Description

Century Communities (NYSE: “CCS”)

-        Century Communities is one of the fastest growing homebuilders, in the country’s best housing markets, trading cheap on an absolute and relative basis, with the following catalysts:

-        Catalyst 1: Market recognition of the company’s JV, called Wade Jurney Homes (“WJH JV”), one of the best assets in the homebuilding industry, which could be worth more than CCS’ current market cap by 2020

-        Catalyst 2: CCS’ new financial services division, which was a drag in early 2017 as it ramped up, will generate significant incremental revenue and earnings in 2018

-        Catalyst 3: 2018 margins will benefit from lapping initial expenses related to new markets entered in 2017 as well as CCS’ UCP and Sundquist acquisitions

-        The net effect of CCS’ rapid organic growth coupled with the contributions from the WJH JV, the financial services division and new market contributions will expand ROE by ~500bps in 2018 to about 15% which is consistent with the best public homebuilders which trade at much higher P/B multiples

-        We believe that CCS, currently trading at 2018 7.2X P/E and 1.2X P/B with organic growth in excess of 20%, is conservatively worth $55-$60 per share, nearly double the current share price, and is a possible acquisition target given its land ownership in top markets and the WJH JV

Century Communities (CCS) is a $900M small-cap homebuilder located in Denver, Colorado. The company was founded in 2002 by two brothers, Dale and Robert Francescon, who sold their previous company to D.R. Horton in 1996. Dale and Robert are fantastic operators, evidenced by the fact Century has produced a profit every year since inception, including through the financial crisis of 2008. The two brothers still own 18% of the company, aligning their interest with those of outside shareholders. Having started the company from scratch, Dale and Robert have been able to selectively enter the best housing markets in the country, and the company now controls more than 30,000 lots. Century primarily targets the entry-level home buyer, and the company’s largest markets are Atlanta, Denver, and Austin/San Antonio. Existing supply in these markets is very tight, which should yield a strong market for new home construction. Century’s markets are also experiencing population increases, as the company is exposed to eight of the top 13 fastest growing US markets. Century is both relatively and nominally cheap at 7.2X 2018 P/E and 1.2X 2018 P/B with organic growth in excess of 20% and multiple company-level catalysts that should come to pass in 2018. We believe this sets the stock up for appreciation of greater than 70% over the next 12-18 months.

A prerequisite for investing in a homebuilder is having an opinion on the housing cycle. We are bullish on the housing cycle, as supply is very tight while demand should continue to be strong over the next few years. We have provided a detailed top-down analysis of our view on the US housing market as Appendix A at the end of this write-up. The balance of the discussion will focus on CCS.

We were initially attracted to Century Communities due to its exposure to strong housing markets, cheap valuation and excellent management. The two largest markets for CCS are Atlanta and Denver, which each comprising 15%-20% of consolidated closings. Austin/San Antonio, the Central Valley (Fresno) and Las Vegas come next in terms of size, followed by Salt Lake City and San Francisco. Markets that contribute less than 5% of consolidated closing include Houston, Charlotte/Raleigh, Nashville and Los Angeles. The table below lays out the supply/demand dynamic in each of the company’s markets.

The primary takeaways are: 1) Inventories are extremely low in most of CCS’s markets (6 months of inventory is considered a balanced market), 2) sales are up ~5%-7% in most of CCS’s markets despite falling inventories, and 3) even in Texas, where inventories are up year-over-year, sales continue to increase, and supply remains low (outside of Houston, which looks to be balanced).

Rising wages and falling unemployment are obviously two of the biggest factors that have created the current housing supply/demand dynamic. However, CCS also benefits from being in some of the best areas with respect to population growth. In fact, Century has operations in 8 of the top 13 fastest growing states, and all of its markets are ranked in the top 20.

The favorable housing fundamentals in Century’s markets, entering new markets via strategic acquisitions, and excellent execution have resulted in impressive growth metrics. CCS’s most recent quarterly results highlights its strong position with home sales revenue, new contracts and deliveries up 22%, 30% and 31% organically in its legacy regions. On the Q4 conference call, management mentioned that the sales have accelerated and were up 55% in January for CCS’ legacy regions.  

CCS’ strong operating performance has driven book value materially higher over the past 4 years.

While CCS has executed at a high level and the stock has performed well over the past two years, we believe the most exciting times are yet to come for Century. There are three primary catalysts that we believe will cause Century’s stock price to appreciate significantly from today: 1) Century’s JV investment in Wade Jurney Homes, 2) Century’s newly established Financial Services division, and 3) The company will lap expenses incurred in 2017 related to entering new markets and creating the financial services division, which will now yield revenue and profit in 2018.

Catalyst 1: WJH JV

The most exciting part of the Century story is its investment in the Wade Jurney Homes JV. In 4Q16, Century invested a total of $18.3M to acquire a 50% interest in the WJH JV, an entry-level home builder with a unique and innovative model located in the Southeast. Wade Jurney Homes maintains very little land on the balance sheet that doesn’t have a house under construction on it, and the turnover is very high. Wade Jurney buys unsold plots of land in existing developments and therefore has no development costs or risk. The WJH JV employs a low cost distribution and sales model that is a unique for the home building industry.  Instead of selling with a model home, WJH sells its homes over the internet or out of studios located in retail centers alongside anchor tenants like Wal-Mart or Target.  Each of the company’s studios represent about 24 active homes per year.

The WHJ JV also employs an assembly line–style operations model that was born out having no excess lots on the balance sheet. Buyers come to the studios to select the home they want among several different models that fit their desired lot location.

On day one of owning the lot, Wade Jurney starts to build the home. The home is completed and closed 90 to 120 days later. The ASP on a Wade Jurney home is less than $150,000, representing unmatched affordability for the entry-level homebuyer. This is illustrated in the chart below with Atlanta highlighted as an example.  The lowest priced homes offered by each other builder are materially more expensive than Wade Jurney’s. The company does not offer options, and value engineering helps to provide an extremely low price point to first-time buyers to compete with the resale market.

                (numbers above in thousands)

By leveraging its unique model, Wade Jurney grew revenue from $19M in 2013 to $170M in 2016, and was named the country’s fastest growing private homebuilder for both 2015 and 2016 by Builder Magazine. In 2017, the JV sold 2,319 homes, closed 1,742 homes and generated $259M of revenue, representing year-over-year increases of 101%, 54% and 60%, respectively. All of this growth has come from a presence in only four markets: Georgia, Florida, North Carolina and South Carolina.

Even without expanding WJH to new markets, CCS received $12.2M of net income in 2017 from the JV, generating a first-year ROI of ~67%! Put simply, the WJH JV is producing the highest economic returns of any homebuilding operation in the country, including the likes of NVR, LGIH, DHI and PHM.