Despite a loss of $52.5 million, or $1.20 per share, for its third quarter, executives at The Ryland Group were very clear during an earnings call Thursday that the company was shifting its focus from cash generation and preservation toward improving profitability and growth.
"We are optimistic that the housing market is on the mend," said CEO Larry Nichols.
For as much as Nichols saw the market improving, so were the company's gross margins, which had been dogging the company the previous quarter. Although still below peers, the company's margins rose from 300 basis points from 2Q2009 to 10.7%.
Company executives said they expected to see more growth in margins as the company continued to close out less profitable communities and restock its community count with lots at a lower land basis.
Moreover, margins also should get a boost going forward from decreasing incentives. The company was able to reel in its sales incentives from an average of 18% of sales price to 14.7% during the third quarter; by comparison, historical norms placed incentives at around 5% of sales price. Management said that percentage would continue to come down, particularly as it was starting to see pricing firm up. In fact, management said it has been able to raise prices during the quarter.
"In most of the markets we're in, we've tried to raise prices," said Nichols, adding that 75% of the time the price increases stuck.
So, with a renewed emphasis on margin growth and returns, management has turned its attention to buying lots. During 3Q2009, the company secured lots in Atlanta, Baltimore, Houston, Indianapolis, Las Vegas, and San Antonio, mostly through option deals.
Analyst Ivy Zelman of Zelman & Associates questioned management's decision to actively pursue land deals, particularly given that the company was sitting on roughly four years of land at current closing rates. She asked quite frankly, "What's the rush?"
The answer it would seem was that many of the lots the company controls are simply in the wrong places, meaning where people don't want to live. But CFO Gordon Milne also suggested that there was no harm, no foul in pursuing lot option deals because not only does it give the company strategic land position in areas where there are pockets of demand, but there's little risk to the company's liquidity in tying up the lots. The company is putting only a small amount of money down to secure lots, so the company's cash position is hardly in jeopardy, he said.
"$744 million is a lot of capital to have when you are doing option deals," said Milne.
Milne went on to explain that the company's cash was only earning 1% to 1.5% by sitting on the company's books, whereas land could deliver far better returns. Milne said management was only looking at doing deals for lots that yielded a 30% internal rate of return and an 18% margin.
However, despite the urgency to secure more lots, Ryland execs said deal flow has been a trickle as banks have continued to be slow in shedding their real estate assets.
"There aren't enough lots coming to the market," Nichols said.