Q3 2019 Earnings Call
Greetings welcome to century communities third quarter 20, 910 earnings conference call.
At this time, all participants I know listen only mode. A question and answers that she will father, the former presentation. If any what's your car operator assistance during the conference. Please press Star Zero on your telephone keypad. Please note. This conference call is being recorded I will now turn the conference over to Scott Dickson Chief Accounting Officer.
Thank you may begin.
Good afternoon, we would like to thank you for joining us today for century communities third quarter 2019 earnings conference call.
Before I called begins I would like to remind everyone that certain statements made in the course of this call or not based on historical information you may constitute forward looking statements.
These statements are based on management's current expectations and beliefs.
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 and report on Form 10-K .
No matter by other FCC filings.
Our FCC filings are available at Www Dot Si Si dot Gov, and honor website at Www Dot century communities Dot 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, whereas the substitute for the financial information presented in accordance with gap.
Management will be available after the call should you have any questions. They did not get answered.
Hosting the call today, our Dale Francescon, Chairman and co Chief Executive Officer, Rob Friends, Haskin, Co Chief Executive Officer, and David Messenger, Chief Financial Officer.
Dan will review our operating highlights in business updates Rob will then discuss our businesses our business end markets in further detail.
Afterwards, Dave will follow up with further information on our financial results balance sheet and improved outlook.
Following our prepared remarks, the line will be open for questions with that I'll turn the call over to deal.
Thank you Scott.
Our third quarter performance resulted in another quarter of strong earnings as we leveraged our national scale to drive improvements and efficiencies and achieve record levels of net new home contracts deliveries home sales revenues and net income.
We experienced improving homebuyer demand and considerable operating momentum throughout our business as reflected by year over year increases in net new home contracts in each of our regions.
These favorable dynamics have reinforced our view that the overall homebuilding environment remains positive.
And poised for continued growth into 2020 and beyond.
We believe our strategy of offering a diversified choice a product across a broad geographic footprint with a strong emphasis on entry level buyers will fuel our continued growth and validate our cycle tested approach to investing in attractive markets that exhibit sound long term fundamentals.
During third quarter 2019, net new home contracts grew 35% to 2046 homes home deliveries increased to 1891 homes home sales revenues improved to 573.9.
<unk> million dollars and net income increased 59% to $27 million.
This progress was broadly based and accomplished by the balanced contribution across our markets during the quarter.
Our adjusted homebuilding gross margin percentage was 20.6% a 100 basis point improvement since the second quarter of this year.
This sequential improvement is primarily the result of reduced need for the use of incentives.
The year over year growth that occurred during the third quarter was entirely organic given that we completed our full acquisition of Wade jurney homes in the second quarter 2018.
The Wade Jurney homes region has now been integrated onto our platform and continues to represent a growing mix or net new home contracts deliveries and revenues.
For example, this region generated year over year increases in contracts and deliveries, a 52% and 19% respectively.
We're very pleased with our returns on this investment over the last 16 months and continue to focus on cost effective opportunities to expand this asset light fast turning portion of our business within existing as well as new geographies.
The success in our core homebuilding operations also contributed meaningfully to growth in our financial services group.
This business grew its revenues and profits by 35% year over year to $10.4 million and $2.2 million, respectively in the third quarter.
As a one stop solution for centuries, homebuyers, providing mortgage title and insurance offerings. The financial services group helps us created more seamless home buying experience for our customers, while capturing incremental value on each home delivery.
As we move into the remainder of 2019.
Our team continues to focus on driving operational efficiencies to enhance margins and reduce our SGN a in order to maximize profits and returns while maintaining consistent strength and liquidity in our balance sheet.
We continue to leverage our substantial national land position to deepen our presence and gain additional share within our current markets.
Given expectations for interest rates to remain low and our focus on delivering homes at entry level price points throughout our national platform.
We are confident and our ability to grow our earnings and create an even stronger foundation for century, as we continue to invest time energy and capital to advance our goal of building century into one of the most profitable national homebuilders.
I'd now like to turn the call over to Rob to discuss our markets and business in greater detail.
Thank you Dale and good afternoon, everyone.
A strong economic backdrop, including job growth higher wages and low interest rates all helped to sustain the pickup in demand that began earlier this year.
During the quarter. Our success was very broad based with net new home contracts, increasing double digits in each region and home deliveries rising in nearly all of our markets.
This translated to a 35% year over year increase in net new home contracts to a third quarter record of 2046 homes.
Furthermore, we were pleased that our absorption pace improved by 24%, which combined with more selling communities.
Allowed us to end the quarter with a strong backlog of 2746 homes with a dollar value of $855 million.
Now looking at our regions in greater detail.
Starting with our Texas region.
Boston, San Antonio and Houston continues to drive excellent results.
Evidenced by 109% increase in absorptions, a 73% improvement in net new contracts for the region.
40% increase in deliveries and a 23% increase in home sales revenues as we continue to increase our offerings at entry level price points.
In the third quarter, we opened additional lower price point communities and attractive locations.
Which should continue to augment the strong performance of our a vibrant Texas markets into year end.
Austin's Tech sector continues to attract workers supporting job growth in the area.
In San Antonio sales of homes priced below 220000 continued to outperform bolstered by employment levels now 25% above the prior 2008 peak.
In Houston affordability at entry level price points remains strong.
Looking at our mountain region, we saw significant growth with net new contracts up 36% year over year, reflecting a solid pace of activity across the region.
Shop markets are stable in Denver, Las Vegas, and Salt Lake City, while home supply remains constrained at less than three months.
Providing us with good opportunities to capture demand on our strong pipeline of new communities.
Furthermore, each of our markets in the mountain region are benefiting from good economies and noticeable strength at entry level price points.
In the West region, we experienced solid improvement during the quarter with a year over year net new contracts up 10% and deliveries up 18%.
Through a combination of well situated communities and affordable product offerings. We are firmly situated to take advantage of stabilizing market conditions in the region.
Our new communities in the Bay area and the Central Valley have supported additional sales into the fourth quarter.
While southern California overall has shown that most improvement over the past six months.
Additionally, we expect to open a number of communities in the fourth quarter in each of our four divisions in the west which will provide growth heading into 2020.
In the southeast solid home price appreciation and rising entry level demand have contributed to make.
This one of the more attractive regions in the nation with our year over year absorptions, increasing by 36%.
Estimated months supply across our southeast markets stand at 3.2 months.
Nashville has been our best performing southeast market in recent months.
We've been able to take advantage of home price appreciation on new sales.
Third quarter results in our Wade Jurney homes division increased significantly year over year, leading to net new contracts up 52% and deliveries up 19%.
As Dayl mentioned, our final integration initiatives were largely complete by the end of the third quarter, including the relocation of the main office to Atlanta implementation of enhanced systems processes procedures and the back office conversion mentioned on our last earnings call.
Our incremental investments into our Wade jurney business are focused on deepening penetration within already established markets, while carefully evaluating opportunities to expand into new attractive markets, where we can gain additional share in the entry level segment.
During the quarter, we increased our inventory of lots both sequentially and year over year, while achieving our desired 50 50 mix between owned and controlled.
The improved homebuilding landscape across our markets has continued into October .
This environment, coupled with continued positive momentum of our us economy keeps us confident in the longer term housing fundamentals and our improved outlook for the remainder of 2019.
We remain committed to deepening our presence in vibrant markets to grow revenue and deliver incremental profitability.
We're pleased with our business execution year to date with our solid pipeline of new communities and record lot positions.
We have the resources in place to generate improved returns on equity during the remainder of the year as well as into 2020 and beyond.
I'll now turn the call over to Dave who will provide greater detail on our financial results and outlook.
Thank you Rob.
During the third quarter of 2019, our net income increased 59% to $27 million or 87 cents per diluted share a third quarter record for the company.
Home sales revenues for the third quarter were $573.9 million, an increase of 4% compared to $552.9 million and the prior year quarter.
This improvement in revenues was mainly driven by an 8% increase in home deliveries to 1891.
The average selling price of homes delivered for the third quarter, 2019 was $303500 compared to $316700 and the prior year quarter.
Consistent with our higher mix of entry level homes.
Homebuilding gross margin for the third quarter was 18.1% compared to 16.8% in the prior year quarter.
The 130 basis point differential largely attributable to acquisition purchase accounting impacts in the prior year quarter.
Adjusted homebuilding gross margin percentage was 20.6% compared to 21.2% and the prior year quarter, but improved 100 basis points sequentially from the 19.6% and the second quarter of this year.
And our September Thirtyth backlog of 2746 homes, we have a similarly improved gross margin profile and expect our fourth quarter adjusted gross margins to also be on the 20% range.
Asked DNA as a percent of homebuilding revenues was 12.7% in the third quarter compared to 12.8% and the prior year quarter, mainly due to scale benefits and process enhancements.
Our SGN a is split roughly 36% for variable costs, including selling commissions and advertising, while our fixed costs accounted for the remaining 64%.
Over the last five quarters, we have held our fixed spend in absolute dollars relatively flat.
While we expect additional investments for targeted optimization initiatives and our Wade Jurney division through year end, reducing our SGN as a percent of homebuilding revenues remains one of our primary focus items. Accordingly, we continue to anticipate and improved SGN a margin year over year for full year to date.
2019.
In the third quarter 2019, our financial services business generated $10.4 million in revenues up 35% year over year.
The business contributed $2.2 million and pre tax income compared to 1.77 million in the prior year quarter.
35% increase and representing and essentially stable margin.
Now turning to our balance sheet and liquidity.
As of September 32019, our stockholders equity expanded to a record $951 million.
We had total long term homebuilding debt of $1.2 billion with total liquidity of $430 million, consisting of 69 million in cash and $361 million of capacity on our unsecured revolver.
Our net homebuilding debt to net capital ratio held steady sequentially, even though our inventories increased due to the typical seasonal buildup of work in process and certain land investments.
We remain committed to reducing our leverage ratio below 50% Howard due to some attractive land investments, we expect to make in the fourth quarter. The achievement of this call may be delayed into the new year.
Given the strong execution across our business year to date, we're pleased to increase our full year 2019 outlook.
We now expect deliveries to be in the range of 7000, 708100 homes and home sales revenues to be in the range of $2.4 billion to $2.5 billion.
In regard to our tax rate for 2019, we continue to expect to incur an annual income tax rate exclusive of federal energy credits of approximately 26.5%.
Compared to 25% in 2018.
In closing our third quarter results demonstrate the strength and depth of our national homebuilding platform.
Our markets continued to be supported by positive fundamentals, including job gains household formations and positive regional economies.
We remain confident about our business prospects and are increasingly diversified national footprint enhances the stability of our growth and earnings profile.
The continuation of our growth is well underway for 2020 with a strong pipeline of communities, a deep land portfolio and ample capital resources to further increase our base of activity and an effective manner. We look forward to updating on our progress in coming quarters. Operator, Please open the lines for questions.
Thank you Sam if you like to ask your question. Please press star one and your telephone keypad a confirmation tele indicate your line is in the question Q.
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Our first question is from Thomas Maguire with Zelman and Associates. Please proceed.
Hey, guys, good afternoon, and nice quarter.
On the yes, you said I appreciate there's a little bit of leverage this quarter and you talked about some of the issues like office relocation being complete but with Wade jurney, but maybe some other investments that might ramp up there as an offset can you just specifically talk about what that spend is there any additional color on what the continued incremental investment in a way journey is and then.
If we take a step back and even if you could talk about how you guys think about a normal normalized senior leverage ratio or.
A multiyear target or kind of what you guys think than the normal business should run at.
Yeah, Hey, Thomas This is Dave I would say taking your second half your question first.
In terms of a longer term run rate target. We don't have went out there are other than that we expected. We can continue to get leverage out of our platform. As we spent the past several years acquiring a variety of homebuilders and then integrating them into our system, which is obviously takes time, but good gains a lot of visibility into the business I as we've been able to hold our fixed costs.
It's relatively flat from where we are for the past several quarters, we think that that from that standpoint, we're probably hitting some sort of a run rate on fixed dollars in terms of the third quarter I would say that you know we we had some increased costs on our on on the selling side due to some additional broker co ops and increase in broker crops and some of our markets.
And then from the fixed cost side.
Just had a variety of dollars going out regarding the conversion of the Wade jurney systems into our systems. The final relocation of people at offices.
But it's something that right right now, we're we're expecting to incur a little bit more in the fourth quarter, but think of will have the majority of that behind us.
Got it sounds good and sounds like 2020 will shape up well.
Just to stay on the Wade jurney side and shipped to volume a pretty incredible growth. There this quarter and appreciate the comment now has made that it's coming from both market expansion and just organic opportunity in existing markets can you help us split that out or think about it a little how do you guys think about what's driving the majority of the growth is it evenly split and then just maybe.
Qualitatively can you talk about the opportunity in existing Wade jurney markets in how you think about that longer term does it feel like volume kind of hit supply targets tapped out.
From a land availability perspective or demand or kind of how do you think about the growth in existing markets. So Thomas this is dale.
We're not seeing that were platte totaling in any market there's.
Land remains available we believe that we've got depth in all of our markets to continue to grow.
When we look at it.
Florida is a market that on the Wade Jurney side, we think we have tremendous opportunity, it's a very large market and.
A relationship basis, we have a very small position. There. So we think that we have a lot of room to grow there when we look at Arizona, which is one of our more recent expansion markets. The March the market has been very strong there were continuing to acquire land.
And scale that business, so I mean were.
We're still very bullish on our opportunities both in each of our markets as well as where we've expanded.
Our focus really recently has been to continue to get everything converted over onto our system.
And with that.
Just about behind US at this point with the move behind US at all then we're going to start looking at growing in expanding into new markets as well.
Awesome Thanks, everyone.
Our next question is from Michael.
Mark again. Please proceed.
Yes.
Hi, Thanks, Mike re heart.
Nice quarter.
Maybe first question I would love to dig in a little bit around the.
Absorption improvement in the in the business ex Wade Jurney.
And if you compare against last year.
You know up 24%, but it kind of varied widely by region in terms of the year over year change.
I I was wondering if you could just kind of call out if there any kind of unusual drivers. There I mean, obviously, Texas continues to benefit from just a significantly improved position and.
Book of business, and obviously you transition there to more affordable.
And so you see the results so.
That that reason does continue kind of a year long year over year trend.
But when you look at the South East and the West in particular I guess.
Yeah even.
Even the mountain region the year over year differences are are much more wide and varied, particularly relative to the first couple of quarters of the year. So just hoping you could address what what was driving to those other regions the year over year changes be at mix community openings et cetera.
Sure Mike its sale well when we look at at the regions you highlighted Texas and I mean, we've had had significant improvement in in Texas because of the.
Just really the state of the market in our continue pivot towards more entry level. I mean, we were more than able to double our our absorptions and so it's really a reflection of both strategy as well as.
A market that's doing very well.
When we look at the southeast we were able to increase in the southeast we increased our or sales on a year over year basis, even though our community count actually went down.
Community Count declined because we've seen that theres been an elongated and in the timeframe to get communities opened in developed.
In the southeast we look at our Mountain region. We were we were flat on a year over year basis in terms of.
Of our absorptions, yet our communities were were up and.
And so our sales were up.
The West was the was the one area, where we did see a slight decline in absorptions.
Even though our sales were still up 10% because we had additional communities. It's just a reflection of when we when we look at.
The California market, which is the majority of our west I'd say, it's the highest price that we have in our portfolio and its it has been a little slow, but when we look at it.
We've been happy with it and it's actually done very well.
But it's the highest price that we have in our portfolio.
Okay I appreciate that.
Those comments I guess secondly.
Kind of shifting to community count.
Yeah.
On an overall basis this year.
You've been up very very slightly year over year based kind of been in a relatively tight range.
And I look at your total lots controlled.
And kind of even excluding any way journey.
Yeah, well I I call it seems like.
It seems like I.
Sure.
Your your loss control X Wade jurney.
You are actually down a little bit.
Total loans in option.
So just trying to get a sense.
How we should think about community count.
Maybe nearer term going fourth quarter, but also as we think about 2020.
Yes, particularly with your lot position again, yes, just community Count X Wade Jurney, obviously, but your lot position does look a little than our slightly thinner a year over year.
How should we thinking about community count next quarter and into next year.
Well when we look at it.
Our sales were up 35% year over year, so with that we're going to move through our communities.
More quickly than than we did in the third quarter of last year and so.
And in that case, even though we're opening new communities were closing out communities, where we have robust sales.
In in those communities.
Yeah as we've indicated on past calls we have in a number of of instances taken larger positions within larger community. So that it takes us longer to build through them.
But we were able to year over year increase our community count.
Bits on a year over year basis, and I mean.
Part of the the opening of communities is dependent on on weather and municipal approvals and just getting some of the work done. So some of that even though we plan to have things open they get pushed off into a into another period, just because of circumstances.
Okay. Thank you.
Thanks.
Our next question is from Alan right with FBR and company. Please proceed.
Thank you nice quarter gentlemen, thanks, Alex.
Couple of questions coming back to your comment with regards to seeing some attractive land acquisition opportunities in the fourth quarter.
Could you go a little bit more detailed and.
Listen on whether or not that's in your core Wade jurney business and strategy of going deeper in existing markets or if it's in your century brand going into.
Deeper into existing markets are new markets.
It's in.
Both brands, Alex and these are assets that we feel really good about they will be accretive to 2020 and beyond.
And we're taking positions in some of our better markets without disclosing the exact markets for obviously competitive reasons, but.
We feel really good about the markets. We're in and these particular positions that were scheduled to close on in the fourth quarter.
And could you expand upon your views of your broader views.
Of land acquisition pricing today, and how that's changed maybe over the last 12 months or might change in the near term.
It varies from market to market on that.
Let's say 12 months ago, or so we saw a kind of a slowdown.
With the market shifting as the market has picked back up with interest rates dropping theres been renewed interest in land DAC.
Generally across the board you know with that said, though we've been very cautious to continue to maintain our 50 50 ratio between owned and controlled.
We feel really good about that this is our all time high end total lots of just under 40000, yet we like the optionality of having 50% owned versus 50% controlled Youre, we're still on the market.
To buy land, but again, we're putting in a very strategic lens on that on deals that we are doing and so the ones that we were talking about in the fourth quarter that are scheduled to close those are ones that.
We've been tracking for a while now have had them under contract there just coming to fruition and again, they will be accretive to 2020 and beyond.
And also coming back to an earlier comment with regards to.
Acquiring a larger positions in larger communities.
Can you comment on what that implies towards your intermediate term outlook for the housing markets.
And how that could impact year homebuilding gross margins over the coming years.
I would say therefore, as we're looking at taking down larger positions and larger communities Weve got a pretty good view on that particular market. So we think that.
Building through the community over a little longer period of time is warranted, given where we're seeing the underlying demand and I know that price part of that product in that market. So we're comfortable taking a longer position, we oftentimes have multiple multiple product lines with different price points within some of those communities in order to help us work.
Through the lots quicker, but we're still taking positions where we feel comfortable with.
The outlook on the overall housing.
And what does it mean towards your homebuilding gross margins.
Well I wish larger I suspect buying larger portfolios could possibly improve your land acquisition cost and also improve certain utilization of fixed labor on site. So I would suspect it would drive margins higher or at least puts you in a better pricing position.
But I mean, that's our expectation but.
It's always difficult to forecast, what's going to happen on individual project as there's so many somebody different inputs that go into it but I mean, obviously theoretically as you underwrite. These deals you do expect to get some sort of economies of scale.
Thank you very much thanks, Alex.
Our next question is from Alex Barron with housing Research Center. Please proceed.
Yes, hey, guys, thanks, and good job in the quarter.
I was.
As you've been working with Wade jurney brand and expanding into new markets.
Are you finding that the demand.
Moving between both entry level people versus you know downsizing.
Baby Boomers or can you comment on how that's what you guys are observing there.
Yeah, we're actually seeing both and.
I think most people think it's just truly an entry level buyer and of course, that's a large percentage of it Alex but we are seeing a lot of move down buyers as well and some of that is more.
Geography, driven but candidly, it's probably pretty much in every one of the markets right now.
Got it and in the rest of the business the century brand business.
How are you guys.
Looking at your product positioning, especially from a price point perspective, what can we expect over the next 12 months or so.
Price is going to start trending.
Lower because the mix is shifting or would it be similar.
That's consistent with what we've been doing now for some period of time and we.
We have designed new plans, what we called project Genesis, which are new entry level price point plan. So that took what we had earlier of an entry level series and actually dropped.
Some efficiencies additional efficiencies into the plan drop the price points the direct costs on these and so as a result, you are going to see a shift of continuing to get our price point down and that's been if you just look at kind of where weve been over the past 12 to 24 months that's been a consistent theme that we've continued to add.
Execute on and I see that continuing in the future.
Got it thanks, Jeff one last one have you guys given any thought to build to rent as an opportunity or something that you guys are considering at this point.
Yeah, we've we've looked at it from a variety of different perspectives.
And we've we have always sold certain amount of homes to investors.
We.
Ill from our standpoint, we haven't figured out.
Exactly how.
That we would want to play in that particular arena.
But it's something that we're continuing to explore getting in the build for rent business ourselves.
Our joint venturing with someone else probably doesn't happen, but we think theres an opportunity as a potential additional outlet for some of our homes.
That as.
As we would continue to find ways of of.
Of executing on that that we might be able to meaningfully increase our deliveries as a result, but we haven't really settled on a strategy yet.
Got it. Thank you very much good luck welcome.
Our next question is from Jay.
With Wedbush Securities. Please proceed.
Hey, good afternoon. The first question I had it looks like the diluted share count went up sequentially from Twoq to Threeq. You can you tell us how much start was issued and what the outstanding share count was a quarter around.
Outstanding.
San share count the at the quarter end was about just shy at 31 million is about 30.9 million.
In terms of shares being issued.
During the quarter it was about.
897000 shares.
For about $27 million.
And then my next question and I know, Alex just asked about pricing but.
With the Midpoints of the new guidance it looks like the average closing price should come in around somewhere around 311000.
And.
I'm just wondering as we look ahead to next year is there going to be the same type of volatility in the average closing price because of mix or are you guys thinking that Mike balance out and be a little bit smooth or maybe a more normal trend were prices start low at the beginning of the year and then kind of tick higher.
I think it's really good it's actually sorry, it's really going to vary.
Based on the percentage of closings, we have from the Wade Jurney brand that obviously at 155000 that does help drive DSP lower and depending on how much we have any given quarter from that brand will depend will help determine what that ultimate ASP is each quarter. So there's probably still going to be.
A little bit of variability from quarter to quarter.
Got it.
And then apologies if you if you mentioned the sort of your discuss already but what did the order trends look like for each month of the quarter and could you talk about what what you've seen so far in October .
Sure.
Overall for the quarter, we were up 35% when we look at.
Each month.
You know the incremental amount was fairly consistent.
Its so we really didnt see that the trend changed at any point in the quarter either in the beginning starting out stronger and then tailing off first starting out slower and then picking up.
When we look at October .
And how those sales trends are going so far.
We would anticipate that we will end up October up about the same amount that we were up in the third quarter. So we really not seen a change since we've been in the in the October period. Its just bid yelp, a relatively steady improvement throughout the that four month timeframe.
Great to hear.
And then the last question I had I think the ushering in a number was certainly a little bit higher from from both a dollar and margin perspective than we were anticipating for the quarter.
Can you give us maybe a dollar figure.
Items that may not necessarily be onetime items for gap, but one time spend whether it's for the relocation for.
The broker co op that you talked about is there any type of cost. It may not recur and also is that broker co op. You talked about is it getting worse or was that just you guys trying to get out of some neighborhoods and maybe paying a little bit more to make that happen.
You know the increase in the in the broker co up which was about 30 basis points is really it's it's hard to tell whether it was actual increased incentives or if it was just a higher percentage and it's really a combination of both and so when when we look at that.
That's going to vary from from quarter to quarter, just depending on on circumstances.
You know in terms of you know specific items and quantifying them I I don't think we're prepared to to do that but you know as Dave indicated we we obviously had a fair amount of expenditure related to wrapping up the the Wade jurney homes relocation, finishing up.
The the conversion, we've got a little bit left to that will trickle in in the fourth quarter, but most of that is behind us at this point.
Okay sounds great. Thanks for taking my questions. Thanks industry.
We have each said never question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you operator, and thank you again to everyone for joining us on todays call. We look forward to speaking with you again next quarter.
This concludes today's conference you may disconnect your lines at this time and thank you for your participation.