Q1 2021 Century Communities Inc Earnings Call
[music].
Greetings and welcome to century communities first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your <unk>.
Telephone keypad. Please note. This conference is being recorded I will now like to turn the conference over to Hunter Wells, Vice President of Investor Relations for century communities. Thank you you may begin.
Good afternoon. Thank you for joining us today for century communities earnings conference call for the first quarter ended March 31 2021.
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 and.
And the forward looking statements certain of these risks and uncertainties can be found under the heading risk factors and 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 Dot Sedaka Av and on our website at www.
<unk> dot century communities dotcom and 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 and isolation or as a substitute for the financial.
Permission and 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 Franciscan Chairman and co Chief Executive Officer, Robert and Satkin Co Chief Executive Officer, and President and David Messenger, Chief Financial Officer. Following todays prepared remarks, we will open up the line for questions with that I will turn the call over to Dale.
Thank you Hunter and welcome everyone to our quarterly conference call.
2021 is off to a very strong store and the first quarter, we achieved multiple all time records, including exceeding $1 billion and total revenues for the first time.
Generating our highest quarterly net sales ever with 3000, and 455, new contracts, a 45% year over year increase and producing $131 million and pre tax income.
On a 284% increase of $102 million and net income.
289% increase and a $152 million and EBITDA.
198% increase.
Home sales revenues increased 67% to nearly $960 million.
Driven by a 50% increase and deliveries.
We delivered a first quarter record 2797 homes with broad based strength across our regions.
Century like the rest of the construction industry has been impacted by elevated costs and labor and materials stemming from surging demand.
Our ability to successfully push price is offset any negative impact to our margins.
And the first quarter, we increased home sales gross margins to 21, 1% as compared to 17, 7% on a year over year basis.
In fact, our margins on new sales have sequentially increased each month since may of last year.
SG&A as a percentage of sales improved to nine 6% the lowest and our history, reflecting a 330 basis point improvement over last year.
Our pre tax margin was 13%.
Highest and our history and a significant improvement from five 7% in the prior year quarter.
Our national footprint and increased size, coupled with our focus on operational efficiencies has allowed us to navigate a challenging inflationary environment, while delivering topline growth expanded.
Profitability and continued progress against our long term strategic goals.
Mid last year, we saw an acceleration and on our business that has continued into this year.
The demand for new homes, we are witnessing is the strongest we've seen in years.
Our recent results reflect our ability to capitalize on these dynamic trends.
And demonstrate our proven ability to execute.
Reinforcing that we are on the right strategic path.
Our solid foundation positions us for even greater financial achievements this year and beyond.
Our two brands century communities and century complete provide a compelling value proposition for home buyers, particularly for the millennial generation driving new household formation.
Based on loans, we originate millennials are presently centuries largest age cohort apart of buyers.
Our percentage of buyers age 25 to 35 has continued to increase while the average age of our new homeowner is decreasing.
Overall homeownership rates among younger demographic groups has been lower than that of previous generations for a variety of reasons, including affordability challenges.
While we offer homes that appeal to a broad range of buyers from entry level to move up as well as lifestyle. Our portfolio is heavily weighted within the affordable home category with 80% exposure to entry level buyers across our combined brands.
Even if interest rates were to increase 50 basis points, we estimate that would only increase the monthly mortgage payment by $95 for a century communities homebuyer and $51 for a century complete home buyer.
Further illustrating the impressive affordability of our homes.
We're mindful of this demographic shift and are focused on positioning centuries products as well as refining our home buying processes to appeal to a younger buyers.
We strategically invested and enhanced our online home buying platforms.
Even making it possible to complete a home purchase entirely from a smartphone.
As we understand their preference for shopping digitally.
From a macro perspective, there are additional factors at play supporting demand the most compelling being the severe lack of inventory for single family homes.
There is a structural shortage of homes and the U S and passed under building is a key reason for today's remarkable demand environment.
A significant presence of large institutional investors purchasing single family homes for the rental market has further constrained supply and depleted inventory available for purchase.
According to recent analysis by Freddie Mac.
The U S housing market is $3 8 million units short of what is needed to meet near term demand.
We believe tight inventory is pushing buyers to the new home market.
And the opportunity we are well positioned to benefit from.
We ended the quarter with a formidable balance sheet.
Reaching one 4 billion and stockholders' equity and.
$557 million and cash.
We continue to de lever journey.
Generally positive cash flow and.
And build our cash reserves that will allow us to reinvest in our business and drive further growth.
In March we published our first ESG report.
Signifying our enhanced commitment to sustainable growth.
This commitment along with our continued execution on our strategic initiatives.
We will propel growth organically as we expand the business and current and future markets.
Further improve profitability and deliver increased value to our shareholders.
With that I'll turn the call over to Rob to discuss our business and more detail.
Thank you Dale.
We ended the first quarter with a backlog of 4097 homes, a 58% increase over last year, and the highest and our history, resulting in a record dollar value of $1 6 billion.
Importantly, as a result of our business model, 95% of these homes were already under construction at quarter end.
This healthy backlog has us well positioned to meet our growth objectives.
Given the strength of the macro backdrop, we have prioritized our land investments.
And we ended the first quarter with nearly 58000 owned and controlled lots a 61% increase over last year.
We already own and control all the lots we need to support our 2021 growth as well as most of 2022.
While the land market continues to be competitive we remain disciplined and still do not include home price appreciation, our current absorption rates and our underwriting assumptions.
We've advanced our land light operating model, increasing our percentage of controlled lots to 64% from 42% last year.
Controlled lots and allow us to better manage risk as we can quickly respond to shifting market dynamics.
Further supporting this land light strategy is our continued focus on spec builds.
And the first quarter, 82% of our total deliveries were built on spec.
Given the demand for quicker moving homes, and increasing input costs, especially lumber today, we allow very few pre sale homes to be offered for sale.
This approach allows us to not only maximize the sales price of the home that gives us good visibility into its course.
Okay.
Our land acquisition efforts are based on our desire to deepen and widen our share positions within existing markets as well as strategically expand into additional ones.
We recently entered the North Florida market and expect to open six new communities under our century complete line and 2021.
Across the Panhandle and Jacksonville areas.
Jacksonville is one of the fastest growing cities and Florida with job growth over the next 10 years predicted to be 44% well above the U S average.
With its strong local economy affordable price points and desirable climate Jacksonville is a highly attractive market to many buyers.
We are also pleased to announce that our century communities brand has recently entered north Florida.
As of today's call, we secured over 2000 lots under both brands illustrating our continued success and growing the business organically.
With the addition of Florida, we now operate both brands and six states, joining Arizona, Georgia, North Carolina, South Carolina and Texas.
This two brand strategy provides scale benefits, enabling century to have a larger presence within a market further and operational synergies and our back office systems and facilitating more efficient land buying.
Across our 17 states and beyond we see attractive opportunities for continued growth for both brands.
We're encouraged by the broad based demand strength, we're experiencing throughout our entire footprint and are seeing signs of and ever improving U S economy.
There continues to be steady progress with Corona virus vaccinations and American employers added 916000 jobs in March the biggest gains since August.
We expect a positive recovery to drive continued momentum into the balance of the year and into 2022.
Across our organization, we're focused on pushing price productivity and synergy benefits, allowing us to offset increased costs and minimize issues within our supply chain.
We work closely with our local and National trade partners.
And suppliers to monitor anticipate and address and a supply chain challenges.
The centralized controls and resources within our platform are both flexible and responsive.
We're pleased with our recent performance and strong operating results and remain confident we're solidly positioned for even more robust future earnings growth.
I'll now turn the call over to Dave to discuss our financial results and more detail.
Thank you Rob.
During the first quarter of 2021 net income increased 289% to a record $101 7 million.
Or $3 per diluted share compared to $26 1 million and 78, <unk> and the prior year quarter.
First quarter pretax income was $131 million and increase of 284% pre.
Pre tax margin was 13% compared to five 7% and the prior year quarter.
Home sales revenues for the first quarter increased to $959 3 million and increase of 67% compared to $572 7 million and the prior year quarter.
Total revenues increased 67% to a record $1 billion from $602 $6 million propelled by a 50% increase and deliveries.
And the first quarter net new contracts across our divisions were up 45% to 3455 homes, a quarterly record with the century complete division increasing by 90% followed by the Texas and mountain regions up 56% and 54% respectively.
Our financial services business capitalized on low interest rates and increased geographic penetration and capturing 75% of closings generating $33 6 million and revenues compared to $9 8 million and the first quarter 2020 and.
And contributing $15 3 million and pretax income.
And we're pleased with the performance of this business segment, which provides significant value to our homebuyers by creating an efficient streamlined home buying experience.
During the quarter, our century communities and century complete buyers and respective FICO scores of 744% and 710.
But the current rate of 3% on a 30 year fixed mortgage is still substantially lower and the current five year average of three 8% and many potential buyers have bolstered their personal savings over the past year strengthening and their financial profiles.
Homebuilding gross margin percentage improved to 21, 1% compared to 17, 7% for the same period last year.
Adjusted homebuilding gross margin percentage was 23, 1% compared to 22% and the prior year quarter.
We expect continued year over year margin improvement and the second quarter, given last year's heavy usage of incentives and this year's price depreciation.
SG&A as a percent of home sales revenue improved 330 basis points to nine 6% and the first quarter compared to 12, 9% and the prior year.
Our net homebuilding debt to net capital ratio improved to 19, 9% down significantly from 46, 6% and the prior year quarter.
Our operations generated positive cash flows of approximately $110 million ending the quarter with approximately $557 million of cash and total liquidity of $1 2 billion.
Which includes our available and Undrawn 640 million.
Unsecured revolving credit facility.
Recently, both Moody's and S&P upgraded our credit ratings and century.
In February we were upgraded by Moody's to be one and a positive outlook and.
And April S&P raised our rating on century to double B minus.
And our improved ratings reflect the continued and sustained operating performance of the company.
And the first quarter, our tax rate was 22, 4% compared to 23, 4% and the same quarter last year.
On a record first quarter results have set us up for a strong year.
Our improved sales deliveries and ASP growth lead us to increase our guidance for the year.
Home deliveries are now expected to be and the range of 10750 to 11750 homes.
And home sales revenues are now expected to be and the range of $3 $7 billion to $4 billion.
With that I'll open the line for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is and the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to.
Up your handset before pressing and Starkey one moment, please while we poll for questions.
Our first question is with Michael Rehaut with J P. Morgan. Please proceed with your question.
Hi, This is Maggie on for Mike.
<unk> on the quarter.
First I'd like to dig in to the SG&A line, a little bit more.
Obviously, you saw some really nice volume leverage during the during the first quarter, but I was wondering if you could.
Talk about any.
Other moving pieces during the quarter, there and also how we should be thinking about that line item.
And as as the year progresses.
Yes, and Maggie this is Dave I would say that you know, we've obviously seen a lot of tremendous benefits on the SG&A line item over the past several years as we and historically done a variety of acquisitions that we've grown our top line and we've made a lot of significant advances internally with our G&A structure, especially on the fixed side.
And youre seeing some of those benefits coming through here and the first quarter and I think you saw benefits various quarters last year as well I think going forward.
We were probably somewhere in that.
High single low double digit range on a go forward basis, and it will as it will bounce around a little bit whether it's due to commissions or other initiatives that we have ongoing with.
Our corporate office and our fixed structure, but we're very pleased with where we are today.
Got it thank you and.
Sure.
Next I was just wondering if you could talk a little bit about what you're what you've seen and the market.
Through the first few weeks of April day.
In terms of demand trends sales pace any color you can give around that.
Sure Maggie this is dale.
Well, we're really almost a month into the second quarter and we've seen new.
No reduction in demand or sales momentum when.
And we look at April.
We're tracking to and April up about 50% on a year over year basis, so relatively consistent with where we were in Q1.
Got it thanks guys.
Thank you. Thank you.
Operator next question please.
And a pause for just a moment.
And then.
And.
Okay.
Okay.
Our next question is with Alex Rygiel with B Riley FBR. Please proceed with your question.
Thank you and fantastic quarter gentlemen.
Thanks, Alex Alex.
Couple of questions here, obviously, the first quarter was fantastic from a gross gross margin standpoint.
How should we think about the cadence of gross margin over the next couple of quarters.
Yes, we had a tremendous first quarter and I think that as we look at our backlog.
And a 4000 homes and what we think will be delivered in Q2 Q3, we expect gross margin to be relatively in line with where Q1 was that as long as we're able to be pushing price at the moment. We're also experiencing.
On a relatively significant increases on the prices on materials and the supply side. So on what will continue to try pushing as much.
True to the end user we are seeing pressures on on the margin line from that standpoint.
And based upon.
The cadence of order activity and your timeline for deliveries and historically the fourth quarter always witnessed a pretty significant step up and closings how should we think about the fourth quarter of this year based upon your timeline of closings.
I think there's probably still a fair trend that youre going to see that.
And we had a good first quarter you see.
Second quarter, and third quarter would be lower than the fourth quarter, just given the way the selling season works and where we've got our sales pace happening and especially if certain closings get moved out from Q2 Q3 adult all and up in the fourth quarter.
One last question the century complete ASB grew significantly in the quarter can you expand upon this a little.
Yeah, it's really.
A function of two things we've been raising prices on the century complete line.
As we have been on the century communities line. So on a on a unit by unit basis, we've had have increased prices as well as over time, we've improved our product we've enhanced our offering we've gone into more subdivisions as opposed to more scattered lots and so when we.
We when you look at that we're just having homes that we can sell for more than where the previous.
Business was set up before we started making all of the transitions.
Great. Thank you very much.
Okay. Thank you.
Our next question is with Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.
Hi, good evening.
Thanks for taking on Hey, Hi, Thanks for taking my question I appreciate it.
Can you talk a little bit about how the quarter.
Deliveries per farmed clothing.
With respect your expectation looks like and outpaced meaningfully, but the guide range kind of seems a little conservative to us and until 50 units higher.
Just curious how much did you beat Q1 by one and your expectations.
So any color on.
And if the guide range.
Flex just Q1 outperformance is their second half outlook increase also in that guide are conservative or Conversely that pull forward that you might affect that and just curious if you're able to just talk to the components within that range too.
And delivering great to 50 units.
Hey, David This is Dave I would say that debt in terms of the delivery the delivery raise on our guidance. We do it on an annual basis, we don't necessarily comment on quarterly expectations and that's why we don't provide quarterly guidance internally as you can probably imagine we are fairly lofty and high expectations for what the company can deliver and what.
And we felt and what it will achieve.
So I would say you know we're looking at it at $2 50.
Being a raise.
And is really over the course of the year and not necessarily a pull forward or anything from next year.
Okay, that's fair.
My second is on pricing strength and any thoughts on.
And on the pricing strength, that's being witnessed here, especially as we head into 2022.
What are some of the drivers that youll, probably monitoring to test how long this run could last.
Well I think really from an operational standpoint, what we've what we've done is in many cases, we've reduced the size of the releases.
And that we provide and then every time, we have our release, we have a price increase and some and some of our communities where we may have we may have larger releases, there and we set.
And a set price increase every so many homes that are sold so when we look at that we're really monitoring down to the subdivision level.
And we really have not seen any.
Price resistance at any levels that we've achieved.
If if we start seeing that and we can adjust but it's really down to our teams are managing a subdivision level and each and each grouping of homes that are sold were trying to get the maximum sales price for those homes.
Okay. That's fair my final one if I can sneak it in.
Seeing any incremental challenges on the supply chain.
Especially with delivery off Brian and appliance has been doses doors.
And lumber obviously.
And well telecast more on the price increase side, but just curious any debt.
And it got our U.
And your cycle times, extending because of any incremental supply chain pressures.
Thank you.
We've seen a little bit of impact to that and.
And our.
Sure.
Management team here at the corporate level that that's devoted to helping the decisions with their purchasing and supply chain management has really done a very good job of anticipating where.
We're gonna have shortages or delays.
And they've been able to in many cases transfer from different suppliers and in certain cases, even even different markets two to satisfy the need that we have.
To date the.
Really the the delays we've seen had been pretty manageable they'd been in the case of.
On the Maxim of a week to two weeks and it's.
It's not everywhere and some markets are more than others and some were not seeing any impact at all but it's something that we're keeping a close eye on them and we anticipate as the year progresses.
We certainly could see more delays, but so far it's not something that's been a big impact to us.
Got it thanks, so much I'll pass it on.
Sure. Thanks.
Our next question is with Jay Mccanless with Wedbush. Please proceed with your question.
Hey, good afternoon, congrats on a great quarter.
And maybe ask the guidance question a little bit differently.
Unit midpoint went up 2% with the revenue midpoint went up 8% on the guidance.
Is that price mix, you think youre going to be getting from different parts of the country is it some of the new expansion and Joe maybe just talk about why the revenue midpoint moved up so much more than the unit midpoint.
Hey, Jay this is Dave.
And Jim and Doug Doug the Asps.
And that we're seeing right now was outpacing our expectations at the beginning of the year and so given where we are delivering homes today and the first quarter, where we expect the asps were seeing and backlog.
It felt prudent to be increasing and the revenue accordingly.
Okay, So just price strength.
And sorry, My second question is.
On the community Count can you talk about where you think that that might be for <unk>, and where we're getting and the year.
Yes.
Excuse me Q2 and is used.
On our last call, we expected Q1 to decline in Q2 probably has.
Small bit to it as well as we're selling out of communities faster than we had originally intended last.
Last year, when we brought them on and so then you start seeing some growth in Q3, and Q4, but it'll it'll be backend weighted.
And to the end of the year.
Okay.
Yes.
And then could you talk about order growth by month, I know, everyone felt the pinch from Texas, but where orders evenly weighted through the different months of the quarter or how does that flow.
Yeah, we really didn't see any.
Spike or dip and any of the months.
When we when we look at the absolute number of orders they were fairly consistent throughout the three months.
On a on a year over year basis, obviously March was up more just because of the impact in the second half of March last year, but in terms of absolute number of orders that were very consistent.
Okay.
And then the last question I had.
Could you give the stab again and I apologize I missed it but what percentage of the backlog was started.
And that you guys sold this quarter.
90, Pfizer, who started expect 95% okay.
And that's what in our backlog, 95% of those homes were already started by quarter and when we look at what closed.
Close for the quarter.
That was about 83% of them were starting to specs.
Okay, great. Congrats again, thanks for taking my questions.
Okay.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is with Alan Ratner from Zelman and Associates. Please proceed with your question.
Hey, guys. Good afternoon, congrats on the great results.
And first first question would love to dig in a little bit and you made earlier just about land underwriting and just as far as not assuming HPA or current absorptions.
First and any details you could give just in terms of what type of absorptions you are assuming on new land acquisitions, and yes, I guess more broadly and I'm a little surprised just in general that land sellers would be kind of willing to go along with that just seems like the land market is pretty heated and and all builders are ramp and your lot count pretty significantly so.
When you come to a land seller with your assumptions and underwriting and tell them Hey, we are incorporating something lower than where the market is today.
How does that conversation go in general I mean is that is that pretty much the norm across the industry or have you started to see builders get a little bit more irrational.
Well, we're seeing some builders get more aggressive, but you know theres. Many publics that take the same approach that we do all on and.
And there's a difference between using home price appreciation and your underwriting and using current pricing and so we'll look at the absolute most current pricing as we go forward, but we're not going to put on an accelerator on appreciation and think that we're just going to keep clipping away at a at a large percentage each and every year.
During the life of that project. So we're looking at it just where it is today same thing on absorptions.
We're looking at what we think our project can sustain over the life of it and so if were taking lots on the balance sheet. We may have those lots for and access of a year lets say and.
And so with that we're going to look at what we're going to average over that period of time versus what somebody may have been selling and a robust time and this frame on a competing project. So we're going to look at it that way and candidly most of our contemporaries from the public realm look at it that way as well.
Okay. That's helpful.
And then second question given the fact that you made the comment youre, not really allowing many presale homes to be available for sale.
Can you talk a little bit about kind of the production cadence in terms of how many homes you are starting each month or are you kind of.
Running at that and 1000 per month range that and obviously your closing guidance would imply or have you been able to accelerate that even further and in recent months to potentially provide some upside.
Syed if and if the demand environment allows it.
And this is Dave.
Either they're closing guidance doing about 1000, a month, we feel comfortable with what we've been starting.
Since the last part of last year, we obviously took a big pause in Q1 Q2, and then ramp it back up and we've been pretty consistent on what we've been doing for starts.
Through call. It Q4 into Q1, and we feel comfortable with where we are today and what we're starting and what we think will ultimately deliver for the year.
So David are you confirming that the 1000 per month and I'll just throw out that that is kind of roughly what your starting or do you have a specific number there and I'm just curious.
What that pace is running at today.
No we've never disclosed what our starts on a per month or any statistics like that I mean, I understand that that's what the guidance implies but as you know we have and previously disclosed what our quarterly starts are.
Okay I appreciate it and good luck guys.
Thanks.
Okay.
Our next question is with Alex Barron from housing Research Center. Please proceed with your question.
Good afternoon, gentlemen, and great job on the quarter.
Thanks, Alex.
Yeah I saw on the progress you've been making on the land front.
It seems like you guys are holding the line on the owned lots and increasing your.
<unk> significantly just kind of curious.
How you see that playing out over the and other.
The next few quarters is that going to increase in terms of that direction.
Well, we're definitely moving toward a more asset light land light business model and so we've made tremendous progress to get to now 64% of our lots being controlled.
And we would hope to improve on that on a go forward basis, but at a minimum be at that level.
And is there something that has fundamentally changed on the business, that's allowing that now or is it more just your choice to moving that direction.
Part of it as we're moving through.
With velocities, we're moving through our inventory.
Quicker and so that's allowing us to do that plus we've spent additional time on trying to bring land on an adjusted time basis. So that it is controlled until we're ready to actually use it.
And go forward with construction.
Okay great.
And so from a capital perspective, and it would seem that that's going to.
And free up some cash flow and looks like your your balance sheet is obviously, improving so any thoughts around share.
Share buybacks or dividends at this point based on that.
Okay.
And this is Dave we have a share repurchase program in place that we've had for.
And for some time and it is about $3 9 million shares available for repurchase on it.
And obviously with the cash balance and we have today and our capital preferences to reinvest and the business. We've got a significant amount of lots that we are working on today, but we always evaluate whether or not a share repurchase or some other distribution of capital is and the best interest of the company.
Okay, great and if I could ask one last one obviously the looks like the order momentum and the century complete was.
Very strong this quarter.
We anticipate that that line of business is going to keep growing faster than the rest of the company.
It's really been our goal to increase the century complete brand and as we've said on past calls.
That was the brand that was hurt the most when we hit pause last year and that momentum has has picked back up.
It's very dependent on land closings because virtually every.
A lot that we have on balance sheet for century complete is taken on when we're starting that home. So when we look at that now that that machine has ramped back up we would certainly expect to see that the the starts and the sales and the result, and closings will continue to increase.
<unk>.
Okay, Great best of luck for the year.
Thank you. Thank you.
We will now turn the line back over to Dale for some brief closing remarks.
Thank you operator, I'd like to thank our entire team, especially our frontline employees, who have continued to outperform expectations demonstrate their commitment to exceptional customer service and their tenacity and unparalleled work ethic.
Without your efforts century would not be where it is today.
Thank you all for your time today. We appreciate your continued support investment and look forward to speaking to you again next quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.