Century Communities, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Century Communities develops and sells single-family homes across 17 states through Century Communities and Century Complete; it also provides mortgage, title and insurance services and is developing multifamily rental properties through Century Living.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total revenue | $1,144.3 million | $958.0 million | +19.4% |
| Homebuilding revenue | $1,121.0 million | $928.9 million | +20.7% |
| Net income | $144.5 million | $114.0 million | +26.8% |
| Diluted EPS | $4.44 | $3.31 | +34.1% |
| Homebuilding gross margin | 24.8% | 25.7% | Down 0.9 percentage points |
| Deliveries / average selling price | 2,630 / $425,300 | 2,322 / $395,100 | Deliveries +13.3%; price +7.6% |
For the first nine months, revenue was $3,326.8 million, net income was $445.6 million and diluted EPS was $13.41, versus $3,009.5 million, $333.5 million and $9.69, respectively, in 2021. Nine-month homebuilding gross margin rose to 27.0% from 23.5%; adjusted margin excluding interest and inventory impairment was 28.2% versus 25.3% (non-GAAP).
Cash flow, debt and liquidity
- Nine-month operating cash flow was negative $67.1 million, compared with positive $82.8 million in 2021, primarily reflecting a $597.5 million increase in inventory investment.
- Investing cash outflow was $37.3 million, including $18.1 million for multifamily rental property development. Financing cash outflow was $108.5 million. Cash and cash equivalents declined to $98.2 million from $316.3 million at year-end 2021; cash, cash equivalents and restricted cash totaled $109.3 million.
- Total debt was $1,376.6 million, including $1,016.5 million in notes payable, $165.0 million drawn on the $800 million revolving facility and $195.0 million under mortgage repurchase facilities. Senior notes include $500 million at 6.75% due 2027 and $500 million at 3.875% due 2029.
- Net homebuilding debt to net capital was 32.5%, up from 26.3% at December 31, 2021. Management reported liquidity of $817.2 million, comprising cash, escrow cash and available revolving credit capacity. The company reported compliance with applicable debt covenants.
Material changes and operating trends
- Net new home contracts fell 51.9% in Q3 to 1,318; nine-month contracts declined 30.3% to 6,495. The reported cancellation rate was 35% overall: 31% for Century Communities and 41% for Century Complete.
- Backlog declined 29.0% year over year to 3,455 homes, valued at $1.38 billion. Selling communities increased 16.7% to 217, while owned and controlled lots fell 16.9% year over year to 62,778.
- Financial services revenue declined 20.0% in Q3 and 21.8% for the first nine months, driven by fewer mortgage originations and lower gain-on-sale margins. Q3 originations declined 23.6% to 1,375 loans; the homebuyer capture rate was 66%.
- SG&A increased 22.8% in Q3 to $110.7 million, while remaining approximately 9.9% of home sales revenue.
Management outlook, risks and unusual items
- Management cited higher mortgage rates, inflation and macroeconomic uncertainty as drivers of weaker sales, higher cancellations and reduced affordability. It increased buyer incentives and expects them to pressure homebuilding margins during the first half of 2023; it also said it had taken steps to reduce fixed costs.
- Management stated that future housing demand is uncertain but believes its affordable product mix, land positions and liquidity support resilience. It provided no specific financial guidance. Management expects to fund liquidity needs for at least 12 months through cash, operations and available or potential external financing, while noting financing may not be available on acceptable terms.
- Hurricane Ian modestly affected Q3 deliveries, primarily in Century Complete markets; management expected further Q4 disruption to supply chains, municipalities and labor availability in affected regions.
- The Inflation Reduction Act extended energy-efficient home tax credits. The retroactive extension benefited Q3 taxes by $13.6 million. The company also recorded $4.4 million of other expense from terminating land contracts that no longer met investment criteria.
- Construction-defect self-insurance reserves increased to $13.9 million from $5.1 million at year-end 2021. Management cautioned that long claim periods and uncertain claim costs could cause actual losses to differ from estimates. Ordinary-course legal claims were not expected by management to have a material adverse effect.
Key facts investors should verify
- Whether the sharp decline in contracts and higher cancellation rates persist, and how these trends affect backlog conversion and deliveries.
- Whether buyer incentives and changing home prices further reduce gross margins, particularly in the first half of 2023.
- Inventory investment, operating cash flow and the ability to maintain liquidity as demand changes.
- Debt levels, floating-rate borrowing costs, revolving-facility availability and refinancing access.
- The adequacy of construction-defect reserves and the extent of any Hurricane Ian-related delivery or cost impacts.
- The persistence of financial-services declines and the extent to which tax-credit benefits affect reported earnings.