Century Communities Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 24, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Century Communities First Quarter Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Tyler Langton. Please go ahead, sir.

Speaker 1

Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the Q1 2024. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward looking statements. These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's latest 10 ks as supplemented by our latest 10 Q and other SEC filings.

Speaker 1

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 presented in accordance with GAAP. Hosting the call today are Dale Francescon, Chairman and Co Chief Executive Officer Rob Francescon, Co Chief Executive Officer and President and Scott Dixon, Interim Chief Financial Officer. Following today's prepared remarks, we'll open up the line for questions.

Speaker 1

With that, I'll turn the call over to Dale.

Speaker 2

Thank you, Tyler, and good afternoon, everyone. To start, I want to welcome Scott Dixon, our Interim Chief Financial Officer to the call. Scott joined Century back in 2013 and was most recently our Assistant Chief Financial Officer. Turning to the quarter. We're very pleased with our Q1 results, including deliveries of 2,358 Homes, an increase of 23% versus the prior year period and the 2nd highest level of 1st quarter deliveries in our company's history.

Speaker 2

Our first quarter revenues of $949,000,000 increased by 26% versus the prior year period and our adjusted diluted earnings per share of $2.22 increased by 114%. We have continued to see strong demand for our affordable new homes and low resale inventories in our markets. Our first quarter net new contracts of 2,866 homes increased by 42% year over year and by 22% versus the Q4 2023. Our orders increased on a sequential basis in each month of the Q1 and our orders in the 1st 3 weeks of April are consistent with overall Q1 levels. We also experienced a meaningful improvement in absorptions with our Q1 2024 monthly absorption rates averaging 3.8 versus 2.9 in the year ago period and 3.1 in the Q4 of 2023.

Speaker 2

On a year over year basis, our net orders increased across all our segments, with the Southeast and Mountain regions posting the strongest gains at 86% 84%, respectively. While we continue to provide incentives through rate buy downs when necessary, We are seeing buyers adjust to higher interest rates across our platform, which has enabled us to reduce our level of incentives. Our focus on affordability positions us well for future growth and continued success as we can target the widest range of potential homebuyers. In the Q1, more than 90% of our deliveries were priced below FHA limits. Our average sales price of $391,000 remains among the lowest of the publicly traded homebuilders.

Speaker 2

In the Q1, we generally matched our starts with our sales and built nearly 100 percent of our homes on a spec basis. This approach allows us to control our costs, maintain an appropriate supply of quick move in homes, provide our homebuyers with certainty of financing and meet the healthy demand that we are seeing in our markets. In closing, I want to highlight that Century was recently selected as the highest ranked homebuilder on Newsweek's list of America's Most Trustworthy Companies for the 2nd year in a row, and we believe our inclusion on this list is a testament to the unwavering dedication of our team members and trade partners who consistently deliver a home for every dream. Our entire company culture and work ethic is built around consistently pairing quality affordable homes with a best in class home buying experience. So we're deeply honored to receive this recognition for the 2nd year in a row.

Speaker 2

I'll now turn the call over to discuss our operations and land position in more detail. Thank you, Dale, and good afternoon, everyone. Given the strong demand for our new homes, we are able to reduce our incentives on closed homes to a little over 700 basis points in the Q1 2024 from roughly 800 basis points in the Q4 of 2023. As we've discussed in the past, interest rate buy downs continue to be the most important incentive for our customers given their ability to significantly lower monthly payments, a key focus for our entry level buyer. In the Q1, the FICO scores of our homebuyers remain healthy and consistent with levels from the Q4 and full year 2023.

Speaker 2

We also had continued success in controlling our costs in the Q1. On a sequential basis, we saw a further 2% reduction in our direct construction costs across a wide range of categories on the homes we started. We've been able to achieve these reductions even with the continued strength in the housing market by both leveraging and expanding our trade and supply base across our national footprint. During the Q1, our cycle times remained in the 4 to 5 month timeframe after having returned to these pre COVID historical averages in the back half of twenty twenty three. On the land front, we ended the Q1 with approximately 75,000 owned and controlled lots, a 46% year over year increase.

Speaker 2

The higher lot count on a year over year basis was driven by an increase in our controlled lots, which accounted for 58% of our total lots in the Q1, with our number of owned lots remaining relatively static over the past 2 years. Additionally, at the end of the Q1, Texas and the Southeast accounted for roughly 50% of our total lot count, up from 39% in the year ago period and reflective of our strategy to grow our presence in these attractive markets that are benefiting from relative affordability, strong employment and population growth. Combined with Century Complete, these more affordable markets comprise over 70% of our owned and controlled land supply. Additionally, the strength of our relationships with 3rd party land developers across the Southeast, Texas and in all of Century Completes markets further support our land light strategy that is focused on acquiring finished lots where possible. We ended the Q1 with a community count of 253, the highest level in our company's history and an increase of 8% versus year ago levels with every region we operate in experiencing growth.

Speaker 2

Century Complete accounted for over 40% of our total community count in the Q1, while the Southeast and Texas combined accounted for close to 30%. During the quarter, we opened a total of 42 communities and closed 40. We also closed out a greater number of communities than originally planned in the Q1 due to our better than expected level of sales and deliveries. We continue to expect to see community count growth for the full year 2024 with the increases more heavily weighted towards the second half of the year as more new communities start to come online. I'll now turn the call over to Scott to discuss our financial results in more detail.

Speaker 3

Thank you, Rob. During the Q1 of 2024, pre tax income was $84,300,000 and net income was $64,300,000 or $2 per diluted share, a 93% year over year increase. Adjusted net income was $71,400,000 or $2.22 per diluted share, a 114 percent year over year increase. EBITDA for the quarter was $100,300,000 and adjusted EBITDA was $109,600,000 respective increases of 83% and 100% over year ago levels. Revenues for the Q1 were $948,500,000 up 26% versus the prior year quarter on both higher deliveries and average sales price.

Speaker 3

Our average sales price of $391,200 in the Q1 increased by 4% on a sequential basis, mainly due to lower levels of incentives index. As Century Complete accounted for 33% of 1st quarter deliveries versus 39% in the Q4 2023. Our deliveries of 2,358 homes increased by 23% versus the prior year period. We saw growth across all our regions with the Southeast experiencing the highest growth rate of 91% year over year as we continue to expand our presence in this attractive region. We are pleased with the strong start to the year for our deliveries and expect to see sequential growth over the remaining quarters of 2024.

Speaker 3

At quarter end, our backlog of sold homes was 15.90 units valued at $667,000,000 with an average price of $420,000 The increase in the average sales price While deliveries in backlog in the first quarter While deliveries in backlog in the Q1 were more weighted towards higher price regions, we expect this trend to broadly reverse with the percentage of our deliveries by region for the full year 2024 estimated to be roughly similar to 2023 levels. We currently expect our average sales price for the full year 2024 to range between $380,000 $390,000 In the Q1, adjusted homebuilding gross margin percentage was 22.8% compared to 19.6% in the Q1 of 2023. Homebuilding gross margin was 21.3% compared to 18.2% in the prior year quarter. Our gross margins in the Q1 were roughly flat on a sequential basis. While margins benefited from lower incentives, this sequential tailwind was certainly offset by mix and purchase price accounting adjustments from our acquisition of Landmark Homes of Tennessee that we completed in January.

Speaker 3

SG and A as a percentage of home sales revenue was 12.4% in the first quarter compared to 13.4% in the prior year. The largest drivers of this year over year decrease were our higher levels of deliveries and a focus on controlling our fixed levels of G and A. For 2024, we expect SG and A as a percentage of home sales revenue 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. Other expense in the quarter was $9,600,000 which included a $7,700,000 impairment on other non core investments. In the Q1, our tax rate was 23.7% compared to 24.3% in the prior year quarter.

Speaker 3

We expect our full year tax rate for 2024 to be roughly 25%. Our net homebuilding debt to net capital ratio was 24.9% compared to Q4 2023 levels of 22.4%. The change was driven by increased starts heading into the spring selling season. Our homebuilding debt to capital ratio decreased to 29.4% at quarter end compared to 29.9% as of the end of the Q4 2023. During the quarter, we increased our quarterly cash dividend by 13% to $0.26 per share, repurchased 186,887 shares of our common stock for $16,100,000 and grew our book value per share to a record $76.10 a 12% year over year increase.

Speaker 3

We ended the quarter with $2,400,000,000 in stockholders' equity, $1,000,000,000 in total liquidity and $208,000,000 in cash. At March 31, we had no borrowings outstanding on our $800,000,000 dollars unsecured revolving credit facility that does not mature until April 2026. Additionally, we have no senior debt maturities until June of 2020 7, providing us ample flexibility with our leverage management. Now turning to guidance. Even with our positive outlook on the housing market and our business, we are maintaining our guidance for full year 2024 deliveries to be in the range of 10,000 to 11,000 homes and our home sales revenue to be in the range of $3,800,000,000 to $4,200,000,000 given the uncertainty that exists around interest rates.

Speaker 3

In closing, we are encouraged with our strong start to the year. We are seeing solid demand across our footprint, are successfully managing our costs and cycle times and will grow both our community count and deliveries on a year over year basis. With that, I'll open the line for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Carl Reichardt with BTIG. Please go ahead.

Speaker 4

Thanks. Good afternoon, everybody.

Speaker 5

Good afternoon, Carl.

Speaker 4

Hey, guys. I'm a little confused on the guide. I mean, you grow deliveries just a little sequentially, you're at the bottom end of the guide by the end of the year. So and you've got business in April already trending, it sounds like fairly well. And clearly, your backlog conversion rate is extremely high.

Speaker 4

So help me understand again why you're not raising at least the low end of the guide unless you're expecting, I don't get catastrophic interest rates, but certainly much higher from here rates?

Speaker 2

Carl, it's strictly a function of trying to be conservative, not knowing where rates are going to go. As we started out the year, we expected to see significant rate cuts during the year. Now that seems to be somewhat in question. So when we just look at the future, what we're seeing right now is pretty positive, but it's hard to anticipate what's going to happen as the year unfolds. And so that's the reason for not changing guidance.

Speaker 4

Okay. I certainly understand the uncertainty. You've added a lot of developed lots and kept your own lot count fairly flat year over year. And you mentioned, I think, that your relationships with 3rd party developers are key to you. So two questions.

Speaker 4

On the lots you're putting under contract today, when do you anticipate that they will be ready to be built on coming to market on average? And then second, of your option lots, what percentage are with 3rd party developers versus lots that you are going to develop yourself and bring to market later potentially at higher margins?

Speaker 2

So on the first part, lots that we're putting in the control position and bringing them on, those range everywhere from finished lots that could be even accretive to this year's business to full development deals where we have a 3rd party developer, they have to develop those lots for us on various structures. So they just range across the board, if you can imagine. Obviously, though, our desire is to have more finished lots. As a reminder, the Century Complete model only buys finished lots. And on the Communities brand, we're trying to buy finished lots everywhere that we can and create that more capital efficient landline approach.

Speaker 2

The second part of that question or your second question regarding the percentage that are 3rd party developers, that's not something that we have disclosed previously. But we do develop in the Communities brand in all of our markets ourselves in addition to 3rd party developers that develop for us. So on the Century Complete brand, that would be 100% third party developers developing those finished lots. On the Communities brand, we develop along with 3rd party developers.

Speaker 4

Perfect. I appreciate it. I'll get back in queue. Thanks a bunch, guys. Thanks.

Operator

The next question will come from Alex Rygiel with B. Riley. Please go ahead.

Speaker 6

Thank you, gentlemen, and very nice quarter again.

Speaker 2

Thanks, Alex.

Speaker 6

As you look into the Q2, does it appear that incentives could again decline sequentially?

Speaker 3

Yes. Alex, very good question. I think we were optimistic as we got into the Q1 in terms of the rate environment that, as we said in our prepared remarks, that we had a little bit of additional pricing power on the incentive line item. Certainly,

Speaker 2

with some

Speaker 3

of the volatility in rates over the last few weeks, I don't know that there's significant additional optimism on our standpoint in terms of being able to reduce the amount of mortgage incentives that we're looking at into Q2. Certainly, the rest of the year plays itself out, it's something that we'll be evaluating.

Speaker 6

That is helpful. And then as we think about your gross margins for the remainder of the year, can you talk about the sort of tailwinds and headwinds and maybe provide some directional guidance as it relates to sort of everything else on incentives?

Speaker 3

Yes, absolutely. I think when you saw the Q1 come through with margins and kind of that low GAAP gross margins in that low 21% range. As we're looking out in terms of our cost structure, we're not seeing significant cost pressures over the immediate future. So that kind of guide from it from an initial Q1 perspective from a margin feels about right for the immediate future. Certainly, there can be some tailwinds or headwinds from a mortgage incentive standpoint going into the future on us here as it impacts ASPs.

Speaker 3

The other item that we would call out is we do have a little bit of a drag from some purchase accounting related to our Landmark acquisition that we completed here in January. It was about a 20 basis point drag here on the Q1 margins. We would anticipate that to be pretty similar for Q2 as well as Q3 within it, it's falling off really by the back half and final quarter of the year. Very helpful. Thank you very much.

Speaker 3

Absolutely. Thank you.

Operator

Your next question will come from Jesse Lederman with Zelman and Associates. Please go ahead.

Speaker 5

Hi. Thanks for taking my questions and congrats on the strong quarter. Thank you. First one is on backlog conversion. So given the high backlog conversion, you presumably sell and deliver a high percentage of your homes in the same quarter.

Speaker 5

That said, your percentage of Century Complete deliveries fell sequentially to 33% from 39%. So the question is, is that just kind of timing or is that somewhat of a testament to demand for that Century Complete Home or maybe qualification issues, affordability issues, etcetera?

Speaker 3

Yes. Thanks for the question, Jesse. And it's a good question. It's something we spent a fair amount of time as a management team looking at as our as the quarter really played itself through. So I think and we mentioned it a little bit in our prepared remarks, we were a little bit lighter on the Century Complete deliveries as a percentage of our overall platform this quarter.

Speaker 3

We anticipate that to trend a little bit more towards where we were at from all of last year from a 2023 perspective, just from a percentage of the mix. And then from the backlog conversion, yes, it was a pretty high backlog conversion that we've done historically. We did sell and close intra quarter over 50% of our units. A lot of that was obviously a factor of the demand that we experienced ourselves within our markets this quarter as well as coming into the year with units that were further along in the stage of construction.

Speaker 5

That's helpful. But just one quick follow-up on that. So you didn't see any particular affordability concerns or pushback from that Century Complete buyer that paused the percentage of deliveries in the quarter or maybe even if you could talk about the percentage of homes you sold in the quarter relative to the rest of the business? Those are maybe more affordability constrained prospective homebuyers?

Speaker 3

No, I mean, I think when you look at our Century Complete being able to bring homes to market in the mid to below $300,000 range. I think our ASPs in that brand are in the 260%, 2.75% or 275 ks range. From a sales perspective, we were up 35% quarter over quarter on the Century Complete side. And while that buyer is certainly one that needs some additional incentives on the mortgage side from time to time, we're still seeing strong demand.

Speaker 5

Great. Thanks for the color. One last question. You've done a great job acquiring locked over the last several quarters, as you know, mostly off balance sheet with your lock count up 45% year over year. So turning to just capital allocation priorities, where does share buybacks fit on that capital allocation priority list?

Speaker 5

I noticed you bought back about $16,000,000 of shares in the Q1, which was among your highest in a couple of years along with the Q3 of last year. So maybe you can talk about the share buybacks

Speaker 7

a little bit? Thank you.

Speaker 3

Yes, absolutely. And larger from a kind of question from just a capital allocation perspective, and our number one priority is obviously putting our capital back into the business. As you've seen us grown our owned and controlled bought positions, we're pretty optimistic about the markets that we're currently in and think that, quite frankly, is the best return from our shareholders. Other than that, we certainly have a dividend, quarterly dividend that's at $0.26 a share that's up 13% from the previous quarter. So that plays itself into our capital allocations.

Speaker 3

And then from a buyback perspective, we have over 1,000,000 shares still authorized underneath our Board program. It is something I received you saw us do during the quarter. I think to the extent that we see dislocation within the market compared to our book price, it's something that we will take

Speaker 7

a look

Speaker 3

at. But no specific guidance or structured program on the buybacks currently.

Speaker 5

Great. Thanks so much. Absolutely.

Operator

The next question will come from Jay McCanless with Wedbush. Please go ahead.

Speaker 8

Hey, thanks for taking my questions. I guess the first one I had, could you talk about what percentage of your closings in the Q1 were customers that used a mortgage rate buy down?

Speaker 3

Yes. Jade, that's not a specific number that we've

Speaker 2

And then

Speaker 8

we've heard from a lot of your competitors that they're seeing rising lot costs and also rising land development costs. I guess maybe could you talk to us about how that's going to play out this year for Century and whether that's going to be a 24 thing or going to be more of a 25 thing when you think those higher land costs might start to impact the income statement?

Speaker 2

Yes. I think it would be more of a $25,000,000 I think we're going to be relatively flat this year on that. From an LD standpoint, that's market dependent. We're actually getting some reductions in certain markets as people get a little bit hungrier for business with some competitor multifamily type projects that don't have the starts. So when you look at that, we are getting a little bit of benefit in certain markets.

Speaker 2

Other markets, it's a challenge. And so overall, on a consolidated basis, it's probably flat to slightly up on the LD side. But again, it's market dependent. But overall, land is competitive right now. It seems like everybody's wanting to go after land.

Speaker 2

And so with that, we've been very competitive for so that we kind of started that a little bit early as you see our year over year growth than some of our competitors. So that feels good. We have that type of a control position now going into 2024.

Speaker 8

Okay, great. And then talking about the gross margin, could we Scott, if we could zero down a little bit more, or should we expect once you factor in the purchase price accounting, that 2Q gross margin is going to be fairly similar to 1Q? Or is there anything in there from an incentive or delivery perspective that we need to be thinking about?

Speaker 3

I mean, Jay, I'd say that's a reasonable expectation outside of obviously what happens from an interest rate and what we're able to do or need to do from a mortgage incentive standpoint. But from where we sit today, I think that's a reasonable expectation.

Speaker 8

Okay, great. That's all I had. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 7

Hi, guys. Andrew Ozzio for Mike. Thank you for taking my question. Congrats on the quarter. Thank you.

Speaker 7

It looks like average order prices ticked up nicely sequentially. I just wanted to maybe dial in on how wide spread that is and your outlook on

Speaker 1

the ability to push price in this environment? Thanks.

Speaker 2

A lot of that would have been driven just by the mix, as we mentioned earlier, just because of circumstances in terms of production units, the percentage of our Century Complete business, which carries the lowest ASP, was down below where we've normally been. As a result, that brought it brought down the number of homes that we closed that had the lower Century Complete ASP, the higher ASP in the Century Communities had a bigger percentage. As a result, that affected our overall average sales price.

Speaker 7

Got it. I appreciate that explanation. And then just secondly, I was hoping if I can get any more granularity on community count growth as we go across this year and maybe any initial thoughts as

Speaker 1

we move into next year?

Speaker 3

Yes, absolutely. I think we said in our prepared remarks, which is pretty consistent with what we said last quarter, as we anticipate really community count growth throughout the year, but really being back half weighted as we've been adding to our own and controlled pipeline. I think it's when we sit here and look at it today, we obviously opened up 42 new communities during the Q1, which was something that we were excited about. Close out, quite frankly, got a little bit fewer than we thought, which was a good thing given the market demand. But from our current kind of look at the pipeline, we really think we'll be up mid to high single digits on community count as compared to last year by the time we get to the end of this year.

Speaker 7

Thanks so much. That's all for me. Good luck.

Speaker 3

Thank you.

Operator

The next question is a follow-up from Carl Reichardt with BTIG. Please go ahead.

Speaker 4

Hey, thanks guys for all the helpful color. Really appreciate it. Just on Century Complete and the mix shift a bit away from it this quarter, as you're looking out in 'twenty four and 'twenty five, do you expect the Century Complete mix percentage of communities to begin to increase again or should we expect it to be flat from here or fall as a percentage of the overall?

Speaker 2

No, I mean, we've been if you look at the past few quarters, Century Complete has been 38%, 39% of our overall closings. I would expect that we get back to those same levels. It was just when we look at it, the homes that we had in our Century Complete brand were just less this quarter than what we had on our Communities brand.

Speaker 4

Okay. So more of an anomaly. Okay, great. And then last one, can you just talk a little bit about the non core investment you impaired? What was it and why did you impair it?

Speaker 3

Yes, sure, absolutely. It was an investment we had in the startup company called Diamond Age, which is a 3 d printing company. And we went through an exercise from accounting perspective every quarter of taking a look at updated data points, and that flushed itself through in the charge this quarter.

Speaker 4

Okay, great. I appreciate it, Scott. Thanks very much, guys.

Speaker 3

Absolutely. Thank you. Thank you.

Operator

Our next question will come from Alex Barron with Housing Research Center. Please go ahead.

Speaker 9

Hey guys, congratulations on the quarter. I wanted to ask about incentives. I'm assuming a lot of buyers are using some form of rate buy down or forward commitment. But I was curious if you guys could spell out what percentage of the buyers actually take advantage or something like that?

Speaker 3

Yes, absolutely, Alex. Obviously, from our buyer pool, from really focusing on that first time homebuyer, it's the substantial majority. It's above 75% of our buyers will take advantage of some level of a mortgage incentive.

Speaker 9

Got it. And as you as we look at what's happened so far this month, rates up, I don't know, 40, 50 bps versus last quarter, Is your sense that you guys will increase the incentive to kind of keep the sales pace momentum going? Or is that the rate you offer people will go up along with market rates?

Speaker 2

The rate that we've been offering has trended up as we have seen rates go up, so that we're basically keeping a similar spread between market and the rates that we're offering.

Speaker 9

And so far, you haven't noticed whether it's affected sales pace much?

Speaker 2

Yes. So far, we don't it has not obviously, the month is not over yet, but right now it has not.

Speaker 9

Okay. That's great. All right. That's all I got. Thank you.

Speaker 1

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Dale Francescon for any closing remarks. Please go ahead.

Speaker 2

Thank you, operator. And to our team members, thank you for your hard work, dedication to Centuri and commitment to our valued homebuyers. To our investors and everyone else on the call today, we appreciate your continued support and look forward to speaking with you again next quarter and sharing our continued progress.

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Key Takeaways

  • Century delivered 2,358 homes in Q1, up 23% year-over-year, driving revenues to $949 million (+26%) and adjusted EPS to $2.22 (+114%).
  • Net new contracts reached 2,866 homes (a 42% increase), with monthly absorption improving to 3.8 homes per community versus 2.9 a year ago.
  • With affordability as a priority, over 90% of Q1 deliveries were priced below FHA limits, the average sales price remained among the lowest in the sector at $391,000, and mortgage incentives were reduced to ~700 basis points.
  • Century ended Q1 with approximately 75,000 owned and controlled lots (a 46% increase), of which 58% were controlled, and continued to expand in high-growth markets like Texas and the Southeast.
  • Q1 adjusted homebuilding gross margin was 22.8% (versus 19.6% a year ago), book value per share hit a record $76.10, liquidity stood at $1 billion, the quarterly dividend rose 13%, and 2024 guidance remains at 10,000–11,000 deliveries amid interest-rate uncertainty.
A.I. generated. May contain errors.
Earnings Conference Call
Century Communities Q1 2024
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