Although The Ryland Group lost $29.3 million in 1Q2008, Wall Street applauded the company's performance because of declining impairments and a backlog increase. Investors voted with their wallets; Ryland stock (NYSE:RYL) closed up 6.5% at $34.46 on heavy volume amid a good day for the entire builder group. However, a negative cash flow, increasing SG&A, slow sales, and exposure to a failing joint venture in Las Vegas all indicate pain points going forward.

The "bright spots," as CEO Chad Dreier called them during an earnings call Thursday, April 24, were largely concentrated in the following areas:


Dreier said he was "encouraged" by an increase in backlog, both in terms of units and dollars, from 4Q2007. The company ended the quarter with 3,485 units in backlog, up 21.5% from the previous quarter but still representing a 28.8% year-over-year decline. The dollar value totaled $916.3 million, up 16.5% from 4Q2007 but down 38.1% from 1Q2007. Operations in Las Vegas, Northern California, Phoenix, Virginia, Indianapolis, and the Ohio Valley all logged backlog increases.


The company beat analysts' expectations for land-related charges. The company took inventory and valuation adjustments of $18.1 million, JV impairments of $7.2 million, and option deposit and feasibility write-offs of $2.1 million. The JV impairment related to Ryland's 3% interest in Kyle Canyon, a struggling JV in Las Vegas that involves recently-bankrupt Kimball Hill Homes. When further questioned about the JV, Dreier bristled. "We would not be comfortable speaking on behalf of the JV," he said.


The company was successful in bringing its can rate down to 27% from a high of 46% in 4Q2007. Dreier attributed the decrease to a shift in focus from move-up buyers to entry-level buyers, which now account for roughly two-thirds of buyers. By targeting the first-time buyer segment, the company avoids dealing with contingency sales. And with the courts settling the down-payment assistance issue, Dreier said entry-level buyers have more opportunity to overcome their biggest homeownership hurdle.


Dreier said divisions resisted a seasonal uptick in spec count, further reducing the company's spec count from 4Q2007. Ryland's spec count totals 686, down from approximately 1,800 a year ago.


The company made additional strides in cutting construction costs and labor. Dreier noted that a division in the Southeast was able to get costs down by roughly $10,000 on a 2,000-square-foot home. While some of the cost cuts are linked to a decline in lumber prices, much of the gain was on labor, particularly in rough carpentry and drywall costs.

Despite these positive notes, home building revenues fell 42.2% to $399.6 million for the quarter, mostly due to a 33.0% drop in closings to 1,543 units and a 13.8% drop in sales price to $257,000. The decline in revenue jacked up SG&A to 16.0% of home building revenue, up from 13.9% in 1Q2007.

Incentives also played a role in the decrease in revenues and the crush on gross margins, which were 5.0% after impairments and other charges. Dreier said incentives totaled on average about 16% of sale price. "We think prices in backlog are a little better," he noted.

New orders totaled 2,159 units and a combined value of $526.4 million, down 27.8% and 39.7% respectively from a year ago.