Century Communities, Inc. (CCS) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Mike Rehaut. I'm the senior analyst covering the homebuilding and building products sector for JPMorgan. We're continuing with our afternoon session on day 2 of our 2 day conference, our 13th Annual Homebuilding and Building Products Conference, streaming live in virtual for the first time in the current environment. We're thrilled to kick off the afternoon session with Century Communities. We have CFO, Dave Messenger, joining us. Century, one of the IPOs that came out from the prior great financial crisis, the prior great downturn and has done exceptionally well, had a strong execution over the last several years with integrating several acquisitions as it's built out its footprint with very solid integration and execution. Dave has some slides that he's posted to our website. So as part of our digital conference book logging into the conference that's accessible for those registered. He'll walk through those slides. I have several questions, and we are also taking questions from our virtual audience. You can click on the, ‘ask a question’ feature. And I can relay those questions as well. So without any further ado, I'll turn it over to Dave. We have about a 35-minute session. So we'll end right around 02:05. And I'll turn it over to Dave. Thank you.

Great. Thanks, Mike. Welcome, everybody, to the afternoon presentation today, coming through live from Denver. So I think everybody has a copy of the book that we put out the presentation we filed on an 8-K last week. So I'll just reference as I go through some opening remarks before turning it over to Mike. So Page 2, forward-looking statements. The attorneys and legal teams always want me to reference that to give cover to anything that we're about to discuss. Page 3, you can see how our results have been over the last 12 months. In the last 12 months, ending the first quarter, we've done $2.5 billion of home sales revenue, 8,201 home closings. We're the 9th largest builder in the country. And we've had 17 years of profitability since the company was formed back in 2002, and that includes through the '08, '09 recessions. We have about $1.1 billion in stockholders' equity, just under 36,000 lots that are owned and controlled. And we operate throughout the country, a wide footprint, 17 different states, 28 different markets, and we have a financial services company that provides mortgage title and insurance to our homebuyers. Looking at Page 4, a little bit more about the company here. We build under 2 brands that are -- we think are complementary and have a significantly high exposure to the entry-level segment. As you can see from the last 12 months, 8,201 home deliveries that are fairly evenly spaced through our 4 regions being West, Mountain, Texas, Southeast. And then we have a century complete brand that has about 35% of the volume. When you flip that over to our revenues and $2.5 billion, you can see that we're again fairly evenly spaced amongst our regions with century complete coming down, given its price point. A little bit about the brands. Century Communities is your typical homebuilder, where we would go into a marketplace, acquire large sorts of lands, develop it, put up a model homes and sell-through community and do it over and over and over again. We have a wide range of products, still focused on the entry-level buyer in those marketplaces, but you have the options to specialize your home and create a little bit more of a custom home feel to it. In the Century complete brand, that is a bit more of a unique homebuilder with a finished lot basis for our land acquisition strategy. So we do not do any development in that building segment. We only acquire finished lots. When we're ready to build on them, and then we go ahead and put a house of them. So all of our land is off balance sheet. With that model, there are no options in the home buying process. So as you come in, you choose a home, once you've chosen at home, you're done. We just need to go to finance and come to the closing table. So there's no opportunities along the way in order for you to change the walls, change the colors, change the carpet or the cabinetry, it's kind of a one-stop shop for the house. So once you make that decision, you're done. That allows us to build the homes relatively quickly. And in that model, we have an average price point of about $150,000. So between our Century brand and our Century complete brands, about 82% of our homes, we would consider to be entry-level focused, given that those 82% qualify for FHA lending, which is typically a mortgages choice for that entry level buyer. And if you look at our deliveries, the 8,201 homes we've done in the last 12 months, almost 90% of those were done at less than $500,000. So everybody understands that $150,000 house is definitely entry level. Even the markets where we build, whether it's in Atlanta, throughout Texas or the mountain of the West Coast, we are always trying to be at that lower price point in any given market that we look at. If you turn to Page 5, which I think probably most people are really interested in is just how did we end the quarter, the first quarter, and how we've done so far heading into the second quarter. So heading into the end of the quarter, obviously, in the middle of the month of March. We took some significant actions and tried to be very proactive with the business and the balance sheet. And we immediately stopped spec construction. We stopped land acquisition and we stopped main development. That got us through the end of the -- into April. And then as we saw April transition in our call, we had talked about April sales being very positive. We ended the month being down less than 1% on a year-over-year basis for our net sales. We saw that as cancellations spiked at the end of Q1, heading into the first week of April, we saw cancellations moderate through the balance of the month and into May. And we saw sales increase sequentially throughout the course of April, so just we ended up down only 1%. That positive sales momentum and trend has continued for us into May, such that through the first 2 weeks of May. We're happy to report that our net sales are up 13% on a year-over-year basis. And so we're finding that to be fairly broad-based across all of our markets and cancellations continue to hold steady for us. We had the fourth bullet point that we had done some proactive draws on our line of credit at the end of the first quarter. Subsequent to then, we had debt paid down $100 million on that line of credit. And then today, we've paid back another $100 million. So now we paid back $200 million of those proactive draws. As we said on our call, holding the cash on the balance sheet was just a preventative measure. Our net debt-to-cap ratio was 46.6%, it was up only 1.4% from year-end, which is a typical seasonal trend for us, given that you’re selling homes and you're starting to construct inventory in the first half of the year, so we typically increase our leverage. And -- but we did say that we are focused on growing our markets, generating cash flow, and ultimately, bringing our leverage back down. And so as we've seen states continue to loosen their restrictions, we've continued to see improvements in our business, I mean, we hadn't expected 8 weeks ago, especially now our sales for May are up 13%. We've had the ability to repay $200 million on our line of credit. Given that sales momentum we've had and generating the cash flow, we've decided to selectively restart some of our spec construction as well as some of our land development activities. So as we talk to our presidents and division presidents across the country. We have allowed them to begin restarting spec inventory, and we've begun looking at, and restarting some of our developments that we're fairly far along in the process such that we can invest a little more money, get them to a finished lot status, and ultimately, put a house on it, sell it and then generate cash flow there. Looking at Page 7, for those that don't know, Dale Francescon, the co-CEOs, both very actively involved in the business. They're active involved in our business every day. The single largest shareholder combined, they own about 12% to 13% of the company and has seen more than their fair share of cycles. If you look at Page 8. You can just see how we've grown from 2015 through today, and a lot of that growth has been done by the acquisitions detailed on Page 9. We've had a fairly successful track record in M&A. We've been able to do it through a variety of equity and debt transactions. We successfully integrated all of these acquisitions into one platform within our company. And throughout the course of this, we did 7 acquisitions, a little more than $700 million in transaction values, and we've put less than 4% of that on the books as goodwill. If you flip to Page 10, you can see how our price points stack up across our portfolio. And as I mentioned earlier, 89% of our products delivered are less than $500,000. So we are definitely positioning ourselves across all of our markets to be at that entry-level segment. So I said now, our ASP for the Q1 on homes delivered was just over $307,000. Page 11. You can see a little more detail about our 2 brands. And as I said, Century Communities, very broad based portfolio, your typical homebuilder. We're still targeting first time homebuyers, we do have first, some first and second move ups. But with the vast majority of our homes qualified for FHA lending, more than 80% of them really considered to be entry-level product. And then Century Complete, that is one, where it is at 100% entry-level focused at $150,000 as a price point. If I flip over to Page 13, something we get asked about a lot is our online investments. With Century Complete, you have the ability to buy a house online. And given that it is a spec construction and there are no options. It allows us to put up inventory of homes. You can go online, you can provide a deposit, you can sign a -- choose a house, sign a contract and move over to the mortgage company for a prequalification, all of that can be done online. We've also made significant investments in the Century Community side in terms of providing floor plans, programs with realtors, virtual appointments, video walk-throughs, electronic signatures on documents, and being able to move [ EMDs ] electronically such that we're trying to get to more and more of a no-touch process with the home buying processes. Page 14. You can see our footprint where we build out West, it is predominantly the Century Communities brand. As you move into the Midwest, you're predominantly Century Complete. And then Texas and the Southeast, we have both brands in a variety of markets. As where we have 17 stage, 28 markets and just shy of 36,000 lots. Page 15. On the deck, you can see, as Mike mentioned, we had a strong first quarter. Our homes are delivered were up 12% on a year-over-year basis. Our ASP, we managed to move down again as our product mix continues to change, and we continue to focus on the entry-level of potential homebuyer. Home sales revenues up 9%. Net new orders, net new sales contracts, up 29%, and our net income was up 53% for the first quarter. Now I would flip over to Page 17. Looking at the balance sheet. Then as you can see, from a capital stack, we have a fairly simple capital stack, one class of common stock. While we have 2 bonds that are outstanding today, one not due until 2025, the second is due in 2027. So we -- our maturity ladder has been pushed out. And then we have a lot of credit that matures in April. And as I mentioned, our net debt-to-book cap ratio stands at 46.6%, and was up slightly from 45.2%, and that was really -- we have a significant amount of cash on the balance sheet that we're looking to redeploy now. With that, I would turn it back over to Mike.

Great. Thank you, Dave. I appreciate the comments. And obviously, also the update on the -- on order trends so far in May, which is obviously very encouraging. I guess first off on that, maybe you could describe the pricing and promotional backdrop. I think that the positive trends that we've seen even in April, when you look at the first half versus the second half and now further improvement in May, surprised just about everyone in the industry. Initially on the set of conference calls that we heard in the back half of April, it was a pretty uniform view around pricing and promotions or pricing and incentives. In that pricing had more or less been stable, particularly even in the earliest days of the outbreak. There was effectively no price discovery. So no reason to change price. But even on the promotional or incentive backdrop, the common refrain was that incentives have been relatively stable, maybe up some degree in certain more spec heavy or inventory heavy instances, which if there are some builders trying to move or some markets were a little bit higher in inventory. But overall, incentives being relatively in check as well. Has that dynamic, specifically on the incentive front, continued or persisted through May? Have there been any changes as you've noticed across your markets or across your own business as you've continued to navigate the current situation?

I would say that from the pricing environment that we're seeing today, you're right on price. There really wasn't any opportunity for any kind of price discovery and prices have helped pretty far. That if you look at the available supply of homes that people are looking to choose from, resales are plummeting, new home sales and specs are pretty much the avenue a lot of people are going. And so home prices have not been falling. Maybe incentives have been in the marketplace for several months. I don't think they've become -- they've gotten to an elevated level. I don't think we saw -- we haven't seen incentives across our markets, skyrocketed have gone out of control. I don't think anybody is acting in an unusual pattern, us included. I think that our team uses incentives accordingly in order to sell and close the homes, whether it comes from Century closing costs or mortgage were mortgage benefit -- incentives are out there, but it's not -- I don't think they've gotten out of hand as they may have been downturn to past.

So overall then, safe to say incentive levels more or less normal? Or are they a little bit elevated relative to the couple of hundreds though?

Probably between normal and a little bit elevated.

Okay. I'm sorry, just writing this down myself. I think another dynamic that's been pretty prominent over the last 6, 8 weeks across the industry has been the bifurcation or the divergence in performance between more spec-oriented builders and build-to-order. I mean you've seen a pretty wide range in results. And given the Century Complete business that you have and portions of the core Century Communities business, it feels like you guys are probably a little bit more on the spec production side of the equation? And certainly, your results point to that? I wanted to get a sense for perhaps the reasons that you think are out there that the spec-oriented builders have performed so much better than the build-to-order focused builders? And if those reasons, certainly with your May results, you would think that those reasons are persisting out there. But if you have any view of whether or not some of those reasons might moderate as the backdrop normalizes?

And I think that -- so Century and through both of its brands, we've always been a spec builder. That obviously, in Century Complete, it's 100% spec. And then we've always had -- carried a decent spec inventory on the Central communities brand. If you look at the markets that we typically serve in the deck, there are typically been your higher-growth markets where there has not been a lot of inventory. And so anything that we've been building, we've been selling. And so we've not had an inventory promise. It's not like '07 and '08, where you had great big buildups in inventory levels in the markets. And so we haven't seen that. So we've been very successful at building specs and to be able to continue that model. Fast forward to today, and you're talking about the divergence you're seeing between build an order and spec. I think spec right now is carrying some weight in the market because as people are sitting around the houses, working from home and looking for someone else to live. The ability to move into a new place in 30, 60, 90 days, is very attractive for somebody compared to going out, making all the decisions, doing the house that's build-to-order that maybe 9 months away. And so the people are definitely looking for a faster move right now. And I think that given where supply is and the availability of homes in the markets that's where price spec builders are carrying a little bit more of an advantage today. And then I see that continuing to persist as states are still encouraging work-from-home arrangements. I think they know that, that's something that could be -- could go on for many months yet.

Right. You also mentioned that the performance so far in May was pretty broad-based across your markets. So I'm taking that as meaning that most of your markets were up as opposed to down. Were -- are there any markets that you're operating. And today, where you are still seeing year-over-year declines in May? And maybe if you could just kind of walk through your different regions? And kind of talk to which markets are maybe above that plus 13%? And which are less, just to give us a sense of relative strength?

Well, I would say that without getting into specific markets, I'd say, like let's just go region-by-region. That if you look in the Southeast, which is both Century Communities and Century Complete, we're seeing positive traction there, a very positive sales environment. Atlanta, we're the second -- the second largest builder in that marketplace. And in Georgia, and Charlotte are both experiencing great sales trends right now. You start moving west, you get into our Texas region, where we're in Austin, San Antonio and Houston. And despite all the headlines regarding oil, Houston has been a very positive market for us in conjunction with the other 2. If you look back on where the company was 5 years ago, when we first got into Houston, and oil had a downturn. We were selling homes above $400,000, and that was a real struggle. The company had made the decision back in '15 and '16 to really reposition that portfolio, start developing land at a much lower basis and change reside [indiscernible] runs. So it’s a – now we're delivering homes for $215,000 in that market, and we're having great success, despite all the news and negative information about oil. You move into the Mountain region for us, which consists of -- we've got a Century Complete division in Phoenix. That's been very successful there for us. When we look at Colorado, Utah and Las Vegas. For the Century Communities brand, Utah and Colorado are performing well. Las Vegas is kind of performing as expected, a market that's been hit by a job loss and furlough, but we have a fairly -- one of our more experienced teams there that's going to help us navigate through that. And Vegas, we're still confident, and we're still seeing positive traction there with our developments in our sales. You get into the West Coast, we've got 3 markets in California, Northern California, Central Valley and Southern California, and then you've got Seattle, Washington. So California is performing. And then Seattle is performing extremely well. So Seattle is one we're at that market, what I think a lot of people predicted would have been the epicenter for the virus has really turned itself around. And we've had great success selling homes all through their lockdown and in demand.

No, that's great. That's great. So a lot of positive commentary there, Dave, without question. So -- but it seems like you're saying Vegas and California within the mix are on the weaker side? And then you've mentioned all the other positive...

I mean their performance as we expected, they may not be as strong as the southeast. But we don't see them as being real laggards or real problems for us. So I think we see -- we could see good sales momentum out of those markets. But it's not quite at the same pace as we've seen in Southeastern Texas.

Okay. Fair enough. Fair enough. One question we have from the field is just with the improvement that you've seen in May, how are you thinking about land spend today? Yourself, along with a lot of builders kind of pushed out some acquisitions, some land spend, delayed some purchases, et cetera. Where are you in that area? And have you kind of gone back? And maybe kind of turn back on the spigot a little bit from a transactional standpoint?

I would say 3 of our biggest areas of capital spend being spec homes, land development and land acquisition. We brought all of them to a halt at the end of Q1, and we've since turned back on -- we've been -- starting to do spec starts, and we've restarted land development activities. From a land acquisition standpoint, that's one where we've pushed out a lot of our contracts and a lot of the takedowns. We've pushed those out through some part in Q2 into Q3. And we're still waiting to see a little more visibility into the balance of 2020 as we get ready to take down those lots. But I'd say, land acquisition, we've not turned back on just yet. And keep in mind, right now, I've got 20,000 lots on our balance sheet. So we've got plenty of inventory that I could be working through at the moment.

Right, right. No, that's helpful. That's helpful. I think another area of focus has been product mix. If you switch over for a moment to the building products side, there's been some negative mix in certain categories just from consumers trading down in possibly a tougher environment. We had D.R. Gordon earlier today talk about better-than-expected April results. But ASP -- average order ASP down, more from a geographic mix standpoint and a product mix standpoint, have you guys been seeing any within your markets, not from a geographic driven standpoint, but within each of your markets, have you seen customers, I guess, more so on the Century Communities brands trade down or shift towards lower ASP against the current backdrop?

A little bit difficult for us to -- for me to kind of be a proxy for in terms of that -- looking for a comment on that kind of a topic because a lot of our products are already -- even in the Century Communities brands, we're already at some of the lower price points in those markets. So albeit it's a higher price than our portfolio average in that marketplace. It's typically going to be more of an entry-level home anyway. So even though California house entry-level is going to carry a big price tag, it is entry level. And so we aren't seeing -- I don't think I can really speak to seeing a trade down from one type of entry-level house in Colorado to another one entry-level house in Colorado. I think that our portfolio ASP average probably stays a little as status quo, unless you were to see a big pickup in the Century Complete business or something out of the Southeastern Texas regions where we have a larger percentage of homes that are below $300,000, or at that $300,000 or below price point.

Right. Right. One last one on the -- actually 2 more at this point. We're a few minutes out, I guess, from the end of the session. But on, excuse me, mortgage credit, another key area of movement over the last 4 to 6 weeks, 6 to 8 weeks. What have you seen in terms of the recent tightening? And now we're hearing a little bit maybe a reversal of that tightening. But what have you seen across the credit markets? And your ability -- the ability of getting your customers approved? Has that impacted your business at all? Obviously, you've had nice improvement into May. But even relative to within that, has that held back -- held you back at all or impacted your business?

I think the mortgage market, as everybody knows, really locked up the end of the quarter and the start of April. Since then, you've seen them start to begin functioning more normally that you have people in the marketplace are originating mortgages, we're originating mortgages, putting them on a warehouse line, closing the home and then selling was to investors. And things seem to be acting and behaving much more normally now than they were just 6 to 8 weeks ago. So I'd say, our buyers are finding credit, whether it's through us or through some third-party lender, that there's definitely capital in the marketplace that sees a value in providing those home mortgages. And so right now, for us, whether it is through our own mortgage subsidiary Inspire Home Loans or through a third party, having low 3%, 3.25% mortgage rates, is very attractive. And so that with our ability to have spec inventory on the ground for people to move in has helped lead to some outsized April and May results.

And do you have a sense of what the average FICO scores are for your Century Complete buyers?

Yes, for the -- so for Century Communities, we're a little bit above 730. For the Century Complete buyers, we're a little bit above 700. And keep in mind that those are the mortgages that we're underwriting. And so maybe there's a little bit of cherry picking going on. But it's -- the mortgages that we're doing, we're making sure they are going to be down the middle of the fairway. We'll be able to originate them, sit them on the warehouse line for a short period of time as you clean it up, you close the home. And then it gets moved off to an investor. We want to make sure that, ultimately, we're not holding those mortgages. So we will oftentimes move people that have lower credit scores, different types of issues on their FICO, different types of issues on their income, we'll move those off to third parties and let them close the loans.

Okay. Okay. Fair enough. And then just one last one on M&A. As we alluded -- as I alluded to before, you had a slide as part of your deck around M&A and how you use that to grow the company. How do you think about M&A going forward to the extent that it's either bolt-ons? Or are there a few markets that perhaps you'd still like to enter? And has the current environment kind of created any opportunity relative to any remaining desires in M&A?

I'd say that heading into 2020, we're definitely focused on our existing footprint. We're focused on generating cash flow out of our existing footprint and really trying to get bigger and more efficient within our existing marketplaces. I don't think that's really changed now as we're still looking to manage the balance sheet and move leverage down and get more out of our existing markets, I think that would still continue to be the trend up. If opportunities were to come up in our marketplace, we would look at them. But we want to make sure that we're protecting the balance sheet, and we're getting the appropriate returns on the balance sheet and that potential investment is, what we'd be looking for. So we haven't rolled it out. But right now, I'd say, our focus is probably more towards managing the balance sheet and managing our existing footprint.

Great. Well, I think that actually does it. Well, actually, I apologize, one more question from the field. Just any other -- with the recent disruptions in the market, if you could comment to your cost of goods sold, other components of your gross margin, if you've been able to -- other builders have talked about perhaps trying to exact a little bit better pricing from labor or materials, if you've seen any of that in your own operations? I believe -- and correct me, if I'm wrong, if you could just remind us in terms of your workforce as well, if there have been any adjustments there? I seem to remember that, but I could be off from that; and how, in general, how you're thinking about the last 6, 8 weeks as it relates to any tailwinds or headwinds on the gross margin side?

Yes. So from the gross margin side, obviously, times like these, you definitely talk to your labor and trade partners about what we can do to continue building homes, build them a more cost-effective basis. So we have a variety of discussions going on with our suppliers and with our trades in terms of -- are there any price concessions that can be obtained during this time. You probably asked about our staffing decisions. We did make the decision in early April. We laid off approximately 20% of our workforce as we were just not knowing how the environment was going to shake out. It was a broad-based layoff, everything from builders, field managers, construction personnel, sales, back office, IT, all various departments were impacted by that. So just we could help rightsize the organization ahead of whatever the economy is going to present as we get into the second and third quarters.

Okay. And with the recent improvement in trends, that 20% workforce reduction, any thoughts around any of those people coming back over the next quarter or 2 is now at least -- to the extent they're able to shift back towards some positive growth does that -- how does that affect your thoughts as you progress through the year?

I think that companies go through crises like these and you learn to do more with less. And so I think there will be some opportunity that we'll push some jobs and we'll end up hiring some roles back. But I don't know, if we end up hiring all the roles back even if we got back to 100% normal, call it, 100% what we used to call it normal, we did that tomorrow. But I think the company is look -- we saw this as an opportunity to become a more efficient, more streamlined company.

Right. All right, Dave. We are actually more or less coming right up on 5 past the hour. And I think that does it from our end. So I want to thank you again for your participation. Great having you. And now I think it's a third year, I want to say, maybe third or fourth year of Century participating at our conference. So great having you as always. We'll resume the conference. We have 2 more sessions rounding out our 2-day event, 02:15, Four-Star, and at 3:00 p.m., JELD-WEN. So I appreciate you guys, again, participating. Have a great day, and we'll see you back at -- the audience. We'll see you back at 02:15 with Four-Star. Thank you.