Despite The Ryland Group's fourth quarter loss of $201.9 million, CEO Chad Dreier said he's "encouraged by how Ryland is positioned" to weather what he deemed the worst housing downturn in recent memory. A drastic reduction in spec home count improved the company's cash position, allowing management to drive down debt and add to its cash reserve.
Much of the loss was attributed to higher-than-expected inventory impairments and option write offs of $242.7 million and a $75.2 million reserve against deferred tax assets. During the earnings call, Dreier noted that most of the $198 million is asset valuation charges were concentrated in the Chicago, Jacksonville, Las Vegas, Tampa, and Washington, D.C., markets. D.C., in addition to the Atlanta, Chicago, and Northern California markets, contributed the bulk of the company's roughly $45 million in option deposit write offs.
At the close of the quarter, the company counted roughly 39,900 lots under control with 26,647 owned and the balance optioned. Dreier said that land pipelines were the longest in Chicago, Houston, Orlando, and Tampa.
Aggressive pricing strategies, which reduced average home price by 14% for the quarter and helped shrink company's spec home inventory, kept new orders from falling more than 7%. Dreier said the company is at its "lowest [spec] level in eight years," after reducing its standing inventory by 53% from a year ago. The other good news was that SG&A was down $20 million from a year ago.
By clearing out much of the spec inventory, the company generated more than $300 million in cash. Management chose to use $119 million to pay off the company's bank line and also retired $25 million in senior notes. The moves left the company with a debt-to-capital ratio of 35%, well below its 3Q2007 target of 40%. Excluding $50 million in senior subordinated debt due this year, the company's next bond maturity is in 2012.
Future asset write downs and/or tax reserves could affect the company's net worth, putting it in danger of noncompliance with some of its covenants. However, CFO Gordon Milne said this was an unlikely scenario. Not only have banks generally been amenable to covenant easements, but the company is currently $100 million under the trigger for its net worth covenants and virtually debt free.
"Since we're not borrowing money, it's not an issue for the next six months," Milne said.
Margins and cancellations, on the other hand, remain an issue. Land impairments and hefty sales incentives took a heavy toll on margins. Gross profit margins averaged 13.9% prior to the land-related charges, and -15.3% with the charges factored in. Can rates for the quarter hovered at 46%. "It's tough to gain any momentum when buyers drop out of backlog at such high levels," Dreier said.
However, five divisions were able to muscle through the challenges during the quarter. Dreier said the Baltimore, Charleston, Charlotte, Indianapolis, and Orlando divisions all generated profits, even with write downs and write offs.
For all the billions of dollars in impairment charges and write offs that public builders have taken, Dreier said he sees a silver lining. The charges have driven average lot costs down significantly, a side effect that Dreier said he believes would help builders get back to "sell[ing] affordable homes profitably."