Q1 2020 Earnings Call
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Greetings welcome to centric century communities first quarter 2020 earnings conference call.
This time, all participants are in listen only mode.
The question an exercise your my follow the formal presentation.
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As a reminder, this conference is being recorded.
I will now turn the conference Overkill Hunter Wells, Vice President of Investor Relations for century communities. Thank you you may begin the afternoon. Thank you for joining us today for century communities first quarter 2020 earnings conference call before the call begins I would like to remind everyone that certain statements made on of course at this.
Call are not based on historical information and May constitute forward looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results could differ materially from those described or implied in the fourth looking statements.
Certain of these risks and uncertainties can be found under the heading risk factors and the company's most recently filed annual report on form 10-K, I supplemented by our other FCC filings RCC filings are available at Www Dot FCC Dot Gov, and our website at Www dot.
Century communities Dot Com the company undertakes no duty to update any forward looking statements that are made during this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company presentation of this information is not intended to be considered in isolation or as a substitute for the financial and.
For me shape presented in accordance with gap management will be available. After the call should you have any questions that did not get answered.
During the call today, our Dalfen Soskin, Chairman and co Chief Executive Officer, Rob Friends, asking co Chief Executive Officer, and David Messenger, Chief Financial Officer. Following today's prepared remarks, we'll open up the wind for questions with that I will turn the call over to Dale.
Thanks, Hunter and good afternoon, everyone.
Since we spoke to you our last earnings call just three months ago, the world in which we're living in operating has changed dramatically as the cobot 19 pandemic quickly escalated into a global health crisis.
There is much regarding the full M impacted this crisis that remains unknown, including the four reaching implications. It will have water national economy, and every person business and industry across the United States.
We are fortunate that homebuilding is deemed in essential business by most state and local governments.
Which has allowed us to continue servicing our home buyers during this challenging time.
In addition, our team members have displayed impressive ingenuity that has enabled us to continue to build so enclose homes daily across our national platform.
Well, we fully acknowledge the challenges at hand, and the uncertainty in the months that lie ahead.
Century communities is resilient and well positioned to toward the disruptions caused by the cold at 19 pandemic.
Today I'll describe some of the actions we implemented to enable century to continue servicing our customers as well as streamlining our operations.
Rob will provide some additional commentary on steps, we've taken to strengthen and fortify our business, including near term expectations for land acquisition and development.
Finally, Dave will take you through our first quarter results.
Review, our strong balance sheet and discuss our full year outlook.
We'll then open the line for your questions.
Not long ago, we shared with you the robust growth in sales contracts in January and are optimistic for your expectations.
Even with the impact from Covidien 19 affecting March sales activity, we still generated 2388 that new contracts during the quarter. The most in the company's history and a 29% increase in the prior year quarter.
The strong sales performance resulted in the achievement of a variety of first quarter records, including home sales revenues.
$572.7 million.
Deliveries of 1864 homes, and an ending backlog of 2594 homes with a dollar value of over $861 million.
The Corona virus has created an ever changing and unpredictable landscape.
Our entire leadership team is intently focused on maintaining safe and supportive conditions for our team members customers existing homeowners and trade partners.
We have quickly adapt it to the restrictions and challenges affecting our home selling and building processes, such as limiting trade partners within a home.
Online contracting capabilities for home buyers and scheduling appointment only and virtual visits to our sales offices.
In terms of adapting our sales processes or century complete Brad was already utilizing a variety of online resources, which enable buyers to shop for and purchase homes completely online.
We could we quickly migrated and ramp these resources across our entire century communities portfolio.
Through this action, we're now providing a full suite of online resources to create a seamless and uniquely tailored home buying experience.
From virtual chores appointment and video walk throughs to signing contracts and transferring earnest money deposit electronically.
In lieu of in person meetings, we're also increasing our engagement with potential buyers via text phone email and video calls.
We saw an increase response in our digital efforts with total company website traffic in the first quarter up 30% compared to the same period last year.
Web traffic for the first three weeks of April were up 29% as compared to the same three week period the prior year.
We're pleased with this increase in web traffic, which reflects our highly successful transition to a so full service virtual home buying experience.
Additionally, our mortgage title and insurance companies are fully equipped to meet the necessary demands of virtual homebuying.
These capabilities ranged from online.
Loan Prequalification, two full application and approval and even all the way through to the closing of the home.
We're able to distantly facilitate the entire home buying process for our customers providing them an effective onestop financing and closing online experience.
Our ability to adapt and utilize our impressive array of online tools has allowed us to continue our commitment to servicing our customers. During this challenging time.
While these recent events have caused us to adjust the way we run our business, we're developing more efficient ways to operate that will make our organization stronger and more competitive long. After this crisis has passed.
Our sales efforts continued to be supported by a positive mortgage rate environment with interest rates at historical lows, which is expected to continue for the balance of this year and into 2021.
Even with the credit tightening a dislocation that has occurred in the mortgage market.
We have continued to be successful in qualifying and closing the vast majority of our home buyers.
Well the restrictions and uncertainty surrounding the impact from the virus have clearly affected our sales.
Homebuyer demand has so far held up better than anticipated.
Net sales for April or trending to be down less than 10% from April 2019, with both gross and net sales increasing each sequential week.
Well cancellations were elevated in March.
They have declined each week this month and are now consistent with our year to date average.
We are encouraged by are increasing April sales pace and the declining cancellation rate.
As well as seeing a number of states beginning to loosen corona virus related restrictions and reopened their economies.
This is not the first storm we have weather.
Robin I, along with our entire leadership team.
The experience to make the adjustments necessary to navigate through these turbulent times.
Given our strong balance sheet with ample liquidity.
At an attractive competitive position across our national Pep platform.
We are confident in our ability to deliver long term growth.
Drive improved operational performance and create meaningful value for our shareholders.
I'll now turn the call overdraft.
Thank you and good afternoon, everyone.
As discussed demand across our national platform remains strong into the beginning of March.
However, we saw traffic and sales activity decelerated during the second half a month.
This significant shift caused us to quickly take steps to strengthen and fortify our business.
In addition to enhancing our online resources and virtual technology to aid in the continuation of our sales at home closings.
We also took action to ensure that the company was positioned with cash flow on liquidity to endure an extended period of lower demand stemming from the cobot 19 pandemic.
First we have reduced new spec starts in our century complete business and with few exceptions, a limited eliminated them in the century communities brand.
The spec starts that remain our end markets in communities, where we are confident we will sell and close the home.
While we continue to sell and start pre sold homes, where we have the appropriate deposit and loan approvals. We are focusing our current sales efforts on spec homes already under construction.
Second we have adjusted our approach to land acquisition and development.
Toward the end to end of the first quarter, we reviewed our pipeline of controlled land positions and terminated a number of pending acquisitions that no longer met our heightened criteria.
Which reduced the number of controlled lots compared to the fourth quarter 2019.
Of the controlled lots that remain we have successfully worked in most cases to extend expected closing dates.
Our number of owned lots increased sequentially and with the exception of century complete and certain other finished lot rolling option transactions, we now own all of the land needed for the balance of this year as well as the vast majority of next year's needs.
We have also slowed or stopped land development activities, which we do not anticipate will adversely affect our ability to grow the business once the market stabilizes as nearly 60% of our own lots are already finished.
We intend to continue this course until we have better visibility and understanding of the near and longer term impacts of the pandemic on homebuyer demand.
Lastly, we have instituted a variety of actions designed to reduce our operating expenses, including the extremely difficult decision to reduce the size of our workforce through a targeted layoff in April.
We felt this reduction in staffing was necessary given the current and uncertain economic environment.
We intend to continue to closely monitor our operations for additional opportunities to control costs and limit cash expenditures.
We're also resolutely committed to not only sustaining our business operations through this global pandemic, but also adhering to evolving best practice recommendations regarded cobot 19 in order to safeguard the health and safety of our employees customers homeowners.
And trade partners as well as their families.
We have been extremely fortunate that to our knowledge as of today's call not in a single employee of century communities has reported contracting the corona virus.
From the first reports of this escalating health crisis, our leadership team took immediate steps to protect our team members and we continue to be 100% focused on doing so.
As Dayl mentioned this is not the first crisis, our tenured management team has experienced and we have successfully operated through cycles of distress before.
In times of economic uncertainty buyers tend to be more conservative and purchase homes at more affordable price points.
Our target target buyers are intent on pursuing their dream of homeownership and know the value of securing a record low mortgage rate.
We are confident in our ability continue profitably selling building and closing homes.
I will now turn the call over to Dave who will provide a detailed update on our financial results and outlook.
Thank you Rob.
During the first quarter of 2020, our adjusted net income increased 45% to a record $26.7 million.80 per diluted share and net income increased 53% to a record $26.1 billion or 78 cents per diluted share.
Home sales revenues for the first quarter increased to 572.7 billion, an increase of 9% compared to 523.3 million in the prior year quarter.
This improvement in revenues was driven by 29% increase in net new contracts to accompany record 2388 homes and a 12% increase in home deliveries to a first quarter record of 1864.
The average selling price of homes delivered for the first quarter of 2020 decreased to $307200 compared to $314700 in the prior year quarter, which is consistent with our plan to capture an increasing share of homebuyers at entry level price points.
Given the increased demand that we experienced in our market. We successfully drove an outsize backlog conversion rate and increased our gross margin both year over year and sequentially.
Adjusted homebuilding gross margin percentage increased 40 basis points to 20.2% compared to 19.8% in the prior year quarter.
Adjusted homebuilding gross margin in the first quarter of 2020 excludes a onetime noncash pretax impairment expense of $781000 related to one community that is in close out.
SGN a as a percent of home sales revenue was 12.9% in the first quarter compared to 13.2% in the prior year.
This was a result of our past and continued efforts to improve the operating leverage of our company.
In the first quarter 2020.
Our financial services business, consisting a title insurance and mortgage generated $9.8 billion on revenues of 17% year over year.
The business contributed $209000 in pre tax income compared to 1.6 million in the prior year quarter.
Our Q1 results were negatively impacted by the turbulence in the credit markets that occurred in the last two weeks of March.
As a result are hedged portfolio incurred a 3 million dollar unrealized noncash valuation loss.
During April we had been recouping this valuation loss as a credit markets have begun to stabilize.
Now turning to our balance sheet liquidity, we ended the quarter with a strong financial position to weather the challenges related to the cobot 19 pandemic.
During the first quarter 2020, the company drew down additional moneys under its revolving credit facility as a proactive measure during this period of disruption and uncertainty.
As a result, we ended the quarter with cash of $473.5 million and total liquidity of $592 million, including 118.1 million of availability under our credit facility.
Based on our current cash balance and the cash conservation measures that Rob discussed we believe our balance sheet is well positioned to provide us the necessary flexibility on the current environment.
We will continue to closely monitor our operations and we'll make further adjustments as appropriate.
As of March 31, 2020, we had total assets of $2.9 billion liabilities totaled 1.8 billion and stockholders equity was 1.1 billion.
Our net homebuilding debt to net capital increased slightly to 46.6% compared to 45.2% at the end to 2019 and down significantly from 53.6% in the prior year quarter.
Given the proactive measures we have put in place we expect continued to make progress in reducing our leverage as we go forward.
In the first quarter, our tax rate was 23.4% compared to 25.6% in the same quarter. The prior year, primarily due to estimated 45 l. credits.
For the first quarter of 2020 business trends through the first two months of the year were in line with company expectations.
However, as cobot 19 reached a global pandemic level, we have experienced many unexpected changes to our business.
Mandates at all levels of government continue to change by the day and safety and wellness guidelines are being updated on a real time basis by local and National health authorities.
Furthermore, the estimated timing of shelter in place restrictions being lifted varies widely across our markets and the country at large.
Therefore, the ultimate economic impact to covert 19, and the related effects of homebuyer demand is truly unknown currently.
As such were withdrawn or previously communicated full year financial outlook for 2020.
I do want to discuss one item related to the second quarter.
As previously mentioned, we made the decision to lay off a number of our associates in April Lv recording a severance charge of approximately $2 million.
These are unprecedented times and we will look to provide additional updates on our business as we gave more visibility.
And the interim we're confident in the strength of our business our capital resources and that the talented century communities team will help us succeed and come out of this disruptive period stronger than ever before.
With that I'll open the line for questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation total indicate your line is any question Q.
Hey Press Star too if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Kay.
Our first question comes from the line of Thomas Maguire with Zelman and Associates. Please proceed with your question.
Hey, guys, great quarter, I'm glad everyone is safe and healthy thanks, I guess in India.
I guess first the April commentary was obviously really encouraging can you can you just dig in there and talk about we think is driving the sequential improvement in activity and part of the net sided cancellation, but you also had the common in there about growth to just broadly what do you think is getting the consumer more comfortable to engage with century and how do you.
The pullback in specs that you spoke to could could impact orders and future months if at all.
Well so it's all of US you know in terms of eat all what's making them more comfortable I think it's its a couple of things one I think we're doing now a better job adjusting to the circumstances of we've ramped up a lot of our virtual sales tools, our salespeople are getting more comfortable with that.
<unk> and candidly, we're seeing more people out and about there are restrictions being loosened all the time.
And it's just I think everybody is feeling that after the initial shock while there's still a long way to go people are starting to to recognize it's really not the end of the world.
And in terms of of the declining cancellations.
Well, we've spent a lot of time with our salespeople have with our homebuyers.
Making them comfortable and reminding them what a great time this is to buy a home low interest rates.
And we've really focused our sales efforts on our.
Homes that are under construction and as a result, they're going to deliver much much more quickly than if we were selling a to be built home.
As far as what we expect in future months.
For a period of time, we have a fair amount of homes under construction, we're comfortable with that we're continuing to keep a very close on the market.
And if we feel that everything is starting to stabilize even more then we'll probably start building some additional specs, but right now that's one of the things that we've done is we really backed off on our specs.
And we wanted to make sure where everything settles out before we would start that up again.
Got it I think that makes a lot of said.
And then just to look back at the first quarter results, obviously, a lot of moving pieces, but but essentially completed out as little weaker on a relative basis for what you reported can you just talked about that is it more of a function of cancellations in the net number we're seeing for that buyer and maybe some issues. The financing you spoke to in the prepared remarks or.
I guess more broadly how do you think about the difference in.
The behavior of that entry level buyer for that product versus you know course century, even a a first move up product in this environment.
You know, it's it's really two things one we've we've changed how we how we count to sell a sale.
So with because where we sell online what we now too is when a when a buyer puts up their initial $95 deposit.
And they execute a contract we no longer count that as a sale until they they put up the balance of their deposit and we have a conditional loan approval. So we have a little bit of a lag time with that but we have found that.
That process works a lot more smoothly.
Then if we counted right up front.
The other thing that we had that affected the results as we had a a group of homes that were sold to one investment group that canceled right at the into the quarter. So those two things are really what.
Drove the.
The reduced sales rate in terms of the buyer the as we go through.
And the qualification, we obviously have certain buyers that that have a challenge qualifying but in general that is not a a challenge that we face in fact, you know the average FICO score of our buyers on the century complete side is is above 700.
Got it that makes sense I appreciate the color us they said.
Thank you.
Oh next question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.
Hi, This is Maggie on for Mike.
First question another on.
I guess century complete versus the a century the traditional century branded product.
As you talk about April and the.
Sequential improvement each week.
Is that improvement pretty consistent between the century complete product in the century. The traditional sentry product are you seeing one versus the other improving more I guess any color you could give about the different buyer groups.
No actually Matt you were really seeing it across the board and so the improvement that.
That we're seeing is really.
Both in the traditional century communities product as well as in the century complete product.
The same the same thing with the reduction in cancellation rate, we're seeing that across our portfolio as well.
Okay.
Thanks and no.
You mentioned that Youve reduced the number stack starts in the century complete.
Brand and I was wondering if you could maybe give an idea of.
Magnitude of that reduction.
Well that will be the that'll be the first side that we see that we started up because just the nature of the business.
The it's all of those are spec starts and we we don't do presales on that business.
It just isn't really set up for that so and when we look at where our average price point is we're really not concerned about selling those homes. It's just we wanted to give everything a pause I'm just get our feet underneath us and then.
That will be the first part of the business that will start building specs.
Okay. Thank you.
Welcome.
Oh next question comes from the line of Alec struggle with B. Riley FBR. Please proceed with your question.
Yes happy to hear anybody has helped in very nice first quarter.
Thanks.
Bill could you expand upon your comments about the mortgage market tightening.
And maybe how that is leased up in the month of April.
Hey, Alex this is Dave.
You know everybody obviously saw that.
Middle of March when.
Liquidity dried up you had a variety of issues of forbearance, you had people having job losses, the credit markets really seized since then.
The government's come out we have liquidity back into markets. He has some rules regarding forbearance and.
And all of a sudden now you get you've got the market acting acting in a more traditional manner.
We've had no pushback from investors buying mortgages, we see liquidity in the market.
Only from warehouse banks, but from the investment side as well.
So we see the sea to market.
Acting a bit more normal compared to what it was just call it six weeks ago.
And then Dave on you mentioned there were a number of cost savings actions in the month of April head count related expense related.
I suspect there are also increased costs associated with managing with coated.
How should we think about those cost savings versus the.
<unk> costs do they sort of offset each other or is one greater than the other.
I would say it maybe they offset each other to some extent, but I'd say that you know as we look at it.
Obviously, we made the difficult decision to lay off.
Some of our some of our staff throughout the country.
And with that if theres any discretionary spending going on in the company. It's under under a microscope right now and so we're we're definitely watching $8 a quad so whether that's on new contracts any other spending that we had that was in the queue. We're evaluating what is really necessary for the business.
Versus what it was what does a nice to have.
There are some increased costs in terms of dealer colleges given.
Where you can have people and additional supplies that we have but I wouldn't say, it's been two significant of a number for us.
And lastly, as well as it relates to land purchases and cash spent on land in 2020 versus 2019.
I suspect, it's obviously going to be down in any way you could quantify or rockets.
How much it could be down.
How comfortable you are with.
Actively eliminating land purchases this year, given they got sort of two years local BAW backlog in hand already.
Yes, we're comfortable if we have to eliminate land purchases I don't think thats going to be the case. So I think things will start sign out a little bit as we get further ended the year, but since we have 60% of our.
Owned lots finished as well as there is rolls on top of that on a controlled basis that are finished lots that are role in on an as needed basis, we feel pretty comfortable with that and until we really see how that shakes out on on the land side and the demand side.
We're not prepared to go forward.
At this point, but I think thats kind of thought and open up by sometime this year toward the end of the year.
Fair enough. Thank you.
Thank you take outs.
Oh.
Our next question comes from a line of Jay Mccanless with Wedbush. Please proceed with your question.
Good afternoon, everyone.
Hi, Jane.
Okay. So the first question I had could you actually give us what the cancellation rate was for one Q.
How that compared to one Q of last year.
Yes, I'd be happy too. So for example, when we look at.
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Last year.
January through April 2019, or cancellation rate was 24%.
And we look at first quarter of this year or cancellation rate was 21%.
If we look at at March by itself the cancellation rate was 28%.
And when we look at April we're back down to year to date at 21%. So if if we look at it.
Over the first four months of the year were 21%, which is exactly where we stood at the end of the first quarter, which is down from where we stood at this point last year.
The next.
Excuse me.
Next question I had.
Your average backboard prices up almost 10% sequentially.
And I'm guessing that's just mix issues with with the cancellation you talked about complete.
Should we expect higher.
Average backlog price like we saw this quarter both sequentially year over year as you guys are de emphasizing and building less lead side.
No I wouldn't expect that at all and and it's not that were really de emphasizing it. It's just it just has to do was with starts for a a period of time and so.
The backlog is strictly based on mix I wouldn't expect that to our ASP is going to change significantly as we go forward.
And then what I guess what are what are you all doing with incentives on the core century product and what are you seeing as far as incentives.
I'm from your competitors, whether its buyer incentives or maybe some higher coburg or fees touch on those.
Yes, there is there's a little bit of all of that.
Where we're not doing anything that I would consider to be extraordinary and we're not seeing any of our competitors in the marketplace do that.
It's really we're as we're as we're focused on selling or specs, it's really down to a two a house by house cases, a case and what that particular buyer needs to to buy that home and you talked about incentives.
Additional co broke all of those are are part of the playbook and we've given the flexibility to the divisions to do.
What they need and we're not seeing anything that's crazy that there are people are doing or that really that all the competition is doing.
And then on prices, whether whether it's from prices are on land prices.
Being either of those come down for your product or what what the competitors are doing right now.
No not really it's.
When this is going on for really a short period of time, there hasn't been from what we've seen an adjustment to on land prices.
We pushed off land closings land sellers have been pretty accommodating.
And as we talk to our peers there they're doing the same thing.
Obviously, if this goes on for an extended period of time that'll start affecting land prices right now, it's only affected the timing of closings.
I think the same thing holds true with with home prices, we really haven't seen.
A.
Downward a push on prices and we're not expecting that unless it goes on for up for a long time, but there's just a lot of inventory on the market.
One of the one of the things that's occurring as well is that a lot of the resell inventory has come off the market. So it.
People are really favoring newly built homes as well because they're more comfortable going through it will have to go through a home where somebody is living in and so there's a lot of benefits right now.
And all of those things are really holding up the prices of our homes pretty well.
Yeah. It sounds great. Thank you for taking my questions.
Okay.
Our next question comes from the line of Alex Barron with housing Research Center. Please proceed with your question.
Yes, Thank you and hope you guys are all well.
I want to thank you hope you are as well.
Yes. Thank you.
Wanted to ask about Bill times.
With social distancing between workers and stuff has that affected.
The construction time of the homes much.
Now we have not really seen an effect on that things had been running fairly smoothly on cycle times.
Our trade partners showing up and of course, you know theres different protocols on the job sites.
As a result of this but everybody seems to be embracing that and we have not seen that is a.
As anything detrimental.
Great and as part of the century complete.
I guess that brand used to rely more on clients on the window shopping on the internet.
Has that changed.
Changed much in the way that it.
Being.
Sold these days.
Or not.
It hasn't changed at all.
In fact, that's as one of the advantages that.
We've always sold holiday almost on a virtual basis and so when we look at that we've we've really developed a bit of an expertise on that and we've been able to take that expertise in moving over to the century communities side as well so when we look at that.
Everything in terms of focusing on selling over the Internet is what that that product line has always done add so as we've taken them more sat onto the century side.
We've we've been able to take some of the things that we've learned on century complete and move those over so it's really enhancement.
Overall.
Yes, I thought it would probably help.
One last question you know I think some of your other competitors have seen hales drop in the last few weeks a lot more than and you guys probably in the neighborhood I don't know 40% to 80%. So what do you think you guys are doing differently or what do you think of the main.
Value proposition that you guys are offering clients why your sales only down about 10%.
You know I think part of it is that about 80% of our offering is what I would consider to be entry level.
Those.
When you when you take that price point of view, coupled with low interest rates it becomes very attractive.
In many cases, our buyers and in fact in most cases, our buyers don't have homes to sell.
So they're not in a situation where they can't move there in an apartment and it makes a lot of sense you know they want to be able to move into their own home move out of the other denser environment.
And I think that our product is perfectly positioned for that and then you couple that with the fact that we have experienced selling online we have experience selling virtually.
It's not all related to someone walking into the door and walking through models from one into the other so when we look at all that I think that our product offering and the way. We sell is set up very well for the situation. So that currently exist.
Yeah.
Okay, well best of luck in spacing. Thank you.
Due to Alex.
There are no further questions into Q I'd like to hand, the call back to Dale friend session for closing remarks.
Thank you operator.
We could not be more impressed by the truly extraordinary efforts of our entire organization, which is quickly adapt it to these challenging times, we've seen team members display unwavering tenacity and an unparalleled commitment to serving our valued homebuyers.
On behalf of our entire leadership team, we want to sincerely thank them for their hard work and continued dedication during these unprecedented times.
Thank you to everyone, who has joined US on our first quarter conference call today.
We appreciate your continued support and investment.
And look forward to speaking to you again next quarter.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.