Homebuilder Rises as It Moves Back Into Markets

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Westlake Village homebuilder Ryland Group Inc. appears to be building its foundation for recovery.

The company became one of the country’s largest homebuilders by specializing in constructing lower-cost homes in master-planned communities. Hit hard in the recession, it retrenched, downsizing operations, exiting markets, restructuring debt and designing less costly homes.

But shortly after its shares bottomed out at around $10 in late 2011, Ryland began to turn things around. It expanded to cities where the recovery is strongest, acquiring in the last year homebuilders in three markets it had all but abandoned during the downturn and signaling it is looking for more.

Together, three recent deals provided the firm with 2,740 homes and home sites for future sales, and an additional 247 homes already under construction. That’s equivalent to about 60 percent of its net new inventory of owned and optioned lots in the first quarter this year.

The aggressive approach reflects ongoing confidence in the rebounding housing market, one that helped Ryland post first quarter year-over-year sales increases of 54 percent. That helped it record a first quarter profit for the first time in seven years, earning $22 million (43 cents a share) in the period ended March 31, compared with a loss of $5.1 million (-11 cents) the year earlier. The pace continued in April, when Ryland experienced a 59 percent increase in year-over-year home sales.

Investors have taken note. Ryland’s stock price soared to a 52-week high last week, topping $50 a share May 14, the first time it has been at that level since the recession.

Larry Nicholson, its chief executive, said the strong numbers are a signal the company is turning a corner.

“This is the significant milestone for our company as it not only underscores how we’ve come since the downturn but it also highlights the potential of even better results in the future,” he said during an earnings conference call last month.

Southern exposure

Ryland mainly builds homes for entry-level buyers as well as first- and second-time move-up buyers. Its prices generally range from $100,000 to more than $450,000, with the average price of a home closed at $277,000 in the first quarter this year.

The purchases of the regional homebuilders mark a return for Ryland to markets hard hit in the downturn. It reasserted it presence in Charlotte and Raleigh, N.C., in July with the purchase of Timberstone Homes. The deal included sites for more than 1,000 units in various stages of development. It followed that deal with the acquisition of Trend Homes in Phoenix from private equity firm Najafi Cos. LLC in December. That brought Ryland more than 900 lots and homes for future sales as well as 106 homes currently sold and under construction for delivery.

Most recently, Ryland agreed to acquire LionsGate Homes in Carrollton, Texas, which operates 15 communities in the Dallas-Fort Worth region. It has 885 lots and homes for future sales. Financial terms were not disclosed and the deal is not yet closed.

Though the company has been mum on the acquisition costs, Ryland sold $250 million in convertible notes in an offering expected to close May 20. The proceeds can be used for general corporate needs, which might include land and home acquisitions, according to the regulatory filing.

Ryland executives did not return a request for comment for this story, but Drew Mackintosh, its vice president of investor relations and corporate communications, previously told the Business Journal that the company sees acquisitions as a way to get into recovering cities.

Ryland left Phoenix in 2009 and Dallas in 2011 after not achieving the return it sought in those cities. In a cost-saving effort, it decided to deploy its capital into better performing markets.

But as the recovery takes hold and those cities begin to see growth again, Ryland has decided to get back into them by acquiring existing companies or assets instead of starting from scratch. Nicholson has said that he views the deals more as land deals than as company acquisitions.

While it’s still too early to record results for the Phoenix and Dallas acquisitions, Ryland did experience a 3 percent uptick in sales volume at the end of last year in Charlotte.

David Williams, an equity research analyst who follows Ryland for Williams Financial Group Inc. in Dallas, said acquiring existing well-known homebuilders and their properties is a clever way for the company to get back into markets it had exited as part of a cost-saving move during the recession.

“They can get into these communities and can immediately start building,” he said. “It’s difficult to buy off lots and land at a reasonable price and get the return you’re seeking if you’re not already in the market. We should see the benefits during this quarter.”

He added that Ryland’s aggressive strategy likely won’t be isolated to new markets. It probably will continue to ramp up its operations in its strong markets, such as Southern California and Orlando, Fla.

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