Q1 2024 Century Communities Inc Earnings Call

Participants

Tyler Langton; Senior Vice President of Investor Relations; Century Communities Inc

Dale Francescon; Chairman of the Board, Co-Chief Executive Officer; Century Communities Inc

Robert Francescon; President, Co-Chief Executive Officer, Director; Century Communities Inc

John Dixon; Interim Chief Financial Officer, Principal Accounting Officer; Century Communities Inc

Carl Reichardt; Analyst; BTIG, LLC

Alex Rygiel; Analyst; B. Riley Securities

Jesse Lederman; Analyst; Zelman & Associates

Jay McCanless; Analyst; Wedbush Securities Inc.

Andrew Azzi; Analyst; J.P. Morgan Securities LLC

Alex Barron; Analyst; Housing Research Center

Presentation

Operator

Good day and welcome to the Century Communities first-quarter earnings call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Tyler Langton. Please go ahead, sir.

Tyler Langton

Good afternoon. Thank you for joining us today for Century Communities Earnings Conference Call for the First Quarter 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 K as supplemented by our latest 10 Q and other SEC filings. We undertake no duty to update our forward-looking statements, and 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 that I'll turn the call over to Dale.

Dale Francescon

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. Scott has played a key role in driving our growth over the past 10 plus years and his direct responsibilities have included overseeing accounting, treasury, risk management and financial planning and analysis.
Turning to the quarter, we're very pleased with our first quarter results, including deliveries of 2,358 homes, an increase of 23% versus the prior year period and the second highest level of first quarter deliveries in our company's history. Our first quarter revenues of $949 million 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 fourth quarter 2023. Our orders increased on a sequential basis in each month of the first quarter and our orders in the first three weeks of April are consistent with overall first quarter levels. We also experienced a meaningful improvement in absorptions with our first quarter 2024 monthly absorption rates averaging 3.8% versus 2.9% in the year ago period and 3.1% in the fourth quarter of 2023.
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% and 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 first quarter, 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.
In the first quarter, we generally matched our starts with our sales and built nearly 100% 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.
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 strong demand for our new homes, we were able to reduce our incentives on closed homes to a little over 700 basis points in the first quarter 2024 from roughly 800 basis points in the fourth quarter of 2023. As we've discussed in the past, interest rate buydowns continued 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 first quarter. The cycle scores of our homebuyers remain healthy and consistent with levels from the fourth quarter and full year 2023. We also had continued success in controlling our costs in the first quarter. 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 have 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 first quarter, our cycle times remained in the four to five month timeframe after having returned to these pre-COVID historical averages in the back half of 2023.
On the land front, we ended the first quarter with approximately 75,000 owned and controlled lots, a 46% year-over-year increase. 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 first quarter with our number of owned lots remaining relatively static over the past two years. Additionally, at the end of the first quarter, 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 third-party land developers across the Southeast, Texas, and in all of Century Complete markets, further support our land-light strategy that is focused on acquiring finished lots where possible. We ended the first quarter 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.
Century Complete accounted for over 40% of our total community count in the first quarter 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 first quarter 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.

John Dixon

Thank you, Rob. During the first quarter of 2024, pretax income was $84.3 million and net income was $64.3 million or $2 per diluted share, a 93% year-over-year increase. Adjusted net income was $71.4 million or $2.22 per diluted share, a 114% year-over-year increase.
EBITDA for the quarter was $100.3 million and adjusted EBITDA was $109.6 million, respective increases of 83% and 100% over year-ago levels. Revenues for the first quarter were $948.5 million, up 26% versus the prior year quarter on both higher deliveries and average sales price.
Our average sales price of $391,200 in the first quarter increased by 4% on a sequential basis, mainly due to lower levels of incentives and mix. Essentially complete accounted for 33% of first quarter deliveries versus 39% in the fourth quarter 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.
At quarter end, our backlog of sold homes was 1,590 units valued at $667 million with an average price of $420,000. The increase in the average sales price of our backlog at the end of the first quarter compared to fourth quarter 2023 was also largely due to mix.
While deliveries in backlog in the first quarter 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 and $390,000.
In the first quarter, adjusted homebuilding gross margin percentage was 22.8% compared to 19.6% in the first quarter 2023. Homebuilding gross margin was 21.3% compared to 18.2% in the prior year quarter. Our gross margins in the first quarter were roughly flat on a sequential basis. While margins benefited from lower incentives, the sequential tailwind was generally offset by mix and purchase price accounting adjustments from our acquisition of Landmark homes of Tennessee that we completed in January.
SG&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&A. For 2024, we expect SG&A as a percentage of home sales revenue it's a decline on a year-over-year basis as we look to grow our deliveries and keep our fixed levels of G&A relatively constant.
Other expense in the quarter was $9.6 million, which included a $7.7 million impairment on other non-core investments. In the first quarter, our tax rate was 23.7% compared to 24.3% in the prior year quarter. 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 fourth quarter 2023 levels of 22.4%. The change was driven by our 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 fourth quarter 2023.
During the quarter, we increased our quarterly cash dividend by 13% to $0.26 per share. We repurchased 186,887 shares of our common stock for $16.1 million and grew our book value per share to a record $76.10, a 12% year-over-year increase. We ended the quarter with $2.4 billion in stockholders' equity, $1 billion in total liquidity, and $208 million in cash.
At March 31, 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.
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 $3.8 billion to $4.2 billion, given the uncertainty that exists around interest rates.
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?

Question and Answer Session

Operator

(Operator Instructions) Carl Reichardt, BTIG.

Carl Reichardt

Hey, guys, I'm a little confused on the guide. I mean, if 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 rates extremely high. So help me understand again why the you're not raising at least the low end of the guide unless you're expecting -- I don't give catastrophic interest rates, but certainly feel much higher from here rates.

Dale Francescon

You know, 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 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.

Carl Reichardt

Okay. I certainly understand the uncertainty, but I'm 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 third party developers are key to you. So the two questions 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 third party developers, VERSUS lots that you are going to develop yourself and bring to market later, potentially at higher margin.

Robert Francescon

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 third 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, you're trying to buy finished lots everywhere that we can and create that more capital-efficient land-light approach the second part of that question.
To your second question regarding the percentage that are third 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 third party developers have developed 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 third-party developers.

Operator

Alex Rygiel, B. Riley.

Alex Rygiel

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

John Dixon

Yes, Alex, very good question. And I think that I think we were optimistic as we got into the first quarter in terms of the rate environment that, as you said in our prepared remarks, that we had a little bit of additional pricing power on the incentive line item, certainly with some of the volatility volatility in rates over the last few weeks. I don't know that there's significant additional optimism and optimism on our standpoint in terms of being able to reduce the amount of mortgage incentives that we're looking at into Q2. And certainly as the rest of the year plays itself out, it's something that we'll be evaluating.

Alex Rygiel

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

John Dixon

Yes, absolutely. I think we you saw the first quarter come through on with margins and kind of that low GAAP gross margins in that low 21% range. As we're looking out and some of our in terms of our cost structure, we're not seeing it significant cost pressures over the immediate future so that that kind of guy from it from an initial first quarter 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 AST.s.
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. An acquisition that we completed here in January was about a 20 basis point drag here on the first quarter margins who we would anticipate that to be pretty similar for Q2 as well as Q. three within it falling off really by the back half and final quarter of the year.

Operator

Jesse Lederman, Zelman & Associates.

Jesse Lederman

Thanks for taking my questions and congrats on the strong quarter on your first one's on backlog conversion. So given the high backlog conversion, you presumably sell and deliver a high percentage of your homes in the same quarter, that said, your percentage of Century Complete deliveries fell sequentially to 33% from 39%. So the question is, is that just timing or is that somewhat of a testament to demand for that Century Complete home or any qualification issues, affordability issues, et cetera?

John Dixon

It thanks for the question, Jesse, and that's a good question. And some 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 we mentioned it a little bit in our prepared remarks. We're a little bit lighter on the Century Complete deliveries as a percentage of our overall platform this quarter. We anticipate that the trend a little bit more towards where we were at from all of last year from a 2023 perspective and 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 on intra quarter over 50% of our units. And a lot of that was obviously a factor of the demand that we experienced from ourselves within our markets this quarter as well as well as coming into the year with units that were further along in the stage of construction.

Jesse Lederman

That's helpful. But just one quick follow-up on that. So you didn't see any no particular affordability concerns or pushback from that Century Complete buyer that you pause the percentage of deliveries in the quarter or maybe even if you could talk about percentage of homes you sold in the quarter relative to the rest of the business. So maybe more affordability constraint on prospective homebuyers?

John Dixon

I mean, I think I think when you look at our Century Complete, being able to bring homes to market in the mid to below $300,000 range and or ESPs in that brand during the 260%, 275% or $275,000 range. We were from a sales perspective, we were up 35% quarter over quarter on the Century Complete side. And while that buyers certainly one that fit that need some additional incentives on the mortgage side from time to time, we're still seeing strong demand.

Jesse Lederman

Great. Thanks for the color. One last question on. You've done a great job acquiring lots over the last several quarters, as you know, obviously off balance sheet with your lot count up 45% year over year.
So turning just to just capital allocation priorities were to share buybacks fit on the capital allocation priority list. I noticed you bought back about $16 million of shares in the first quarter, which was among the highest in a couple of years along with the third quarter last year. So maybe you can talk about the share buybacks a little bit? Thank you.

John Dixon

Yes, absolutely. And larger from a kind of question from just a capital allocation perspective. And our number one priority is, is is obviously putting our capital back into the business. And as you've seen us grown our owned and controlled lot positions, we're pretty optimistic about the markets that we're currently in and think that quite frankly, is the best return for our shareholders. And 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. And then from a buyback perspective, we have over 1 million shares still authorized underneath our board program. It is something obviously, 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 we will take a look at, but no specific guidance or structured program on the buybacks currently.

Operator

Jay McCanless, Wedbush.

Jay McCanless

Hey, thanks for taking my questions. And I guess the first one I had, could you talk about what percentage of your closings in the first quarter our customers they used to have a mortgage rate buydown?

John Dixon

Yeah`, Jay, that's a definite specific number that we've disclosed in the past, but it's a substantial majority. It's over 75%.

Jay McCanless

And then we've heard from a lot of your competitors that they're seeing rising log 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 24, things are going to be more of a 25 thing when you think those higher land costs might start to impact the income statement?

Robert Francescon

I think it would be more of a 25 thing. I think we're going to be relatively flat this year on that from an LTV standpoint, that's market dependent. We're actually getting some reductions in certain markets as people get a little bit hungrier for business with still some competitors, 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. 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 and overall land is competitive right now. It seems like everybody is wanting to go after a planned 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 that we have that type of a control position now going into hub 24.

Jay McCanless

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

John Dixon

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

Operator

Michael Rehaut, JPMorgan.

Andrew Azzi

Hi, guys. Andrew Azzi on for Mike. thank you for taking my question and congrats on the quarter.
It looks like average order prices ticked up nicely sequentially. I just wanted to maybe dial in on how widespread that is and your outlook on the ability to push price in this environment? Thanks.

Dale Francescon

You know, a lot of that would have been driven just by the mix of as we mentioned earlier, but 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 some brought down the number of homes that we closed that had the lower Century Complete ASPC., the higher ASP. and the Century Communities had a bigger percentage as a result that that affected our overall average sales price.

Andrew Azzi

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 we move into next year?

John Dixon

Yes, absolutely. And I think we said in our prepared remarks, which is pretty consistent 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 owned and controlled pipeline. I think it's when we sit here and look at it, Tom today, we obviously opened up 42 new communities during the first quarter, which is something that we are excited about and closed out, quite frankly, a little bit a little bit fewer than we thought, which was a good thing given the market demand and from our current kind of look at the pipeline, we really think will be up mid to high single digits on community count. It count as compared to last year by the time we get to the end of this year.

Operator

Carl Reichardt, BTIG.

Carl Reichardt

Hey, thanks, guys, for all the helpful color. I really appreciate it. Just on Century Complete and the mix shift a bit away from it this quarter. As you're looking out in 24 and 25, do you expect the Century Complete percentage of communities to begin to increase again? Or could we expect it to be flat from here or fall as a percentage of the overall.

Dale Francescon

So I mean, we've been if you look at the past few quarters, Century Complete has been on 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 our Century Complete brand were just less this quarter than what we had our communities brand.

Carl Reichardt

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

John Dixon

Yes, you're absolutely would say I'm an investment we had in the startup company called Diamond age, which is a 3D printing company. And we went through an exercise an accounting perspective. Every quarter have taken a look at updated data points in that flush itself through in the charge this quarter.

Operator

(Operator Instructions) Alex Barron, Housing Research Center.

Alex Barron

Hey, guys. Congratulations on the quarter. I wanted to ask a final sense I wanted to ask about incentives. I'm assuming some a lot of buyers are are using some form of rate buydown or for the moment. But I was curious if you guys could spell out how what percentage of them buyers actually take advantage of something like that?

John Dixon

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

Alex Barron

Got it. And as you know, as we look at what's happened so far this month, rates up 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 that the rate you offer people will go up along with market rates.

Dale Francescon

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

Alex Barron

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

Dale Francescon

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

Operator

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

Dale Francescon

Thank you, operator, and to our team members, thank you for your hard work, dedication to Century 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.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.