The decision by Ryland Group Inc. to pull out of two cities indicates the residential real estate market isn’t in recovery mode yet, and probably won’t be any time soon.
Analysts who follow the housing market in general and the Calabasas homebuilder in particular agreed with Ryland’s move. They said the company probably won’t be the only homebuilder to pull up stakes in secondary markets.
Ryland announced Aug. 26 that it will wind down building operations in Dallas and Jacksonville, Fla. The company intends to finish all homes under contract and will service warranties in those markets, but will sell off the remaining land as part of a strategic plan to efficiently manage its invested capital.
Ryland’s stock price rose 8 percent the day after the announcement. The stock continued to climb; Ryland was one of last week’s biggest gainers on the LABJ Stock Index, rising 16 percent to $11.66 on Aug. 31. (See page 24.)
James McCanless, an analyst at Guggenheim Securities in Nashville, Tenn., said homebuilders have spent the last few years cutting costs by trimming payroll and reducing housing starts. At this point, the only way to save money is to shut down low-performing operations even if that means reducing total revenue.
“If we don’t see national housing demand improve, then for the industry overall you’ll see more builders shrinking their footprint,” he said. “This is the logical step to redeploy assets to other cities where demand is better.”
Stephen East, an analyst at Ticonderoga Securities in New York, estimates Ryland sold 127 homes in Jacksonville and about 50 in Dallas last year. As a benchmark, the industry considers 200 homes the break-even point in a typical metropolitan market.
“Ryland’s move makes strategic sense,” East wrote in a note to investors the day after Ryland’s announcement. “We believe it likely other builders will follow suit with respect to some of their secondary markets that show little prospect of achieving profitability over the intermediate term.”
Drew Mackintosh, vice president of investor relations at Ryland, said the company has no plans to pull out of additional markets. He added that the company doesn’t have a specific timetable for when it will obtain capital from the sale of land in Jacksonville or Dallas.
“Our departure from these markets will be a function of finding the right price for the assets,” he said. “We aren’t in any financial distress so we don’t need to take the first offer.”
About 50 employees were let go, mostly in Jacksonville and Dallas, but none at Calabasas headquarters, Mackintosh said.
Other local homebuilders face the same struggles as Ryland, which lost $10.7 million in the most recent quarter. Westwood-based KB Home reported a net loss of $68.5 million and faces a complex bankruptcy of one of its developments near Las Vegas that could cost it up to $225 million.
Uncertain future
For Ryland and competitors, the big question is when the new home market will improve. Forecasts point to a pick up next year but the market will remain slow compared with historical averages.
On Aug. 23, the Commerce Department forecast 298,000 new single-family homes would be sold in 2011, the lowest total on record since the government started tracking sales in 1963.
Chris Redfearn, associate professor at USC School of Policy, Planning and Development, said each local housing market faces different conditions. Since the economic downturn in 2008, large metro areas such as Los Angeles experienced big slumps and have since stabilized. But in secondary markets such as Las Vegas, Phoenix and most Florida cities, prices and sales continue to drop.
For investors, Ryland’s decision won’t result in a financial windfall but indicates good managers are running the company, analysts said.
East, the analyst at Ticonderoga Securities, believes the homebuilder has about $60 million invested in Jacksonville and Dallas. Given the relatively small dollar amount compared with the company’s 2010 revenue of $840 million, the outcome of land sales won’t be a material factor in the stock’s future price, he said.
East rates Ryland stock a “buy” with a price target of $19.50. McCanless at Guggenheim Partners also rates Ryland a “buy” with a target of $19.
McCanless said even with the retirement of Chad Dreier, who served as chief executive of Ryland for 16 years until 2009, the core management style and team remained in place.
“They are a stable management team who have been in the business for many years, and I think it’s a well-run company,” he said.
East expected Ryland to announce cost reductions in the fourth quarter of 2011. He’s waiting to see how management will deploy capital from Jacksonville and Dallas.
“In sum, this announcement demonstrates the more aggressive nature of the company under its new leadership and is a principal reason for our ‘buy’ rating,” he stated in his note to investors.
