KB Homes Reports Backlog of Over 7.6K Units

KB Home (NYSE: KBH) today reported results for its fourth quarter and year ended November 30, 2022.

“Our financial results for 2022 mark one of the best years in our Company’s history. Our top-line growth of more than 20% and operating margin expansion to over 15% drove diluted earnings per share above $9, a greater than 50% increase year over year. As a result, we produced a year-end book value of $43.59 per share, a 27% improvement,” said Jeffrey Mezger, Chairman, President and Chief Executive Officer.

“While favorable demographics and a prolonged undersupply of homes give us confidence in the housing market's long-term outlook, current conditions remain challenging. High mortgage rates and persistent inflation, together with an uncertain economy, have made homebuyers more cautious since the middle of last year. As such, in the fourth quarter, we prioritized delivering our large backlog and protecting our high margins over taking steps to stimulate additional sales during this seasonally slower time frame. This emphasis on deliveries continues as we enter the new year, with a still large backlog of over 7,600 homes, representing approximately $3.69 billion of future revenues, that supports our top-line projection for 2023. Depending on market dynamics and backlog levels in each community, we are getting more aggressive with our pricing ahead of the Spring selling season, in order to generate new orders. At the same time, with the industry-wide deceleration in housing starts compared to a year ago, we are also pursuing reductions in direct construction costs and build times, which should help to offset the impact of pricing adjustments we may take.”

“We believe we are well positioned to navigate the current environment, with a solid balance sheet and anticipated healthy cash flow for 2023. We are committed to continuing to moderate our land investments until market conditions improve, as well as to maintain a balanced approach to capital allocation, to maximize long-term shareholder value.”

Three Months Ended November 30, 2022 (comparisons on a year-over-year basis)

• Revenues grew 16% to $1.94 billion.
• Homes delivered increased 3% to 3,786.
• Average selling price rose 13% to $510,400.
• Homebuilding operating income grew 30% to $278.2 million. The homebuilding operating income margin increased to 14.4%, compared to 12.8%. Excluding total inventory-related charges of $27.9 million for the current quarter and $.7 million for the year-earlier quarter, the homebuilding operating income margin increased 290 basis points to 15.8% as a result of improvements in both the housing gross profit margin and selling, general and administrative expense ratio.
  • The housing gross profit margin increased 10 basis points to 22.4%. Excluding the above-mentioned inventory-related charges, the housing gross profit margin improved 150 basis points to 23.9% from 22.4%, primarily due to the higher average selling price of homes delivered, which reflected a favorable pricing environment earlier in the year, partially offset by increased construction costs and the impacts of selective price adjustments and other concessions resulting from a softening housing market.
  • Selling, general and administrative expenses as a percentage of housing revenues improved 180 basis points to 8.0%, primarily reflecting a decrease in external sales commissions, lower costs associated with certain performance-based employee compensation plans, and increased operating leverage from higher revenues.
• The Company’s financial services operations generated pretax income of $6.7 million, compared to $9.9 million, due to a decrease in the equity in income of its mortgage banking joint venture, KBHS Home Loans, LLC (“KBHS”), reflecting significant homebuyer interest rate lock commitments in the 2022 second quarter that pulled forward a portion of KBHS’ earnings, as well as increased competitive pressures in the current quarter.
• Total pretax income grew 27% to $284.9 million and, as a percentage of revenues, increased 130 basis points to 14.7%.
• Net income of $216.4 million and diluted earnings per share of $2.47 increased 24% and 29%, respectively. The Company’s net income reflected an effective tax rate of approximately 24%, compared to approximately 22%.

Twelve Months Ended November 30, 2022 (comparisons on a year-over-year basis)

• Homes delivered increased 2% to 13,738.
• Average selling price rose to $500,800, up 18%.
• Revenues of $6.90 billion grew 21%.
• Pretax income increased 54% to $1.07 billion.
• Net income rose 45% to $816.7 million.
• Diluted earnings per share increased 51% to $9.09.

Backlog and Net Orders (comparisons on a year-over-year basis)

• Ending backlog value decreased 25% to $3.69 billion. Ending backlog units were down 27% to 7,662.
• Reflecting sharply lower demand stemming from higher mortgage interest rates, inflation and other macroeconomic and geopolitical concerns, fourth quarter net orders of 692 and net order value of $362.7 million decreased from 3,529 and $1.77 billion, respectively.
  • Gross orders for the quarter of 2,169 were down 47% from 4,072. The cancellation rate as a percentage of gross orders was 68%, compared to 13%.
• The Company’s ending community count increased 13% to 246 and the average community count for the fourth quarter increased 11% to 237.

Balance Sheet as of November 30, 2022 (comparisons to November 30, 2021)

• The Company had total liquidity of $1.26 billion, with $328.5 million of cash and cash equivalents and $933.4 million of available capacity under its unsecured revolving credit facility.
• Inventories totaled $5.54 billion, up 15%.
  • During the quarter, inventories decreased 3%, largely due to the Company’s reduced land acquisition and development spending that reflected softening housing market conditions in the 2022 second half and the strength of the land pipeline it built from substantial investments made previously.
    • Land and land development expenditures for the quarter decreased 29% to $442.7 million, compared to $621.7 million for the year-earlier quarter. Land acquisition investments included in these amounts decreased 74% to $68.0 million.
  • The Company’s lots owned or under contract totaled 68,795, compared to 86,768, primarily due to reduced land investments and the abandonment of previously controlled lots.
    • Of the Company’s total lots, approximately 70% were owned and 30% were under contract, compared to 56% owned and 44% under contract.
    • The Company’s 48,055 owned lots represented a supply of approximately 3.5 years, based on homes delivered in the trailing 12 months.
• Notes payable increased by $153.5 million to $1.84 billion, mainly due to borrowings outstanding under the Company’s unsecured revolving credit facility. The Company’s debt to capital ratio was 33.4%, compared to 35.8%.
  • On November 14, 2022, the Company borrowed $360.0 million under a senior unsecured term loan agreement with various lenders (“Term Loan”). Proceeds from the Term Loan were used toward the redemption of the Company’s $350.0 million in aggregate principal amount of 7.625% senior notes prior to their May 15, 2023 maturity. The Term Loan will mature on August 25, 2026. The Company’s next senior note maturity is on June 15, 2027.
• Stockholders’ equity expanded 21% to $3.66 billion, mainly due to current year earnings.
  • During the 2022 fourth quarter, the Company repurchased approximately 1.8 million shares of its outstanding common stock at a total cost of $50.0 million, bringing its total repurchases for the year to approximately 4.9 million shares at a total cost of $150.0 million, or $30.44 per share. As of November 30, 2022, the Company had approximately $150.0 million remaining under its Board of Directors repurchase authorization.
  • Book value per share of $43.59 increased 27% year over year.
  • Return on equity improved 470 basis points to 24.6% from 19.9%.

Guidance

The Company is providing the following guidance for its 2023 first quarter:

• Housing revenues in the range of $1.25 billion to $1.40 billion.
• Average selling price in the range of $490,000 to $500,000.
• Homebuilding operating income as a percentage of revenues in the range of 9.5% to 10.5%, assuming no inventory-related charges.
  • Housing gross profit margin in the range of 20.0% to 21.0%, assuming no inventory-related charges.
  • Selling, general and administrative expenses as a percentage of housing revenues anticipated to be approximately 10.3% to 10.8%.
• Effective tax rate of approximately 23%.
• Average community count up in the range of 15% to 20%.

Due to significant uncertainty and limited forward visibility regarding 2023 housing market, macroeconomic and geopolitical conditions, which are anticipated to be challenging compared to prior periods, the Company is providing guidance as to the full fiscal year only for the following:

• Housing revenues in the range of $5.00 billion to $6.00 billion.