Q2 2021 Century Communities Inc Earnings Call
Greetings and welcome to century communities second.
The 2021earnings conference call at this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note this conference call is being recorded.
Of course, I'll now turn the conference call over the Hunter Wells, Vice President of Investor Relations for century communities.
Thank you you may begin.
Good afternoon. Thank you for joining us today per century communities earnings conference call for the second quarter ended June 30th 2021 before the call begins I would like to remind.
And that certain statements made of of 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 Dot S. E C dot Gov and on our website at Www Dot century communities dotcom.
Everyone. 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.
Dot com, that's when it will be available after the call should you have any questions that did not get answered.
The call today are Dale for the Baskin, Chairman and co Chief Executive Officer, Rob Franciscan Co Chief Executive Officer, and President and David Messenger, Chief Financial Officer. Following today's remarks, we will open up the line for questions with.
With that I will turn the call over to Dale.
Thank you Hunter and welcome everyone to our quarterly conference call.
We're pleased to report our exceptional start to the year as continued resulting in record second quarter results and our most profitable quarter ever.
In the second quarter, we generated over $1 billion.
And home sales revenues, a 34% increase and the highest ever achieved in the single quarter.
Net new home contracts increased 17% to 3120 homes driven by of 56 per cent increase in sales from our century complete brand and home deliveries.
<unk> 12 per cent to 2771 homes, both of which are quarterly records.
Net income improved 207% to $118 million and pre tax income improved 204% to $152 million both.
Both company Records, we are extremely pleased with the health of our balance sheet stockholders equity increased to 1.5 billion from $1.1 billion and our net homebuilding debt to net capital ratio improved to 23% compared to 37, 5% with the liquidity.
<unk> of $1.3 billion.
We ended the quarter with a backlog of 4446 homes a new record.
Valued at $1.8 billion increases of 60 per cent and 83% respectively.
Given our disciplined business model.
Liquidity over 96% of these homes had already been started at quarter end and across our 2 brands less than 15% of our home deliveries were sold as pre sales.
For new second quarter sales only 10% of the homes were pre sales.
There are many benefits to this model.
Particularly during periods of increased material and input costs.
Such as what we recently experienced with lumber.
Homes also simplify the design process for homebuyers promote shorter build times and accelerate the cash flow and profit recognized upon the closing of the home.
Selling homes already.
Already under construction provides better visibility into costs per.
Protects our margins and drive increased profitability to the bottom line.
This meaningful focus on move in ready homes has enabled century to capture additional margin expansion.
[noise], culminating in second quarter margins of $23.
9% up 700 basis points from 16, 9% last year.
Our fourth consecutive quarter of sequential margin improvement.
The strong order activity, we are experiencing reflects a healthy pricing environment supported.
Supported by robust demand.
And tight inventory.
While we expect this level of obtainable price increases to moderate at some point in the near future.
Will be occurring at a time when certain material costs, such as lumber are decreasing.
As we have grown in scale of our organization we have maintained.
<unk> controls on all of our costs.
This focus resulted in SG&A as a percent of home sales improving to 9.9%.
A 170 basis point improvement over last year.
Our emphasis on controlling costs, while growing our top line has resulted.
<unk> increased profitability and.
And a second quarter return on equity of 28%.
Our ninth consecutive quarter on quarter improvement.
In May we announced the initiation of a quarterly cash dividend of <unk> 15 per share.
On amount that allows us to reward.
<unk> the stockholders with cash.
While maintaining sufficient cash levels as we simultaneously invest in our future growth and build on our business momentum.
Looking ahead, we're committed to maintaining a disciplined approach to capital allocation and expect to drive further value creation.
Warner stockholders.
We're pleased with our tremendous progress not only in the second quarter, but since going public in 2014.
In May we were again ranked the ninth largest homebuilder by the annual builder 100 list.
Demand for new homes is at record levels.
For a reported by industry tailwind such as low interest rates, increasing household formation and a shortage of homes available at affordable price points.
Across the majority of our markets the months of supply of homes for resale is well below the current U S National average.
R M.
So total footprint continues to benefit from domestic migration to the Smile States. These.
These positive industry dynamics, coupled with our focus on the entry level of homebuyer.
Provide us with exciting opportunities and are in a strong catalyst for continued growth.
Cross both of our century community.
<unk> and century complete brands.
With that I'll turn the call over to Rob.
To discuss our business in more detail.
Thank you Dale as we head into the second half of the year. We are extremely pleased with our second quarter and year to date results.
Given constructive market dynamics and our substantial backup.
<unk> by the <unk>.
The 4500 homes, we fully expect the results in the second half of 2021 will be as positive as the first half.
We are experiencing broad based demand across all of our markets, resulting in an absorption pace of 5.7 sales per community per month.
Demand for homes today exceeds the available supply and sales pace is heavily influenced by the number of homes actually available for sale.
Given that we only pre sale homes and limited communities our preference to sell homes later in the production cycle and the reduced number of unsold homes, we have completed.
<unk> in the third quarter due to strong sales earlier in the year we.
We expect sales in Q3 to be down on a year over year basis.
However, we have placed a strong emphasis on moving new subdivisions into a position of being able to start homes and as a result expect sales to.
The rebound in the fourth quarter, when we will have more homes available to be purchased.
We ended the quarter with 184, selling communities and moving forward expect our community count to increase over the balance of the year ending up more than 15% from the second quarter level.
In keeping with our desire to increase the number of active selling communities. Our total lot inventory continued to expand during the quarter ending at 65610 launch an additional 8074 lots from the first quarter.
We remain conservative on our approach to land acquisition.
Considering potential opportunities our underwriting criteria emphasizes controlled rather than on lots utilizes absorption rates lower than today's current rates and does not include home price appreciation.
This is the sixth quarter in a row, we've increased our overall percentage of controlled lots.
<unk> went in the quarter with 43049 lots under control or 66% of our total pipeline compared to only 45% of year ago, reflecting our ongoing focus on a capital efficient land portfolio and our highest percentage since going public in 2014.
And of strategy is also reflected on our inventory composition.
Where the percentage of our inventory dollars invested in land and land development has declined for 4 consecutive quarters and even most recently at less than 38% of total inventory dollars as we have increased our investment in homes under construction.
As we expand our lot positions to support our future trajectory our preference for controlled lots over owned is key to our low risk land light high return business strategy.
These controlled lots also provide us with tremendous flexibility to adapt to changing market conditions as they may occur in the future.
Over 10000 of our controlled lots are under our century complete product line and all will be fully finished and ready for vertical construction when acquired.
We do not develop any land under century complete which further promotes our land light acquisition strategy.
We are typically starting in the home.
Concurrent with acquiring the land, enabling us to scale quickly in new markets and drive quicker asset turns.
As an overall percentage of new sales century complete grew sequentially from 32% in the first quarter to 42% the highest in our history and we remain intent on growing.
The complete line as a larger percentage of our overall business in future years.
This past quarter century complete expanded into 2 new markets Dallas Fort worth in Louisville.
The largest metro areas in their respective states Louisville was recently named 1 of the top 10 places to live and over the next 10.
Job growth in Louisville is predicted to seed and outpaced the national average.
Given the low local infrastructure required by this business line geographic expansion can be scaled quickly and without a large investment.
Along with century complete century communities also entered Dallas Fort worth.
The largest homebuilding market in the U S.
We currently operate both brands in 6 states, including Arizona, Florida, Georgia, the Carolinas, and Texas and see additional opportunities to increase penetration of other existing markets by adding the second brand.
Given.
The current demand environment like our peers, we have experienced supply side and municipal disruptions that have impacted cycle times in some markets, causing them to extend on average by approximately 2 to 4 weeks.
Since 2013, we've completed and fully integrated 7.
Additions added 16 states and created an extensive national footprint, which allows us to focus our continued growth through organic means with a low risk land light high return business strategy, we are well positioned to deliver continued top line growth profitability.
<unk> expansion and enhanced returns to our stockholders.
I'll now turn the call over to Dave to discuss our financial results in more detail.
Thank you Rob during the second quarter net income increased 207% to a record $117.9 million or $3.47 per.
Looted share compared to $38.5 million and of $1.15 per share in the prior year quarter.
Second quarter pretax income was $152.1 million, an increase of 204% and.
And pre tax margin was 14, 6% compared to 6.5% in the prior year quarter.
Home sales revenues for the second quarter increased of $1 billion, an increase of 34% compared to $747.4 million in the prior year quarter.
Deliveries increased 12% to 2000, and 771 homes and net new contracts increased 17% the 3000.
120 homes.
With century complete increasing by 56% followed by the mountain and west regions with respective increases of 30% and 28%.
Our financial services business generated $29.9 million in revenues compared to $25.7 million in the second.
Quarter of last year.
Driven by an increase of the number of loans originated.
Financial services pre tax income was $11.7 million compared to $13 million. A result of more normalized gain on sale margins and the benefit of a Q2.2021 time item of approximately $3 million.
Homebuilding gross margin percentage improved to 23, 9% compared to 16, 9% of for the same period last year, an increase of 700 basis points.
Adjusted homebuilding gross margin percentage was 25, 7% compared to 19, 5% in the prior year quarter and the highest achieved.
Second quarter 2014 public offering.
Margins as a percent of home sales, including adjusted have increased sequentially each quarter since the second quarter of 2020.
Looking at our backlog margins, we anticipate our current margins to be relatively stable into the third and fourth quarter and expect continued.
<unk> year over year margin improvement in the back half of this year.
SG&A as a percent of home sales revenue improved 170 basis points to 9.9% in the second quarter compared to 11, 6% of the prior year.
This is the second sequential quarter, our SG&A ratio of below 10%.
Our net homebuilding debt to net capital ratio improved to 23%.
On significantly from 37, 5% in the prior year quarter.
We ended the quarter with approximately $457 million of cash and total liquidity of $1.3 billion.
Our net homebuilding debt to net capital ratio slightly.
Increased sequentially due to investments in our increased backlog and spec homes under construction, while reducing our investment in on land.
In the second quarter, we secured a new credit agreement, increasing our unsecured revolving credit facility, the $800 million with a $200 million accordion and a 5 year term maturing.
In April of 2026.
We have no borrowings outstanding on our revolving credit facility.
Our tax rate was 22, 5% in the second quarter compared to 23, 3% last year.
Due to our pricing power from the strong demand for our homes, we are increasing our full year revenue guidance to be in the range of $3.
The <unk> billion to $4.1 billion.
We reiterate our full year expectations for home deliveries to be in the range of 10750 homes to 11750 homes.
We're extremely pleased with our quarterly results and remain confident in our future financial and operational performance market fundamentals remained.
A positive and we are well positioned for a strong second half of the year.
With that I'll open the line for questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad.
The confirmation tone will indicate your line is on the question queue.
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1 moment, please while we poll for questions.
Thank you. Our first question comes from Michael Rehaut with J P. Morgan. Please proceed with your question.
Hi, This is Maggie on for Mike <unk>.
Congrats on the quarter and thanks for taking my questions.
So first question I, just was hoping you could talk a little bit more.
About.
Hi.
The efforts to the kind of meter sales and how your sales pace trended towards the end of the quarter.
Specifically Ah.
The sales pace came in a good bit higher than what you were seeing.
In the update at the beginning of June So I was hoping you could.
But that more color there.
Sure be happy to the this is Dale Maggie while we don't intentionally meter sales of the similar effect kind of occurs because we only release of small number of homes at a time in the subdivision. So that we can increase sales.
Get the losses with each new release.
We did see sales pick up in the last 3 weeks of June.
That's just really a function on the the number of homes that we had available to be purchased.
Got it.
Thank you and.
Second just on gross margins.
Could you I think you said that you expect to kind of current margins to remain relatively stable through the back half of the year.
Could you talk about kind of the outlook for cost inflation.
On that you're baking into that and to the extent later this year that costs do come down.
Is there the potential to see a bit of a lift to that those gross margins.
Yes, so I guess as Dave So the way, we kind of look at that you know given.
Given the fact, you know 85% plus of our homes are.
Our spec are sold and delivered under our spec construction basis, we've got a decent idea of where our costs are going to be coming in and so when we look at our backlog on what we're what we're selling today, we feel comfortable saying that our margins should be relatively stable on constant through the next couple of quarters compared to the first half of this.
This year.
To see increased lumber prices roll through in Q3 and Q4.
So we've taken that into account as well.
Got it thank you.
Thank you our next question comes from.
From Deepa Raghavan with Wells Fargo. Please proceed with your question.
Hi, good evening.
Thanks for taking the question.
Can you clarify your comments on Q3 deliveries guidance you provided I don't know if I heard that right and also.
How should we think about Q4 rebound just given the widespread.
Guide that you are still maintaining 10.75 to 11 points of 1.5.
Hi, Andy but as long as the guidance provided.
This is Dave I think I think what you heard was dales prepared comments.
Comments talking about sales in Q3, as we are closing guidance.
Right now it's still of the $10.750 of 11, 750, and we fully expect to meet that range through the back half of this year, but we didn't.
Talk about anything regarding.
Regarding the like you're mentioning.
Okay Oh, okay.
Any how do we think okay. So what is there like a of production constrained that's actually causing you to kind of the you know not fulfill despite the hell the order activity that youre seeing in the healthy backlogs are just you know how do we or is it still.
Of those reopening of community counts.
Had issues with.
In the past few months, that's actually causing a.
The delivery cadence to not move higher just curious is there any any any color there you could provide.
Sure Deepa this.
This is dale.
It's it's really in terms of closings, we've been impacted like all of the other homebuilders with.
Both supply chain and municipal limitations. So when we when you look at that.
That's the reason notwithstanding the strong sales.
On the strong market.
Where we're seeing anywhere on average in select markets from delays of 2 weeks to 4 weeks and it's there's a variety of challenges that come up in the supply chain and from market to market Theyre not always the same and from time to time, even with the same within.
Within the same market theyre different ones. So that's why when we look at our closings. We have we have factored in the fact that we've got some elongation of our cycle times.
Oh, Okay got it.
Thanks, Thanks, I'll follow up off line.
Thank you. Our next question comes from Alex right Joe.
B Riley FBR. Please proceed with your question.
Thank you for taking my question of Great quarter, gentlemen, first question.
You mentioned in the in the remarks that you expect prices to moderate can you expand upon that a little bit.
Well the prices have gone up significantly as I think everybody knows.
<unk> reached the point, where we can't continue to increase prices.
Just anticipating that thats going to occur at some time.
In the future when that is we don't know because we haven't reached it but we're just as we look forward.
We don't think we can just continue to raise prices on an ongoing basis. However, the the good news is we're starting to see some.
The relief will certainly on lumber.
Number.
And we're not seeing the same.
Pressure on other input cost that we had earlier in the year and so we think that all balances itself out.
And then could you comment a little bit on.
Land cost him and how in.
And the inflation and price inflation has affected land costs.
Well like you would imagine Alex.
Land costs have risen.
They are at a high point in the cycle for sure, but with that said, we're looking at structuring deals a little differently.
And as well as when you look at our 66% of controlled lots on our portfolio not only do we have.
The room to run and really grow community count in the future, but we feel like we have mitigated risk by the way, we've structured things, but yes home land prices.
As have increased.
Very helpful. Thank you very much.
You're welcome.
Thank you. Our next question comes from Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys, good afternoon, and the nice quarter and thanks.
Thanks for taking my questions.
First I would love to follow up on that prior question about the the comments about price and power and you know again I don't think that's that's to Earth shattering of of a statement to say that we can't continue at the rate. We're at right. Now you mentioned you haven't hit that.
Point of elasticity, yet in terms of demand.
Price of curious you know when you look at your primarily your entry level buyers and century complete how does the credit profile of that buyer look today on these higher home prices recognizing of course that net incomes have not gone up nearly to the extent debt that you guys had been raising price at over the last year.
Well we.
But at the the credit profile really Hasnt changed and we've raised we've raised prices on the century complete line as we have in the century community line, but as as you mentioned, we believe there is price elasticity in the market and if you have certain people that are priced out of certain of our offerings.
Look at we think other people that are priced out of other people's even higher offerings dropdown into our price point and as a leader in offering.
Affordable lower priced homes, we think that's an advantage for us.
Got you Okay. That's helpful.
Second question.
And you know I think you made a comment when you were talking about your you expected order trajectory for the remainder of the year that youre going to have more inventory available for sale on the fourth quarter and I would imagine.
Some of that is at least being driven by the community count growth that you guys are expecting since you probably built up some inventory ahead of those community openings. So we're hearing similar comments.
Rings from just about every other builder just about every builders guiding for community count growth through the remainder of the year. We know even though you guys don't necessarily do this a lot of builders are building up spec inventory and kind of holding them off the market for the time being until they hit a point of construction, where where they have more visibility into their costs. So.
I'm curious if you've given any thought to what impact that could have on the market.
If all of the builders do kind of come forward with more supply over the next 3 to 6 months in and how would you respond if the demand for that inventories, perhaps not as strong as <unk> been seeing over the last few months as inventories been so constrained.
Well, Alan we really.
The the demand we're seeing is remains.
The extremely strong M.
And our sales paces is really impacted by the number of homes that we actually are available to purchase.
So when we look at the interest list.
We have in our various communities.
And the feedback that we're getting from our.
Of our people on the ground, we think theres a tremendous amount of.
Demand that's out there that just hasnt been able to be satisfied with the available supply.
As we look at.
As we look ahead.
That.
I'm sure that other builders will have additional inventory, but we think there's plenty of demand to satisfy all of that inventory, that's going to be coming onto the market.
And the the other thing.
With the production delays that are out there.
All of that inventory.
Tori starts getting pushed out a little further to and some of those delays none of us really know where they are or what that's going to be as we continue to move forward. If there's there's a finite number of of labor resources of material resources and if.
But he is trying to increase their inventory debt.
Then the actual deliveries for everybody, who kind of get pushed out even further.
Makes sense alright, guys. Thanks, a lot.
Well thanks.
Thank you our next question comes.
If every blips Barron with housing Research Center. Please proceed with your question.
Hey, gentlemen, great job on the quarter.
On your last comment on your last comment about.
If everybody starts more homes.
Things will get pushed out further.
Further what is your current.
Can you talk about how many homes you guys started this quarter versus last quarter and how whats your thought process for the second half of the year in terms of starts.
Is it the plan to also meter starts or to accelerate starts just how are you guys thinking about it.
From App.
In terms of in terms of starts.
It's we started more homes in the second quarter than we did in the first quarter as we look forward to the balance of the year.
We're going to be starting homes based on what we are comfortable.
Going to be absorbed.
As I said, a few moments ago, so far what we're seeing is the demand will certainly.
Be able to absorb all of the homes that we offer for sale of if we start seeing that Something's changed then we'll back off on that but that's not what we're anticipating.
<unk> Okay great.
M.
So obviously I think I don't know of 70, 580% of your sales are typically specs and on.
On the past, what's usually the opposite where.
You would have spec people show up and they buy them when they close now it's.
The other way, where sometimes people show up and there isn't enough inventory, but your business model hasn't changed so at what stage are you guys releasing the homes for sale now.
The same specs is it.
As soon as you as soon as you started you're willing to put it on in the market or is it like.
Like 1 or 2 months before its ready too.
To get delivered.
You know we've we in many cases, we're releasing them later in the in the production cycle.
The 1 thing that we want to make sure that we do is that we've got our cost locked in before we set of price on that.
More on release it for sale and so that's the that's really the gating item is to make sure that we were comfortable with where our costs are so that we know that we can appropriately price it.
But in general.
We are releasing homes a bit later in the production cycle.
Got it.
I'll get back in the queue. Thanks.
Sure.
Thank you. Our next question comes from Jay Mccandless with Wedbush. Please proceed with your question.
Hey, good afternoon, everyone. The first question I had could you.
You reiterate or repeat the community count guidance.
Heard part of it but on the whole guidance.
Yes, so part of this is Dave.
We ended the quarter, we entered the second quarter, where the 184 communities and we expect to be up 15% by the end of this year.
Yeah.
So that would get us to something on the low twos for actual fourth quarter ending number.
You'd be a little over 210.
Okay, Alright, just 1 of them just want to make sure on that.
And then the second question I had.
For homes that you're starting now.
So the delays that you've talked about are most of those starts getting sold during the quarter or is there. Some of those are pulling over into the fourth quarter now with some of the delays you are having to deal with or into the next quarter. After after you started it.
Yeah, we.
Sell every home.
Within the quarter that we started and really because as I said earlier I mean, we're releasing things later in the production cycle and some of that is dependent on on the subdivision how many homes, we have under construction and we're mindful of the of the.
Supply chain.
Collonges and labor challenges.
And it doesn't make any sense the start homes M.
And move.
Move of home forward and sell of home if we're getting delayed.
2 of point, where we don't have enough labor of materials in a particular market to.
Change sort of move that that amount of inventory.
Got it.
And then the last question I had with the the complete business is the availability of finished lots to support that business improving or are you finding because I know you've gone into some smaller markets Panhandle of Florida.
Be able and places like that are you finding a larger supply or the developers and some of the smaller markets able to bring more product.
For century to purchase.
Yes, yes, we're finding that and Jay if you just look at the numbers on a year over year basis were up 80% in that business.
<unk> to an owned and controlled of almost 15000 lots. So we've really increased.
As a reminder, we only do finished lots there so.
We've really increased our number of lots and of course like anything else as I said previously land is.
Competitive now, but we have.
Been able to compete and get the positions we need.
That's great. Thanks for taking my questions.
Youre welcome.
Yes.
Thank you. Our next question comes from Alex Barron with housing Research Center. Please.
Please proceed with your question.
Yeah. Thanks, Thanks for taking my follow up so I mean this quarter you guys had a very strong margin surprise.
The upside versus last quarter, and I'm guessing part of that is.
That you had these homes started in probably.
In 2020, and then the prices went up and you guys have already locked in the cost of you benefited from that so would you expect that same sort of dynamic to play out.
In the next couple of quarters or is it going to be more muted because now the lumber costs are going to be flowing through.
Hey, Alex This is Dave I think what we are.
I said earlier was as we look at the back half of the year and how we've been pricing and what we see in backlog, we expect our margins in Q quarters.
Quarters, 3 and 4 to be relatively constant with where we've been producing on the first half of the year. So I don't think you're going to see some of those skyrocket, but we'll be able.
There's still produced healthy margins out of the homebuilding business.
Okay.
And on the SG&A side I've.
I've seen several builders have been cutting back.
Commissions towards.
Brokers and even towards sometimes their internal salespeople are you guidance doing.
Either of those things.
You know Alex.
We've got in all of our markets, we've got deep really the relationships and that we value those although as we've seen our competitors in many of the markets reduce the.
The commissions that they paid.
The third party re litters, we followed suit and a number of markets as well.
Got it.
Okay. Thanks, so much gentlemen.
Thank you. Thank you.
Okay.
Thank you there are no further questions at this.
This time I would now like to turn the line back over to Dale for any closing remarks.
I wanted to take a moment just to recognize the resiliency and agility of our entire team.
Their commitment and dedication enabled us to achieve our most successful and profitable quarter ever.
This impressive performance.
<unk> would not have been possible without them.
We'd also like to thank you all for your time today. We appreciate your continued support and investment and look forward to speaking to you again next quarter.
This concludes today's conference you may disconnect your lines at this time and.
On logo.
Okay.
Thank you for your participation and have a wonderful day.