Greetings and welcome to Century Communities Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference call is being recorded.

I will now turn the conference call 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 earnings conference call for the second quarter ended June 30, 2021..

Thank you, Hunter, and welcome everyone to our quarterly conference call. We are pleased to report our exceptional start to the year as continued, resulting in record second quarter results and our most profitable quarter ever.

In the second quarter, we generated over a billion dollars in home sales revenues, a 34% increase and the highest ever achieved in a single quarter. Net new home contracts increased 17% to 3120 homes, driven by a 56% increase in sales from our Century Complete brand and home deliveries increased 12% to 2771 homes, both of which are quarterly records.

Net income improved 207% to $118 million, and pre-tax income improved 204% to $152 million both company records. We’re extremely pleased with the health of our balance sheet. Stockholders equity increased to $1.5 billion from $1.1 billion and our net homebuilding debt to net capital ratio improved to 23% compared to 37.5%, liquidity up 1.3 billion.

We ended the quarter with a backlog of 4446 homes, a new record valued at $1.8 billion, increases of 60% and 83% respectively. Given our disciplined business model, over 96% of these homes had already been started at quarter end. And across our two brands, less than 15% of our home deliveries were sold as pre-sales.

For new second quarter sales, only 10% of the homes were pre-sales. There are many benefits to this model, particularly during periods of increased material and input costs, such as what we recently experienced with lumber.

Back homes also simplify the design process for homebuyers, promote shorter build times and accelerate the cash flow and profits recognized upon the closing of the home..

Thank you, Dale. As we head into the second half of the year, we are extremely pleased with our second quarter and year-to-date results. Given constructive market dynamics and our substantial backlog of nearly 4500 homes. We fully expect the results in the second half of 2021 will be as positive as the first half.

We are experiencing broad based demand across all of our markets, resulting in an absorption pace of 5.7 sales per community per month. Demand for homes today exceeds the available supply, and sales pace is heavily influenced by the number of homes actually available for sale.

Given that we only presale homes in limited communities, our preference to sell homes later in the production cycle and the reduced number of unsold homes we have completing in the third quarter due to strong sales earlier in the year, we expect sales in Q3 to be down on a year-over-year basis.

However, we have placed a strong emphasis on moving new subdivisions into a position of being able to start homes and as a result, expect sales to rebound in the fourth quarter, when we will have more homes available to be purchased.

We ended the quarter with 184 selling communities and moving forward expect our community count to increase over the balance of the year, ending up more than 15% from the second quarter level.

In keeping with our desire to increase the number of active selling communities, our total lot inventory continued to expand during the quarter, ending at 65,610 lots an additional 8074 lots from the first quarter. We will remain conservative in our approach to land acquisition when considering potential opportunities.

Our underwriting criteria emphasizes controlled rather than own lots, utilizes absorption rates lower than today's current rates and does not include home price appreciation.

This is the sixth quarter in a row we've increased our overall percentage of control lots, ending the quarter with 43,049 lots under control or 66% of our total pipeline, compared to only 45% a year ago, reflecting our ongoing focus on a capital efficient land portfolio and our highest percentage since going public in 2014.

This strategy is also reflected in our inventory composition, where the percentage of our inventory dollars invested in land and land development has declined for four consecutive quarters any most recently at less than 38% of total inventory dollars, as we have increased our investment in homes under construction.

As we expand our lot positions to support our future trajectory, our preference for controlled lots over owned is key to our low-risk, land-light high return business strategy. These control bots also provide us with tremendous flexibility to adapt to changing market conditions as they may occur in the future..

Thank you, Rob. During the second quarter, net income increased 207% to a record $117.9 million, or $3.47 per diluted share, compared to $38.5 million and $1.15 per share in the prior year quarter. Second quarter pre-tax income was $152.1 million an increase of 204% and pre-tax margin was 14.6% compared to 6.5% in the prior year quarter..

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Michael Rehaut with JPMorgan..

Hi, this is Maggie on for Mike. Congrats on the quarter and thanks for taking my questions.

First question, I just was hoping you could talk a little bit more about the efforts to kind of meet your sales and how your sales pace trended toward the end of the quarter, specifically, the sales pace came in a good bit higher than what you were seeing in the update at the beginning of June.

So, I was hoping you could give a little bit more color there. Thanks..

Sure, be happy to. This is Dale, Maggie. While we don't intentionally meter sales, the similar effect kind of occurs because we only release a small number of homes at a time in a subdivision, so that we can increase sales prices with each new release.

We did see sales pickup in the last three weeks of June and that's just really a function on the number of homes that we had available to be purchased..

Got it. Thank you.

And second, just on gross margins, I think you said that you expect kind of current margins to remain relatively stable through the back half of the year, could you talk about kind of the outlook for cost inflation that you're baking into that and to the extent later this year that costs do come down? Is there the potential to see a bit of a lift to those gross margins?.

Yes. So, Maggie, this is Dave. So, the way we kind of look at that, given the fact that 85% plus of our homes are spec, are sold and delivered under our spec construction basis. We've got a decent idea of where our costs are going to be coming in.

And so, when we look at our backlog and what we're selling today, we feel comfortable saying that our margins should be relatively stable and constant through the next couple of quarters compared to the first half of this year. And you're going to see increased lumber prices roll through in Q3 and Q4. So, we've taken that into account as well..

Thank you. Our next question comes from Deepa Raghavan with Wells Fargo..

Can you clarify your comments on Q3 deliveries guidance you provided? I don't know if I heard that right.

And also, how should we think about Q4 rebound just given the widespread guide that you are still maintaining 10.75 to 11.75, high-end guide provided?.

Hi, this is Dave. I think what you heard was Dale's prepared comments talking about sales in Q3. Our closing guidance right now is still at a 10.750 to 11.750, and we fully expect to meet that range through the back half of this year but we didn't talk about anything regarding that like you're mentioning..

Okay.

So, is there like a production constraint that's actually causing you to kind of not fulfill despite the healthy order activity that you're seeing and the healthy backlogs or just how is it still -- some of those reopenings of community counts that you had issues with in the past few months, that's actually causing the delivery cadence to not move higher? Just curious, is there any color there you could provide?.

Sure. Deepa, this is Dale. In terms of closings, we've been impacted like all the other homebuilders with both supply chain and municipal limitations. So when we look at that, that's the reason notwithstanding the strong sales on the strong market. We are seeing anywhere on average in select markets from delays of two weeks to four weeks.

And it's a variety of challenges that come up in the supply chain. And from market-to-market, they're not always the same and from time-to-time, even within the same market, they're different ones. So, that's why, when we look at our closings, we have factored in the fact that we've got some elongation of our cycle times..

Thank you. Our next question comes from Alex Rygiel with B. Riley FBR..

Great quarter, gentlemen.

First question, you mentioned in the remarks that you expect prices to moderate, can you expand upon that a little bit?.

Well, prices have gone up significantly as I think everybody knows so far this year. And while we currently have not reached a point where we can't continue to increase prices; we're just anticipating that that's going to occur at some time in the future. When that is, we don't know, because we haven't reached it.

But we're just -- as we look forward, we don't think we can just continue to raise prices on an ongoing basis. However, the good news is, we're starting to see some relief, well, certainly on lumber and we're not seeing the same pressure on other input costs that we had earlier in the year and so we think that it all balances itself out..

And then, could you comment a little bit on land cost and how inflation and price inflation has affected land costs?.

Well, like you would imagine, Alex, land costs have risen. They are at a high point in the cycle for sure.

But with that said, we're looking at structuring deals a little differently, as well as when you look at our 66% of controlled lots in our portfolio, not only do we have room to run and really grow community count in the future but we feel like we have mitigated risk by the way we've structured things. But yes, land prices have increased..

Thank you. Our next question comes from Alan Ratner with Zelman & Associates..

Nice quarter and thanks for taking my questions. First, I would love to follow up on that prior question about the comments about pricing power. And again, I don't think that's too earth shattering of a statement to say that we can't continue at the rate we're at right now. You mentioned you haven't hit that point of elasticity yet in terms of demand.

I'm curious, when you look at your -- primarily, your entry level buyers in Century Complete, how does the credit profile of that buyer look today on these higher home prices, recognizing of course that incomes have not gone up nearly to the extent that you guys have been raising prices over the last year?.

Well, we look at it, the credit profile really hasn't changed. And we've raised prices on the Century Complete line as we have in the Century Community line.

But as you mentioned, we believe there is price elasticity in the market and if you have certain people that are priced out of -- certain of our offerings, we think other people that are priced out of other people's even higher offerings dropdown down into our price point.

And as a leader in offering affordable lower-priced homes, we think that's an advantage for us..

Got you. Okay, that's helpful. Second question, I think you made a comment, when you were talking about your expected order trajectory for the remainder of the year that you're going to have more inventory available for sale in the fourth quarter.

And I would imagine some of that's at least being driven by the community count growth that you guys are expecting, since you probably built up some inventory ahead of those community openings.

So we're hearing similar comments from just about every other builder, just about every builders guiding for community count growth through the remainder of the year.

We know even though you guys don't necessarily do this, a lot of builders are building up spec inventory and kind of holding them off the market for the time being until they hit a point of construction where they have more visibility into their costs.

So, I'm curious if you've given any thought to what impact that could have on the market if all of the builders do kind of come forward with more supply over the next three to six months and how would you respond if the demand for that inventory, perhaps not as strong as you've been seeing over the last few months as inventory has been so constrained?.

Well, Alan, the demand we're seeing is, it remains extremely strong. And our sales pace is really impacted by the number of homes that we actually have available to purchase.

So when we look at the interest list that we have in our various communities and the feedback that we're getting from our people on the ground, we think there is a tremendous amount of demand that's out there that just hasn't been able to be satisfied with the available supply.

So as we look ahead, I'm sure that other builders will have additional inventory but we think there is plenty of demand to satisfy all of that inventory that's going to be coming onto the market. The other thing with the production delays that are out there, all that inventory starts getting pushed out a little further too.

And some of those delays, none of us really know where they are, or what that's going to be as we continue to move forward. If there is a finite number of labor resources and material resources and if everybody is trying to increase their inventory, then the actual deliveries for everybody is going to get pushed out even further..

Thank you. Our next question comes from Alex Barron with Housing Research Center..

Good job in the quarter.

On your last comment about if everybody starts more homes things will get pushed out further, can you talk about how many homes you guys started this quarter versus last quarter and what's your thought process for the second half of the year in terms of starts? Is it the plan to also meter starts or to accelerate starts, how are you guys thinking about it?.

Well, in terms of starts, we started more homes in the second quarter than we did in the first quarter. As we look forward to the balance of the year, we are going to be starting homes based on what we are comfortable is going to be absorbed.

And as I said a few moments ago, so far what we're seeing is the demand will certainly be able to absorb all the homes that we offer for sale. If we start seeing that some things change, then we'll back off on that but that's not what we're anticipating..

Okay, great. So, obviously, I think, I don't know 75%, 80% of your sales are typically specs. And in the past it was usually the opposite where you would have specs, people show up and they buy them and they closed. Now, it's the other way, where sometimes people show up and there isn't enough inventory but your business model hasn't changed.

So at what stage are you guys releasing the homes for sale now, those same specs as soon as you start it, you're willing to put it out in the market or is it more like one or two months before it's ready to get delivered?.

We, in many cases, we're releasing them later in the production cycle. The one thing that we want to make sure that we do is that we've got our costs locked in before we set a price on that home and release it for sale.

And so, that's really the gating item is to make sure that we're comfortable with where our costs are, so that we know that we can appropriately price it. But in general, we are releasing homes a bit later in the production cycle..

Thank you. Our next question comes from Jay McCanless with Wedbush..

The first question I had, could you reiterate or repeat the community count guidance I have heard part of it but not the whole guidance..

Yes. This is Dave. We ended the second quarter with 184 communities and we expect to be up 15% by the end of this year..

So that would get us to something, the low-twos for your actual fourth quarter ending number?.

You'd be a little over to 210..

Okay, all right. I just want to make sure on that.

And then, the second question I had; for homes that you're starting now, with the delays that you've talked about, are most of those starts getting sold during the quarter or is there -- some of those are pulling over into the fourth quarter now with some of the delays you're are having to deal with or into the next quarter after you've started it?.

Yes. We don't sell every home in the quarter that we started. And really because, as I said earlier, I mean we're releasing things later in the production cycle and some of that is dependent on the subdivision, how many homes we have under construction and we're mindful of the supply chain challenges and labor challenges.

And it doesn't make any sense to start homes and move a home forward and sell a home, if we are getting delayed to a point where we don't have enough labor or materials in a particular market to be able to move that amount of inventory..

Got it. And then, the last question I had, with the complete business, is the availability of finished lots, do you support that business improving, are you finding because I know you've all gone into some small markets, Panhandle, Florida and some places like that.

Are you finding a larger supply or the developers in some of these smaller markets able to bring more product for Century to purchase?.

Yes. We're finding that. And Jay, if you just look at the numbers on a year-over-year basis, we're up 80% in that business to an owned and controlled of almost 15,000 lots. So we've really increased and as a reminder, we only do finished lots there. So, we've really increased our number of lots.

And we have, of course, like anything else, as I said previously, land is competitive now but we have been able to compete and get the positions we need..

Thank you. Our next question comes from Alex Barron with Housing Research Center..

Yes. Thanks for taking my follow-up. So I mean this quarter you guys had a very strong margin surprise or upside versus last quarter. And I'm guessing part of that is that you had these homes started in probably in 2020 and then the prices went up and you guys had already locked in the cost so you benefited from it.

So would you expect that same sort of dynamic to play out in the next couple of quarters or is it going to be more muted because now the lumber costs can be flowing through?.

Hey, Alex. This is Dave. No, I think, what we had said earlier was, as we look at the back half of the year and how we've been pricing, what we see in backlog, we expect our margins in quarters three and four to be relatively constant with what we've been producing in the first half of the year.

So I don't think you're going to see some of those skyrocket but we'll be able to still produce healthy margins out of the homebuilding business..

Okay.

And on the SG&A side, I've seen several builders have been cutting back commissions toward brokers and even toward sometimes their internal sales people, are you guys doing either of those things?.

Alex, we've got in all of our markets, we've got deep realtor relationships and we value those. Although as we've seen our competitors in many of the markets reduce the commissions that they paid to third party realtors, we followed suit in a number of markets as well. Operator Thank you. There are no further questions at this time.

I would now like to turn the line back over to Dale for any closing remarks..

I want to take a moment just to recognize the resiliency and agility of our entire team. Their commitment and dedication enabled us to achieve our most successful and profitable quarter ever. This impressive performance would not have been possible without them. We'd also like to thank you all for your time today.

We appreciate your continued support and investment and look forward to speaking to you again next quarter..

This concludes today’s conference. You may disconnect your lines at this time and log out..