2nd UPDATE: Ryland, Oaktree Cap To Acquire Distressed Assets

Looking to stretch capital and lower risk, home builder Ryland Group Inc. (RYL) announced a joint venture with investment manager Oaktree Capital Management LLC to acquire and develop residential real estate projects.

The plan involves investing in distressed assets and taking advantage of the worst housing downturn in decades - and the eventual recovery.

While competitors including Lennar Corp. (LEN) and Hovnanian Enterprises Inc. (HOV) have discussed forming similar joint partnerships with outside capital, JPMorgan's Michael Rehaut labeled this the first joint venture officially formed. Monday's announcement, he added, "could accelerate other capital investors to finalize partnerships with other home builders."

For builders, the "goal is to invest a relatively small amount of capital, with the more capital-intensive company providing the balance," said Robert Curran, Fitch Ratings' lead home-building analyst. "To a degree, what they're providing is expertise."

Shares of Ryland were recently up 3.1% at $16.10, compared with the Dow Jones US Home Construction Index's 1.42% decline.

Few details were provided for competitive reasons, but California-based Ryland said an executive committee, comprised with representatives of both companies, will make purchase decisions with the intent to sell the projects as finished lots. Ryland said it would maintain the right to option all lots sold by the partnership.

With overzealous land purchases made during the boom forcing painful impairments that now top $26 billion, builders are trying to curb ownership. Some, like NVR Inc. (NVR) and Meritage Homes Corp. (MTH), favor options, which secure land with a small down payment. Builders buy only when ready to build. But even that seemingly safe strategy has required write-downs.

"Some builders are now trying to outsource the land ownership to investors," said Alex Barron, an Agency Trading Group analyst. "It sounds good in concept."

Whether it works remains to be seen.

"I don't know if today's the right time, and nobody knows," he said. "Somebody needs to build houses. Maybe not today, but maybe five years from now."

As the industry waits out what has spiraled into a prolonged downturn, confidence and starts have fallen to record lows. Builders struggled before the recession hit and then were battered by a financial crisis that has left buyers stuck on the sidelines. To bring in cash and stay afloat, they have slashed prices, added upgrades and even vacations to lure buyers. Such specials have yielded few sales.

Last week, Ryland reported its fourth-quarter loss narrowed as the company posted fewer write-downs, but revenue and new orders continued to crumble.

Ryland has a strong presence in the South and Southwest and sells homes in hard-hit regions such as California, Nevada and Florida. Oaktree has $55 billion in assets under management. The firm specializes in investments in distressed debt, real estate, and high-yield and convertible bonds.

-By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; [e-mail]

(John Kell contributed to this report.)

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