Century Communities Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 31, 2024

There are 10 speakers on the call.

Operator

Greetings. Welcome to Century Communities 4th Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen only mode. Please signal a conference specialist by pressing the star key followed by 0. After today's presentation, There Will Be an Opportunity TO Ask Questions.

Operator

Call. Please note, this conference call is being recorded. Conference Call. I will now turn the conference over to Tyler Langton, Senior Vice President of Investor Relations for Century Communities. Thank you.

Speaker 1

You may

Speaker 2

begin. Good afternoon. Thank you for joining us today for Century Communities Earnings Conference Call for the Q4 and Full Year 2023. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward looking statements. Call.

Speaker 2

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 Call 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 ks 2019 as supplemented by our latest 10 Q and other SEC filings. We undertake no duty to update our 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 the financial information Conference presented in accordance with GAAP.

Speaker 2

Hosting the call today are Dale Francescon, Chairman and Co Chief Executive Officer Rob Francescon, Co Chief Executive Officer and President and Dave Messenger, Chief Financial Officer. Following today's prepared remarks, we will open the line up for questions. With that, I'll turn the call over to Dale.

Speaker 3

Thank you, Tyler, and good afternoon, everyone. I'd like to begin by saying that we are pleased not only with our results, but also with the meaningful improvement that we have seen in the housing market in general and our business in particular. Course of 2023 and the underlying strength of the housing market. In the 4th quarter, our deliveries of 3,000 157 Homes were a quarterly record and increased by 9% versus the prior year period. On a quarter over quarter basis, our deliveries increased by 39% and grew sequentially for the 3rd quarter in a row as we continue to benefit from improved cycle times and our increased level of home starts, which began in the Q1 of 2023.

Speaker 3

On the back of these higher deliveries, our 4th quarter revenues were $1,200,000,000 36% sequential increase and our highest level since the Q4 of 2021. Diluted earnings per share of $2.83 increased for the 4th sequential quarter and represented an improvement of 15% over year ago levels. For the full year 2023, We delivered 9,568 Homes and generated home sales revenues of $3,600,000,000 exceeding the upper end of our guidance for both deliveries and home sales revenues. Our book value per share increased by 11% on a year over year basis to $75.12 a company record and we ended the year with 22.4 percent net leverage, the lowest year end level in our history as a public company. Our 4th quarter net new contracts increased 86% to 2,340 homes compared to the 4th quarter 2022.

Speaker 3

On a sequential basis, our net orders in the 4th quarter increased by 9%. This level of sales activity was much stronger than we were anticipating as our 4th quarter net orders have experienced an average 10% sequential decline in each of the last 4 years. January has continued to see strength with our sales more than 30% ahead of the prior year's January. Regardless of the market served, The Century Communities and Century Complete brands target building and selling affordable homes with more than 90% of our Q4 deliveries priced below FHA limits. In addition to that affordability, Both brands build nearly 100 percent of their homes on a spec basis, which allows for direct cost control, availability of quick move ins and buyer certainty of financing.

Speaker 3

Our focus on affordability positions us well for future growth and continued success as we can target the widest range of potential homebuyers. Our average sales price of $376,000 is among the lowest of the publicly traded homebuilders, while Century Complete's average sales price came in at $258,000 this quarter. Additionally, through our Century Complete business, We have developed an expertise in entering and operating in secondary markets where there is less competition from the public homebuilders and where we believe we can take share from smaller private builders that are more capital constrained and have higher development and construction costs. As a reminder, our Century Complete business only acquires finished lots and typically on a just in time basis. Last week, we announced the strategic acquisition of the assets of Landmark Homes of Tennessee, which will grow Century's already sizable presence in the Greater Nashville market through the addition of 6 active Landmark Homes communities.

Speaker 3

Importantly, this transaction provides us with a pipeline of controlled lots that will be delivered to us in the future as land development is completed and furthers our goal of increasing market share throughout and beyond our 18 state geographic footprint through the opportunistic acquisition of other homebuilders to augment the organic expansion of our land portfolio. In closing, I want to thank all of our team members for their hard work and dedication that drove significant improvements in our business in 2023 and have positioned Century for continued success in 2024 and beyond. I'll now turn the call over to Rob to discuss our operations and land position in more detail.

Speaker 4

Thank you, Dale, and good afternoon, everyone. As expected, incentives on closed homes increased to roughly 800 basis points in the Q4 2023, up from over 600 basis points in the 3rd quarter. These higher costs were primarily due to the increased cost of mortgage rate buy downs in the quarter. Interest rate buy downs continue to be the most important incentive for our customers given their ability to significantly lower monthly payments, construction costs and grow our land pipeline and community count. During the Q4, our cycle times further improved, putting us in a position that we can now typically start and complete homes in a normal 4 to 5 month timeframe.

Speaker 4

We also had continued success in controlling our costs in the 4th quarter. On a sequential basis, we saw a further 1% reduction in our direct construction cost on the homes we started, even with the continued strength in the housing market. On the land front, We ended the 4th quarter with approximately 74,000 owned and controlled lots, an 8% sequential improvement and 39% year over year increase. The higher lot count this year was driven entirely by an increase in our controlled lots, which accounted for 59% of our total lots in the 4th quarter, with our number of owned lots remaining relatively static for the 8th consecutive quarter. Additionally, at year end, Texas and the Southeast accounted for roughly 50% of our total lot count, up from 43% at year end 2022 and reflective of our strategy to grow our presence in these attractive markets that are benefiting from relative affordability and strong employment and population growth.

Speaker 4

Combined with Century Complete, these more affordable markets comprise nearly 75% of our owned and controlled land supply. We ended 2023 with a community count of 251, the 2nd highest level in our company's history And an increase of 21% versus year ago levels with every region we operate in experiencing growth. Century Complete accounted for over 40% of our total community count and 37% of total deliveries in 2023, while the Southeast and Texas combined accounted for close to 30% of our total community count and over 30% of total deliveries for the year. In summary, our year end 2023 community count of 251 and total owned and controlled lots of nearly 74,000 gives us confidence that 2024 will be a growth year for us. I'll now turn the call over to Dave to discuss our financial results in more detail.

Speaker 1

Thank you, Rob. During the Q4 of 2023, Pretax income was $126,100,000 and net income was $91,300,000 or $2.83 per diluted share, a 15% year over year increase. EBITDA for the quarter was $145,200,000 a 20% increase over year ago levels. Revenues for the Q4 were $1,200,000,000 up 36% sequentially and 2% versus the prior year's quarter. Our record 4th quarter deliveries of 3,157 homes increased 39% on a sequential basis and by 9% versus prior year levels.

Speaker 1

For the Q1 of 2024, we expect our deliveries to see their typical seasonal decline. As a reminder, the Q1 typically represents the low point for our deliveries during the year, with Q1 deliveries having accounted for a little over 20% of our full year deliveries on average over the past 5 years. Our average sale price of $376,000 in the 4th quarter decreased by 2% on a sequential basis, mainly due to higher levels of incentive and mix as Century Complete accounted for 39% of 4th quarter deliveries versus 36% in the Q3 of 2023. At quarter end, Our backlog of sold homes was $10.70 valued at $401,000,000 with an average price of $375,000 This is the direct result of intentionally selling homes later in the construction process. In the 4th quarter, Homebuilding gross margin was 21.6% compared to 17.6% in the prior year quarter.

Speaker 1

As expected, our gross margins decreased sequentially in the 4th quarter, primarily due to higher levels of incentives. Looking out to 2024, Telsey. For the full year 2023, our SG and A was 12.4% versus 9.8% in the prior year, being impacted by higher commission rates, lower home sales revenues due to decreased homes closed at a lower ASP and the significant number of new communities that we opened in 2023. For 2024, we expect our SG and 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 G and A relatively constant. In the Q4, our tax rate was 27.6% compared to 22.4% in the prior year quarter and 26.1 percent for the full year 2023.

Speaker 1

The increase in our annual effective rate 2020 3 as compared to 2022 was primarily driven by a reduced number of homes qualifying for 45L credits. We expect our full year tax rate for 2024 to be similar to the full year 2023 levels. Our net homebuilding debt to net capital ratio decreased to 22.4% compared to 23.5% in the prior year quarter and represented the lowest year end level in our history as a public company. Our homebuilding debt to capital ratio decreased to 29.9% atquarterend compared to 32% at the end of the same period last year. During the quarter, we maintained our quarterly cash dividend at $0.23 share and ended the quarter with $2,400,000,000 in stockholders' equity, dollars 1,100,000,000 in total liquidity and $328,000,000 in cash.

Speaker 1

At twelvethirty one, we had no borrowings outstanding on our $800,000,000 unsecured revolving credit facility with our leverage management. Home buyers are exhibiting strong demand for affordable new homes. Our cycle times have returned to historical levels and further growth in our community count is anticipated. Accordingly, we expect our full year 2024 deliveries to be in the range of 10000 to 11000 homes and home sales revenues to be in the range of $3,800,000,000 to $4,200,000,000 With that, I'll open the line for questions. Operator?

Operator

We will now begin the question and answer session. Our first question is from Carl Reichardt with BTIG. Please go ahead.

Speaker 5

Thanks. Good afternoon, gentlemen. Good afternoon. David, just got to my question at the very end on community count. Obviously, the growth, 23 was super strong.

Speaker 5

So can you talk a little bit how you plan to lay it out in 'twenty four? I'm assuming it's slower. Is there a cadence to the community count that you expect to be front end or back end loaded in terms of new stores. And if you can give us a sense of the growth, it would be helpful.

Speaker 1

Yes, I think that As we've been talking, we wanted to see 2023 as significant amount of growth. We invested a lot of capital in the land to get to That $215,000,000 we want that to be our new plateau, kind of the new jumping off point for the company going forward. We do expect to be growing community count. It would be probably We see more of that growth come online in Q3 as we're getting finishing getting communities out of the ground in the first half of this year and start looking for sales in that Q3 timeframe. Right now, we don't have a guidance range out there, but we do expect to see community count at a slower pace than 25% year per year, But we do have land and assets that we want to get into production and increase that growth going forward.

Speaker 5

Okay. Thanks, Dave. And then also just on the rapidity with which you turn your backlog this quarter recognizing business improved and you had inventory ready to go. So as you look and your cycle times have normalized too. So when you talked about we're trying to sell homes later at construction process It's like on average between taking the order and closing the house, what's your timeframe?

Speaker 5

And can you tell me what percentage of homes in the 4th quarter You both saw orders and delivery within that quarter? Thanks.

Speaker 1

I'm sorry. Can you repeat the last part of that question? I've got the first part in terms of how fast we're Returning.

Speaker 5

Correct. Yes. The last one was, if you look at your delivery volume in Q4, what percentage of those deliveries did you have ordered and closed in that same quarter, in the Q4?

Speaker 1

Well, you can see that from the our backlog conversion rate, we had a significant amount that got sold and closed during the quarter. I believe we turned our backlog Not quite 170%, it's like 167% in the 4th quarter. So obviously there was a significant amount of homes that were sold and closed during that period. And given the amount of time that we have between selling and closing, it's typically about a quarter. Give a few months that we're able to sell and close a home and just depending on where it is in the process, Obviously, quick move in homes these days have had have been in fashion, and so people have been able to Find those on our website and been able to sell and close homes in the Q4.

Speaker 5

Okay. So quarter turn is kind of what you're back to that normal rate after having flushed through inventory this quarter. Okay. And then last question, sorry to add one more. Just on the acquisition, I I think we've asked before and maybe all of you guys can talk about what the environment looks like for private company acquisitions.

Speaker 5

We started to see a few crop up in a number of builders now. Have things loosened up? Are there particular places that you're especially interested in beyond Tennessee? Thanks.

Speaker 3

Yes, Carl. We definitely have seen more M and A offerings and we expect that that's going to continue. Part of it is when you look at the private builders, the capital constraints are starting to become impactful to them. As well as you just look at it, in many cases, the people who founded the business are starting to age a bit, And they'd like to be able to liquidate their holdings. For example, in the situation that We found ourselves in Nashville, where we found a great company that has been in business for 30 years.

Speaker 3

And they've now become our land development source as we go forward. We have an ongoing relationship with them. It was one of their expertise and they wanted to exit the homebuilding business, but stay and keep their hand in land and land development. And so we have an ongoing relationship with Amer. And so from our standpoint, we find that to be a very valuable thing that we can Create those ongoing relationships.

Speaker 3

In terms of markets, we really look M and A at this point is really opportunistic abilities to enhance our organic portfolio of land. In terms of voids in our market, the only ones that we really have, we'd like a higher presence within Florida. We're there throughout Florida in our Century Complete brand, but on our communities brand, we're only in Jacksonville. Florida, our experience has been very positive and we'd like to expand our presence there and M and A would be one way to do that.

Speaker 5

I appreciate the answers guys. Thanks so much.

Speaker 1

Welcome. Thank you.

Operator

The next question is from Jay McCanless with Wedbush Securities. Please go ahead.

Speaker 6

Hey, good afternoon, everyone. Great quarter.

Speaker 1

Thanks, Steve.

Speaker 5

So the

Speaker 6

good news on January being up 30 percent. I guess, when in 'twenty three did you guys start to see the turn? Just wondering when the comps are going to get harder from a year over year perspective?

Speaker 3

I think that we probably started seeing a turn

Speaker 1

midway second quarter. If you're thinking 'twenty three as we started out the year with relatively high interest rates and we saw some interest rate relief as As we got into kind of March April, we started seeing a pickup in sales and then it really kind of bounced around. So I think comps based on any given month may be hard or light just Given where we were and where interest rates were at that given time of last year.

Speaker 6

Okay. Thanks for that. And then I guess the other question, if you're bringing incentives down, I guess what's more impactful right now, to volume that you're generating or the incentives coming down? Just trying to think about what Q1 gross margin would look like relative to what you put up in the 4th quarter.

Speaker 1

I think, while we don't have guidance out there on margins, we're obviously thinking that as incentives are getting pulled back, We think there's some stability to that gross margin line and heading into the year. I don't think you're going to see we're not anticipating it Falling like it did from Q4 to Q3.

Speaker 6

Okay, great. That's all I had. I'll get back in queue. Thank you.

Speaker 1

Thanks.

Operator

2019. The next question is from Alex Rygiel with B. Riley FBR. Please go ahead.

Speaker 7

Thanks. A great quarter, gentlemen. How should we think about Century Complete growth in 2024 versus the base business?

Speaker 3

Our Century Complete business has for quite some time, it was roughly a third of our overall volume. We moved it up to 35%, 36%. We're now just under 40%. It's a type of thing that because we only buy finished lots, and we're typically buying them just in time, Some of our constraints on growing that business is impacted by some of our land development partners and the timing in which They're able to complete and deliver lots to us. But as we look at it right now, we're just under 40% of our overall business in terms of units on Century Complete.

Speaker 3

As we've said, we ideally, we'd like to see it get to 50%, But as the community side continues to grow, that becomes harder to make Century complete 50%. But we're very happy with it at the point that it currently is.

Speaker 7

And then is there a magical rate right now that's really getting your

Speaker 1

I don't There's a magical rate. I know that I think we've talked about that in the past. I'd say right now as buyers have seen rate the overall rates come down, They are exhibiting more confidence and we're seeing that demand come out to our marketplace. And so while there may be individual buy downs that Turning on a closing table, which always occurs. I think that today, we're just seeing The fact that the macro economy and the macro interest rate levels have been coming down, buyers are more encouraged about going out and buying that house.

Speaker 1

So I don't know that I would say there's definitely a magic rain out there at the moment.

Speaker 2

Helpful. Thank you.

Operator

The next question is from Jesse Lederman with Zelman and Associates. Please go ahead.

Speaker 8

Hi. Thanks for taking my question and congrats on the really strong end to the year. My first question is just a follow-up on the Century Complete brand. Can you remind us if there is any Gross margin or return differential between that the Century Complete product and the Communities brand?

Speaker 3

In terms of gross margin, because we're only buying finished lots, so we really Have no land profit built into the margins. The margins tend to be structurally a bit lower. On the flip side, because we are not carrying land and developing land, the returns are significantly higher.

Speaker 8

Got it. Yes, that makes sense. And then just a quick follow-up on that. Are you seeing any I I mean, you talked about the constraint there in terms of your developer, you're kind of at the mercy of your developers. Can you talk about maybe what they're seeing what you're seeing from them in terms of their ability to get financing and continue on the development process?

Speaker 4

Obviously, financing has tightened up in the last 12 months on that or more. But when we look at it, The stronger developers have been able to figure out workarounds whether they can get financing or figure out other ways to fund their projects, As well as our structure sometimes on our optioned lots on how we'll do things. So we've been able to navigate that. But clearly, As a general statement, it is tighter from a financing front for the land development communities. And so we're continuing to source Good partners in that daily and we're getting through that fine, but it has tightened up.

Speaker 8

That's helpful. And one more on the page.

Speaker 4

One other thing on a positive side, we've seen a flattening of increases in LP costs. And so with that, Where we were seeing ramp at increases in the past, we've seen a flattening now, so

Speaker 3

that's a good thing going forward.

Speaker 8

That's great. It's very encouraging. Generally spec builders have a higher inventory turnover ratio and you're hovering around 1 times, Which is a bit below the peer group. Now that your cycle times are improving and you're on more consistent start cadence since the beginning of the year, do you have internal targets that you're striving in terms of working capital as a percentage of revenue or inventory turnover that you discussed internally to drive the business?

Speaker 1

Not to try to avoid your question, but yes, we obviously have a variety of internal metrics, internal hurdles Now we're looking at everything from the time that we are reviewing land deals to when we're doing starts for homes and opening new communities, but it's nothing That we published or put out there right now.

Speaker 8

Okay, understood. Thanks for all the color.

Operator

The next question is from Michael Rehaut with JPMorgan. Please go ahead.

Speaker 9

Hi guys, this is Andrew Ozzie on for Mike. I appreciate you taking my question. I just yes, congrats on the quarter

Speaker 3

as well. I just I just want

Speaker 9

to maybe, obviously with understanding that you're not guiding margins, help us think maybe through some of your assumptions or thoughts on construction costs, pricing or the land environment to help us think of gross margins next year or this year rather?

Speaker 1

I think it's obviously going to be a combination of all those things that given right now our guidance is Estimated an ASP of around $380,000 in the low and high end. And then we are looking to pull back incentives, but we know that Some of that is some of those savings will get eaten up by some direct cost increases. So while we're still experiencing Positive trend in the 4th quarter. Later this year, we may see increases. So it will be how well can we negotiate Direct Cost Down Across Our National Platform in order to provide some additional margin

Speaker 9

Thank you for that. And then maybe if you can just review your capital allocation priorities going forward?

Speaker 1

Yes, I would say that we continue to invest in the business. We've got roughly 75,000 lots owned and controlled with about 60% of those being off balance sheet under some form of option and then controlled arrangement. And We're looking to continue growing the business. As I said earlier with somebody else's, quiet with one of the other analyst questions, we're looking to grow community count. So we think that we'll have Plenty of opportunities to be reinvesting this capital that we're generating back into the business and grow organically, as well as Dale said, look, there are other Parts of the market that we'd like to see M and A opportunities and Florida being one of them.

Speaker 1

We just executed on the transaction in Tennessee. And so we think there'll be other opportunities that come out for us to utilize this capital to continue to grow the business.

Operator

The next question is a follow-up from Jay McCanless with Wedbush Securities. Please go ahead.

Speaker 6

Hey, thanks for taking my follow ups. Just wanted to get a sense of what percentage of communities during the Q4 you're able to raise price and what pricing power looks like as you start the New

Speaker 3

Jay, it's I can't give you a specific number, but it really comes down to We're adjusting prices and reviewing them on a weekly basis on a subdivision by subdivision level. I can give you just kind of a general feel that certainly once we saw some interest rate Relief. We started raising prices, reducing our incentives, because most of Look at it, most of our homes have some type of incentive in it. Most of the increased price is really reflected in reduced incentives. Although there are increased base prices from a case to case basis, but it's really more incentives.

Speaker 3

And so which is all based on what we see in terms of competition for that particular subdivision, the level of inventory we have, that type of thing. But in general, on a directional basis, we are seeing that our incentives are going down And that's really where our focus is.

Speaker 1

Okay. That's

Speaker 6

great. And then the other follow-up I had, What are you seeing from competitors right now? Has some of the frenzy discounting and promotions that we're seeing in the 4th quarter, has that lessened somewhat or It's still pretty aggressive what you're seeing from some of the larger competitors.

Speaker 3

Notwithstanding the fact that still generally inventories are very low, Everybody is looking to move product and from time to time, one competitor or another Maybe discounting homes more than the rest of the market. But in general, we're not seeing rampant discounting going on out in the market. And what was there in the Q4 seems to have settled down as we've gone into the New Year.

Operator

This concludes our question and answer session. We will now turn the line back over to Dale for some brief closing remarks.

Speaker 3

To everyone on the call, thank you for your time today Day and your interest in Century Communities. To our team members, 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 and sharing with you our continued progress.

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Key Takeaways

  • Century Communities achieved a record Q4 with 3,157 home deliveries (+9% YoY, +39% sequential), $1.2 billion in revenues (+36% sequential), and $2.83 diluted EPS (+15% YoY).
  • For full-year 2023, the company delivered 9,568 homes, generated $3.6 billion in home sales revenues (exceeding guidance), grew book value per share to $75.12 (+11% YoY), and ended with a record low net leverage of 22.4%.
  • Sales momentum accelerated in Q4 with net new contracts rising 86% YoY to 2,340 homes (+9% sequential), and January 2024 orders were more than 30% ahead of prior year levels.
  • The Century and Century Complete brands maintain a focus on affordability, with over 90% of Q4 deliveries priced below FHA limits, spec builds for direct cost control, and average sales prices of $376,000 and $258,000 respectively.
  • Century ended Q4 with a robust land and community pipeline of approximately 74,000 owned and controlled lots (+39% YoY) and 251 communities (+21% YoY), further bolstered by the strategic acquisition of Landmark Homes of Tennessee to expand in Greater Nashville.
A.I. generated. May contain errors.
Earnings Conference Call
Century Communities Q4 2023
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