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Text: While it has only been a year, our Q1 2021 earnings call will obviously be very different discussion than we had this time last year.
Before we get started, let me highlight that in addition to reviewing our reported first quarter results, we will also discuss our adjusted results which exclude both a $61 million pre-tax charge associated with a debt tender completed in the quarter, and a $10 million tax insurance benefit recorded in the period.
For purposes of comparison, we will also discuss prior year Q1 earnings adjusted for a $20 million pre-tax goodwill impairment charge.
We encourage you to review these tables to assist in your analysis of our business performance.
Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.
From double-digit growth in sign ups, revenues and earnings, to enhance liquidity and a $1 billion expansion of our share repurchase authorization we posted a tremendous start to 2021.
Beyond company's specific gains, our first quarter results reflect the ongoing strength of home buying demand throughout all segments of our business.
It is worth highlighting that I believe the strength of the market is due in part to a significant housing shortage in this country, that shortage has been years in the making, and will take years to correct.
I think the first two sentences from a recent Wall Street Journal article aptly summarize the current state of housing supply in the U.S. The U.S. housing market is 3.8 million single family home short of what is needed to meet the country's demand according to a new analysis by mortgage-finance company Freddie Mac.
The estimate represents a 52% rise in the nation's home shortage compared with 2018, the first-time Freddie Mac quantified the shortfall.
Beyond this long-term structural shortage, COVID-19 has also resulted in a growing desire for single family living, and has changed what the homebuyers want and need from their homes.
We believe these new wants and needs are often best met through the floor plans and features available in new construction, these dynamics do supportive demographics, low interest rates and an improving economy, and you get the tremendous demand environment we are experiencing today.
The strength in demand is reflected in our strong order growth for the quarter.
In total, our net new orders were up 31% over last year, while our absorption pace was up 37%.
On a unit basis, this was the highest first quarter sign-ups we've reported in over a decade and at $4.6 billion our highest reported quarterly sales value ever.
I would highlight that the strong demand we experienced in the first quarter of 2021 has continued into the first three plus weeks of April.
We continue to see high traffic volumes in our communities and buyer's anxious to purchase a new home.
Working within the strong demand environment, we continue to improve our operating and financial performance.
Our pricing strategies and disciplined business practices helped us to generate a gross margin of 25.5% and an adjusted operating margin of 14.6% in the quarter.
The resulting cash flows were then available to fund the future growth of our business, and an increase in our ongoing return of excess capital to shareholders.
At a very basic level this is the model that we have been refining for the past decade.
It starts with running a higher performing homebuilding operation, seeking to capture incremental gains in all areas of the business.
It also includes investing in high quality projects and increasing our use of land purchase options to improve cash flows and overall asset efficiency, while delivering consistently strong returns on investment and equity.
Having build a homebuilding operation that we believe can routinely generate strong returns and cash flows, we then allocate capital to support our long-term success and reward our shareholders.
As we have highlighted many times, our highest priority is investing in our business through the acquisition and development of land assets that can generate required risk-adjusted returns.
To that end, since 2016, we have invested $14.6 billion in land acquisition and development, and have done so while building a more efficient land pipeline.
To clearly demonstrate the progress we have made, at the end of 2016, we owned 99,000 lots, while controlling an additional 44,000 lots via option.
Today, we actually own 5,000 fewer lots than five years ago and have more than doubled the lots we hold via option to 100,000.
This significant and continuing change in the composition of our land pipeline has allowed us to increase the returns we generate, while also helping us to reduce land related market risk.
As you know, we have also made the return of funds to our shareholders, an integral part of our capital allocation.
Over the past five years, we've returned approximately $3 billion to shareholders through dividends and share repurchases, including $154 million of stock repurchased in the first quarter.
And finally, as you saw in the first quarter we are also prepared to allocate capital with a view toward further strengthening our balance sheet and reducing our financial leverage.
By paying $726 million of debt in the quarter, including the successful tender for $300 million of our nearest dated outstanding debt, we were able to lower our debt-to-capital ratio on a gross basis to 23.3%.
To be paying down debt and returning significant funds to shareholders, while targeting a 30% increase in our land acquisition and development in 2021, says a lot about our expectations for the earnings power, and the financial strength of this business.
I think it also reflects a more return oriented shareholder-friendly approach toward operating our business.
In fact, I think there is an ongoing maturation of the broader homebuilding industry, in terms of its ability to generate higher returns with reduced risk.
Given changes in the industry's operating and return profile, we believe investors can grow increasingly comfortable about investing in the sector over the entire housing cycle.
With the opportunity for sustained high levels of housing demand, I believe PulteGroup's unique operating strategy has us well positioned to compete, and to continue to grow our business.
Beyond the financial strength that I discussed, I believe that our size and diversity provide important advantages.
For example, a key driver to our order growth in the first quarter was the ongoing recovery in demand among active adult consumers.
A year of being separated from their kids, and grandkids has been more than enough for this buyer group.
With vaccinations now moving into high gear, our active adult buyers are anxious to get on with their lives, including moving into a new Del Webb community.
In conclusion, 2021 has gotten off to an excellent start for our company.
With ongoing strong demand that exceeds available supply, a backlog value of $8.8 billion, and our tremendous financial strength and flexibility, I am excited about what we can accomplish this year.
Jumping right into our operating results.
Home sale revenues in the first quarter increased 17% over last year to $2.6 billion.
The higher revenues for the period reflect the 12% increase in closings to 6,044 homes, coupled with a 4% increase in average sales price to $430,000.
While home closings for the period were up more than 12% over last year, deliveries came in slightly below our guidance with the shortfall resulting primarily from the severe weather in Texas.
4% or $17,000 increase in average sales price realized in the quarter benefited from price increases across all buyer groups, and was led by a 6% increase in ASP for our active adult closings.
The buyer mix of closings in the first quarter was comparable with the prior year, and included 33% from first-time buyers, 43% for move-up buyers, and 24% from active adult buyers.
As Ryan mentioned, our net new orders in the first quarter were up 31% over last year to 9,852 homes.
We experienced strong demand across all geographies and buyer groups, with notable ongoing strength among our active adult buyers.
In the first quarter orders among our first time buyers increased 39% to 3,303 homes, while move-up orders gained 18% to 4,040 homes, and active adult orders increased a robust 49% to 2,509 homes.
49% year-over-year increase in active adult closings reflects the impact of the slowdown in sales in the last two weeks of March last year, but I would highlight that the 2,500 active adult orders this year represent a first quarter high getting back almost 15 years.
I would also point out that buyer demand was consistently stronger during each month of the quarter, even with interest rates increased during the period.
The 31% increase in orders could have been higher, but our divisions continue to actively manage sales in the quarter to match production rates and to help maximize project specific returns.
Along with raising prices in 100% of our community to help cover cost inflation and moderate sales all of our divisions used dropped lot releases to more directly manage sales in some or all of their communities.
For the first quarter, we operated from an average of 837 communities, which is down 4% from last year's average of 873 communities.
The year-over-year decline in community count is consistent with our prior comments and reflects the impact of our decision to slow land spend when the pandemic first hit in March of last year, along with the accelerated close out of communities resulting from the ongoing elevated pace of sales.
Consistent with the overall strength of the market, our cancellation rate in the quarter declined by more than 500 basis points from last year to just 8%.
And we ended the quarter with a backlog of 18,966 homes, which is an increase of 50% over last year.
On a dollar basis, our backlog increased 58% to $8.8 billion.
On a year-over-year basis, we increased the number of homes, we started in the quarter by 25% to 8,364 homes, which helped to raise our total homes under construction by 22% to 14,728 homes.
Of these homes, 1,798 or 12% were spec units, which on a percentage basis is down slightly from the fourth quarter of last year.
Given market conditions, we have continued to work with our trade partners to further increase production and expect to increase overall start to at least 10,000 homes in the second quarter of this year.
This would be an increase of at least 20% over the first quarter of this year.
Based on the stage of construction for the 14,728 homes currently under construction, we expect deliveries in the second quarter to be in the range of 7,400 to 7,700 homes.
At the midpoint, this would be an increase of 27% in deliveries over the second quarter of last year.
Based on the ongoing strength of buyer demand and with almost 19,000 houses in backlog, we are raising our guidance for full year closings to 32,000 homes.
This is an increase of 7% from our prior guide of 30,000 homes and represents a 30% increase in deliveries for the year versus the prior year.
The strong pricing environment has helped to lift the average sales price in our backlog by 5% over last year to $465,000.
Given the backlog ASP and the anticipated mix of deliveries, we expect our average closing price in the second quarter to be in the range of $440,000 to $445,000.
For the full year, we now expect our average closing price to be between $450,000 and $450,000.
Our home sale -- our homebuilding gross margin for the first quarter was 25.5%, which is an increase of 180 basis points over the prior year and a sequential gain of 50 basis points from the fourth quarter of 2020.
The increasing gross margins, which exceeded our prior guidance benefited from the exceptionally strong pricing environment for sold and spec homes and for the mix of homes closed in the period.
In addition to the 4% increase in year-over-year ASP, our gross margins also benefited from lower sales discounts of 2.5% in the quarter, which represents a decrease of 110 basis points for the same period last year.
And a decrease of 50 basis points for the fourth quarter of last year.
As has been well reported material and labor costs continue to move higher being led by lumber prices which now seem to reach new highs every day.
While we now expect our house costs excluding land to be up 6% to 8% for the year, strong demand environment is allowing us to pass through these costs in the form of both higher base sales prices and lower discounts.
Given these cost price dynamics, we expect gross margins to move higher throughout the remainder of 2021.
As a result, we expect to realize sequential gains of approximately 50 basis points in each of the three remaining quarters this year, which would have us in the range of 27% for the fourth quarter of 2021.
In the first quarter, our reported SG&A expense was $272 million or 10.5% of home sale revenues, excluding the $10 million pre-tax insurance benefit recorded in the period, our adjusted SG&A expense was $282 million or 10.9% of home sale revenues.
This compares with prior year SG&A expense for the quarter of $264 million or 11.9% of home sale revenues.
We are adding people to handle our higher construction volumes, but we still expect to realize sequential overhead leverage with the second quarter SG&A expense in the range of 9.9% to 10.3%.
And for the full year, we now expect adjusted SG&A as a percent of homebuilding revenue to be approximately 9.8%.
As Jim noted, we did record a $61 million pre-tax charge in the period related to the cash tender offer for $300 million of our senior notes that we completed in the first quarter.
Turning to Pulte Financial Services, they continue to report outstanding financial results with pre-tax income more than tripling to $66 million, which compares to $20 million in the first quarter of last year.
The large increase in pre-tax income reflects favorable competitive dynamics in the market as well as higher loan production volumes resulting from the growth in our closings and a 150 basis point increase in capture rate to 88%.
Tax expense for the first quarter was $90 million, which represents an effective tax rate of 22.8%.
Our effective tax rate for the quarter was lower than our recent guidance, primarily due to benefits related to equity compensation recorded in the period.
We continue to expect our tax rate to be approximately 23.5% for the balance of the year, including the benefit of energy tax credits we expect to realize this year.
In total for the quarter, we reported net income of $304 million or $1.13 per share.
Our adjusted net income for the period was $343 million or $1.28 per share.
In the first quarter of 2020, the company reported net income of $204 million or $0.74 per share and adjusted net income of $219 million or $0.80 per share.
Turning to the balance sheet, we ended the quarter with $1.6 billion of cash.
On a gross basis, our debt-to-capital ratio at the end of the quarter was 23.3%, down from 29.5% at the end of the year, as we use available cash to pay down $726 million of senior notes in the first quarter.
Our net debt-to-capital ratio was 5.5% at the end of the quarter.
Along with paying down debt during the quarter, we repurchased 3.3 million common shares at a cost of $154 million or an average price of $46.11 per share.
As Ryan mentioned, given the strength of our business and expectations for continued strong cash flows and with our existing repurchase authorization down to approximately $200 million at the end of the quarter, Board of Directors approved an increase of $1 billion to our repurchase authorization.
The return of excess capital to our shareholders remains a priority and as such, we expect to remain a consistent and systematic buyer of our shares.
In the first quarter, we invested $795 million in land acquisition and development, including the lots we've put under control through these investments, we ended the first quarter with approximately 194,000 lots under control, of which 94,000 were owned and 100,000 were controlled through options.
With 51% of our lots now controlled via option, we have surpassed our initial target of 50% owned and 50% optioned and expect that the percentage of option lot can move even higher.
Consistent with our outstanding financial results, I'm pleased to report that earlier this month Standard & Poor's upgraded PulteGroup's debt to investment grade.
This means that our senior notes are now rated investment grade by Standard & Poor's, Moody's, and Fitch.
It's been a long process, but I'm extremely proud of the improvements we've been able to achieve in our credit metrics.
Before opening the call to questions, there are two final topics that I want to quickly review.
First, as one of the nation's largest homebuilding companies, we recognize and accept the important responsibilities we have to continue advancing sound ESG policies.
In today's world, success is judge not just by what we do, but also considers how we do.
As such, along with actively working to improve how we operate, we are advancing our associated environmental, social and governance reporting.
To that end, along with all of our other accomplishments in the first quarter, we launched a new section of our website called Pulte Cares.
In addition to housing information on our efforts to run a sustainable business that supports the communities we serve.
The site also contains our reporting against the Sustainability Accounting Standards Board standards for our industry.
This is the first year reporting against the SASB standards and we look forward to showing our progress in future updates we will be posting to the site.
Finally, I would like to give a big shout out to the entire PulteGroup family for being ranked on the Fortune 100 list of Best Companies to Work For.
Since the founding of our company, we have viewed our culture as a critical and competitive advantage.
The Fortune 100 list is built on an analysis conducted by the Great Place to Work organization, which is based on employee surveys from thousands of companies.
In our case they surveyed 100% of our employees.
To make the Fortune 100 list is an accomplishment, but to make it for the first time when we are operating in a global pandemic is clear and resounding statement about our people, and the culture that they have -- the culture they have built inside of our organization.
I truly cannot be prouder of our company and specifically of our field leaders who do so much to support our people, and help them to be engaged especially during these challenging times.

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q1 adjusted earnings per share $1.28.
q1 earnings per share $1.13.
quarterly net new orders increased 31% to 9,852 homes.
quarter-end backlog increased 50% to 18,966 homes with a value of $8.8 billion.

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