Century Communities, Inc. (NYSE:CCS) Q3 2023 Earnings Call Transcript
Century Communities, Inc. (NYSE:CCS) Q3 2023 Earnings Call Transcript October 25, 2023
Century Communities, Inc. beats earnings expectations. Reported EPS is $2.58, expectations were $1.59.
Operator: Greetings. Welcome to Century Communities' Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Tyler Langton, Senior Vice President of Investor Relations for Century Communities. Thank you. You may begin.
Tyler Langton: Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the third quarter 2023. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found in the heading Risk Factors in the company's latest 10-K, as supplemented by our latest 10-Q and other SEC filings. We undertake no duty to update our forward-looking statements.
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 David Messenger, Chief Financial Officer. Following today's prepared remarks, we'll open-up line for questions. With that, I'll turn the call over to Dale.
Dale Francescon: 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 activity performed in line with our expectations and typical seasonality, demonstrating the strong underlying demand that remains for affordable new homes. Our deliveries of 2,264 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 gaining 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. Our net new contracts in the third quarter totaled 2,149 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 out to the fourth quarter as a whole, if 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 35% of our sales and deliveries. As we've discussed in the past, Century Complete targets entry-level customers with a hundred percent of its deliveries within FHA limits and only acquires finish 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 $265,000. 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 lock-in effect, so there is less competition from the used home market. Smaller, private, new homebuilders tend to borrow from local and regional banks. Their borrowing costs are generally higher than ours, and we think the local and regional banks will likely reduce the amount of credit that they're 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 in 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 builds, which enables us to better control our costs and 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, consistent 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 our strategy of selling homes later in the construction cycle.
In closing, we're encouraged by the improvement that we have seen over the past several quarters in our deliveries and gross margins, which are benefiting from reduced levels of incentives, improve 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 counts, which 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 over to Rob to discuss our operations and land position in more detail.
Robert Francescon: 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 were 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 even lower, the cost to buydown 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, a 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 that can't compete on this front. We experience further improvement in our cycle times on completed 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 the more normalized four to six month timeframe. Earlier this year, we discussed direct construction costs declining by roughly 11%, an average of approximately $20,000 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 cost of mortgage rate buydowns. Given the level of industry-wide, new home starts, our direct construction costs on the homes we started in the third quarter, which will be delivered in 2024 increased approximately one and 5% on a quarter-over-quarter basis. Turning to land. We ended the third quarter with approximately 69,000 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 11,000 lot increase in our controlled land to 38,000 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 30,000 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 252, 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 recognize increased deliveries in 2024 and beyond.
I'll now turn the call over to Dave to discuss our financial results in more detail.
David Messenger: 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 2,264 homes. For the fourth quarter, we are currently forecasting deliveries to be in the range of 2,200 to 2,600 homes. Our average sales price of 382,000 in the third quarter increased by 4% on a sequential basis as we continue to reduce incentives and selectively increase base prices.
At quarter-end, our backlog of sold homes was 1,887, valued at $707 million with an average price of $375,000. 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 buydowns. SG&A, as a percent of home sales revenue, was 12.9% in the third quarter compared to 9.9% 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 the 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 pre-tax 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 30.8% 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 $0.23 per share and ended the quarter with a strong financial position, including $2.3 billion in 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 that does not mature until April, 2026. Additionally, we have no senior debt maturities until June of 2027, providing us ample flexibility with our leverage management. Finally, back in September of this year, S&P upgraded our credit rating to double B from double B minus. Now turning to guidance. Given the continued strength in our deliveries, which have benefited from improved cycle times and the continued sales pace, we are increasing the mid points of our full year 2023 guidance for home deliveries to be in the range of 8,600 to 9,000 homes and 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?
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