Greetings. Welcome to Century Communities Second Quarter 2022 Earnings Conference Call. All lines will be on listen-only mode throughout the presentation. We will have a question-and-answer session at the end of the presentation. Please note this conference is being recorded. I will now turn the conference over to Tyler Langton, Senior Vice President. Thank you, sir. You may begin.

Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the second quarter 2022. Before the call begins, I would like to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's 2021 Annual Report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at www.centurycommunities.com. The company undertakes no duty to update any forward-looking statements that are made during this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Management will be available after the call, should you have any questions that did not get answered. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer and President; and David Messenger, Chief Financial Officer. Following today's prepared remarks, we will open the line up for questions. With that, I will turn the call over to Dale.

Thank you, Tyler and good afternoon, everyone. We're very pleased with our record-setting performance this quarter, including $214 million in pre-tax income, the highest in our history. Net income of $159 million, a second quarter record, and diluted earnings per share of $4.78, equaling the company record we established in the fourth quarter of 2021. The achieved levels of pre-tax income, net income, and earnings per share represented increases of 40%, 35%, and 38%, respectively from the prior year quarter. Our focus on operational fundamentals enabled us to produce another quarter of strong gross margins of 28.2% and adjusted gross margins of 29.4%, which were only 10 basis points below the highest in our history. Second quarter EBITDA increased 33% year-over-year to a second quarter record of $230 million. During the quarter, we delivered 2,713 homes for $1.1 billion in revenues at an average sales price of $418,000 with deliveries generally flat year-over-year, while our average sales price was up 15%. Total revenues were $1.2 billion, a second record. Backlog at quarter-end consisted of 4,767 sold homes valued at $2 billion, year-over-year increases of 7% and 12%, respectively. Net new contracts declined to 2,233 homes as the sharp increase in mortgage rates and overall uncertainty caused some homebuyers to pause their plans to acquire homes as the quarter progressed. We have seen this understandable and predictable pattern many times before, with the most recent being in the latter part of 2018. Given the strong underlying demographics that still exist, we expect buyers will return to the market as they adjust to these changes and continue to make decisions around their careers, marriage, and children that so often lead to the purchase of a new home. The summer season for home buying is typically the slowest period of the year, and we expect that to be especially true this year. We are also seeing potential home buyers looking for homes that are closer to completion in order to lock in their financing options. We do not have a significant number of available homes with near-term completions, and coupled with the summer months, we expect our third quarter sales to be consistent with the second quarter. While we still have the ability to raise prices in certain communities, most of our subdivisions have begun utilizing incentives more than they have over the past two years. Year-to-date, our incentives have averaged 80 basis points of average sales price versus 380 basis points in 2018, and we expect incentives to return to those levels. The type and amount of incentive differs by community and by market. We have seen mortgage rate buy downs, forward rate commitments, and rate locks to be effective in getting buyers in the door and signing contracts. We are not typically reducing base prices in existing communities but are carefully reviewing them prior to opening a new community. While inventory levels have started to increase for the industry as a whole, these increases are off very low levels and absolute inventory is still quite low. Months of supply for both new and resale homes in most of our markets remain well below the national average of 2.6 and rental rates are continuing to increase, which we believe will be positive for home purchases. We are also encouraged to see that on a year-over-year basis, community counts in most of our markets were down significantly, including Atlanta down 11%, Charlotte down 13%, and Houston down 10% according to John Burns Real Estate Consulting, further limiting supply and providing pricing stability. We are well-positioned to navigate the current headwinds, given our focus on delivering affordable homes and the flexibility inherent in our model. By offering homes at the lower end of the pricing spectrum, we can appeal to the largest number of potential homebuyers and to the homebuyers that are purchasing more out of need as compared to a move-up buyer making a discretionary purchase. Our spec-based model allows us to increase or reduce starts and react quickly to changes in market conditions. With the exception of new communities, we are generally matching our starts pace with the sales cadence in a subdivision. In the second quarter, we continued our goal of returning profits to our shareholders by maintaining our quarterly cash dividend of $0.20 per share and repurchasing approximately 791,000 shares of our common stock at an average price of $45.42 per share. The share repurchases were at a cost equal to 75% of ending book value as of June 30th, 2022. Our record second quarter results are due to the innovation, commitment, and resilience of our talented teams across the country. They continue to support our mission of providing our customers a home for every dream, and we thank them for their contributions. I'll now turn the call over to Rob to discuss our operating results and plans going forward in more detail.

Thank you, Dale and good afternoon, everyone. As Dale mentioned, our team performed well this quarter, and we believe the flexibility of Century's operating model and focus on delivering affordably priced homes positively positions the company moving forward. We also benefit from the strategic operational initiatives that have been implemented over the last several years. And our business model is well-suited to address the headwinds from the current interest rate environment. Our homebuyers continue to have a healthy financial profile. Century Communities and Century Completes homebuyers had respective average FICO scores of 740 and 715 based on loans originated in the second quarter. Additionally, 75% of our deliveries in the quarter were priced below FHA limits, demonstrating our strong positioning within the affordable new home category and allowing us to target the widest range of potential buyers in any given market. We did see the expected increase in our cancellation rates to 19% in the second quarter, which is still below the 26% cancellation rates we experienced in 2018 and 2019. The cancellations we experienced were primarily financing related. We continue to qualify buyers at a rate that is 50 basis points above the current interest rate. On an ongoing basis, we evaluate and stress test all buyers in our backlog without a rate lock at interest rates up to 6%. And we are encouraged that only a small percentage of buyers needed to be canceled since they would no longer qualify at these higher rates. At the end of the quarter, we had only 44 completed and unsold homes over our 45-plus markets. We will continue to carefully monitor changes in market conditions going forward and will generally match our starts with our sales so that we are in a position to sell and deliver homes to buyers as they come back into the market without taking undue risk. The home building industry continues to be challenged by municipal and utility delays, supply chain issues, and trade shortages. However, during the second quarter we saw our construction cycle times improve as various materials and labor are becoming more readily available. We are beginning to experience some easing of input costs, especially lumber and wood products, and expect further improvements in both cycle times and input costs in the back half of the year. Century's total community count at quarter-end stood at 213, and we have the ability to increase this number throughout the back half of this year, reaching as many as 240 to 250 communities by year-end. However, we intend to be mindful of local market conditions and retain the optionality of postponing initial vertical construction starts in new communities if warranted. We ended the quarter with approximately 76,000 lots with roughly 47% owned and 53% controlled and a total lot pipeline down from the first quarter 2022 level of just over 85,000 lots. Since we have a disciplined approach towards land spend, we stepped away from a number of deals that no longer met our stringent investment standards, reducing our acquisition commitments by over $500 million and our total potential land spend commitments by significantly more. While our write-off of feasibility costs and deposits exceeded $2 million in the quarter, our focus on controlling lots versus owning lots gives us the ability to exit transactions at acceptable costs when the market adjusts. Our large footprint and presence in over 45 markets affords us the ability to look at a wide range of land deals and be extremely selective about where we invest our capital. Going forward, we expect to continue to adjust our land spend based on market conditions. We are pleased with our performance this quarter and remain confident. We are well-positioned to continue generating exceptional financial and operating results into the future. I'll now turn the call over to Dave to discuss our financial results in more detail.

Thank you, Rob. During the second quarter of 2022, net income increased 35% to a second quarter record $158.7 million, or $4.78 per diluted share compared to $117.9 million, or $3.47 per diluted share in the prior year quarter. Pre-tax income was $213.6 million, a year-over-year increase of 40% and a company record. Home sales revenues for the second quarter grew to $1.1 billion, a 13% increase compared to year ago levels. This improvement in revenues was driven by a 15% year-over-year increase in our average sales price to $418,000 and the delivery of 2,713 homes in the quarter. In the second quarter, net new contracts across our regions were 2,233. As Dale previously mentioned, this decline was primarily due to the impact that the sharp increase in interest rates had on potential homebuyers, particularly in the latter part of the quarter. Versus the prior year, we increased our quarter-end backlog 7% to 4,767 homes valued at $2 billion, a 12% increase. In the second quarter, adjusted home building gross margin percent was 29.4% compared to 25.7% in the prior year quarter. Home building gross margin percentage improved to 28.2% compared to 23.9% for the same period last year. Both gross margin and adjusted gross margin were only off 10 basis points from the company records that were established in the first quarter of this year. SG&A as a percent of home sales revenue improved to 9.6% in the second quarter compared to 9.9% in the prior year and 10.3% in the first quarter of the year. Pre-tax income margin was 18.3% compared to 14.6% in the prior year quarter. During the second quarter, financial services generated $22.8 million in revenues compared to $29.9 million in the prior year quarter. The business captured 70% of the closings and contributed $8.6 million in pre-tax income compared to $11.7 million in the prior year quarter. The decrease in pre-tax income compared to the prior year period was primarily due to fewer loan originations compared to the prior year and selling loans into the secondary markets at normalized margins this year versus 2021. In the second quarter, our tax rate was 25.7% compared to 22.5% last year, due to the federal energy tax credits not being renewed for 2022. During the quarter, we invested $35.9 million in repurchasing 790,558 shares of common stock, leaving approximately 2 million shares available for repurchase under our current authorization. As a reminder, in the first quarter of this year, we invested $62.4 million in repurchasing 1,013,387 shares of our common stock. Combined, these share repurchases year-to-date have reduced our share count by over 5%. We maintained our quarterly cash dividend of $0.20 per share this quarter after having increased it by 33% in the first quarter of this year. Our home building debt to capital ratio was 37.1% at quarter-end compared to 37.7% in the prior year. Our net home building debt to net capital ratio was 33.6% compared to year ago levels of 23%. This increase in net home building debt was largely driven by investments in our WIP inventories during the quarter. The increase in WIP inventories is integral to monetizing the land we have on our balance sheet and opening our new communities. Opening new communities will be dependent on market conditions, and should we achieve our guidance range of 240 to 250 selling communities open at year-end, we will maintain this level of leverage through the balance of the year. We ended the quarter with a strong financial position, including $2 billion in stockholders equity, a 31% year-over-year increase and $820 million in total liquidity. Our return on equity also remained near the top of the industry at 33.7%, which equaled the record level from the first quarter of this year and up from 27.6% in the year ago quarter. Given the industry-wide slowdown in current activity, we are reducing our full year home delivery guidance to 10,750 to 11,750 homes. We are reaffirming our full year home sales revenues to be in the range of $4.3 billion to $4.9 billion. And depending on market conditions, we expect our year-end selling communities to be in the range of 240 to 250. We ended the quarter with a strong balance sheet and ample liquidity, which positions us well to continue to invest in the business and return cash to shareholders throughout cycles in the market. With that, I'll open the line for questions.

Thank you. Our first question is from Deepa Raghavan with Wells Fargo. Please proceed.

Hi. Good evening, everyone. Thanks for taking the question. The order decline was quite significant. Could you explain how the quarter unfolded, particularly the absorption phase for June? Also, what can you share about July so far? You mentioned that we should anticipate sales in Q3 to be similar to Q2. To clarify, are you referring to orders or closings?

Sure, Deepa, this is Dale. I will answer your last question. We were discussing sales. When we compare the sales in Q2 of this year to last year, it's important to note that we faced a challenging comparison due to high sales in Q2 of 2021. Specifically for this quarter, as it progressed, we encountered increasing pressure on the sales side. Buyers paused their home searches to address the impact of higher interest rates. In many instances, it’s not that they can't afford homes at these rates, but they need time to adjust to the new normal. We believe that entry-level buyers have a greater need to purchase a home compared to move-up buyers who may simply want a larger property. Therefore, we think they will return to the market sooner. As for July, we have observed a continuation of the trends seen in late June, which is largely due to it being summer and buyers still adjusting to the new interest rate environment.

Okay. I'll switch topics and ask about gross margins. They've been quite strong, and pricing has exceeded our expectations, which is great news. Could you discuss other factors that may have impacted gross margins positively or negatively this quarter? For instance, was lumber a contributing factor, and how much did incentives act as a headwind? Can you help us break down the elements that influenced gross margins during the quarter?

Yes, Deepa, this is Dave. Gross margin for the quarter benefited from strong average selling prices as those homes were sold earlier. When we evaluate direct costs for the second quarter, lumber was helpful, but most other costs associated with a home were increasing. Therefore, we still saw a net increase in the second quarter compared to the first quarter, which posed a challenge. On the incentive side, we have been operating at about 80 basis points for the first two quarters of 2022. Historically, this figure has been in the upper 300s, around 380 basis points. As Dale mentioned in the prepared remarks, we expect those incentives to return to previous levels, which will be a challenge for us moving forward.

Could you share your thoughts on how pricing might evolve from this point? Since you focus on the entry-level first-time home segment, you're likely more knowledgeable about any weakness in that area. However, we aren't seeing any immediate changes in pricing trends. What do you think might happen going forward? Should we anticipate a gradual decrease in pricing, or do you think it could drop more quickly and sharply? Any insights would be appreciated.

Well, generally as I said in my prepared remarks, we're not dropping base prices in communities. And as we open new communities, we're obviously carefully looking at what the base prices should be based on the competition and the market. Most of our incentives as opposed to price reductions are based around helping with regard to either closing costs or rate buy downs, that type of thing. So, when we look at it, while we certainly don't have the ability across the board to raise prices the way we and our peers have been doing it over the recent past, we're not seeing that we would expect that there will be a significant drop either.

Got it. Okay. I'll pass it on. Good luck.

Thank you.

Thanks Deepa.

Our next question is from Mike Rehaut with JP Morgan. Please proceed.

Hi, this is Andrew Rossi. I'm here for Mike Rehaut. Congratulations on the quarter. I wanted to ask if you could share any information about the timing of that historical data. I understand you mentioned that historically it’s around 300 basis points for incentives. Is there a timeline for how that will ramp up?

What I was referring to was our experience in 2018, which was a similar period where rates spiked, leading to incentives. However, we currently don't have any guidance on when we will move from 80 basis points to a higher level. At the moment, we're actively engaged in the market and observing the return of incentives in our communities. We're not rushing to lower prices; instead, we're carefully using different incentives and strategies to find the right approach for each community and buyer to successfully close deals.

We are noticing genuine interest in the homes with upcoming deliveries. Consequently, for those homes that already have strong interest, we will be increasing incentives. This means we should not need to offer as many incentives overall.

Thank you. That was super helpful. I'm going to pass it on.

Thanks.

Our next question is from Alan Ratner with Zelman & Associates. Please proceed.

Hey, guys. Good afternoon. Thanks for taking the questions here. First one, maybe just sticking on the incentive topic. Dave, I think you mentioned it's an 80 basis points year-to-date. I'm just curious if you have any quantification specifically on what that is more recently in June and July. And I'm assuming those have been maybe disproportionately weighted towards Century Complete, correct me if I'm wrong, but it looks like that segment might have faced some outsized pressure on the orders and maybe cancellations this quarter? So, just curious if you provide a little bit more color about what you're seeing specifically at Century Complete.

Yeah. The 80 basis points, there is a bit of a weighting more towards a Century Complete product than the Communities product. And obviously, as the quarter progressed, incentives would've been ticking up if we were trying to get somebody that was in backlog trying to get them across the goal line.

Okay. Great. Second, I guess on the lot option abandonments, first, I just want to make sure these are apples-to-apples. And it looks like your lot count dropped by about 10,000 lots sequentially. And I think you mentioned the write-off was just only over $2 million, which seems like a pretty small deposit for that number of lots. So, first off, is that correct? And second off, I'm assuming if, so that those were lots that were probably pretty early on in the due diligence process. So, how are you thinking more specifically about lot options that are closer to takedown, which I would imagine have larger deposits associated with them larger pre-act costs associated with them? Are you renegotiating? Are you trying to push out those takedown schedules? And are you contemplating walking away from some of those deals as well?

First, the mix includes a variety of stages regarding the land Summit inception, with some contracts recently put in place and others further along in the process. To address your last question, we are evaluating these on a control basis, considering land extensions if necessary, and analyzing them from all perspectives to ensure they align with our investment criteria moving forward. As for the $2 million, it is a modest investment given the number of lots we dropped, but we have assessed the pool of controlled lots; our business model aims to have more controlled lots than owned. This approach allows us to manage lots with a relatively small financial commitment. We prioritize controlling our contracts with minimal deposit amounts.

Great. Thanks for that added color. If I could add a quick one in here before I hop off. Your spec count, I think you gave finished specs. Do you have the total spec count, including homes under construction, and any color on kind of where in the construction process, the majority of those homes are?

We haven't shared the total number of homes we have under construction across the country, except to note that we had 44 completed at the end of the quarter. There hasn't been significant growth in our completed spec count. With new communities launched in the first and second quarter and several homes started in those areas, we don't have many homes finishing in the third quarter that will be available for sale, particularly those that align with what buyers are seeking in terms of near-term completions.

Got it. Thanks for that color Dave. Appreciate it guys.

Thanks.

Thank you.

Our next question is from Alex Rygiel with B. Riley. Please proceed.

Yeah. Thank you very much, and a very nice quarter, gentlemen. Congratulations. Have you made any decisions yet that would impact your community openings in 2023?

So, we're looking at that very carefully. And that's kind of a day-by-day basis, but we're relooking at every new community opening, looking at making sure we have the right offering in that community. And a litany of additional items to make sure that when we start that community, it's going to be successful. So, to answer your question without going into all the specifics of the things we're looking at, but yes, we are looking at all new community openings.

I understand you have previously adjusted the deposit requirements. Have there been any changes to those requirements? How might that affect the cancellation rate, if at all?

Well, we have increased our deposits, really across the board. And when we look at it from the point that we are highly focused on being a spec builder, we're not carrying our backlog nearly as long as if we were on a pre-sale basis. So, as a result, I mean, our focus is making sure that we have a committed homebuyer, that we have an appropriate deposit. And most importantly, that they're qualified and committed to buy the home.

Very helpful. Thank you.

Thanks Alex.

Our next question is from Jay McCanless with Wedbush. Please proceed.

Hey, good afternoon. Thanks for taking my questions. The first one I had, it looks like based on the guidance that the average closing price at the midpoint is in, call it, the low 400s now, I think versus the high 380s before. Is that just losing some of the complete homes to cancellations? Or has there been a geographic shift that we need to be thinking about in terms of ASP for the rest of the year?

No, I think if you look at the fact that through the first half of the year, our closing price is about 420. And given that, we've already closed essentially a little less than half of our annual guidance at the midpoint. The math works that based on where we're seeing, what we expect our mixture of complete versus our mixture of communities coming out at an ASP of 400,000 versus where we were at in the first half of the year at 420, the math kind of all makes sense.

When considering the cancellation of these land deals, what assumptions are you currently making? Are you focused on your base pricing or the pace of sales? I'm curious about whether one concern is more significant than the other or if you're exercising more caution in one area compared to the other.

We are currently exploring all options, starting with our product offerings. As homebuilders, it's important for us to align what we sell with consumer preferences in each geographic area. There are many factors we consider as we evaluate our lots. Overall, we have eliminated nearly 10,000 lots from our control that did not meet our strict standards. We feel confident moving forward, but we continue to monitor the situation closely.

I understand. It seems that complete tends to compete more with existing local home inventory than with new homebuilders in those markets. In the smaller markets, are you noticing an increase in the availability of existing homes or condominiums for sale? I'm asking because we've observed that local inventories have risen month over month for the past few months, and I'm curious if this trend is also evident in the smaller markets.

I think smaller markets generally function in a similar way. We are noticing that inventory is up, but from such low levels that the increase is not a major concern. They are still quite low. When we consider it from the perspective of our complete offerings, we may often be the only public homebuilder in those markets. While there are usually other new homebuilders, they tend to be local builders who lack the resources we have. However, we haven't encountered any challenges regarding inventory levels on the complete or community side.

And then, I guess, the other one, and if you don't have it, we certainly follow-up. But just for frame of reference, if 380 basis points was the peak in incentives in 2018, maybe once settled back to normal in the 2019 timeframe. Where did incentives move back then versus where they are now?

I'll follow-up with you Jay afterwards on what a normalized level was, but it was somewhere below that.

Okay. Okay. Yeah. That's all I have. Thanks again.

Thanks Jay.

Our next question is from Alex Barron with Housing Research Center. Please proceed.

Yeah. Strong quarter, gentlemen. I wanted to ask regarding starts, how many homes did you guys start this quarter? How did that compare versus last year? And what's your general thought or approach now that things are a little softer?

Hey, Alex. This is Dave. We've historically not disclosed the number of homes under construction or the starts we have. But as we said in the prepared remarks, right now, we're essentially matching our start pace with our sales in all of our existing communities.

Got it. Okay. Also wanted to ask, we've heard that builders are starting to get more inbound calls from fund and trades. I'm wondering if you guys are seeing an opportunity to get better pricing, if that's the case.

Yeah. I think everybody understands right now as the industry is pivoting from where it's been the last 18 months that as more incentives are out there and profits are being challenged, it's going to work its way all the way through the supply chain into direct costs into labor. And we are seeing opportunities for additional trades and additional suppliers to be working with us and partnering with us in our various markets.

Okay. And if I could ask one last one, is it your sense that, right now, the slowdown is more just as some have characterized it, more like a shock, that people just kind of need to get used to it, or is it leaning more towards affordability challenges?

Our perspective is that interest rates have increased rapidly, and people are still adjusting to the idea of buying a home at the new payment levels. From our viewpoint, we don't see it as a significant affordability issue. While we have encountered some challenges, we have provided rate buy downs and other incentives in the mortgage sector. We believe our position at the lower end of the market is advantageous because if someone is priced out of more expensive homes, they may find our options much more affordable. Therefore, we see some flexibility in the market, which is why we are confident about our price points.

Okay. Great. Best of luck for the year. Thank you.

Thank you, Alex.

And we do have a follow-up from Jay with Wedbush. Please proceed.

Hey, thanks for taking my follow-up. Just two questions. I guess, the first one, what sounds like pretty good news on labor and input cost and cycle time coming down, how should we expect gross margins to trend in the back half year versus half and maybe year-over-year?

I think gross margins will likely decline due to the return of incentives in the market, which will exert pressure on margins. The benefits from trades or other suppliers and products that I might start contracting for now, in July, August, and September, will contribute positively in 2023. However, I don't anticipate seeing significant benefits from these activities in 2022.

Could you quantify how much the cycle time improved? And are you seeing those same improvements through quarter-to-date and the third quarter?

In the second quarter, we noticed a reduction of about two to three weeks in our cycle times. We consider this a positive trend that continued through July. We're nearly at the end of the month, and the cycle times have remained quite steady.

Great. Thanks.

Thanks Jay.

We will now turn the line back over to Dale for some brief closing remarks.

Thank you, operator. I'd like to take this opportunity once again to thank all of our team members for their incredible work and continued dedication to our value suppliers. I'd also like to thank our investors for their time today. We appreciate your continued support and investment, and look forward to speaking to you again next quarter.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.