Q2 2023 Century Communities Inc Earnings Call
Greetings welcome to century communities second quarter 2023 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star Key then zero on your telephone keypad.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two please note. This event is being recorded I will now turn the conference over to Tyler Langton Senior 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 second quarter 2023.
Before the call begins I'd 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.
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 latest 10-K as supplemented by our latest 10-Q 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.
The company's presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP.
Hosting the call today are chairman.
Chairman and co Chief Executive Officer, Robert That's good co Chief Executive Officer and President.
Messenger Chief Financial Officer.
On todays prepared remarks, well open up the line for questions with that I'll turn the call over to Beth.
Power and good afternoon, everyone.
In the second quarter, we experienced strong sequential gains across our business, including substantial increases in net orders deliveries starts and gross margins.
We generated $69 million in pre tax income $51 million of net income.
Diluted earnings per share of $1 $68 million to $80 million of EBITDA.
Strong underlying demand for affordably priced homes scare.
Scarcity of existing homes on the market.
And consumers are adjusting to higher interest rates are all contributing to an increase in new home sales.
Our net new contracts in the second quarter totaled 2317 homes.
A 15% improvement over first quarter 2023.
A 4% increase over a year ago levels.
Net new contracts were especially strong in our century complete business.
Increasing 40% sequentially and 16% on a year over year basis in the second quarter.
Century complete had an average sales price of $257000 in the quarter.
We're seeing strong demand for affordable entry level homes across both of our brands.
This lower price segment of the market is benefiting from favorable demographics and has the widest range of potential buyers.
As a reminder, the century.
Complete portion of our business when we purchase as finished lots on a just in time basis.
It helps to drive above average returns for this segment.
Consistent with the past several quarters.
Continuing to concentrate our sales efforts on homes with near term completions as it allows our buyers certainty in their interest rates.
Our quarter end backlog consisted of 2002 sold homes valued at $750 million and we are not focused at this point on building up a significant sold backlog of later term deliveries.
Our cancellation rate was 14% in the second quarter.
An improvement versus our 18% rate in the first quarter 2023.
Significant reduction from the 37% rate we saw in the fourth quarter of 2022 as buyers are adjusting to the higher interest rate environment.
Our strategy of selling homes later in the construction cycle is another factor in driving this lower cancellation rate.
For comparison purposes.
Our cancellation rate was typically in the low to mid 20% range in the years prior to Covid.
Our cadence of orders was relatively consistent throughout the quarter.
As we commented on our earnings call last quarter in terms of sales patterns, we expect more typical seasonality to return this year.
<unk> sales slowing during the summer months, and then picking up in the fall.
In the second quarter, we delivered 2235 homes.
Our second quarter deliveries increased 17% sequentially and exceeded the guidance, we provided last quarter.
These better than expected deliveries were the result of moving up homes due to improving cycle times.
Were originally expected to complete in the third quarter.
Since the beginning of the year, we have been increasing our starts given the improvement in our sales activity and margins on these newly started homes.
In the first quarter 2023, we started 2354 homes, which further increased to 3041 homes in the second quarter.
To put these starts into perspective, the number of homes. We started in the first half of 2023 were twice the number we started in the second half of 2022.
And as a result, we continue to expect to see higher deliveries in the second half of this year as compared to the first half.
Revenues from home sales were $818 million in the second quarter.
Our average sales price on deliveries decreased by 12% on a year over year basis to $366000.
Reflecting our strategy of properly incentivizing homes with near term deliveries.
Building more affordably priced homes and more closings coming from some of our lower priced regions.
In the second quarter, the average sales price on our backlog equaled $375000.
And we expect our average selling price to increase in the second half of this year over second quarter levels as we continued to reduce incentives and selectively increase base prices.
I also want to highlight that we released our 2023 ESG report last week.
In this report we published our greenhouse gas emissions inventory for the years.
2019 through 2022 and provided details on our significant accomplishments over the past two years since our inaugural ESG report in 2021.
As we detailed in the report.
We are committed to providing our team members with the ongoing training and development. So that we can continuously raise the bar for the home buying experience and want to thank all of our employees for their hard work and dedication to our valued customers.
With the first half of the year behind US we are on track to grow our business and increase our margins and returns in the second half of this year.
Buyers are currently looking for affordably priced homes with near term completions, and we are well positioned to meet this demand.
We have continued to increase our starts given our confidence that the homes. We're starting now will carry higher margins and returns as.
As a result, not only do we expect our deliveries in the second half to exceed first half levels, but our gross margins should continue to improve sequentially due to lower direct costs.
Improved cycle times and reduced level of incentives.
I'll now turn the call over to Rob to discuss our business and plans going forward in more detail.
Thank you Dale and good afternoon, everyone.
We have a strong presence and concentrated focus within the affordable new home category with approximately 93% of second quarter deliveries coming from homes priced below FHA limits.
Allowing us to target the widest range of potential buyers in any given market.
Additionally, roughly 99% of our home deliveries this quarter were from spec builds which allows our buyers to purchase quick move in homes and lock in their mortgage rates for certainty of financing.
We are continuing to see improvements in our cycle times due to easing of supply chain issues and trade shortages and expect the cycle times of homes that start in the second quarter of 2023 to begin to approximate a more normalized four to six month timeframe.
In the second quarter of 2023, the direct construction costs on our starts remain static with the prior quarter, which had declined by roughly 11% and average of approximately $20000 per home versus the high watermark in the second quarter of 2022.
These savings will flow through to our earnings and benefit margins in the second half as we begin to deliver more of these lower cost homes.
Recently, we have experienced increases in lumber costs and could potentially see increases in certain other categories as the new home market continues to rebound.
In the second quarter, we generated adjusted gross margins of 21% 840 basis point improvement over first quarter 2023 margins of 19, 6%.
Our gross margins in the second quarter were ahead of our expectations for them to be roughly flat on a sequential basis.
The primary drivers behind the better than expected results were lower incentives as well as solid performance on costs and cycle times.
The homes that we have been starting over the past several months are carrying a higher margin profile due to improvements in direct construction costs reduced incentives and shorter cycle times.
As a result, as Dale mentioned, we continue to expect our homebuilding gross margins to trend positively on a sequential basis in both the third and fourth quarters and our second half deliveries to exceed first half levels.
Given solid demand in the market, we have been able to reduce the amount of incentives that we have been offering while still maintaining a healthy sales pace.
Incentives averaged 900 basis points on closed homes in the second quarter of 2023, which was down roughly 100 basis points on a quarter over quarter basis.
Our incentives on closed homes will continue to decline as incentives on new orders in the second quarter decreased sequentially throughout the quarter, reaching approximately 600 basis points for June sales.
The remaining incentives offered are largely related to interest rate buy downs.
Now turning to land we ended the second quarter with approximately 58000 owned and controlled lots a 12% increase over first quarter 2023 levels as we began to expand our land acquisition efforts.
This higher lot count was driven by an increase in our controlled lots of 27000 with controlled lots as a percentage of total lots increasing to 46% in the second quarter versus 39% in the first quarter 2023.
Our 31000 owned lots in the second quarter was roughly similar with the last six quarters and provide approximately three years of deliveries.
On the prior year volumes.
We would expect our controlled lot count to increase further over the balance of the year as we continue to invest in land to support our future growth.
In the second quarter, our community count of 233 increased by 10% from year ago levels of 213 and was basically flat with first quarter 2023 levels are.
Our community count saw the greatest year over year increases in Texas, and the southeast to markets that have been performing well given their relative affordability strong employment and population growth.
We continue to expect our year end 2023 community count to be in the range of 250 to 260 communities, representing strong year over year growth of 20% to 25%.
We will achieve these levels by opening over 90 communities and closing out approximately 70 communities in the second half of the year.
We view this new number of communities as a new base that we will look to further grow in the years ahead as we focus on increasing our share across our national footprint.
We are pleased with our performance this quarter our sales activity remained at healthy levels, given the strong demand for affordably priced homes and limited supply of existing homes for sale and we expect to see the positive momentum experienced in the second quarter to continue into the second half of this year.
<unk>.
I'll now turn the call over to Dave to discuss our financial results and increased guidance in more detail.
Thank you Rob during the second quarter of 2023 pretax income was 68 $7 million and net income was $51 $4 million or $1 60 per diluted share.
Even after the quarter was $80 $1 million. We also posted strong sequential gains in net orders starts deliveries and gross margins.
Home sales revenues for the second quarter or $818 $4 million compared to $1 1 billion in the prior year quarter and $735 $6 million in the first quarter 2023.
Home deliveries of 2000, and 235 homes increased 17% sequentially and declined by 18% on a year over year basis, a direct impact from our decision to start fewer homes in the second half of 2022.
Our average sales price of $366000 declined by 12% versus the prior year quarter, reflecting higher incentives in homes closed this year building more affordably priced homes that buyers are seeking and mix.
Regarding mix in the second quarter this year, the west and especially the high priced Bay area accounted for a lower percentage of deliveries, while our lowest priced southeast and Texas regions, along with century complete accounted for a higher percentage.
We expect our average selling price to increase in the second half of this year over second quarter levels as we continued to reduce incentives and selectively increase based prices.
Net new contracts in the second quarter across our footprint for 2000, and 317, a sequential increase of 15%.
As Dale mentioned, we believe our sales activity is benefiting from strong underlying demand for affordably priced homes.
The city of existing homes on the market.
Consumers adjusting for higher interest rates and our ability to buy down rates.
On a sequential basis, our new orders also benefited from having a higher level of inventory with near term deliveries available for sale.
At quarter end, our backlog of sold homes with 2002 valued at $750 million with an average price of $375000.
In the second quarter.
Adjusted homebuilding gross margin percentage was 21% compared to 19, 6% in the first quarter 2023.
Homebuilding gross margin was 19, 7% compared to 18, 2% in the first quarter of 2023.
Even with these improved second quarter margins, we still expect our gross margins to increase sequentially in both the third and fourth quarters of this year due to improvements in direct construction costs reduce incentives.
The order cycle times, we did not book any impairments this quarter.
SG&A as a percent of home sales revenue was 12, 8% in the second quarter compared to nine 6% in the prior year.
It was down sequentially from first quarter 2023 levels of 13, 4%.
The largest driver of this year over year increase was the spreading of our fixed costs over a lower revenue base as well as higher commission rates on home sales.
During the Covid driven sales boom that lasted through the first half of 'twenty 'twenty. Two we were able to lower our commission rates given the exceptionally strong demand for housing.
As demand returned to more normalized levels, we increased our commissions to more historical averages to ensure that we're driving buyers to our communities and expect to continue offering this level of commissions in the current environment.
During the second quarter financial services captured 73% of the closings generating $24 3 million in revenues compared to $22 8 million in the prior year.
The business contributed $12 5 million in pretax income compared to $8 6 million in the prior year quarter.
Our net homebuilding debt to net capital ratio decreased a 120 basis points to 22, 3% in the second quarter compared to 23.5% at the end of last year, even with a significant increase in the number of homes under construction.
Our homebuilding debt to capital ratio also decreased to 31, 2% at quarter end compared to 32% at the end of last year.
We maintained our quarterly cash dividend at 23 cents per share and ended the quarter with a strong financial position, including $2 2 billion and stockholders' equity.
$1 $2 billion in total liquidity and $374 million in cash.
During the second quarter, we had no borrowings outstanding on our 800 million dollar unsecured revolving credit facility that does not mature until April 2026.
Additionally, we have no senior debt maturities until June of 'twenty, you said 27, providing us ample flexibility with our leverage management.
At quarter end, our inventories totaled $2 9 billion.
Now turning to guidance the second quarter had strong sequential gains across our business and bolster our confidence in the second half of 2023.
As a result for the full year 2023, we are increasing our guidance for home deliveries to be in the range of 8300 to 9000 homes at our home sales revenues to be in the range of $3 $1 billion to $3 $4 billion.
With that I'll open the line for questions operator.
Thank you.
We'll now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble roster.
Our first question comes from Alex Wright gel with B Riley FBR. Please go ahead.
Thank you and good morning, gentlemen, very nice quarter.
Thanks, So a couple of quick.
Couple of quick questions here can.
Can you talk a bit about the mortgages. Your buyers are getting average interest rates FICO scores that sort of thing.
Yeah from a FICO score perspective, it's been volatile the concept we've been staying in me.
On the CMP side in our central complete side worried about seven the high Teen 15, 719 on the central community side, we're hanging out right around 730 that buyer profile for both buyers really hasn't changed over the past couple of years. It's been it's been pretty flat and then in terms of mortgages right. Now you know we've been in we've been offering.
Five and three quarters on mortgages and foreign buyers that we've seen that'd be a pretty pretty attractive rate to move people through.
Excellent and then can you talk a little bit about thoughts about geographic expansion into new markets over the next six to 12 months.
And your thoughts on M&A opportunities.
No in terms of expansion into additional markets, we're very happy with the markets that we currently have and not that that we would rule out expansion into other markets. We found the right opportunity same thing with M&A more generally we continue to look at.
Things as they become available.
There still seems to be quite a difference between bid and ask and so as we would find an opportunity that we thought the pricing work and the market works.
We would move forward on that without without a doubt, but right now I don't see any of that in on the horizon.
Yeah.
Thank you.
Welcome.
Our next question comes from Carl Reichardt with B P. I G. Please go ahead, thanks and afternoon, everybody do you have Dave off hand.
<unk> of unsold units you had under construction at the end of the quarter and then a corollary to that is of the 3000 or so starts you did in the quarter what percentage of those.
Would you sell during two Q.
Sorry, sorry.
Sorry, what what what percent are in yeah did you have an order on in Q2.
Understood.
I don't have anything related to homes under construction other than the fact that we have started more than 5000 homes. This year since we're selling homes later in the cycle you would imagine that the majority of the second quarter home starts have yet to be sold so we would see those sales later in the year as they get closer to completion.
If I look at your guide and I say, you've got 2000 and backlog you've delivered 4100, plus you need 2500, or so to get to the midpoint of the backlog effectively all of that 2500 is in the ground already yeah at least it's trashed.
Correct. Okay. Thank you and then you guys talked a little bit about the century complete business and talked about the breadth of demand in terms of buyer segments, which is interesting can you talk a little bit about.
The mix of first time buyers coming out of apartments versus move down older customers versus maybe say investors, who are buying that product what that mix looks like and how it might have changed.
Yes in terms of our investors were saying.
Pretty minimal investor activity right now, where historically that was on the century complete business may have been a.
10% to 15% of our deliveries.
It's hardly worth mentioning at this point.
With regard to the demographics of our buyers.
It's really the entire spectrum.
Where you're getting first time homebuyers were getting move down buyers were.
We're getting some buyers that are selling their existing house and buying a century complete house. So it's really across the board.
Okay, Thanks, and if I can squeeze one more in just on buybacks can you talk maybe if I I don't know exactly where your current authorization sets.
And you've obviously got the dividend going now can you talk about.
Given the run in the stock your thinking on potential buybacks or are we thinking about the cash you're generating.
Since you have no debt to pay down going really plugging back into the land market to grow the business more or less over the next year or two.
Yeah, No problem Carl Yeah, we've got a roughly a million and a half shares available under our current authorization and as we look at it right now obviously the stock has been on a run for a little bit here, but we have always viewed the opportunity to plough. Some of these earnings in that cash flow back into the business and continue to grow it we think that you.
We have an opportunity across our footprint and our markets to really keep expanding this business and get a deeper larger more scale in our existing markets and we will do that through reinvestment.
Okay. Thank you David Thanks Al.
Question comes from Jay Mccanless with Wedbush Securities. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. So I guess the first question I had with the guidance of <unk> 80 309000 closings.
It seems like a pretty wide range for this late in the year, maybe talk to me about what what the differences between the top and the bottom of that range.
Yeah, I think I think you know 8300 to 9000 closings.
We still have we did put those homes on the ground are we still have to sell and close them and there's still a lot of things that can happen between now and the end of the year, we think that there's still going to be strong underlying demand. We've got a macro economy to think about we have cycle times you have municipalities, we have labor in a variety of issues and so.
At this point in time, we feel pretty good with having that range is less than 10% from the bottom to the top of it.
And what will hopefully tighten it up as we get into the third quarter.
Okay.
And then.
With SG&A dollars could you maybe talk about a special for what you said about co broker and in your prepared remarks, where do you think that quarterly or annual run rate in dollars should be now in fixed versus variable if you could.
Yeah, I think on the on the commission side of the World I think that will end up being you know kind of in that 3.5% to 4% range with where we've been historically.
And it's roughly 30, 38% of our overall SG&A dollars that we've been running pretty.
Pretty historically fixed SG&A and 65% to 70% of the bucket.
Okay.
And then one other question I wanted to ask on complete.
Yeah, we've heard people in the media talk about this lock in effect, where existing homeowners don't Wanna list because they they don't.
I'm Gonna give up a 3% mortgage for 7% mortgage historically you guys have talked about completes competition being more the local housing market than other new homebuilders I guess is that still the case and is that something that contributed to some pretty nice order growth for complete this quarter.
Yeah, I think first of all it's still the same when we look at it well and some subdivisions who we're competing against the homebuilders, it's largely with against resale homes and we are definitely seeing the number of resale homes available in virtually all of our markets as being very constrained.
So as a result that gives us a competitive advantage and one that we're continuing to.
Push and I do think that's a big reason why our complete business did so well in.
In terms of new orders on the second quarter.
And then last one.
I know you said in the guidance that you expect the gross margin to go up sequentially.
Is there going to be in terms of the actual closings for the next two quarters are you thinking it's going to go up from <unk> to <unk> or should we expect to adopt just because of what you talked about with starting less homes at the last half of 'twenty two how should we expect the quarterly cadence on on closings to go.
I would expect the ladder based on your commentary that you'd see a bit of a dip in Q3 and pick it up again in Q4.
Okay, Great. That's all I had thanks for taking my questions.
Thanks Jay.
Question comes from Alan Ratner with Zelman and Associates. Please go ahead.
Hey, guys. Good afternoon, Thanks for taking my questions Hey, Alan.
Okay.
So I apologize for the somewhat technical modeling question, but I'm trying to figure out some math here and hoping you can.
For me. So I think you mentioned that you guys expect to see typical seasonal pullback in order activity in the back half of the year, which we're hearing from a lot of builders, but.
I'm struggling to reconcile that with your model right now where you're effectively selling homes.
The completion and Youre closing guide for the back half of the year implies pretty pretty steady closing activity at least back half versus first half kind of averaging 21, 'twenty 200 closings per quarter.
Why wouldn't your orders kind of be in a similar range and if it were to be in a similar range that would imply kind of flat.
With the first half of the year.
Yours.
Yeah, I think I'm, making sure I'm trying to fall here your math and happy to discuss with you after the call as well, but as I look at it with when we have homes, completing we expect to be selling them.
With a little bit of seasonality occurring here and into July and August months, and we'll see sales pick up again.
Into the fall, we think that where our backlog is today 2002 homes and that sales cadence, we think that we still hit the closing guidance whether to be in that range of 80 309000 homes.
Got it okay.
Can talk through the math of that.
Yeah.
Appreciate that.
Secondly on the margin.
Obviously, you're expecting sequential improvement over the next couple of quarters. If I think about your incentives right now which are running about 600 bps on orders versus 900 bps on closings is that to use.
He is the way to think about how much improvement you expect kind of 300 bps or so over the next couple of quarters or are there other moving pieces in there that yeah.
Consider.
Well theres moving pieces on direct as well as I pointed out, but you know I think that would be at the top level at that 300 deaths.
Copying that would be at the high end of what you would expect.
Yeah, Yeah, that's helpful and I guess just on the direct comments.
Yeah.
I've been personally a little surprised it seems like many builders that have seen nice cost reductions expect those reductions to remain in place even as starts are accelerating across the industry Georgetown to me sounds a little bit more realistic and aligned with how I'm thinking about it.
With some of these.
Pretty pretty significant increases in starts.
It's possible certain items might might see a bit of a reversal. There I'm just curious if you've seen any indication of that up to this point any particular markets or trades that you feel like you're starting to get a little bit stretched or come back for some price increases or is that just more kind of perspective thinking on your part of this.
Nothing that's consistent right now Alan but it's really more from our perspective looking forward and just you know being in the business for a long time, knowing how things work and we're seeing it obviously right now on lumber, but we think we're going to see it in some other categories as well.
But nothing that I can say that it's on the ground happening today in numerous areas that is not the case, but on the other hand.
We're flat.
Basically that net flat from where we were on a sequential quarter basis. So yeah, certainly it is not going down at this point.
Got it and just a strategic.
On this so you know on one hand demand is strong today and.
Surprisingly strong and it feels like you guys definitely have some pricing power as evidenced by the incentives pulling back.
Let's say costs were too to claw back up a bit here.
How aggressive would you be on trying to pass that along to the consumer or are you, perhaps a bit more cautious given where affordability is today than perhaps you would've been two years ago, let's say when rates were where they are today.
Yeah, I I think rates today, clearly impacts this and but I'm not sure it's any different than where we were going.
Going back a year and a half or so ago.
As our costs were rising we were moving along.
The additional costs wherever we could we would try to do the same thing going forward now there is obviously with the higher interest rates. So it would be more difficult to do but to the extend in a particular subdivision. We can do it we will and if we can't another subdivision then we'll just have to absorb it.
Got it I.
I appreciate the thoughts thanks for all the time.
Great. Thank you. Thanks.
Our next question comes from Michael Rehaut with J P. Morgan. Please go ahead.
Hi, Thank you for taking my question the Zandra Aussie on for Mike Nice quarter I just wanted to ask.
Yeah.
Of course I just wanted to ask in terms of the absorptions you saw this quarter. It looks like you were doing a little bit better than you would historically.
And kind of just given your confidence going forward do you kind of expect that to continue.
In terms of just beating your historical seasonality, a little bit or any puts and takes there.
Well you know part of that is all driven by what we have available for sale and it still is it still comes down to as things are nearing completion, we have been selling them and we have very little in the way of completed inventory, so with that and more.
Mind some of the seasonality is impacted by what we have available for sale as well as the same thing with absorption rates so as.
As we look at it as Dave commented earlier some of our sales pace is going to be impacted on win.
Homes are nearing completion and where they are in the construction cycle, so that kind of.
Sex the actual absorptions as well.
That makes sense I appreciate it. Thank you for that I also wanted to ask maybe I don't think I heard earlier in the call about kind of what you saw month to month in terms of demand trends and maybe what you're seeing in July so far.
Yeah, I would say that you know.
Month to month.
We saw some of that seasonality, we are moving through the quarter from April through June and then as I look at July you know on a sales basis were up 15% or so over last year.
At this point and you'll continue to see some of that seasonality play into our numbers are going from June to July .
I appreciate that.
And then you know as you continue to invest in land to support growth, where where do you aim to be maybe long term in terms of your option lot percentage.
Well, we still like the ratio of about 50 50.
Option versus owned and were getting back closer to that now we weren't ticked up above that when we dropped.
So many lots at the end of the last two quarters of last year.
But we're starting to rebuild that now you know we're up sequentially quarter over quarter. We're at roughly 58000, as we said in our prepared remarks, we see our control lots continuing to grow throughout the year and so that will get us closer to that 50 50 ratio.
No commitments will be there, but that's kind of the goal right now.
Thanks, So much that's all I had a good luck and best of luck in the next quarter.
Hey, guys.
Okay.
This concludes our question and answer session. We will now turn the line back over to Dale for some brief closing remarks.
Thank you operator, 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.
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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.