Century Communities Inc (CCS) Q4 2020 Earnings Call Transcript

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Century Communities Inc (CCS -1.60%)
Q4 2020 Earnings Call
Feb 4, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Century Communities Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I would now like to turn the conference over to your host, Hunter Wells, Vice President, Investor Relations.

Hunter Wells -- Vice President of Investor Relations

Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the fourth quarter and full year ended December 31, 2020. 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 on 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.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thank you, Hunter, and good afternoon, everyone. We're pleased to report that in 2020, we achieved multiple milestones, including our 18th consecutive year of profitability, $3.2 billion in total revenues, a 25% increase; to 10,822 net new contracts, a 38% increase; and 9,453 home deliveries, an 18% increase.

These results again demonstrate our ability to achieve consistent double-digit revenue and delivery growth, reflecting the power of our business model and the appeal of our geographically diverse footprint as we deliver new homes across the country's most active housing markets. In the fourth quarter, we generated record home sales revenues of nearly $950 million, a 22% increase, while increasing home deliveries by 14% to a company record 2,826 homes.

During the quarter, we also increased our net new contracts by 45% to a fourth quarter record of 2,566 homes. Our sales pace accelerated through the end of 2020 and into the beginning of 2021, with net new contracts for December increasing 54% and January increasing 77%, reflecting not only the resiliency of demand but our ongoing sales momentum into 2021. We also made significant progress in growing our backlog, ending the year with 3,439 sold homes with a value of nearly $1.3 billion.

More importantly, we drove significant profitability expansion, achieving our highest pre-tax income for both the fourth quarter and full year and more than twice the prior year periods. Net income for the quarter and year also increased 72% and 82%, respectively, to $92 million and $206 million. Our cash flows continued to increase in the fourth quarter as reflected by an 87% increase in EBITDA to a company record $145 million.

Our net homebuilding debt to net capital ratio also improved to 27.2%, down 1,800 basis points from 45.2% in the fourth quarter last year and a 570 basis point sequential improvement compared to 32.9% at the end of the third quarter. We also achieved gross margin and SG&A leverage expansion. Adjusted homebuilding gross margin percentage increased sequentially 300 basis points to 23%, primarily due to improved home price appreciation across our markets as well as a reduced reliance on incentives.

SG&A as a percent of home sales declined 80 basis points to 10.1%, the lowest in our history. This was down from 10.9% in the fourth quarter of last year and a sequential improvement of 120 basis points from the third quarter. In 2021, we expect to see continued margin and leverage improvement as we realize further operational efficiencies across our organization.

Since going public in 2014, we've successfully expanded and diversified our footprint primarily through acquisitions, while transforming our competitive positioning to become one of the largest homebuilders in the country. We've invested deeply into our platform to advance, synergize and better position Century to thrive, not only in the current environment, but future housing cycles as well.

Over the last two years, our focus on completing the integration of our past acquisitions, improving the visibility into all aspects of our business and generating efficiencies from our growing scale and national platform have resulted in increased returns on equity. We believe that over the course of the next few years, we can further improve upon this achievement. In early 2020, we took prudent actions to strengthen our balance sheet by reducing expenditures, increasing liquidity and accelerating asset turns in order to provide us with maximum flexibility to manage our organization and capitalize on opportunities as they arise.

We are better situated than ever before to expand our scale and scope, accelerate growth and generate expanded profitability. Before the full effects of the pandemic were felt last year, housing demand was solid and picking up pace. At that time, there were already multiple demand drivers and industry tailwinds at play. We believe these trends are real and have considerable staying power. The primary factor is, and continues to be, record low interest rates.

In January, the Federal Reserve reiterated its expectation to maintain low rates, while the Mortgage Bankers Association recently echoed a similar conviction. Recently, U.S. mortgage rates even hit a 30-year low of 2.65% compared to 3.64% one year ago. Additionally, there exists a severe housing shortage across the U.S. at all price points. This trend continues to intensify. Across the majority of Century's markets, the estimated months of supply decreased on average by approximately 30% from the third quarter to the fourth, reflecting an average supply of 1.2 months and well below the national average of 2.3 months.

In terms of demographics, the U.S. population of millennials represents a key home buying group that is expected to grow incrementally over the next decade. An increasing number of baby boomers are also entering retirement, taking advantage of recent gains in home price appreciation and either downsizing or refinancing their homes, both of which provide additional investable dollars to help grow the overall economy.

Looking ahead to 2021, we are emboldened by these supportive tailwinds, which will not only propel incremental housing demand, but help spur our expanded home price appreciation. We continue to raise prices across all of Century's markets throughout the fourth quarter and into January. We believe low mortgage rates, increased personal savings and improved buyer credit profiles will allow us to increase price while maintaining affordability for buyers.

Across our entire product portfolio, we are strongly positioned within the attractive, affordable new home category with nearly 80% of our 2020 deliveries qualifying for FHA loans. The FHA recently increased their floor and ceiling loan limits by approximately 7%, helping expand our pool of potential buyers, support our strategy to attract first-time and move-up homebuyers and drive accelerated growth for Century Complete. Over the past several years, we have built a strong foundation to solidly propel Century to even greater success.

Our goal is to deliver our customers' high-quality beautiful homes at affordable prices while creating long-term shareholder value. Our national footprint, robust systems and talented employee base competitively position us to grow our presence in existing markets as well as future ones. We were recently named one of Fortune's 100 fastest-growing company and one of America's most trusted homebuilders, outperforming nearly all of our peers. For this honor as well as our success, we thank our exceptional team of 1,400 employees that share our drive, our passion and our customer-first philosophy.

I'll now turn the call over to Rob to discuss our business in more detail.

Robert J. Francescon -- Co-Chief Executive Officer and President

Thank you, Dale, and good afternoon, everyone. Given the strength in market conditions and to support our future growth expectations, we have devoted considerable energy to expanding our land pipeline and more deeply penetrating local markets. We expect significant future growth to come from our existing markets, and we are heavily focused on growing our local market share.

As part of executing on this growth plan, we grew our year-over-year landholdings by 26%, ending the year with nearly 50,000 owned and controlled lots. In the fourth quarter alone, we added nearly 8,000 gross lots and over 5,000 lots net of home closings. In keeping with our land-light operating strategy, our mix of controlled lots versus owned improved to 58% compared to 52% at the end of 2019. We continue to be disciplined in our land and lot acquisition strategy and still do not include home price appreciation into our underwriting assumptions.

Last month, we announced our organic expansion into the Phoenix Metro area with our Century Communities brand. Previously, only our Century Complete brand had a presence in Phoenix. Near term, we plan to break ground across multiple planned communities consisting of over 1,700 home sites, which will be dedicated to our legacy brand. This extension further diversifies Century's offerings in this attractive, high-potential market where new home demand is at an all-time high. In 2020, Phoenix was a top 10 U.S. city for inbound growth.

We're excited to fully enter the Phoenix Metro area and expect to begin delivering homes under the Century Communities brand in the third quarter of 2021. Arizona will now be the fifth state in addition to Texas, Georgia, North Carolina and South Carolina, where both our brands have a presence. Because this 2-brand strategy enables Century to have a bigger presence within a market, we can more efficiently buy land as a single large deal can provide lots for both our Century Communities and Century Complete brands.

Additionally, given we already have personnel in place with local market expertise, we have immediate access to land opportunities and can rapidly scale and turn our invested capital more quickly. Across our footprint, we see additional opportunities for organic expansion by adding a second brand to help further our growth within existing markets. Another aspect of our operating strategy is the preference for building move-in ready over built-to-order homes. In the fourth quarter, 83% of our total deliveries were built on spec.

We see several advantages in building spec homes, particularly in a high-demand environment, such as what we are experiencing today. The construction process is typically faster, more efficient and less prone to closing delays. Typically, we can also obtain better trade pricing due to this even flow approach. And the time frame between sale and delivery can be materially shortened, allowing us to more appropriately price the house and maximize our margin potential.

Across our two brands, we have a high concentration in the attractive entry-level segment with approximately 80% of our total deliveries representing entry-level buyers. Additionally, of the 9,453 homes we delivered over the past 12 months, 88% of those were sold at less than $500,000. Even with this focus on delivering homes at the lower price points within a particular market, we sell to many move-up homebuyers and view this as an opportunity to further expand our business. Given the increasing number of millennial and other buyers, we expect this trend to further drive new home demand at all price points.

Over the past year, we have all witnessed a move to a more virtual world. In keeping with this trend, we've continued to evaluate new opportunities and implement new tools to improve the customer experience for our homebuyers. Not only did Century's total web traffic increased 60% compared to the prior year, but our team has embraced this as an opportunity to demonstrate the meaningful potential of online home buying. We recently launched a new website to better highlight and further simplify our online home buying process.

A key component of this redesign was to improve the functionality of the mobile experience of our site as many prospective buyers now begin their home purchase journey from their smartphone. Our new mobile-friendly site brings our two brands under one domain, allowing homebuyers to search for either brand in prime locations throughout the United States. We've also made it easier to get prequalified in minutes for a loan or to secure a home online with a click of a Buy Now button.

We believe our investments into digital tools and capabilities, mobile-friendly applications and a more simplified online experience will be reflected in our ongoing success in 2021 and beyond. Our history of strong, profitable and consistent performance is compelling evidence that our business model, operating strategy, strategic investments and efficiency initiatives are working.

Looking ahead, we expect market conditions to remain favorable into the spring selling season and throughout the balance of the year, enabling us to further grow our business, strengthen our competitive positioning and in turn, drive increased returns and long-term growth for our shareholders.

I will now turn the call over to Dave to discuss our financial results in more detail.

David L. Messenger -- Chief Financial Officer

Thank you, Rob. During the fourth quarter of 2020, net income increased 72% to a record $91.8 million or $2.72 per diluted share compared to $53.4 million and $1.63 in the prior year quarter. Full year net income increased 82% to $206.2 million with earnings per diluted share rising to $6.13, compared with $113 million and $3.62 in the prior year.

Fourth quarter pre-tax income was $121.2 million, an increase of 125% and a fourth quarter record, while pre-tax income for the full year increased 104% to $270.2 million, the highest in the company's history. Home sales revenues for the fourth quarter increased to $946.8 million, an increase of 22% compared to $775.7 million in the prior year quarter. Total revenues increased 25% to a record $987.8 million. This improvement in revenues propelled by a 14% increase in deliveries to a record of 2,826 homes.

In the fourth quarter, net new contracts across our divisions were up 45% to 2,566 homes, a fourth quarter record with our Mountain region outpacing all other divisions and demonstrating the substantial broad-based demand we are currently witnessing. We improved our year-end backlog 66% to 3,439 homes valued at $1.3 billion. In the past, within our Century Complete brand, while some homes will be built on lots within communities similar to our legacy brands, a number of homes would also be built outside of communities on scattered lots.

However, as the brand has matured, entered new markets and expanded its land pipeline, we've significantly reduced our reliance on scattered lots and increasingly build the majority of homes in traditional subdivisions or in pods clustered together, which function more like a traditional community. As such, beginning this quarter, we will provide a community count number for the Century Complete brand. In 2020, our total community count was 198 communities, of which 102 communities were part of the Century Complete brand. This was down from 212 communities in the prior year.

This decrease was an expected consequence of us selling through more communities than we opened as we aggressively work to meet accelerated demand as well as our pause on land acquisition and development for a period of time in the beginning of the second quarter given the uncertainty we were experiencing at the time. Our team has been intently focused on building our land pipeline, and in the coming year, planned to open a variety of communities across all of our markets.

Looking ahead, we expect to end 2021 with total community count increasing potentially as high as 10%. Adjusted homebuilding gross margin percentage was 23% compared to 21% in the prior year quarter. On a sequential basis, adjusted homebuilding gross margin percentage improved 300 basis points from the previous third quarter. Homebuilding gross margin improved 20.8% compared to 18.2% for the same period last year and 17.5% in the third quarter of 2020.

We expect to continue to see year-over-year improvement as a result of our division's increasing price and reducing reliance on incentives in order to offset material and labor cost increases. In fact, beginning in June of last year, we experienced incremental margin improvement on newly sold homes and each month throughout the balance of the year, a trend which has continued into January of this year. SG&A, as a percent of home sales revenues, improved 80 basis points to 10.1% in the fourth quarter compared to 10.9% in the prior year. This was a result of our past and continued efforts to contain costs and improve the operating leverage of our company.

In the fourth quarter of 2020, our financial services business generated $35.8 million in revenues compared to $14.5 million in the fourth quarter of 2019. The business contributed $17.8 million in pre-tax income compared to $4.7 million in the prior year quarter. Our fourth quarter results were primarily due to a larger number of loan originations and increased spread on loans sold. The increase in loan originations resulted from both growth in our homebuilding business and a continued increase in our capture rate across the platform.

We believe our financial services and homebuilding businesses are well positioned to benefit from the low interest rate environment and demand trends being seen at all price points. In 2020, the strategic action we took to strengthen our balance sheet resulted in an improvement of our net homebuilding debt to net capital ratio of 27.2%, down significantly from 45.2% in the prior year quarter. We improved our cash flows, ending the fourth quarter with approximately $417 million of cash and total liquidity of $1.1 billion, which includes our availability under our undrawn $640 million unsecured revolving credit facility.

In the fourth quarter, our tax rate was 24% compared to 1.1% in the same quarter of the prior year and up slightly from 23.3% in the third quarter of 2020. In the fourth quarter of 2019, Century's tax rate benefited to the retroactive reinstatement of energy-efficient home credits for the full years of 2019, 2018 and 2017. We are very pleased with our strong results for the fourth quarter and full year 2020 and remain encouraged by the strength and health of the housing market.

With the combination of our recent performance, coupled with the favorable demand tailwinds and our proven ability to execute, gives us confidence our positive momentum will continue. Accordingly, we are introducing 2021 guidance of deliveries to be in the range of 10,500 to 11,500 homes and home sales revenues to be in the range of $3.3 billion to $3.8 billion. We look forward to delivering another year of exceptional performance as we strengthen our business, scale our organization, accelerate growth and deliver outsized returns to our shareholders.

With that, I'll open the line for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] First question is from Michael V. Hart of JP Morgan. Please go ahead.

Michael V. Hart -- JP Morgan -- Analyst

Thanks. Good afternoon, everyone, and congrats on all the results. Very, very encouraging. First, I wanted to just clarify a year around demand. You said that you were at a slow pace, but now I think you're saying orders growth was in December of 54%, January at 77%. So just want to make sure that we understood that correctly, that they are referring to actual order growth. And that you're indeed also referring to an improved sales pace sequentially as well during this month.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Yes. Hi, Mike. It's Dale. Yes, you heard the numbers correctly. That's the year-over-year improvement. And we did see incremental sales base, in addition to just the year-over-year improvement. When we look back on it, we really didn't see a slowdown at the end of the year that is pretty typical. And oftentimes, at the very beginning of the year, it takes a while to get going, we didn't experience that either. So we just -- we sold completely through the holidays, and it just continued on after the New Year.

Michael V. Hart -- JP Morgan -- Analyst

Got it. Thanks. To shift a little bit, the gross margins, obviously a tremendous results in the fourth quarter, kind of a step function change. I believe he talked about expecting continued improvement in '21 over '20. And I was hoping to get a little bit of sense of how you should think about gross margins into the first and second quarters of the year.

I believe you have mentioned that in your backlog, every month, over the past six months, you're seeing improved margins in your backlog. So is this 23%, is kind of a new bar for the company. Is it something that you can kind of hold on to in the first or second quarters? How should we think about it directionally as we head into '21?

Dale Francescon -- Co-Chief Executive Officer and Chairman

I think it will, we'll definitely do as much as we can to hold on to and as we've been pushing, we've been able to increase our ASP. Across the portfolio, we're also dealing with a lot of the cost factors that everybody's reading about in the industry. But as we look at our margins 20.8% in Q4, on a GAAP basis 23 on an adjusted basis, I think that Q1, Q2, being in that '20 to '21 range on a GAAP basis for margins. It should be expected.

Michael V. Hart -- JP Morgan -- Analyst

Great. Thanks very much.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thanks, Mike. Thanks.

Operator

The next question is from Jack McCannco of SIG. Please go ahead.

Jack McCannco -- SIG -- Analyst

All right. Good afternoon, I want to talk a little bit about the Community Council growth for next year. You -- talk to a potential upon one, how does that look through the year? It looks like he kind of pulled forward some demand later. It's gonna be more back and weighted? And then can you continue to leverage the GMA, as you open these communities, sort of based on the cadence?

David L. Messenger -- Chief Financial Officer

Hey, Jack. It's Dave. I would say that as we look at our community calculus, it is gonna be more back end weighted toward Q3 and Q4, you look at last year took a pretty heavy pause, and it brought to a stop all land buying and CenturyComplete. So now that lots of we have under control, they're going back to the acquisition cycle.

We'll bring those on the later part of this year. On essential community size, we've had such great sales pace, we've been selling through our communities faster than originally expected, and dealing with land development just like everyone else. We expect to be bringing more communities online.

So I think you'd probably see community count dip in the first half of the year, but we bring it back, being back in waves in Q3 and Q4. And I saw the GA, we've continued to make progress over the last several years, doing a bit better every year than the year before. And I would think that as we look at each of the quarters, as you're looking at 2021, we would expect to continue seeing improvements on the GMA line.

Hunter Wells -- Vice President of Investor Relations

Okay, great. And then on the mix, breaking out the two business lines by community, is it going to be a comparable sort of 50-50 as you see it for 2021 as well? Or is it going to be more replenishment of some of the legacy brands versus Complete?

David L. Messenger -- Chief Financial Officer

Are you referring to the community account?

Jack McCannco -- SIG -- Analyst

Yes. The community mix, basically.

David L. Messenger -- Chief Financial Officer

Yes. Okay. So I think that depends really on how land development goes, depending on how much the Century Communities brand we bring online and how much we continue to sell through. Like, we've been saying that we expect the Century Complete brand to be growing. So you're probably gonna be a little bit more weighted toward Century Complete than you would be Century communities.

Jack McCannco -- SIG -- Analyst

Okay. If I could -- 80% first time buyer, I think you should 80% with a qualified price point for FHA. I heard that right. Have you done a stress test? Have you done a stress test about affordability? You know, things are great, everybody's pushing the price, they're getting it. But that's for Q2, Q3 in 2018, kind of sitto the back of your mind.

And just curious if there's, if you've done any sensitivity work around these entry level buyers, and how much of an updraft? Could they potentially absorb on rates if the tenure moves higher? Thanks.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Yeah, we definitely have all of our divisions in us here at the corporate office, looking at what we can be doing on our ISP versus what affordability and the subsequent loans are for the buyers. And we keep that in mind, and especially in our Century Complete brand as we're dealing with a lower priced house on a different credit profile for the buyers. We were right cognizant of it. So we ran a variety of stress tests internally, and we price our homes against those.

Jack McCannco -- SIG -- Analyst

Thank you.

Operator

The next question is from Alan Ratner from Zelman and Associates. Please go ahead.

Alan Ratner -- Zelman and Associates -- Analyst

Hey, guys, good afternoon. Congrats on the great year, and especially the great fourth quarter. Yes, I guess, first question, would love to dig in a little bit more on the land underwriting and I know you made the comment about not assuming price appreciation on the land deals. Yet the same time I'm looking at your lot count, it's pretty striking that, you know, roughly 50% of your lots you've been tied up over the last 12 months.

So clearly, there's going to be some mixed dynamic as these communities come online. And, you know, I'm curious when you think about, gross margin, for example, you're at 23% today, what's the underwriting threshold? I don't know if it's gross margin or returns. But how do you think about gross margin on new land deals that you're tying up? And how does that compare to what you're delivering today?

Dale Francescon -- Co-Chief Executive Officer and Chairman

So we're looking at similar gross margins. But Alan, it depends on the risk profile of the particular land. You know, if we're buying finished lots on a just in time basis, we would take a lower margin versus a development deal that has additional risk and an elongated timeframe. But as we look at it, we're not only looking at gross margin, we're looking at various other returns that have to meet our internal thresholds. But we're not looking at anything, generally speaking lower than where we are right now on a margin basis.

Alan Ratner -- Zelman and Associates -- Analyst

And that's specifically on the fourth quarter level, I just want to be clear, because obviously, it ramped tremendously for the year, where are you from?

David L. Messenger -- Chief Financial Officer

We're on now, and it really depends on the mix, on what's coming through the pipeline. So as an example, if we had a lot of finished lots coming through the pipeline, then it would be a lower margin. You know, generally speaking, I'm saying more on a consolidated if everything was kind of coming through on the same amounts.

Alan Ratner -- Zelman and Associates -- Analyst

Got it. Okay, that's helpful. And then on the closing growth guidance, you know, obviously, I don't think anybody's expecting you to keep up the growth rates you've been running at, especially as you get up against some tougher comparisons.

But you admittedly, I would have thought it might have been a touch stronger than that based on where your backlog is, and certainly based on where January started off, so is that a function of the comps getting tougher in the back half of the year? Or are you getting to a point maybe where, you're having to intentionally slow the sales pace to keep the production machine running efficiently, and not gap out even more on communities?

David L. Messenger -- Chief Financial Officer

I think it's a combination of a couple things that -- when you look at our backlog, conversion rates, I'm expecting some of those will get compressed over the next couple quarters as we're dealing with elongated cycle times, different supply chain issues. So I think that that's going to be one component, and then it's going to be a matter of when we bring some of those communities online in Q3 and Q4. Like I spoke about earlier today, a combination of those will really depend on how much we can grow our closings.

Alan Ratner -- Zelman and Associates -- Analyst

Okay, great. And if I miss it, did you give a first quarter closing guidance number? Any chance?

David L. Messenger -- Chief Financial Officer

No, I didn't.

Alan Ratner -- Zelman and Associates -- Analyst

Any chance you can hold your hand a bit on that one, just given the range that we're dealing with?

David L. Messenger -- Chief Financial Officer

I think that -- is you're looking at prior years you're looking at last year. And to my point about backlog conversion coming down. We started with, you know, a conversion rate from last year, and adjusted accordingly, for what we're seeing in the industry and supply chain and cycle time taking longer and bring that down a little bit. That's probably gonna get you in a decent range.

Alan Ratner -- Zelman and Associates -- Analyst

Okay, that's helpful. Thanks, guys. Good luck.

Operator

The next question is from Alex Rygiel of B. Riley. Please go ahead.

Alex Rygiel -- B. Riley -- Analyst

Thank you. Great years, gentlemen.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thanks, Alex.

Alex Rygiel -- B. Riley -- Analyst

Can you expand upon your comment about the potential to expand into the move up market? Some more color on that.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Yes, I'm happy to. It's always been a component of our business. And we're, in no way suggesting that we're moving away from our entry level focus, but we see opportunity to continue to add move up product to the mix. As we've said, when we look at what we've been delivering, it's about 80%, focused on the entry level buyer, which means 20% or so is move up. And so, but those are opportunities where you continue to look for when we look at our heavy concentration on entry level, adding some additional move up is just incremental business for us.

Alex Rygiel -- B. Riley -- Analyst

Have you started to shift in that inventory already? For that plan?

Dale Francescon -- Co-Chief Executive Officer and Chairman

Now, I wouldn't really call it it's just, it's really more opportunistic. We just look at it. We're open to those kind of opportunities. And we're not limiting ourselves to strictly doing entry level product nor have we ever done so.

Alex Rygiel -- B. Riley -- Analyst

We were expecting average selling prices to sort of drift down as the Century Complete product category got larger as a percentage of total? Should we maybe alter that view and start to think that maybe average selling prices are going to drift higher over the coming years?

Dale Francescon -- Co-Chief Executive Officer and Chairman

Yes, I wouldn't expect that. I think what you're seeing happened this quarter, for example, is really a reflection of the pause that we took on land acquisition and starts on Century Complete. We took it on the entire business, but it really impacts the Century Complete business because we do not release a house for sale, it has already started. So we ended up with a gap there. And so I think that's just a really more of a matter of circumstances, we would still expect that our average ASP will come down.

Alex Rygiel -- B. Riley -- Analyst

One last question on the elephant in the room has always been sort of the leverage that you've carried on the balance sheet, keep that down below 30% congratulations on that. What's your new sort of normal operating range for leverage on your balance sheet?

Dale Francescon -- Co-Chief Executive Officer and Chairman

I think right now we're demonstrating that we've been able to make some very significant strides and bringing that down from north of 45 and in 2019, North of 50, to not today we're at 27. I think that you have continued to see us operate somewhere in this range that we've got cash on the balance sheet and undrawn revolver. And we've got the ability to fund growth and expansion plans we have from free cash flow and our balance sheet. And so leverage will just tick tick up in around you as we continue to fund our business.

Alex Rygiel -- B. Riley -- Analyst

That's great, thank you.

Operator

The next question is from Alex Barron from Housing Research Center. Please go ahead.

Alex Barron -- Housing Research Center -- Analyst

Hey, guys, thanks and great job.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thanks, Alex.

Alex Barron -- Housing Research Center -- Analyst

So I heard you say that you're expanding the into Phoenix with the Century Complete brand on the Century brands. I was curious whether you guys have any other expansion plans, either in Century Complete or the regular Century brands into markets?

Dale Francescon -- Co-Chief Executive Officer and Chairman

Well, we've talked for a year or so that we'd like to get the Century brand, the Legacy brand in Florida. And so as we talked, we have five markets, we're paired up both brands right now. And Florida would be a natural Century Complete, is about Florida and growing quite substantially, we're hoping in the future with new penetration in the north part of Florida. And so to have the legacy brand go into Florida would be a nice addition. And so that would kind of be the first one I think we'd be looking at.

Alex Barron -- Housing Research Center -- Analyst

Okay, that sounds great. I also wanted to ask, I mean, it doesn't sound like it. But are you guys doing anything to intentionally try to slow down the business? Or are you just taking as many orders as people? Come your way, I guess what I'm getting at is, is there any limitations to your production capacity that would cause you to try to slow down the business at this point?

Dale Francescon -- Co-Chief Executive Officer and Chairman

Now, we've got production challenges, like all the other home builders do, but no, we've not intentionally metered the production down. It is -- we really -- because most of our scouts are on a spec basis, we try to, we try to put about an even flow basis, so that, we don't create gaps, either in terms of inventory, or on expectations that we have for our trade partner. But, you know, so far we've been able to manage price and pace, and neither one has really been a hindrance.

Alex Barron -- Housing Research Center -- Analyst

Okay, and would it be possible to know roughly how many homes you guys are starting a month or per quarter?

Dale Francescon -- Co-Chief Executive Officer and Chairman

As we look at it, in the back half of 2020, we're doing anywhere from 700,000 to 900,000, a month that we're doing. So somewhere in that range. It varies by month but there's where the round numbers. Right now, I believe we've got more under construction between spec and backlog homesthan we did this time last year. I told 31. And so we feel good about what our production capabilities are, while may take a little bit longer, but we are continuing to embrace sales on board and we're continuing to build homes.

Alex Barron -- Housing Research Center -- Analyst

Okay, well, great. Look forward to your success this year. Thanks.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thank you.

Operator

The next question is from Jay McCanless of Wedbush, please go ahead.

Jay McCanless -- Wedbush -- Analyst

Good afternoon. Good quarter, everyone. the cancellation rate, what was it this year versus last year?

Dale Francescon -- Co-Chief Executive Officer and Chairman

Second here, I'll get that to you offline. I'll get that to you after the call.

Jay McCanless -- Wedbush -- Analyst

Okay, thanks. And then I guess, last quarter, pretty significant increase in lots and it was pretty well dispersed among the regions that you acquired this quarter. Was there any geographic focus or product focus on them? Or was it pretty evenly balanced like we saw in the third quarter?

Dale Francescon -- Co-Chief Executive Officer and Chairman

It was evenly balanced. And as you pointed out, year-over-year, each region grow from the end of 19th, at the end of 20. And it was evenly balanced. Obviously, primarily, entry level type product, but lots for product of entry level, but it was fairly. Okay.

David L. Messenger -- Chief Financial Officer

And so that mix of lots going on in '21 is going to start to move the ASP probably closer back to what, something we saw, like the end of 2019, or maybe splitting the difference between the end of '19 and '20.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Well, yes, but there's been price appreciation in the market too, Jay. Everybody's aware of it, so the fourth quarter might be a high mark, in terms of ASP and seeing that come down. And, you know, again, predominantly entry level. I don't think it's gonna be back at the '19 numbers, though.

Jay McCanless -- Wedbush -- Analyst

Got it. Okay. Thanks.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thanks, Jay.

Operator

We've reached the end of the question and answer session and now the next turn the call back over to Dale Francescon for closing comments.

Dale Francescon -- Co-Chief Executive Officer and Chairman

Thank you, operator. Our impressive performance is compelling evidence of the power of our business model, as well as the strength of our entire team and our ability to overcome the unprecedented challenges of the past year. We would like to thank each and every one of our employees for their continued dedication to Century. We couldn't have done it without you.

What we are mostly proud of, we're even more excited for what lies ahead. We are in 2021 with a great sense of opportunity and looking into the future, remain confident in our ability to build on our success and achieve a long term vision. Thank you for your time today. We appreciate your continued support and investment. And look forward to speaking to you again next quarter. [Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Hunter Wells -- Vice President of Investor Relations

Dale Francescon -- Co-Chief Executive Officer and Chairman

Robert J. Francescon -- Co-Chief Executive Officer and President

David L. Messenger -- Chief Financial Officer

Michael V. Hart -- JP Morgan -- Analyst

Jack McCannco -- SIG -- Analyst

Alan Ratner -- Zelman and Associates -- Analyst

Alex Rygiel -- B. Riley -- Analyst

Alex Barron -- Housing Research Center -- Analyst

Jay McCanless -- Wedbush -- Analyst

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