Q1 2023 Century Communities Inc. Earnings Call
Good day, everyone and welcome to the century communities first quarter 'twenty 'twenty earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by vehicle.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Tyler Langton, Vice President of Investor Relations.
Please go ahead, Sir good afternoon. Thank you for joining us today for century communities earnings conference call for the first quarter 2023.
Before the call begins I would like to remind everyone that certain statements made during this call may constitute.
Forward looking statements.
These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward looking statements.
Okay.
Certain of these risks.
[noise] uncertainties can be found them heading risk factors in the company's latest 10-K as.
Supplemented by our latest.
In Q and.
And other SEC filings, we undertake no duty to update our forward looking statements.
Certain non-GAAP financial measures will be discussed on this conference call.
This presentation of this information.
Not intended to be considered in isolation.
Or as a substitute for.
Financial information presented in accordance with GAAP.
Hosting the call today are Dalfen, Stephan Chairman and co Chief Executive Officer, Rob.
Rob Francesca and co Chief Executive Officer, President and.
David Messenger Chief Financial Officer.
Following today's prepared remarks, we'll open the line up for questions with that I'll turn the call over to Dan.
Thank you Tyler and good afternoon, everyone.
We are pleased with our solid first quarter results, including $44 million in pre tax income.
Net income of $33 million.
Diluted earnings per share of $1.04 and EBITDA of $55 million.
We successfully achieved the objectives discussed on our year end conference call.
As we continue to focus our sales efforts and incentives.
Monetizing homes with near term deliveries, despite their lower margins, resulting from inflated direct construction costs given their start dates in 2022.
During the quarter, we also significantly increased our new home starts Jenna.
<unk> generated $191 million in operating cash flow.
And further reduced our net debt to capital ratio to 21, 5%.
We have become increasingly encouraged by the pickup in our sales activity over the past several months.
Net new contracts in the first quarter totaled 2022 homes with sequential increases in both February and March and a 61% improvement from fourth quarter 2022 levels.
Given the solid demand we saw in the quarter. We believe that we could have sold even more homes, if our inventory of near term deliveries has been higher.
Our quarter end backlog consisted of 1920 sold homes valued at $714 million.
Economic uncertainty continue to impact the U S consumer.
Yeah.
Yes, we have seen over the past several quarters homebuyers are continuing to look for homes that are closer to completion in order to lock in their interest rates.
Consistent with our strategy, we intend to continue concentrating our sales efforts on homes with more near term completions.
In terms of sales patterns, we expect more typical seasonality to return this year after being obscured by the Covid driven sales boom that began in 2020 and continued until the interest rates led downturn in the second half of 2022.
As a result, we would expect our sales to see the usual spring selling season uptick.
Slow down during the summer and then pick up in the fall before trailing off at the end of the year.
In the first quarter, we delivered 1912 homes, a level, which was ahead of our expectations heading into the quarter.
These better than expected deliveries were mostly due to timing as deliveries originally expected for the second quarter ended up closing in the first quarter.
As a result, we expect our deliveries in the second quarter to be slightly below first quarter levels.
As a reminder, our fourth quarter and year end 2022 conference call.
We guided to deliveries in the first and second quarters of 2023.
Below prior year levels due to the fact that we delayed community openings and started fewer homes in the second half of 2022 as the market deteriorate.
Yeah.
In order for you to better understand how our starts pace in 2022 impacts our deliveries in 2023.
We think it is helpful to discuss our starts cadence for the last five quarters.
We started 3246 homes in the first quarter of 2022.
Followed by 3469 homes in the second quarter.
As interest rates started to rapidly wise in the second half of 2022 and the housing market market softened.
We reduced our starts to 1765 homes in the third quarter.
And only 970 homes in the fourth quarter of 2022.
Given this cadence of starts we simply have fewer homes available for delivery in the first two quarters of 2023.
Over the past several months is the margins on homes, we were starting to begin to see healthy gains.
Sales activity has started to rebound we began to increase our starts resulting in a total of 2354 homes starts in the first quarter of 2023.
We expect our starts in the second quarter of 2023 to be higher than the first quarter.
As a result, we anticipate seeing sequential improvement in our home deliveries in both the third and fourth quarters.
Revenues from home sales were $736 million in the first quarter.
Our average sales price decreased by 9% on a year over year basis.
$385000.
Reflecting our strategy of properly incentivize them homes with near term deliveries and building more affordably priced homes.
In the first quarter, our century complete business had strong results deliveries and revenues were up 12% and 17% respectively on a year over year basis.
With an average sales price of $253000.
Our century complete business accounted for 38% of total deliveries in the first quarter of 2023 compared to 28% of our deliveries in the year ago period.
We are continuing to see strong underlying demand for affordable entry level homes.
This lower priced segment of the market is benefiting from favorable demographics and has the widest range of potential homebuyers.
As a reminder, this portion of our business only purchases finished lots on a just in time basis.
We believe we have the right strategy that positions as well as home sales rebound.
Margins improve off of trough levels.
Ayers are currently looking for affordably priced homes with near term completions.
And we intend to meet this demand.
We've been ramping our starts and new community openings over the past several months given our confidence that the homes, we're starting now shouldn't carry higher margins and returns.
As a result, our deliveries in the second half should exceed first half levels and our second half gross margins should exceed the first half margins due to lower direct costs improved cycle times and reduced levels of incentives.
In closing I want to highlight the century was recently named to Newsweek's list of America's most trustworthy companies 2023 and has the highest rent homebuilder on the list.
Our cornerstone goal has always been to deliver a home for every dream.
And this recognition is a reflection of how much our employees and trade partners strive each and every day to fulfill that mission.
On behalf of the entire senior management team.
I want to thank all of our team members, who are critical to our success as a company.
And through our century University training programs, we are committed to providing them with ongoing training and development. So that we can continually raise the bar for what the home buying experience it should be.
I'll now turn the call over to Rob to discuss our business and plans going forward in more detail.
Thank you Dale and good afternoon, everyone.
We have a strong presence within the affordable new home category with approximately 90% of first quarter deliveries coming from homes priced below FHA limits, allowing us to target the widest range of potential buyers in any given market.
Our homebuyers continue to have a healthy financial profile with century communities and century complete homebuyers, having respective average FICO scores of $7 29, and seven and 13 in the quarter.
We believe that we are well positioned as conditions in the housing market normalize given our spec based model and focused on entry level homes.
Our cancellation rate was 18% in the first quarter a significant reduction from the 37% rate. We saw in the fourth quarter of 2022 as buyers are adjusting to the higher interest rate environment.
For comparison purposes, our cancellation rate was typically in the 20% range in the years prior to Covid.
While the homebuilding industry continues to be challenged by municipal and utility delays supply chain issues and trade shortages. These pressures are continuing to slowly ease.
As a result, we are seeing improvements in our cycle times and expect the cycle times at homes that started in the fourth quarter of 2022, and first quarter of 2023 to be significantly better than the cycle times of homes that were started earlier in 2022.
Additionally, as supply chain delays and trade shortages further subside or cycle times will decline further in the quarters ahead.
Such that this year, we expect to be starting and completing homes at a more traditional four to six month time period.
In the first quarter of 2023, the direct construction costs on our starts declined by roughly 11% and average of approximately 20000 per home versus the high watermark in the second quarter of 2022.
We have seen a reduction in our costs across a range of products to varying degrees.
While the amount of additional cost savings on our starts should moderate as the year progresses, we should see incremental benefits to our gross margins in the second half of the year as we start delivering these lower cost homes.
In the first quarter, we generated adjusted gross margins of 19, 6%, which was in line with the expectations. We provided last quarter for our margins to be consistent with fourth quarter levels.
Similar to last quarter, our first quarter margins were impacted by the fact that the homes delivered were burdened with elevated construction costs given their start dates in 2022 as well as higher incentives than historical norms as we prioritize the sale of complete and completing inventory.
We currently expect our gross margins in the second quarter to be similar with first quarter levels. As we continued to deliver homes started at the time in 2022, when our direct costs were at or near peak levels.
Okay.
The homes that we have been starting over the past several months are carrying a higher margin profile due to improvements in direct construction costs reduced incentives and shorter cycle times.
As a result, we expect our homebuilding gross margins to trend positively on a sequential basis in both the third and fourth quarters.
We ended the first quarter with approximately 52000 owned and controlled lots with roughly 61% owned and 39% controlled.
This total locked pipeline was roughly flat with fourth quarter 2022 levels of 53000 lots.
And our 31001 lots provide approximately three years of deliveries based on 2022 volumes, which is consistent with past years.
As we have stated previously our land strategy allows us to control a significant amount of land for future growth during periods of high sales absorptions for limited investment and exit those positions at a reasonable cost in the event of a market downturn.
All without adversely impacting our near term need for lots on which to start homes.
Looking forward, we don't expect any further significant decreases in our controlled lots are controlled lot count increase modestly in March compared to February levels, as we started to slowly and conservatively increased our land acquisition efforts.
In the first quarter, our community count increased to a company record 234 communities up 13% from the fourth quarter 2022 levels of 208, and 19% from year ago levels of $1 97.
While our community count saw year over year increases across all our segments in the first quarter, we saw the greatest growth in Texas and the southeast.
Two markets that are generally held up better during the recent slowdown given their relative affordability strong employment and population growth.
We intend to continue to grow our community count is the recent declines in direct cost moderation of incentives and inspected improvements in cycle times has given us increased confidence in our ability to generate solid margins and returns from the new communities.
Given the extent of our existing land pipeline, our year end 2023 community count could be in the range of 250 to 260 communities. If we elect to open all communities that we expect to be available representing year over year growth of 20% to 25%.
We are pleased with our performance this quarter and encouraged by the improvement in sales activity that we have seen since the start of the year.
Looking forward, we are confident that our existing land pipeline will support strong community count growth this year and increased deliveries in the years ahead.
I will now turn the call over to Dave to discuss our financial results in more detail.
Thank you Rob Regeneron.
We generated strong operating cash flow this quarter and further reduced our net homebuilding debt ratio, while also increasing our starts and community count to drive future growth.
During the first quarter of 2023 pretax income was $44 million and net income was $33 $3 million or $1.04 per diluted share.
Home sales revenues for the first quarter were $735 6 million.
Prior to $988 4 million in the prior year quarter.
Home deliveries of 1912 homes declined by 19% on a year over year basis, a direct impact from our decision to start fewer homes in the second half of 2022.
Our average sales price of $385000 declined by 9% versus the prior year quarter, reflecting our strategy of properly incentivizing homes with near term deliveries building more affordably priced homes and century complete accounting for a greater percentage of our deliveries.
In the first quarter net new contracts across our footprint or 2022.
The year over year decline in the quarter was primarily due to the reduced number of homes, we had available for sale and the impact that mortgage rate volatility and economic uncertainty had potential homebuyers.
At quarter end, our backlog of sold homes was 1920 valued at $714 million with an average price that had decreased by 10% year over year.
In the first quarter adjusted homebuilding gross margin percentage was 19, 6% compared to 29, 5% in the prior year quarter.
19, 8% in the fourth quarter 2022.
Homebuilding gross margin was 18, 2% compared to 28, 3% from the same period last year and 17, 6% in the fourth quarter of 2022.
Similar to last quarter. This year over year reduction in margin percentage was expected and primarily resulted from our strategy of generating cash and reducing our leverage profile by focusing our sales efforts and incentives on near term deliveries, even though they carried elevated construction costs due to their start dates earlier and.
A year.
Looking ahead, we expect our margins to increase sequentially beginning in the third quarter of this year and we did not book any impairments this quarter.
SG&A as a percent of home sales revenue was 13, 4% in the first quarter compared to 10, 3% in the prior year.
Largest driver of this year over year increase was the spreading of our fixed costs over a lower revenue base.
During the first quarter financial services captured 66% of the clothing is generating $15 $9 million in revenues compared to $26 3 million in the prior year quarter, primarily due to fewer loan originations angry and increased competitive pressures.
The business contributed $5 1 million in pre tax income compared to $11 2 million in the prior year quarter.
Yeah.
During the quarter, we increased our quarterly cash dividend by 15% to 23 cents per share from <unk> 20 per share and did not repurchase any shares of our common stock, leaving approximately one 5 million shares remaining available for repurchase under our current authorization.
As a result of executing on our objectives, we generated $191 $3 billion in operating cash flow in the first quarter, even with the significant increase in our home starts.
Our net homebuilding debt to net capital ratio further declined to 21, 5%.
Paired to fourth quarter 2022 levels of 23, 5%.
Our homebuilding debt to capital ratio declined to 31, 8% at quarter end compared to 32% as of the end of the fourth quarter of 2022.
We ended the quarter with a strong financial position, including $2 $2 billion and stockholders' equity of 19% year over year increase at $1 $2 billion in total liquidity, including.
Including $418 $4 million in cash.
At the end of the first quarter, we had no borrowings outstanding on our $800 million unsecured revolving credit facility that does not mature until April 2026. Additionally.
Additionally, we have no senior debt maturities until June of 2027.
Riding us ample flexibility with our leverage management at quarter ranked our inventories totaled $2 $7 billion.
Now turning to guidance, we have become increasingly encouraged by the improvement in sales activity that we experienced in the first quarter and our ability to start more homes.
As a result for the full year 2023 we're increasing our guidance for home deliveries to be in the range of 7250, 8250 homes and home sales revenues to be in the range of $2 7 billion to $3 $2 billion.
As Dale mentioned in his remarks, our deliveries in the second quarter should be slightly below first quarter 2023 levels as we delivered a greater number of homes in the first quarter that were originally expected for the second quarter.
Given our increased level of starts since the beginning of the year. We continue to expect our deliveries to increase sequentially in both the third and fourth quarters.
In closing, we believe that our spec based model dedicated focus on more affordable homes geographic footprint and solid balance sheet positions us well as conditions in the housing market continued to improve.
With that I'll open the line for questions operator.
Thank you we will now begin the question and answer session.
Dan Your question has been asked us.
Thank you.
At this time, we will pause momentarily to assemble our roster.
Our first question.
From Carl Reichardt with BP.
Go ahead. Thanks.
Good afternoon, everybody I'm I wanted to ask Hey, I wanted to ask a bit about the lot count in particular and so the complete sides now I think about half of your control, but they are down a lot year on year and can you talk a little bit about the developers who are feeding you. Those finished lots since I'm guessing you're not typically self developing those.
And how are you feeling about how they're capitalized now given some of the concerns about a regional bank capital in particular for for for acquisition and development financing.
It's something we're heavily focused on Karl with the regional banks and all you know this is something that's transpired fairly quickly.
With that.
We've had the developers continue to be able to feed us those lots part that ones that already had the financing new deals that are coming up you know that's kind of more of a challenge.
We've been able to.
At least to this point overcome it.
Just not to get too granular, but as an example, we have lot Committee every week at our century complete.
On Thursdays tomorrow, they have the biggest amount for this entire year coming up for lot community.
Large number of lots that would be looked at for purchase again. These are all finished lots and so we're still getting our share lots but.
Definitely you know the financing side, we're looking at that very closely.
Tax the private developers.
Okay. Thanks that makes sense and then along those lines. So what can we expect that if the mix shifts substantially away from century complete.
And it obviously from an orders perspective, it did relatively speaking in terms of absorptions. This quarter. So as you look out is your is your thought process on the guide for this year that you'll have a mix not dissimilar from century complete to what you've had in the past or will it grow and just wondering trying to figure out the margin guide in the delivery guide based on that mix of central <unk>.
It moves a bit thanks.
Yeah.
Carl I, we're really not expecting that there's going to be a big shift actually century complete side continues to grow when we when we look at it part of the reason.
When you look at the century complete sales is when we slowed down on land acquisition in the second half of last year that impacted that part of the business more.
Because they they built inventory lots on the community side, we already own the land. So if we chose not to start it. It was in a situation where we're still on our books on the century complete side. If we didn't start. It then we didn't buy the lots.
So it took it took them a bit longer to start back up than it did on the community side.
That makes a lot of sense, okay. Thanks, a bunch I appreciate it guys.
Thanks Carl.
The next question comes from Alex Rygiel with B Riley. Please go ahead.
Thank you good evening and very nice quarter.
Can you talk a bit about your product mix geographic mix.
Okay.
Yes, I think that you know you look at our product mix with Bell just talked about you know, where we're still expecting central complete to be a growing part of our business as we expect the rest of the business to grow over the balance of this year. So you know the.
The difference we have between completing to use we expect to keep just stay there through the balance of this year and S. P.
We've seen kind of the the heights of where it could be and we think that as we bring new product online and we have no more new communities will be opening up later this year, we're looking to be bringing on product that can be at a lower price point. So maybe not a you don't win those deals were originally approved to be developed and built maybe were not built the most extensive plans anymore. So we're.
Turning to rotate down the E. S. P. A the overall community, which in turn will bring down our ASP across the portfolio.
That's helpful and then can.
Can you talk a bit about.
Some of the buyer characteristics that you're seeing I know you went into a few of them there but.
Maybe go a little bit deeper.
Ayers today and the urgency they have.
General age category and so on.
Well in general just given the positioning of our product.
A significant percentage of our of our buyers are first time homebuyers and so in many cases are coming out of apartments or or other types of non ownership arrangements.
And so it's that's why we have focused our efforts on selling near term completions.
Because those buyers are are very interest rate dependent.
We don't want to carry them in backlog for a long period of time and they don't want to be in backlog for a long period of time and they want to be able to know what their interest rate is what their payment is going to be and be able to get to closing and move on and live in a brand new home and so to to a certain extent that's always.
The profile of a buyer, but even more so now with with the interest rate environment.
They want they want to make sure that they know what their payment is going to be and that it's not going to change on them before they close.
Thank you.
Yeah.
The next question comes from Jay Mccanless with Wedbush Securities. Please go ahead.
Hey, good afternoon, everyone. I guess, the first question I had with the with what's in backlog at the end of the first quarter.
Yes.
Is that backlog basically been price adjusted and that's why you're thinking gross margin is going to be flattish from one <unk> do you think theres any more work from an incentive or buy down that you would need to do to bring some of that backlog to the closing table.
No no I think that that's all been taken into account I think that what we're seeing now is different than what we're seeing.
In the back half of last year, where there were obviously a different adjustments.
Adjustments made at the closing table or getting right up to closing when you look at it now I don't think that that's necessarily something that we need to be doing and incentives that we have in in those deals already we've already taken into account in that guidance.
And what should we expect for SG&A in the second quarter, either dollar or percentage amount you're targeting.
Well I think we're always targeting lower but I think that given that are you know, we're we're expecting volumes to be down a little bit Oh from Q1, I think you know our fixed costs have been running you know I think al last year were hanging out just under 70% of our G&A numbers, we're fixed I think right now in Q1, whereas the tick.
Bob about 71% and my guess is that those fixed costs to stay probably pretty consistent as we build those pretty flat for a three or four or five quarters now and then the variable piece on commissions will be just dependent on what we do from a closing perspective.
So on that.
We've heard I think from another builder today that maybe co broker is starting to move up a little bit is that something that your buyers typically use in and if so is that something we need to think about and in the SG&A line through.
Through the rest of the year, especially as you're growing the community count.
Yes, yeah, we've definitely seen the the external railroad the brokers come back.
Back into the fold them into the mix, so I would expect it.
Most of our markets have a pretty healthy co broker percentage and we expect that to continue and see it increase as our deliveries go up throughout the rest of the year.
Okay.
And then any commentary you could give us on April .
Yeah in terms of in terms of sales what we experienced in the first quarter.
It has continued into April as we said in our.
Prepared remarks, we increase sequentially.
In sales as the quarter went on February was it was higher than January .
January and March was higher.
Then in February was when we look at where we stand today on April we're above where we were at this time last year in April so we.
We've not seen any change with regard to the the velocity out there in terms of interest in the home buyers.
Okay, great. Thanks for taking my questions.
The next question comes from Alan Ratner with Zelman and Associates. Please go ahead.
Hey, guys. Thanks for all the color and taken are taking my questions.
First of all I guess on the land side I hate to put it on the wind side, you mentioned flow deal flow is starting to pick up a little bit and there's more activity in the in the.
Land Committee.
What are you seeing on land prices I mean, if I look at your your average closing price, it's down about 40000 or so from the peak last year I'm guessing a lot prices have not reset is meaningfully but have you seen any pullback on lot prices at this point and if not.
I guess are you just assuming that the construction and labor cost relief you are seeing is enough to offset kind of a.
Similar lot prices.
Yes Alan.
In terms of land prices, we started seeing a little bit of relief last year, certainly on deal terms and structure a lot of relief. There. We started seeing some land price reductions as the spring selling season has picked up here in 'twenty three other builders now are all.
So in the market for land.
People have kind of three instituted I'm looking at various deals and so with that we are not seeing the price drops in land that we had hoped to see when we ran these let's say fourth quarter of last year on what we thought we might have coming forward. This year, so it's been pretty pretty.
Pretty stable.
Got it but I guess so on that note do you you're confident moving forward even at these call it peak land prices or close to it because like what you're seeing on the ground in terms of your ability to maybe pull back a little bit on incentives or kind of pricing firming up yes.
And also it's a product that we're putting in their communities as well.
And what we're offering them more efficiently.
Shunt product lower square footage is things like that that can help make deals work, but yeah definitely.
No we're not anticipating.
Right now it would be great. If it happens, but we're not anticipating land prices coming down.
Got it that's helpful I.
I guess in a similar vein on the cost side for for construction materials.
Thank you for giving those start figures because I think it really does help conceptualize.
What's been going on in and kind of.
In terms of not only your inventory availability, but obviously the cost relief that you and others have seen an improvement in cycle times, if not surprising given that pullback in starts I guess my question now is with you and others are beginning to ramp starts back up again.
How confident are you in holding on to these cost savings you've been able to realize I mean thinking back to last year. When you were starting three 3030 500 homes a quarter.
Was a pretty tough environment from a from a labor and material standpoint. So if you if you get close to that number again or maybe even a little bit but Huawei is there a risk that some of this relief you've found in the near term kind of reverses.
Yes, I think theres always a little bit of risk in that but you've got to put it in the context of how quickly direct construction costs escalated so and when we when we look at that and they went up pretty fast and pretty high and so as they as they come.
Come off that high.
They are as we said in our prepared remarks, we were not expecting going forward that we're going to be able to continue getting the same types of reductions as we've as we've been able to get so far.
But with that being said a lot of the supply chain challenges that also were a factor in increasing the price not just because of the number of homes that were being built but still coming off all of the Covid disruptions continues to get better. So at least we don't have that in the mix.
So when we look at.
We're starting more homes and we're assuming that our competitors will be starting more homes.
The supply chain overall is in better shape than it was last year, regardless of the number of homes that are being built.
Got it very helpful. Appreciate the added color guys. Thanks, a lot. Thanks, alright, thanks Alan.
The next question comes from Michael Rehaut with J.
J P. Morgan. Please go ahead.
Hi, everyone. This is Dan drowsy on for Mike I wanted to get a sense of if I can ask about pricing trends within the quarter I'm not sure. If you guys disclosed that but would love to get any color there.
I think generally in terms of when we look at it I mean are are incentives that we were offering in the fourth quarter, where we are at peak levels as we saw the.
Our absorptions starting to pick up and the demand to be better than what we saw at the end of last year. We certainly started pulling back on incentives. So as a result, as we look at it from the B and the beginning of the quarter to the end of the quarter our incentives were down.
Over that period of time and as we look into April there continuing to be down. So it's a it's a process as we go forward, but it's definitely based on the amount of demand that we see and the amount of absorptions that we're getting.
Thanks for that and then I believe you said that there was a $20000 cost reduction from the peak what with lumber relatively stable can you split out maybe how much of those cost savings are you maybe longer versus other inputs.
Okay. It's it's a variety of inputs, it's everything from Hill.
Our plumbing and HVAC C in flooring and labor, there's a variety of components that go into it. So what we've been seeing a cost relief across the board a couple of areas you know concrete appliances, you're not seeing as much cost relief, but you know the rest of our kind of our direct cost stack, we've been seeing reductions in improvements.
Sure.
Thanks, that's all for me.
Okay, great. Thanks.
Operator are there any further questions.
With that we'll turn it back over to John for some closing remarks.
I'd like to take this opportunity to once again, thank all of our team members for their incredible work and continued dedication to our valued homebuyers I'd also like to thank our investors for their time today. We appreciate your continued support and investment and look forward to speaking to you again next quarter.
Okay.
Okay.