Century Communities, Inc.

Hey everyone, and welcome to the Century Community's first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Tyler Langton, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon. Thank you for joining us today for Century Community's earnings conference call for the first 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 findings. 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. Posting the call today are Dale Franceskin, Chairman and Co-Chief Executive Officer, Rob Franceskin, Co-Chief Executive Officer and President, and David Messinger, Chief Financial Officer. Following today's prepared remarks, we'll open the lineup for questions. With that, I'll turn the call over to Dan.

Thank you, Tyler, and good afternoon, everyone. We are pleased with our solid first quarter results, including $44 million in pre-tax income, net income of $33 million, diluted earnings per share of $1.04, and EBITDA of $55 million. We successfully achieved the objectives discussed on our year-end conference call as we continue to focus our sales efforts and incentives on monetizing homes with near-term deliveries despite their lower margins resulting from inflated direct construction costs given their start dates in 2022. During the quarter, we also significantly increased our new home starts, generated $191 million in operating cash flow, and further reduced our net debt to capital ratio to 21.5%. We have become increasingly encouraged by the pickup in our sales activity over the past several months. Net new contracts in the first quarter totaled 2,022 homes, with sequential increases in both February and March, and a 61% improvement from fourth quarter 2022 levels. Given the solid demand we saw in the quarter we believe that we could have sold even more homes if our inventory of near-term deliveries had been higher. Our quarter end backlog consisted of 1,920 sold homes valued at $714 million. Underlying demand for new homes remains favorable given positive demographics and the scarcity of existing homes on the market. So interest rate volatility and overall economic uncertainty continue to impact the US consumer. As we have seen over the past several quarters, homebuyers are continuing to look for homes that are closer to completion in order to lock in their interest rates. Consistent with our strategy, we intend to continue concentrating our sales efforts on homes with more near-term completions. In terms of sales patterns, We expect more typical seasonality to return this year after being obscured by the COVID-driven sales boom that began in 2020 and continued until the interest rate led downturn in the second half of 2022. As a result, we would expect our sales to see the usual spring selling season uptick, slow down during the summer, and then pick up in the fall before trailing off at the end of the year. In the first quarter, we delivered 1,912 homes, a level which was ahead of our expectations heading into the quarter. These better than expected deliveries were mostly due to timing as deliveries originally expected for the second quarter ended up closing in the first quarter. As a result, we expect our deliveries in the second quarter to be slightly below first quarter levels. As a reminder, On our fourth quarter and year-end 2022 conference call, we guided to deliveries in the first and second quarters of 2023 being below prior year levels due to the fact that we delayed community openings and started fewer homes in the second half of 2022 as the market deteriorated. In order for you to better understand how our starts pace in 2022 impacts our deliveries in 2023, we think it's helpful to discuss our starts cadence for the last five quarters. We started 3,246 homes in the first quarter of 2022, followed by 3,469 homes in the second quarter. As interest rates started to rapidly rise in the second half of 2022 and the housing market market softened, we reduced our starts to 1,765 homes in the third quarter and only 970 homes in the fourth quarter of 2022. Given this cadence of starts, we simply have fewer homes available for delivery in the first two quarters of 2023. Over the past several months, as the margins on homes we were starting began to see healthy gains and sales activity started to rebound, we began to increase our starts, resulting in a total of 2,354 home starts in the first quarter of 2023. We expect our starts in the second quarter of 2023 to be higher than the first quarter. As a result, we anticipate seeing sequential improvement in our home deliveries in both the third and fourth quarters. Revenues from home sales were $736 million in the first quarter. Our average sales price decreased by 9% on a year-over-year basis to $385,000. Reflecting our strategy of properly incentivizing homes with near-term deliveries, and building more affordably priced homes. In the first quarter, our Century Complete business had strong results. Deliveries and revenues were up 12% and 17%, respectively, on a year-over-year basis. With an average sales price of $253,000, our Century Complete business accounted for 38% of total deliveries in the first quarter of 2023 compared to 28% of our deliveries in the year-ago period. We are continuing to see strong underlying demand for affordable entry-level homes. This lower price segment of the market is benefiting from favorable demographics and has the widest range of potential homebuyers. As a reminder, this portion of our business only purchases finished lots on a just-in-time basis. We believe we have the right strategy that positions us well as home sales rebound and our margins improve off of trough levels. Buyers are currently looking for affordably priced homes with near-term completions, and we intend to meet this demand. We have been ramping our starts and new community openings over the past several months, given our confidence that the homes we are starting now should carry higher margins and returns. As a result, our deliveries in the second half should exceed first half levels, and our second half gross margins should exceed first half margins due to lower direct costs, improved cycle times, and reduced levels of incentives. In closing, I want to highlight that Century was recently named to Newsweek's list of America's Most Trustworthy Companies 2023 and is the highest-ranked homebuilder on the list. Our cornerstone goal has always been to deliver a home for every dream, and this recognition is a reflection of how much our employees and trade partners strive each and every day to fulfill that mission. On behalf of the entire senior management team, I want to thank all of our team members who are critical to our success as a company, and through our Century University training programs, We are committed to providing them with ongoing training and development so that we can continually raise the bar for what the home buying experience should be. I'll now turn the call over to Rob to discuss our business and plans going forward in more detail. Thank you, Dale, and good afternoon, everyone. We have a strong presence within the affordable new home category with approximately 90% of first quarter deliveries coming from homes priced below FHA limits, allowing us to target the widest range of potential buyers in any given market. Our home buyers continue to have a healthy financial profile with century communities and century completes home buyers having respective average FICO scores of 729 and 713 in the quarter. We believe that we are well positioned as conditions in the housing market normalize given our spec-based model and focused on entry-level homes. Our cancellation rate was 18% in the first quarter, a significant reduction from the 37% rate we saw in the fourth quarter of 2022 as buyers are adjusting to the higher interest rate environment. For comparison purposes, our cancellation rate was typically in the 20% range in the years prior to COVID. While the home building industry continues to be challenged by municipal and utility delays, supply chain issues, and trade shortages, these pressures are continuing to slowly ease. As a result, we are seeing improvements in our cycle times and expect the cycle times of homes that start in the fourth quarter of 2022 and first quarter of 2023 to be significantly better than the cycle times of homes that were started earlier in 2022. Additionally, as supply chain delays and trade shortages further subside, our cycle times will decline further in the quarters ahead, such that this year we expect to be starting and completing homes at a more traditional four to six month time period. In the first quarter of 2023, the direct construction costs on our starts declined by roughly 11%, an average of approximately 20,000 per home versus the high water mark in the second quarter of 2022. We have seen a reduction in our costs across a range of products to varying degrees. While the amount of additional cost savings on our start should moderate as the year progresses, we should see incremental benefits to our gross margins in the second half of the year as we start delivering these lower cost homes. In the first quarter, we generated adjusted gross margins of 19.6%, which was in line with the expectations we provided last quarter for our margins to be consistent with fourth quarter levels. Similar to last quarter, our first quarter margins were impacted by the fact that the homes delivered were burdened with elevated construction costs given their start dates in 2022, as well as higher incentives than historical norms as we prioritize the sale of complete and completing inventory. We currently expect our gross margins in the second quarter to be similar with first quarter levels, as we continue to deliver homes started at the time in 2022 when our direct costs were at or near peak levels. The homes that we have been starting over the past several months are carrying a higher margin profile due to improvements in direct construction costs, reduced incentives, and shorter cycle times. As a result, we expect our home building gross margins to trend positively on a sequential basis in both the third and fourth quarters. We ended the first quarter with approximately 52,000 owned and controlled lots, with roughly 61% owned and 39% controlled. This total lot pipeline was roughly flat with fourth quarter 2022 levels of 53,000 lots. And our 31,000 owned lots provide approximately three years of deliveries based on 2022 volumes, which is consistent with past years. As we have stated previously, our land strategy allows us to control a significant amount of land for future growth during periods of high sales absorptions for limited investment and exit those positions at a reasonable cost in the event of a market downturn, all without adversely impacting our near-term need for lots on which to start homes. Looking forward, we don't expect any further significant decreases in our controlled lots, and our controlled lot count increased modestly in March compared to February levels as we started to slowly and conservatively increase our land acquisition efforts. In the first quarter, our community count increased to a company record 234 communities, up 13% from the fourth quarter 2022 levels, of 208 and 19% from year-ago levels of 197. While our community count saw year-over-year increases across all our segments in the first quarter, we saw the greatest growth in Texas and the Southeast, two markets that have generally held up better during the recent slowdown given their relative affordability, strong employment, and population growth. We intend to continue to grow our community count as the recent declines in direct cost, moderation of incentives, and inspected improvements in cycle times has given us increased confidence in our ability to generate solid margins and returns from the new communities. Given the extent of our existing land pipeline, our year-end 2023 community count could be in the range of 250 to 260 communities if we elect to open all communities that we expect to be available, representing year-over-year growth of 20 to 25 percent. We are pleased with our performance this quarter and encouraged by the improvement in sales activity that we have seen since the start of the year. Looking forward, we are confident that our existing land pipeline will support strong community count growth this year and increase deliveries in the years ahead. I will now turn the call over to Dave to discuss our financial results in more detail. Thank you, Rob. We generated strong operating cash flow this quarter and further reduced our net home building debt ratio while also increasing our starts and community count to drive future growth. During the first quarter of 2023, pre-tax income was $44 million and net income was $33.3 million or $1.04 per diluted share. Home sales revenues for the first quarter were $735.6 million compared to $988.4 million in the prior year quarter. Home deliveries of 1,912 homes declined by 19% on a year-over-year basis, a direct impact from our decision to start fewer homes in the second half of 2022. Our average sales price of $385,000 declined by 9% versus the prior year quarter, reflecting our strategy of properly incentivizing homes with near-term deliveries, building more affordably priced homes, and Century Complete accounting for a greater percentage of our deliveries. In the first quarter, net new contracts across our footprint were 2,022. The year-over-year decline in the quarter was primarily due to the reduced number of homes we had available for sale and the impact that mortgage rate volatility and economic uncertainty had on potential homebuyers. At quarter end, our backlog of sold homes was 1,920, valued at $714 million, with an average price that had decreased by 10% year-over-year. In the first quarter, Adjusted home building gross margin percentage was 19.6% compared to 29.5% in the prior year quarter and 19.8% in the fourth quarter of 2022. Home building gross margin was 18.2% compared to 28.3% in the same period last year and 17.6% in the fourth quarter of 2022. Similar to last quarter, this year-over-year reduction in margin percentage was expected and primarily resulted from our strategy of generating cash and reducing our leverage profile by focusing our sales efforts and incentives on near-term deliveries, even though they carried elevated construction costs due to their start dates earlier in the year. Looking ahead, we expect our margins to increase sequentially beginning in the third quarter of this year. and we did not book any impairments this quarter. SG&A as a percent of home sales revenue was 13.4% in the first quarter compared to 10.3% 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. During the first quarter, financial services captured 66% of the closings generating $15.9 million in revenues compared to $26.3 million in the prior year quarter, primarily due to fewer loan originations and increased competitive pressures. The business contributed $5.1 million in pre-tax income compared to $11.2 million in the prior year quarter. During the quarter, we increased our quarterly cash dividend by 15% to $0.23 per share from $0.20 per share and did not repurchase any shares of our common stock leaving approximately 1.5 million shares remaining available for repurchase under our current authorization. As a result of executing on our objectives, we generated $191.3 million in operating cash flow in the first quarter, even with the significant increase in our home starts. Our net home building debt to net capital ratio further declined to 21.5% compared to fourth quarter 2022 levels of 23.5%. Our home building debt to capital ratio declined to 31.8% at quarter end, compared to 32% as of the end of the fourth quarter of 2022. We ended the quarter with a strong financial position, including $2.2 billion in stockholders' equity, a 19% year-over-year increase, and $1.2 billion in total liquidity, including $418.4 million in cash. At the end of the first quarter, 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. At quarter end, our inventories totaled $2.7 billion. Now turning to guidance, we have become increasingly encouraged by the improvement in sales activity that we experienced in the first quarter and our ability to start more homes. As a result, for the full year 2023, we're increasing our guidance for home deliveries to be in the range of 7,250 to 8,250 homes and our home sales revenues to be in the range of $2.7 billion to $3.2 billion. As Dale mentioned in his remarks, Our deliveries in the second quarter should be slightly below first quarter 2023 levels as we delivered a greater number of homes in the first quarter that were originally expected for the second quarter. Given our increased level of start since the beginning of the year, we continue to expect our deliveries to increase sequentially in both the third and fourth quarters. In closing, we believe that our spec-based model dedicated focus on more affordable homes, geographic footprint, and solid balance sheet positions as well as conditions in the housing market continue to improve. With that, I'll open the line for questions. Operator?