Gleanings From Ryland Group's Q2'08 Conference Call

| About: Ryland Group (RYL)

 From Seeking Alpha's Ryland Group, Inc. Q2 2008 Earnings Conference Call Transcript

On company debt:

CEO Chad Dreier: “In June we paid off the remaining $50 million of a senior noted to have matured for payment. Our next bond maturity does not occur until 2012. Debt in total capital at the end of the period is 48% and net debt-to-capital is 41%... The tax charge and the inventory impairments did however have a material impact on our equity which resulted in another inventory credit facility. We worked with the bank group to successfully negotiate reasonable financial covering reflecting our current and expected future performance, while maintaining a $550 million line up credit.”

On joint ventures:

CD: “Total inventory at the end of June stood at $1.5 billion. We took $180 million pre-tax charge associated with land evaluation adjustments, joint venture impairments and the abandonment of options. Two large projects, one in Chicago and one in Orlando accounted for nearly half of these charges. Embedded in a $180M pre-tax charge is a $36M joint venture impairment. Now that we have written off the equity in our two large joint ventures, one in Nevada and one in Chicago, we think the likelihood of future joint venture impairment is small.”

On mortgages and financing:

CD: “Our mortgage company secured loans for 85% of our home buyers in the quarter and the average FICO score for these loans was 710, and the average combined loan-to-value was 90%... We have not experienced the significant change in our ability to market the loans we originate which are exclusively conventional and government insured loans… We continued to see a shift to government insured product, which made up 45% of our loan volume in the quarter. The acquisition of Countrywide by Bank of America closed earlier this month and so far the transition has not affected the way we do business with them. In addition we continue to expand our relationship with Guaranty Bank. The $40 million warehouse facility we have in place with Guaranty gives us the ability to sell our own to a number of buyers.”

Michael Rehaut – JP Morgan: “How many of your closings have the down payment assistance from the nonprofit groups… this quarter? CD: “…We made 18 to 20% of our, say, first half of the year, our backlog is in the down payment assistance."

On land holdings and purchases:

 CD: “In addition to the cash we are generating, we expected to receive a substantial tax refund in Q1’09, further enhancing our liquidity position. When land reaches that competitive pricing level we expect to see land deals in corrective locations that meet our hurdle rates, and we will be in a position that takes advantage of these opportunities. Until then we continue to work down our existing land position...  Yesterday one of the bigger builders in Indianapolis filed [for] bankruptcy so I think you’re starting to see more of those low to middle size builders [fail]… There was an article on yesterday's Wall Street Journal about a lot of mid range or regional banks that are just stopping commitments to [builders], so I think you are going to see those smaller guys have more and more challenges like that. I think that land will eventually go back to the banks and… they usually take a long time to put that into an apartment to get that out, so I think it would be a while before you see those deals come back on the market.”

Ivy Zelman – Zelman & Associates: “Do you feel like there is some markets, it doesn't pay to even build a house because the land is zero and you can't even cover construction and labor? Do you see any markets like that, I have heard like Central Valley's a market like that…” CD: I would say whoever told you the Central Valley is probably correct… We have 21 divisions. I would say absent the Central Valley or Northern California… I would say most all of them were so positive margins.”

On how different Midwest housing markets are faring:

 CD: “With the result of oil in Houston… their economy is a little better there… So it’s a little easier to sell houses in Texas than in California… The big $36 million [writedown] that was mentioned was a joint venture in Chicago and that market has really dropped. We we’re I think in number permeations decline just staggeringly in Chicago and we haven’t moved houses there… Orlando has suffered significantly; so those were the two biggest… Another one in Las Vegas, we wrote down a deal in Northern California that we’re trying to sell, we wrote down a little bit Charleston… We actually have a pretty good business in Indianapolis and they are actually doing reasonably well. We think we're the number one builder volume-wise now in Indianapolis. Cincinnati: we are auctioning that market and it has not gone much. Minneapolis… and the Twin City in the Midwest [are] challenging, difficult markets. Minneapolis or the Twin Cities was – is or was a higher priced market even in Chicago, and I think you've seen a lot of builders take a hit there in Minneapolis. I think the permits are pretty far down there in Minneapolis and – so that's actually all we're in, in the Midwest.”

On foreclosures:

 Larry Nicholson, COO: “We're pretty comfortable with our communities. We don't have a lot of foreclosures in our existing communities and we're just going to have to keep fighting it everyday.”

On downsizing:

 CD: “If the market went down another leg… it means we probably wouldn't buy anymore land. I think we had 4,200 sales in H1. If you define that as 3,000 and all of a sudden you're a 6,000-unit builder instead of an 8,000, I think you have to make another overhead correction and probably be even tougher on things that we haven't done yet. Having said that, if, and that's all hypothetical… If you were a 6,000-unit builder and you could get half decent margins and you'd be generating a lot of cash flow, you still have a pretty decent business, not like 2005, but I think you could be profitable… Our peak [headcount] was 3,200 and we're now at about 1,725, so that's 45%, 46% [less].”

On commodities and house prices:

 “LN: Earlier we talked about the price reductions we have and I think we’ve seen that slow. I think our guys have done a great job by just fighting off price increases. They’re obviously common on the petroleum side, but I think our goal right now is just to prolong and drywall, and is going to go up. We think we’re in pretty good shape with that for the rest of the year. So, I think right now, we’re just in the defensive mode just to fight off any price increases. There’s going to be some, you know… We’re just going to try and minimize them. We don’t see a big impact this year… A lot of our larger long-term contracts are locked in with price protection. So we know what our downside is and a lot of the bigger component. I think obviously, we think we’d see some increases.”


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