KB Home FY 3Q17 Earnings Call Notes

Jeff Mezger

Housing market conditions remain stable

“Overall, housing market conditions remain stable and positive with strong employment, wage growth and healthy demand from first-time buyers driving overall demand for new homes. Resale inventory remains constrained averaging 4.2 months across the country and far below that level in most of the markets that we build in, filling that deficit of existing home supply. With this market dynamic ongoing, we remain focused on maintaining our healthy pace and increasing overall price where appropriate across the broad range of opportunities in our built-to-order model, including base price, lot premiums, structural options and studio options. ”

Going to be pressure on labor materials in Florida and Houston

“we know there is going to be pressure on labor materials in Florida and Houston, we don’t know to what degree and that there isn’t a lot of funding to start repairs. What we have been doing as a company is procuring the materials for our deliveries we have already procured into the second quarter and it’s a benefit of being in our built-to-order model and knowing your starts and you have visibility in your production. So, we are going to our subs and lock them down. We are going to our suppliers and locking them down now. ”

Strong market in California

” Right now, there is a very strong market in the Bay Area. There is a shortage of product on the market. Prices are still moving up. And as they move up, it moves buyers a little more in them, because there is strong demand to be a homeowner and they will go where they can afford to buy a home. So, we saw price in both Northern and Southern Cal in the inland areas in the the third quarter.”

There is more demand than there is supply

“right now, with the shortage of inventory and all the positive things I mentioned first time buyers coming out, wage growth, employment growth, all these good things are going on and there is more demand out there right now than there is supply.”

KB Home FY 2Q17 Earnings Call Notes

Jeff Mezger – Chairman, President and CEO

Extremely low levels of resale inventory

“What remains especially striking is the extremely low levels of resale inventory available. At 4.2 months nationally, and well below that in many our submarkets, resale inventory is insufficient to meet demand. It is one of the key factors underlying pricing power in most of our markets, and we plan to continue maintaining price or pace – sorry – continue maintaining pace while increasing price when appropriate.”

Millenials moving on with their lives

“Certainly there has been employment growth and employment growth creates demand and don’t forget the millennials moving out of the parent’s house. There is a lot of demand being generated right now as millennials move on with their life and get married and dual incomes and all of those things. On the mortgage side, again there was an announcement today out of Fannie on encouraging lenders to loosen up their guidelines a bit. We are seeing little bits around the edges, but no major shifts in the quality of the underwriting.”

June remains good

“Jay, we typically don’t comment within the quarter, because we are so early into it. We did in the first quarter because we do our earnings release half way through the quarters, but we feel we can give you the color I can say in general but the trends remain good just like March, April and May and that’s some specific.”

KB Home 4Q16 Earnings Call Notes

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.”

KB Home 3Q16 Earnings Call Notes

KB Home’s (KBH) CEO Jeff Mezger on Q3 2016 Results

California reflects ongoing strength along the cost

“The dynamics of the California real estate market continue to reflect ongoing strength along the coast, with rising prices in those areas driving higher demand to the inland areas as buyers seek affordable alternatives. California is a large and diverse economy, one that is showing an accelerating recovery”

Houston market stabilized

“In Houston, as we discussed, we pulled back on our investment in early 2015 until we had more clarity on the impact on demand from falling oil prices, and our community count is now lower as a result. We are now seeing the market stabilize with demand solid at price points below $250,000. We are well-positioned today in Houston with an average selling price of about $230,000 and our net order growth for the quarter returned to positive territory in spite of fewer opened communities.”

Interest rates low and credit availability is expanding

“Economic indicators continue to show general improvement and we remain encouraged by the housing market’s steady recovery. Interest rates remain low and credit availability is expanding, contributing to healthy demand. And with existing home inventory limited and new home starts well below normalized levels, the new home industry is positioned to benefit for the foreseeable future.”

We are seeing strengthening demand in the B submarkets

” we are seeing strengthening demand in what I’ll call the B submarkets. We’re really not looking at the Cs yet, don’t know that we ever will, as long as there’s opportunity in the B. So we’re, within each city, we have a strategy. We’ll target the median income and that submarket. We try to get to the most desirable submarkets with the best balance of demand supply and a median income that can get a mortgage, and that’s where we’ll spend our attention. So we hug the coast in California but we are seeing more business in the inland areas as they recover.”

Biggest order growth areas in inland empire and central cal

” our two biggest order growth areas were Inland Empire and Central Cal. So the inland area is the more affordable place, typically more first time buyer or more affordable first move-up demand in those regions, and that’s what we’re seeing. It’s also where we, in a year ago, had more what I’ll call underperforming communities, whether reactivations or things that just weren’t working that well. So we’re, if you want to say there’s a mix shift going on, I think there is because we’re holding our business in the coastal zones of California, and lifting it inland.”

Underwriting standards continue to migrate towards normal

“Well, if you look at credit profiles of Fannie Mae bonds being sold, the FICO score continues to move down a little bit. So you’re seeing they’re still well above the regulations and guidelines but they are coming down from where they were a year ago or certainly two or three years ago. I think as more submarkets get into a position where more of the homeowners and loans have equity, that the banks are feeling more comfortable in getting back to more normalized underwriting as well. But I would start by looking at the Fannie and Freddie bonds that are being sold because the credit profile is migrating more towards normal underwriting.”

Not going to talk about this quarter yet but solid demand in the last quarter

“The color on the quarter that just finished is pretty consistent through the quarter. We saw solid demand, we saw good traffic levels. And as you could tell by our comments, across the Company, our sales per community were better than they were a year ago. So it’s encouraging, but we’ll speak to the fourth quarter later this year.”

Jeff Kaminski

Very tight labor conditions across the country

Right. What we’re seeing across most of the markets, there’s been very tight labor conditions across the country in most of the markets, particularly in framing labor category and dry wall I guess secondarily. And as the demand ticks up for those services, as we get later in the year, we’re seeing more and more pressure on that side. And we’ve had instances in some of our divisions where some contractors are coming back to us and basically saying they’re going to have to work over time with their folks or that they’re going to need to see some price increases in order to stay on the job. It’s been a very competitive environment out there and we’re trying to hold our build times and obviously complete our homes and deliver those for our expectations. So those are and they have been continuing to be headwinds for us for quite some time.”

KB Home 1Q16 Earnings Call Notes

Jeff Mezger

There is an affordability issue in CA that is pushing demand inland

Sure. But Susan, you’ve followed us for a while and I’ve told this story before about how the California market can ebb and flow. And what we’re seeing right now is continued strength along the coasts, both north and south, that’s moved pricing up, and so it’s an affordability challenge in the more expensive coastal areas and it pushes demand further inland. And as we saw, as the quarter unfolded, the inland areas sold well and had good momentum coming out of the quarter.

Consistent market dynamics through the quarter

“sequentially as the quarter played out, we saw a fairly consistent market dynamics through the quarter, so, March, April, May held pretty well throughout, I think it got a little bit stronger toward the end.”

May was a little bit stronger than March

“Yup. Patrick, we’re two weeks into the quarter so we typically don’t give a lot of color on the current month activity. As I shared, May was probably a little bit stronger than March but we had a nice progression through the quarter with pretty consistent demand. We’re pleased with the results.”

KB Home 1Q16 Earnings Call Notes

Jeff Mezger

Encouraged by the traffic levels and steady demand

“While it is still early in the spring selling season, we are encouraged by the traffic levels and steady demand we are seeing and are optimistic as we continue to build backlog in support of our delivery targets for the latter part of this year.”

Once again seeing demand move to inland areas in CA

“On a regional basis, California demand remained strong in the first quarter, particularly in the coastal regions where supply is very limited and with prices continuing to climb along the coast, we are once again seeing demand move to the inland areas as well.”

Given softness in Houston, it speaks to the strength of the overall region that comps were favorable

“with the softness in Houston and the fact the region continues to have a favorable sales comp each quarter, it speaks to the strength of the overall region and we are actually encouraged with the sales in Houston. ”

Still have some cost pressures on the labor side, but I think the worst of it is over

“The pressure is more on the cost side, the pressure is more on labor than it is material, right now and there definitely still is a shortage of labor and it varies around the system, there is different shortages in each city. But, it starts on the left with land development subs, we’re short a year ago and then it works through the framing and concrete and into the finished sub through the year. I think the worst of it’s over. It was pretty tight and we had a lot of cost pressures in the fourth quarter, there is still out there but they don’t seem as impactful as they were in the fourth quarter. So we will continue to sort through things and we think it’s getting better right now in the labor front.”

Nowhere near a bubble price in SF

“I don’t think you are anywhere near a bubble price, certainly not at the price points we are playing out. Had stay, but $1.5 million is an affordable in Bay area right now or the City of San Francisco, I’d say. So, I think you’ll see the price come here due to mix this year not that the market is letting us raise prices 6% to 8%. I don’t think we are seeing that right now.”

Didn’t see any impact from Wall Street volatility

“We didn’t see that at all, as I shared, we ended February with some good momentum and that’s the month that there was all the volatility in the marketplace. And I think if you look at a couple we are both gainfully employed and you now a child and you have the need to get out of your apartment and move into a home. You are not worried about Wall Street volatility you are worried about the second bedroom or third bedroom that you need and on the street, out on main street the consumer right now is favorably looking at home ownership.”

KB Home FY 4Q15 Earnings Call Notes


Jeffrey Mezger

Traffic to communities highest since 2007

“Traffic to our communities was the highest we have seen for any fourth quarter since 2007 indicating strong interest in our product offerings and locations.”

Continue to have favorable outlook for housing market

“As we enter 2016, we believe the housing market is on firm ground and expect housing to continue to be a major catalyst of the economic recovery. We also believe that market conditions will continue to gradually improve supported by employment growth, increased household formation and low inflation. We anticipate demand will be boosted by the large millennial population that is expected to be purchasing more homes in 2016 as well as the so-called boomerang buyers who lost their homes in the downtown and are now returning.”

There’s a strong desire among the consumer to be homeowners

“I shared in my prepared remarks that we actually saw the highest traffic levels per store we’ve seen in many years and I think it’s a combination of the products and locations we have and also that there’s a strong desire among the consumer to be homeowners. That’s very encouraging and that’s normally a good indicator of where things are headed.”

The market in California remains good

“I shared in my prepared remarks that we actually saw the highest traffic levels per store we’ve seen in many years and I think it’s a combination of the products and locations we have and also that there’s a strong desire among the consumer to be homeowners. That’s very encouraging and that’s normally a good indicator of where things are headed.”

KB Home 3Q15 Earnings Call Notes

KB Home saw some softening at higher price point houses in Houston

“There’s been lot of media coverage relative to the price of oil impacting the economy and housing in Houston. And we can report that our absorption rate per community was basically flat year-over-year. Due to the severe weather in this spring, we did delay openings in Houston into our fourth quarter as well. We are seeing some softening at higher price points in Houston above 350,000.”

Higher labor costs are offsetting the benefits from lower raw material costs

“On the direct cost side, what we’re seeing, we’re actually seeing some favorability in a few of the material categories. I mean, lumber is down pretty significantly; oil cost, gasoline prices are down, that’s reducing travel and transportation for the materials et cetera in some of the other inputs. A lot of the commodities are down. So most of the pressure has been on the labor side and I’d say the labor cost have offset a lot of the other base material cost.”

Demand is starting to recover in the inland empire

“It’s a fairly typical recovery pattern. As prices move up on the coast, people get as close to the coast as they can and buy where they can afford it. So the western end of what we call the Inland Empire, the western side of Riverside and San Bernardino that commutes to work in LA or Orange County has stronger demand and less supply than the far eastern side of those two counties.”

Even Sacramento is picking up, not just commuting from the Bay

“the same thing is going on up in the Bay Area. I mentioned in my prepared comments we’re actually seeing Sacramento gaining momentum in their recovery and it’s not – that one is not necessarily a Bay Area commuter. They’re not going all the way to Sacramento, but you have a local economy that seems to be improving and demand building due to income growth and a lack of inventory. So you have a combination of things going on. I think the underlying supply and demand in those markets is better and you’re seeing a little ripple come out from the coast.”

KB Home FY 2Q15 Earnings Call Notes

A tale of two halves

“we view this year as a tale of two halves. In the first half, among other things, we’ve expanded our community count and built a robust backlog that has strategically positioned our operations for revenue and earnings growth.

In the second half, we expect to realize the benefits of our expanded platform, as we convert our backlog into deliveries and revenues, improve our margins on a sequential basis and achieve greater economies of scale.”

Big headline increases in backlog numbers

“Our ending backlog in units grew 39% to 4,733 and our backlog value rose 57% to $1.6 billion. This was our highest second quarter ending backlog value since 2007. With this solid backlog position and our expectation for continued year-over-year community count growth over the balance of this year, we are now set up for accelerating revenue and profits and to enter next year with terrific momentum”

Housing market continues measured recovery

“the housing market also continues its measured recovery. Inventory levels remain well below normal, and while there is still price appreciation occurring in most markets, it is at a more moderate and sustainable pace. Even with the slight uptick in mortgage rates over the past week, affordability remains at compelling levels. The most encouraging statistical trend that bodes very well for future housing demand is the dramatic increase now occurring in household formation.”

Household formation has been accelerating

“Recent census reports put household formation at an annualized rate of almost 2 million, well above normalized historical levels and significantly higher than the 500,000 households we have averaged per year over the last eight years. This data point suggests that we may be at a turning point in this housing recovery, as household formation has been the missing link.”

No sign of slowdown from oil price decline

“While we remain cautious, we are still not seeing signs of a slowdown in demand in our communities as a result of the oil price decline.”

First time buyer coming back

“our first-time buyer percentage did move up a little bit in the quarter. We were up to 56% – couldn’t tell you if that’s a sustained trend or a coincidence of mix. But we saw an increase in three of the four regions during the quarter – a couple of points a region in first-time buyers. So it’s an encouraging sign and as I’ve shared, it’s what’s been missing to get a sustained housing recovery. We haven’t had the first-time buyer demand and this household formation that’s developing, that was very encouraging.”

The aging of the millennials

“over a 40-year period, the nation averaged 1.2 million household formations. From the period of 2008 to 2014, we averaged 500,000, well below normal. So people that don’t have a job, they’re staying with their parents longer – everything we’ve talked about over the past few years.

With the job growth that’s occurring and the aging of the millennials, they’re getting to a point in their life where they’re getting a job and moving on with their life. So if you go from annualizing the 500,000 to 2 million, it creates demand, whether it’s rental or for sale, there’s a lot more people that are out there needing a roof over their household.”

Strong volumes and pricing trends gave better than expected margins

“The predominant – I guess, when we were forecasting, the 50 basis points predominantly came from leverage; increased revenues on some of our fixed costs are included in margin. What we also saw during the quarter was some pretty strong pricing trends. ”

Seeing broad based strength across markets

“Specific to our business, there is no question that our demand has broadened out, where some regions that weren’t as larger contributor to our orders are stepping up quite a bit. So there is a broadening, but within the markets that we’re in, we’re seeing strength across the markets. There is not – all of them are doing better at their own pace of improvement, but there is none that I can think of where I’d say that’s a tough market today. It’s a pretty broad-based strengthening going on and I think a lot of it’s demographics. This household formation you can’t ignore the demand that gets created when those many people are moving from the roost.”

KB Home 1Q15 Earnings Call Notes

Economy continuing to strengthen

“By most metrics, the national economy is continuing to strengthen, whether you consider job growth, the unemployment rate, GDP growth or consumer confidence. At the same time, mortgage rates and affordability remain favorable. Resale inventories levels are low, price appreciation continues and the share of home sales that are distressed has declined. There have also been recent reports published regarding the acceleration of household formation as millennials are finding jobs in the improving economy and moving out on their own. This age group is also now entering their prime home buying years which could create significant demand going forward.”

Housing recovery gaining traction, plenty of runway

“The housing recovery is gaining traction with plenty of runway before we reach normalized volume levels. Our increasing traffic is a strong indication that demand is on the rise. While our average community count was up 22% year-over-year in the first quarter, our traffic levels were up 46%. We believe that this acceleration in traffic can be attributed to not only improved housing fundamentals but also the favorable response to our new community openings which feature the right products in the right locations.’

California doing well

“In California, the Bay Area is very strong with solid job and income growth occurring in an area with limited housing supply. Our net orders in the Bay Area were the primary driver of our positive order comp in our West Coast region. In Southern California, the coastal area is showing a real uptick in demand after a soft fourth quarter and there are indications that the strengthening demand is starting to ripple inland once again. We are particularly pleased with our strong order comp in our Southwest region. Las Vegas continues to be one of our best performers in net orders per community in a market demonstrating strong demand.

We are also seeing encouraging signs in Phoenix, where we are working to expand our community count in a market that is stabilized and improving. Our central region continues to perform wel’

No signs of slowdown in Texas

“There has been a lot of new coverage on the impact of declining oil prices on jobs and housing in Texas. At this time, we are not seeing any evidence of a slowdown in demand. While the central region was up a solid 15% in net orders, Houston’s results actually exceeded the region’s average. ”

Delivered 1593 homes in Q1

“We delivered 1593 homes in the first quarter representing a conversion rate of 55% of beginning backlog”

Spring selling season has been very encouraging

“The early signs of spring selling season have been very encouraging and we are well positioned to take advantage of this demand.”

More first time buyers poking around

“We are certainly seeing, with the traffic increase, a lot of people that are out for the first time, looking around. I don’t know that we can share that we have seen a big swell in sales to the first time home buyers yet but it’s an encouraging trend. And I agree, the data is always subject to revisions. The consistency and the uptick over the last couple of quarters would suggest that it’s a real trend and we will see. To me it’s really the missing link in a fulsome and sustained housing recovery.”

So much pent up demand

“it’s an incredible pent up demand that seems to be starting to get unlocked.”

Cost of build went up faster than price

“you have a combination of — in many of our markets our cost of build went up faster frankly, than we could move price. So we have some margin erosion on the cost of build.’

Mortgage situation remains tight

“I certainly think the mortgage situation remains tight. And it is holding back the recovery. You know we have talked about things like the mortgage insurance premium came down and that’s a good thing. I do feel that the big banks still have overlays and are still conservative in their underwriting because of the rules and the impact of Dodd-Frank are still getting clarified. So you have a recovery that’s occurring and demand is growing. It’s still a top shelf borrower, I will say, in that FICO scores that five years ago you could get a loan on you still can’t get today.”