Greetings. Welcome to Century Communities' first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to Hunter Wells, Vice President of Investor Relations for Century Communities. Thank you. You may begin.
Good 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 in the course of 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 to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's most recently filed annual report on Form 10-K, as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and our website at www.centurycommunities.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's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Management will be available after the call should you have any questions that did not get answered. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer, Rob Francescon, Co-Chief Executive Officer, and David Messenger, Chief Financial Officer. Following today's prepared remarks, we will open up the line for questions. With that, I will turn the call over to Dale.
Thanks, Hunter. Good afternoon, everyone. Since we spoke to you on our last earnings call just three months ago, the world in which we are living and operating has changed dramatically as the COVID-19 pandemic quickly escalated into a global health crisis. There is much regarding the full impact of this crisis that remains unknown, including the far-reaching implications it will have on our national economy and every person, business, and industry across the U.S. We are fortunate that home building is deemed an essential business by most state and local governments, which has allowed us to continue servicing our homebuyers during this challenging time. Our team members have displayed impressive ingenuity that has enabled us to continue to build, sell, and close homes daily across our national platform.
While we fully acknowledge the challenges at hand and the uncertainty in the months that lie ahead, Century Communities is resilient and well-positioned to endure the disruptions caused by the COVID-19 pandemic. Today, I'll describe some of the actions we've implemented to enable Century to continue servicing our customers, as well as streamlining our operations. Rob will provide some additional commentary on steps we have 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 will then open the line for your questions. Not long ago, we shared with you the robust growth in sales contracts in January and our optimistic full-year expectations.
Even with the impact from COVID-19 affecting March sales activity, we still generated 2,388 net new contracts during the quarter, the most in the company's history, and a 29% increase from the prior year quarter. This strong sales performance resulted in the achievement of a variety of first-quarter records, including home sales revenues of $572.7 million, deliveries of 1,864 homes, and an ending backlog of 2,594 homes with a dollar value of over $861 million. The coronavirus 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 adapted to the restrictions and challenges affecting our home selling and building processes, such as limiting trade partners within a home, online contracting capabilities for our homebuyers, and scheduling appointment-only and virtual visits to our sales offices.
In terms of adapting our sales processes, our Century Complete brand was already utilizing a variety of online resources, which enable buyers to shop for and purchase homes completely online. We quickly migrated and ramped these resources across our entire Century Communities portfolio. Through this action, we are now providing a full suite of online resources to create a seamless and uniquely tailored home buying experience, from virtual tours, appointments, and video walkthroughs, to signing contracts and transferring earnest money deposits electronically. In lieu of in-person meetings, we are also increasing our engagement with potential buyers via text, phone, email, and video calls. We saw an increased 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 are pleased with this increase in web traffic, which reflects our highly successful transition to a full-service virtual home buying experience. Additionally, our mortgage, title, and insurance companies are fully equipped to meet the necessary demands of virtual home buying. These capabilities range from online loan pre-qualification to full application and approval, and even all the way through to the closing of the home. We are able to distantly facilitate the entire home buying process for our customers, providing them an effective one-stop 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 are developing more efficient ways to operate that will make our organization stronger and more competitive long after this crisis has passed. Our sales efforts continue 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 and 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. While the restrictions and uncertainty surrounding the impact from the virus have clearly affected our sales, home buyer demand has so far held up better than anticipated.
Net sales for April are trending to be down less than 10% from April 2019, with both gross and net sales increasing each sequential week. While 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 our increasing April sales pace and the declining cancellation rate, as well as seeing a number of states beginning to loosen coronavirus-related restrictions and reopen their economies. This is not the first storm we have weathered. Rob and I, along with our entire leadership team, have the experience to make the adjustments necessary to navigate through these turbulent times. Given our strong balance sheet with ample liquidity and an attractive competitive position across our national 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 over to Rob.
Thank you, and good afternoon, everyone. As Dale discussed, demand across our national platform remained strong into the beginning of March. However, we saw traffic and sales activity decelerate during the second half of the 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 and home closings, we also took action to ensure that the company was positioned with cash flow and liquidity to endure an extended period of lower demand stemming from the COVID-19 pandemic. First, we have reduced new spec starts in our Century Complete business, and with few exceptions, eliminated them in the Century Communities brand. The spec starts that remain are in markets and 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 deposits 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 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 home buyer 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 are also resolutely committed to not only sustaining our business operations through this global pandemic, but also adhering to evolving best practice recommendations regarding COVID-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 a single employee of Century Communities has reported contracting the coronavirus. 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 Dale 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 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 to 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, or $0.80 per diluted share, and net income increased 53% to a record $26.1 million or $0.78 per diluted share. Home sales revenues for the first quarter increased to $572.7 million, an increase of 9% compared to $523.3 million in the prior year quarter. This improvement in revenues was driven by a 29% increase in net new contracts to a company record 2,388 homes, and a 12% increase in home deliveries to a first quarter record of 1,864. The average selling price of homes delivered for the first quarter of 2020 decreased to $307,200 compared to $314,700 in the prior year quarter, which is consistent with our plan to capture an increasing share of home buyers at entry-level price points.
Given the increased demand that we experienced in our market, we successfully drove an outsized backlog conversion rate and increased our gross margin both year-over-year and sequentially. Adjusted home building gross margin percentage increased 40 basis points to 20.2%, compared to 19.8% in the prior year quarter. Adjusted home building gross margin in the first quarter of 2020 excludes a one-time non-cash pre-tax impairment expense of $781,000 related to one community that is in close out. SG&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 of 2020, our financial services business, consisting of title, insurance, and mortgage, generated $9.8 million in revenues, up 17% year-over-year.
The business contributed $209,000 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, our hedged portfolio incurred a $3 million unrealized non-cash valuation loss. During April, we have been recouping this valuation loss as the credit markets have begun to stabilize. Now, turning to our balance sheet and liquidity. We ended the quarter with a strong financial position to weather the challenges related to the COVID-19 pandemic. During the first quarter of 2020, the company drew down additional monies 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 in the current environment. We will continue to closely monitor our operations and will 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 home building debt to net capital increased slightly to 46.6%, compared to 45.2% at the end of 2019, and down significantly from 53.6% in the prior year quarter. Given the proactive measures we have put in place, we expect to continue 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 of the prior year, primarily due to estimated 45L 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 COVID-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 of COVID-19 and the related effects of home buyer demand is truly unknown currently. As such, we are withdrawing our 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 and will be 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 gain more visibility. In the interim, we are 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 tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Thomas Maguire with Zelman & Associates. Please proceed with your question.
Hey, guys. Great quarter, and glad everyone is safe and healthy.
Thanks, Thomas.
Same to you.
I guess first, the April commentary was obviously really encouraging. Can you just dig in there and talk about what you think is driving the sequential improvement in activity? Part of the net side is cancellation, but you also had the comment in there about growth. Just broadly, what do you think is getting the consumer more comfortable to engage with Century? How do you think the pullback in specs that you spoke to could impact orders in future months, if at all?
Thomas, in terms of what's making them more comfortable, I think it's a couple things. One, I think we're doing now a better job adjusting to the circumstances. We've ramped up a lot of our virtual sales tools. Our salespeople are getting more comfortable with that. Candidly, we're seeing more people out and about. There are restrictions being loosened all the time. 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 recognize it's really not the end of the world. In terms of the declining cancellations, we've spent a lot of time with, our salespeople have with our home buyers, making them comfortable and reminding them what a great time this is to buy a home, low interest rates.
We've really focused our sales efforts on our homes that are under construction. As a result, they're going to deliver 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 eye on the market. If we feel that everything is starting to stabilize even more, then we'll probably start building some additional specs. Right now, that's one of the things that we've done, is we've 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 sense. Then just to look back at the first quarter results, obviously, a lot of moving pieces, but the Century Complete it out as a little weaker on a relative basis for what you're reporting. Can you just talk about that? Is it more of a function of cancellations in the net number we're seeing for that buyer and maybe some issues with financing you spoke to in the prepared remarks? I guess more broadly, how do you think about the difference in the behavior of that entry-level buyer for that product versus a Core Century or even a first move-up product in this environment?
It's really two things. One, we've changed how we count a sale. Because we sell online, what we now do is when a buyer puts up their initial $95 deposit, and they execute a contract, we no longer count that as a sale until they put up the balance of their deposit, and we have a conditional loan approval. We have a little bit of a lag time with that, but we have found that
That process works a lot more smoothly than if we count it right up front. The other thing that we had that affected the results is we had a group of homes that were sold to one investment group that canceled right at the end of the quarter. Those two things are really what drove the reduced sales rate. In terms of the buyer, as we go through and the qualification, we obviously have had certain buyers that have a challenge qualifying. In general, that is not a challenge that we face. In fact, the average FICO score of our buyers on the Century Complete side is above 700.
Got it. That makes sense. I appreciate the color, Dave.
Thank you.
Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Hi, this is Maggie on for Mike. First question, another on, I guess, Century Complete versus 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 and the traditional Century product, or are you seeing one versus the other improving more? I guess any color you could give about the different buyer groups.
No, actually, Maggie, we're really seeing it across the board. The improvement that we're seeing is really both in the traditional Century Communities product as well as in the Century Complete product. The same thing with the reduction in cancellation rate. We're seeing that across our portfolio as well.
Okay. Thanks. You mentioned that you've reduced the number of spec starts in the Century Complete brand, and I was wondering if you could maybe give an idea of the magnitude of that reduction?
That'll be the first side that we start up because just the nature of the business, all of those are spec starts, and we don't do pre-sales on that business. It just isn't really set up for that. 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, just get our feet underneath us, and then that'll be the first part of the business that we'll start building specs.
Okay. Thank you.
You're welcome.
Our next question comes from the line of Alex Rygiel with B. Riley FBR. Please proceed with your question.
Yes. Happy to hear everybody's healthy and a very nice first quarter.
Thanks, Alex.
Dale, could you expand upon your comments about the mortgage market tightening and maybe how that has loosened up in the month of April?
Hey, Alex, this is Dave. Everybody obviously saw that in the middle of March when liquidity dried up, you had a variety of issues with forbearance. You had people having job losses. The credit markets really seized. Since then, the government's come out. We have liquidity back in the markets. You have some rules regarding forbearance. All of a sudden, now you've got the market acting in a more traditional manner. We've had no pushback from investors buying mortgages. We see liquidity in the market, not only from warehouse banks, but from the investment side as well. So we see the market acting a bit more normal compared to what it was just, call it, six weeks ago.
Dave, you mentioned there were a number of cost-saving actions in the month of April, headcount related, expense related. I suspect there are also increased costs associated with managing with COVID-19. How should we think about those cost savings versus the increased costs? Do they sort of offset each other, or is one greater than the other?
I would say maybe they offset each other to some extent, but I would say that, as we look at it, obviously we made the difficult decision to lay off some of our staff throughout the country. With that, if there's any discretionary spending going on in the company, it's under a microscope right now. We're definitely watching any dollars that go out. 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 is a nice to have. There are some increased costs in terms of dealing with COVID-19, just given where you can have people and additional supplies that we have, but I wouldn't say it's been too significant of a number for us.
Lastly, as it relates to land purchases and cash spent on land in 2020 versus 2019, I suspect it's obviously going to be down. Any way you could quantify or bracket how much it could be down and how comfortable you are with effectively eliminating land purchases this year, given that you've got sort of two years' worth of backlog in hand already?
Yeah. We're comfortable if we have to eliminate land purchases. I don't think that's going to be the case, though. I think things will start thawing out a little bit as we get further into the year. Since we have 60% of our own lots finished, as well as there's rolls on top of that on a controlled basis that are finished lots that'll roll in on an as-needed basis, we feel pretty comfortable with that. Until we really see how this shakes out on the land side and the demand side, we're not prepared to go forward at this point. I think that's going to thaw and open up by sometime this year, toward the end of the year.
Fair enough. Thank you.
Thank you.
Thanks.
Our next question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.
Hey, good afternoon, everyone.
Hi, Jay.
Okay, the first question I had, could you actually give us what the cancellation rate was for 1Q and how that compared to 1Q last year?
Yeah, I'd be happy to. For example, when we look at last year from January through April 2019, our cancellation rate was 24%. When we look at first quarter of this year, our cancellation rate was 21%. If we look 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%. If we look at it over the first four months of the year, we're at 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 backlog price is up almost 10% sequentially. I'm guessing that's just mix issues with the cancellation you talked about Complete. Should we expect a higher average backlog price like we saw this quarter, sequentially year-over-year as you guys are de-emphasizing and building less on the Complete side?
No, I wouldn't expect that at all. It's not that we're really de-emphasizing it. It just has to do with starts for a period of time. The backlog is strictly based on mix. I wouldn't expect that our ASP is going to change significantly as we go forward.
I guess, what are you all doing with incentives on the Century Communities product, and what are you seeing as far as incentives from your competitors, whether it's buyer incentives or maybe some higher co-broker fees, if you could touch on those?
Yeah, there's a little bit of all of that. 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. As we're focused on selling our specs, it's really down to a house by house case, and what that particular buyer needs to buy that home. You talked about incentives, additional co-broke. All of those 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 our people are doing or that really that all the competition is doing.
On prices, whether it's home prices or on land prices, are you seeing either of those come down for your product or what the competitors are doing right now?
No, not really. This has gone on for really a short period of time. There hasn't been, from what we've seen, an adjustment on land prices. We've pushed off land closings. Land sellers have been pretty accommodating. As we talk to our peers, 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 home prices. We really haven't seen a downward push on prices, and we're not expecting that unless it goes on for a long time. There's just not a lot of inventory on the market. One of the things that's occurring as well is that a lot of the resale inventory has come off the market.
People are really favoring newly built homes as well because they're more comfortable going through them. They don't have to go through a home where somebody is living in. 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. That 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.
Yeah, thank you. Hope you guys are all well.
Yeah, thank you. Hope you are as well.
Yes. Thank you. I wanted to ask about build times. With social distancing between workers and stuff, has that affected the construction time of the homes much?
We have not really seen an effect on that. Things have been running fairly smoothly on cycle times, our trade partners showing up, and of course, there's different protocols on the job sites as a result of this. Everybody seems to be embracing that, and we have not seen that as anything detrimental.
As far as the Century Complete, I guess that brand used to rely more on clients kind of window shopping on the internet. Has that changed much in the way that it's being sold these days or not?
No, it hasn't changed at all. In fact, that's one of the advantages that we've always sold almost on a virtual basis. When we look at that, we've really developed a bit of an expertise on that, and we've been able to take that expertise and move it over to the Century Communities side as well. When we look at that, everything in terms of focusing on selling over the internet is what that product line has always done. As we've taken and morphed that onto the Century side, we've been able to take some of the things that we've learned on Century Complete and move those over. It's really enhanced it overall.
Yeah, I thought it would probably help. One last question. I think some of your other competitors have seen sales drop in the last few weeks, a lot more than you guys, probably in the neighborhood of, I don't know, 40%-80%. What do you think you guys are doing differently, or what do you think is the main value proposition that you guys are offering clients, why your sales are only down about 10%?
I think part of it is that about 80% of our offering is what I would consider to be entry-level. When you take that price point and you couple with low interest rates, it becomes very attractive. In many cases, our buyers, 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. They're in an apartment, and it makes a lot of sense. They want to be able to move into their own home, move out of a denser environment, and I think that our product is perfectly positioned for that. You couple that with the fact that we have experience selling online, we have experience selling virtually. It's not all related to someone walking into the door and walking through models from one end to the other.
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 that currently exists.
Okay. Well, best of luck, and stay safe. Thank you.
Thank you.
You too, Alex.
There are no further questions in the queue. I'd like to hand the call back to Dale Francescon for closing remarks.
Thank you, operator. We could not be more impressed by the truly extraordinary efforts of our entire organization, which has quickly adapted to these challenging times. We have 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's 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 today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.