Century Communities, Inc. (CCS) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Century Communities Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference call is being recorded. I will now turn the conference over to Scott Dixon, Chief Accounting Officer. Thank you. You may begin.

Good afternoon. We would like to thank you for joining us today for Century Communities third quarter 2019 earnings conference call. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs 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 most recently filed annual report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at www.centurycommunities.com. The company undertakes no duty to update any forward-looking statements that are made during this call. 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. Management will be available after the call should you have any questions that did not get answered. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer; and David Messenger, Chief Financial Officer. Dale will review our operating highlights and business update; Rob will then discuss our business and markets in further detail. Afterwards Dave will follow up with further information on our financial results, balance sheet and improved outlook. Following our prepared, the line will be opened for questions. With that, I will turn the call over to Dale.

Thank you, Scott. Our third quarter performance resulted in another quarter of strong earnings as we leveraged our national scale to drive improvements and efficiencies and achieve record levels of net new home contracts, deliveries, home sales revenues and net income. We experienced improving home buyer demand and considerable operating momentum throughout our business as reflected by year-over-year increases in net new home contracts in each of our regions. These favorable dynamics have reinforced our view that the overall homebuilding environment remains positive and poised for continued growth into 2020 and beyond. We believe our strategy of offering a diversified choice of product across a broad geographic footprint with a strong emphasis on entry level buyers will fuel our continued growth and validate our cycle tested approach to investing in attractive markets that exhibits sound long-term fundamentals. During third quarter 2019, net new home contracts grew 35% to 2046 homes. Home deliveries increased to 1,891 homes. Home sales revenues improved to $573.9 million and net income increased 59% to $27 million. This progress was broadly based and accomplished by the balanced contribution across our markets during the quarter. Our adjusted homebuilding gross margin percentage was 20.6%, a 100 basis point improvement since the second quarter of this year. This sequential improvement is primarily the result of reduced need for the use of incentives. The year over year growth that occurred during the third quarter was entirely organic. Given that we completed our full acquisition of Wade Jurney Homes in the second quarter 2018. The Wade Jurney Homes region has now been integrated onto our platform and continues to represent a growing mix for our net new home contracts, deliveries and revenues. For example, this region generated year-over-year increases in contracts and deliveries of 52% and 19% respectively. We’re very pleased with our returns on this investment over the last 16 months and continue to focus on cost effective opportunities to expand this asset-light fast-turning portion of our business within existing as well as new geographies. The success in our core home building operations also contributed meaningfully to growth in our financial services group. This business grew its revenues and profits by 35% year-over-year to $10.4 million and $2.2 million respectively in the third quarter. As a one-stop solution for Century’s home buyers providing mortgage, title and insurance offerings, the financial services group helps us to create a more seamless home buying experience for our customers while capturing incremental value on each home delivery. As we move into the remainder of 2019, our team continues to focus on driving operational efficiencies to enhance margins and reduce our SG&A in order to maximize profits and returns while maintaining consistent strength and liquidity in our balance sheet. We continue to leverage our substantial national land position to deepen our presence and gain additional share within our current markets. Given expectations for interest rates remain low and our focus on delivering homes at entry level price points throughout our national platform, we are confident in our ability to grow our earnings and create an even stronger foundation for Century as we continue to invest time, energy and capital to advance our goal of building Century into one of the most profitable national home builders. I’d now like to turn the call over to Rob to discuss our markets and business in greater detail.

Thank you, Dale, and good afternoon everyone. A strong economic backdrop including job growth, higher wages and low interest rates all help to sustain the pickup in demand that began earlier this year. During the quarter, our success was very broad based with net new home contracts increasing double-digits in each region and home deliveries rising in nearly all of our markets. This translated to a 35% year-over-year increase in net new home contracts to a third quarter record of 2046 homes. Furthermore, we were pleased that our absorption pace improved by 24%, which combined with more selling communities allowed us to end the quarter with a strong backlog of 2,746 homes with a dollar value of $855 million. Now looking at our regions in greater detail, starting with our Texas region, Austin, San Antonio and Houston continued to drive excellent results evidenced by 109% increase in absorption, a 73% improvement in net new contracts for the region, a 40% increase in deliveries, and a 23% increase in home sales revenues as we continue to increase our offerings at entry level price points. In the third quarter, we opened additional lower price point communities in attractive locations, which should continue to augment the strong performance of our vibrant Texas markets in the year end. Austin’s tech sector continues to attract workers supporting job growth in the area. In San Antonio, sales of homes price below 220,000 continue to outperform, bolstered by employment levels now 25% above the prior 2008 peak. In Houston, affordability at entry level price points remains strong. Looking at our mountain region, we saw significant growth with net new contracts up 36% year-over-year reflecting a solid pace of activity across the region. Job markets are stable in Denver, Las Vegas and Salt Lake City, while home supply remains constrained at less than three months providing us with good opportunities to capture demand on our strong pipeline of new communities. Furthermore, each of our markets in the mountain region are benefiting from good economies and noticeable strength at entry level price points. In the west region, we experienced solid improvement during the quarter with a year-over-year net new contracts up 10% and deliveries up 18%. Through a combination of well-situated communities and affordable product offerings, we are firmly situated to take advantage of stabilizing market conditions in the region. Our new communities in the Bay area and the Central Valley have supported additional sales into the fourth quarter. While Southern California overall has shown the most improvement over the past six months. Additionally, we expect to open a number of communities in the fourth quarter in each of our four divisions in the west, which will provide growth heading into 2020. In the Southeast solid home price appreciation and rising entry level demand have contributed to make this one of the more attractive regions in the nation with our year-over-year absorptions increasing by 36%. Estimated months supply across our Southeast market stand at 3.2 months. Nashville has been our best performing Southeast market in recent months where we’ve been able to take advantage of home price appreciation on new sales. Third quarter results in our Wade Jurney Homes division increased significantly year-over-year leading to net new contracts up 52% and deliveries up 19%. As Dale mentioned, our final integration initiatives were largely complete by the end of the third quarter, including the relocation of the main office to Atlanta, implementation of enhanced systems, processes, procedures, and the back office conversion mentioned on our last earnings call. Our incremental investments into our Wade Jurney business are focused on deepening penetration within already established markets while carefully evaluating opportunities to expand into new attractive markets where we can gain additional share in the entry level segment. During the quarter, we increased our inventory of lots both sequentially and year-over-year while achieving our desired 50:50 mix between owned and controlled. The improved home-building landscape across our markets has continued into October. This environment coupled with continued positive momentum of our U.S. economy keeps us confident in the longer term housing fundamentals and our improved outlook for the remainder of 2019. We remain committed to deepening our presence in vibrant markets to grow revenue and deliver incremental profitability. We are pleased with our business execution year-to-date with our solid pipeline of new communities and record lot positions. We have the resources in place to generate improved returns on equity during the remainder of the year as well as into 2020 and beyond. I will now turn the call over to Dave, who will provide greater detail on our financial results and outlook.

Thank you, Rob. During the third quarter of 2019, our net income increased 59% to $27 million, or $0.87 per diluted share, a third quarter record for the company. Home sales revenues for the third quarter were $573.9 million, an increase of 4% compared to $552.9 million in the prior year quarter. This improvement in revenues was mainly driven by an 8% increase in home deliveries to 1,891. The average selling price of homes delivered for the third quarter of 2019 was $303,500 compared to $316,700 in the prior year quarter consistent with our higher mix of entry level homes. Home building gross margin for the third quarter was 18.1% compared to 16.8% in the prior year quarter with the 130 basis point differential largely attributable to acquisition purchase accounting impacts in the prior year quarter. Adjusted homebuilding gross margin percentage was 20.6%, compared to 21.2% in the prior year quarter, but improved 100 basis points sequentially from the 19.6% in the second quarter of this year. In our September 30 backlog of 2,746 homes, we have a similarly improved gross margin profile and expect our fourth quarter adjusted gross margins to also be in the 20% range. SG&A as a percent of homebuilding revenues was 12.7% in the third quarter, compared to 12.8% in the prior year quarter mainly due to scale benefits and fast enhancement. Our SG&A is split roughly 36% for variable costs including selling commissions in advertising while our fixed costs account for the remaining 64%. Over the last five quarters, we have held our mix spend in absolute dollars relatively flat. While we expect additional investments or targeted optimization initiatives in our Wade Jurney division through year-end, reducing our SG&A as a percent of homebuilding revenues remains one of our primary focus items. Accordingly, we continue to anticipate and improved SG&A margin year-over-year for full year 2019. In the third quarter of 2019, our financial services businesses generated $10.4 million in revenues, up 35% year-over-year. The business contributed $2.2 million in pretax income compared to $1.7 million in the prior year quarter, a 35% increase and representing an essentially stable margin. Now turning to our balance sheet and liquidity. As of September 30, 2019, our stockholders’ equity expanded to a record $951 million. We had total long-term homebuilding debt of $1.2 billion with total liquidity of $430 million consisting of $69 million in cash and $361 million of capacity on our unsecured revolver. Our net homebuilding debt to net capital ratio held steady sequentially, even though our inventories increased due to the typical seasonal buildup of work in process and certain land investments. We remain committed to reducing our leverage ratio below 50%. However, due to some attractive land investments we expect to make in the fourth quarter, the achievement of this goal may be delayed into the New Year. Given the strong execution across our business year-to-date, we are pleased to increase our full year 2019 outlook. We now expect deliveries to be in the range of 7,700 to 8,100 homes and home sales revenues to be in the range of $2.4 billion to $2.5 billion. In regard to our tax rate for 2019, we continue to expect to incur an income tax rate exclusive of federal energy credits of approximately 26.5% compared to 25% in 2018. In closing, our third quarter results demonstrate the strength and depth of our national homebuilding platform. Our markets continued to be supported by positive fundamentals including job gains, household formations, and positive regional economy. We remain confident about our business prospects and are increasingly diversified national footprint enhances the stability of our growth and earnings profile. The continuation of our growth is well underway for 2020 with a strong pipeline of communities, a deep land portfolio and ample capital resources to further increase our base of activity in an effective manner. We look forward to updating you on our progress in coming quarters. Operator, please open the lines for questions.

Thank you. [Operator Instructions] Our first question is from Thomas Maguire with Zelman & Associates. Please proceed.

Hey guys, good afternoon, and a nice quarter. On the SG&A side, appreciate there was a little bit of leverage this quarter and you talked about some of the issues like office relocation and being complete, but with Wade Jurney, but maybe some other investments that might ramp up there as an offset. Can you just specifically talk about what that spend? Is there any additional color on what the continued incremental investment in Wade Jurney is? And then if we take a step back and even if you could talk about how you guys think about a normalized SG&A leverage ratio or a multiyear target or kind of what you guys think the normal business should run out?

Yes. Hey Thomas, this is Dave. I would say taking your second half of your question first. In terms of a longer-term run rate target, we don’t have one out there. Other than that, we expect that we can continue to get leverage out of our platform as we spent the past several years acquiring a variety of homebuilders and then integrating them into our system, which is obviously it takes time, but gains a lot of visibility into the business. As we’ve been able to hold our fixed costs relatively flat from where we are for the past several quarters, we think that that – from that standpoint, we’re probably hitting some sort of a run rate on fixed dollars. In terms of the third quarter, I would say that, we had some increased costs on the selling side due to some additional broker co-ops – increase in broker co-ops in some of our markets. And then from the fixed cost side, we’ve had a variety of dollars going out regarding the conversion of the Wade Jurney systems into our systems, the final relocation of people in offices. But it’s something that right now we’re expecting to incur a little bit more in the fourth quarter, but I think that we’ll have the majority of that behind us.

Got it, sounds good, and sounds like 2020 all shape up well. Just to stay on the Wade Jurney side and shift the volume pretty incredible growth there this quarter and appreciate the comment. That was made that it’s coming from both market expansion and just organic opportunity in existing markets. Can you help us split that out or think about it a little – how do you guys think about what’s driving the majority of the growth? Is it evenly split? And then just maybe qualitatively, can you talk about the opportunity in existing Wade Jurney markets and how you think about that longer-term? Does it feel like volume kind of hits a plateau or gets tapped out from a land availability perspective or demand or kind of how do you think about the growth in existing markets?

So Thomas, this is Dale. We’re not seeing that we’re plateauing in any market. There’s land remains available. We believe that we’ve got depth in all of our markets to continue to grow. We look at it, Florida is a market that on the Wade Jurney side, we think we have tremendous opportunity. It’s a very large market. And on a relationship basis, we have a very small position there. So we think that we have a lot of room to grow there. When we look at Arizona, which is one of our more recent expansion markets, the market has been very strong there. We’re continuing to acquire land and scale that business. So I mean we’re still very bullish on our opportunities both in each of our markets as well as where we’ve expanded. Our focus really recently has been to continue to get everything converted over onto our system. And with that just about behind us at this point with the move behind us and all, then we’re going to start looking at growing and expanding into new markets as well.

Awesome. Thanks, everyone.

Our next question is from Michael Rehaut with JPMorgan. Please proceed.

Hi, thanks. It’s Mike Rehaut. Nice quarter. Yes, maybe my first question, I would love to dig in a little bit around the absorption improvement in the in the business ex-Wade Jurney, and if you compare again last year up 24% but it kind of varied widely by region in terms of the year-over-year change. I was wondering if you could just kind of call out if there were any kind of unusual drivers there. I mean, obviously Texas continues to benefit from just a significantly improved position and book of business and obviously you’ve transitioned there to more affordable. And so you see the results. So that reason does continue kind of a yearlong year-over-year trend. But when you look at the Southeast and the West in particular, I guess even the mountain region, the year-over-year differences are much more wide and varied, particularly relative to the first couple of quarters of the year. So I was just hoping you could address what was driving those other regions, the year-over-year changes be at mix community openings, et cetera.

Sure. Mike, it’s Dale. Well, when we look at the regions, I mean you highlighted Texas and I mean we’ve had significant improvement in Texas, because of the just really the state of the market and our continued pivots towards more entry level. I mean we were more than able to double our absorptions. And so it’s really a reflection of both strategy as well as market that’s doing very well. When we look at the Southeast, we were able to increase in the Southeast. We increased our sales on a year-over-year basis, even though our community count actually went down. Community count declined, because we’ve seen that there’s been an elongation in the timeframe to get communities open and developed in the Southeast. When we look at our Mountain region, we were flat on a year-over-year basis in terms of our absorptions yet our communities were up. And so our sales were up. The West was the one area where we did see a slight decline in absorption. Even though our sales were still up 10%, because we had additional communities, it’s just a reflection of when we look at the California market, which is the majority of our West. It’s the highest price that we have in our portfolio and it has been a little slow, but when we look at it, we’ve been happy with it and it’s actually done very well. But it’s the highest price that we have in our portfolio.

Okay. I appreciate that those comments. I guess secondly kind of shifting to community count, on an overall basis this year, you’ve been up very, very slight in year-over-year, but it’s kind of been in a relatively tight range. And I look at your total lots control and kind of even excluding just Wade Jurney. Yes, well, I can’t – it seems like you’re lost control ex-Wade Jurney are actually down a little bit total loans and options. So just trying to get a sense of how we should think about community count maybe nearer-term going into the fourth quarter, but also as we think about 2020, particularly with your law position against just community County ex-Wade Jurney obviously, but your lot position does look a little thinner, slightly thinner year-over-year. How should we think about community count next quarter, the next year?

Well, when we look at it, our sales were up 35% year-over-year. So with that, we’re going to move through our communities more quickly than we did in the third quarter of last year. And so and in that case, even though we’re opening new communities where we’re closing out communities where we have robust sales in those communities. As we’ve indicated on past calls, we have in a number of instances taken larger positions within larger communities, so that it takes us longer to build through them. But we were able to year-over-year increase our community count a bit on a year-over-year basis. And I mean part of the opening of communities is dependent whether in municipal approvals and just getting some of the work done. So some of that, even though we plan to have things open, they get pushed off into another period just because of circumstances.

Okay. Thank you.

Thanks.

Our next question is from Alex Rygiel with FBR & Company. Please proceed.

Thank you. Nice quarter gentlemen.

Thanks, Alex.

Thanks.

Couple of questions. Coming back to your comment with regards to seeing some attractive land acquisition opportunities in the fourth quarter, could you go a little bit more detailed and fill us in on whether or not that’s in your core Wade Jurney business and strategy of going deeper in existing markets or if it’s in your Century brand going into – deeper into existing markets or new markets?

It’s in both brands; Alex and these are assets that we feel really good about. They will be accretive to 2020 and beyond. And we’re taking positions in some of our better markets without disclosing the exact markets for obviously competitive reasons. But we feel really good about the markets we’re in and these particular positions that we’re scheduled to close on in the fourth quarter.

And could you expand upon your views – your broader views of land acquisition pricing today and how that’s changed maybe over the last 12 months or it might change in the near-term?

It varies from market-to-market on that. Let’s say 12 months ago or so, we saw kind of a slowdown with the market shifting. As the market has picked back-up with interest rates dropping, there’s been renewed interest in Land Act generally across the Board. With that said though, we’ve been very cautious to continue to maintain our 50/50 ratio between owned and controlled. We feel really good about that. This is our all-time high in total lots of just under 40,000. Yet, we like the optionality of having 50% owned versus 50% controlled. We’re still in the market to buy land, but again we’re putting a very strategic lens on that, on deals that we are doing. And so the ones that we were talking about in the fourth quarter that are scheduled to close, those are ones that we’ve been tracking for a while now had them under contract. They’re just coming to fruition and again, they will be accretive to 2020 and beyond.

And also coming back to an earlier comment with regards to acquiring larger positions in larger communities, can you comment on what that implies towards your intermediate term outlook for the housing market and how that could impact your homebuilder gross margins over the coming years?

I would say, as we’re looking at taking down larger positions in larger communities, we’ve got a pretty good view on that particular market. So we think that building through the community over a little longer period of time is warrant and given where we’re seeing the underlying demand and that price point, the product and end market so we’re comfortable taking a longer position. We oftentimes have multiple product lines with different price points within some of those communities in order to help us work through the lots quicker. But we’re still taking positions where we feel comfortable with the outlook on the overall housing.

And what does it mean towards your homebuilder gross margins?

Well, I suspect buying larger portfolios could possibly improve your land acquisition cost and also improve certain utilization of fixed labor on site. So I would suspect it would drive margins higher or at least puts you in a better pricing position. But...

That’s our expectation, but it’s always difficult to forecast what’s going to happen on an individual project because there are so many – so many different inputs that go into it. But we obviously theoretically as you underwrite these deals; you do expect to get some sort of economies of scale.

Thank you very much.

Thanks, Alex.

Our next question is from Alex Barrón with Housing Research Center. Please proceed. Alex Barrón: Hey guys, thanks and good job on the quarter. I was curious to see, as you’ve been working with the Wade Jurney brand and expanding it to new markets. Are you finding that the demand is [indiscernible] between both entry level people versus downsizing baby boomers or can you comment on how that – what you guys are observing there?

We’re actually seeing both and I think most people think it’s just truly an entry level buyer and of course that’s a large percentage of it, Alex. But we are seeing a lot of move down buyers as well. And some of that is more geography driven but candidly it’s probably pretty much in every one of the markets right now. Alex Barrón: Got it. And the rest of the business, the Century brand business, how are you guys looking at your product positioning especially from a price point perspective, what can we expect over the next 12 months or so. Price is going to start trending lower because the mix is shifting or would it be similar?

That’s consistent with what we’ve been doing now for some period of time and we have designed new plans, what we call Project Genesis, which are new entry level price point plans that took what we had earlier of an entry level series and actually dropped some efficiencies – additional efficiencies into the plan, dropped the price points to direct costs on these. And so as a result you are going to see a shift of continuing to get our price point down. And that’s been – if you just look at kind of where we’ve been over the past 12 months to 24 months, that’s been a consistent theme that we continue to execute on and I see that continuing in the future. Alex Barrón: Got it. Thank you, guys. One last one. Have you guys given any thought to build the rent as an opportunity or something that you guys are considering at this point?

Yes. We’ve looked at it from a variety of different perspectives and we have always sold certain amount of homes to investors. We from our standpoint we haven’t figured out exactly how that we would want to play in that particular arena. But it’s something that we’re continuing to explore. Getting in the build for rent business ourselves or joint venturing with someone else probably doesn’t happen, but we think there’s an opportunity as a potential additional outlet for some of our homes. That as we would continue to find ways of executing on that, that we might be able to meaningfully increase our deliveries as a result, but we haven’t really settled on a strategy yet. Alex Barrón: Got it. Thank you very much. Good luck.

Welcome.

Our next question is from Jay McCanless with Wedbush Securities. Please proceed.

Hey, good afternoon. The first question I had, it looks like the diluted share count went up sequentially from 2Q to 3Q. Can you tell us how much stock was issued and what the outstanding share count was at quarter end?

Outstanding share count at the quarter end was about just shy of 31 million, about 30.9 million. In terms, our shares being issued during the quarter it was about 897,000 shares for about $27 million.

And then my next question, and I know Alex just asked about pricing, but with the midpoints of the new guidance, it looks like the average closing price should coming around somewhere around 311,000. And I’m just wondering, as we look ahead to next year, is there going to be the same type of volatility in the average closing price because of mix or are you guys thinking that might balance out and be a little bit smoother, maybe a more normal trend where prices start low at the beginning of the year and then kind of pick higher?

I think it’s really good. Excuse me, sorry. It’s really going to vary based on the percentage of closings we have from the Wade Jurney brand that obviously at 155,000 that does help drive the ASP lower and depending on how much we have in a given quarter from that brand will depend – will help determine what that ultimate ASP is each quarter. So there’s probably still going to be a little bit of variability from quarter-to-quarter.

Okay. And then, apologies if you mentioned this already or discussed already, but what did the order trends look like for each month of the quarter? And could you talk about what, what you’ve seen so far in October?

Sure. Overall for the quarter we were up 35%. We look at each month; the incremental amount was fairly consistent. So we really didn’t see that the trend changed at any point in the quarter either in the beginning starting out stronger and then tailing off or starting out slower and then picking up. When we look at October and how those sales trends are going far. We would anticipate that we will end up October, up about the same amount that we were up in the third quarter. So we’ve really not seen a change since we’ve been in the October period. It’s just been a relatively steady improvement throughout that four-month timeframe.

Great to hear. And then the last question I had, I think the SG&A number was certainly a little bit higher from both the dollar and a margin perspective than we were anticipating for the quarter. Are there – could you give us maybe a dollar figure of items that may not necessarily be one-time items for GAAP, but one-time spent whether it’s for the relocation or the broker co-op that you talked about. Is there any type of costs that may not refer, and also is that broker co-op you talked about, is it getting worse or was that just you guys trying to get out of some neighborhoods and maybe paying a little bit more to make that happen?

The increase in the broker co-op, which was about 30 basis points, is really, it’s hard to tell whether it was actual increased incentives or if it was just a higher percentage and it’s really a combination of both. And so when we look at that that’s going to vary from quarter-to-quarter just depending on circumstances. In terms of specific items and quantifying them, I don’t think we’re prepared to do that, but as Dave indicated, we obviously had a fair amount of expenditure related to wrapping up the Wade Jurney Homes, relocation, finishing up the conversion. We’ve got a little bit left that’ll trickle in, in the fourth quarter, but most of that is behind us at this point.

Okay, sounds great. Thanks for taking my question.

Thanks, Jay.

Thanks, Jay.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, operator, and thank you, again, to everyone for joining us on todays call. We look forward to speaking with you again next quarter.

This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.