KB Home 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

There were delays that are typical when the homebuilding industry is ramping up production

“There were various delays around the system. The tempered closings, such a subcontractor shortages, inadequate municipal staffing among city inspectors and the inability of utility companies to get new communities energized or meters installed on completed homes. We always face these types of challenges, but they are more pronounced at this point in the cycle when the industry is ramping back up and we are self developing the majority of our new communities.”

Underwriting environment still tight especially for first time buyer

“While there has been some indication of a slight easing of credit requirements, underwriting remains tight and continues to impact the availability of mortgage financing, in particular for the first time buyer.”

Homebuilding is a local business

“As I often point out, homebuilding is a very local business and we are seeing very diverse market dynamics throughout our four regions. We like our current footprint, which has been carefully selected for its favorable long-term economic and demographic projections. In today’s environment, we are especially pleased with our strong positions in Coastal California, Colorado and Texas.”

Conversions are weak

“Our backlog conversion ratio for the 2014 third quarter declined to 53%, the lowest level in several years. While we are taking steps to address the factors that impacted our Q3 deliveries and intend to have most of these actions implemented by the end of the fourth quarter, it is important to note that the vast majority of these deliveries were deferred and not lost. As we realize improvements from the corrective actions, we expect to report a much higher Q4 backlog conversion ratios compared to the third quarter in the range of 65% to 70%, which would result in approximately 2,200 to 2,400 deliveries for the fourth quarter.”

Labor shortages, typical in this part of the cycle

“As we have been sharing, you hear it across the industry, there is pockets of labor shortages that, depending on the city, are really tough or not so bad and that’s fairly typical in our industry when things are recovering.”

Utility companies are struggling to keep up

“What we are continuing to bump up against relative to the utility companies, if you think about our industry is moving past buying finished lots and building homes on those and completing those communities to more deals that are self developed and in those it’s not just getting an electric meter plugged in, it’s getting the community energized. And the utility companies reduced staff in the downturn, just like everyone else and they are really struggling with their infrastructure to keep up.”

Part of the deferral problem is that can’t get communities energized in timely manner

“. We had 15 homes in the queue to deliver where the home is completed, the loan is approved, the buyers walked, because we can put temporary power to the homes to totally shake them down and present them to the customer, but we couldn’t get the community energized and in turn meters plugged in. So what in the past would have been a two day to a week process, took five weeks. And as a result, we deferred up to 15 closings at a meaningful price and above company average margin.”

Mortgage underwriting is tight at different FICO thresholds

“As to mortgage underwriting, I was trying to give a balanced view on the pluses and minuses. As I said, we have seen a slight improvement in underwriting and I would still say that it is not as difficult as it was, but it still is a headwind as you look at FICO scores, they have come down somewhat, but they have not come down to the degree where you could say that the mortgage companies are underwriting to the broad, HUD approved underwriting criteria.

You get under a 670 or 680 FICO, you still have to put a lot more money down and as a first-time buyer, you don’t have that.”

Don’t forget, new homes are a small part of the market

“I mean, pricing ultimately is the market function. New homebuilders are a small percent of the overall housing market. There has to be some alignment with resale pricing in order for us to sell homes and make money and that’s what we strive for.”

Spec builders have to turn inventory faster

“When you are a spec builder, the longer the home sits, the lower the price gets. We build value up and we are continuing to find ways to get higher margin through the revenue side”

There is real traffic out there

“The feedback I am getting from the field is that the quality of the traffic is improving. These are real buyers that are out there that are just taking their time right now and making sure they are comfortable with the home buying decision. And I think the good old days are gone right now where you could get, what I call a floor pop, we you could actually sell somebody on their first time in. We are seeing the customers come back four, five, six, seven times before they make the home buying decision. So I do believe that this increase in traffic suggests there is a strengthening interest in homeownership and we think it will help propel more sales in the future.”

Don’t take too much stock in new home sales data

“I don’t react too much to the monthly new home sales because they always seem to be adjusted 30 days later, and I am not sure the quality of the number, it’s a number that’s posted.”