Century Communities, Inc. (NYSE:CCS) Q2 2023 Earnings Call Transcript

Century Communities, Inc. (NYSE:CCS) Q2 2023 Earnings Call Transcript July 26, 2023

Century Communities, Inc. beats earnings expectations. Reported EPS is $4.78, expectations were $0.97.

Operator: Greetings. Welcome to Century Communities’ Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I will now like to turn the conference over to Tyler Langton, Senior Vice President of Investor Relations for Century Communities. Thank you. You may begin.

Tyler Langton: Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the second quarter 2023. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management’s current expectations 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 in the heading Risk Factors in the company’s latest 10-K, as supplemented by our latest 10-Q and other SEC filings. We undertake no duty to update our forward-looking statements.

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. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer and President; and David Messenger, Chief Financial Officer. Following today’s prepared remarks, we’ll open-up line for questions. With that, I’ll turn the call over to Dale.

A – Dale Francescon: Thank you, Tyler and good afternoon everyone. In the second quarter, we experienced strong sequential gains across our business, including substantial increases in net orders, deliveries, starts, and gross margins. We generated $69 million in pretax income, $51 million in net income, diluted earnings per share of $1.60, and $80 million of EBITDA. Strong underlying demand for affordably priced homes, a scarcity of existing homes on the market, and consumers adjusting to higher interest rates are all contributing to and increasing new home sales. Our net new contracts in the second quarter totaled 2,317 homes, a 15% improvement over first quarter 2023, and a 4% increase over a year ago levels. Net new contracts were especially strong in our Century Complete business, increasing 40% sequentially and 16% on a year-over-year basis in the second quarter.

Century Complete had an average sales price of $257,000 in the quarter, and we are seeing strong demand for affordable, entry-level homes across both our brands. This lower-priced segment of the market is benefiting from favorable demographics and has the widest range of potential buyers. As a reminder, the Century Complete portion of our business only purchases finished lots on a just-in-time basis, which helps to drive above-average returns for this segment. Consistent with the past several quarters, we are continuing to concentrate our sales efforts on homes with near-term completions as it allows our buyers certainty in their interest rates. Our quarter end backlog consisted of 2,002 sold homes valued at $750 million and we are not focused at this point on building up a significant sold backlog of later-term deliveries.

Our cancellation rate was 14% in the second quarter, an improvement versus our 18% rate in the first quarter of 2023, and a significant reduction from the 37% rate we saw in the fourth quarter of 2022 as buyers are adjusting to the higher interest rate environment. Our strategy of selling homes later in the construction cycle is another factor in driving this lower cancellation rate. For comparison purposes, our cancellation rate was typically in the low to mid-20% range in the years prior to COVID. Our cadence of orders was relatively consistent throughout the quarter. As we commented on our earnings call last quarter in terms of sales patterns, we expect more typical seasonality to return this year, resulting in sales slowing during the summer months and then picking up in the fall.

In the second quarter, we delivered 2,235 homes. Our second quarter deliveries increased 17% sequentially and exceeded the guidance we provided last quarter. These better than expected deliveries were the result of moving up homes due to improving cycle-times that were originally expected to complete in the third quarter. Since the beginning of the year, we have been increasing our starts given the improvement in our sales activity and margins on these newly started homes. In the first quarter of 2023, we started 2,354 homes, which further increased to 3,041 homes in the second quarter. To put these starts into perspective, the number of homes we started in the first half of 2023 were twice the number we started in the second half of 2022, and as a result, we continue to expect to see higher deliveries in the second half of this year as compared to the first half.

Revenues from home sales were $818 million in the second quarter. Our average sales price on deliveries decreased by 12% on a year-over-year basis to $366,000, reflecting our strategy of properly incentivizing homes with near-term deliveries, building more affordably priced homes, and more closings coming from some of our lower-priced regions. In the second quarter, the average sales price on our backlog equaled $375,000, and we expect our average selling price to increase in the second half of this year over second quarter levels as we continue to reduce incentives and selectively increase base prices. I also want to highlight that we released our 2023 ESG report last week. In this report, we published our greenhouse gas emissions inventory for the years 2019 through 2022 and provided details on our significant accomplishments over the past two years since our inaugural ESG report in 2021.

As we detailed in the report, we are committed to providing our team members with the ongoing training and development so that we can continuously raise the bar for the home buying experience and want to thank all of our employees for their hard work and dedication to our valued customers. With the first half of the year behind us, we are on track to grow our business and increase our margins and returns in the second half of this year. Buyers are currently looking for affordably priced homes with near-term completions and we are well positioned to meet this demand. We have continued to increase our starts given our confidence that the homes we are starting now will carry higher margins and returns. As a result, not only do we expect our deliveries in the second half to exceed first half levels, but our gross margins should continue to improve sequentially due to lower direct costs, improved cycle-times, and reduced level of incentives.

I’ll now turn the call over to Rob to discuss our business and plans going forward in more detail.

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Rob Francescon: Thank you, Dale and good afternoon everyone. We have a strong presence and concentrated focus within the affordable new home category with approximately 93% of second quarter deliveries coming from homes priced below FHA limits, allowing us to target the widest range of potential buyers in any given market. Additionally, roughly 99% of our home deliveries this quarter were from spec builds, which allows our buyers to purchase quick move-in homes and lock in their mortgage rates for certainty of financing. We are continuing to see improvements in our cycle-times due to easing of supply chain issues and trade shortages and expect the cycle-times of homes that started in the second quarter of 2023 to begin to approximate a more normalized four to six-month timeframe.

In the second quarter of 2023, the direct construction costs on our starts remained static with the prior quarter, which had declined by roughly 11%, an average of approximately $20,000 per home versus the high water mark in the second quarter of 2022. These savings will flow through to our earnings and benefit margins in the second half, as we begin to deliver more of these lower-cost homes. Recently, we have experienced increases in lumber costs and could potentially see increases in certain other categories, as the new home market continues to rebound. In the second quarter, we generated adjusted gross margins of 21%, a 140 basis point improvement over first quarter 2023 margins of 19.6%. Our gross margins in the second quarter were ahead of our expectations for them to be roughly flat on a sequential basis.

The primary drivers behind the better than expected results were lower incentives, as well as solid performance on costs and cycle-times. The homes that we have been starting over the past several months are carrying a higher margin profile due to improvements in direct construction costs, reduced incentives, and shorter cycle-times. As a result, as Dale mentioned, we continue to expect our homebuilding gross margins to trend positively on a sequential basis in both the third and fourth quarters and our second half deliveries to exceed first half levels. Given solid demand in the market, we have been able to reduce the amount of incentives that we have been offering, while still maintaining a healthy sales pace. Incentives averaged 900 basis points on closed homes in the second quarter of 2023, which was down roughly 100 basis points on a quarter-over-quarter basis.

Our incentives on closed homes will continue to decline as incentives on new orders in the second quarter decreased sequentially throughout the quarter, reaching approximately 600 basis points for June sales. The remaining incentives offered are largely related to interest rate buy downs. Now, turning to land, we ended the second quarter with approximately 58,000 owned and controlled lots, a 12% increase over first quarter 2023 levels, as we began to expand our land acquisition efforts. This higher lot count was driven by an increase in our controlled lots to 27,000, with controlled lots as a percentage of total lots increasing to 46% in the second quarter versus 39% in the first quarter 2023. Our 31,000 owned lots in the second quarter was roughly similar with the last six quarters and provide approximately three years of deliveries based on the prior year volumes.

We would expect our controlled lot count to increase further over the balance of the year, as we continue to invest in land to support our future growth. In the second quarter, our community count of 233 increased by 10% from year-ago levels of 213 and was basically flat with first quarter 2023 levels. Our community count saw the greatest year-over-year increases in Texas and the Southeast, two markets that have been performing well given their relative affordability, strong employment, and population growth. We continue to expect our year-end 2023 community count to be in the range of 250 to 260 communities, representing strong year-over-year growth of 20% to 25%. We will achieve these levels by opening over 90 communities and closing out approximately 70 communities in the second half of the year.

We view this new number of communities as a new base that we will look to further grow in the years ahead, as we focus on increasing our share across our national footprint. We are pleased with our performance this quarter. Our sales activity remained at healthy levels given the strong demand for affordably priced homes at limited supply of existing homes for sale, and we expect to see the positive momentum experienced in the second quarter to continue into the second half of this year. I’ll now turn the call over to Dave to discuss our financial results and increased guidance in more detail.

Dave Messenger: Thank you, Rob. During the second quarter of 2023, pretax income was $68.7 million, and net income was $51.4 million, or $1.60 per diluted share. EBITDA for the quarter was $80.1 million. We also posted strong sequential gains in net orders, starts, deliveries, and gross margins. Home sales revenues for the second quarter were $818.4 million, compared to $1.1 billion in the prior year quarter and $735.6 million in the first quarter 2023. Home deliveries of 2,235 homes increased 17% sequentially and declined by 18% on a year-over-year basis, a direct impact from our decision to start fewer homes in the second half of 2022. Our average sales price of $366,000 declined by 12% versus the prior year quarter, reflecting higher incentives in homes closed this year, building more affordably priced homes that buyers are seeking and mix.

Regarding mix, in the second quarter this year, the West and especially the high-priced bay area accounted for a lower percentage of deliveries, while our lowest-priced Southeast and Texas regions, along with Century Complete, accounted for a higher percentage. We expect our average selling price to increase in the second half of this year over second quarter levels, as we continue to reduce incentives and selectively increase base prices. Net new contracts in the second quarter across our footprint were 2,317, a sequential increase of 15%. As Dale mentioned, we believe our sales activity is benefiting from strong underlying demand for affordably priced homes, the scarcity of existing homes on the market, consumers adjusting to higher interest rates, and our ability to buy down rates.

On a sequential basis, our new orders also benefited from having a higher level of inventory with near-term deliveries available for sale. At quarter end, our backlog of sold homes was 2,002, valued at $750 million, with an average price of $375,000. In the second quarter, adjusted homebuilding gross margin percentage was 21%, compared to 19.6% in the first quarter of 2023. Homebuilding gross margin was 19.7%, compared to 18.2% in the first quarter of 2023. Even with these improved second quarter margins, we still expect our gross margins to increase sequentially in both the third and fourth quarters of this year due to improvements in direct construction costs, reduced incentives, and shorter cycle-times. We did not book any impairments this quarter.

SG&A as a percent of home sales revenue was 12.8% in the second quarter, compared to 9.6% in the prior year, but was down sequentially from first quarter 2023 levels of 13.4%. The largest driver of this year-over-year increase was the spreading of our fixed costs over a lower revenue base, as well as higher commission rates on home sales. During the COVID-driven sales boom that lasted through the first half of 2022, we were able to lower our commission rates given the exceptionally strong demand for housing. As demand returned to more normalized levels, we increased our commissions to more historical averages to ensure that we are driving buyers to our communities and expect to continue offering this level of commissions in the current environment.

During the second quarter, financial services captured 73% of the closings, generating $24.3 million in revenues, compared to $22.8 million in the prior year. The business contributed $12.5 million in pretax income, compared to $8.6 million in the prior year quarter. Our net homebuilding debt-to-net capital ratio decreased 120 basis points to 22.3% in the second quarter, compared to 23.5% at the end of last year, even with a significant increase in the number of homes under construction. Our homebuilding debt-to-capital ratio also decreased to 31.2% at quarter end, compared to 32% at the end of last year. We maintained our quarterly cash dividend at $0.23 per share and ended the quarter with a strong financial position, including $2.2 billion in stockholders’ equity, $1.2 billion in total liquidity, and $374 million in cash.

During the second quarter, we had no borrowings outstanding on our $800 million unsecured revolving credit facility that does not mature until April 2026. Additionally, we have no senior debt maturities until June of 2027, providing us ample flexibility with our leverage management. At quarter end, our inventories totaled $2.9 billion. Now, turning to guidance. The second quarter had strong sequential gains across our business and bolstered our confidence in the second half of 2023. As a result, for the full year 2023, we are increasing our guidance for home deliveries to be in the range of 8,300 to 9,000 homes, and our home sales revenues to be in the range of $3.1 billion to $3.4 billion. With that, I’ll open the line for questions. Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Rygiel with B. Riley FBR. Please go ahead.

Alex Rygiel: Thank you and good morning gentlemen. A very nice quarter.

Dale Francescon: Thanks Alex.

Alex Rygiel: A couple quick questions here. Can you talk a bit about the mortgages your buyers are getting, average interest rates, FICO scores, that sort of thing?

Dale Francescon: Yes. From a FICO score perspective, it’s been relatively constant. We’ve been staying on the CMP side, on our Century Complete side. We’re at about the high teens, 7.15, 7.19. On the Century Community side, we’re hanging out right around 7.30. That buyer profile for both buyers really hasn’t changed over the past couple of years. It’s been pretty flat. And then in terms of mortgages, right now, we’ve been offering 5.75 on mortgages and for the buyers that we’ve seen. That’d be a pretty attractive rate to move people through.

Alex Rygiel: Excellent. And then can you talk a little bit about thoughts about geographic expansion into new markets over the next six to 12 months, and your thoughts on M&A opportunities?

Dale Francescon: In terms of expansion into additional markets, we’re very happy with the markets that we currently have. And not that we would rule out expansion into other markets, we found the right opportunity. Same thing with M&A more generally. We continue to look at things as they become available. There still seems to be quite a difference between bid and ask. And so as we would find an opportunity that we thought the pricing worked and the market worked, we would move forward on that without a doubt. But right now, I don’t see any of that in — on the horizon.

Alex Rygiel: Thank you.

Dale Francescon: You’re welcome.

Operator: Our next question comes from Carl Reichardt with BTIG. Please go ahead.

Carl Reichardt: Thanks. Afternoon everybody. Do you have, Dave, offhand, the number of unsold units you had under construction at the end of the quarter? And then corollary to that is of the 3,000 or so starts you did in the quarter, what percentage of those would did you sell during Q2? Sorry, that’s not what I would ask it. Sorry, what percent are — yes, did you have an order on in Q2?

Dave Messenger: Understood. So, I don’t have anything related to homes under construction other than the fact that we have started more than 5,000 homes this year. Since we’re selling homes later in the cycle, you would imagine that the majority of the second quarter home starts have yet to be sold. So, we would see those being sales later in the year as they get closer to completion.

Carl Reichardt: If I look at your guide and I say, you’ve got 2,000 in backlog, you’ve delivered 4,100 plus, you need 2,500 or so to get to the midpoint of the backlog. Effectively, all that 2,500 is in the ground already, yes? At least it’s trenched.

Dave Messenger: Correct.

Carl Reichardt: Okay. Thank you. And then you guys talked a little bit about the Century Complete business and talked about the breadth of demand in terms of buyer segments, which is interesting. Can you talk a little bit about the mix of first-time buyers coming out of apartments versus moved down, older customers versus maybe, say, investors who are buying that product, what that mix looks like and how it might have changed?

Dave Messenger: Yes, in terms of investors, we’re seeing pretty minimal investor activity right now where historically that was on the Century Complete business may have been 10% to 15% of our deliveries. It’s hardly worth mentioning at this point. With regard to the demographics of our buyers, it’s really the entire spectrum. We’re getting first-time homebuyers. We’re getting moved down buyers. We’re getting some buyers that are selling their existing house and buying a Century Complete house. So, it’s really across the board.