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Greetings, welcome to the Century Communities Third Quarter 2020 Earnings Conference Call. Please not 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 third 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 everyone. The improvement in market conditions that we experienced in the latter half of the second quarter continued and even strengthened throughout the third quarter. Demand for our homes was exceptionally strong across our entire national platform of diversified and high growth markets. We achieved multiple milestones in the third quarter, including record net new home contracts, record third quarter home sales revenues, record third quarter net income, and our highest pre-tax net income quarter ever.
Our home deliveries grew 21% to a third quarter record 2,283 homes and net new home contracts increased 57% to 3,204 homes, the most in our history. Home sales revenues increased 32% to $760.2 million, with total revenues increasing 35% to $794.4 million, another company record. In addition to realizing double digit top line growth, we generated impressive profitability expansion. Pre-tax income was a record $64.9 million and our pre-tax net income margin was 8.5%, a 240 basis point improvement over the prior year and a sequential 180 basis point improvement from the second quarter.
EBITDA increased 65% to a company record $87 million, reflecting increased cash flows as we improved our net home building debt to net capital ratio to 32.9%, down 20.9 percentage points from 53.8% in the third quarter last year, and a further 460 basis point sequential improvement, compared to 37.5% at the end of the second quarter. Our expanded profitability and increased cash flows are compelling evidence for success in achieving lasting efficiency gains, as we continue to benefit from our larger scale and the operational improvements enacted over the past few years.
SG&A as a percent of home sales declined to 11.3% from 12.7% in the third quarter of last year, and on a sequential basis improved 30 basis points from the second quarter. In addition, adjusted homebuilding gross margin percentage increased sequentially 50 basis points to 20%, primarily due to improved home price appreciation across our markets. Looking ahead, we expect to see continued margin improvement, as well as further efficiency gains for our previously enacted initiatives.
Century is well-positioned to benefit from multiple industry tailwinds that will sustain our growth through 2021 and beyond. The primary factor helping housing is historically low interest rates, currently below 3% for the first time in nearly half a century. Year to date, approximately 80% of our total deliveries [were at] entry level price points. These buyers typically evaluate purchasing a home, my monthly payment perspective, and often in relationship to rental expense.
With the cost of borrowing at unprecedented lows, many buyers are moving up their timeline to purchase a home and secure a low interest rate that they can benefit from for years to come. As the Federal Reserve recently reiterated their commitment to maintaining low rates, it is expected that mortgage rates will remain favorable over the next several years. The U.S. also continues to experience a severe housing supply shortage, a condition which has only been exacerbated by the recent COVID-19 health crisis. Rarely have there been fewer homes for sale with U.S. home sale inventory reaching a 40 year low just last month, while challenging for buyers, low supplies [favorable to Century] and other home builders, as it bolsters new home demand.
Across all of Century’s markets the number of homes available does not exceed a three month supply with majority of markets between one and two months of supply. This limitation in home supply is also contributing to price appreciation. We are seeing more millennials become buyers as they reach the prime age for new household formation, a trend which is expected to further drive entry level new home demand.
In the third quarter, over 60% of Century's total loan originations were for buyers between 25 and 45 years old. The U.S. population of millennials represents a key home buying group that is expected to grow incrementally over the next decade. The recent pandemic has accelerated the outbound migration for apartments and urban areas to the suburbs. Due to social distancing orders earlier this year, many consumers spent months confined within their homes, and are now prioritizing increased living and outdoor space in their decision to purchase a home.
Additionally, the opportunity to work remotely has allowed homebuyers to search for homes to purchase in less urban and less costly areas of the country. These trends are fueling a shift from urban areas to the suburbs. And we expect this to positively support increased demand for our homes. In more ways than one, 2020 has been transformative for our society, particularly in how the COVID-19 health crisis has resulted in many of us spending more time at home than ever before.
We are witnessing a shift in consumer lifestyle preferences from where we live, to how we live, to how we buy homes, and even how we spend our money. All of which directly benefits builders such as Century.
I’ll now turn the call over to Rob to discuss these consumer shifts and our business in more detail.
Thanks, Dale. Our team has demonstrated enormous agility and impressive execution by quickly stepping up to accommodate and prioritize these evolving consumer preferences. For example, we recently announced a program to offer dynamic flex spaces or increased adaptability, such as versatile workspace layouts, built-in desks, and additional shelving and storage. We've innovatively added these flex spaces to utilize a single space for multiple purposes without requiring additional square footage, helping to maintain the affordability of our homes.
We're pleased with our team's productivity and ability to accommodate these new home trends, while continuing to deliver homes at entry level price points. This progress would not have been possible without them, and we thank our entire team for their dedicated efforts. We've continued to bolster the investment in our online platform to better serve homebuyers through the use of enhanced digital technologies as consumers have become increasingly receptive to a virtual home buying experience.
In the third quarter, our total web traffic increased 69% year-over-year, a trend we expect to continue enable further SG&A improvement. As a result of these digital and other efforts, we generated 3,204 net new contracts during the quarter, the highest number of quarterly sales in our history, and which represented a 57% year-over-year increase. We were especially pleased to see the broad based nature of this improvement with our Century Communities and Century Complete brands up 56% and 58% respectively.
In fact, as we look at our markets across the country, they are all doing very well in a demand environment that accelerated as the third quarter progress was sequential monthly increases in the number of net new contracts. September sales increased over 75% compared to the same month in the prior year and up from the 47% increases we saw in July and August. While the sales momentum remains strong, we expect the increase for October to be in the 30% to 40% range.
As you may recall, in mid-March, we made the decision to incentivize the sale of our spec inventory. By May, we pivoted and since that point, we've successfully pushed price in every market achieving incremental margin improvement each month on new sales. As a result of these efforts, adjusted gross margins increased 50 basis points on a sequential basis to 20% in the third quarter. Given the current strength of the market, we expect to deliver gross margin improvement through the end of the year.
We believe Century has the unique capability to be both a quickly growing and increasingly profitable company as positive demand continues to support our sales momentum. Our total land position increased 29% in the third quarter to nearly 45,000 lots of which over 50% of these lots are finished.
In keeping with our desire to emphasize a land-light strategy, our mix of controlled lots versus owned also improved sequentially to 56%, compared to 45% in the second quarter. This attractive land position will enable us to capitalize on the long runway of opportunities ahead of us and meet the broad base demand we are experiencing across our markets.
Given the uncertainty that existed at the beginning of the second quarter, we stopped all new spec starts of homes for a period of time. This pause most affected our Century Complete brand, since in this business model we did not pre-sell homes. However, when demand began to accelerate in the second and third quarters, we were able to quickly begin starts to address the rapidly improving environment, which resulted in our Century Complete business generating in excess of 1,000 quarterly net sales for the first time in its history.
With our home starts up 73% over the prior year quarter, we ended the third quarter with a record backlog of 3,699 homes valued at $1.3 billion, which are respective increases of 35% and 53% over the prior year. We are pleased with the performance of both our brands and believe they are well-positioned to continue delivering record results for the balance of the year and beyond.
Looking ahead, we are intently focused on growing century complete into an even more substantial part of our overall business. We particularly like this business line for its asset light nature and sole focus on serving the housing needs of those homebuyers at entry level price points. Since we only purchase finished lots and avoid pre-sales, we have greater visibility in a home's cost so we can precisely price it. This approach also reduces inventory dollars, improves cash flow, and helps moderate some of housings cyclicality as it enables us to quickly pivot and react to changing market dynamics.
Near term, we're focused on leveraging our strategic investments to drive further growth and enter 2021 as a stronger and even more efficient organization with a return on equity of approximately 16% at the end of Q3; our goal is to move it even higher. Our nearly one day in, in liquidity reduced leverage and strong balance sheet with no near term maturities will fund and support our future growth.
We plan to utilize increasing cash flows to reinvest in our business and support working capital needs, while we increase home construction to meet strong new home demand. We believe our financial discipline, operational excellence, and continued focus on growth will serve us well and allow us to seize the opportunities that lie ahead.
I'll now turn the call over to Dave to discuss our financial results in more detail.
Thank you, Rob. During the third quarter of 2020, net income increased 84% to a third quarter record of 49.8 million or $1.48 per diluted share. Pre-tax income was $64.9 million, an increase of 86% and the highest in the company's history. Home sales revenues for the third quarter increased to 760.2 million, an increase of 32%, compared to 573.9 million in the prior year quarter.
Total revenues increased 35% to a record 794.4 million. This improvement in revenues was driven by a 21% increase in home deliveries to a third quarter record of 2,283, which was accompanied by a 57% increase in net new contracts to a company record 3,204 homes, and a record backlog of 3,699 homes valued at $1.3 billion increased to 35% and 53% respectively.
The average selling price of homes delivered to the third quarter of 2020 was $333,000, compared to $303,500 in the prior quarter. The increase can be attributed to price increases and a reduced percentage of Century Complete deliveries as a result of the previously discussed pause in starting homes earlier in the year. Adjusted homebuilding gross margin percentage was 20%, compared to 20.6% in the prior year quarter.
On a sequential basis, adjusted home building gross margin percentage improved 50 basis points from the previous second quarter, and homebuilding gross margin percentage was 17.5%. Looking ahead, we expect continued margin improvement through the balance of this year as we have seen all of our divisions increasing pricing and offsetting material and labor cost increases.
SG&A as a percent of home sales revenue improved 140 basis points to 11.3% in the third quarter, compared to 12.7% 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 third quarter of 2020, our financial services business generated $32 million in revenues, compared to 10.4 million in the third quarter 2019. The business contributed 17.5 million in pre-tax income, compared to 2.2 million in the prior year quarter.
Our Q3 results were primarily due to a larger number of loan originations and closings, increased spread on loans sold, and the initiation of a mortgage servicing rights portfolio, which is valued at $1.8 million. The increase in loan closings resulted both from growth in our home building business and a continued increase in our capture rate across the platform.
In the third quarter, we continued to fortify the resiliency of our business by strengthening our balance sheet. We ended the third quarter with approximately $315 million of cash and total liquidity of $955 million, which includes our available and undrawn 640 million unsecured revolving credit facility. Consistent with our goal of reducing leverage and strengthening our financial position, we ended the quarter with a net homebuilding debt to net capital ratio of 32.9%, compared to 37.5% at the end of the second quarter, and down significantly from 53.8% in the prior year quarter.
In the third quarter, our tax rate was 23.3%, compared to 22.4% in the same quarter the prior year. Given the strong third quarter performance, we are increasing our full-year guidance. We now expect deliveries to be in the range of 9,300 to 9,600 homes, and home sales revenues to be in the range of $2.8 billion to $3 billion. Year to date, we’ve achieved top line growth, expanded profitability, and operational improvements across our organization.
Century is more strongly positioned than ever before to capitalize on the sustained new home demand across our national footprint. As we more deeply penetrate our markets and grow our share, we are confident that our positive momentum will continue enable us to further realize operational efficiencies. Looking ahead, we expect to deliver a long runway of top line growth and expanded profitability as we benefit from enduring long-term demand trends.
With that, I'll open the line for questions. Operator?
[Operator Instructions] The first question is from Michael Rehaut of JPMorgan. Please go ahead.
Hi, this is [Maggie] on for Mike. Congrats on the quarter. My first question is on the cadence of your order growth. I think you mentioned that after September was up more than 75%. October is on track to increase about 30 to 40%. So, I was wondering if there any dynamics that you can call out there, or if that’s just normal seasonality kicking in, or if that's maybe a result of some more price increases kind of sticking? And is there any difference there in the slowdown between the Century Complete and Century Traditional brands?
Hi Maggie. This is Dale. What we are seeing is really balanced across both brands. And we don't see anything other than just normal seasonality. You know, plus, there's a lot going on in the overall national scene right now. And, but you know, to see this step down a little bit in October is pretty typical.
Got it. Thanks. And second, just on the price increases that you're you mentioned, could you give us an idea, maybe the rate of those increases, and if there were any differences across the regions there?
Well, in general, it's no different than what we're always doing. And that's we're pricing down to the subdivision level. And depending on the absorptions that we have, really depends on how often that we have price increases. So, in a lot of communities we’ll institute a price increase, you know, every four or five sales. In other communities, we'll do it more on a timing basis; maybe you know, once every other week, something like that. So, when we look at that, there's really not a lot of consistency. It really just depends on the subdivision and the absorptions that we're getting out of that.
Got it. Thank you.
Thanks.
The next question is from Alex Rygiel of B. Riley FBR. Please go ahead.
Thank you and fantastic quarter gentlemen.
Thanks Alex.
Thanks Alex.
Couple of quick questions. First, land availability is becoming more challenging across the industry. It's not necessarily evident in your results, but can you expand upon why you think maybe you're more successful at finding land and sort of what does that pipeline of future land purchases look like?
So Alex, we basically, in Q2, put a hold on land and yet we had a lot of good opportunities that were close to the finish line, but we just, you know, put a pause button on that. As the demand continue to pick up, and, you know, we saw the market showing some really great progress, we started really pushing land knowing that all of our competitors were going to be doing the same thing, which is what has happened. But as a result of having, you know, a lot of those relationships and a lot of those deals already farther along, we were able to actually sequentially grow almost 30%, from Q2 to Q3 on our land.
And going forward, we're continuing to look at great opportunities. We have a good pipeline, but we're also being very picky on the type of deals we're doing. As you can imagine in a competitive environment things can get a little frothy. And so, we're very focused on finding the right deals on the right terms, and still working along that [asset-like] approach. And so far, that's worked pretty well for us.
And your success with Century Complete has also been fantastic, can you talk a little bit about how many states you're in now, how many new markets you plan on entering in 2021, and sort of where we stand on that front?
Yeah, we're in 11 states right now. And it's - when we look at that, that is a – that's a big focus that we have for 2021. As we, you know, we've spent part of the past time getting everything set up within that business line, to be able to continue to really expand it geographically. Recently, within our Florida region, we've expanded into Jacksonville; we've expanded into the panhandle. And those are markets that we've already entered. We were already in Florida in the number of markets. So it just made a lot of sense to expand there.
What we have is a strategy for geographic expansion that we're moving through on an orderly sequential basis. And so, you'll see us enter a number of new markets and a number of new states in 2021.
In our [nav front], your ASPs and your backlog for Century Complete have been growing nicely over the last couple quarters, can you talk about the success there? And also the impact that could have on your total company ASP over the next 12 months?
Well, I would expect that the ASPs and Century Complete are going to continue to rise a bit. You know, the one governor on that is that we really focus on trying to be the lowest new home alternative that a homebuyer has. And in many of our cases, we're pricing really against re-sales and not against other new homes. So with that in mind, we're always very conscious of making sure that we do keep our price points down. But with that, when you look at the low interest rates that we're experiencing, to raise prices, $3,000, $4,000, $5,000 is very meaningful to us. Yet, when you look at the impact to the homebuyer, it really is not that significant. So, that's something that we think that we have upward movement to continue doing that as we go forward.
Thank you very much.
The next question is from Thomas Maguire of Zelman and Associates. Please go ahead.
Hey guys, great job on the quarter and impressive execution all the way around.
Thanks Thomas.
Just on community count, you know, you guys are obviously focused on [adding lot], just building on last question and really successful there, but selling through a lot of communities at the same time. So, how do you think about the ability to bring a lot, you know, that are now tied up to a place where they can be active and how community count trends from here?
Hey, Thomas, it’s Dale. I would tell you, you know, as we look at the fourth quarter here, you know, we ended with 110 communities at the end of Q3. We've got about another 10% of those that we're going to open up in Q4 and obviously that will be offset by [indiscernible] that we sell through, but with that being said, we do expect to continue growing community count into 2021 and 2022, based on the land pipeline that we've got today.
Got it. That makes a lot of sense. And then just, you know, as a follow up to that, what's the appetite for M&A right now and just what are you seeing in that environment, you know, is that an avenue to help with lots, you know, a more competitive land environment and just the continuity of growth or how do you think about M&A today in kind of the environment and what's going on?
You know, pretty much the way we've always done it. You know, it's something that we look at, we look at opportunities, our primary focus is growing our business organically. When we look at M&A, not that we wouldn't do something that added another market, most likely would be somewhere where we were already operating, which really makes it in a much easier transaction. But, you know, the – again, the primary focus remains as it has for sometime on growing organically. We've got room to grow in every one of our markets. Every one of our markets is growing. And that's really where our focus is.
Got it. Thanks, guys. [Indiscernible]
Thank you.
The next question is from Alex Barron of Housing Research Center. Please go ahead.
Yeah. Hey, guys, congrats on the strong quarter. My question on the financial services segments, you guys have clearly seen some pretty significant progress versus previous quarters, I was just curious, you know, how sustainable that is there, something that's more of a one-time nature, you know, just kind of what to expect there. And also on gross margins, you know, whether there's any reason that, you know, [you could have the same] – the same level into next quarter?
Yeah, this is Dale. So, on the fixed services side, I think we've pretty well – we've built that out pretty well throughout our platform. And given where our capture rates are right now, I would say that, you know, where we are right now, maybe kind of a good place to model. The one thing I would – just would tell you about is, you know, keep in mind that this quarter, we did start a mortgage servicing portfolio. So that had a roughly $2 million bump in those numbers. So, if you're going to be modeling something, I’d take the $2 million out, because that'll just fluctuate a little bit each quarter based on fair values.
Regarding margins, as we look at our backlog at the end of the quarter, we do see margin rising, you know, increasing a little bit through the end of the fourth quarter into the first quarter of 2021, but that's consistent with us taking price increases throughout the summer.
Okay, great. And as far as the mix of your business right now, obviously, you know, the Century Complete brand has been growing significantly and it seems like everybody's looking for affordable housing, is that something that you think can sustain a higher than company average growth rate? You know, even as we look into future years?
Definitely. I mean, that's certainly our plan. And as Dale pointed out, you know, we've gone into new markets in Florida, we're looking at additional markets to go into as well. And so, with that, yeah, we definitely see that as a growth engine and a higher percentage of the mix going forward.
Now, that product, you know, has a significantly lower than average price point, are you seeing more competitors, you know, trying to enter that or is there any reason why you think they're not doing so?
You know, the landscape, the homebuilding landscape is competitive really across the board. And so, when we look at that, I mean, we have competition in the Century Complete, just as we have in the Century Communities business. But as I said earlier, we really try to price the Century Complete home below other new home builders where we can, and when we do that, then we're really competing against resale. And so, while we're not always able to do that, that's the place that we really like to be able to position ourselves.
Okay, great. Well, look forward to next quarter. Thanks.
Thanks, Alex.
The next question is from Jay McCanless of Wedbush. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my question. Just wanted to ask about the guidance. First, it looks like based on the new mid-point that there's going to be a sequential deceleration in the ASP. Like I'm coming up with a [high 290s] numbers, is that correct? And is that related to the additional Century Complete homes that are supposed to close this quarter?
Jay, I think depending on how you're modeling it's going to be a combination of sensory complete, you know, having increasing closings on a sequential basis in Q4 versus Q3 and then becoming a higher mix related to the overall deliveries for the portfolio. You're looking at the third quarter and given the pause we did in Q2 related to Century Complete that produced a lower than average number of closer to Century Complete as a percent of the overall deliveries. As Century Complete grows in the fourth quarter, since we've restarted their spec business, we would expect to see them grow as a percent of the overall deliveries that will in turn drive down the ASPs.
And I apologize, I think you’ve said this already, but we should expect gross margin to grow sequentially, even though you're going to be delivering more of the Century Complete product in the fourth quarter?
Correct.
And then just wanted to ask in terms of some of the costs you're seeing, whether it's [lumber], or some of the other materials, how are you feeling about your pricing power relative to keeping up with those costs? And then also, the other question I have is just around, I know you guys do most expense, but for what you are doing on the to-be built side, how are your cycle times looking there?
So, basically on the direct costs, we've seen lumber come down, you know, as everybody else has as well. We've been able to keep up on our increases on our directs with our increase on sales price. So that part, we feel good, which has allowed us to sequentially continue to increase our margins. But it's like anything else Jay in homebuilding, you know, you have lumber that spikes, and now it comes down, and then something else will come up. And we're just used to that, that's just part of it. So, with that, we've been able to maintain our spreads and increase our margins. So, we feel good about that aspect of it.
In relation to cycle times, we are mostly on a spec build, you know, we're very cautious on [guard starts] on where they are in the process from a permitting standpoint, and everything else. So far we have not seen any significant elongation in our cycle times, and that's something we're looking at very closely to make sure we don't see that.
And then actually, if I could ask one other question, and I can't remember if you all given this out before, but is there a long term goal for like percentage of total closings? I guess the best way to think of that, where you all want Century Complete to be over the next two years to three years?
You know, we've never really set either one that we've announced or even one internally on where we expect that to be. What we do expect is that it'll grow at a faster level than the Century Communities brand, but the Century Communities brand has such a head start on it that, you know, it’s – as that continues to grow on its own, but you know, ultimately, if we could get to a 50/50, I think that would actually be a good mix. But, you know, it's just got to play out over time and just see how that all works.
Got it. Okay, I'll get back in queue. Thank you.
Thank you.
This concludes the question and answer session. I will now turn the line back over to Dale for some brief closing remarks.
Thank you, operator. We want to acknowledge the tremendous work of our entire team, who've risen to the challenge of meeting record housing market demand, under unprecedented circumstances, all while providing exceptional support and superior customer service to our homebuyers. We thank them for their commitment to Century, which has enabled us to deliver impressive year to date results. We expect to end the year strongly and are poised for long-term growth and financial out performance in 2021 and beyond. Thank you all for your time today. We appreciate your continued support and investment and look forward to speaking to you next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.