Today's market finds a number of public home builders under pressure to spend some of the large amount of cash they've been sitting on as the downturn has drawn out. Their cash hoards are much larger than their shrunken operations necessitate, a fact that's coming out in the interest charges many are racking up quarter after quarter. The options are somewhat limited: repurchase shares, pay down debt, or buy more land.
For some builders, such as Beazer Homes and D.R. Horton, reducing debt is one of the best uses of their cash. For others, such as Meritage Homes or Toll Brothers, the focus is more on identifying new land opportunities. Meritage recently announced an expansion into the Carolinas, and Toll executives are admittedly trolling for new positions for the company's City Living product in metro areas such as Boston and Washington, D.C.
So, for many in the industry, it came as a surprise that Ryland Homes' management team announced late last week that the company would be exiting both Jacksonville, Fla., and Dallas.
According to Drew Mackintosh, vice president of investor relations and corporate communications for Ryland, the decision resulted in the elimination of 50 positions and will bring the company's footprint down to 15 markets from 17. However, Mackintosh said there was no set timeline for the exit, adding that it will be "a function of finding buyers for the land and the right price for the land." Including all homes under construction, specs, and models, the company controlled roughly 750 lots in Jacksonville and 1,300 in Dallas.
In the press announcement, the company said the decision was part of "a strategic plan to efficiently manage its invested capital."
Historically, Ryland management has followed a strict management principal that no more than 10% of its capital is invested in any one market. The strategy intended to promote geographic diversity, something that management had hoped would help it better weather any bumps in the road. However, the widespread nature of the current housing slowdown has challenged this philosophy.
Mackintosh said the strategy "gets tough to adhere to in the trough of a cycle," and at this time, it made more sense for management to redeploy capital from Jacksonville and Dallas to other markets that can more easily grow volume. By eliminating the two markets from the company portfolio, management cuts overhead expense without sacrificing a lot of volume.
"This is as much about supporting the remaining division as it is about shutting two divisions down," he said.
Both from a revenue and volume perspective, both Jacksonville and Dallas were hardly top performers for the company. According to data from Hanley Wood Market Intelligence (HWMI), for the 12 months ending June 2011, the company closed just more than a hundred homes in both markets. Based on average sales price, at that level of volume, the Jacksonville and Dallas divisions contributed approximately $19.7 million and $22.7 million, respectively, to the company's top line. In contrast, in Houston, the company's best market, Ryland closed 410 homes for revenues in the ball park of $97.1 million.
But given the company's solid balance sheet, there's a question mark around why the company, particularly in a relatively strong market such as Dallas, had trouble getting the volume. Although the company broke the Top 10 list in terms of market share in Jacksonville, coming in at No. 8, the company ranked No. 28 in terms of market share in Dallas, according to HWMI.
For sure, the markets overall have shrunk. In 2006, there were more than 17,000 closings in Jacksonville; for the 12 months ending June 2011, there were 3,111. Similarly, in 2006, Dallas had 50,835 closings compared with 12,387 today.
However, some industry insiders point to other issues. Competition is ferocious in these markets, as there are low barriers to entry. Moreover, in lower-price markets such as Jacksonville and Dallas, margins can be slim, so it's a play for volume. Without significant volume, it's hard to get a first look at land positions unless a builder's acquisition team is not only connected but aggressive.
David Goldberg, a housing analyst for UBS Securities, applauded Ryland's decision. "If you aren't that big, don't have much leverage, why are you in a market?" he said. "If you were to see more builders think from this perspective, business would be better."
But industry veterans, such as Jim Jenkins, senior vice president with local Dallas developer Huffines Communities, remain surprised at the decision, given the long-term outlook for the Dallas market for large national builders. "Dallas represents the future of single-family detached building," he said. "You must be able to make it in this market."
This issue of scale for Ryland isn't limited to the Jacksonville and Dallas operations. The industry's general rule of thumb is that a builder needs roughly 200 units to justify the overhead. However, according to HWMI data, Ryland has a number of additional markets that are falling short of that threshold, including Minneapolis, Tampa, Fla., and Denver.
However, Ryland's Mackintosh said the company has no immediate plans to shut down more divisions. "We have no plans to exit markets at this time," he said, "But we've demonstrated a willingness to exit markets where we see opportunities to reallocate capital."
Note: Hanley Wood Market Intelligence data is based on closing documentation, which could be subject to delay. Consequently, HWMI figures may vary somewhat from builder's reported figures.