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November 06, 2007

Comments

mike

Hey Reggie! some great posts lately. I would be very curious to see the mortgage docs for Ara Hovnanian's mansion.

Reggie

Thanks. Compliment will get you everywhere in life:-)

As for the docs, I gave it some thought and somehow feel that distributing them over the web is somehow unethical. I can't exactly put my finger on it, but I know I wouldn't want anyone doing that to me. If you realy want to verify it, the docs are public record, though.

Reggie

I keep reading about CEOs, pundits and investors trying to call a bottom in the homebuilders, bankers, and real estate markets. Why in the world would someone try and time these markets? Many say that the bottom will come when one or two homebuilders file for bankruptcy. Is that the way it played out in the S&L crisis? How about the dot come bust? Historically, these entire industries were routed - for many years. You know what happened after the first dot com or S&L went under? The second one did? What happened after that? The third one did. I guess you can guess what happened after the 4th, 5th, and 6th.

Reggie

Ryland filed it's 10Q, and as I thought, they are running very thin on cash. They reported $85 million of cash in thier press release, but failed to mention in that same release that the money came from drawing down $117 million from a credit line. Without the credit line draw down they would have ended the quarter with negative cash generated. They would save about $75 million a quarter if they stopped trying to fool those that may not know better by buying thier stock back and issuing dividents. That money is much, much better used in marketing to take sales share from their competitors, or even offering incentives to get people to buy houses. Which which you rather have as a shareholder, a piece of a percent greater accretion from the stock buyback and a few pennies dividend, or a company that successfully reduces it's overpriced, high carrying cost inventory or reduces it's life threatening debt?

As a little tiny aside, they noted that they lost an additional $37.3 million in option contracts, which they classified as a non-cash charge. Sure it's non-cash this quarter, because they wasted the clash in past quarters. Remember, the cash flow statemets have the impairment charges added back in, eventhough the impairments are still representative of cash gone, just cash from previous periods.

david

Hi Reggie,

Very interesting analysis. I have a few questions.

1) How did you come to your 2008 book value projection ($16.72)?

2) You said that RYL is trading at a 100% premium to its peers based on P/B value but I'm not sure why. It seems to me that all the builders' book value may be overstated.

3) I read that RYL doesn't have any serious debt payments until 2011. Moreover, they are rated higher by the credit agencies compared to most other builders and seem to have less off balance sheet debt exposure. Also, I thought I read a news item which said their l/t debt was halved from $1.5 billion to 750 million (true?). Anyway, do you think you are perhaps overstating their financial difficulties, at least in terms of survival?

David

Reggie

@ Dan
"Very interesting analysis."
Thank you for the positive comment.

1) I used a proprietary housing price algorithm and historical price movements to track and forecast price increases and decreases in each of Ryland's specific geographic business areas. I then adjust book value according to their inventory holdings. This is explained in more detail in the assumptions section of the post on Ryland.


2)Yes, they are all overstated, which is why I went through the pains of calculating book values for many of them myself. My comment could be more accurately stated as "Ryland is trading 100% over its book valuation, while some of its peers are not" Hey, some say tomato, some say tomoto:-)

3)"I read that RYL doesn't have any serious debt payments until 2011. Moreover, they are rated higher by the credit agencies compared to most other builders and seem to have less off balance sheet debt exposure."

I am only stating what the numbers reveal to me. Ryland has serious debt payments every year/quarter/month. They may not have any significant debt (on balance sheet) coming due till 2011. Debt payment and debt repayment are two very different terms. As for the rating agencies, it seems as if you have read enough to realize how foolish it is to depend on rating agencies as independent advisors. That is what got everybody in hot water with the MBS/ABCP/CDO/CLO/SIV mess. It is also misleading with the builders, the insurers, and the bankers. The builders should have been on the downgrade path since late '05 or early '06. Since the rating agencies are not a fiduciary, and act as giving their opinion only, they have an out - although their is a significant conflict of interest since they are compensated by the very same entities that they rate.

" Also, I thought I read a news item which said their l/t debt was halved from $1.5 billion to 750 million (true?). "

Ryland's reported debt and liabilities as of its latest 10Q is as follows: approx. $1 billion dollars of debt on balance sheet debt, approx half billion of off balance sheet debt (Q2 est.), $164 million in accounts payable, $401 million in accrued and other liabilities - with a negative valuation movement in nearly all of the assets underpinning the debt and $81 million in cash.

"Anyway, do you think you are perhaps overstating their financial difficulties, at least in terms of survival? "

So they have:

- Over $2 billion in liabilities and $83 million in cash,

- 5.4% of their total debt in cash, and

- 4% of their total liabilities in cash (your local bank will probably not lend you a dime anywhere close to these numbers).

- Their z score has them as a bankruptcy candidate by next quarter (and that is without including the half billion dollars of debt off balance sheet - an oversight on my part),

- Negative net cash flow

- Negative gross margins, trending downward

- Negative net margins, trending downward

- Declining revenues

- They are having a hell of a time selling their inventory, despite 20%+ discounts,

- competitors are slashing pricing by up to 56% in order to move inventory,

- Backlog is decreasing,

- Cancellations are increasing,

- They have resorted to sale leasebacks on their model homes (the homes that they use to show you what your home may look like) in an attempt to save money on carrying costs and boost sales,

-Management has been selling shares rampantly, with absolutely no insider purchases,

- Moody's has them on standby for a junk rating status due to an inability to move inventory and generate cash,

- banks are adding to their competition through REOs,

- mortgage market is freezing up

- and the macro environment is getting much, much worse than the environment that caused them to generate the aforementioned numbers and won't improve till about the 2nd half of '09.

Now, looking at this company's situation, do you think I have been overstating their financial difficulties? I just interpret what the numbers tell me. I actually think I was overly conservative by not including the off balance sheet debt - ok, actually it was a mistake, but nobody's perfect:-)

David

Thanks for your response.

Reggie is the man

Reggie how can i play RYL with options today. What other homebuilders do you think are done. have you done anything with PHM

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