CHIARMAN'S LETTER
Ryland's outstanding performance in 1998 marked the culmination of our five-year
turnaround strategy. In our homebuilding operations, pretax earnings, sales, and
backlog all reached their highest levels ever. In addition, our homebuilding gross
profit margins rose in each consecutive quarter. As a result, we again met our goal
of increasing shareholder value and strengthening our position as a market leader.
Our turnaround efforts, which began in 1994, have primarily centered on improving
the company's product, land, and people. These are the fundamental disciplines of our business, and we have successfully rebuilt the company by focusing on these important areas.
For example, over the past five years we have introduced more than 800 new home designs in Ryland communities across the country. In addition to boosting sales and
capturing the attention of homebuyers, many of these homes have received a variety of local and national awards for their superior design and value. Furthermore, we have developed a comprehensive land acquisition and review process, which has resulted in higher quality communities, excellent locations, and most important, substantially improved profitability.
To effect these changes in our product and land positions, it was necessary to upgrade the quality of our people. We now have a strong team of motivated and experienced employees who are dedicated to our strategies and accomplished in carrying them out. Moreover, I am proud to say that our management team is one of the most experienced in the industry.
Ryland's financial performance in 1998 demonstrates the absolute success of the
initiatives we took to improve our home designs, land positions, and management
talent. For the full year, Ryland's consolidated net earnings from operations increased
99 percent to $43.6 million, or $2.90 per share; for the fourth quarter of 1998,
consolidated net earnings from operations increased 84 percent to $17.6 million,
or $1.18 per share.
RYLAND HOMES REPORTS RECORD RESULTS, CONTINUED MARGIN IMPROVEMENT
Our strong earnings results reflect the significant improvement made in Ryland's
homebuilding operations. For 1998 and the fourth quarter, Ryland Homes performed beyond expectations. We surpassed our historical levels of sales, pretax earnings,
and year-end backlog; and we achieved record closings during the final quarter.
Additionally, the fourth quarter marked the fifth consecutive time we increased our
gross profit margins from home sales over the prior-year period, and the third
consecutive time the increases were by more than two percentage points.
Homebuilding pretax earnings for the year increased by an
impressive 128 percent to $80.1 million; and earnings for the fourth quarter jumped 113 percent to $34.3 million.
As further evidence of Ryland's successful turnaround, we had record annual sales of 9,430 homes and record fourth-quarter sales of 2,146 - increases of 5 percent and
4 percent, respectively. Homebuilding revenues were $1.69 billion for the year, up
9 percent from 1997. A 7 percent increase in closings for the year, to 8,994 homes, and a slight increase in average closing price contributed to the revenue growth.
At year-end, our backlog of homes sold but not yet closed consisted of 3,452
contracts, up 23 percent from the end of 1997. This was the highest year-end level
in the company's history.
However, one of the best indications of our success was the steady growth we achieved in our gross profit margins from home sales. These averaged 15.9 percent for the year and 17.2 percent for the fourth quarter of 1998 - a major improvement from the 13.5 percent reported for all of 1997 and the 13.9 percent reported for the fourth quarter of 1997. Increases in gross profit margins, combined with higher closings, were the driving force behind Ryland's improved performance.
Also contributing to last year's earnings improvement was the strong position we
established in key housing markets. These markets included Charlotte, Chicago, Denver, Northern California, and Southern California. In addition, we also increased our
investment and presence in Tampa through the acquisition of Regency Communities, a privately owned builder primarily of active-adult retirement communities. This acquisition provided Ryland an immediate presence in the strong Florida retirement market and the opportunity to gain dominant market share in a rapidly growing area of Florida. It also brought us a high-caliber team of employees with up to 20 years of experience in the homebuilding business.
We currently operate in 13 of the top 15 housing markets. During 1999, we will focus on increasing volume and achieving market dominance by allocating additional capital to those markets that have the greatest potential for growth.
RYLAND MORTGAGE CONTINUES TO PROVIDE SIGNIFIGANT INCOME TO RYLAND
Ryland Mortgage Company, our mortgage-financing subsidiary, provides key support
to our homebuilding operations by serving as a critical link in the homebuying process. In addition, with pretax earnings of $11.8 million in 1998, Ryland Mortgage
represents an important source of income for Ryland.
As part of our turnaround efforts, we successfully repositioned Ryland Mortgage to
better support our homebuilding operations and provide homebuyers with a variety of competitive mortgage-financing programs and related services. As a result, during 1998 the percentage of Ryland homebuyers who chose Ryland Mortgage to finance their home purchase increased substantially, to a level we have not seen in many years.
RYLAND POSITIONED FOR FURTHER GAINS IN 1999
The unqualified success of the company's turnaround is now firmly established, as
evidenced by our record 1998 performance. As a result, we now are focused on
accelerating growth in order to further increase earnings and maximize the value of our homebuilding franchise.
To accomplish those goals, we have developed a cohesive growth strategy that calls for us to become a dominant high-volume production homebuilder by:
- Focusing on entry-level, first-time and second-time move-up buyers, as well as active adults seeking retirement housing.
- Providing homebuyers with the best value from a product and price standpoint.
- Building upon the strength of our national brand and our reputation for customer
service.
- Maintaining geographic diversification.
- Following a decentralized operating strategy in order to capitalize on the company's extensive local market knowledge.
We look forward to the opportunities and challenges of 1999, and are confident that we will be able to further improve our operations. We have a comprehensive, effective strategy in place and an experienced management team to build upon the success of our turnaround. In addition, there is plenty of opportunity for growth in our existing
markets.
More importantly, we have the resources and capital we need to grow the company and achieve our goals. As a result, we are in an excellent position to provide our
shareholders the exceptional value and growth they expect from us.
R. Chad Dreier
Chairman, President and Chief Executive Officer
