Investors, analysts, and industry watchers anxious to get more color on what exactly drove The Ryland Group's 75% year-over-year spike in new orders during the company's fourth-quarter earnings call Thurs. Jan. 28 likely left the call with more questions than answers about what the company was doing right.
Despite suggestions from some Ryland competitors in select markets that the company has been aggressively dropping prices to spur sales, average pricing appeared relatively stable, with the average value per home in backlog declining a moderate 3.8% year-over-year to $251,000. Incentives also declined for the quarter to approximately 12% of sales price versus a peak of 18% earlier in the year. Management added that it had made no changes to its sales compensation structure.
Moreover, Ryland had neither opened more stores nor swapped out a ton of existing communities with new, more affordable communities. In fact, the company finished its 4Q2009 with 182 actively selling communities, 34% fewer than the prior year. And management estimated that new communities would account for roughly 10% of deliveries in 2010 as the company planned to grow its community count by about the same amount in the year ahead.
"We just worked real hard in the field with the traffic we had," said CEO Larry Nicholson, adding, "The tax credit helped. But it's really just execution in the field."
Helping to put some shine on the year-over-year new order growth certainly is the fact that Ryland had an easy comp with 4Q2008, when orders were down 65% from the prior year, as Wells Fargo analyst Carl Reichardt pointed out in a related research note. However, the company's recent new order rally was enough to build backlog by 11% during the quarter, marking the first year-over-year positive increase since 2005.
The company's impressive sales performance was all the more conspicuous because not only did it make many of Ryland's public builder peers' sales numbers pale in comparison, but it ran counter trend to the market at large. For their fiscal fourth quarters, Lennar managed a 3% year-over-year order increase while KB Home and Meritage Homes logged sales increases of 12% and 24%, respectively. NVR, the powerhouse in the public builder group, was the closest to Ryland's numbers, reporting a 47% year-over-year increase in orders.
Looking month-by-month at the quarter, Ryland's order trends were fairly stable, with the company logging 322 sales in October, 336 in November, and 311 in December. Compare that trend to what was happening in the new-home market at large--new-home sales rose in October, possibly spurred by the home buyer tax credit expiration, but then dropped off in November and December--and Ryland's order performance was all the more intriguing.
But whether the order pace improvement is sustainable is a question mark. Ryland management all but balked at giving analysts any meaningful guidance on what to expect in the quarters ahead. Even insight into January traffic trends was limited. "It's been a little better than the fourth quarter," Nicholson said. "But we're not through the month."
However, Nicholson did say the company was ramping up its spec count in 1Q2010 to capture sales spurred by the extended home buyer tax credit; currently, the company counts 429 spec homes in inventory, of which roughly 198 are finished.
"We started putting houses in the ground in December," Nicholson said, estimating that the company would have an additional 150 to 200 specs in the field from the strategy.
However, when asked if that incremental inventory could still grow, Nicholson responded, "We'll manage it on a weekly basis. We don't have a lot of time left [to build and close homes before the tax credit deadline], especially in some markets."
Management also said it expected gross margins to continue to improve through 2010 from 14.2%, excluding impairments and other charges, as more profitable communities come online and average incentives continue to decline. CFO Gordon Milne said he saw average incentives, as a percentage of sales price, settling closer to the company's historical average of 5% over time.
Sarah Yassi is the executive editor for Big Builder magazine.