The spring selling season's lackluster performance has pushed back some of Ryland Homes executives' strategic plans to move the company back to profitability. As orders plunged 17% during 1Q2011, management decelerated its pace of land acquisition, a move that not only could affect its community growth but also slow the elimination of key expenses. (Click here for full earnings results.)
During a conference call with analysts Thursday, Ryland executives characterized the quarter as spotty, nearly devoid of any sort of trend as results varied market by market and even community by community. "It's been uneven the whole term," said CEO and president Larry Nicholson. "But we've had good, consistent traffic."
But the weak orders caused management to tap the brakes a bit, curbing its appetite for new lots. Management spent $47 million on land acquisition and $17 million on development for the quarter, compared with $70 million in new land purchases last quarter. The company ended the quarter with 16,854 owned lots and 6,444 lots held on option; between 65% and 70% were finished lots, added CFO Gordon Milne.
Management provided a little color on what land purchases it did make during the quarter, saying they found deals in Charlotte, Houston, and Minneapolis. In addition, management said the company is poised to enter the Raleigh market, a decision that had been delayed as housing's recovery has lagged. Outside of that strategic move, company executives said the company was unlikely to expand its footprint anytime soon.
In addition, executives indicated the company's lot mix was shifting as demand seemed to be strengthening in the move-up segment of the market. Whereas currently roughly 60% of the company's controlled lots are earmarked for entry-level product, executives expect that percentage to swing to the 30% to 35% range, which is close to the company's historical level of entry-level lots.
"Entry level is still a sizeable market, but it's a little more challenging with the mortgage issues," said Nicholson. "We've been traveling around and have been impressed with what we're seeing in move-up markets."
However, with the pace of land acquisition slowing, management's plan to rid its balance sheet of additional interest expense could take longer than originally expected. Like many of its peers, Ryland must grow its inventory to be able to stop incurring the charges, which amounted to $6.3 million during 1Q2011. While CFO Milne was hesitant to put a time stamp on when interest charges would hit the zero mark, he did say, "We'll probably be experiencing some interest [charges] through the third quarter."
With fewer dollars going into land these days, executives have had to find other places to deploy capital to generate returns. Consequently, management recently decided to buy back some debt. The company paid $28.2 million to repurchase $27.5 million of its 5.4% senior notes due 2015. Milne said while the balance sheet won't show much benefit from the move this year because much of the savings will be offset by lower interest earnings on a lower cash balance, going forward it will. The company ended the quarter with $685.9 million in cash, cash equivalents, and marketable securities.
Less land spend also could mean fewer new communities, which are proving to be more profitable than legacy communities, coming online in the future. However, nearer term, Ryland executives said the company still looked to be on track to hit its target community count range of 240 to 245 actively selling communities by the end of the year.