Ryland struggles to play catch-up Home builder hurt by land-buying policy, executive exodus

August 08, 1993|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

When the recession came to the home building business and competitors seemed to be racing each other to bankruptcy court, none of the analysts following Ryland Group Inc. was sweating. Just wait until 1992 or 1993, they said.

"They're sitting pretty for the inevitable turnaround," Barbara Allen, now the home building industry analyst at Donaldson, Lufkin & Jenrette in New York, said in December 1990.

But what a difference three years make. Columbia-based Ryland, the nation's third-largest home builder, is struggling as competitors surge.

Ryland's stock languished at $18.38 Friday, down 27 percent since last October, even as shares of industry leader Centex Corp. of Dallas and second-ranked Pulte Corp. of suburban Detroit hit 52-week highs last week. Moody's Investors Service says it might lower Ryland's bond rating. Earnings are lagging, too -- Ryland lost $4.7 million on home sales during the first half of 1993, though a profitable mortgage banking arm allowed the company to stay in the black overall.

And Ryland faces a major challenge -- finding a replacement for Chairman and Chief Executive Roger W. Schipke, who announced his resignation last week. He will head Sunbeam-Oster Co., a Rhode Island-based small appliance maker.

The search for a chief executive points to a deeper quest -- Ryland is searching for a direction that can make it an investor darling again, and restore its profit potential.

"The last couple of quarters, [Pulte and Centex] have done much better than we have," said Andre W. Brewster, 68, a top Baltimore lawyer and Ryland director who is serving as temporary chairman and chief executive. "I don't know exactly why. But their [profit] margins are obviously better."

Ms. Allen draws stark differences between Ryland and its major competitors. "Both [Pulte and Centex] have surpassed their previous peak earnings [from the 1980s]. They have margins rising, no losses in home building, and more than 50 percent of the companies' earnings are from home building."

Critics also fault Ryland for stacking its top levels with executives from outside the real estate business who, as the phrase goes, "just don't get it."

Still, Ryland's mistakes, which have held back its profits and stock price, aren't life-threatening.

Ironically, Ryland's problems were triggered by the fiscal conservatism that Ms. Allen praised in recessionary 1990 -- the company didn't take advantage of more recent situations that called for bold moves.

Industry leaders realized in 1990 that the recession and its accompanying credit crunch would radically change the rules of real estate. Ryland, however, took longer than other big, national builders to figure out how.

Ryland, for example, was slow in altering its long-standing reluctance to buy undeveloped land, said Lawrence Horan, an analyst at Prudential Securities Inc. in New York.

Since the 1960s, Ryland generally refused to buy land before local governments had approved development plans, or before land developers had installed streets and sewers. Ryland bought only "finished lots," and often only after it had pre-sold the house it planned to build there.

That worked fine when finished lots were plentiful. But land development is the most speculative part of the new home business, and the credit crunch put most land developers out of business at least temporarily, Mr. Horan says. Finished lots got scarce -- and expensive.

Rivals forge ahead

Centex and Pulte started buying raw land, and installing streets and sewers themselves. Ryland wouldn't.

"One thing we've done is take advantage of [Resolution Trust Corp.] land sales," said Centex spokeswoman Sheila Gallagher. "We were the RTC's biggest, and sometimes only,customer."

She says Centex used the RTC strategy successfully in Texas and plans to do much the same thing in California, where the recession has beaten down land prices.

Pulte executed a similar strategy in Timonium, buying 253 townhouse lots that Provident Bank of Maryland had foreclosed on in 1991. Pulte bought the lots from Provident at the depths of the recession. Today, its townhouses are selling well, partly because they are up to $20,000 cheaper than those NVHomes tried to sell there.

Ryland stuck to buying finished lots. But that expensive land, combined with flat housing prices, left little room for home-building profits, Mr. Horan says. In California, for example, the average sales price for a Ryland home fell from $245,000 in 1991 to $210,400 last year.

"We didn't gamble on that market turn, or you could say we didn't take advantage of it. Either way," Mr. Brewster conceded.

He argues that the cautious policy has served Ryland well in the past. The one place Ryland had made an exception to its rule was in Southern California, where the late 1980s land market forced builders to buy raw land -- and the company was stuck with tens of millions of dollars' worth of property when the regional economy cooled off.

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