(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Some of the statements included in this Quarterly Report on Form 10-Q (which we refer to as this "Form 10-Q") constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events and results of operations could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as "may," "will," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential," the negative of such terms and other comparable terminology and the use of future dates. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors.
The forward-looking statements included in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:
?the impact of the COVID-19 pandemic on our business operations, operating results and financial condition, as well as the general economy and housing market in particular;
?economic changes, either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;
?shortages of or increased prices for labor, land or raw materials, including lumber, used in housing construction;
?a downturn in the homebuilding industry, including a reduction in demand or a decline in real estate values or market conditions resulting in an adverse impact on our business, operating results and financial conditions, including an impairment of our assets;
?changes in assumptions used to make industry forecasts, population growth rates, or trends affecting housing demand or prices;
?continued volatility and uncertainty in the credit markets and broader financial markets;
?our future operating results and financial condition;
?our business operations;
?changes in our business and investment strategy;
?availability and price of land to acquire, and our ability to acquire such land on favorable terms or at all;
?availability, terms and deployment of capital;
?availability or cost of mortgage financing or an increase in the number of foreclosures in the market;
?delays in land development or home construction resulting from adverse weather conditions or other events outside our control;
?impact of construction defect, product liability, and/or home warranty claims, including the adequacy of accruals and the applicability and sufficiency of our insurance coverage;
?changes in, or the failure or inability to comply with, governmental laws and regulations;
?the timing of receipt of regulatory approvals and the opening of projects;
?the impact and cost of compliance with evolving environmental, health and safety and other laws and regulations and third-party challenges to required permits and other approvals and potential legal liability in connection therewith;
?the degree and nature of our competition;
?our leverage, debt service obligations and exposure to changes in interest rates and our ability to refinance our debt when needed or on favorable terms;
?our ability to continue to fund and succeed in our mortgage lending business and the additional risks involved in that business;
?availability of qualified personnel and contractors and our ability to retain key personnel and contractor relationships;
?taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance; and
?changes in United States generally accepted accounting principles (which we refer to as "GAAP").
Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described above and in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K, and other risks and uncertainties detailed in this report, including "Part II, Item 1A. Risk Factors", and our other reports and filings with the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those
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matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q.
As used in this Form 10-Q, references to "we," "us," "our," "Century" or the "Company" refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates.
The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends. Some of the numbers included herein have been rounded for the convenience of presentation.
Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 17 states. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand targets a wide range of buyer profiles including: entry-level, first and second time move-up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade opportunities. Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet and generally provides no option or upgrade opportunities. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete. Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, primarily to our homebuyers have been identified as our Financial Services segment.
While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, our offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments. Additionally, we prefer building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing us to more appropriately price the homes and deploy our capital.
Impact of COVID-19 Pandemic
The outbreak of the novel coronavirus, (COVID-19), which was declared a pandemic by the World Health Organization on March 11, 2020, created significant volatility, disruption, and uncertainty across the nation and abroad.
The homebuilding industry started to experience slowing sales trends in mid-March through April of 2020 at the outset of the widespread uncertainty concerning the pandemic. However, home sales sharply rebounded in May and June of 2020, aided by historically low interest rates, lack of supply, and renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas, which desire was likely accelerated by the COVID-19 pandemic. These positive trends and market dynamics continued throughout the remainder of 2020 and through the first nine months of 2021.
While these positive trends and market dynamics continued through the first nine months of 2021, we recognize that long term macro-economic effects of the pandemic that could ultimately impact the homebuilding industry have yet to be known. There is still uncertainty regarding the extent and duration of the COVID-19 pandemic and future increases in COVID-19 positive cases and hospitalizations could result in altering of the "re-opening" plans of numerous state and local municipalities, which may include government restrictions, such as "stay-at-home" or "shelter-in-place" directives, quarantines, travel advisories and social distancing measures. Despite overall strong demand and sales of our homes during the first nine months of 2021, continued future demand is uncertain as economic conditions are uncertain, in particular with respect to unemployment levels, and the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the U.S. economy, unemployment levels, financial markets, credit and mortgage markets, consumer confidence, interest rates, availability of mortgage loans to homebuyers, wage growth, household formations, levels of new and existing homes for sale, cost of land, labor and construction materials, demographic trends, and housing demand, and other factors, including those described elsewhere in this report. A decrease in demand for our homes would adversely affect our operating results in future periods, as well as have a direct effect on the origination volume of and revenues from our Financial Services segment. In addition, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventories in the future.
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Driven by the continued strong demand for our homes through the first nine months of 2021, we ended the third quarter of 2021 with no amounts outstanding under our revolving line of credit, $491.9 million of cash and cash equivalents, $29.2 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 23.1%. Additionally, we increased our land acquisition and development activities during the first nine months of 2021 to bolster our lot pipeline and support future community growth, which resulted in 75,537 lots owned and controlled at September 30, 2021, a 68.0% increase as compared to September 30, 2020 and a 51.2% increase as compared to December 31, 2020. Although the trajectory and strength of our markets have continued to remain strong and allowed us to pass on increased costs through price increases and increase our margins, we continued to experience materials shortages and delays and material and labor supply cost pressures during the first nine months of 2021 that could negatively impact our margins in future periods. While the impact of the COVID-19 pandemic will continue to evolve and at any given time recovery could be slowed or reversed by a number of factors, we believe we are well positioned from a cash and liquidity standpoint not only to operate in an uncertain environment, but also to continue to grow with the market and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of debt refinancing and/or strategic opportunities as they arise.
Results of Operations
During the three and nine months ended September 30, 2021, we delivered 2,332 and 7,890 homes, respectively, with an average sales price of $395.1 thousand and $365.2 thousand, respectively. These deliveries represent increases of 1.7% and 19.1%, respectively, as compared to the three and nine months ended September 30, 2020 and represent increases of 18.6% and 16.3%, respectively, in average sales price as compared to the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2021, we generated $958.0 million and $3.0 billion in total revenues, respectively, approximately $145.8 million and $428.9 million in income before income tax expense, respectively, and approximately $114.0 million and $333.5 million in net income, respectively, in each case representing substantial increases over the respective prior year period.
For the three and nine months ended September 30, 2021, our new home contracts, net of cancelations, totaled 2,742 and 9,317, respectively, a 14.4% decrease and 12.9% increase over the same respective periods in 2020. As of September 30, 2021, we had a backlog of 4,866 homes, a 31.5% increase as compared to September 30, 2020, representing approximately $1.9 billion in sales value, a 46.8% increase as compared to September 30, 2020.
In August 2021, we completed a private offering of $500.0 million aggregate principal amount of our 3.875% senior notes due 2029, which were issued at 100% of their principal amount and we received net proceeds of $493.8 million. The indenture covering these notes contains certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the 3.875% senior notes due 2029 is due August 2029, with interest only payments due semi-annually in February and August of each year, beginning on February 15, 2022. In addition, during the three months ended September 30, 2021, we redeemed $400.0 million in outstanding principal of our 5.875% senior notes due 2025 at a redemption price equal to 102.938% of the principal amount, plus accrued and unpaid interest, totaling $414.8 million. The redemption transaction resulted in a loss of $14.5 million, which is presented in loss on debt extinguishment in the condensed consolidated statement of operations. ?
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The following table summarizes our results of operations for the three and nine months ended September 30, 2021 and 2020.
(in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Consolidated Statements of Operations: Revenue Home sales revenues $ 917,337 $ 760,239 $ 2,881,404 $ 2,080,364 Land sales and other revenues 11,594 2,105 35,522 25,516 928,931 762,344 2,916,926 2,105,880 Financial services revenues 29,101 32,017 92,586 67,534 Total revenues 958,032 794,361 3,009,512 2,173,414 Homebuilding cost of revenues Cost of home sales revenues (682,012) (627,364) (2,203,187) (1,718,545) Cost of land sales and other revenues (6,977) (2,046) (23,996) (18,597) (688,989) (629,410) (2,227,183) (1,737,142) Financial services costs (17,666) (14,511) (54,135) (36,841) Selling, general, and administrative (90,154) (85,806) (281,961) (246,131) Loss on debt extinguishment (14,458) - (14,458) - Inventory impairment and other - - (41) (1,691) Other income (expense) (1,004) 251 (2,790) (2,533) Income before income tax expense 145,761 64,885 428,944 149,076 Income tax expense (31,784) (15,121) (95,406) (34,736) Net income $ 113,977 $ 49,764 $ 333,538 $ 114,340 Earnings per share: Basic $ 3.38 $ 1.49 $ 9.90 $ 3.43 Diluted $ 3.31 $ 1.48 $ 9.69 $ 3.41 Adjusted diluted earnings per share(1) $ 3.63 $ 1.48 $ 10.02 $ 3.48 Other Operating Information (dollars in thousands): Number of homes delivered 2,322 2,283 7,890 6,627 Average sales price of homes delivered $ 395.1 $ 333.0 $ 365.2 $ 313.9 Homebuilding gross margin percentage(2) 25.7 % 17.5 % 23.5 % 17.3 % Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) 27.2 % 20.0 % 25.3 % 19.9 % Backlog at end of period, number of homes 4,866 3,699 4,866 3,699 Backlog at end of period, aggregate sales value $ 1,922,784 $ 1,309,449 $ 1,922,784 $ 1,309,449 Average sales price of homes in backlog $ 395.1 $ 354.0 $ 395.1 $ 354.0 Net new home contracts 2,742 3,204 9,317 8,256 Selling communities at period end(3) 186 214 186 214 Average selling communities(3) 185 216 186 223 Total owned and controlled lot inventory 75,537 44,963 75,537 44,963 Adjusted EBITDA(1) $ 177,376 $ 86,998 $ 502,755 $ 212,839 Adjusted income before income tax expense(1) $ 160,219 $ 64,885 $ 443,443 $ 152,351 Adjusted net income(1) $ 125,282 $ 49,764 $ 344,812 $ 116,852 Net homebuilding debt to net capital (1) 23.1 % 32.9 % 23.1 % 32.9 %
(1) This is a non-GAAP financial measure and should not be used as a substitute for the Company's operating results prepared in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under "Non-GAAP Financial Measures." An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.
(2) Homebuilding gross margin percentage is inclusive of a $0.0 million and $1.7 million inventory impairment for the three and nine months ended September 30, 2020, respectively, which is included within inventory impairment and other on our condensed consolidated financial statements. We recognized no inventory impairment for the three months ended September 30, 2021 and nominal inventory impairment for the nine months ended September 30, 2021.
(3) The selling communities as of September 30, 2020 has been adjusted from prior year presentations to reflect 104 selling communities in our Century Complete segment, which business was acquired in 2018, and for which the number of selling communities was previously not disclosed.
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Results of Operations by Segment (dollars in thousands) Average Sales Price of Income before Income Tax New Homes Delivered Homes Delivered Home Sales Revenues Expense Three Months Ended Three Months Ended Three Months Ended Three Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 2021 2020 2021 2020 West 409 316 $ 655.8 $ 596.5 $ 268,219 $ 188,484 $ 60,915 $ 13,627 Mountain 509 514 $ 500.6 $ 429.3 254,794 220,680 50,561 28,695 Texas 274 307 $ 313.1 $ 249.0 85,778 76,440 11,884 6,904 Southeast 325 421 $ 403.8 $ 362.7 131,228 152,683 20,004 13,414 Century Complete 805 725 $ 220.3 $ 168.2 177,318 121,952 24,838 7,826 Financial Services - - $ - $ - - - 11,435 17,506 Corporate - - $ - $ - - - (33,876) (23,087) Total 2,322 2,283 $ 395.1 $ 333.0 $ 917,337 $ 760,239 $ 145,761 $ 64,885 Average Sales Price of Income before Income Tax New Homes Delivered Homes Delivered Home Sales Revenues Expense Nine Months Ended Nine Months Ended Nine Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 2021 2020 2021 2020 West 1,113 862 $ 621.2 $ 558.2 $ 691,369 $ 481,134 $ 129,279 $ 42,716 Mountain 1,805 1,327 $ 462.0 $ 415.8 833,916 551,771 158,355 67,789 Texas 1,079 951 $ 281.9 $ 247.3 304,158 235,137 39,554 22,012 Southeast 1,322 1,304 $ 393.2 $ 351.7 519,762 458,577 69,540 33,743 Century Complete 2,571 2,183 $ 207.0 $ 162.0 532,199 353,745 69,657 17,159 Financial Services - - $ - $ - - - 38,451 30,693 Corporate - - $ - $ - - - (75,892) (65,036) Total 7,890 6,627 $ 365.2 $ 313.9 $ 2,881,404 $ 2,080,364 $ 428,944 $ 149,076
During the three and nine months ended September 30, 2021, our West segment generated income before income tax expense of $60.9 million and $129.3 million, respectively, a 347.0% and 202.6% increase, respectively, over the respective prior year period. These increases were driven by increases in home sales revenue of $79.7 million and $210.2 million, respectively, and increases of 1,548 basis points and 982 basis points, respectively, in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenues on a partially fixed cost base and (2) increased gross margins on home sales. The revenue increases during the three and nine months ended September 30, 2021 were generated by both increases in the number of homes delivered of 29.4% and 29.1%, respectively, as well as increases of 9.9% and 11.3%, respectively, in the average sales price per home. During the three and nine months ended September 30, 2021, the increases in the number of homes delivered were driven by favorable market dynamics across our markets. During the three and nine months ended September 30, 2021, the average sales price increases were driven by both the mix of deliveries within individual communities, as well as increased pricing power as a result of strong market dynamics.
During the three and nine months ended September 30, 2021, our Mountain segment generated income before income tax expense of $50.6 million and $158.4 million, respectively, a 76.2% and 133.6% increase, respectively, over the respective prior year period. These increases were driven by increases in home sales revenue of $34.1 million and $282.1 million, respectively, and increases of 684 basis points and 670 basis points, respectively, in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenues on a partially fixed cost base and (2) increased gross margins on home sales. The revenue increase during the three months ended September 30, 2021 was primarily generated by a 16.6% increase in the average sales price per home, and the revenue increase during the nine months ended September 30, 2021 was generated by a 36.0% increase in the number of homes delivered, as well as an 11.1% increase in the average sales price per home. During the three months ended September 30, 2021, the number of homes delivered remained relatively consistent with the prior year period. The increase in the number of homes delivered during the nine months ended September 30, 2021 was driven by favorable market dynamics across our markets. The average sales price increases for both comparison periods were driven by the mix of deliveries within individual communities, as well as increased pricing
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power as a result of strong market dynamics.
During the three and nine months ended September 30, 2021, our Texas segment generated income before income tax expense of $11.9 million and $39.6 million, respectively, a 72.1% and 79.7% increase, respectively, over the respective prior year period. These increases were driven by increases in home sales revenue of $9.3 million and $69.0 million, respectively, and increases of 482 basis points and 364 basis points, respectively, in the percentage of income . . .
Oct 28, 2021
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