Q3 2023 Century Communities Inc Earnings Call
Greetings.
Welcome to century communities third quarter 'twenty twenty-three earnings conference call.
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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 third quarter 2023.
Before the call begins I'd like to remind everyone that certain statements made during this call may constitute forward looking statements.
Payments 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.
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 forward looking statements. 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 financial information presented in accordance with GAAP hosting the call today are Dalfen, Tuscany, Chairman and co Chief Executive Officer, Robert Desk, and co Chief Executive Officer, and President and David Messenger, Chief Financial Officer.
Sure.
Following today's prepared remarks remarks, we'd love it up the line for questions with that I'll turn the call over to Dale.
Thank you Tyler and good afternoon, everyone.
I want to start by saying that we are very pleased with our solid third quarter results, especially within the context of a challenging overall housing market.
Despite rising interest rates, our sales activities performed in line with their expectations and typical seasonality.
Demonstrating the strong underlying demand that remains for affordable new homes.
Our deliveries of 2264 homes increased on a quarter over quarter basis and benefited from improved cycle times.
Home sales revenues of $865 million.
Grew by 6% over second quarter levels with our average sales price scheme and 4%.
Our gross margins increased by 490 basis points sequentially to 24, 6%, while our adjusted gross margins increased by 480 basis points to 25, 8%.
As a result, we delivered third quarter diluted earnings per share of $2.58, a 62% increase over second quarter 2023 levels.
Turning to our sales activity.
Net new contracts in the third quarter totaled 2149 homes, a 63% improvement over the level of sales activity that we saw in the third quarter 2022.
We commented last quarter that we expected more typical seasonality to return this year and we saw it play out in the third quarter with our net orders declining 7% sequentially roughly in line with the 6% quarter over quarter decline, we saw in the third quarter of 2019.
Our net orders in August and September both exceeded the levels, we experienced in July which we view as a positive trend given the continued increase in interest rates over the past several months.
Looking now to the fourth quarter as a whole.
Typical seasonality holds we would expect our net orders to decline on a sequential basis.
We are continuing to see good demand for affordable entry level homes across both our century communities and century complete brands and wanted to use this opportunity to go into a little more detail on the value that we see in our century complete business, which currently generates approximately 30.
5% of our sales and deliveries.
As we've discussed in the past century complete targets entry level customers with 100% of its deliveries within FHA limits and only acquired finished lots.
It is a scalable business model, which requires less capital investment and yields quicker asset turns.
The increase in interest rates over the past year has also reinforced some additional advantages of the century complete brand.
In the third quarter century, complete had an average sales price of $265000.
And the large public homebuilders generally don't build at this price point.
Century complete tends to compete more with existing homes and smaller private homebuilders, which puts us in a strong position.
Existing home inventories remain depressed due to the walk in effect. So there was less competition from the used home market.
Smaller private new homebuilders tend to borrow from local and regional banks.
They are borrowing costs are generally higher than ours.
And we think the local and regional banks will likely reduce the amount of credit that they were willing to extend to the smaller private builders.
As a result, we think century complete is in a strong position to capture additional market share in the years ahead.
Turning back to century as a whole we continue to maintain our focus on building some of the most affordable new homes and the markets we serve.
More than 90% of third quarter deliveries were from homes priced below FHA limits, which allows us to target more potential buyers in any given market.
Additionally, 99% of our home deliveries this quarter were from spec films, which enables us to better control our costs.
It allows our buyers to purchase quick move in homes and lock in their mortgage rates for certainty of financing.
Our cancellation rate was 16% in the third quarter.
Assistant with our year to date rate.
And well below an average cancellation rate in the low to mid 20% range in the years prior to Covid.
We continue to believe that our cancellation rate is benefiting from buyers adjusting to the higher interest rate environment and.
And our strategy of selling homes later in the construction cycle.
In closing, we're encouraged by the improvement that we've seen over the past several quarters and our deliveries and gross margins, which are benefiting from reduced levels of incentives.
Improved cycle times and lower direct costs.
As expected and previously messaged, our deliveries have increased sequentially in each of the last two quarters.
And as Dave will detail in his remarks, we expect our fourth quarter deliveries to increase over third quarter levels.
And are increasing the midpoint of our 2023 delivery guidance.
The sequential improvement in our margins and deliveries this year, coupled with the increase in our community count.
Rob will discuss further in his remarks position us well for 2024.
And on behalf of the entire management team.
I want to thank our team members and trade partners for their hard work and dedication that made these results possible.
I'll now turn the call a little girl, Rob to discuss our operations and land position in more detail.
Thank you Dale and good afternoon, everyone.
Given the market demand, we were able to reduce our level of incentives, while still maintaining a healthy sales pace in the quarter.
Incentives averaged roughly 700 basis points on closed homes in the third quarter 2023 down roughly 200 basis points on a sequential basis.
In the third quarter incentives on new sales also averaged approximately 700 basis points and we're primarily mortgage related.
While we are continuing to purchase forward loan commitments and are currently offering our customers 30 year fixed interest rates between 5% and 6% depending on the loan type with certain programs eat them lower their cost to buy down these rates to these levels has been increasing over the past several months with the.
Overall increase in interest rates.
However, given the ability to significantly lower monthly payments are below market interest rate provides us a significant sales tool that continues to be one of the most sought after incentive by our homebuyers and allows us a competitive advantage over private builders. It can't compete on this front.
We experienced further improvement in our cycle times uncompleted homes in the third quarter, which generally averaged in the five to six month timeframe.
We expect our cycle times to see some additional improvement in the fourth quarter such that by the end of the year, we are back to starting and completing homes in a more normalized four to six months' timeframe.
Yeah.
Earlier this year, we discuss direct construction costs declining by roughly 11% and average of approximately $20000 per home versus the high watermark in the second quarter of 2022.
The homes with these savings will flow through in the fourth quarter as we deliver these lower cost homes and help offset the rising costs that mortgage rate buy downs.
Given the level of industry wide new home starts are direct construction costs on the homes. We started in the third quarter, which will be delivered in 2024 increased approximately one 5% on a quarter over quarter basis.
Turning to land we ended the third quarter with approximately 69000 owned and controlled lots a 19% increase over second quarter 2023 levels as we continued our land acquisition efforts.
This higher lot count was driven almost entirely by an 11000 lot increase in our controlled land to 38000 lots.
Our controlled lots as a percentage of total lots increased to 56% in the third quarter from 46% last quarter and 39% in the first quarter.
Our 30000 owned lots in the third quarter are consistent with levels over the last seven quarters and provide approximately three years of deliveries based on prior year volumes.
In the third quarter, our community count of 250 to a company record increased by 16% from year ago levels and by 8% on a sequential basis.
Century complete accounted for over 40% of our total community count, while the southeast and Texas combined accounted for close to 30% as these markets are continuing to perform well given their relative affordability and 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 showing strong year over year growth of 20% to 25%.
We believe this increased number of communities will represent a new base for century communities, which we will look to grow even further as we recognized increased deliveries in 2024 and beyond.
I'll now turn the call over to Dave to discuss our financial results in more detail.
Thank you Rob.
During the third quarter of 2023 pre tax income was $112 million and net income was $83 2 million.
Or $2 58 per diluted share representing sequential increases of over 60% for all three metrics.
EBITDA for the quarter was $125 $3 million, a 56% increase over second quarter 2023 levels.
Home sales revenues for the third quarter were $865 1 million compared to $1 1 billion in the prior year quarter and $818 4 million in the second quarter 2023.
Our third quarter deliveries were 2264 homes.
For the fourth quarter, we are currently forecasting deliveries to be in the range of 2200 2600 homes.
Our average sales price of 382000 in the third quarter increased by 4% on a sequential basis as we continued to reduce incentives and selectively increased based prices.
At quarter end, our backlog of sold homes with 1887 valued at $707 million with an average price of $375000.
In the third quarter.
Adjusted Homebuilding gross margin was 25, 8% compared to 21% in the second quarter 2023.
Homebuilding gross margin was 24, 6% compared to 19, 7% in the second quarter of 2023.
As expected our gross margins increased sequentially in the third quarter due to improved cycle times, lower direct costs and reduced levels of incentives.
For the fourth quarter, we expect our gross margins to decline versus third quarter 2023 levels, primarily due to the increased cost of mortgage rate buy downs.
SG&A as a percent of home sales revenue was 12, 9% in the third quarter compared to nine 9% in the prior year.
The largest driver of this year over year increase was the spreading of our fixed costs over a lower revenue base as well as more normalized commission rates on home sales.
Looking out to next year, we expect our SG&A as a percent of home sales revenues to decline on a year over year basis, as we look to grow our deliveries and keep our fixed levels of SG&A relatively constant.
During the third quarter financial services captured 71% of our closings and generated $23 6 million in revenues compared to $23 3 million in the prior year. This business contributed $12 2 million in pretax income compared to $9 3 million in the prior year quarter.
Our net homebuilding debt to net capital ratio decreased to 25, 3% compared to 32, 5% in the prior year quarter.
Our homebuilding debt to capital ratio decreased to 38% at quarter end compared to 36, 3% at the end of the same period last year.
During the quarter, we maintained our quarterly cash dividend at <unk> 23 per share and ended the quarter with a strong financial position, including $2 3 billion and stockholders' equity $1 billion in total liquidity and $246 million in cash.
At quarter end, we had no borrowings outstanding on our $800 million unsecured revolving credit facility does not mature until April 2026.
Additionally, we have no senior debt maturities until June 2027, providing us ample flexibility with our leverage management.
Finally back in September of this year SMP upgraded our credit rating to double B from double B minus.
Now turning to guidance.
Given the continued strength in our deliveries, which had benefited from improved cycle times and a continued sales pace.
We are increasing the midpoint of our full year 2023 guidance for home deliveries to be in the range of 8600 to 9000 homes at our home sales revenues to be in the range of $3 $2 billion to $3 4 billion.
With that I'll open the line for questions operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Carl Reichardt with BTG. Please go ahead.
Hey, guys how are you.
Great.
Okay got it thanks for the time as always thanks for taking my question.
And I'll talk about that margin change 480 bps.
Year on year direct construction costs incentives off and improve cycle times can you talk a little bit about how each of those three contributed to that 480 basis points was there a lean in one direction or the other I assume that was incentives, but maybe just sort of lay that out for us.
And I think it was a it was really a combination of all of them call. You know we saw.
The ability that we're pulling back on some incentives with the sales for homes that closed during the third quarter. We saw the benefit of some lower direct costs that came through in those closings as well.
And then being able to deliver a home at a more normalized construction period is helpful and we have some markets, where we're increasing base prices and so the combination of those three or four items.
Tough to parse out, which is which are which one may have contributed more than another but honestly all four contributed to you know some some great gross margin performance, we had this quarter.
We can talk about.
Okay, and so then if we look at fourth quarter and trying to think about the sequential change in margin you'll have direct construction costs.
I don't know if for the upper flat with with with third quarter per house basis incentives may come up pricing power may flatten and your cycle times I think will continue to improve so if I add that all up the change in gross margin from third quarter to fourth quarter should be relatively modest on a negative basis is that the right way to think about it based on what youre seeing today.
Yes.
Yes.
Those are definitely all the components that will weigh against each other and it's really going to come into you know what are the cost of those mortgage rate buy downs or other incentives that we have in place in order to move product and what does that do to margins sitting.
Sitting here today, not sure what the economic environment and rate environment will look like in 30 to 60 days is where as we're closing homes, but those are definitely before the three or four components that we're looking at that.
That will impact margins in the fourth quarter.
Okay, great I'll get back in queue. Thanks, so much I appreciate it.
The next question is from Jay Mccanless with Wedbush. Please go ahead.
Hey, good afternoon. Thanks for taking my questions could could you talk about which markets are you or maybe what percentage of communities you've been able to raise price.
You know Jay it it really comes down to a community by community basis.
Although generally I'd say, we have more pricing power in Texas in our southeast markets and in Florida.
It's just those markets have benefited more from having lower price points in general more in migration stronger economies. So in general if we were going to look at it I would say that most of the price increases came in those markets.
Okay.
And then Dave I think you said that you guys are expecting the SG&A margin SG&A to sales margin in 'twenty for just kind of flattened out so is this $112 million.
The kind of the run rate going forward.
On a quarterly basis.
Yes, we're looking at you know we feel comfortable with where we are from a fixed dollar perspective. So I think on the fixed dollars. You know we feel good about that and then obviously the variable is going to flow as we as we see closings come come through the pipeline, but you know it kind of it is really we think that SG&A as a percent of revenues is going to decline on a year over year basis as we're looking to grow our deliveries next year.
I think that with a fixed dollars being you know relatively constant our 'twenty three 'twenty four we should see some leverage improvement in that line item next year.
Okay.
And then I guess kind of thinking ahead.
Ahead for 24 if rates.
Stay at these levels or even go up from here.
Should we expect gross margins to kind of settle in somewhere.
If it can be down sequentially from third quarter to fourth quarter, how much more with what youre seeing in terms of these buy down costs, what type of impact might that have on fiscal 'twenty for gross margins.
Especially if youre thinking youre going to have to carry our full year buying down an 8% or 9% par rate down to I think you guys said on your website, it's like five and seven eights for some of these I guess how much more is that cost go up if you have to carry this our full year versus only call. It three months.
Where where rates had been around 8%.
And that's really tough tough to forecast in terms of where where that mortgage.
Market is going to be in terms of buy downs, we do expect that the cost of buying out some go up and accordingly, if you'd go ahead and move into 9% or something above an eight and it's going to get more costly, but will really look at that next year. It will we will try to evaluate that so we can still still posted the best margins possible because we'll look at how far do we want to buy down the rates are we buying them down.
Across the board are we buying them down by community and on what products. We're utilizing in terms of government loans versus conventional and then what do we want to be offering to the consumer and so we will look to stratify the offerings and try to minimize the impact, but we do expect that if rates are going to be at an elevated level for some time, it's going to cost more.
Okay, and one more and I'll jump back in queue.
I guess, what are you guys thinking in terms of the community openings that are coming on.
Do you expect average pricing to go in and and are you expecting.
Century complete to flex higher as a percentage of the Muni count and maybe pull that ASP down a little bit in 24 versus 23.
And a J, we were looking from a community count growth at the $2 50 to where we ended Q3, that's where we really think the basis going forward. So as we look forecast out let's just say over the next 12 months, we think our community count is going to grow in that but it's going to grow similar to where we've been now with <unk>.
The same percentages of century complete versus the communities brand.
But again, it's office higher base, which we feel really good about that and that's why we're anticipating to have higher deliveries in 2020 for that.
Then we get it are going to have in 2023.
Okay sounds great. Thanks for taking my questions.
Yeah.
The next question is from Alex Rygiel with B Riley FBR. Please go ahead.
Thank you and just following up on community Count will the contribution of new communities have a notable impact on your average selling price in 2024.
Now, they're very they're very similar we've continued to look at more entry level offerings.
So it will be very similar to the price points right now and again that's on a general statement, we have outlier communities that summer at higher price points of course.
For different markets and different niches and strategies within a particular market, but as a general statement. The new communities that were opening are very similar from a price point standpoint to where we are today.
And then.
Looking at the communities again century complete communities are down year over year most of the other regions are up.
The number of times the expectation to see some growth in century complete communities is at communities that are growing is it the average size of the community within century complete increasing a little bit more color. There would be helpful. Yeah. So the average size is definitely increasing and century complete.
And also some of Thats timing differences as well because just as a reminder century complete only buy finished lots and so sometimes there may be delays on a developer, bringing the lots to us from a cycle time and so there could just be certain mixed delays within these.
Within a particular point in time, but as a general statement that communities are getting bigger.
Thank you.
The next question is from Alan Ratner with Zelman and Associates. Please go ahead.
Hey, guys. Good afternoon next quarter Alan.
Question on the incentives so it.
It sounds like they were pretty steady both on orders and closings during the quarter around 700 deaths, but based on your comments for fourth quarter. It sounds like you expect an uptick there what was the trend on orders I guess through the quarter and into September and October have you seen that that incentive number rises.
Here, thus far in October.
Yeah, we have as we look at the third quarter and coming into the fourth quarter.
Interest rates have continued to stay high and actually continue to increase and is so when we look at the cost of buying down mortgages to be able to offer something in that mid 5% range. It just becomes more costly.
Depending on as the rate continues to increase so yes, we have we have definitely seen an increase and we expect to continue to see an increase.
Got it okay that makes sense and then the.
The rate your offering in that 5% to 6% range. How are you thinking about that in that if rates continue to kind of gradually move higher from here.
Is that an important kind of.
Line in the sand, where you feel like once you get above a 6% rate or in the mid fixes that you see a pretty dramatic pullback in demand or will that base kind of gradually move higher along with the current prevailing rate. It's just kind of you're trying to ease that debt.
The trajectory a little bit.
That's really hard to say I mean, obviously you know the way we are mitigating the high high rates is to buy them down and we even have some programs for a small dollar amount on very very select communities that are in the high 4% range.
Obviously, that's very costly right now and we like a five handle on it currently if rates continue to go up.
Get up approaching close to 9% then the reality is we're probably not going to be able to offer that and our competitors aren't either and the consumer will adjust to that but it'll just raise up but.
But it's really hard to say how rates are going other than what we do know for a fact is that at the current lifted rates. It is costing us more on the buy downs currently.
Got it great and if I could sneak in one one more the the big increase in your lot count. This quarter can you provide a little bit of color around it.
What what's the these lots that you're tying up today when when should we expect that to flow through to community count growth, what's the pricing trends in the land market today and are you seeing any compelling distressed opportunities either from VFR deals falling through or some other factors that might have contributed to the bag.
Jumping lot count this quarter.
So we are buying from VFR operators operators that it picked up lot positions they were either going to get a fee builder on it or build it themselves. We have been successful in purchasing lots from those entities. So that's been a positive.
In terms of the timing of the increase as you see it really increased our control percentage of we telegraph. This in our previous calls that we were going to increase our land based on how.
How we changed in 2022 on some of our controlled positions with a decrease based on market conditions. We wanted to get back up to levels, we felt comfortable with and this has been a good start in the third quarter to get there.
There are a variety of lot types from finished lots. That's obviously our preference if we could get finished lots and adjusted time basis and so we have some of those as far as development deals that we are developing.
We did pay on municipalities and timelines out on this I know you know these answers.
But they're anywhere from 12 to 24 months generally before they start development and then you go from there. So it's kind of all across the board structure on the land.
We feel really good about the control positions, we have there in the markets, we want them to be in the higher growth markets. Some of the markets Dale alluded to on this call and we feel really good about it.
Great.
One just last thing that you also asked about distress.
We have not seen any significant distress in the market. We are seeing things open up a little bit where financings being tighter for the privates.
Theyre not able to compete it's really competition against public to public.
So certain things are opening up but as far as distress I wouldn't go that far yet.
Thanks very much appreciate it.
Welcome to.
The next question is from Alex Barron with housing research. Please go ahead.
Yes. Thank you.
Yes. It was curious if you guys could tell.
Tell us how many homes you started this quarter. That's my first question.
Yeah. This quarter in terms of starts we did our two.
2000, and 434 homes sold.
So we're pretty much matching what we're doing from a sales pace.
Got it yes. My other question was you know last year I think.
Several builders engaged in trying to find the market clearing price.
And obviously that had an impact on margins. This year. It seems like everybody's focused on buying down rates, instead, which I think is probably healthier.
Just kind of curious if as we are approaching year end are you do you believe that's likely going to continue to be the case or are you starting to see.
Some of that activity of people trying to compete on cutting prices.
Well I guess, we'll see as we get closer to the end of the year right now the incentive.
That buyers are most interested in is to have a below market interest rate.
I mean, you can certainly see why it dramatically lowers their cost of ownership and so that's where our focus has been and as we look at our competitors, that's where their focus has been so far as well.
Okay, well, hopefully, we'll keep our fingers crossed that it stays that way because.
It seems like a more.
Rational way to compete I E.
Yes.
And yes other than that.
Do you believe in general that you know because.
Because you said you expect growth in.
In units for next year. So do you believe you're just going to that's going to happen based on growing community count, but may be slightly lower.
Sales phase.
Oh that's.
That's tough to say.
We think that we're well positioned well.
We're well positioned today.
Do you know call. It a 250 to 260 community count going into next year.
Given our current sales basically we feel good about being able to deliver those homes.
We'll comment more on future guidance, when we get into our fourth quarter call and we may have a little bit of a better flavor on what we think absorptions will be next year by them.
Got it okay, well best of luck guys. Thank you.
Thank you.
The next question is from Michael Rehaut with J P. Morgan. Please go ahead.
Hi, guys. This is Andrew ASEAN for Mike. Thank you for taking my question and congrats on the quarter.
Yeah.
Wanted to ask if you guys have put out maybe a absorption targets that you're managing the business to and if there's maybe a level where if that if it dipped below that you would get much more aggressive on incentives and discounts and things like that.
No no we haven't done that but we we manage.
All of the communities in our divisions and markets individually, but we do not have any company stated absorption pace.
Got it thanks, and then I'm not sure if he doesn't alluded to.
Demand has been trending in October and I'm, just curious I believe I heard the cancellation was 13% which is similar to last quarter.
Just given just given how impressive orders were this quarter in the entry level exposure.
I'm curious how cancellation rates have stayed so low.
Yeah, our cancellation rate last quarter was 16%, which is consistent with where we had been running down quite a bit from what we were experiencing pre COVID-19 in the low to mid 20% range.
And I think Thats as we said in our prepared remarks, it's really a reflection of two things one we're selling later in the.
The construction cycles, so that the consumer can know what is interest rate is and we can lock that.
As which is the primary factor as well as people are starting to adjust to these higher rates.
With regard to the sales pace, we are seeing so far this month October is actually up over the.
At the same period in September although as we get later in the year, we start really being impacted by seasonality that happens towards the end of the year, we expect that to certainly start slowing down.
But so far October has started out very well for us.
Thank you I appreciate that.
Yeah.
The next question is a follow up from Alex Barron with housing research. Please go ahead.
Yeah. Thank you I was curious if you guys would be able to share some of your average statistics for you know what a typical consumer it looks like and and maybe even break it down into a century complete meaning like what's the average household income.
Average FICO or what's the average down payment you know those types of things.
Yeah I'd say.
I think that we can look at providing something like that offline as opposed to going into all the nitty gritty details here or we can look at putting something into one of our investor deck said going forward in the future.
Okay.
I think that would be helpful. Main reason I'm asking is because I.
I think you know.
There's this notion that you know how can a median household income afford a home today and I think the answer is it's not your typical median household income buying homes I think it's more like the upper.
Quintile or something so I think it would be helpful for investors to see what the profile of a typical buyer today as well.
Got that in your piece today, Alex so.
Free shape, where you're coming from there and Dave can.
We have all those statistics, Dave could give you that.
Got it thanks, so much.
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 to everyone on the call. Thank you for your time today and interest in century communities.
To our employees. Thank you for your incredible efforts dedication to century and commitment to our valued homebuyers.
To our investors. We appreciate your continued support and look forward to speaking with you again next quarter, ensuring our continued progress and outlook for 2024.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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