Presented by Jun Yuan (Jason) Chan, Michael De Renzo, Rob Jannusch and Harout Sahakian April 15 th , 2014 The Ryland Group, Inc.
Jan 18, 2016
Presented byJun Yuan (Jason) Chan, Michael De Renzo, Rob
Jannusch and Harout SahakianApril 15th, 2014
The Ryland Group, Inc.
2
AGENDA
• Introduction• Company Overview• Macroeconomic Outlook• Relevant Stock Market Prospects• Financial Analysis• Valuation• Recommendation
3
COMPANY OVERVIEW
• Founded in 1967• Homebuilder and mortgage
finance company• Builds single family detached
and attached homes on-site• The company uses direct
acquisition and lot option purchase contracts to control lot inventory
• On-site construction is done by independent contractors
• Ticker: RYL (NYSE)• Market Cap: 1.8B• P/E: 5.7• DIV Yield: .31%• Number of Employees: 1,395
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
4
FULL SERVICE REAL ESTATE COMPANY
Planning
Styling
Financing
Building
Closing
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
5
OPERATING SEGMENTS
Texas US
• Cities include: Austin, Dallas, Houston
• FY 2013 Revenue: $448M
• Gross profit margin: 20.5%
West US
• Cities include: Denver, Las Vegas, Southern California
• FY 2013 Revenue: $425M
• Gross profit margin: 21.8%
North US
• Cities include: Baltimore, Chicago, Philadelphia
• FY 2013 Revenue: $617M
• Gross profit margin: 19.3%
Southeast US
• Cities include: Atlanta, Charlotte, Orlando
• FY 2013 Revenue: $597M
• Gross profit margin: 21.8%
Financial Services
• Mortgage related, insurance, title, and escrow services
• FY 2013 Revenue: $51M
Corporate
• Non-operating business segment
• Purpose of supporting operations
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
6
RECENT FINANCIAL PERFORMANCE
Ryland’s Closings & Closing Prices
2009 2010 2011 2012 20130
500
1000
1500
2000
2500
1186.1271001.952 890.733
1308.466
2140.755Total Revenue
($ in thousands)
2009 2010 2011 2012 2013
-200
-100
0
100
200
300
400
500
-162.474-85.139 -50.75
40.382
379.205
Net Income($ in thousands)
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
7
MANAGEMENT’S ACTIONS AND OUTLOOK
• Downsized operations• Exited or reduced investments in certain markets• Redesigned its product to be more affordable
Recent Actions
• Housing market as a whole may continue to progress• Mortgage interest rate rise most likely accompanied by improvements in economic
conditions• Strength of balance sheet, additional liquidity, and improved operating leverage puts
the company in a position to take advantage of changes in the marketplace
Forward Outlook
Source: Ryland 2013 10-K
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
8
MACROECONOMIC OUTLOOK– KEY EXTERNAL DRIVERS
• 30 –year Mortgage rates• Credit Availability• Employment Growth/Increase in Payrolls• Number of Households• Geographic Region
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=169#CP
9
UNDERSTANDING MARKET POWER
Strengths Weaknesses- Multiple business segments (one
stop shop for homebuyers)- Financing arm (if used properly)
- Limited geographic regions- Long-term capital costs (Moody’s
credit rating of B1)- Outsource development to third
party contractors
Opportunities Threats
- Short-term industry outlook- Geographical expansion- Accretive acquisitions
- Cyclicality of industry- Long-term interest rates and credit
availability- Asset bubbles- Government regulation (e.g. tax
subsidies, HAFA Program)
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Source: MarketLine, Ryland 2013 10-K, Bloomberg
10
INDUSTRY OVERVIEW – REAL ESTATE
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=169#CP
Current Performance• Highly Turbulent• Case-Shiller Index increased by 13.5% in
2013• Many Tax Credit and Pricing
Opportunities
Keys to Success• Opportunistic regions where growth is
not priced in• Reduced cost structure• Tax subsidies and incentives• Access to reliable contractors• Good track record/success rate
11
INDUSTRY OVERVIEW – REAL ESTATE (HOME BUILDERS)
Industry Trends• Prices undervalued by 30% relative to
renting• Rise of institutional investors– Investors accounted for 21% of home
purchases• Market for rentals growing• More competitors after 2008
Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=169#CP
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
12
INDUSTRY ANALYSIS – REAL ESTATE (HOME BUILDERS)
Revenue Revenue Growth
• Revenue increased from 2010 to 2014 with a CAGR of 9.32%• In addition, housing starts forecasted to grow 19.4% in 2015 and 12.5% in 2016• Projected revenue growth frontloaded in 2015 and 2016
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
08 09 10 11 12 13 14 15 16 17 18 19 20 $-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Revenue $ (million)
08 09 10 11 12 13 14 15 16 17 18 19 20
-40%
-30%
-20%
-10%
0%
10%
20%
Revenue Growth %
Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=169#CP
13
PORTERS’ FIVE FORCES
Power of Suppliers: Strong Substitutes: High
• Housing input prices lag housing prices set forth in contracts
• Banks/Credit availability
• Renting vs. home ownership• Second-hand market for homes
Barriers to Entry: Medium Power of Buyers: High• State-based licenses and registration• Industry mostly based on reputation and proven
performance• Availability and cost of building warranty insurance for
contractors • Learning curve steep
• Customers able to exert pressure to drive down prices• Switching costs low
Competition: Medium
• Designs of products can easily be differentiated• Recovery in housing market
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Sources: Marketline
14
RECENT STOCK PERFORMANCE
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
• Currently Ryland’s stock price is slightly below the 20 and 200 moving averages• Watch carefully for a stock price move in either direction
Source: Yahoo Finance
15
FINANCIAL RATIO ANALYSIS
2009 2010 2011 2012 2013Current Ratio 5.78 7.21 5.12 6.22 4.97 Quick Ratio 5.54 7.07 5.08 6.20 4.97 Cash Ratio 1.11 1.10 0.60 0.58 0.50
2009 2010 2011 2012 2013Operating Profit Margin -21.49% -6.68% -3.93% 3.89% 9.05%Net Margin -13.70% -8.50% -5.70% 3.09% 17.71%ROA -9.59% -5.15% -3.21% 2.09% 13.64%ROE (Book Value) -27.92% -15.16% -10.49% 7.68% 41.04%
2009 2010 2011 2012 2013Debt/Assets 0.51 0.53 0.52 0.59 0.50 Debt/Equity 1.47 1.57 1.70 2.16 1.51 Interest Coverage (23.67) (2.75) (1.91) 3.16 23.19
2009 2010 2011 2012 2013A/R Turnover N/A N/A N/A N/A N/AFixed Asset Turnover 54.27 53.43 44.72 64.11 84.16 Total Asset Turnover 0.70 0.61 0.56 0.68 0.77
RYL Financial Analysis
Liquidity Ratios
Profitability Ratios
Solvency Ratios
Activity Ratios
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
16
FINANCIAL RATIO ANALYSIS
2009 2010 2011 2012 2013Tax Burden 67.54% 105.77% 155.05% 91.85% 193.78%Interest Burden 98.55% 189.08% 196.49% 65.61% 96.78%Operating Profit Margin -20.58% -4.25% -1.87% 5.12% 9.45%Asset Turnover 0.70 0.61 0.56 0.68 0.77Leverage 2.91 2.94 3.26 3.68 3.01 ROE -27.92% -15.16% -10.49% 7.68% 41.04%
DuPont Analysis
2009 2010 2011 2012 2013TEV 1,079,357 957,086 1,068,306 2,123,722 2,898,047 EBIT/Tangible Assets -35.41% -5.52% -2.04% 6.10% 12.07%EBIT/TEV -22.61% -4.45% -1.56% 3.16% 6.98%
Greenblatt Ratios
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
17
DISCOUNT RATE CALCULATION
WACC Calculation
Capital Structure
Debt-to-Total Capitalization 50.3%
Equity-to-Total Capitalization 49.7%
Total 100.0%
Cost of Debt
Cost of Debt 4.6%
Tax Rate 35.0%
After-tax Cost of Debt 3.0%
Cost of Equity
Risk-free Rate(1) 2.8%
Market Risk Premium 6.5%
Levered Beta 1.55
Cost of Equity 12.8%
ROE 24.4%
Weighted Cost of Equity 16.3%
WACC 9.6%
Business Risk Premium 3.0%
Discount Rate 12.6%
WACC Sensitivity Analysis
3.6% 4.1% 4.6% 5.1% 5.6%
30.3% 15.1% 15.2% 15.3% 15.4% 15.5%
40.3% 13.7% 13.8% 13.9% 14.1% 14.2%
50.3% 12.3% 12.4% 12.6% 12.8% 12.9%
60.3% 10.9% 11.1% 11.3% 11.5% 11.7%
70.3% 9.5% 9.7% 9.9% 10.2% 10.4%
Deb
t /
Cap
Pre-tax Cost of Debt
70% weight applied to CAPM, 30% weight applied to ROE
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
18
DCF VALUATION
2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P
EBIT (244,073) (42,574) (16,658) 67,017 202,200 264,383 330,479 191,747 15,390 124,455
Less: Income Taxes (97,197) 195 (2,865) 1,585 (183,408) 96,236 116,990 58,291 (8,187) 24,172Plus: D&A 23,211 16,399 11,312 15,399 20,517 41,745 52,181 57,524 46,170 41,485Less: CapEx (1,979) (12,423) (10,964) (12,224) (19,908) (27,830) (34,787) (38,349) (30,780) (27,657)Less: Change in Working Capital: 0 134,325 (15,043) 274,993 385,915 400,653 371,867 105,209 (451,468) (205,598)
Unlevered FCF (218,591) (140,984) 47,422 490,435 319,710
Terminal Value = 3,241,121
Historical figures Forecast Figures
Terminal Growth 2.5%Terminal Value 3,241,121
Discount Rate 12.61%Present Value of Cash Flows
EV = 1,999,201
Calculation of Implied Share PriceImplied Enterprise Value 1,999,201$ Less Debt 1,397,308$ Plus Cash 631,175$ Implied Market Cap 1,233,068$
Implied Share Price 26.83$
Terminal Value Assumption
Share Price Sensitivity
2.0% 2.3% 2.5% 2.8% 3.0%10.6% $38.38 $39.99 $41.70 $43.53 $45.4711.6% $30.86 $32.11 $33.42 $34.81 $36.2812.6% $24.81 $25.79 $26.83 $27.91 $29.0513.6% $19.83 $20.63 $21.45 $22.32 $23.2214.6% $15.68 $16.33 $17.00 $17.70 $18.44
Terminal Growth Rate
Dis
coun
t Ra
te
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
19
COMPARABLE COMPANIES
• Ryland’s number of house closings is on the lower end compared to its competitors• Ryland’s average sales price and sales price range is in line with competitors
Sources: Company 2013 10-Ks
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Company Markets Financing Arm # Closings (2013 Units)
Average Sales Price (2013) 2013 Base Sales Range
# Employees (2013)
Ryland Group Inc. (RYL) North, Southeast, Texas and West
Ryland Mortgage Company
7,027 296,000$ $150,000 to $600,000 1,395
DR Horton Inc. (DHI) East, Midwest, Southeast, South Central, Southwest, and West
DHI Mortgage 24,155 249,400$ $100,000 to $1,000,000 4,609
KB Home Inc. (KBH) West Coast, Southwest, Central, and Southeast
None 7,145 291,700$ NA 1,430
Lennar Corporation (LEN) East, Central, West, SE Florida, Houston, Other
Universal American Mortgage Company
25,500 290,000$ $163,000 to $279,000 5,741
M/I Homes Inc. (MHO) Midwest, Mid-Atlantic and Southern regions
M/I Financial 3,472 286,000$ $120,000 to $1,000,000 827
PulteGroup, Inc. (PHM) Northeast, Southeast, Florida, Texas, North, Southwest
Pulte Mortgage 17,766 305,000$ $100,00 to $1,200,000 3,843
20
COMPARABLE COMPANY GREENBLATT ANALYSIS
Company EBITEnterprise Value
Net Working Capital
Net Fixed Assets
Tangible Assets
EBIT/Tangible Assets (FY Ended 2013)
EBIT/Enterprise Value (FY Ended 2013)
Ryland Group Inc. (RYL) 202.35 2,744.30 1,449.45 25.44 1,474.88 12.07% 6.98%DR Horton Inc. (DHI) 679.10 9,656.20 6,068.70 106.70 6,175.40 11.00% 7.03%KB Home Inc. (KBH) 97.69 3,256.22 1,941.73 8.46 1,950.19 5.01% 3.00%Lennar Corporation (LEN) 693.37 12,659.43 7,215.86 181.42 7,397.29 9.37% 5.48%M/I Homes Inc. (MHO) 64.50 934.31 640.74 10.54 651.28 9.90% 6.90%PulteGroup, Inc. (PHM) 577.39 7,656.28 3,314.68 53.05 3,367.73 17.14% 7.54%
Mean 10.75% 6.16%Median 10.45% 6.94%
High 17.14% 7.54%Low 5.01% 3.00%
• Ryland’s Greenblatt Ratios are higher than the peer group’s average and median values• As Ryland continues to recover from the recession its EBIT/Tangible Assets should trend upward
Sources: Company 2013 10-Ks
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
21
COMPARABLE COMPANY VALUATION
Comparables Enterprise Value / Price / Growth Rates Profitability
2012A 2013A 2014PShare Shares Equity Debt/ Enterprise EPS EPS EPS 1 Year Margins
Ticker Price Outstanding Value Equity Value Rev. EBITDA BV Actual Actual Est. Rev. EBITDA EBITDA NIRyland Group Inc. RYL 38.73 46.59 $1,804 151.2 $2,744 1.0x 8.2x 1.97x 110.7x 1.4x 12.1x 3% 5.0% 10.4% 17.7%DR Horton Inc. DHI 21.61 323.57 $6,992 59.7 $9,656 1.3x 9.1x 1.67x 7.2x 16.7x 13.1x 2% 5.9% 11.8% 7.8%KB Home Inc. KBH 16.53 83.74 $1,384 398.1 $3,256 1.3x 16.2x 2.53x NA 39.7x 13.7x 2% 10.3% 5.4% 2.9%Lennar Corporation LEN 38.73 204.42 $7,917 100.1 $12,659 1.7x 11.1x 1.90x 14.0x 18.4x 15.5x 3% 2.6% 12.5% 7.9%M/I Homes Inc. MHO 22.68 24.47 $555 77.0 $934 0.7x NA 1.24x 96.3x 4.8x 15.8x 2% NA 7.0% 14.6%PulteGroup, Inc. PHM 18.71 381.17 $7,132 44.3 $7,656 1.3x 7.9x 1.53x 43.2x 3.2x 16.1x 0% 6.7% 10.7% 46.1%
Mean 1.2x 10.5x 1.8x 54.3x 14.0x 14.4x 1.79% 6.13% 9.63% 16.17%Median 1.3x 9.1x 1.8x 43.2x 10.8x 14.6x 2.06% 5.95% 10.55% 11.25%
High 1.7x 16.2x 2.5x 110.7x 39.7x 16.1x 2.56% 10.29% 12.50% 46.10%Low 0.7x 7.9x 1.2x 7.2x 1.4x 12.1x 0.02% 2.65% 5.40% 2.90%
Multiples Weight Implied Share Price
Price/Book Value 10% 35.52 Forward TEV/Sales 10% 29.98 Forward TEV/EBITDA 0% (17.69) Forward P/E 10% 44.92 DCF 70% 26.83 Ryland Group, Inc. Implied Stock Price 29.82
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
22
RECOMMENDATION
WATCH LIST
• Ryland is currently trading at $39.02• Ryland’s DCF intrinsic value: $26.83• Ryland’s triangulated intrinsic value: $29.82