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RYLAND LANDS ON TOP Builder's limited land purchases keep it ahead during downturn

THE BALTIMORE SUN

From the ninth floor of the Ryland Group's new bottle-glass green headquarters in Columbia, Roger Schipke's office overlooks verdant swaths of suburban land -- perfect sites, it would seem, for one of the nation's top three home builders.

But Ryland owns little such land, and that makes Mr. Schipke very happy. The 55-year-old chairman takes pride in how few building lots Ryland owns in Columbia or in its two dozen other U.S. markets. Indeed, he attributes Ryland's financial health to its disinclination to buy land.

"Buying land at the wrong price at the wrong time can kill you," says Mr. Schipke, the ebullient former head of General Electric Co.'s large-appliance division in Louisville, Ky., who was hand picked to head Ryland by his predecessor, Ted Peck.

To be sure, times have not been easy for Ryland during the downturn in residential real estate.

With buyers of new homes in retreat, the company's net income skidded nearly 65 percent last year, to $6.7 million. That continued a decline that began in 1990, when profits reached $19 million -- a $38 million tumble from 1989. Ryland actually dipped into the red during the first quarter of last year, something that had never happened in its 25-year-history.

"Last year was the worst year for the industry since 1945," says Mr. Schipke, a tall man with an ever-present smile who left General Electric after 29 years because "it was clear I was never going to become chairman."

Although Ryland felt the affects of the weakened real estate market, its main rival in the region, Virginia-based NVR LP, fared far worse. Overwhelmed by a debt of $605.4 million compared with $480.7 million in assets, NVR -- owner of both Ryan and NVHomes -- filed for Chapter 11 bankruptcy protection in April after working out a debt-for-equity swap in exchange for fresh financing from its bondholders.

A key difference between the two builders was that NVR was a heavy buyer of land at the height of the inflated 1980s market, while Ryland took a different route.

"Ryland just isn't a land buyer. It has taken an approach to home building that keeps it out of trouble," says James F. Wilson, a San Francisco-based analyst who tracks the company for Montgomery Securities.

The reluctance to hold land (in all but the California markets where Ryland considers it essential to do business) may be nothing new for Ryland since Roger Schipke took the chairman's swivel chair in December 1990. Still, Mr. Schipke has definitely moved the company and its 2,900 employees in new directions.

He has retargeted Ryland's M. J. Brock Homes subsidiary, the Los Angeles-based builder of upscale homes, toward the broader and potentially more lucrative middle-income market. He has spun off Ryland's modular housing subsidiary -- now known as Regional Building Systems -- on the basis that itdidn't mesh with the company's central goals. And he has rapidly expanded the portfolio of mortgages that Ryland services to $11 billion. The goal is to continue positioning the company's financial services arm -- first designed to serve as a mortgage issuer for Ryland's home buyers -- to create a counterbalance to the cyclical swings of home construction.

"A mortgage servicing portfolio is a very stable source of income," says Montgomery Securities' Mr. Wilson, noting that Ryland would have lostmoney every quarter last year had it not been for earnings from financial services.

Mr. Schipke is also drawing Ryland into fledgling overseas ventures through its year-old trading company. Last year, it built 1,300 homes in Israel, and this year it has forged joint-venture relationships with home-grown enterprises in Moscow and St. Petersburg, Russia, where models should begin going up beginning late this summer.

Analysts consider such international adventures bold moves butquestion their profit potential. Russians may want Ryland's homes, they reason, but where will they find the hard currency to buy? "It's just gravy if they get any earnings from their foreign ventures in the next couple of years," Mr. Wilson said.

"It's a small beginning," agrees Thurman W. Bretz, president of Ryland Trading Ltd. , who spends much time traveling the globe in search of markets where Ryland's predominantly wood and largely factory-built homes might sell well. Although Ryland's primary market is for traditional, middle-income homes geared to U.S. suburbs, it recently commissioned an architect to design an "Asian House," a "Caribbean House," a "Spanish House," and a "European House," in addition to designs for the uncertain Russian market.

As it emerges from the real estate recession, Ryland is especially well positioned in the face of a shakeout that is gripping the residential construction industry, analysts believe. Because of the fallout from the crisis in savings and loan industry, U.S. financial institutions remain highly resistant to making residential and development loans. Cut off from their financing sources, many small and medium-sized builders -- especially private companies -- have lost their capital sources, and many are perishing.

Ryland's size (it ranks among the top three publicly owned home builders, along with the Dallas-based Centex Corp. and Pulte Home Corp. of Bloomfield Hills, Mich.) gives it the right status and size to keep its capital appetites satisfied while others not so lucky starve, says Kenneth Campbell, who follows Ryland for Audit Investments, a money manager in New Jersey.

"Because of credit problems, the competition has diminished enormously in housing markets. But the Rylands of the world can still tap the public markets when traditional capital markets dry up. It's inescapable that the large builders are getting larger," Mr. Campbell says.

As the survivors swell in size, Ryland could be well placed to take advantage of economies of scale, analysts assert. Of the top three builders, Ryland is the only one to have invested heavily in a new-home technology known as "panelization."

At its five factories, Ryland builds wall units, roof trusses, stairs and floor joists. These units are shipped on flat-bed trucks to building sites, where they can be erected into homes in just a few weeks.

"What they're doing is finding a way to put houses together more cheaply," says Mr. Wilson of Montgomery Securities. Building houses out of panels made in controlled factory conditions is a better idea than building modules that are more awkward and expensive to transport, he says, endorsing Ryland's sale of its modular building company.

Never a believer in factory home construction, Ryland's archrival in the Baltimore-Washington market, NVR LP, would be too strapped to change its building technology if it wanted to, analysts say. NVR's Chapter 11 filing, coupled with its inventory of high-priced land, mean it is likely to lose ground relative to Ryland, analysts believe.

In fact, some analysts wonder whether NVR will ever re-emerge from bankruptcy reorganization in any semblance of its current form. "It's just tremendously difficult for a home-building company to come out of a chapter proceeding. The odds are stacked against it," says Mr. Campbell of Audit Investments. The only other major home-building company to have gone Chapter 11 in recent years is the U.S. Home Corp., based in Houston, which has been downsizing since it made its filing in April 1991, he notes.

While NVR seeks to draw down its inventory of land purchased at the height of the market, Ryland is in a position to pick up land at a bargain from builders that have gone out of business because of capital starvation or from bank auctions on foreclosed property.

"Right now is a great time to be growing because land values are declining," Mr. Campbell says.

Ryland has a way to go before it even regains ground it lost during the recession. In the late 1980s, it was building close to 9,000 homes a year, compared to just 6,600 last year. The company now operates in 17 states, most of them on the East Coast. It hopes to expand its scope throughout the nation.

Of course, there are frustrations and worries for Mr. Schipke as he leads Ryland on an expansion drive through 1990s.

The swings in consumer confidence, which are highly influential in determining the public's buying behavior for homes, are more exaggerated than ever before, meaning the business is more prone to longer cyclical changes, the chairman is convinced. "We really track consumer confidence," he says.

Mr. Schipke is also troubled by the proliferation of local government regulation -- everything from demands by local municipalities that builders install sprinkler systems in new homes to broad growth-management controls. He speaks disdainfully, for instance, of the approach taken by Elizabeth Bobo, the former Howard county executive, an advocate of growth controls.

Still, analysts believe that as they face increased government regulation, big builders will be in a better position than small ones to cope.

Mr. Wilson forecasts that by the end of the 1990s, Ryland, Centex and Pulte -- which together share 1 percent of the U.S. market -- will have increased their share to 10 percent. Ryland could be a winner if the chairman plays his cards right, Mr. Wilson contends.

"This is the greatest opportunity for growth that the company has seen since the early '70s, when it was small," he says.

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