The future of the Ryland Group Inc. may very well lie within four spacious, elegantly decorated model homes about a mile from its Columbia headquarters.
Beyond their amenities -- large windows, higher ceilings and option packages ranging from entertainment rooms to offices -- the homes represent Ryland's revamped attitude and one of its first attempts to shed its generic image.
The Trails at Woodlot, a 66-acre site where 56 single-family, detached homes and 32 townhouses are slated, also marks the first involvement in a Ryland project by R. Chad Dreier, the firm's president and chief executive since November 1993.
"The Trails is the first visible, physical manifestation of what we're doing differently," said Mr. Dreier, 47, who joined Ryland from California homebuilder Kaufman & Broad Home Corp. and was elevated to chairman last month. "And a lot of its significance is because it's right in our backyard. Every banker, employee and customer is going to see it. I think the models exhibit newness, brightness and a willingness to take risks."
Like the changes being implemented in the Trails at Woodlot project, Ryland -- the nation's third-largest homebuilder with 3,300 employees and operations in 19 states -- in many respects is a company in the midst of a deep, far-reaching and even cultural transition.
In addition to the changes in the home construction operation -- new marketing techniques which respond to consumer trends, land acquisition strategies and cost-cutting measures -- Mr. Dreier has pledged to focus less on the mortgage banking and servicing that had become a key fixture of Ryland's earnings.
The devotion to the core business results from a belief shared by Mr. Dreier, Ryland's board and industry analysts that long-term, most of Ryland's profits will be derived from its home construction operations by better cost management and by building on its national presence and expertise.
Ryland's changes were prompted by a series of market misadventures, the economic recession of the early 1990s, poor commitment to its core customer base and a lack of direction, according to industry analysts, company executives and developers familiar with the company's operations.
Ryland's lack of direction and decline in the early part of this decade came as large competitors, such as Pulte Home Corp. and Centex Corp., posted significant domestic homebuilding gains after the early 1990s recession.
Furthermore, under Mr. Dreier's predecessor, Roger W. Schipke, General Electric Co. executive with little homebuilding experience, Ryland's customer satisfaction rating declined. The rating, which asks buyers if they would purchase another Ryland home or recommend one, fell from a high of roughly 85 percent in the late 1980s to under 70 percent during 1991-92 in the six regions, or 19 states, where Ryland operates.
Ryland's performance failed to raise red flags, however, because much of its decline in homebuilding sales were masked by record gains in the company's mortgage operation, which last year had pretax earnings of $55 million.
"When I came, there was no sense of urgency," Mr. Dreier said. "I found two companies, one a homebuilder whose policies were outdated and had a vacuum of leadership. That created a situation where the homebuilding side was afraid to make a decision inspired by innovative ideas. They were following the status quo of the 1980s, only it was the 1990s."
Mr. Schipke, who left to become chief executive of Sunbeam Oster in August 1993, deflects criticism by noting that many of the company's troubles were well under way when he arrived three years earlier, and that some of the current changes were put in place during his tenure. He added that the differences between his management and Mr. Dreier's are largely philosophical.
"Whether they want to admit it or not, Ryland is a manufacturer of consumer durables," Mr. Schipke said recently. "And I tried to instill that. It sounds like the direction they're moving is back to being a homebuilder. It's certainly a shift, resulting from a change in chief executives with different philosophies."
Today, Ryland's monthly index of customer satisfaction has crept back to an average of over 80 percent in virtually all of its geographic divisions. Mr. Dreier attributes the climb to an
emphasis on both customer service and improved design, as well as an improved bonus package for employees that will tie positive results to compensation.
"Gone are the days when we would say, and did say, 'Here's our house. If you want it, buy it. If not, tough,' " said Mr. Dreier.
Timothy R. Doyle, president of Ryland Homes' Mid-Atlantic region, agreed that there had been a change.
"His coming has had a dramatic impact," said Mr. Doyle. "It was quite simply one of the greatest things to happen to Ryland, and that's coming from someone with 20 years of experience. He has clear vision, and he's instilled it."
To help finance Ryland's transformation, the company -- with annual revenues of roughly $1.5 billion and assets as of Sept. 30 totaling $1.7 billion -- late last year issued $100 million worth of senior subordinated notes. The company is using the new capital to implement flexible land-buying strategies in desired markets and to cover the shortfall associated with less-successful communities, Mr. Dreier said.
And in October, in the clearest sign yet that Mr. Dreier is serious about refocusing the company, Ryland announced plans to divest itself of the Institutional Financial Services (IFS) division.
IFS, which manages a $46 billion portfolio, is one of the nation's largest private issuers and administrators of mortgage-backed securities. The unit accounts for roughly $10 million worth of pretax earnings annually, or about one-fifth of the company's financial services income.
Although Ryland has declined to reveal its reserve price for the 12-year-old unit, some analysts believe that the division will fetch more than $100 million.
Unless IFS fails to garner an appropriate price, it will be sold by the end of the current quarter, Mr. Dreier said.
Despite efforts to pare the mortgage banking business, though, Mr. Dreier insists a mortgage component will always accompany Ryland Homes, to both generate fees and provide customer convenience.
Changes get results
Initial financial results indicate that Mr. Dreier's changes are taking hold. In the first nine months of this year, Ryland posted net earnings of $22.2 million, $1.31 a share, on revenues of $1.2 billion. Those figures reversed a net loss of $10.3 million, 80 cents a share, on revenues of $1.04 billion in the comparable period of 1993. Year-end results are due to be released in February.
Through Sept. 30, both its new orders and settlements increased 13 percent to 7,364 and 6,620, respectively. In all of 1993, by comparison, Ryland completed 8,319 homes.
Ryland plans to counter rising interest rates, which traditionally hamper new homebuilding and sales efforts, by offering adjustable rate loans and other mortgage services through Ryland Mortgage, its mortgage subsidiary, Mr. Dreier said.
"I'm optimistic about their earnings looking forward and the effort Ryland is making," said Ivy Schneider, a Salomon Bros. Inc. housing industry analyst, after Ryland released improved third-quarter figures this year. She cautioned, however, that most of Ryland's earnings continue to come from its mortgage side, despite Mr. Dreier's attempts at change.
In the first three quarters of this year, for instance, Ryland's pretax mortgage earnings were 4.5 times that of its homebuilding segment.
"Their homebuilding margins are still extremely low relative to the rest of the industry, and their marketing costs have increased in conjunction with the new push," said R. Bentley Offutt, a principal of Offutt Securities Inc., a local investment house which tracks Ryland. "But theirs is a quality balance sheet whose earnings have improved considerably in the past year."
Other analysts, however, including Lehman Bros., worry that Ryland may be moving away too fast from the mortgage operation, where it has built a solid reputation and become one of the nation's largest independent servicers. At the end of last year, Ryland's 106,000-loan portfolio of $9.8 billion ranked it among the top 50 loan originators and top 30 servicers in the United States.
Ryland is in the midst of other significant, and no less apparent, changes as well.
Having limited itself for years to supplying housing to the suburbs, Ryland is beginning to venture into urban markets, on the heels of its work in Baltimore's Sandtown-Winchester section with the nonprofit Enterprise Foundation.
Ryland's first Baltimore City endeavor began in November 1993 in Federal Hill, where it constructed 42 townhouses in a project known as Montgomery Square. Thus far, 27 of the homes have sold. The company also is in the midst of selling 46 single-family homes in the Cold Spring section of the city, and has committed to a 113-townhouse project known as Barre Station, in Washington Village.
Urban projects in other, selective markets are planned as well, including San Francisco and Indianapolis, where Ryland already has a firm presence in the suburbs. Mr. Dreier admits the urban projects have inherently less profit potential than do their suburban counterparts, but that exploring new markets and capitalizing on demographic changes are necessary for Ryland's long-term viability.
Mr. Dreier also has worked to phase out Ryland Trading Ltd., the subsidiary created by Mr. Schipke in 1991 to expand internationally into places such as Mexico, Israel and Russia. Most recently, Ryland has retained Michael Mangan to replace outgoing chief financial officer Alan P. Hoblitzell Jr., who retired at year-end. Mr. Mangan joins Ryland from GMAC Mortgage Corp., the $40 billion mortgage arm of auto giant General Motors.
On a more procedural level, Ryland in the past often fell victim to high land costs because it refused to purchase land, unlike most builders who often will "bank" property, until it was ready to build. As a result of the change, Mr. Dreier believes prudent land acquisitions in the future will slightly lower the cost of its products.
Other cost-cutting measures include establishing national accounts with suppliers such as Armstrong Flooring and General Electric, as well as construction subcontractors and interior designers. Previously, Ryland dealt with a raft of architects nationwide for its interiors. It now does business with 10.
The firm also consolidated and improved the continuity of its extensive national advertising by retaining one person to handle that responsibility, as opposed to having various divisions dictate advertising on a local level.
Differences in model homes
Nowhere are Ryland's changes more evident than at the Trails at Woodlot's four models, many of which include subtle differences inspired by Mr. Dreier.
For starters, Ryland almost never builds more than one model home. Ordinarily, potential option packages and floor plans are explained through two-dimensional illustrations.
Mr. Dreier also instructed that the time required to construct its Woodlot models be slashed, from a typical 100 days to 47 days, as well as the cost -- part of the larger effort to negotiate better deals and tighten expenses with frequent suppliers and subcontractors.
The Trails at Woodlot also marks the first implementation of other Dreier-led strategies, including innovative, California-inspired architectural designs that employ light and open space, and a relentless marketing campaign that has resulted in one of the highest traffic counts in any Ryland community in recent history.
Since its Oct. 22 opening, for instance, nine of the single-family lots have sold and half of the 32 planned townhouses. And in a dramatic increase, more than 1,000 people visited the models in the Harpers Farm section of Columbia in the initial weeks following the opening. Ryland executives attribute the increased traffic to both curiosity and Woodlot's new designs.
Before Woodlot, Ryland designs had drawn criticism for their lack of flair. Even Mr. Dreier acknowledged the company's houses had lacked the boldness of its competitors.
"Ryland's typical home has been traditional, and one could even say not very exciting," Mr. Offutt said. "But the new homes at Woodlot have a lot of open space, lots of glass. They're designed quite nicely."
Looking forward, Mr. Dreier and company analysts believe the fruits of the Ryland renaissance won't be realized until late 1995 and into 1996, when the company will have fully divested itself of problem communities with low margins such as in California, and implemented many of its new strategies.
"In 1994, I've spent a lot of time focusing on the past, but that
confusion is gone now," said Mr. Dreier. "We still have a long road ahead, but in 1995, our homebuilding segment will again be profitable, and the year after that we'll see the impact of margin improvements and new products. By 1996, we'll be in line with or ahead of the rest of the industry."