Century Communities, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparative periods are the corresponding 2021 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
Century Communities develops, builds and sells single-family homes in 17 states under its Century Communities and Century Complete brands. It also provides mortgage, title and insurance services, and develops multifamily rental properties through Century Living. The company reported five homebuilding segments, Financial Services, and Corporate.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1,166.1 million | $1,042.9 million | $2,182.5 million | $2,051.5 million |
| Homebuilding revenue | $1,143.3 million | $1,013.0 million | $2,133.4 million | $1,988.0 million |
| Income before tax | $213.6 million | $152.1 million | $402.4 million | $283.2 million |
| Net income | $158.7 million | $117.9 million | $301.2 million | $219.6 million |
| Diluted EPS | $4.78 | $3.47 | $8.97 | $6.47 |
| Homebuilding gross margin | 28.2% | 23.9% | 28.2% | 22.5% |
Q2 revenue rose 11.8% and net income rose 34.6% year over year; for the first half, revenue rose 6.4% and net income rose 37.2%. Higher average selling prices and improved homebuilding margins contributed to earnings growth. Adjusted homebuilding gross margin excluding interest and inventory impairment, a non-GAAP measure, was 29.4% in Q2 versus 25.7% and 29.4% for the first half versus 24.4%.
The company delivered 2,713 homes in Q2 and 5,061 in the first half, down 2.1% and 9.1%, respectively. Average delivery prices increased to $418,200 in Q2 and $419,500 for the first half. Backlog at quarter-end was 4,767 homes valued at $1.98 billion, up 7.2% in units and 12.2% in value year over year.
- Cash flow: Operating activities used $102.9 million in the first half, versus $143.4 million generated in 2021, principally reflecting a $493.6 million increase in inventory. Investing activities used $25.3 million, including $13.6 million for rental-property development. Financing activities used $96.3 million.
- Liquidity: Cash and cash equivalents were $78.0 million and cash held in escrow was $82.5 million at June 30. Management reported liquidity of $819.5 million, including cash, escrow cash and Credit Facility availability.
- Debt: Total debt was $1.36 billion, including $1.01 billion in notes payable, $141.0 million drawn on the $800 million revolving facility, and $209.0 million under mortgage repurchase facilities. Net homebuilding debt to net capital was 33.6%, versus 26.3% at year-end 2021.
- Capital returns: The company repurchased 1.8 million shares for $98.3 million in the first half and declared dividends of $0.20 per share in each of Q1 and Q2.
- Taxes: The estimated 2022 annual effective tax rate was 25.6%; management attributed the increase from the 2021 full-year rate of 22.2% primarily to expiration of the Energy Efficient Home Credit.
Material changes versus the prior period
Despite stronger reported earnings and margins, demand weakened during Q2. Net new home contracts declined 28.4% to 2,233, and the monthly absorption rate fell 38.6% to 3.5 homes per community. For the first half, contracts declined 21.3% to 5,177. Management cited rising mortgage rates, inflation and macroeconomic uncertainty, with some increase in cancellations. Financial Services revenue fell 23.7% in Q2 and 22.7% for the first half, reflecting fewer mortgage originations and lower gain-on-sale margins. First-half operating cash flow shifted from positive to negative, as investment in homebuilding inventory increased.
Owned and controlled lots totaled 75,551, down 5.4% from December 2021; the company said it terminated certain lot contracts that no longer met its investment criteria. It began construction on a 425-unit multifamily project in Colorado, expected to be available for leasing in 2024.
Outlook, risks and contingencies
The filing provides no numerical earnings or delivery guidance. Management said future housing demand is uncertain but cited the shortage of new and resale homes, favorable demographics, its affordable-price-point offerings and land positions as potential supports. It expects to fund liquidity needs for at least the next 12 months with cash, operating cash flow and available financing, while cautioning that external capital may not be available on acceptable terms.
Key risks include further increases in interest rates and inflation, reduced affordability and demand, cancellations or difficulty converting backlog into deliveries, and higher land, labor, materials and construction costs. Supply and municipal or utility delays continued, although management said their severity moderated in Q2. Management noted it may not be able to offset future cost increases with higher selling prices if housing conditions weaken.
Outstanding land purchase and option contracts covered 40,418 lots with an approximate value of $1.7 billion; deposits were $66.8 million, including $36.5 million non-refundable. Letters of credit and performance bonds totaled $564.0 million. The company reported ordinary-course legal claims, primarily construction-related, and did not expect them to materially affect its financial condition, results or cash flows. No inventory impairment was recorded in the first half of 2022. The company reported compliance with the covenants on its credit facilities.
Important facts for investors to verify
- Whether weaker net contracts and absorption persist, and how cancellations affect conversion of the $1.98 billion backlog.
- Whether elevated margins and selling prices can be maintained as mortgage rates, affordability and demand change.
- How inventory investment and lot commitments affect operating cash flow, liquidity and leverage.
- The effect of lower mortgage volumes and gain-on-sale margins on Financial Services earnings.
- Availability and cost of revolving, mortgage-repurchase and construction financing, including the near-term maturities of mortgage repurchase facilities.
- Potential exposure from land commitments, performance bonds, warranty claims and other contingencies.