Presented by Jun Yuan (Jason) Chan, Michael De Renzo, Rob Jannusch and Harout Sahakian April 15 th, 2014 Presented by Jun Yuan (Jason) Chan, Michael De

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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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



North US

• Cities include: Baltimore, Chicago, Philadelphia



Southeast US

• Cities include: Atlanta, Charlotte, Orlando



Financial Services

• Mortgage related, insurance, title, and escrow services


Corporate

• Non-operating business segment

• Purpose of supporting operations

FINANCIAL ANALYSIS

FINANCIAL ANALYSIS


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


Source: MarketLine, Ryland 2013 10-K, Bloomberg

10

INDUSTRY OVERVIEW – REAL ESTATE

FINANCIAL ANALYSIS

FINANCIAL ANALYSIS


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK



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


FINANCIAL ANALYSIS

FINANCIAL ANALYSIS


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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 %


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


Sources: Marketline

14

RECENT STOCK PERFORMANCE

FINANCIAL ANALYSIS

FINANCIAL ANALYSIS


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


• 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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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


OVERVIEW

STOCK MARKET

PROSPECTS

STOCK MARKET

PROSPECTS

MACRO OUTLOOK


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

Documents

Presented by Jun Yuan (Jason) Chan, Michael De Renzo, Rob Jannusch and Harout Sahakian April 15 th, 2014 Presented by Jun Yuan (Jason) Chan, Michael De