a quarterly basis. I don’t know if you could give us any color on how much of that you think might have been volume driven and how much we think it could go up from here?

Gordon Milne

We think it will be relatively flat in the next quarter and then later in the year, we are optimistic the margins can increase because of what’s happened in our lower discounts and also because of new products.

Megan McGrath - Barclays Capital

Great, and then to follow up on that in terms of discounts, your incentives as a percentage have gone down for the last two quarters. How do you see that looking as we get through this recovery? Would we get back to incentives of your 5% average first or at some point do you start to raise prices and keep incentives at a particular level?

Gordon Milne

I would think that over time, we get back to the 5%. On new communities, we’re trying to do price them without big incentives, be competitive price. So, I think as we turnover older communities to newer ones, you’ll see the incentive levels drop.

Operator

Your next question comes from Josh Levin - Citigroup.

Josh Levin - Citigroup

Going into the spring selling season, have you changed how you compensate your sales force? Does your sales force have any different incentives this spring than they did last spring?

Larry Nicholson

No. I mean I think your sales forces are always obviously commissioned folks, so they are always motivated to sell houses.

Josh Levin - Citigroup

Could you provide us with any commentary about sales and traffic in January?

Larry Nicholson

We would rather not give any guidance. I would say it’s been a little better than the fourth quarter, but we’re not through the month and don’t have enough information I want to comment.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

First question on community count, you’d mentioned that you expect it to stabilize or begin to stabilize and potentially grow by year end. When you say grow by year end, are you thinking 5% to 10% in that type of a range or greater or just really very modest growth, if there’s any color there on that?

Gordon Milne

I think we expect 10% and obviously we’re out there every day trying to buy lots. So in order to grow our business we’ve got to buy more lots. So if there’s an opportunity available we’ll continue to push it, but right now I’d say 10% is what we’re factoring.

Michael Rehaut – JP Morgan

On the land market, there’s been a lot of talk about builders in some instances bidding where they aren’t necessarily going to get a 20% gross margin. What’s your experience as you now have spent a good amount and by the way, the $70 million, I’d be curious what that means in terms of lots? Have you been able to stick to your hurdle rates or are you accepting a little bit less on the gross margin side if it’s a fast turnover finish lot deal where you can still get the appropriate returns?

Larry Nicholson

I think we’re looking at every deal on a deal by deal case, and like you said I think if you got low deposit, low takes and you can take a little bit less on margin and your returns are still pretty good. So we just look at a deal by deal case, and right now we’re seeing most stuff that’s pretty close to meeting our hurdle rates. So it hasn’t been a big issue yet.

Michael Rehaut – JP Morgan

The incentives, very good improvement throughout 2009. I was wondering if you could describe maybe it seems like maybe its 1% to 2% improvement a month if you want to straight line it, but do you expect where would you think average incentives would be by the end of 2010?

Gordon Milne

I’d just have to say lower. It’s hard to quantify.

Larry Nicholson

The crystal ball is not working today, Mike.

Operator

Your next question comes from Joshua Pollard - Goldman Sachs.

Joshua Pollard - Goldman Sachs

I wanted to first talk about profitability in 2010. With your expectations for higher gross margins by the end of the year, could you guys see yourself being profitable for the full year or even being profitable in the first half of the year?

Larry Nicholson

I would say that we really don’t want to give guidance, but we would expect to be profitable in the second half.

Joshua Pollard - Goldman Sachs

Any chance that those second half profits would offset any potential first half losses?

Gordon Milne

We’re not giving out guidance for the full year, so it’s hard to do that.

Joshua Pollard - Goldman Sachs

Could you talk about the percentage of your potential sales you would see from new versus old communities and it would be interesting because you guys do talk about new versus old communities, how you define that? Is there are breaking point as in the year you bought it or when you acquired the land? As well as the spread on incentives in those new versus old communities are your new communities already down to 5% and you’re still up at 20% for your older communities getting used to 12% or could you give us a better sense of the mix?

Larry Nicholson

Well, I think I don’t know if we have all of that information right here that we can give you. We could probably get it to you. Obviously, our lower margin communities have obviously decreased through time, and as we get new stuff up obviously the margins are higher. So, but we’ve been disciplined in our pricing and in our incentives, so the margins are improving across-the-board.

Joshua Pollard - Goldman Sachs

The way you guys define new versus old communities, what, a round number percentage of your deliveries are coming from these newer communities?

Gordon Milne

2010?

Joshua Pollard - Goldman Sachs

2010 would be great, and also where you’re at today.

Gordon Milne

Less than 10% in 2010, but that would increase dramatically as we move forward from there.

Joshua Pollard - Goldman Sachs

Less than 10% today or less than 10% in 2010?

Gordon Milne

In 2010.

Operator

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

Ivy Zelman - Zelman & Associates

The first question I have is just on the gross margin. If I heard you correctly you said that, generally the margins going forward, if you look at the 19.5%, correct me if I’m wrong, almost at the midpoint of a normalized kind of gross margin. Would you expect that on a look forward that the margin upside is going to be somewhat limited on gross margin and flat lines, and that really the growth and operating margin will have to come from operating leverage off of higher volumes?

That’s my first question, Larry, and then the second question relates from a competitive standpoint recognizing you’re opening communities and you’re seeing better traffic we hope in 2010 in conversion. What do you guys do to analyze the markets in terms of your due diligence to open up new communities in the case where you don’t yet see maybe competitive foreclosures that might come to market? What kind of analysis are you doing to make sure you’re not necessarily opening in a market where there may be shadow inventory that’s not yet prevalent? How are you analyzing that?

Gordon Milne

On the first question, what I meant to say earlier was, we see flat in the first quarter and we see incremental improvement in the quarters thereafter, since only less than 10% are new communities and a lot of that is in existing communities for various reasons. On the second question, I’ll turn it to Larry.

Larry Nicholson

I think on the market research obviously, we look at the whole market; we look at the resales and we look at the foreclosures. I mean I think it’s tough to predict how quickly those things were going to come back into the market on the shadow inventory side.

So we run everything at current economics, and then look at all of the competition both from the builder, from the resale, from the foreclosure. Then you just got to make a business decision if it’s going to pencil and you can move forward. So if we concern ourselves with shadow inventory too much, we may never do a deal.

Ivy Zelman - Zelman & Associates

Could you just go back to, I guess the first question, but the sustainability or margin trajectory on growth versus where the real leverage comes from investing? Is that how you would articulate it in the same way I did?

Gordon Milne

We see there’s a mix component. There’s incentive component. There are a number of components. It’s just the way things are rolling out this year that allow us to have higher margins later in the year.

Ivy Zelman - Zelman & Associates

I’m not referring to this year. I’m sorry, I’m referring to on a normalized longer term basis, you’re kind of at that fourth quarter 19.5% gross margin, which is historically, as builders have educated me, 18% to 22% is kind of normalized growth. So would you agree that can kind of flat line, if you were using a longer term sort of basis at that call 20%-ish level and that really margin above that could get to the operating leverage and volumes? Or do you think 20% is not the right normalized margin longer term?

Larry Nicholson

I think your assumptions are pretty good. So we don’t disagree with what you just said.

Operator

Your next question comes from David Goldberg - UBS.

David Goldberg - UBS

First question, I was wondering if we could get some color. We’ve heard different thoughts from different builders about foreclosure activity relative to where your communities are, where youre opening new communities.

Do you feel like theres still a substantial amount of pressure from foreclosures on your new communities, or do you feel that maybe the fact that theres not as much new home inventory is really impacting and giving you more of a tailwind relative to your ability to control pricing and maybe get some stability in prices?

Dave Fristoe

Well again, I think its market-by-market. There is some foreclosure pressure obviously in some markets, but we continue to see inventory come down, resale inventory continues to shrink, new home inventory continues to shrink, so I think everything has continued to move in the right direction. When some of that other inventory comes back into the market, I cant tell you, but right now were pretty comfortable that most of the markets were seeing, all of the lines are moving in the right direction.

David Goldberg – UBS

Then just maybe we could go back to the question on the land youre buying and Larry, I was interested to hear the comments that youre feeling like in most areas youre able to buy land and its hitting your targets. Im wondering if you could talk a little bit about, in the transactions are you finding multiple bidders that youre bidding against, and also what kind of margin is safety or how do you guys think about margin as safety when you bid on new land?

Larry Nicholson

Well yes, you do have multiple bidders, but depending on what kind of lots youre bidding on, you could have institutional people bidding it, you have developers bidding on it and you have the builders bidding on it, and again, thats a little bit market-by-market. Ill use Southern California as an example, thats very been competitive with both builders and developers.

Were pretty comfortable with our assumptions in the deals were purchasing and the deals were looking at. We got good market data, and again, we havent changed how we run our feasibility. So were running everything on current economic terms. Were not factoring in all kinds of upside. So were running them at a pretty lean model, so were pretty comfortable with how were doing it.

David Goldberg – UBS

Id like to sneak one more in. I mean, this might be counter intuitive or maybe you are not sure, but what do you think gives you an edge relative to the people youre bidding against, assuming you already seem to have a pretty high hit rate on land that youre buying?

Larry Nicholson

Well, again we always get into the relationship stuff. We can talk at [nausea] about that stuff.

Gordon Milne

In every market its not like Southern California. Thats a big competitive situation, but a lot of these lots are buying other markets, where theres not the same dynamics as there is here in Southern California.

Larry Nicholson

You just got to keep working at it.

Operator

Your next question comes from Carl Reichardt - Wells Fargo Securities.

Carl Reichardt - Wells Fargo Securities

Just to follow on Davids question; so I dont know if I should think about it $70 million spent or lost, but can you give me a sense of what percentage of the stuff that youre buying is coming in as finished versus say blue top or entitled without grading? Im just trying to get a sense of, if your mix is moving towards stuff that your going to have to do some development work on it or not.

Larry Nicholson

I would say probably 70% to 80% of it is finished and theres very little raw dirt. I mean there maybe some development to be finished, but most of it is close to being finished; theres limited spend on it to get it to the finish line.

Carl Reichardt - Wells Fargo Securities

And would you guess just now looking at what the pipe might be for 2010 Larry that youd expect that mix to be roughly comparable or do you think youre going to have to move more towards stuff that isnt finished in 2010 as you add more lots?

Larry Nicholson

I think it will be a function of what comes out of the banks. I mean because if stuff comes out of the banks at a relatively fluid level, I think there will be enough finished lots. If the banks are slow to respond, I think you may see guys towards the end of the year start looking at opportunities to develop lots.

Carl Reichardt - Wells Fargo Securities

Okay, and then one last one, can you just give us an update on if there have been any investments at the joint venture with Oaktree has made, just a status update on where that is and how thats progressing for you?

Larry Nicholson

To-date weve worked real hard, and we have no deals done.

Operator

Your next question comes from Nishu Sood - Deutsche Bank.

Nishu Sood - Deutsche Bank

First question I wanted to ask was on your impairments. Was there any proportion of your impairments that was related to the year-end land sales?

Larry Nicholson

Yes. Hold on, Ill get that for you - $3.5 million. Well Im sorry, thats just land in general, land held for sale and land sold. The land sale is a much smaller number, probably 15% of that or 20% of that.

Nishu Sood - Deutsche Bank

Second question, maybe a question for Gordon, in 2008 obviously you had no excess interest that flowed through, because it wasnt capitalized to COGS, 2009 I think it was about $14 million, now looking ahead in 2010 obviously you are taking more of a growth stance. I wanted to get a sense of, depending on what the growth rates might be, whats the dynamics of the interest expense should be. How fast can we expect that excess number to come down depending on how fast you are growing?

Dave Fristoe

Thats the challenge from the interest as weve got more debt now than weve got inventory, and so we cant capitalize our interest. Well just have to see how successful we are of getting money out the door this year. Obviously, if we are more successful well have less interest expense; if we are less successful well have, like we did in the fourth quarter or more.

So at this point, we expect to be successful increasing our account, and so I would expect interest expense to generally head down more of a de-capitalize, but again thats pretty based on how successful we are at getting money out the door.

Nishu Sood - Deutsche Bank

Is it fair to say that in a quarter where your average inventory balance over the 90 days, or have you exceeds your debt, that will be the quarter that, that goes away finally. Is that the right way to look at it?

Dave Fristoe

Yes. You will see it go down incrementally quarter by quarter, thats true.

Operator

Your next question comes from James McCanless - FTN Equity.

James McCanless - FTN Equity

Wanted to ask first if you could talk about some of the factors that caused the 74% order increase this quarter, was it incentives to either customers or salespeople, or something to do with the tax credit? Just one more explanation would be great.

Dave Fristoe

As you can see our incentives came down. We didnt change our commission structure. We just worked real hard in the field with the traffic we had and we think we were appropriately priced and in the right location. So I think its a combination of things.

Obviously the new tax credit helped and that weve seen that continue on into January, but its really just execution in the field is the biggest.

James McCanless - FTN Equity

Speaking of the tax credit, with the stands I think you all had in the past about being [a third, of third, of third] of entry level move up et cetera. Did the move up tax credit help you guys more in the fourth quarter? And do you think its going to be more beneficial than the entry level tax credit? And also what was your sales mix in the quarter between entry level and move up?

Larry Nicholson

I dont think it had a huge impact on the fourth quarter sales. I think a lot of the questions around that move up tax credit just got clarified in the last week actually and I think we got a mix of about 60% entry level.

James McCanless - FTN Equity

Then what, 40% move up, between move up and active at all adult.

Larry Nicholson

We dont really qualify active adult, so it would be first move up and move down to second move up.

Operator

Your next question comes from Alex Barron - Housing Research Center.

Alex Barron - Housing Research Center

Wanted to talk a little bit about your capitalized interest, I was noticing that it came down I guess quite a bit this quarter. I was just wondering if in general thats something we can expect going forward that youre going to be working that down over time?

Dave Fristoe

Working the balance down or the actual expense?

Alex Barron - Housing Research Center

The balance down, because it seemed like the amount of interest you ran through COGS was a little bit higher than normal this quarter.

Dave Fristoe

Balance was down about $89 million and that will go down for a while until were capping more a little bit later this year.

Alex Barron - Housing Research Center

Then my other question had to do with, I think you mentioned last year you guys were mothballing I guess a certain number of communities, Im assuming to rework the product. So can you give us a sense of how many communities, or how many lots are in that mothball stage right now?

Larry Nicholson

We got 20 communities that are mothballed today.

Alex Barron - Housing Research Center

And then my last question. Of the lots you guys own, how many of those are completely finished?

Larry Nicholson

72%.

Operator

Your next question comes from Wayne Cooperman - Cobalt Capital Management.

Wayne Cooperman - Cobalt Capital Management

I apologize if someone asked this, because I got off for a minute. How much of the lots that you sold in the quarter had already been impaired, and I guess what percent of your inventory now has been impaired or not impaired?

Dave Fristoe

I can’t give you the number on lots sold during the quarter. I have to get back to you. We’ve impaired 26,000 lots, I would say in the 90% range or something.

Gordon Milne

It’s kind of difficult, because like in Texas we’ve hardly impaired anything in our lots, certain Indianapolis hardly impaired anything. So parts of the country haven’t had impairments, so other parts like the West, where every lot got impaired.

Wayne Cooperman - Cobalt Capital Management

That’s what I’m trying to figure out, because you’re taking more impairment, but your gross margin is going up at the same time. I’m just trying to reconcile that as much as possible.

Gordon Milne

It was in one market really this quarter. I mean Chicago had, it really got softer again in the fourth quarter, so we had a significant impairment there. Other than Chicago, the impairments are fairly light.

Larry Nicholson

Those impairments were mainly favoring on for the most part current deliveries.

Wayne Cooperman - Cobalt Capital Management

You don’t know how many of the lots you delivered in this quarter had previously impaired? My guess is it’s relatively high, right?

Larry Nicholson

Yes, don’t have the number.

Gordon Milne

I could guess, but I don’t know.

Operator

Your next question comes from Dan Oppenheim - Credit Suisse.

Dan Oppenheim - Credit Suisse

I was wondering with your comments about the goal of 20% community count growth at year-end 2010, do you need to acquire any lots during the year to get there, or does your current owned lot position enable you to get to that without any purchase?

Gordon Milne

We didn’t hear the first part. We said 10% increase this year in community count, is that what you said?

Dan Oppenheim - Credit Suisse

Was just wondering to get to that?

Gordon Milne

To get to that, we still have some communities to buy.

Dan Oppenheim - Credit Suisse

Sorry what’s that?

Gordon Milne

We’ve got most of them tied up, but we’ve got some more communities to buy before the end of the year.

Dan Oppenheim - Credit Suisse

Secondly, as you’re looking at community count and thinking about this year and next year and you look at the broad plant do the economics in some of your markets now justify developing that or are we not there yet as you look at the market?

Larry Nicholson

I don’t think we’re there yet. I think we’ve got a ways to go.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

Just don’t know if you answered this before, that $70 million that you spent was that in the fourth quarter itself, and what does that correlate in terms of the amount of lots and potential communities?

Gordon Milne

That was the money we spent in the fourth quarter. I mean we look at lots we approved in the fourth quarter and then what we spent in the fourth quarter. This is actually dollars that went out the door in the fourth quarter.

Michael Rehaut - JP Morgan

What does this relate in terms of amount of lots tied up and communities?

Gordon Milne

It’s kind of two different numbers. We think we added about 1,300 lots in the quarter from deals we approved, but that isn’t necessarily dollars that got spent in the quarter. I think on the math, how many do we have, do you know, Drew? I’d have to get back to you on the exact number we added in the quarter as a result of that.

Michael Rehaut - JP Morgan

The 1,300 lots are potentially what you were able to tie up during the quarter.

Gordon Milne

Correct

Operator

Your next question comes from Megan McGrath - Barclays Capital.

Megan McGrath - Barclays Capital

Just wanted to know if you could give us the sequential order trends in the quarter as you’ve done in the past.

Larry Nicholson

October was 322, November was 336, and December was 311.

Megan McGrath - Barclays Capital

Just a follow-up on the tax credit, one of the concerns that I’ve been hearing is on the pricing environment and potentially that builders will have to come in after the tax credit is over and offer an equivalent incentive, I know the timing of it might be difficult to answer this question, but did you sense that at all at the end of October, early November before it got extended that people were looking for some incentive to keep the order in? Doesn’t sound like it, but just wanted to get your view there.

Larry Nicholson

No, I think people were starting to realize that it was coming to an end and I think that’s what spurred some of that early traffic, but I think people are going to realize that it is going to end and there’s not going to be the incentives that have been around in the past.

Operator

Your next question comes from Kenneth Zener - Macquarie.

Kenneth Zener - Macquarie

Gross margins if you could talk about that by segment, which has been relatively equal across your segments in recent quarters, did you guys see a difference this quarter given the lift that you had, and do you expect that to kind of it’s greater dispersion as you move into the second half of 2010.

Larry Nicholson

The last was a little bit higher but it’s across-the-board, fairly spread fairly evenly.

Kenneth Zener - Macquarie

Then I guess in the gross margin, do you guys receive really exceptional benefits from any let’s say year end rebates or warranty adjustments or anything like that?

Larry Nicholson

No.

Kenneth Zener - Macquarie

Then given the 10% expected rise in community count, how much do you think your fixed G&A base would have to rise to support that on a dollar cost?

Gordon Milne

Very little.

Dave Fristoe

The only thing about that is you’d have to add a superintendent salesperson in the community.

Gordon Milne

You got to pay commission on each house you sell.

Larry Nicholson

Remember those are variable anyway.

Dave Fristoe

So no fixed I would say in the office at all.

Operator

Your next question comes from Joshua Pollard - Goldman Sachs.

Joshua Pollard - Goldman Sachs

Can you talk about exactly how you guys are planning to build specs in order to take advantage of the tax credit? Have you already put the slabs in and you’re looking to go vertical as you get the order or are you going vertical today and stopping that drywall? What exactly are you doing operationally to set yourselves up for a potentially strong selling season?

Larry Nicholson

Well, we started putting houses in the ground in December and then we’ll continue along the stage and we believe we’ll sell them at a pace. We don’t usually stop houses. We just finish them, and that gives us a better opportunity to sell them later in the stage.

So it will just be a fluid process and we kind went through this at the beginning of the last year with the tax, so we ramped up a little bit and then we brought it back inline by the end of the quarter. So we would expect it to ramp up early and then by mid year be back inline with our normal two per community.

Joshua Pollard - Goldman Sachs

So are you adding right now one per community, two, and three?

Larry Nicholson

It varies by market. We put about somewhere between 150 and 200 additional specs out in the field.

Joshua Pollard - Goldman Sachs

Okay, and still more to come, correct?

Larry Nicholson

We’ll manage it on a weekly basis. It’s going to depend on demand, but we don’t have much longer obviously to get stuff in the ground especially in certain markets.

Joshua Pollard - Goldman Sachs

What’s your average cycle time at this point from sell to finish, or better put, from the time you go vertical to finish?

Larry Nicholson

From start to finish, I would say our average is somewhere in the 70 day range.

Joshua Pollard - Goldman Sachs

Last quick question your total valuation allowance for your deferred tax assets?

Gordon Milne

It’s $221 million

Operator

Your final question comes from James McCanless - FTN Equity.

James McCanless - FTN Equity

Just wanted to ask one more question on the move up credit I think you also at the last week we got clarification on the use of that credit. Could you go into that in a little more depth?

Dave Fristoe

Well, I think they finally published all of the guidelines for it last week. I don’t think until then all of the guidelines were available. I mean I think everybody was assuming things, but it’s all finally in black and white, and not that it grossly changed anything, but. So I couldn’t tell you if it’s had a huge impact or not.

Operator

With no further questions in the queue, I’d like to turn the conference back over to Drew Mackintosh for any additional or closing comments.

Drew Mackintosh

Great, thanks for joining us and we look forward to speaking to you again soon.

Operator

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

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Source: The Ryland Group Inc Q4 2009 Earnings Call Transcript
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