Century Communities, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Greetings, and welcome to the Century Communities Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Hunter Wells, Vice President, Investor Relations.

[Hunter Wells:]

Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the fourth quarter and full year ended December 31, 2020. 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.

[Dale Francescon:]

Thank you, Hunter and good afternoon, everyone. We're pleased to report that in 2020, we achieved multiple milestones, including our 18th consecutive year of profitability, $3.2 billion in total revenues, a 25% increase to 10,822 net new contracts, a 38% increase and 9,453 home deliveries, an 18% increase. These results again demonstrate our ability to achieve consistent double-digit revenue and delivery growth, reflecting the power of our business model and the appeal of our geographically diverse footprint as we deliver new homes across the country's most active housing markets. In the fourth quarter, we generated record home sales revenues of nearly $950 million, a 22% increase, while increasing home deliveries by 14% to a company record 2,826 homes. During the quarter, we also increased our net new contracts by 45% to a fourth quarter record of 2,566 homes. Our sales pace accelerated through the end of 2020 and into the beginning of 2021 with net new contracts for December, increasing 54% and January increasing 77%, reflecting not only the resiliency of demand, but our ongoing sales momentum into 2021. We also made significant progress in growing our backlog ending the year with 3,439 sold home with a value of nearly $1.3 billion. More importantly, we drove significant profitability expansion achieving our highest pre-tax income for both the fourth quarter and full year and more than twice the prior year periods. Net income for the quarter and year also increased 72% and 82% respectively to $92 million and $206 million.

[Rob Francescon:]

Thank you, Dale, and good afternoon, everyone. Given the strength in market conditions and to support our future growth expectations, we have devoted considerable energy to expanding our land pipeline and more deeply penetrating local markets. We expect significant future growth to come from our existing markets, and we are heavily focused on growing our local market share.

[David Messenger:]

Thank you, Rob. During the fourth quarter of 2020 net income increased 72% to a record $91.8 million or $2.72 per diluted share compared to $53.4 million and $1.63 in the prior year quarter. Full year net income increased 82% to $206.2 million with earnings per diluted share rising to $6.13 compared with $113 million and $3.62 in the prior year. Fourth quarter pre-tax income was $121.2 million, an increase of 125% and a fourth quarter record while pre-tax income for the full year increased 104% to $270.2 million the highest in the company’s history.

[Operator:]

Thank you. First question is from Michael Rehaut of JPMorgan. Please go ahead.

[Michael Rehaut:]

Thanks. Good afternoon, everyone and congrats on all the results, very, very encouraging. First, I wanted to just clarify here around demand, you said that, in almost sales pace but now I think you're saying orders, order growth in December up 54%, January up 77%. So I just wanted to make sure that we understood that correctly and that those are deployed to actual order growth and but also that you're indeed also referring to an improved sales pace sequentially as well during those month?

[Dale Francescon:]

Mike, it's Dale. Yes, you heard the numbers correctly. That was the year-over-year improvement. And we did see incremental sales pace in addition to just the year-over-year improvement. When we – we looked back on it, we really didn't see the slowdown at the end of the year. That is pretty typical. And oftentimes at the very beginning of the year, it takes a while to get going. We didn't experience that either. So we just – we sold completely through the holidays and they just continued on after the New Year.

[Michael Rehaut:]

Great. That’s great to hear. Also wanted to shift a little bit because the gross margins obviously, a tremendous results in the fourth quarter, kind of a step function change, I believe David talked about expecting continued improvement in 2021 over 2020. But I was hoping to get a little bit of sense of how we should think about gross margins into the first and second quarters of the year. And I believe you had mentioned that in your backlog, every month over the past six months, you were seeing improve margins in your backlog. So this 23% kind of the new bar for the company, is it something that you can kind of hold on to in the first or second quarters? How should we think about it directionally as we head into 2021?

[Dale Francescon:]

I think that we'll definitely do as much as we can to hold onto that as we've been pushing – we've been able to increase our ASP across the portfolio. We're also dealing with a lot of the cost factors that everybody's reading about in the industry. But as we look at our margins, as a 20.8% in Q4 on a GAAP basis, 23% on an adjusted basis, I think that Q1, Q2 being in that 20% to 21% range on a GAAP basis for margins, it should be expected.

[Michael Rehaut:]

Great. Thanks very much.

[Dale Francescon:]

Thank you.

[Operator:]

The next question is from Jack Micenko of SIG. Please go ahead.

[Jack Micenko:]

All right, good afternoon. I want to talk a little bit about the community count growth for next few years and you talked your potential upfront; one, how does that look through the year? It looks like you kind of pulled forward some demand later in the year. Is it going to be more backend weighted and then can you continue to leverage the G&A as you work with these communities sort of based on the cadence community count?

[David Messenger:]

Hey, Jack, it’s Dave. I would say that as we look at our community count growth, it is going to be a bit more backend weighted towards Q3 and Q4. When you look at last year, we took a pretty heavy pause and just brought to a stop all land buying in Century Complete. And so now that we have under control there, going back to the acquisition cycle, we’ll bring those on the later part of this year. On the Century Communities size, we’ve had such great sales pace we’ve been selling for our communities passed down originally expected and dealing with land development, just like everyone else. We expect to be bringing more communities online. So, I think you’d probably see a community count dip in the first half of the year, but we bring it back – being backend weighted in Q3 and Q4. And as far as G&A, we’ve continued to make progress over each of the last several years doing a bit better every year than the year before and I would think that as we look at each of the quarters this year looking at 2021, we would expect to continue seeing improvements out of the G&A line.

[Jack Micenko:]

Okay, great. And then on the mix, you’re not breaking out the two business lines by community. Is it going to be a comparable sort of 50/50 as you see it for 2021 as well? Or is it going to be more replenishment of some of the legacy brands versus company?

[David Messenger:]

Are you referring to the community count?

[Jack Micenko:]

Yes. Yes. Community mix basically.

[David Messenger:]

Yes. Okay. So, I think it will depend really on how our land development goes, depending on how much the Century Communities brand we bring online and how much we continue to sell through. but we’ve been saying we expect to Century Complete brand to be growing. So, you’ll probably be a little bit more weighted towards Century Complete than you would be Century Communities.

[Jack Micenko:]

Okay. Okay. Just one more from me if I could, 80% first time buyer, I think you said 80%, what a qualified price point for FHA, if I heard that, right in the context. Have you done a stress test about affordability? Things are great, everybody’s pushing price, they’re getting it, but that 4Q, 3Q 2018 kind of sits in the back of your mind. I’m just curious if there’s – if you’ve done any subsidy work around these entry-level buyers and how much of an updraft, could they potentially absorb on rates if the 10-year moves higher over there? Thanks.

[David Messenger:]

Yes. I would say that we definitely have all of our divisions here at the corporate office, looking at what we can be doing on our ASP versus what affordability and the subsequent loans are for the buyers. And we keep that in mind, and especially, in our Century Complete brand is we’re dealing with a lower price house on a different credit profile for the buyers. We were cognizant of it. So, we ran a variety of stress tests and we price our homes against those.

[Jack Micenko:]

Okay. Thank you.

[Operator:]

The next question is from Alan Ratner from Zelman & Associates. Please go ahead.

[Alan Ratner:]

[,:]

So, clearly, there’s going to be some mixed dynamic as these communities come online. And I’m curious when you think about gross margin, for example, you’re at 23% today. What’s the underwriting threshold, I know, if it’s gross margin or returns, but how do you think about gross margin on new land deals that you’re tying up and how does that compare to what you’re delivering today?

[Dale Francescon:]

So, we’re looking at similar gross margins. but Alan, it depends on the risk profile of the particular land. If we’re buying finished lots on a just-in-time basis, we would take a lower margin versus a development deal that has additional risk and an elongated timeframe. But as we look at it, we’re not only looking at gross margin, we’re looking at various other returns that have to meet our internal thresholds, but we’re not looking at anything generally speaking lower than where we are right now on a margin basis.

[Alan Ratner:]

And that’s specifically, on the fourth quarter level. I just want to be clear, because obviously, it ramped tremendously for the year, or are you referring more honest?

[Dale Francescon:]

Yes, Alan. It really depends on mix on what’s coming through the pipeline. So, as an example, if we have a lot of finished lots coming through the pipeline, and then it would be a lower margin, generally speaking, I’m saying more on a consolidated, if everything was kind of coming through on the same amount.

[Alan Ratner:]

Got it. Okay, that’s helpful. And then on the closing growth guidance, obviously, I don’t think anybody’s expecting you to keep up the growth rates you’ve been running at especially, as you get up against some tougher comparisons. but admittedly, I would’ve thought it might’ve been a touch stronger than that based on where your backlog is and certainly, based on where January started off. So, is that a function of the comps getting tougher in the back half of the year, or are you getting to a point, maybe, where you’re having to intentionally slow the sales pace to keep the production machine running efficiently and not gap out even more on communities?

[David Messenger:]

I think – Alan, this is Dave. I think it’s a combination of a couple of things that when you look at our backlog conversion rates, I’m expecting some of those will get compressed over the next couple of quarters as we’re dealing with the elongated cycle times different supply chain issues. So, I think that that’s going to be one component and then it’s going to be a matter of when we bring some of those communities online in Q3 and Q4, like I spoke about earlier. And so I think, a combination of those will really depend on how much we can close – how much we can grow our closings.

[Alan Ratner:]

Okay, great. And Dave, if I missed it, did you give a first quarter closing guidance number by any chance?

[David Messenger:]

No, I didn’t.

[Alan Ratner:]

any chance you can hold your hand a bit on that one, just given the range that we’re dealing with here?

[David Messenger:]

I think that as you’re looking at prior years here, you look at last year and to my point about backlog conversion coming down, we started with a conversion rate from last year and adjusted accordingly for what we’re seeing in the industry and supply chain, and cycle time is taking longer and bring that down a little bit. That’s probably going to be in a decent range.

[Alan Ratner:]

Okay. That’s helpful. Thanks guys. Good luck.

[Operator:]

The next question is Alex Rygiel of B. Riley FBR. Please go ahead.

[Alex Rygiel:]

Thank you, a great quarter and a great year, gentlemen.

[David Messenger:]

Thanks, Alex.

[Dale Francescon:]

Thanks, Alex.

[Alex Rygiel:]

can you expand upon your comments about the potential to expand into the move-up markets, some more color around that?

[Dale Francescon:]

Yes, I’m happy to. It’s always been a component of our business and we’re in no way suggesting that we’re moving away from our entry-level focus, but we see opportunity to continue to add, move-up product to the mix. As we’ve said, when we look at what we’ve been delivering, it’s about 80% of focused on the entry-level buyer, which means 20% or so is move-up. And so – but those are opportunities we continue to look for, when we look at our heavy concentration on entry-level, adding some additional move-up is just incremental business for us.

[Alex Rygiel:]

And do you have – have you started to shift your lot inventory already for that plant?

[Dale Francescon:]

no. And I wouldn’t really call it a shift, it’s really more opportunistic. We just look at it, we’re open to those kinds of opportunities and we’re not limiting ourselves to strictly doing entry-level product nor have we ever done so.

[Alex Rygiel:]

And so there, we were expecting average selling prices to sort of drift down as the Century Complete product category got larger as a percentage of total. Should we maybe alter that view and start to think that maybe, average selling prices are going to drift higher over the coming years?

[Dale Francescon:]

Yes, I wouldn’t expect that. I think what you’re seeing happen this quarter, for example, is really a reflection of the pause that we took on land acquisition and starts on century complete. We took it on the entire business, but it really impacts the Century Complete business, because of – we do not release a house for sale until it has already started. So, we ended up with a gap there. And so, I think that’s just a – really more a matter of circumstances. We would still expect that our average ASP will come down.

[Alex Rygiel:]

One last question. One of the elephants in the room has always been sort of the leverage we have carried on the balance sheet. You can work that down below 30%, congratulations on that. What’s your – new sort of normal operating range for leverage on your balance sheet?

[David Messenger:]

I think right now, we’re demonstrating that we’ve been able to make some very significant strides in bringing that up from north of 45 and in 2019 north of 50; to now, today, we’re at 27.2. And I think that you’ll continue to see us operate somewhere in this range that we’ve got cash on the balance sheet and undrawn revolver, and we’ve got the ability to fund the growth and expansion plans that we have from free cash flow in our balance sheet. And so leverage, we’ll just tick up and around as we continue to fund our business.

[Alex Rygiel:]

That’s great. Thank you.

[Operator:]

The next question is from Alex Barron from Housing Research Center. Please go ahead.

[Alex Barron:]

Hey, guys. Thanks and great job.

[David Messenger:]

Hi, Alex.

[Dale Francescon:]

Hi. Thanks, Alex.

[Alex Barron:]

So, I heard you say that you’re expanding into Phoenix with the new Century Complete brand. I’m sorry, the century brand. I was curious whether you guys have any other expansion plans either in Century Complete or the regular century brand into new markets?

[Dale Francescon:]

Well, we’ve talked for a year or so that we’d like to get the century brand, the legacy brand in Florida. And so as we talked, we have five markets were paired up both brands right now, and Florida would be a natural, Century Complete is throughout Florida and growing. quite substantially, we’re hoping that in the future with new penetration in the north part of Florida. And so to have the legacy brand go into Florida would be a nice addition. And so that would kind of be the first one I think we'd be looking at.

[Alex Barron:]

Okay. And it sounds great. I also wanted to ask, I mean, it doesn't sound like it, but are you guys doing anything to intentionally try to slow down the business or are you just taking as many orders as people come your way? I guess what I'm getting at is, is there any limitations to your production capacity that would cause you to try to slow down the business at this point?

[Dale Francescon:]

We've got production challenges like all the other home builders do, but no, we've not intentionally metered the production down. It is – we really because most of our (00

[Alex Barron:]

Okay. And would it be possible to know roughly how many homes you guys are starting a month or per quarter?

[Dale Francescon:]

As I’ve looked at it, in the back half of 2020, we're doing anywhere from 700,000 to 900,000 a month that we're doing, somewhere in that range, it varies by month. But just looking around numbers, right now, I believe we've got more under construction between speck and backlog homes than we did this time last year at 12/31. So we feel good about what our production capabilities are while it may take a little bit longer, but we've continued to bring sales on board and we're continuing to build homes.

[Alex Barron:]

Okay, great. Look forward to your success this year. Thanks.

[Operator:]

The next question is from Jay McCanless of Wedbush. Please go ahead.

[Jay McCanless:]

Hey, good afternoon. Great quarter everyone. Yes, the cancellation rate what was it this year versus last year?

[Dale Francescon:]

I'll get that to you offline. I'll get that to you after the call.

[Jay McCanless:]

Okay, thanks. And then, I guess, last quarter, pretty significant increase in lights and it was pretty well dispersed among the regions. The lights that you acquired this quarter, was there any geographic focus or product focus on them or was it pretty evenly balanced, like we saw in the third quarter.

[Dale Francescon:]

It was evenly balanced. And as you pointed out, year-over-year each region grew on the end of 2019 to the end of 2020, and it was evenly balanced, obviously, primarily, entry-level type product, but lots for product of entry level, but it was fairly even.

[Jay McCanless:]

Okay. And so that mix of what’s coming on in 2021 is going to start to move the ASP probably closer back to what something we felt like the end of 2019, or maybe split the difference between the end of 2019 and 2020?

[Dale Francescon:]

Yes. There's been price appreciation in the markets, too, Jay, as everybody's aware of. And so, where the fourth quarter might be a high mark in terms of ASP and seeing that come down and, again, predominantly entry-level, I don't think it's going to be back at the 2019 numbers though.

[Jay McCanless:]

Got it. Okay. Thanks for taking my questions.

[Dale Francescon:]

Thanks, Jay.

[Operator:]

We’ve reached the end of the question-and-answer session. And now I would like to turn the call back over to Dale Francescon for closing comments.

[Dale Francescon:]

Thank you, operator. Our impressive performance is compelling evidence of the power of our business model, as well as the strength of our entire team and our ability to overcome the unprecedented challenges of the past year. We would like to thank each and every one of our employees for their continued dedication to Century. We couldn't have done it without you. While we have much to be proud of, we're even more excited for what lies ahead. We are entering 2021 with a great sense of opportunity and looking into the future, remain confident in our ability to build on our success and achieve our long-term growth vision. Thank you for your time today, we appreciate your continued support and investment and look forward to speaking to you again next quarter.

[Operator:]

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