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Ryland Group Inc. (NYSE:RYL)

Q3 2007 Earnings Call

Oct 25, 2007 12:00 PM ET

Executives

Drew Mackintosh - VP of IR

ChadDreier - Chairman, President and CEO

Gordon Milne - EVP and CFO

Dave Fristoe - SVP and Controller

Eric Elder - SVP Marketing and Communications

Analysts

Mike Wood - Banc of America

Jen Consoli - JP Morgan

Steven Kim - Citigroup

Nishu Sood - Deutsche Bank

David Goldberg - UBS

Carl Reichardt - Wachovia Securities

Timothy Jones - Wasserman & Associates.

Dennis McGill - Zelman & Associates

Wayne Cooperman - Cobalt Capital

David Goldsmith - DSG Capital

CliffordRosen - UBS

Buck Horne - Raymond James

Alex Barron - Agency TradingGroup

Rashid Dahod - Argus Research

Randy Riesman - Durham

Operator

Good day everyone and welcome to the Ryland Group ThirdQuarter 2007 Earnings Release Conference Call. Today's conference will berecorded. At this time, for opening remarks and introductions, I would like toturn the conference over to Mr. Drew Mackintosh, Vice President of InvestorRelations. Please go ahead, sir.

Drew Mackintosh

Good morning and welcome to Ryland's third quarter 2007 EarningsCall. Today's call is being transmitted live over the internet and can beaccessed through Ryland's Investor Relations section of the website atryland.com.

In a moment, I will be turning over the conference call, toChad Dreier, Ryland's Chairman, President, and Chief Executive Officer. Alsojoining us today are Gordon Milne, Ryland's Executive Vice President and ChiefFinancial Officer and Dave Fristoe, Ryland's Senior Vice President andController.

Before we begin, please be aware that certain statements inthis conference call are forward-looking statements, based on assumptions anduncertainties that include the completion and profitability of sales, change ineconomic conditions and interest rates, consumer confidence and generaleconomic business and competitive factors. These factors and others may causeactual results to differ from the statements made in this conference call.

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

Chad Dreier

Thanks Drew. Good morning, and thanks to everybody on phonecall for joining us today. By now, I assume you have seen the press release,which details the results of the third quarter.

Earnings per share for the third quarter came in at a lossof $1.30. Results for the period include pre-tax land impairment charges,option deposits and feasibility cost write-offs of $128 million. Excludingthese charges, earnings for the quarter would have been a gain of $0.46 pershare.

Consolidated revenues for the third quarter of 2007 were$732 million, compared to $1.1 billion in the third quarter of 2006.

Revenues for the Homebuilding segment were $717 million withland sales contributing just $8 million to that figure. We closed 2,495 unitsin the quarter, a 32% decline compared to the third quarter of last year. Theaverage closing price for these homes was $284,000, a 2.4% decrease from theprior year.

Gross profit margins from home sales prior to the inventoryvaluation adjustments averaged 17.4%. Previous impairments contributed 50 basispoints to that figure. Including the charges, gross profit margin averagednegative 0.3% or basically flat.

SG&A, as a percentage of homebuilding revenue was 12.3%compared to 9.7% for the same period of 2006. Lower home buying revenuescombined with ongoing sales and marketing cost led to this higher SG&A. Weplanned to get that number closer to our historic 10%, as we continue to scaleback our business to better reflect the current market.

Net sales for the third quarter came in at 1,876 units,compared with 2,372 units in the third quarter of 2006. On the second quarterconference call back in July, I mentioned that sales trend had improved as thesecond quarter had progressed. That momentum obviously came to a halt in Augustas the highly publicized turmoil in the mortgage industry, began to effect grosssales as well as existing buyers in the backlog.

As a result, our net sales declined 21% and our cancellationrate ended up at 43% for the quarter. Sales were down the most in the Texas region, followedby the North and the South East. The West again, showed positive year-over-yearsales growth albeit at the expense of profitability.

As I have mentioned earlier, we booked $128 million inpretax charges in the quarter with a breakdown of $117 million for inventoryvaluation adjustments and $11 million for option abandonment’s. The bulk of thevaluation adjustments occurred in California, Phoenix, Tampa and the Washington, DCarea.

Our Financial Services segment, which provides mortgage,title, escrow and insurance services, contributed $7 million in pretax earningsin the quarter. When the sudden tightening of the mortgage market hit, we wereforced to find alternative financing options for our home buyers.

We had previously been approved for Alt-A or Jumbo loanprograms that no longer existed. While we did lose a number of closings to thetighter lending standards, our mortgage company did an excellent job workingwith our buyers and matching them with a qualified loan program.

Our loan breakdown for the third quarter reflects the newreality in the mortgage market. Of the loans we originated; 78% were primeloans, 20% were government insured and only 2% were Alt-A and subprime was deminimis.

The good news is that the mortgage rates for conventionalloans are near historic lows. Also less than 5% of our communities have productprice above $450,000, so most of our buyers can find a Ryland home that ispriced to confirm with Fannie and Freddie’s Mortgage Cap of $417,000.

Our capture rate for the third quarter was 78%. The averageFICO score for these loans was 716. The cumulative loan to value ratio was 88%.Interest only loans accounted for 11% of the total compared to 23% in the thirdquarter of 2006. And adjustable rate loans made up 9% of the total versus 24%last year. All of these credits statistics are inline with or slightly betterthan historical averages.

Moving to the balance sheet, we ended the third quarter witha debt-to-total capital ratio of 43% and cash of $81 million. In August weredeemed $75 million of our outstanding 5-3/8 senior notes. We have $75 millionremaining on that issue, which we intend to repay out of our operating cashflow next year. After that our next maturity occurs in 2012. We expect that ina year closer to a 40% debt-to-total capital ratio.

Last week, we announced the voluntary reduction of theaggregate commitments on our credit facility from $1.1 billion to $750 million.We decided that since we're reducing inventory, and have never borrowed morethan $400 million on the line, there was no sense in paying for the $1.1billion facility.

The reduction in the commitments should save the companyabout $800,000 annually. We also modified some of the terms under the CreditAgreement, which will give us more operating flexibility to manage through thisdownturn. We closed the quarter with $117 million drawn on this bank line andexpect to have nothing borrowed on by the end of the year.

We generated $51 million in EBITDA from our Homebuildingsegment in the quarter. Interest incurred in the period was $16 million andcapitalized interest amortized for the cost to sales was $11 million.

Our trailing four quarter interest coverage at the end ofthe period stood at six times. Lots under control at the end of the thirdquarter totaled $45,254, a 25% decline from the beginning of the year. Ownedlots declined 9% year-to-date and option lots have come down 43%. We ended thequarter with 1,362 spec units, our lowest level on six quarters. We have alsobeen able to keep our finished spec count below two per community.

We generated $43 million in operating cash flow in theperiod. Given the uncertainty in the market we’re not giving any guidance interms of future cash flow; however I'd like to make a few points on thissubject.

First, our land purchases have slowed dramatically, both newland purchases and option takedowns. Less land means lower development costs.Second, of the 28,571 lots we own, 87% are fully developed finished lots. Thatmeans the incremental amount we need to spend to develop our own land isrelatively low. And finally, consistent with our reduced earnings and loweremployee count, cash compensation will be down significantly in 2008. All thesefactors will contribute to lower cash flows in 2008 when compared to 2007.

In conclusion, while I don't have any good news to reportabout the current state of the housing market, I feel that Ryland is ahead ofthe game as far as positioning ourselves for the eventual turn, thanks to ourrisks reverse business strategy.

Our lot count is at its lowest levels since 2001. Ourdebt-to-total capital remains in low 40s. We have minimal joint venture exposureand our standing inventory remains in check. I believe that Ryland will weatherthis downturn in the housing and the mortgage industry successfully and emergein a position to capitalize on an opportunity when the market stabilizes.

That concludes my prepared remarks and now we would be happyto answer any questions.

Question-and-AnswerSession

Operator

Thank you very much. (Operator Instructions). And we'll takeour first question from Dan Oppenheim with Banc of America.

Mike Wood - Banc of America

Hi, this is Mike Wood. If you can provide some color on kindof what you are thinking about the housing market going forward and if thingswere to deteriorate further. Would your strategy change from what your currentcourse is or are you basically doing now what you think you can to account fora more difficult market condition?

Chad Dreier

Boy, that's a pretty loaded question. I think it's hard tobe optimistic that the market would get much better in the next six months orso. I actually, really believe sooner or later, the whole mortgage thing willstabilize. As I've told our people, hey, to get a loan now people need the downpayment documents and a job and that's the way it used to be. So, I think we'reall getting used to that and the market will react to that.

There are still a lot of people out who want to buy housesand there always will be. I think we're getting used to the fact that we're atthis level of business. So the first half of the question, as I interpreted is,we feel pretty good and we think we're in pretty good shape to continue intothe future.

The second half of your question, I think your aim was tocarry it further. I think you have to re-look. We've done employee reductionsand walk away from options and all those things, we think are prudent. I thinkI redefined deterioration, if it got significantly worse I think you'd have tore-look at all that, just like you would in any industry.

Mike Wood - Banc of America

I agree. You've mentioned that there were buyers out there.Is the strategy to kind of maintain the current pace of sales the price to themarket there, or, is your pricing strategy changing at all?

Chad Dreier

I don't think our strategy has changed that much on that. Iguess that we had 17 plus margins in the third quarter on sales and or asclosings.

Gordon Milne

I think, every sale, you've got to fight for and the buyershave more power than they are used to. So, but basically, we haven't madesignificant changes in the strategy.

Operator

Thank you. Next we'll move to Michael Rehaut with JP Morgan.

Jen Consoli - JPMorgan

Hi. This is Jen Consoli on the line for Mike.

Chad Dreier

Okay.

Jen Consoli - JPMorgan

I just wanted to follow up on that question a little bit. Interms of your pricing strategy, some builders have actually talked about pricesalmost being inelastic in certain markets. Have you seen that, and if so, ifyou could give us what those markets are and finally, if you had to mothballcommunities in response?

Chad Dreier

I probably would agree in general principal, that prices arereasonably inelastic at this point. I mean, if you're selling a house for 300and you are offered 10,000 off. I don't think you'll sell anymore houses. Ithink that's what a lot of people have seen, that's probably a bigger issue in California than anywhereelse, because the numbers are so much higher. The second question, have wemothballed any communities unless they’ve

Gordon Milne

Less than half a dozen.

Chad Dreier

Less than half a dozen, so - and I am not sure, we haven'tclosed any model. Everything we have models on, we are still selling out ofthis five or six properties that we probably stopped development on. So, I hopethat's the response to your question.

Jen Consoli - JPMorgan

Yes, it is. Thank you very much.

Chad Dreier

Okay.

Operator

Thank you. Next we'll move to Steven Kim with Citigroup.

Steven Kim -Citigroup

Thanks. Hi, Chad.

Chad Dreier

Yeah. How are you?

Steven Kim -Citigroup

Alright, hanging in there. Wanted to ask you a questionabout your inventory breakout, if you could give us a sense for, in theimpairment you took this quarter, how is that split between the homes underconstruction and the land component?

Dave Fristoe

That's just pro-rata across whatever communities you happento repair. So, it really depends on the stage of development, how many lots areunder construction. So I mean, you could almost take, that’s a tough answer tothe question because its, I'd say two thirds land, a third construction.

Gordon Milne

Yeah, I think that's probably a good guess.

Steven Kim -Citigroup

Okay, great. And then if you could talk about the landmarket a bit. Obviously one of the things that we are getting the sense for –is that it's pretty tough to find much in the way of a common meeting ground onprice. Seems like land sellers are little stubborn and land buyers are feelingappropriately picky. Can you talk a little bit about the sellers, in youropinion what is the reason why the land sellers are sort of holding back onprices more than let's say the homebuilders are and what you think it may takefor that to crack?

Chad Dreier

Well, that's a general question. So in general, most landsellers they hold the land or not are operating entity. So if let's just use anumber $1 million, hypothetically. If a guy got a piece of land for $1 millionand the market slows down, he can wait two years if he wants and sort of thinksthe market will come back, he doesn’t have the kind of pressure that a publiccompany would have to generate revenues.

So he has less incentive to do a transaction, say than wewould or our colleagues would. I think one of the big challenges or disconnectsis that if home prices go down 20%, land prices don’t go down 20%. So landholders just they don’t have to do anything and usually they don’t.

What it would take for them to move? I think, hey, you know-- I mean, if they get a bank squeezing them or they get a partner who squabbleor the family needs money or something like that, then, I mean, that happens. Imean we've seen a couple of transactions. I mean, we sold a piece to a privatecompany. We wouldn't have bought it at the price they paid, and that's justsort of life in the big city.

Stephen Kim -Citigroup

Okay.

Chad Dreier

Okay, thanks.

Operator

Thank you. Next, we'll go to Nishu Sood with Deutsche Bank.

Nishu Sood - DeutscheBank

Thanks. Chad,you mentioned in your commentary 87% of your own lots are finished and landexpenditures have obviously slowed to a crawl.

Chad Dreier

Yeah.

Nishu Sood - DeutscheBank

Now, that would -- I mean that's great. That shows theconservativeness of your historic and your current land policy. I would thinkthat that would argue that your cash flow trajectory should be on a steady pathof pretty dramatic improvements.

I might have misheard you, but I think you said a fewseconds later that cash flow next year is going to be more challenged than itwill this year. So, I was just wondering if you could just…

Chad Dreier

Unless somebody corrects me, I don't think I said that.

Gordon Milne

Yeah. I think we said cash outflows in 2008 would be lessthan they were in 2007. Maybe you didn't get that word, but…

Nishu Sood - DeutscheBank

Okay. Got it, got it. And so, I guess that gets us to kindof coming back to a concept potential cash flow. Lotof investors, like to think about the 25 -- roughly 25% lot cost that couldbecome cash flow if you don't replace that lot.

Now, with the stats that you gave us, you guys are obviouslymuch closer to that than a lot of other builders are. At about what time do youthink your actual cash flows begin to kind of match your potential cash flows?Is that kind of a mid to late '08 or how do you think about that?

Chad Dreier

Well, I mean, I think that's kind of just arithmetic. I meanif we don't do any land purchases next year, we've only got 13% lots to developsooner or later. And we sell -- if we sold or close the same number of unitswe're closing now, I think you could just do a grid that sort of say probablyat some point it gets better, and I'll let you do the grid.

Nishu Sood - DeutscheBank

Okay. And I guess on a different topic, on your backlogconversion, it was about -- I think you converted about half of your backlog toclosings in the third quarter, improvement from last year. But some of theothers builders were obviously -- we've seen obviously much more dramaticincreases in their conversion ratios.

Now I know a part of that is your policy of not building toomany spec. So I was just wondering if there is anything else in terms of yourkind of tactics, or your strategy that are causing that to not increase at afaster pace?

Gordon Milne

Yeah. This is Gordon. I think that's all to do with the speccounts. Some people have a lot of more specs. So when they sell the home, it'slargely completed. It gives you better returns. But at least on your conversionrate it doesn't give you better returns on your inventory. So again, I thinkit's our lot of spec count that may be holding us back on that number.

Operator

Thank you. And we'll move on to our next question from DavidGoldberg with UBS.

David Goldberg - UBS

Thanks, good morning.

Chad Dreier

Dave.

David Goldberg - UBS

I was wondering if you could give us an idea on the canceledhomes, where they are being cancelled in the process, and how much discount inprices move the home subsequently after it's been cancelled to meet the rangebecause it obviously varies.

Chad Dreier

Yeah. I mean, I -- boy, that's a tough one. You end up withan average that's hard to make sense out of. I would guess most cancellations-- I don't know, 30, 60 days. And it's trending down. So basically, I mean, Ijust give you a general principal. I mean the sooner we cancel, the lessproblems we have with having started out and putting in specific custom changesor whatever you call them, upgrades or options.

So the sooner we cancel, the less discounting you have todo. I mean, if you have -- I think I mentioned we have two per community thatare finished. I mean those houses -- finished means it's got everythingprobably, but carpet. And the buyers command a higher discount to sell that. Soyou could probably, say, in the first 30 days it's "X" and at a 120days it's three times "X."

David Goldberg - UBS

And I guess a follow-up to that is that are you prettycomfortable with your buyers that are in backlog now, you kind of scrub thatout in terms of availability of mortgages and whether they are going to be ableto qualify for mortgages…

Chad Dreier

Yeah. I mean that's a good question. We do scrub iteveryday. There are still some -- a lot of people in backlog from pre-August. Ithink we dealt with almost all of those homebuyers. There are still buyers thatcome down to close and are nervous and just see -they don't show up or don'tmake it.

And then, let me have all the traditional Even in the goodtimes, if somebody has an accident or an illness or loses their job orsomething like that. So I mean, hey, I guess we feel as good as we could feel,but given the lack of consumer confidence and the uncertainty in the business,I wouldn't feel -- I'd still be as nervous next Monday as I was last Monday

Operator

Thank you. And with that we'll move on to our next questionfrom Carl Reichardt with Wachovia Securities.

Carl Reichardt -Wachovia Securities

Good morning, Chad, how are you?

Chad Dreier

Good, how are you?

Carl Reichardt -Wachovia Securities

Good. I am recognizing your longstanding aversion tocommunity count. I am imperious what your plans are right now if you look atwhat you've got in your estimations for impairments as far as pace and pricesgoes? What's your sense as to how much your capacity will shrink next year in'08 versus '07 in terms of stores?

Chad Dreier

I would say it's pretty flat.

Carl Reichardt -Wachovia Securities

Pretty flat, Okay

Chad Dreier

Yeah.

Carl Reichardt -Wachovia Securities

And then, another longstanding aversion of yours,acquisitions must change typically in this…

Chad Dreier

I don't know if that's an aversion as much as just a prettysmart strategy.

Carl Reichardt -Wachovia Securities

Well, fair enough.

Chad Dreier

Okay.

Carl Reichardt -Wachovia Securities

Perhaps it might be a smarter strategy now to look atpotential deals. What's your sense of what has changed it? Has anything haschanged in your mind in that regard as typical of those things are now forothers?

Chad Dreier

Well, from our point of view. I mean, we have -- what did Isay -- 45,000 lots. I'm not sure I want anymore. We probably rather have lessthan more. So, I would catch unless you could go out and just get some hugefire sale deal, lots in $0.50 on a $1 or something.

I just -- it's hard for me to see that. I mean, California, you probablywouldn't do it. I mean, a lot of the places, we're still making money. So Imean, in Charlotte or Texasor Chicago orBaltimore -- I mean, if a guy comes in with a good deal, meets our traditionalhurdle rates, I mean we'd probably do that. But I am not -- I would use yourword have an aversion to doing any acquisitions or big land deals, right now.

Operator

We will move on to our next caller. We will hear from TimothyJones with Wasserman & Associates.

Timothy Jones -Wasserman & Associates.

Hi, Chad.Hi, Gordon.

Chad Dreier

How are you?

Timothy Jones -Wasserman & Associates

I am fine. How are you?

Chad Dreier

Pretty good.

Timothy Jones -Wasserman & Associates

Okay. Well, you sound always good. I have been asking on the(inaudible) I would like to know what your total was clearing account and yourhousing employees, how is it related? It was this year versus and the same twonumbers on last year please?

Chad Dreier

I think that as of September 30th we had about 2300. Andthat's down about 30%, which -- I don't know -- I guess this -- it must been3200. So I think, we're down like 900 from 3200 to 2300. And frankly, Tim, Idon't have in front of me the breakdown between mortgage and homebuilding.

Timothy Jones -Wasserman & Associates

So that's the total, okay?

Chad Dreier

Yeah.

Timothy Jones -Wasserman & Associates

Okay. The second is most builders -- in fact, if you see atthe last quarter reported in the last few days, has taken figures roughly,ending inventory, follow inventory. If market drops about 10%, you get about5%. Is the main reason of that because you have so much less in California and what percentage of your assets, are in California?

Chad Dreier

I do think that is true, that we've had less, assets in California. I thinkGordon -- and he can confirm this, I think we have 9% of our inventories now inCalifornia.

Gordon Milne

That is correct.

Timothy Jones -Wasserman & Associates

Very good. Thank you.

Chad Dreier

Okay, thanks.

Operator

(Operator Instructions). We'll move next to Dennis McGillwith Zelman & Associates.

Dennis McGill -Zelman & Associates

Hey guys, how are you?

Chad Dreier

Pretty good. How about you?

Dennis McGill -Zelman & Associates

I'm pretty well. Just looking at the West region, Chad,it looks like on the quarter at least you guys did a good job of driving ordergrowth there, but it looks like it came at the expense of price. With a lot ofyour competitors out there with more lands that you just talked about having towork here and there is lot of bonanza type sales going on.

I know historically, you've been a company that has notwanted to compete on price. So can you just talk about how you're handlingthose markets -- West now with a lot of competition on price going on?

Chad Dreier

Gosh, I wish I had some really smart, intelligent answer. Ithink, we -- first of all, I think the number -- we only had about 360 sales inthe West in the third quarter. So it's not like we have a lot. I mean there's-- I think as each house -- we like to think that if you came out and youwanted to buy a house in Southern California or Sacramento or some, we sell the best productin the best sales people and we're competitive.

I mean, it's really a house-by-house deal. I don't know thatI have a better answer than that. We don't have a strategy that we sent out toour West regions that says you do "ABC" compared to our colleagues.So and if you have a -- I just can't come up with a better answer than that.

Dennis McGill -Zelman & Associates

Yeah I guess, just thinking about, maybe, on the incentivelevel, you are willing in the short-term to move to where market is and aren'ttaking a stand to maybe the market comes back and...

Chad Dreier

I would be reasonably cynical on the market coming back in California. And basedon, like on the last question, we've had less inventory in Californiafor a long time, and our incentives in California…

Dave Fristoe

They are roughly -- they are higher than the rest of thenation. It is something like 14%.

Chad Dreier

Yeah. They are like, David just said, they are like 14% inthe West. So they will be higher than what is in the rest of the country. Imean I like to -- the more inventory we can move in California, I think the better off ourbalance sheet is.

Dennis McGill -Zelman & Associates

Okay. And then, kind of changing gears a little bit on theimpairment. Did you have any impairments roll through the income statement thisquarter?

Chad Dreier

Yeah. I think I said in the conference 50 basis points ofmargin, I don't know whatever that arithmetic is.

Dennis McGill -Zelman & Associates

Alright. Sorry for mismatch, thank you

Chad Dreier

No problem.

Dave Fristoe

$20 million to $25 million.

Chad Dreier

Okay.

Operator

Thank you. Next we'll move to Wayne Cooperman with CobaltCapital.

Wayne Cooperman - CobaltCapital

Chad,how are you doing?

Chad Dreier

Pretty good. How about yourself?

Wayne Cooperman -Cobalt Capital

Good. Last time you guys wereabout this level of closings, which is quite a long time ago, your margins weresort of 6% to 7%. Just wanted to break a thought what more can you do tostabilize the cost base. Can you run the company back to a level like you didwhen you're closing 10,000 or less homes is that a reasonable strategy?

Chad Dreier

I think it is, if you take kindof a long-term view, I was actually thinking about that driving in thismorning. I mean, for the quarter we did, sales were 1,876, so if you annualizethat, that's like 7,500. I know that's the number you came to.

Wayne Cooperman - Cobalt Capital

Give me a little more credit thanthat, but anyway.

Chad Dreier

Okay. So if you call it 7,500 --hey, if the market stayed exactly flat, I think, we could grow a small percenta year, each year. If we got back to a half piece of market we could probablygrow faster than that, but I wouldn't be so confident as to give a significantnumber on that right now, given the conditions.

Wayne Cooperman - Cobalt Capital

Alright, but that was 1998 - isthe last time you closed that few units, I think.

Chad Dreier

Yeah. Well, I think the market isworse than it was in 1998.

Wayne Cooperman - Cobalt Capital

So was it up. So even getting toa 6% margin is not reasonable.

Chad Dreier

You mean pre-tax margin oroperating margin?

Wayne Cooperman - Cobalt Capital

Yeah. Your margin in 1998 was5.77%.

Chad Dreier

Yeah. Hey, if we had a stablemarket and where these 5,000 units or 7,500 or 10,000 or some like that, I meanwe got to be able to do that. I certainly don't think I would commit to it fornext year, but in a decent business you could do that.

Wayne Cooperman - Cobalt Capital

Okay, thanks.

Chad Dreier

Okay, thanks.

Operator

Thank you. We'll move to our nextquestion from David Goldsmith with DSG Capital.

David Goldsmith - DSG Capital

Hi. Just talking about California, I'm justwondering whether you have had any damage out there.

Chad Dreier

Well, that's a good question.It's actually been a terrible week. Fortunately for us, we've had no -- none ofour houses are in any of those areas. We've had several employees who had toevacuate, but we haven't had any property damage or at this point anythingrelated to that. But it is a pretty scary time out here.

David Goldsmith - DSG Capital

Great, thanks.

Chad Dreier

Thank you.

Operator

(OperatorInstructions). We'll move next to [Clifford Rosen] with UBS.

Clifford Rosen - UBS

Hi, guys. Thanks for taking myquestion. I was hoping you might give some more clarity around what makes upthe $271 million of other assets on the balance sheet?

Chad Dreier

I am going to turn to DaveFristoe on this one. David?

Dave Fristoe

Yeah. It’s deferred comp. Itsjoint ventures, receivables. There are some mortgage loans not for a manythings of that nature.

Clifford Rosen - UBS

Okay. And then, so what should Ithink of that as kind of the largest component there or just sort of a driverof that?

Dave Fristoe

Well, we don't get into too muchof detail. I guess we can give that to you later.

Clifford Rosen - UBS

Okay.

Chad Dreier

Yeah.

Clifford Rosen - UBS

And then, I am sorry if I missthis. In terms of your write-downs, what portion of it was related to optionsversus…

Chad Dreier

I think we said $11 million wasoptions.

Clifford Rosen - UBS

Okay. Thank you.

Operator

Again, with that we'll move toBuck Horne with Raymond James.

Buck Horne - Raymond James

Hey, good afternoon, guys.

Chad Dreier

Hey, well it's a morning for us.

Buck Horne - Raymond James

Oh, sorry. Good morning for youguys. Just wondering -- could you tell us what the cost of the sticks andbricks as a percentage of revenues were this quarter on the homes you sold andcan I know how that's be trending?

Chad Dreier

We have included a proxy figuresa couple of minutes to…

Gordon Milne

Yeah. Give us a minute.

Chad Dreier

We've got lots of fancy chartsand stuff like that.

Buck Horne - Raymond James

Okay. And maybe just, while youare getting that. And I was a little confused on the development spending,since you've got such a large percentage already fully developed. If you takethe June 30 inventory and kind of back out the impairments, it looks like theinventory balance actually grows this quarter. Then I was taking the variancethat would just be the incremental, you sold the houses, of course, and thatwould of course mean you spend a lot on development. I am wondering is that,should that come down dramatically, is that what you are implying here?

Dave Fristoe

Well, what we implied was, we hada lot of option launch at beginning of the second quarter, that we dealt withduring the quarter. Some of them we purchased and some of them we basicallywalked away from and took the $11 million charge. Now we are saying, we reallygot our backlog of option lots under, down to a very little number, won't havemany of those coming. Then we were spending money on development during thequarter, that's really slowed down but we had a lot of development work that wecompleted in the last quarter. So, we are in good shape, going forward, inbringing those costs down.

Buck Horne - Raymond James

And how many option launches didyou go ahead and buy during the quarter?

Dave Fristoe

I don't have that number. But wesaid we took our option launch down from, here’s the number. We went from23,507, at the beginning of the quarter to 16,683 at the end of the quarter.

Chad Dreier

It's giving an idea, though weonly spend about $7 million or $8 million.

Buck Horne - Raymond James

Taken off.

Chad Dreier

Taken off this number.

Buck Horne - Raymond James

Okay.

Dave Fristoe

Why don’t you Eric, answer that?

Eric Elder

Yeah. On your fix and bricks,it’s 51%.

Buck Horne - Raymond James

51%. Okay and how much is that,what was it last year roughly?

Eric Elder

48%.

Buck Horne - Raymond James

48%. Okay. Thanks, guys.

Chad Dreier

Okay. Thanks.

Operator

We'll go next to Alex Barron withAgency Trading Group.

Alex Barron - Agency Trading Group

Yeah. Hi. Good morning guys.

Chad Dreier

Hi.

Alex Barron - Agency Trading Group

I wanted to ask you how you arethinking about, I guess, like a minimum sales pace when you reach a point atwhich you are not selling X number of homes and you decide it’s time toincrease your incentives or whatever. What is that minimum sales pace you'retrying to maintain?

Chad Dreier

Okay. If everything was equal, ifwe were in a classroom and we were teaching the business, we would want to doone sale per community per week. That's just sort of a basic guideline. So, inthis environment, we are probably selling a half a week and so there are somepoint a half isn’t enough so you've got to be little more aggressive. If you gobelow a half you got a big problem. I mean, a big problem and that's where yousee the write offs or the increased incentives or something like that. So, oneof the answers to the question someday, is when does the market get better, iswhen we start seeing one sale a week going forward. That's when we will feelbetter that the market has stabilized.

Alex Barron - Agency Trading Group

Thanks. Got it. I guess touchinga little bit back on the impairment side, I apologize if you already gave it.But can you give a breakdown by region, what the impairments were?

Chad Dreier

Yeah.

Alex Barron - Agency Trading Group

The number of communities thatwere impaired?

Chad Dreier

Carl is still on the phone. Ihave an aversion to community. So, Californiawas 65 million; Phoenix and Tampa,about 20 million each, and Washington and Virginia will be 8million. And as my daughter always said, miscellaneous is about 5 million.

Alex Barron - Agency Trading Group

Got it. Guys, I wasn’t asking fora community account. Just how many?

Dave Fristoe

21 communities.

Chad Dreier

Oh I see, what you mean, sorry,21 communities.

Alex Barron - Agency Trading Group

And were any of those wereimpaired?

Dave Fristoe

Yes. Two.

Alex Barron - Agency Trading Group

Okay. Alright. What's the totalcount since the beginning of the downturn?

Dave Fristoe

Give me a second.

Chad Dreier

Hold on. How about a nextquestion, and we will give that answer out.

Alex Barron - Agency Trading Group

Sounds good. Thanks.

Chad Dreier

Okay.

Operator

(Operator Instructions). We’ll goto Rashid Dahod with Argus Research.

Rashid Dahod - Argus Research

Hi, good morning guys.

Chad Dreier

Yeah, hi.

Rashid Dahod - Argus Research

You made a comment earlier aboutscrubbing your backlog, and I want to know in terms of any price adjustmentsthat you may make, what impact does that have on your backlog and how are youhandling that?

Chad Dreier

I don’t know that when you scrubyour backlog - when we scrub our backlog we’re trying to make sure that ourbuyer with the contract has a more each, and that he can close or that thehouse he is going to sell to get his down payment he’s got a descent price inall that. I don’t know that we make too many adjustments to a buyer in backlog.Now I guess if we were selling in community A, and we have lets just say we had10 units in backlog and we dropped the price 20 grand on for sale of houses,you might have to go back and give those 10 buyers a backlog some discount, butwe don’t have much of that.

Rashid Dahod - Argus Research

Okay, thank you.

Gordon Milne

The answer to the previousquestion is 70 communities.

Chad Dreier

So that was the previous -- Ithink Alex asked that question.

Gordon Milne

Communities impaired to-date?

Chad Dreier

So, communities' impaired to-dateis 70. So anyway, sorry to interrupt, but is that response to your question?I’ll take that as a yes.

Operator

And we will move on to our nextquestion from [Randy Riesman] with Durham.

Randy Riesman - Durham

Hey, can you guys comment, youmay have touched on this, how many lots did you walk away from? On the optionside, so you dropped from 23,000 down to 16, how many were taken down versuswalk away from?

Dave Fristoe

I'll tell you, we walked awayfrom about $20 million worth of options, whether it be letters and credit, oractual dollars up.

Chad Dreier

I don’t know that we have a lotcount number.

Dave Fristoe

Lots was down about 9000, butaround went down as well, so we don’t know the exact number there, but let'ssay we, the acquisitions - well if you look at our deposits we've improvedabout 175 to 106, so we are making serious progress there on the commitments aswell as the lots.

Randy Riesman - Durham

Well I guess, how should I thinkabout you said, you spend $7 million to $8 million taking down lots, I am justtrying to back in to kind of a price per lot, how can you help me get there alittle?

Dave Fristoe

Well we are talking about optionlots take downs and I assume that was kind of rolling.

Chad Dreier

Well, I think another way to lookat is our average price was 285 or 284 whatever it is. I think if we use 25% asa half decent number, a penny lot $70,000, ballpark $70,000 to $75,000, and ifeverything is equal, usually the land is half of that, and relevance half, soyou can probably -- if you use those numbers for guidelines you probably getsome…

Randy Riesman - Durham

Okay, but isn't that kind ofwhere lots were valued at the peak. I am just trying to get where they are now?

Dave Fristoe

Well, couple of years ago, ouraverage price was almost 300, so 300 to 285, gives you some decline.

Randy Riesman - Durham

Okay, thank you.

Operator

And of course, we have no furtherquestions. I'll turn the conference back over to you Mr. Mackintosh for anyadditional or closing remarks.

Drew Mackintosh

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

Operator

Thank you, and with that thatwill conclude today's conference. We thank you for joining us. Have a greatday.

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Source: Ryland Group Q3 2007 Earnings Call Transcript

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