KB Homes

Housing

KB Homes called the market “healthy” thanks to significant price increases and limited supply

KB Homes CEO bragged to analysts “ we significantly stepped up our profitability, expanding our homebuilding operating margin by more than 400 basis points to over 15%.” “Jeff Mezger — Chairman, President, and Chief Executive Officer: Thank you, Thad. Good afternoon, everyone. We delivered strong financial results in our second quarter with 19% year-over-year growth in revenues. Alongside our increased scale, we significantly stepped up our profitability, expanding our homebuilding operating margin by more than 400 basis points to over 15%. As a result, we grew our diluted earnings per share by 55% to $2.32. With a backlog of more than 12,300 homes at a value of over $6.1 billion, we are well situated as we have sold all the homes that we need to achieve our delivery and margin expectations for the year. We are also beginning to shape our fiscal 2023 and have most of our first quarter deliveries and backlog as well. The size and composition of our backlog provide us with good visibility toward achieving our guidance midpoint of about $7.4 billion in revenues and roughly 26% gross margin, contributing to a return on equity of over 27% this year. (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes CEO: “we believe the factors underlying long-term demand continue to be healthy, particularly with respect to demographics and the work-from-home trends, coupled with an ongoing under-supply of new homes and low existing home inventory” “Jeff Mezger — Chairman, President, and Chief Executive Officer: Order rates are moderating from the exceptional levels that the industry experienced beginning in late 2020, as higher interest rates and increased home prices along with other inflationary pressures are impacting current demand. That said, we believe the factors underlying long-term demand continue to be healthy, particularly with respect to demographics and the work-from-home trends, coupled with an ongoing under-supply of new homes and low existing home inventory. Our net orders were 3,914, down 9% versus a year ago when we reported the highest second quarter net orders in the prior 14 years. While our gross orders were flat year over year, a higher cancellation rate created the negative net order comparison as some buyers were affected by the larger monthly payments from the increase in mortgage rates.” (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes COO: “In the second quarter, our overall average selling price of homes delivered increased to $494,000 from $410,000 in the prior year period, reflecting the strong housing market conditions over the past 12 months, which supported the successful opening of new communities and enabled us to raise prices across our operational footprint.”“Jeff Kaminski — Executive Vice President and Chief Financial Officer: In the second quarter, our overall average selling price of homes delivered increased to $494,000 from $410,000 in the prior year period, reflecting the strong housing market conditions over the past 12 months, which supported the successful opening of new communities and enabled us to raise prices across our operational footprint. Average selling prices were higher in each of our four regions with year-over-year increases ranging from 18% in our Southwest region to 23% in our Southeast region. For the 2022 third quarter, we are projecting an overall average selling price of $495,000. We believe our ASP for the full year will be approximately $500,000. (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes said their profit margin was improving thanks to their “success in offsetting input cost inflation with selling price increases… we have been able to largely mitigate the impact of cost inflation during the construction process.”“Jeff Kaminski — Executive Vice President and Chief Financial Officer: Our housing gross profit margin for the second quarter expanded to 25.3%, up 390 basis points from the prior year period. The current quarter metric reflected the favorable pricing environment and lower amortization of previously capitalized interest, partially offset by higher construction costs and increased expenses supporting future growth. Our continued gross margin improvement trend demonstrates our success in offsetting input cost inflation with selling price increases. In addition, with our strategy of locking material and labor costs when we start each home, we have been able to largely mitigate the impact of cost inflation during the construction process. (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes said prices were increasing every quarter and “even through April, we were continuing to lift prices in the majority of our divisions and communities.” “Rob McGibney — Executive Vice President and Chief Operating Officer: Yes. I think it’s just the ongoing price lift that we’ve seen. It’s been increasing sequentially quarter-over-quarter. I don’t know, I would expect that that does not continue on the pace that it’s been on as affordability challenges with rate and everything keep moving up. So I would expect that to level off. But Yes, I don’t know that it’s really driven by anything regionally other than just ongoing price lift that we’ve had. And even through April, we were continuing to lift prices in the majority of our divisions and communities, less so in May, and don’t really expect that to continue going forward with some of the challenges that we’ve talked about. But I think that’s why we’re seeing that, Steve. (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes CEO: “our pricing is up dramatically. We’re selling at margins above what we just reported and have been, so we have a lot of room to navigate .”“Jeff Mezger — Chairman, President, and Chief Executive Officer: And through that all, as Rob just observed, our pricing is up dramatically. We’re selling at margins above what we just reported and have been, so we have a lot of room to navigate without — while continuing to generate above average returns and above average operating margins and we have a lot of communities we’re going to be opening that we tied up three years ago and you know what’s happened to price in the last three years versus when we underwrote those assets. So we really like our position and we think between all and rotating left we have all the tools we need to be competitive, to hold our absorption paces, and maybe they come off from six and go down to five, but at the margins were at, they go to four, we’ll work to optimize the price and the pace at the right margin. And we think we’ve got all the tools we need to navigate through this thing right now. (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes said that lumbers prices were coming down and they were seeing “definite benefit on the lumber side.” “Rob McGibney — Executive Vice President and Chief Operating Officer: Yes. I mean lumber has been the main driver of the cost increases, certainly, everything has moved up, but not to the degree that lumber has. And lumber has dropped drastically over the last few months. We’re seeing the benefit of that in starts today, but we won’t see that in our closings until first part of 2023. Just kind of order of magnitude, I mean framing, just material component of framing in Q2 of ’21 versus ’22 was up — it was up roughly $25,000 in framing material up to $41,000 , so substantial increase. Now those have come back down, we’re seeing random link composites that we’re tracking in the fives now versus in the 12,000 just a few months ago. So there is some definite benefit coming on the lumber side. As far as the other increases, usually there is a lag between what we’re seeing out there on the sales side and starts to — when we start seeing the cost decreases that we’re definitely pursuing that and we expect that there’ll be some tailwinds coming from cost there as well. (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Home CFO said that even when home contracts were canceled, the homes “are fairly quickly reselling and in most cases reselling at higher prices than they were originally sold at.” “Jeff Kaminski — Executive Vice President and Chief Financial Officer: Right. The main changes in the guidance this quarter were just really a tightening of the ranges which just reflects less time period and higher level of confidence in the next couple of quarters on our part. The advantage we have right now is the large backlog and the assurance and the quality of the backlog, frankly, that we’ll be able to close those homes. So we know the prices, we know the costs. In the vast majority of the cases we have customers that are very well qualified, a lot of those cases are actually have locked mortgage interest rates. So we don’t expect to see a lot of volatility in that. And on the other side of it, if we do see some spike in can rate for example on started homes or homes that are supposed to close either in the third or fourth quarter, we’ve been very successful reselling homes as we’ve gone through this latest cycle and there is still very, very thin layer of inventory that we have in our system out there. So any homes that are coming off can or otherwise are fairly quickly reselling and in most cases reselling at higher prices than they were originally sold at.” (KB Homes Q2 2022 Earnings Call, 6/23/2022)

KB Homes reported spending nearly $300 million dividends and share buybacks in 2022.“Jeff Mezger — Chairman, President, and Chief Executive Officer: Over the past year, in addition to the land investments that I just mentioned, we returned nearly $300 million to stockholders. This included our regular quarterly cash dividends of over $53 million and nearly $240 million in stock buybacks, as we repurchased over 6 million shares or roughly 7% of our shares outstanding. With strong profitability and an anticipated tightening of our land investments in response to the changing market conditions, we expect that we will have opportunities to continue to redeploy capital to stockholders. Before I wrap up, I would like to thank the entire KB Home team for their hard work and ongoing commitment to serving our homebuyers. (KB Homes Q2 2022 Earnings Call, 6/23/2022)