KB Home 4Q16 Earnings Call Notes

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KB Home’s (KBH) CEO Jeff Mezger on Q4 2016 Results

Industry continues to face cost pressures due to a shortage of labor

‘ The industry continues to face cost pressures due to a shortage of labor within a subcontractor base. For 2016, our cost to build increased about 4.8% versus the prior year, roughly $5,000 per house. And we were able to cover most of these cost increases with higher prices.”

We haven’t really seen anything on rates having an impact

“in our business model, our buyers typically lock their loans partly through the construction process. They want certainty of their payment of close. So if rates went up in November, it wouldn’t have impacted most of our backlog that’s under construction because they already locked their loans. Rates did pick up in November, they’ve kind of paused right now from that initial 50 basis point. And I heard some anecdotes about buyers moving to lock quickly that hadn’t locked. I’ve heard one story of a buyer who purchased now because of concerns that rates would go up. But in terms of our overall backlog and the quality buyer demand and whatnot, we really haven’t seen or heard anything yet on the rates having an impact yet.”

Definitely better sales in November than October

“Yeah. I don’t know if we can say it was tied to the election. That’s unclear. I didn’t hear any stories or get any feedback that people bought homes because of the election, but there’s no question that our demand actually was a little higher in November. We had better sales in November than we did in October, which is not a normal seasonal shift. Normally, October is stronger than November for us this year, it flipped.”

The income to make payments is not the issue

“as I travel around and talk with our divisions, the income needed and the payment and debt ratio is not the issue, it’s as credit. Or do they have the down payment to close”

I think everyone should be confident that lower taxes lead to higher values

” I hope everyone walks away and has the same concept that we do that lower taxes are definitely a good thing in relation to our company and the valuation of our company. The base concept that a higher or sorry the lower tax rates drive higher future net income and enhance cash flows is a very solid concept and should lead to an increase in value. So we’re very convinced that’s the case and our internal analysis proves that out.”

Jeff Kaminski

Tax discussion

“Given recent tax policy discussions in Washington DC, we have analyzed the potential impacts from changes in the federal corporate tax rate. While the specifics of any corporate income tax reform are still unknown, we would like to provide our current perspective in response to numerous inquiries we have received and hopefully clarify a couple of items in this area. As a starting point, lower tax rates drive higher future cash flows and therefore should result in a higher enterprise value. While we have some complexity associated with our net deferred tax asset position, we have found that it really does not impact this core concept. Until we exhaust the federal net operating loss carryforwards and tax credits that comprise of deferred tax asset, our income tax provision will continue to be a largely non-cash charge against earnings with virtually no cash taxes paid. In addition, our DTA will continue to shield at least the same level of pretax earnings as it does under today’s statutory income tax rate. Although a reduction in the federal rate would reduce the book value of our deferred tax asset.”