PulteGroup Inc (PHM) — Q1 2020 Earnings Call Transcript

Thank you, Joanne, and good morning. I want to welcome you to PulteGroup's first-quarter earnings call, but sadly most of the conversations will be about the impacts of the COVID-19 pandemic. In that regard, I certainly hope that you are all well and staying safe. Today's call is a little different given we have PulteGroup participants located in a number of locations. So I apologize in advance for any technical difficulties we may encounter. Joining me here and observing appropriate social distance are Ryan Marshall, President and CEO; and Bob O'Shaughnessy, Executive Vice President and CFO. Joining us remotely are Jim Ossowski, Senior VP of Finance. And I am pleased to welcome Debra Still, President and CEO of PulteGroup Financial Service, who is dialing in from Denver. We thought it would be helpful to have Debra available to answer questions about our mortgage operations and overall mortgage market conditions. A copy of this morning's earnings release and the presentation slides that accompany today's call have been posted to our corporate website at pultegroup.com. We will also post an audio replay of today's call to our website a little later. Before I turn the call over to Ryan, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan Marshall. Ryan?

Thanks, Jim and good morning. Before I begin, let me offer my thoughts and prayers to everyone on the call today and in the communities in which PulteGroup operates. I sincerely hope that you and your families are well and managing through the challenges created by COVID-19. I also want to acknowledge and say thank you to our nation's healthcare workers and first responders who have been remarkable in fighting the onslaught of this disease. Given the devastating effects COVID-19 has had across the country, I am going to focus my comments on the company's specific impacts and our operational responses. Bob will then discuss some of the key numbers within our first-quarter results, as well as some factors to consider as you think about our business going forward. COVID-19, it's probably best to go back to the beginning. Well, that seems like a lifetime ago it really only has been six to eight weeks. More specifically, PulteGroup and the broader housing industry entered 2020 with tremendous momentum and strong buyer demand. This is reflected in the 16% growth in orders that we reported for the first quarter compared with the prior year. Our reported Q1 order growth, however, is not reflective of current market conditions. In the first quarter, net new orders were up more than 30% over the prior year for both January and February. It's now old news when I say that with the virus spreading rapidly and governments implementing shelter-in-place restrictions, home buying demand slowed dramatically as March progressed. To appreciate the magnitude of the slowdown in the first full week of March, our net new orders exceeded 800 homes. In the final full week, this number dropped to just 140. As a result, our March 2020 orders in total were down 11% from March of 2019. From orders being up 30-plus percent to being down 11% in just a few weeks is unlike anything we have experienced before. It's this level of volatility along with the dramatic economic slowdown and ongoing job loss that led us to withdraw our guidance for 2020 as indicated in our press release earlier today, and we will not be providing any new guidance until conditions stabilize. Given how the U.S. economic slowdown intensified as we moved into April, it is no surprise that housing demand has slipped even further. Through the first three weeks of the month, we have sold approximately 920 homes on a gross basis excluding cancellations. The underlying trend is that buyer traffic to our website and in turn our communities has decreased materially. This is obviously a very small sample size, but directionally, we are running a little below 50% of the pace in the first quarter with the most recent trends generally stable to up slightly. While the impact of COVID-19 was hard and fast, PulteGroup is fortunate to have an experienced management team throughout our organization. In other words, we have been through slowdowns before, such that we can and are responding quickly. A cadence of functional meetings, Skype calls to be exact, at every level of our operations were organized and are ongoing. Based on real-time insights supplied by frontline managers, we are routinely adjusting sales, construction, purchasing, mortgage, and other functional practices to the rapidly changing market conditions. Important information from these division level meetings has been routinely shared via a daily call with my senior team that reviews everything from customer traffic and sales to land investments and conditions in the mortgage market. Think of my leadership calls as a virtual war room in which we can quickly assess ongoing events and adjust business tactics as required. It's vital that information flows both ways inside our organization. We can quickly disseminate critical data and decisions back into our operations via internal communication to the newly built section within our intranet. This section also acts as a data repository for key policies and materials as well as a robust and growing warehouse of best practice videos. These videos cover everything from direct marketing to managing a great virtual house tour, conducting an efficient option selection meeting online, and even closing a home purchase remotely. I won't take you through the daily, even hourly evolution of our business practices, but I will share with you how we are operating the business today. To help ensure the health and safety of our customers and employees, we are working remotely and leveraging available technology platforms to enable virtual interactions with our home buyers, from walking through computer-generated floor plans and taking a tour on our interactive community maps to selecting options and applying for and ultimately closing the mortgage. At this point, we're able to effectively do everything remotely. In fact, I fully expect we will be integrating a number of these new practices into our selling processes even as we move back to more normal operating conditions. I think our millennials and active adult buyers in particular will appreciate having more options in terms of how they interact with the home buying process. For potential home buyers who do want to visit a model and meet in person, such meetings, where permitted, are by appointment only. Appointments ensure we can control the number of attendees and enforce social distancing, as well as to provide time for us to implement our enhanced cleaning protocols. Moving from sales to construction, we are working closely with our trades to confirm compliance with national and local guidelines relating to social distancing and on-site health and personal hygiene practices. Construction has been designated an essential service across all of our markets except for Michigan, Pennsylvania, the state of Washington, and key municipalities in Northern California. We have also notified our home buyers that we will be providing warranty service for emergency situations only until this crisis has passed. Finally, as an extension of protecting the health and reducing risks for the entire team, for the end of March, we made the decision to guarantee employment for all PulteGroup employees through the end of April. We wanted to make sure we provided a sense of security, so our employees could focus on their families and on taking care of our customers. Given the severity of the economic slowdown, we’ve recognized that staffing actions will be needed to better align overhead expenses given the slowdown in housing demand, and we are planning for such, but this decision is consistent with PulteGroup's employee-first culture. Beyond our people, given the challenging operating environment and economic uncertainties resulting from COVID-19, our focus is on protecting the company's liquidity and closely managing our cash flows. Bob will review details shortly, but let me provide a few high-level comments on the actions that we have taken today. On the land side, we are working closely with our existing land sellers to postpone the purchase of land parcels currently under contract. Land sellers understand what's happening in the market, so conversations typically take a collaborative approach. I am extremely pleased to say that we have been successful in delaying well over 90% of the lots scheduled for purchase in the near term. We would hope to have similar success as and when we need to deal with contracted land positions scheduled to close in the future. In the rare situations where we have been unable to agree on some form of extension with the land seller, we have walked away from the lots and our pre-acquisition expense. In the first quarter, these charges amounted to only $4 million. In a similar fashion, we are working to intelligently slow land development such that it is more appropriately aligned with the current sales environment. At this point, our approach is focused on delaying development rather than outright mothballing communities. The latter may become a tactic depending on how the slowdown plays out, but for now, we want to continue turning assets, even at a reduced rate. We've also implemented strategies to limit the amount of capital we are investing in vertical construction. This includes contacting backlog customers and reconfirming their status before beginning the construction of that sold unit. Having said that, between our existing spec starts and an elevated cancellation rate, we have spec units in production that we are also moving onto a slower track. At quarter-end, we had a total of about 3,100 specs in the pipeline, of which almost 40% were early enough in the build cycle that we are able to suspend further construction. Depending upon the exact stage of production, construction on the remaining spec units will be held, slowly advanced, or completed on schedule and then sold. Given the actions that we've taken to adjust land and house spending, we'll be able to postpone several hundred million dollars in cash outflows by effectively idling parts of our business. We can maintain strong liquidity while positioning our operations to meet buyer demand. However, it develops over the remainder of 2020 and into the next year. It's hard to envision a more difficult operating environment than what we are experiencing today, and I don't even want to try to sugarcoat it. That being said, given the way that we have been running the business over the past decade, I do believe that PulteGroup is very well positioned both operationally and financially to navigate the challenging and volatile market conditions we'll face until the impacts of the pandemic recede. Now let me turn the call over to Bob for first-quarter operating and financial results. Bob?

Thanks, Ryan, and good morning, everyone. Before starting my review, let me reiterate that we have withdrawn our previous guidance relating to our 2020 results, and we will not be providing any new guidance at this time. This decision was driven by the dramatic impact coronavirus has had on unemployment, GDP, and consumer confidence, the result of which is that it is impossible for us to forecast how markets and buyers will respond when conditions ultimately begin to improve. We are optimistic that buyer demand has the ability to rebound, but there's too much uncertainty at this time for us to provide meaningful guidance. As Ryan indicated, given the dramatic change in demand dynamics and overall market conditions, I'm not going to walk through our first-quarter statements in the usual detail. I will, however, discuss Q1 results on a high level business to operate over the next couple of quarters. Looking at the income statement, home sale revenues in the first quarter increased 14% to $2.2 billion. Higher revenues in the period were driven by a 16% increase in closings for 5,373 homes, partially offset by a 2% decrease in average sales price to $413,000. The decrease in average sales price for the quarter was driven primarily by changes in the product and geographic mix of homes closed. Product mix continues to benefit from the expansion of our first-time business, which increased to 33% of our closings in the quarter, up from 25% last year. In addition, 42% of our closings came from move-up buyers, and the remaining 25% came from active adult buyers. In the prior year, 48% of closings were move-up, and 27% were active adult. At 33% of closings, we have achieved our stated goal of having first-time buyers represent about one-third of our business. Given our growing investment in first-time, and the fact that it was experiencing the strongest demand prior to the slowdown, first-time buyers could increase slightly in the percentage of our overall business going forward. As Ryan noted, orders for the first quarter were up 16% to 7,495 homes. By buyer group, first-time orders were up 31% to 3,345 homes, and active adult was at 5% to 1,674 homes. Driven in part, we ended the quarter with 12,629 homes in backlog, which is up 20% over the first quarter of last year. Given the strong order rates over the past several quarters, we ended Q1 with 12,088 homes under construction, which represents an increase of 17% over last year. It was driven entirely by sold homes as spec production on a unit base decreased and represented only 26% of homes under construction. Consistent with Ryan's comments, we had curtailed new spec starts for the time being and are identifying opportunities to efficiently and safely pause construction on spec units already in production. Ideally, this would entail holding units at the foundation stage, but we can hold after they are dried in if needed. While we are not providing guidance regarding expected quarterly or annual results, I think it’s useful to share information on backlog performance and the current state of our construction operations. First, to date, buyers have wanted to close relative to the size of our backlog; we are seeing minimal cancellations, with most as you would expect driven by job loss resulting from the coronavirus. Through the first week of April, we've had 360 backlog units cancel, which represents only 3% of homes in backlog. Based on these numbers and our experiences to date, it’s clear that our home buyers are willing and even anxious to get into the safety of their new home. Second, our trades want to work. We remain in close communication with our trades to coordinate activities and ensure we are operating in compliance with all work rules and safety guidelines. As we have had to adjust the cadence of starts and also production timelines, ongoing communication with our trade base is critical to maintaining production efficiency. And third, we are having to proactively and intelligently manage the supply chain. The initial challenge is adjusting to any disruption in materials and our components from China. We were fortunate that we had recently conducted an extensive analysis of the supply chain in response to the U.S.-China tariff issues in 2019. More recently, however, we are dealing with the closures of U.S. plants as a result of state or municipal restrictions to keep people at home. The U.S.-based plants typically have less inventory in the supply chain, so adjustments have to be made very quickly. For commodities and mechanicals like plumbing, electrical, and HVAC, we can usually swap to an upgrade or identify comparable products manufactured by another supplier. It’s much more difficult when the delay involves products such as cabinets, countertops, and appliances where colors and styles can be difficult to match. In these instances, we are working with our customers to identify suitable alternatives, or we may simply have to wait extra days until the required product becomes available. As of today's call, delays across the enterprise are relatively minor, but they can be disruptive within a specific community or market and may cause delays in completing impacted homes. Continuing with my review of our first-quarter results, gross margin for the quarter was 23.7%, which is up 30 basis points over the last year and up 90 basis points sequentially from the fourth quarter of 2019. Gross margin exceeded not only last year but our guidance for the period. In addition to benefits resulting from the mix of homes closed, our improved gross margin reflects the prior strength of housing demand and our ability to capture incremental pricing opportunities as incentives decreased to 3.6% in the quarter. This is down 40 basis points from the first quarter of last year and 20 basis points from the fourth quarter of 2019. Broadly, we would generally tell you that prices have been holding. Unlike the back half of last year, affordability issues today relate to the inability to leave your home, job loss, or simply fear; price does not solve these issues. Price is also benefiting from low levels of new and existing home inventory on the market. That being said, spectrum in the industry's production pipeline are rising, and cancellations are resulting in inventory build-up in a number of markets across the country, which often leads us to solve a price over pace, but we need to continue selling homes, and we will be competitive in the market. Our SG&A expenses in the first quarter were $264 million or 11.9% of home sale revenues. This is a 110 basis points lower than the first quarter of last year in which SG&A expenses were $253 million or 13% of home sale revenues. The improvement in overhead leverage was driven by the volume growth realized in the quarter. As Ryan discussed, given the ongoing erosion in home buyer demand witnessed across the country, we recognize that we will need to make adjustments to our organization. Planning is already in process that will result in furloughs and layoffs in addition to other general cost reductions needed in order to right-size our operations. Moving on, you will see a line for goodwill impairment in our first-quarter income statement. Given the significant decline in equity market valuations, we determined that an event-driven impairment test on goodwill associated with our January 2020 acquisition of ICG was appropriate. This test resulted in an impairment totaling $20 million. This impairment was not the result of any factors specific to ICG's operations, but rather reflects the broad-based declines in the market capitalizations of publicly traded construction companies during the period. Having now worked with ICG since the closing, we're even more excited about the opportunities we see for such off-site production. Of course, accounting guidelines don't factor in our excitement but simply evaluate the recoverability of goodwill based on objectively verifiable market data, and as we all know the equity markets have been under stress in recent weeks. Looking at our financial services operations, the business generated pre-tax income of $20 million, an increase of 58% over prior year pre-tax income of $12 million. This year's higher pre-tax income reflects an improved margin environment, higher loan buyers consistent with growth in our home-building operations, as well as a higher tax rate. Mortgage capture rate increased to 87% in the quarter from 80% last year. I would note that given disruptions in the national mortgage market caused by COVID-19, we did have to write down the value of our mortgage servicing rights in the quarter, reported financial services pre-tax income for the first quarter includes this adjustment. Completing my comments on our income statement, our first-quarter income tax expense was $60 million or an effective tax rate of 22.8% compared with $50 million for an effective tax rate of 23% last year. Our effective tax rate for the quarter was lower than last year and our recent guidance as we recorded benefits related to equity compensation. In summary, for the first quarter, our net income was $204 million or $0.74 per share, which is an increase from prior year net income of $167 million or $0.59 per share. Turning now to the discussion of our balance sheet, cash flows, and uses of capital, we ended the quarter with $1.9 billion in cash, which is up from $1.3 billion at the end of 2019. Our increased cash position primarily reflects our decision to draw $700 million from our revolving credit facility in March. Given the dramatic decline in global economic conditions and the uncertainty of future demand trends, we drew on our facility in an abundance of caution. The incremental net interest expense related to these borrowings, which will be reflected in interest expense, is approximately a million dollars per month, so it's low-cost insurance as we move through the next few months. In the first quarter, we invested $619 million in land acquisition and development. On a sequential basis, this is a decrease of $152 million from the fourth quarter as we are working quickly to adjust land spending to match the current operating environment. Land acquisition spending in the quarter amounted to only $219 million, our lowest quarterly investment since 2014 and will likely decline further as we work to defer future land purchases. In the first quarter, we repurchased 2.8 million common shares for $96 million at an average price of $33.86 per share. As business conditions eroded during the month of March, we elected to stop our repurchase activities. At this time, we have suspended share repurchases consistent with our focus on conserving capital. In conclusion, we entered this period of economic uncertainty in a position of strength. Our home building operations have proven to be efficient and highly profitable and we maintain ample liquidity. We're operating in a period of unprecedented job loss and economic contraction, but I'm confident in our ability to manage through the turmoil and successfully exit to the other side. Let me turn the call back to Ryan for some final comments.

Bob highlighted that we are dealing with this economic crisis from a position of strength. We've put ourselves in this position by operating a highly profitable and high-returning home building business for a number of years. The strong operating results we delivered in this first quarter are consistent with the strategies and tactics against which we have consistently operated. By the time we get through the challenges of COVID-19, we will have adapted to a lot of changes. What won't have changed, however, is the strategic and disciplined approach we take to running our business, which has delivered great financial results in the past. Our work to maintain an exceptional culture and a committed team doesn't change. Our ability to underwrite and develop outstanding communities designed to meet customer needs while delivering high returns doesn't change. Our focus on delivering superior quality homes and outstanding customer service doesn't change. So while a lot will change, the fundamentals that have made PulteGroup successful remain solidly in place. In closing, before we open the call to questions, I want to say thank you to our employees and our suppliers who have been absolutely amazing throughout these past few weeks. In a period of heightened risks and fears where and when appropriate you have been on-site and operating in our communities. As required, you have quickly adapted to working from home and servicing our customers from a socially acceptable distance. And through it all, you have maintained an upbeat attitude and a can-do spirit. It has been impressive to watch. Let me turn the call back to Jim.

Great. Thanks, Ryan. Now we are prepared to open the call for questions, so we can get as many questions as possible during the remaining time in this call. We ask that you limit yourself to one question one follow-up. Now I will ask Joanne to explain the process and open the line for questions.

Hey guys. Good morning. Hope everyone is doing well within the organization and your families, and thank you for all of your commentary this morning. My first question, if I could, and maybe this is directed for Deb, but I'd love to hear and dig in a little bit about what's going on in the mortgage markets today? I know the headlines have been kind of fast and furious about tightening in terms of credit overlays being instituted by a number of investors and lenders, and I know there's a lot of disruption on the servicing side as well, and I'm just curious what you've seen over the last couple of weeks in terms of your ability to originate loans, to sell loans, sales servicing rates, and taking that a step further, where are the current standards today that you're originating for your buyers?

Morning Alan. Thanks for the question. There's certainly a lot there. We are doing well, and I hope that everybody at Zelman is healthy as well. Maybe let me just start with some real broad overview comments, and then I'll turn it over to Deb. Our Pulte Financial Services team has been absolutely outstanding. We do have very good liquidity. The operations of the mortgage company have really continued with minimal interruption. There certainly are some challenges there, but I really do believe that Deb and her team have effectively helped to navigate those. So with that I'll turn it to Deb, and she can provide some additional commentary.

Sure. Thanks Ryan, and good morning Alan. Yes, so certainly disruptions. We've seen a lot of headlines. I think one of the things that is important to note is not all disruptions apply to all lender business models, and so for Pulte, for the majority of our loan programs Pulte Mortgage offers, we're working with the same investors. We're working with the same buyers of servicing that we've done business with for years. For Pulte Mortgage, we are looking to add additional investor partners for our government loans where the environment has gotten more restrictive than the conventional market, and our strategy remains the same, which is to seller loans in the secondary market and to sell our servicing. The jumbo market you read headlines that it may be frozen, and while I think there's far fewer participants, we're partnering with several banks and several credit unions that are still buying our jumbo loans and providing us that liquidity. So I'll stop there and see if you want to go into more detail.

Yes. No, that's very helpful. Yes, I do have one or two follow-ups to that if I could. I guess on the government side, it seems like that's where we've seen some FICO and DTI overlays put in place. I know some lenders have gone as high as 700, not going below that; others are kind of more on the 60-80 range. So I guess the question is when you look at your book of business and you look at your backlog, it seems like cancellations have been very modest. Are you still able to get a FHA VA loan done at a call at 640-660 FICO, and what percentage of your business actually falls into that criteria right now?

Yes. So we still have credit available certainly at the 640-660 range. Some investors are requiring loan-level price adjustments for those credit scores, but for the most part, there's decent liquidity at that level Alan, much like our product mix has been for many years. FHA and VA together are about 20% of our book of business.

Good morning everyone. Hope everybody is well on your end.

Good morning, Jack.

Good morning. I think part of the silver lining here is you're coming into this with a really strong backlog, and so I guess the first question I have is, Ryan, what are the regional heads doing to preserve that backlog? Any kind of strategies there? And then Deb, what's the mortgage company doing proactively to kind of peel through that backlog? Is it a second set of eyes on the underwriting? Is it a closer touch on the employment status? Just kind of curious how you guys are managing. There is a lot of forward revenue there, and preserving that I would imagine is priority number one.

Yes, Jack. Good morning. It's Ryan, and we do, we really do believe that the size of our backlog is a real benefit for us as we move through this crisis. The good news is the majority of that backlog made a buying decision prior to the effects and the impacts of COVID-19, and as Bob highlighted in detail, we've largely seen most of those buyers anxious and ready to move to the closing table. We've certainly done a lot of things in working with our Pulte Financial Services partners inclusive of doing drive-by closings, where we've been able to sign the majority of the documents virtually, and there's only a handful of things that need a wet signature, and we've been able to do that without human interaction and contact, which has been great. In terms of tactics that our operators are taking to preserve that backlog, we're really working with our buyers in a collaborative way to understand their specific needs in the cases of job loss and things like that. In some cases, we've had to take a cancellation, and that's reflected in the numbers that Bob shared with you. Certainly, we've got great partnership with our mortgage company on a number of fronts, and not only does that help minimize risk—they provide just outstanding products and service. Our mortgage team has been able to give us insight into concentrations of customers that might fall into a particular industry, but we are very careful not to violate any of the banking regulations that would prohibit the mortgage company from sharing specific buyer data. So those are a few of the things that we've been doing to manage the backlog.

Okay. And then one for Bob. Looking at cash, stock buyback slowing down the land spend, monetizing backlog, cash position probably balloons pretty significantly into year-end. So assuming a new recovery, how do you think about the cash 12 months out? I mean, Ryan, your comment sounded like prepared for the worst, hope for the best, but you said looking the cash numbers $2.5 billion, $3 billion is kind of numbers, no debt coming due to 2021. If we get to the other side of this, is it just going to be buyback, is it going to be reaccelerate the land spend because the demand is there and you've got to catch up? How do you think about this large likely cash positions into this year?

Yes, Jack, thanks for the question. Hopefully, we are wrestling with that particular question. I think our view on this is we wanted to get as liquid as we could. We drew on our revolver just from a precautionary standpoint. The first use of any cash would be, as we get more comfortable with this, we would seek to pay that down. You mentioned that we've got a maturity in March of next year not that far away; that would be a pretty high priority for our cash depending on market conditions would we refinance it—I don't know, it'll depend. Other than that, I think the process we will go through is no different than what we've been doing for the last five-plus years, which is evaluating the opportunity to generate return from that cash. So if we think there's an opportunity in the land market, obviously, that would be a place where we place primary importance on investing. If we have excess capacity beyond that, we're always thinking about repurchase activity. We've obviously stopped that, but as time goes by, we will revisit whether that's appropriate, and we obviously pay a dividend. We'll be in the course of normal discussion with our board visiting what we do with that over time. So I think the answer isn't really any different, but I would tell you obviously the first thing we would think about is the revolver and paying that down.

Thanks. Good morning everyone and hope everyone in the Pulte family, extended family are safe and healthy in this time. First question I had was if I could try to get a little more clarity obviously appreciate it with regard to order trends in the last six weeks or so, and obviously appreciate all the details that you've given. I think what a lot of people are thinking about is trying to parse out in terms of the orders and the fall-off in orders, which markets and which segments maybe you've seen it the worst? You mentioned about a 50% decline in sales pace versus the first quarter in April. And so I was curious if there's any additional granularity you might have for us in terms of by market, which markets may have seen a greater drop-off and across your three major consumer segments where you saw it a little worse or better?

Yes, Mike, good morning. What I would tell you is that April started very slow as the majority of the country went into shelter-in-place type orders, some markets very aggressive late end of March early part of April and then eventually you saw the entire country go into that mode. As our sales processes evolved and caught up to that, we went to by appointment only for the protection of not only our sales team but also the customers, and then we quickly adapted to a lot of virtual selling practices with virtual tours, heavy use of Microsoft teams to engage with customers where we could share documents and the various choices the buyer would have. What we saw as we moved through April, each week we were doing more virtual appointments. Our team got more comfortable with it. I think buyers got more comfortable with it, and so we were encouraged by that. We had, as I shared with you, we had over 900 sales in April to date, which in this environment we're largely the entire country is still at home to be able to sell that many homes virtually, I think is a fairly decent result. We are starting to see some pretty positive trends in our traffic data just starting this week as we think more of the—I think because more of the country is talking about reopening. We've seen certain states already take action to reopen, and I think some of the understanding and the fears around COVID-19 is starting to subside. We're seeing some positive traffic trends, which I think bodes well. In terms of consumer groups and segments, the one that I would tell you was probably down the most early was the Dell Webb consumer, which I'm sure as you can appreciate is understandable. Number one, that's an aged demographic that is most susceptible and at the highest risk to the virus, and so that's a buyer group that I think was early on the most cautious and probably continues to be. There also a buyer group that’s heavily influenced by volatility in the equity markets which we know there was plenty of that in the back half of March. As that's stabilized and as the virus starts to come under control, we started to see that buyer group rebound. It's a buyer group that's got great liquidity. They've got strong wealth. They're not as dependent on the job market, and so we're actually starting to see some nice trends from that group. What I would tell you though Mike is that every buyer group is susceptible to the impacts of this virus. I don't think there's any one group that is going to be untouched. They may go through different phases as the impacts to the economy move through the entire system.

Thanks Ryan. I appreciate that answer. I guess for the second question, maybe if I could sneak in slightly a two-part. Number one, you mentioned the virtual orders coming in. Of that 960, I was curious roughly what percent was able to be counted as an order without the customer even physically walking into the home? And conversely, you had mentioned in a prior question around the 360 cancellations in the first three weeks of April. I think primarily driven by job loss. I just wanted to try and get a sense again going back to the, I guess you want to call backlog scrubbing, if you feel like that 360 represents fully the initial job losses that we've seen across the country or if the tension there might be an additional portion of the backlog susceptible to the recent unemployment trends?

Yes, Mike. In terms of how many of the April sales we are able to do everything virtually, I don't have that number at my fingertips. I would tell you it was the lion's share of the process was done virtually. There are some buyers that maybe they wanted to do at least one on-site visit. It wasn't required however, and we were set up operationally that the entire process could be handled virtually. So we feel really good about that. In terms of the cancellations, there's some number of cancellations that we take in a given month just as a normal order, a normal course of business, and that's reflected in what is our kind of normal cancellation rate for those that we've seen in April. I would tell you probably the majority were COVID related in some way, shape, or form. Most of those kind of relating to job loss or family health reasons. As we move kind of through this, yes, I think there's certainly continued risk depending on how deep and how prolonged the downturn is, and then what the recovery looks like. So the job loss or the unemployment claims today were a little better than they were last week, but at over 4 million, it's still a pretty big number, and we'll ultimately just need to see how that plays out over the coming weeks and months.

Yes. Thanks a lot Ryan and team, and thanks for all the information thus far. It sounds like you are doing as great a job as one could expect in this environment. There were some very interesting things that you mentioned with respect to how things have been evolving very recently and so far in April, and I just wanted to knit a couple of things together that you've said and just sort of get your overarching view as to how the demand picture looks. I think you indicated that when you gave your numbers for cancellations and the sales, you were doing obviously it seemed like it picked up relative to the final week of March in terms of the gross orders, and then on top of that your cancellation rate if I were to extrapolate that out to a full quarter, looks like you're talking about a backlog cancellation rate of maybe 12% or something like that for a full quarter, which is like less than half of what you saw during the global financial crisis. You said price isn't really the issue and people are wanting to move in. So with all of that said, I'm curious as to how you think this buyer pullback compares to other demand pullbacks that we've seen? Usually, for instance, when you see demand pull back, there is kind of an immediate price response sort of a demand for that, and it doesn't seem like that's happening today, and you've seen a pickup in traffic even before the states have opened up. So it feels to me almost as if there's like a fire that's gone dormant because I had a blanket thrown over it, and then the blanket gets removed, there may be a spike in demand and I'm wondering if you would be ready to capture that and if you think that that's even something that's worth preparing for, or if it's more important to sort of be defensive in the case that things get worse and linger. So my question is a little bit complicated, I apologize, but how are you seeing the demand potential just spike in the next, let's say, month or two as things actually do open up? And what are some of the things that you're doing to position yourself to capture that if in fact that happens?

Yes, Steven, it's a great question, and I would tell you, we don't have a better crystal ball than anybody else does in terms of what the recovery ultimately looks like. Is it a U? Is it V? Is it an L? Is it a square root recovery? There's a ton of theories out there. We're looking and studying all of them. I think you made a couple of interesting points that I would tend to agree with: buyer desire to own a home seems to be holding pretty strong and steady and strong. The ultimate question I think is going to be when does the economy start to reopen and how deep and prolonged the job losses. We know that jobs are a critical component of a home buyer being able to make the decision to move and do something different. If the job losses can be minimized, and the folks that have been furloughed or able to be called back, I think that bodes well for housing. Different than I think other housing downturns, typically there has been a buildup of supply, which we don't have right now. There's not a buildup on the resale side, there's not a buildup on the new side, and so I would tell you that's largely why we've seen price continue to hold. Bob's prepared remarks I think hit the nail right on the head which is this is something that is being driven by partly fear, partly folks being at home and not being able to leave their homes, and price doesn't necessarily solve that. And so I think what you've seen from the industry for the most part is there hasn't been a lot of discounting other than in a few places where we've seen some co-broke type incentives to move inventory that was finished. We haven't seen in the market broad-based price reductions on base pricing, which I think is generally a positive. In terms of being opportunistic, Steven, I think our model of having a very large backlog that is over 12,000 at this point that puts us in a very good position assuming the cancellation rates remain where they're at, and for clarity, we're running at a level that we're 3% for the month of April. I think that translates into something a little less than the number that you quoted, but we'll see kind of what that cancellation rate ultimately trends to for the full quarter.

Yes, Steven just to maybe further clarify that the cancellations, I think what you're going to see is based on the sales level that we're seeing today, gross, and the cancellations against that 12,000 unit backlog, you will likely see an elevated cancellation rate in Q2 because you're going to have a reduced sales environment. We've highlighted that sales are down, you have cancellations while they're not huge against the total backlog are going to be big against that relative number. So just, I heard you say that we might have a lower cancellation rate in Q2 or net cancellation rate, is that will not be the case.

Yes, I was referring to a backlog cancellation rate. Just to hear, because I think that's...

Got it.

Okay, so yes, that's great. Appreciate that. Sort of kind of follow up on that. I feel like it would be interesting to hear particularly that you're given your headquarters in Georgia, how you're planning on handling a reopening policy which probably won't be unified across the country? And so I'm curious as to how whether Pulte would be adopting a kind of a across the country kind of a policy or will it be determined locally. And I'm also curious if you could talk about this pricing issue, how your price has released and an issue you have seen a lot of discounting. I'm curious whether you're actually seeing any desire on the part of the people who are buying, to actually in fact maybe upgrade. Maybe are you seeing any increased demand for an extra bedroom let's say, or maybe the home office. And then lastly, are you seeing, can you give us a sense for what percent of your buyers need to sell a home first and how that's factoring into the demand picture today?

Yes, Steven, let me—there's a lot there. Let me see if I can organize my response.

Yes, it was the reopening, the demand for extra maybe upgrades and then what percent need to sell a home first?

Yes. So in terms of reopening, we are taking a coordinated effort from our corporate office and working with our regional heads and our division presidents in terms of how we reopen, but it will be a customized approach by state, by market, even by sale center or by active community in some cases. So in most of the places where.

Well, let me back up; we will not open anywhere until we're permitted by state and/or local regulation. That being said, we will open on the timeframe that we believe is appropriate for us once permitted by local regulation. So in Georgia, to your point, starting this weekend, a lot of the Georgia economy is starting to reopen. We will be taking a phased approach in how we reopen our corporate office as well as how we open our sales centers in Georgia. In terms of upgrading, Steven, I think what you'll likely see is a lot of folks that have been maybe living in more confined spaces, whether the apartments, condos. My guess is you're going to see an elevated desire for suburban living and having a little bit more space. I think most of our homes do come with the ability to have flex space and do things like home offices, and I would absolutely see that being high on the list of things that buyers would want. And finally, as it relates to homes to sell, I don't know that's necessarily changed from what the historical trends were in talking with a number of resale agents that I know here locally, as well as across the country. There's actually kind of a tight supply of good inventory on the resale market, and so the feedback that I'm getting is if the home is priced properly and in good condition, they're actually selling and selling fairly quickly.

Hey guys, thank you for taking my questions and I hope everyone is well. First question, Pulte and many of your competitors have talked about delaying land purchases, which clearly makes sense. I'm wondering though, are you anticipating any stress at the land developer level? Are developers still able to access capital at this point? Maybe any thoughts around that would be helpful.

Yes. It's a fair question. For the most part, we are self-developing, John, and so we are putting raw parcels under contract. For the larger developers, we have not gotten any indication that they've got capital constraints. I think they, like us, are looking at the phasing of development. So phases might be a little bit shorter, might be delaying the next phase until we can work through the existing ones. So we haven't heard of a lot of noise in the market from folks that we have developed relationships with. Everybody's focused on cash, as you can well imagine, but I think it's pretty coordinated at this point.

Okay. That's helpful. And then, the labor challenges that some folks are seeing, mostly smaller builders, and some of the social distancing that's going on on job sites. I mean, do you get the sense that this could increase the demand or the interest for off-site building? And with your ICG acquisition, have you guys seen increased inquiries into the business since COVID has hit?

Yes, John. We're excited about ICG as Bob mentioned. We've now been operating with ICG for just over three months. We're more excited today than we were at the time of acquisition as we've started to incorporate ICG products and materials into our Jacksonville operation. It's really gone well. Just like we talked last quarter, we really see the implementation and integration of off-site as being a long-term strategic move for the company to address what we really believe are fundamental shortages in labor over time for the industry. My guess is that as social distancing practices will likely continue well into the future. I don't think this is a 30 or 60-day time frame. We're going to be working on social distancing, I think for a long time to come, and it will be a better opportunity to take advantage of the labor efficiencies that are created by using off-site. So suffice to say, we were excited then; we're more excited now and we're looking forward to continuing to see that expansion through our operation over the coming years.

Hi good morning everybody and glad to hear you all are safe. So first question, you all have a proprietary pricing tool that's really helped you achieve elevated gross margins. I'm just hoping you could shed some light on the existing market's pricing as I would imagine there's a lack of inventory that you mentioned. There's also a lack of foreclosures with forbearance, which I think is going to help support the existing market pricing. But have you seen any local market pricing that started to crack or rollover, or are there any local metros that you're really watching near-term?

Yes, Truman, good morning. It's Ryan. I think we addressed in some of the prepared remarks. We've actually seen price hold pretty steady. The only pricing actions that we've really seen are a few spots where certain builders have had an elevated level of spec inventory, and in an effort to move those, they put some financing incentives in place or some elevated co-broke incentives, which I think ultimately at the end of the day is more of an advertising mechanism as opposed to a price mechanism. So underlying values in this environment I think have held steady. We haven't seen broad-based discounting on to-be-built orders. I haven't necessarily even seen broad-based discounting on the resale side either. So knock on wood, we'd hope that that can hold. For the time being, the results have been positive.

Okay. Got you. So specifically no real local metros that have really started to crack or anything along those lines?

Correct.

Okay. Thank you. And then just hoping to get a bit of an overview on the broader land environment, but really what I'm hoping to understand is whether you all are restructuring any of your option land deals and what those are starting to look like in those conversations, and then also if you could look forward maybe one to two quarters what portion or magnitude of the option deals are possibly at risk of being written off?

Yes. It's interesting. There isn't any particular form or fashion. Just like the way we've built the land book, it is negotiation with individual sellers, and as we mentioned on the call to this point, everybody understands we had very limited impact. We had highlighted $4 million in write-offs of pre-acquisition costs. We've got a normal run rate of about $2 million every quarter. So it was slightly elevated but not materially. So I think what that tells you is that the dialogue we're having with our sellers is constructive. In some cases, we've deferred 30 days, in some cases, we've deferred 60 days, in some cases 90, and I think we'll continue to evaluate it as we go forward. I don't know that there's any particular bucket of the contracts that we have in place today that are any more or less at risk than anything else quite honestly. The decision to move forward is going to be based on how we see the market and whether we get the return we are seeking from the investment we're making, and we'll make those decisions candidly community by community. So we are working with all of the sellers, and I talked about development spend, and we're suggesting to folks, hey! don't put more money into it because we may need to wait a little while, and they understand that. So on balance, you never know where this is going to go because demand will dictate how we operate.

Yes, Truman, the only thing I'd add to that is when we negotiate land transactions, we underwrite the return as I think you well know. The two big variables in that are pace and price, and we've talked to price in your first question, which is largely held pretty consistent. Pace is the unknown, and until we kind of come out of this recovery and we start to see how things recover, that's what might ultimately dictate what happens to underlying land values. But we do believe based on the optionality that we've really worked to put into our land book over the last several years, we are as well positioned as the company's ever been to create some real optionality in how our land book comes onto our balance sheet or how we ultimately purchase things over the coming months.

Okay. Well, thank you, Joanne. I apologize there were a few more questions we just didn’t, we've run out of time on this call. We will certainly be available over the course of the day if you do have any other questions. We did run a little bit long. We want to provide as many comments as we could in our prepared script and hopefully answer as many questions as we could that way. Thank you for your time. Stay well, and we'll look forward to speaking to you on the next call.