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

Good afternoon. Welcome as we continue the afternoon session of our first day of our 14th Annual J.P. Morgan Homebuilding & Building Products Conference. My name is Mike Rehaut. I'm the senior analyst covering the space for the firm. And we're pleased to have with us today, kicking off the second half of the afternoon, Century Communities. And representing Century, we have CFO, Dave Messenger. I have worked with Dave now for, I guess, about 6 years, 7, I guess, since the IPO. And it's been really impressive to watch the company grow over that time, achieving tremendous heights. And I think it's a testament to the whole management team, being able to integrate several acquisitions, grow deeper in their markets and more or less knocking on being a top 5 builder at this point. I'm going to turn it over to Dave for some prepared remarks, and then there will be plenty of time for Q&A. I'll have some questions of my own. But please, for those dialed in, we welcome questions for the -- from the audience. You can click on the Ask a Question function or button on the dashboard and submit a question that way, and I'll be happy to pass it along to Dave. So again, Dave, and the Century team, thanks for joining us today. I'll turn it over to you.

Wonderful. Thanks, Mike. And you're right, we've been working together now 6, 7 years since the IPO. And you've had kind of a front-row seat to see a lot of what we've accomplished here over the past several years. So for those watching online, I believe you have a copy of the slide deck. Slide 2, I'll just speak to them real quickly. Slide 2, legal disclaimers, attorneys always like me to point that out. Slide 3, who are we? We were founded in 2002 by Dale and Rob Francescon, who are still actively engaged in the business as co-CEOs. 2013, I joined the firm as CFO. In 2014, we did an IPO, where we raised public capital for the first time. We've raised institutional capital ahead of that through a private placement of 144A, but 2014 was really our launching point for becoming a public company. Since then, we've been able to grow the business to where, today, we're the ninth largest homebuilder in the country. Over the last 12 months, we've delivered a little bit more than 10,000 homes and about $3.6 billion in revenue. And we've been profitable all 18 years that we've been a company, since 2002, and that includes being profitable throughout the recession back in 2008. If you look at Slide 4, you can see where our market positioning is across the country. Since the time of our IPO, we've done 7 acquisitions, 6 of them private, 1 was a public merger and acquisition with a company, UCP, on the West Coast. And as you can see from our footprint, we're arguably in some of the strongest homebuilding markets in the country, and those are all markets that we've been able to enter into in the last 6 or 7 years. And we think that given our growing lot pipeline and land supply that we have for future years, we're going to be able to increase our market share across this platform. If you turn to Slide 5, something I want to talk about just briefly for those that may be new to the story. We have 2 separate brands that we build under, which are really focused on the entry-level consumer. About 80% of our homes would be deemed as entry-level and qualifying for FHA lending. Approximately 90% of our portfolio is sub $500,000 on an ASP. And then when you look at the 2 brands individually, Century Communities, our legacy brand, that is more of a traditional homebuilder. A significant amount of capital goes into a market. You go out, you acquire the tracks of land, develop and put in all roads, curbs and gutters, utilities, build a model home, sell-through the model -- out of the model and sell-through a community and go do it and repeat that numerous times inside of a market. Our second brand is Century Complete. That is solely focused on the entry-level buyer. Price point in that business right now is around $200,000. It is 100% spec-based. Across our portfolio, in the first quarter, we had about 85% of our deliveries came from a spec construction, and that number will probably continue to increase over the next couple of quarters as we do very few presales. But within Century Complete is 100% spec, and there are no options in that business. So as soon as we acquire land, which is 100% off balance sheet, we acquire the lots, we begin building on them immediately, and there's no options throughout the process. It allows us to have an efficient build from a cost perspective and allows us to price it appropriately and provide a house at a $200,000 price point. If you look at Slide 6, just a quick recap on Q1. Really set us off for a strong start to the year. Revenues being up 67% on a total revenue basis. We were about $1 billion. Homebuilding revenue was almost $960 million. Our deliveries were up 50% year-over-year. Our gross margin expanded approximately 340 basis points. Our SG&A went to an all-time low of 9.9%. And we were able to increase our land pipeline by more than 60% year-over-year, with about 64% of that being off balance sheet and being in some sort of controlled structure. Our backlog, as of the end of the first quarter, was 4,097 homes, which is up almost 60% year-over-year. And our backlog value was $1.6 billion, up more than 80% compared to last year. And then on Slide 7, just real quickly. As I mentioned, we've got 80% exposure to entry-level buyers, which is really the price point we like to be focused on. And as we've been able to have a strong and invested management team, we've got a track record of growing the business through cycles and being able to acquire and integrate other companies. We think that we're on a pretty strong footing for whatever this next homebuilding cycle brings. And with that, I'll turn it back over to Mike to delve into some of the Q&A.

Great. I appreciate it. I'm going to start with some questions of my own. And again, I'll just remind people in the audience, please feel free to click on the Ask a Question button function on the dashboard. I'll warn you, Dave, that it appears that, for most of these sessions, I've been solo in my asking, which means that, probably, a combination of lots of people and meetings, but also, apparently, I ask all the questions needed. So...

No problem.

I wanted to kick off with just some bigger-picture, industry-level questions, and then certainly, I have some company-specific ones as well. On the industry level, just to kick off, one question I've been asking most builders at this point is we're at the cusp of getting into the tougher comps into the back half of the year. The -- and as we think about the back half of the year from a sales pace perspective, historically, the industry does exhibit a softer level of sales pace per community. There's seasonality in the business. But I think we're in a kind of a unique point right now, given that the actual -- I think it's fair to say that the actual level of demand that's out there today is significantly higher than what the companies are selling to. Most companies are managing their sales pace to better manage backlog, match construction with pricing or construction costs better. You have many builders saying we could have sold more, but for either capacity or just limiting your sales pace. So with that in mind, how should we think about the back half of the year? In other words, even if there is some seasonality against the true level of market demand, given that you're already selling below that demand, is there the potential, in your view, for what we're seeing today, the sales pace of the first half kind of perpetuating through the back half and you, as a result, wouldn't see that level of seasonality that you normally would? Just any thoughts around that and maybe how you see it for your own business.

I think that the level of demand we're seeing right now is incredibly strong across our portfolio. And I think that, really, as I look at our business and you can kind of throw seasonality out the window this year, we kind of threw it out the window last year just because so many things are in flux at the moment, I think I look at it and say, okay, where is my community count going to be because ultimately, I need to have finished lots on the ground. We're a spec builder, we're not doing build-to-order sales. If I wanted to increase my sales, I can start doing build-to-order, but then I really run market risk on all of our home pricing. That's not what we're about. So as I said, we did almost 85% of our deliveries in Q1 from a spec basis. That number should be climbing as we're just not allowing -- we've been decreasing the amount of presales that we would be allowing over the past couple of quarters that would deliver here in Q2 and Q3. But with that, if you look at Q1, we had a record absorption pace for us. That was just north of 6 across our whole portfolio. That number may seasonally come down as a result of us selling through some communities and our unwillingness to do build-to-order. We're not doing build-to-order homes. And so I look at it as so much not a function of what's the demand out there, I look at it as my communities that, in Q3 and 4 and Q1, our sales pace was strong, but it was not being matched by our development pipeline. And we've got a strong development pipeline. We've been bringing on more and more lots into our portfolio. And we expect community count growth to be growing into Q3 and Q4 and into '22. But I think that you'll see in Q2 that community count is going to dip a little bit. And with that then, you'll see sales start to pick up again when you head into Q3 and Q4 as we have more inventory to be doing more spec sales out of.

That's very helpful. I guess the other big question -- so maybe just before I move on, just so I'm fully understanding, is it in effect that you're saying the rate -- the sales pace that you're achieving today is kind of -- I mean, just given, again, basic construction and physical constraints, you feel like you're at the higher end of that range of possibility and therefore, the ability to grow going forward is going to be more a function of community count rather than sales pace.

I think it's going to be more community count than it is sales pace. And I think, right now, we feel good about where our execution is and given that we want to be spec-selling homes because, for us, that is a way for us to be protecting our margin and be able to drive more profitability to the bottom line. So If I can keep increasing my ROE by doing spec sales and protecting that margin and being able to better price it against the commodity pricing, we think that's a win for our business.

Right. Okay. Fair enough. Maybe just shifting to another area of concern in the industry right now is the extreme level of price appreciation, home price appreciation that's out there and what that may or may not mean from an affordability standpoint. We even heard that, from one of our builders this past earnings season, that, in some markets, they were going above the FHA loan limits, but didn't really view that as an issue given the -- how much demand today is outpacing supply and some ability for consumers to shift to conventional with just a little bit more down. But I wanted to circle back to Century in terms of, number one, how do you guys feel about affordability today across your product? And do you see any issues with the rapid pace of price appreciation? On a national basis, it's up 10% to 15% year-over-year so far year-to-date and if there's also any issues or risks that you see as it relates to the FHA loan limits today.

Being a heavily entry-level-focused builder, we're pretty cognizant of where those FHA limits are and how we're doing price increases across our portfolio, especially given that if you look at our Century Complete business, where if you got an ASP of $200,000, give or take, depending on the market, we're very cognizant of where that is. And right now, we have not seen -- we've seen great success with pushing price, seeing our ASP increase. And you saw us just increase our guidance after Q1 because price increasing was -- prices were increasing faster than we had originally expected and were stronger than expected. But yet, we're not seeing affordability become an issue. We're not seeing cancellations in our portfolio today begin to rise, where you think that if somebody locks up a -- goes under contract to buy the house and later, they can't get financing because they can't qualify and so they cancel out of a contract, we're just not seeing that today. And so, right now, we feel pretty good about where the affordability is for our portfolio and our homebuyers.

And as it relates to the FHA loan limits, is there any portion -- I assume there might be, as some other builders have intimated, some amount of closings that are above those limits today? Or if that's the case, can you kind of describe the level of magnitude there and if there's been any issues around consumers having to pivot off of the FHA, if that's the case?

I think roughly 15% to 20% of our product is probably above FHA across the country. But we haven't seen people with issues getting financing that -- if I'm building something that's above a local market FHA and there was a problem, I would expect to be seeing standing inventory and cancellations within the backlog. And that's just not occurring today. You can go on our website, and you just can't find a ready move-at home because they don't exist, that everything we have is getting sold. And so until you start seeing those numbers climb, I feel pretty good about where the affordability is. Even in those markets where I may be above the FHA limits, people are going out and getting conventional loans and being able to qualify accordingly. I look at our Inspire. We have an in-house financial services team that are Inspire home loans. I think on the Century Communities side, average credit scores around a 740, and even on the Complete side, it's around the 710 to 715. And so when I look at that credit profile, again, we feel pretty good about the end user's ability to acquire that home.

And the 15% to 20% would also include your -- the smaller part of your business, maybe 15%, 15%, 20%, that's nonentry-level. So...

Yes. Yes.

So in effect, you're kind of saying that, I mean, if you want to make a basic assumption that most of your move-up is not entry level, which is generally a safe assumption, it means that, by default, the predominant amount of your entry-level product is within the FHA.

Absolutely. Absolutely. I mean that's how we look at it in the sense of helping classify entry-level product being inside of that FHA limit.

Right. Right, right. Maybe to shift to some company-specific questions, you hit on community count and your plans for growth in the back half of this year. Based on your current land positions and recent purchases, should we be expecting further growth going forward into '22, '23? And if so, what type of degree of magnitude should we be expecting from a reasonability standpoint? I don't want to kind of touch on forward guidance as of yet, but just maybe kind of looking back at your land purchases over the last couple of years, any kind of directional thoughts around how to think about community count going forward would be helpful.

More is better, I think just to sum it up without putting any kind of number on it or any kind of guidance. But we did say that, we've been pretty vocal, that the first half of this year, you're going to see communities sequentially dip because -- just given how last year played out and how the sales are playing out. It's a well-told story. We expect to see though, we're looking for some community count to begin rebuilding in Q3 and Q4, heading into '22. And as I look at our lot pipeline and our markets and in talking with our division presidents and other presidents in the business, we don't see why we shouldn't be growing community count in '22 and '23, that we aren't looking to be shrinking the business. We've grown our lot portfolio to over 57,000 lots, with a significant amount of that being off balance sheet. And we think that we're going to be able to bring that into production over the next couple of years and continue to grow our platform.

Right. Great. And I mean, as you look at the land coming online, so much focus has been on the entry-level buyer. And of course, you guys have shifted hard, not only through the expansion of Century Complete, formerly known as Wade Jurney, but also your core business, it seems like you've had a nice shift within that platform as well. What's the ability over the next 2 or 3 years, either through the land purchases that you've already had or just any flexibility, as those land and communities get put online, to shift to move-up in case that segment does start to come back a little bit? I mean certainly, it's not a dead segment today. There is strength there. It's just there's more strength, let's say, on the entry-level side. But I'm just kind of curious, to the extent that, let's say, parts of the entry-level market cool off a little bit, be it through rates or whatnot, what's the ability to pivot, let's say, more towards -- or back a little -- shift the business a little bit back more to move-up?

I think if we're going to be shifting back to more move-up style hubs and increase the ASP, you're going to see that in the Century Communities business. You won't see that in the Century Complete business. Century Complete will continue to be an asset-light, capital-light model that's focused on turns and returns on capital and keeping that price point, call it, around a $200,000 number. If we're getting into that move-up buyer, you're going to see that on the Communities side. And we have the ability to pivot to it fairly easily. I think that we're in markets where that land could be available, and we already have entrenched teams here that see a variety of deals. And we could give our land teams to go ahead to begin pivoting to that and acquiring that type of land. And I think that if we saw that becoming a viable and more profitable and stronger sector a couple of years from now, we could make that change if we chose to.

Great. Great. Good to hear that. Maybe just also shifting towards the growth opportunity. I had said you're well on your way to becoming a top 5 builder. I believe you stated that's your goal. Currently, you're #9, I believe, on the depth charts. Maybe you can kind of review for us your thoughts around future share gains, presumably going deeper in your existing set of communities. But if there's additional geographic areas or markets that you want to move into de novo, either through acquisition or on your own, how do you think about the share opportunity over the next 2 or 3 years? And is it primarily through going deeper or new markets or both?

I guess it could be a combination of both. I would say that for those watching at home, you look at Slide 4, that has our footprint, and you could see that with the exception of Denver, Atlanta and Las Vegas, we're not in the top 5 for various markets. So we have a great opportunity sitting right in front of us to gain market share in those markets, to continue to get deeper and really drive some additional profits to the bottom line. And I think that's where you're going to see us investing a lot of capital, and that's why we've been acquiring land to do so. Century Complete has the ability to quickly go into new markets. If you look at 2 years ago, we got into the Midwest, and we made a splash out in Arizona. Since then, Century Communities has followed suit and entered into the Phoenix market as well as the Northern Florida market, up in Jacksonville and the Panhandle. And so you continue to see some organic expansion that way. We do like to look at M&A as an opportunity for external growth to the platform. We've done 7 acquisitions, as I mentioned earlier, 6 of them being private, 1 being a public acquisition. And we think that that's one thing that kind of sets us apart, is homebuilding has been a little bit scarred on homebuilder M&A. But we think that we have a pretty good model for it and we've been able to execute extremely well on it, that we've only got about $30 million of goodwill sitting on our books from those 7 transactions, so we've been able to acquire at an attractive price and at the same time, that we've been able to go ahead and integrate them into our business, such that you're seeing the results we're seeing today as a result of that. We've been able to expand each of the footprints of the companies that we acquired and then assimilated into our business. And so it's kind of a long-winded answer for you, that I think it's going to be a little bit of a combination of both. Right now, we're heavily focused on growing our existing platform, our existing footprint, because we're only in the top 5 in 3 markets. So there are several markets where we have the ability to gain market share from our footprint. And then through Century Complete, we can enter into new markets. And then M&A is always an opportunity. I've got more than $1 billion of liquidity on my balance sheet that we're looking to deploy.

Right. Right. Certainly. And I think that really kind of leads into my next question, which is around gross margins. And at about 21%, what you're on track to do this year, it's a solid number, but still trailing most of your peers currently. And I wonder aloud if part of that has to do with maybe not being in the top 5 in most of your markets or what the other factors might be and how you think, to the extent that through deeper -- greater share in your existing markets or other initiatives, that number might change over the next 2 or 3 years.

Yes. I think there's definitely opportunity for that base-level gross margin to increase, that if you are #10 in a market versus #2 in a market, you have different buying power and your platform is different and you can generate different margins. And so I think you'll definitely look to see us finding ways to improve that gross margin across the portfolio as we've restructured and retooled Century Complete from when we acquired it a few years ago. The margin profile and pretax margin on that business has been improving. And I think, over the last several years, last many quarters, you've seen us really grow our return on equity, that whether I'm getting it out of the gross margin line or I'm getting it out of the SG&A line or out of financial services, we've been putting more and more to the bottom line, such that our ROE, now, call it, just a little bit north of 23% this last quarter, is starting to screen favorably amongst many of our peers.

Right. No, no, no. And that's an important point, and it actually, in some ways, speaks to the fact that you're doing a 23% or thereabouts today with some of the lower margins in the industry...

Right.

It speaks to future opportunity going forward. And...

Correct.

On that point as well, you hit on SG&A. That's the other part of the equation of an operating margin, as I'm told. And you're currently, right now, plus or minus, on track to do about 10% for 2021. The guidance is high single- to low double-digit range. So again, my superior math skills say the midpoint of that is 10%.

Yes. We're 12%.

So going forward, where could that number go? I'll leave it to you.

Yes. So we spent a lot of time over the past several years integrating a variety of acquisitions. And that takes a lot of time in dollars. So our SG&A was elevated during that time period, call it, '16, '17, '18. And you started seeing some benefits coming through in '19, '20, and we're really, really reaping a lot of benefits now as we've been able to drive some of the top line growth and we've stabilized the fixed cost structure for the SG&A side. And so printing 9.9% in Q1, it was a great result for us. We do think that we'll be somewhere, give or take, 10% for the year as we continue to look at it. As new communities come online later in the year, that will require some dollars, but we think that probably gets offset by some revenue dollars. So hopefully, we do keep that static. I think that as we look out over the next couple of years, there's no reason why we shouldn't be able to continue driving that lower, not only as a function of higher revenues, but just from the fixed cost side, let's do more with less. I've got -- I have 2 bosses that remind me continually that G&A dollars don't help shareholder returns. And so we're always looking for ways to limit those dollars and do things more efficiently, whether it's centralizing more functions here in the Denver office and really allowing the divisions to just build homes and really worry about land acquisition and construction and closing homes and doing more here or through different types of staffing arrangements or different software systems. We're always looking for a different way to skin the cat on this.

Right. Right. No, definitely. And it would seem that, yes, you're still in the middle of that journey. Last question for me, and we're kind of -- we have a little bit about 5, 6 minutes left. So again, I'll remind people in the audience, feel free to click on the Ask a Question button if you would like me to pass something along to Dave. But just kind of going back to Century Complete, it's interesting, with all the rapid growth that you've had, over the last 4 quarters, Century Complete remained at about 32% of your orders on average pretty consistently. How do you see the future of this segment as a percent of your overall business? Do you expect it to continue to grow kind of more in tandem and alongside Century Communities? Or could that number rise over time? And if so, what type of impact might that have on the financials?

I think we definitely have the ability to see that number rise over the coming quarters and years here in the near future, that we have been running kind of pretty stagnant, pretty constant at, call it, 1/3 of the business from an order and delivery perspective. But Dale and I have both been -- and Rob have been pretty vocal that we think Century Complete could represent 50% of our volume in the coming years, that as we are looking to take down more land, keep it off balance sheet in that model, that a 50% number, given the ability to grow it on an asset-light basis, is really attractive to us. And we think it's a great opportunity that's right in front of us now, that we're trying to capitalize on it. If I can grow that to 50% of my business, it is a high-return business, given that 100% of that land is off balance sheet. As soon as I bring it into the fold and I acquire the land, we pull permits and start putting homes on them. And so I'm looking to turn that capital quickly. And so ultimately, that would be another opportunity for us to be increasing the ROE and the ROIC of the business. So we're still very bullish on that segment of our business, in addition to the rest of our -- of the company.

And certainly, ROE and ROIC accretion is critical, I think, to driving valuation. Does that also bring with it a slightly lower gross and operating margin as well? Or as that business is scaled, is it approaching corporate average?

It's closer to the corporate averages now. If you can get some of the stuff that we disclosed in our 10-Q and 10-K, you can see that some of the operating margins have definitely come in much better than where they were in years past. And now that we've gotten into scale, retooled the way, so some of the internal functions worked, you're definitely seeing more dollars from the revenue to hit the bottom line at pretax and net income.

Great. Great. Well, that actually does it for me. We're probably just a couple of minutes off the end of our 35-minute session in either case. So I'm going to cut it off here. I think that really answered all my questions. So Dave, I want to thank you again for your time and participation today. We'll be continuing the afternoon at 3:55 p.m. Eastern Time with M.D.C., followed by Forestar Group at 4:40. Again, thanks, Dave. Appreciate it, and we'll see you again soon.

All right. Great. Thank you very much.

Thanks.