High interest rates did not deter strong third quarter results for Century Communities. The home builder delivered sequential gains in home deliveries, gross margins, and earnings during the quarter and reported net orders in August and September both exceeded July levels, even with the spike in interest rates.
“Despite rising interest rates, our sales activity performed in line with our expectations and typical seasonality, demonstrating the strong underlying demand that remains for affordable new homes,” chairman and co-CEO Dale Francescon said during the company’s earnings call.
The ninth largest company on the 2023 BUILDER 100 list recorded profits of $83.2 million, or $2.58 per share, in the third quarter. Century Communities’ profits outpaced analyst expectations by approximately $1.00 per share. While third quarter revenue for the builder decreased by $255 million on a year-over-year basis to $889.4 million, the results also significantly beat analyst projections for the quarter.
Century Communities delivered third quarter home sales revenues of $865.1 million on 2,264 deliveries with an average sales price of $382,100. Dale Francescon said deliveries improved on a sequential basis for the second quarter in a row and benefited from continued improvements in cycle times. The builder lowered cycle times to a five- to six-month timeframe and anticipates achieving further improvement in the fourth quarter such that timeframes return to the historical normalized range of four to six months.
Incentives and Sales
Given strong market demand in the quarter, Century Communities was able to reduce the level of its incentives offerings while maintaining a healthy pace of sales. Robert Francescon, co-CEO and president, said incentives averaged roughly 700 basis points on closed homes in the third quarter, down roughly 200 basis points on a sequential basis.
“While we are continuing to purchase forward loan commitments and are currently offering our customers 30-year fixed interest rates between 5% and 6% depending on the loans type with certain programs even lower, the cost to buy down these rates to these levels has been increasing over the past several months with the overall increase in interest rates,” Robert Francescon said.
Net new contracts in the third quarter totaled 2,149 homes, a 63% improvement over the level of sale activity in the third quarter of 2022. At quarter’s end, the builder had 1,887 homes in backlog, representing $707.2 million of backlog dollar value.
More than 90% of Century Communities’ deliveries were priced below FHA limits, and 99% of home deliveries in the quarter were spec builds. Dale Francescon said the lower price point allows the company to target more potential buyers in a given market and the spec model enables better cost controls.
The home builder reported a cancellation rate of 16% in the third quarter, well below the average cancellation rate in the low- to mid-20% range in the years prior to COVID. Dale Francescon said the company’s normalizing cancellation rate is benefiting from buyer adjustments to higher rates and the Century Communities strategy of selling homes later in the construction cycle.
Century Complete
During the earnings call, Dale Francescon highlighted the value of the Century Complete business, which targets entry-level buyers. The segment accounts for a little more than a third of the total sales and deliveries for Century Communities.
The scalable business model has all of its deliveries within FHA limits and only acquires finished lots to achieve quicker asset turns, Dale Francescon said.
“The increase in interest rates over the past year has also reinforced some additional advantages of the Century Complete brand. In the third quarter, Century Complete had an average sales price of $265,000,” Dale Francescon said. “And the large public home builders don’t build at this price point. Century Complete tends to compete more with existing homes and smaller private home builders, which puts us in a strong position.”
Francescon said the limited inventory in the resale market and the increasing costs of borrowing for private home builders are both positive, strong tailwinds that will support the growth in market share for the Century Complete brand.
Land Strategy
Century Communities ended the third quarter with approximately 69,000 owned and controlled lots, a 19% sequential increase from the prior quarter as it accelerated its land acquisition efforts. Robert Francescon said the higher lot count was driven by an 11,000 lot increase in controlled land to 38,000 lots.
“Our controlled lots as a percentage of total lots increased to 56% in the third quarter from 46% last quarter and 39% in the first quarter,” Robert Francescon said. “Our 30,000 owned lots in the third quarter are consistent with levels over the last seven quarters and provide approximately three years of deliveries based on prior year volumes.”
