The improving sales trends that The Ryland Group CEO Chad Dreier had seen in 2Q2007 came to a grinding halt in August. But if there's one thing Dreier and his management team know how to do, it's damage control. The company's third quarter results included a consolidated loss of $54.7 million, but the rest of the bad news was pretty much contained as management stuck to its game plan of limiting risk and staying liquid.
"While I don't have any good news to report about the housing market, I can say Ryland is ahead of the game," Dreier told investors during the company's most recent conference call.
Home building revenues slipped 35.2% in the quarter year-over-year, as total closings fell 32.3% from the same period in 2006. This revenue erosion, coupled with higher marketing and advertising costs per unit, pushed SG&A up to 12.3% of revenues versus 9.7% a year ago. However, all told, total SG&A expense dollars decreased to $19.6 million in the quarter.
New orders were down 20.9% year-over-year, and cancellation rates climbed to roughly 43%. Dreier said the good thing about cancellations is that most were appearing early in the buy-build process, 30 to 60 days after the sales agreement had been signed. "The sooner we [get a] cancel, the less discounting we do," he explained. Sales suffered the most in Texas, followed by the North and the Southeast regions. The West experienced year-over-year sales growth, but Dreier noted that the increase came "at the expense of profitability."
Gross margins plummeted to negative 0.3%, after impairment charges, but the company's average sales price inched down only 2%.
Management reduced the company's spec home inventory by 30%, and Dreier remarked that that move translated to the company having just two finished unsold homes per community. Reducing standing inventory improved the company's free cash flow, of which management used roughly $37 million to pay down debt. Dreier said he expected the company's debt-to-capital ratio to be at 40% by the end of the year.
Dreier also noted that the executive team amended the company's $1.1 billion credit line, reducing it to $750 million. He estimated that the reduction in available credit will generate $800,000 in annual savings.
Like its peers, the company took additional asset charges this quarter. However, unlike its peers, the company was able to limit its write-downs and write-offs to $128.1 million for the quarter, a level well below that of competitors Centex Corp. and Pulte Homes, both of which recently posted charges near if not exceeding the $1 billion mark. Analysts at UBS Investment Bank expect that, when all is said and done and the market bottoms, the company's impairments will level off at roughly 32% of tangible book value.
Management also continued to whittle down the number of lots the company has under its control; its land inventory is down roughly 25% since the beginning of the year as management has continued to operate under a merchant builder business model. Dreier said that of the more than 28,000 lots the company owns, 80% are full developed lots, which means the company will not have to invest much more in the lots to get them into sellable condition.