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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, welcome to the Century Communities Second Quarter 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. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to Hunter Wells, Vice President of Investor Relations for Century Communities. Thank you. You may begin.
Good afternoon. Thank you for joining us today for Century Communities second quarter 2020 earnings conference call. 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.
Certain of these risks and uncertainties can be found under the heading risk factors in the company's most recently filed annual report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at www.centurycommunities.com. The company undertakes no duty to update any forward-looking statements that are made during this call.
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. Management will be available after the call should you have any questions that did not get answered.
Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer; and David Messenger, Chief Financial Officer. Following today's prepared remarks, we will open up the line for questions.
With that, I will turn the call over to Dale.
Thank you, Hunter and good afternoon to everyone on the call.
On our last call in April, we described the strategic actions implemented to protect the health and well being of our team members, homebuyers, homeowners and trade partners, while we continue to build, sell and close homes across our national platform. We also discuss steps being undertaken to generate cash flow, reduce debt and increase our liquidity.
As we look back at those decisions, which were made rapidly and in a period of significant uncertainty, we're very pleased not only with the actions taken, but more importantly, with the exceptional second quarter results these actions generated including double-digit revenue growth, expanded profitability, and our highest quarter ever about new home deliveries and net new home contracts.
Following a 1% decline in April, May and June rebounded strongly with both months enjoying a 33% year-over-year increase in net new contracts, a trend which has even increased so far in July. Home sales revenues increased 23% to $747 million on a 26% improvement in deliveries to a record 2,480 homes.
Adjusted net income increased 71% to a record $40.3 million and absorptions increased an impressive 33% year-over-year to five sales per month per community, the highest rate in the company's history. In addition to our improved top and bottom line, we made significant progress on our goal of realizing cost efficiencies across our business.
SG&A as a percent of home sales declined to 11.6%, an 80 basis point improvement over the second quarter last year and 130 basis point sequential improvement compared to the first quarter of this year. We expect to realize ongoing savings from the cost reduction measures we took earlier in the year. We also took steps to strengthen our balance sheet by paying down the full $522 million on our line of credit and dramatically improving our net debt to net capital leverage ratio to 37.5%, a 910 basis point improvement from the first quarter.
Collectively these results are strong evidence of the adaptability of business model and our team's ability to execute on our playbook and navigate through a difficult and uncertain environment, while meeting the substantial ongoing demand for new homes at entry level price points across our national footprint.
Over the last two quarters, we've continued to expand our investment and employ the use of digital technologies to further serve homebuyers through online reservation and contracting capabilities, virtual tours and appointments, video walkthroughs, electronic earnest money transfers and the like. We have enhanced our online chat features that directly connect customers with onsite agents, where they may browse communities, ask questions and coordinate appointments.
Even with some sales offices still operating on an appointment only basis, through our online platform, homebuyers can not only explore our product offerings, but actually purchase the home and apply for a mortgage all with the click of a button and without the need to personally interface with a salesperson. Depending on a buyer’s preference, we offer the opportunity to meet face to face distantly or not at all.
Our financial services company also wrapped their digital efforts to provide a convenient virtual one stop financing and closing experience. Because of these increased capabilities, total company web traffic improved 66% on a year-over-year basis in the second quarter.
We've also been intently focused on carefully managing our supply chain to mitigate any potential interruptions. Our supply chain is built on a network of extensive national agreements and these relationships enable us to swiftly address any challenges that may arise.
Not only do our supplier partners provide us with preferential treatment in many cases, but if a building material becomes scarce, our team is adept at rapidly finding alternative materials at a comparable price to enable the project to move forward without delays or cost increases. As certain challenges arose during the second quarter, we successfully managed through these issues without incurring additional costs, or missing any closings.
The continued execution on our growth strategy and delivery of robust results is a reflection of the strength and resiliency of our business, and the ability of our team to be agile and adjust to unexpected circumstances. Throughout the second quarter, we saw a sequential month-over-month sales improvement due to our product positioning, the effective work of our sales teams and our robust online sales tools.
As the quarter progressed, we experienced decreases in our cancellation rate from a high of 21% to a low of 15% in June, averaging 19% for the quarter. The ongoing social distancing guidelines and remote working arrangements resulting from the pandemic have fueled demand for homes as we witness an outbound migration from both apartments and more urban areas taking place. Buyers are taking advantage of historically low interest rates, which for the first time in half century fell below 3%.
A lack of resale competition has helped demand within the new home market as resale inventory decrease 30% year-over-year nationwide in nearly every major new home market, while new home sales increased significantly. The homebuilding industry is one of the brightest spots in the economy, and is experiencing an extremely positive macro-environment. The opportunity to work remotely has allowed homebuyers to search for homes to purchase in less urban and less costly areas of the country.
We are confident these positive trends will help support continued demand for our homes. While this year has been marked by many unforeseen challenges, our team is committed to executing on long-term initiatives and increasing our market share across our national footprint as we further scale our business. In July, Century Communities was again ranked as the ninth largest homebuilder in the country, on BUILDER's Builder 100 list, and for a third year in a row, we were named the fastest growing public builder.
We believe these acknowledgments reflect not only the trust that homebuyers have placed in Century, but also the quality of our employees across our local sales centers, construction sites and various nationwide offices. We are truly grateful for our entire team, who have effectively maintained their focus and attention throughout this unprecedented year to deliver exceptional homes and quality service to our customers.
Looking ahead, we remain encouraged with our continued performance and competitive positioning across high potential markets. We are confident in our ability to drive further improvements in operational performance, deliver long-term value enhancement to our shareholders, and support our future growth over the balance of 2020 into 2021 and beyond.
I’ll now turn the call over to Rob to discuss our business and markets in more detail.
Thank you and good afternoon, everyone.
As Dale mentioned, the second quarter was one of tremendous accomplishments and record results within a very difficult environment. Not only did we increase adjusted net income 71% to a record $40.3 million or $1.21 per diluted share. We increased new home deliveries to a record of 2,480 homes a 26% increase, and net new home contracts to a record 2,664 a 22% increase.
Year-to-date, our net contracts and deliveries have increased 25% and 20% respectively over the first six months of last year. We ended the quarter with a backlog of 2,778 homes with $1 value of $963 million a 23% year-over-year increase. Across the 17 states in which we operate, we currently have no COVID-related homebuilding restrictions, and given the constraints supply, historically low interest rates and the rise of the exodus from both apartments and high cost areas of the country.
Our product portfolio was strongly positioned to meet the increased demand that we are experiencing at our entry level price points. In the second quarter, our Century Complete brand continued to scale and expand, delivering 835 homes up sequentially 34% while new orders increase 43% over the same period.
With our average sales price of $160,000 and penetration into 11 states, we are uniquely positioned among all public homebuilders to grow this brand and capture an increasing share of these new homebuyers seeking the ownership of a home at the most affordable level possible.
We have and will continue to make investments into our high growth asset-light Century Complete business line to support its future expansion both within and beyond our existing markets. We are seeing similar demand trends for entry level homes in our Texas region, as evidenced by a year-over-year 60% increase in absorptions, and net new contracts, as well as an 88% increase in deliveries.
The appeal of no state income tax, low cost of living, and increased opportunities for remote work has driven Texas to become a top destination for U.S. relocation. In fact, Austin, San Antonio and Houston are all ranked as top 10 cities for relocating millennial workers. Our Texas portfolio of new home offerings with ASPs in the 240,000 range has us well positioned to further capitalize on this robust demand.
Our mountain region which achieved a 14% year-over-year increase in net new contracts continues to perform well for us. Utah has the second lowest state unemployment rate in the country, and Salt Lake City continues to experience positive in migration trends. Century has built a significant top 10 market share position in this growing and vibrant market. We believe that demand within this high growth metro region will persist, supported by its diverse, healthy economy.
In Denver, sales growth and traffic increased throughout the quarter as stay at home restrictions eased. Even Las Vegas, which was probably our market with the highest percentage of interrupted employment enjoyed double-digit growth in net sales partially driven by continued in migration. These positive tailwinds resulted in strong performance in our mountain region, both for entry level as well as move up product with our backlog of homes increasing 31% year-over-year.
The Southeast region remains a high demand market with absorptions up 45% resulting in home deliveries and new order growth up 43% and 38% respectively. In fact, we experience year-over-year sales improvement each month in every one of our markets in this region. Century is the second largest builder in Atlanta and we have seen a resurgence in demand within this market, particularly within the entry level segment. We are also seeing robust demand across Charlotte and Nashville.
We closed the quarter with a strong backlog of homes at our Southeast region, which increased 34% year-over-year. Despite parts of California and Washington being one of the earliest and most severely affected areas in terms of shelter at home ordinances, closures and homebuilding restrictions. Our West region saw steady sequential improvement in new home demand as the second quarter progressed.
Deliveries and orders increased double-digits up 23% and 18% respectively and we ended the quarter with a backlog of 381 homes, an increase of approximately 30% on a year-over-year basis. Many employers across Washington and California, as in other areas of the country, have recently announced that their employees may work remotely for the foreseeable future and we believe this will likely drive homebuyers out of expensive cities to more affordable suburban and exurban areas, which will continue to support demand for our new homes.
Given the market uncertainty than existing, we made the decision early in the second quarter to deploy the use of incentives to drive an increased sales pace. With more market clarity, we discontinued this practice in June and have since increased prices and reduced incentives in every market. Even with this defensive approach through much of the quarter, our adjusted homebuilding gross margin was essentially flat year-over-year.
Looking at our backlog, we expect margins to improve in the third and fourth quarters. As we discussed on our last call in April, we ceased all investments and land acquisition, land development, and most spec home starts. As the quarter progressed, we restarted acquisition and development activities along with new homes. As of the end of the second quarter, we had nearly 35,000 owned and controlled lots of which 55% are already owned.
Looking ahead, we remain singularly focused on growing both of our brands to capture an increase share of entry level homebuyer demand. Century was built on a strong foundation of quality, affordable homes built in strategic high growth markets. And we will continue to carry out our initiatives to drive improved performance, and expand our market share position across our national platform.
I will now turn the call over to Dave who will provide a detailed update on our financial results and outlook.
Thank you, Rob.
During the second quarter of 2020, our adjusted net income increased to a record $40.3 million or $1.21 per diluted share, and net income increased 148% to a record $38.5 million or $1.15 per diluted share. Home sales revenues for the second quarter increased to $747.4 million, an increase of 23% compared to $608.6 million in the prior year quarter. This improvement in revenues was driven by a 22% increase in net new contracts to a company record 2,664 homes and a 26% increase in home deliveries to a company record of 2,480.
The average selling price of homes delivered for the second quarter 2020 decreased $8,000 to $301,400 compared to the prior quarter, which is consistent with our plan to capture additional share of homebuyers at entry level price points. Adjusted homebuilding gross margin percentage was essentially flat at 19.5% compared to 19.6% in the prior year quarter. Homebuilding gross margin percentage decreased 30 basis points to 16.9% from 17.2% in the prior quarter driven primarily by in and inventory impairment and slightly higher interest costs.
Looking ahead, we expect margins to improve as we have pulled back on our incentives and increased home prices in each market. SG&A as a percent of home sales revenue, improved 80 basis points to 11.6% in the second quarter, compared to 12.4% in the prior year. This was a result of our past and continued efforts to contain costs and improve the operating leverage of our company.
In the second quarter 2020, our financial services business generated $25.7 million in revenues, up 159% year-over-year. The business contributed $13 million in pre-tax income compared to $2.2 million in the prior year quarter. Our improved second quarter results were primarily due to a larger number of loan originations increased efficiencies in our financial services operation and the stabilization of the credit markets, which enabled us to recoup our approximately $3 million unrealized non-cash valuation loss that we reported in the first quarter.
For the second quarter, we benefited from strong margin performance, as well as increased loan closings resulting from both growth in our homebuilding business and continued increase in our capture rates across the platform. In the second quarter, we made substantial progress on strengthening and fortifying our balance sheet to enable our business to weather any ongoing challenges and economic disruptions related to the COVID-19 pandemic.
During the second quarter, as a result of the swift action we undertook in March and April, we were able to fully pay down the $522 million on our line of credit ending the quarter with approximately $220 million of cash and total liquidity of $860 million, which includes $640 million of availability under our credit facility. We feel that we are well positioned to continue to operate our business regardless of the environment.
Consistent with our previously communicated goal of reducing leverage and further strengthening our financial position, we made significant progress during the quarter. At quarter-end, our net homebuilding debt to net capital improved substantially to 37.5% compared to 46.6% at the end of the first quarter, and down significantly from 53.8% in the prior year quarter. In the second quarter, our tax rate was 23.3% compared to 25.6% in the same quarter, the prior year.
Given the strength of our second quarter results and continued sales momentum. We are providing full year guidance of deliveries to be in the range of 8,800 homes to 9,500 homes and home sales revenues to be in the range of $2.7 billion to $3 billion. Our deliveries will be weighted more towards the fourth quarter as a result of the delayed starts that occurred early in the second quarter.
Our recent results demonstrate a vigorous new homebuilding environment supported by positive tailwinds and rising demand across our geographically diverse footprint. Our business is uniquely positioned with an emphasis on serving the entry level homebuyer, a strong balance sheet and solid financial position to weather any changes across the broader macro-economy. We remain certain in our ability to deliver on our long-term strategic and financial objectives and look forward to enhancing value for our shareholders.
With that, I'll open the line for questions. Operator?
[Operator Instructions] Our first question is from Thomas Maguire with Zelman and Associates. Please proceed.
Thanks for all the color and great job navigating in unprecedented times. Just on the pricing side of the equation, I think the July commentary shows there weren't any issues on a companywide level. But were there any pockets on the geographic or price point basis where demand fell as you adjusted net prices? And then just maybe more broadly, can you give a sense of the magnitude for the recent adjustments and was this a one-time action how you think about it to reset after taking a step back with COVID or is there still more pricing power moving forward?
So Thomas this is Dale. When we look across the spectrum of all of our markets, they're all performing well. We have reduced incentives and increased prices across the whole platform. So there's nothing that was an outlier with the ability to do that.
As far as the incentives that we had on at the beginning of the quarter, it was really a function of just where we stood at that point. We were committed to moving homes and not knowing how things were going to play out. We certainly didn't want to get behind the curve.
So as we started getting more clarity as the quarter continued on, we started reducing the incentives and then in June, they were significantly reduced, prices were increased. And as we go forward, we don't see anything that constrains us from being able to continue to do that.
Got it, that's really helpful. And then just on the leverage, you made some really impressive progress this quarter and things got more done, you know than what was expected in terms of where you wanted to be in a relatively quick period of time. I guess, just to confirm you alluded to in the prepared remarks, but at today's level position, were you comfortable running in the current macro backdrop, and if so how do you think about allocating capital moving forward? Is there enough confidence in the market and the availability you know that that cash will go back into inventory or any thoughts on repurchases or kind of the various buckets of what we can do from here?
Thomas, this is Dave. I would say that you know from where we are today at 37.5% on a net leverage basis, we're comfortable with that, that while leverage can fluctuate from time-to-time and quarter-to-quarter. We think that where we are today the business can cash flow itself and operate and support our growth plans as we see over the next year or two.
As we look out for capital allocation, we definitely see an opportunity to continue growing the business that there's reasons for us to reinvest the cash flow back into the business, whether it's through inventory and land.
Our next question is from Michael Rehaut with JPMorgan. Please proceed.
Congrats on the results. Just wanted to get a sense for you had mentioned July order growth, better than May and June both of which were up 33%. Obviously, it's kind of a lot of focus around the exit rate. In other words, how June and July is been doing which obviously incredibly well across the board for the industry, but also trying to triangulate, the sustainability of that type of growth?
So it will be really helpful I think, for modeling and just setting expectations correctly if you give us a sense of is July kind of in the mid to high 30s or 40% or 50%, what type of degree of magnitude are we talking about and if that's driven in any part by an acceleration in community count or certain markets just getting even hotter?
Mike, it's Dave. I would say that, July we're almost 40% above last year. So we continue to see a strong trend, exiting May and June into July. And I would say it's across our markets. It's not just one market focus, nobody is dominating, that percentage increases. So it's really just the markets getting better and stronger as we've gone through the first 28 days of the month.
Thanks, Dave for that. And then also on the gross margins, appreciate the transparency there in terms of dipping a little bit sequentially because essentially if so there's increased incentives earlier in the quarter. At the same time, now you're looking at a nice improvement in pricing in June and I would assume into July?
You mentioned that you expect improvement in the 3Q and 4Q also any type of degree of magnitude be helpful there. And obviously, you started off the year, a little bit shy of 18%. You were actually doing above 18% in the back half of 2019. So any type of directionality there would be helpful also?
This is Dave again. I would say, directionally is going the right direction and we were at 19.5% on an adjusted basis, a little bit below 17% on a GAAP basis for Q2, and as we're pulling back incentives and moving prices, we do see gross margin and our backlog, climbing in Q3, but more so in Q4. So we do see some improvements, but order of magnitude that will really depend on what ends up closing, and how we round out the sales through the third quarter.
Okay, I appreciate that. One last one, if I could sneak one in more of a bigger picture for Rob or Dale. Obviously over the last few years, you guys have expanded nicely across several markets, primarily through acquisition. Has the landscape changed at all this year from your standpoint? I mean, obviously, over the last 12 months, you've talked about growing out Century Complete?
And maybe getting deeper and better leverage from and SG&A standpoint in your existing markets, is that still the plan or in terms of your primary focus or has the M&A meter kind of risen in the last six months and maybe some opportunistic markets that you wanted, would want to take another look at?
Mike, this is Dale - what we messaged before that our primary goals were to expand in Century Complete and deepen in all of our existing Century Communities markets, still remains the same. But with that said I mean, we're always optimistic we're looking at alternatives. And if we found the right M&A opportunity, we would certainly look at it very closely. But we don't think we need to rely on that as we did over the last five years or so in terms of our growth.
We've got a tremendous footprint. We've got depth in every one of our markets, but every one of our markets, we have the ability to pick up additional market share. And that's really where our focus is. And again, not to say we wouldn't do something else if it came, but we're really focused on growing our existing business.
Our next question is from Alex Rygiel with B. Riley FBR. Please proceed.
Thank you, and congratulations on a fantastic quarter. A couple quick questions here, first the Century Complete average selling price is up nicely both sequentially and year-over-year. Can you comment broadly on the margin profile of this business relative to last year, and relative to the legacy Century business?
Well in terms of last year, it's continuing to increase as we scale that business. And we've continued to add efficiencies in both the operation of it, as well as in connection with the construction of our product. We've gone through, we've revamped some product to make it not only more consumer acceptable, but also to reduce some costs. And so, I think you'll see that continue to improve as we go forward.
And it's just - when you look at where our price point is, and a lot of cases, we don't have a lot of new home competition, which allows us to continue to move our prices up which we intend to do.
And then as it relates to sort of your business in the West and the mountain region, could you, is there an opportunity for you to step down to a lower price points that could accelerate growth even greater?
Well candidly, we've been doing that Alex for at least the last 18 months or so. And our new offerings are at more attractive lower price point offerings compared to where we were as I mentioned, just about 18 months ago. So we have continued to do that, and we'll continue to do that in the future.
And then lastly, leverage ratio below 40% that's fantastic. Is this the new norm or if you still have an interest to pushing it back closer to 50% if the opportunity arises?
Alex this is Dave. As I mentioned earlier I think, leverage will continue to fluctuate from quarter-to-quarter, but we're comfortable with where we are right now. And we think it funds the business.
Our next question is from Alex Barron with Housing Research Center. Please proceed.
I wanted to focus in on the financial services business. So this quarter, you guys had a pretty significant increase both in the revenues and the profits. And I was hoping you could expand on that and whether that's something we can expect going forward?
I would say we had a very successful second quarter given how we look back at April and May and as the builder we began moving a lot of homes to the system, called a lot of incentives on those homes to the usage of Inspire, our in-house mortgage company that drove up the capture rate, which then obviously drives up revenue and profitability. And with the credit markets helping on and still being able to secure good margins on selling those loans off into the secondary marketplace allowed us to capture a lot of that profit.
I would say, going forward, it will be a little bit of a dynamic of how much the incentives are tied to the usage of Inspire. But we are seeing increased application capture rates within that business. And so, while that - the profitability of that business will be somewhat dependent on the ultimate sale of the loans. We do expect to be seeing, increased capture rates on the application and ultimately, on the closing side from that business as the quarters progress.
So what was the capture rate this quarter versus say last quarter or last year, don't give a sense?
From an application capture rate, because that's probably more your steady rate, the steady rate of business. On a Century side, we were just over 80% at 82%. On a Century Complete side, we were about 54% for a blended 74% across sales that came through in the second quarter.
How does that compare versus last quarter?
What I've got right in front of me is the last year that you know you look at last year and the application capture rate for Century was probably, it was in the mid 60s and the Century Complete businesses we just started was in the high teens, low 20s. So we nearly, we did more than double on the Century Complete side.
Okay, so pretty significant there. Now I guess this quarter, every region has had some nice growth but the Wade Jurney seemed to be a little bit less or I guess you guys called Century Complete now versus last year, but obviously sequentially it was pretty strong. Do you feel like the opportunities for that segments of the business are as good as for the rest of the Century or similar or higher like how do you guys look at that right now?
In terms of opportunity, we think that it's really part of our business has a significant amount of opportunity. What you saw in the second quarter is really a function of that business because we don't inventory land is highly dependent on as closing land and starting new homes and since we don't sell homes before we start them, that is really what impacted that business. It was the most impacted by the pause we took on land acquisition.
And then so now that land acquisition across the board in both of our brands is undergoing then you'll see that recover as we go into the third quarter and beyond.
And our next question is from Jay McCanless with Wedbush Securities. Please proceed.
So the first question I had, what should we expect for a community growth rate in the legacy Century business for the rest of this year?
Our community count was down obviously, sequentially on year-over-year, but we ended up selling through some communities faster than originally expected. Now that we've restarted some developments, we'd like to see some of those communities come back online in the third and the fourth quarter. We don't have any guidance out there, but we are trying to push as much development as we have. Right now, as many communities we have under development, we're trying to push them to fruition. So they can monetize the assets by putting homes on them.
Because that was and Alex stole part of my question on Century Complete because the sales growth rate orders were up for the quarter, but lagged the rest of your business and the backlog was down for the second quarter in a row? And is it all related to not being able to buy and start land like you talked about before? And if the problem is, you need to buy land and get those homes started? How much more of a lag is there going to be until Century Complete catches up to the rest of your business?
The lag that occurred is really the lag that was there. We had a significant number of controlled lots, but we just won’t bring it on balance sheet. So as a result, we couldn't start the homes. So once we turn that back on in terms of closing the controlled lots, then that issue completely took care of itself.
So, we should expect a little bit faster sales pace as we go through the rest of the year something more in line with Complete being in line with the legacy assets. Is that what we should expect?
Yes, yes.
Yes.
Okay. The other question I had, just looking at the guidance and backing into an average sales price. Looks like there's going to be a step higher in your average sales price for the back half of the year versus the front half. Is that just strictly mix and the Century Complete being behind the growth rate of the legacy business or is it just timing on when some certain higher price communities are going to be delivering homes?
It's both, it's just a matter - it's really a matter of mix and how much the Century Complete comes through versus the legacy business. And as we have new communities come online, what does that do to our overall price point?
This concludes the Q&A portion. I will like to hand the call back over to Dale for closing remarks.
I'd like to close by thanking our entire team for their ongoing commitment to Century and our valued homebuyers throughout this challenging period. Their hard work, dedication and resilience is deeply appreciated and inspires our entire organization to deliver superior quality homes, provide an exceptional home buying experience for our customers, and achieve another year of robust growth and substantial value creation for our stakeholders.
Thank you for taking the time to join us today. We appreciate your continued support and investment and look forward to speaking to you next quarter.
Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.