KB Home, the industry's fifth-largest builder, will trim back its active communities by between 25 percent to 30 percent this year from the 380 neighborhoods with which it ended 2007, when the Los Angeles-based builder's earnings loss was steeper than what many analysts had expected.
KB reported this morning that it had lost $929.4 million during the 12 months ended Nov. 30, 2007, compared to a net gain of $482.4 million in 2006. KB's revenue for the year plummeted 32 percent, to $6.42 billion, as its deliveries fell 26 percent (to 23,743 units), its net orders were off 13.4 percent (to 19,490) and its backlog was down 40.2 percent (to 6,322 units, valued at just under $1.5 billion). For the fiscal year, its loss was equal to $12.04 per share.
"The last 18 months represent one of the most challenging periods in near-term history," said Jeffrey Mezger, KB's chief executive, during an earnings conference with analysts. He also sees "no indication" that markets where KB operates are stabilizing, given the several million new and existing homes still unsold nationwide. However, Mezger and other KB officials attempted to put a positive spin on their company's financial and operating performance by emphasizing its "swift" response to current market conditions, which produced a stronger cash and debt position. "As the market recovers, I believe we'll be better positioned than most," Mezger said.
That spin wasn't easy after a particularly unkind fourth quarter during which the company lost $772.7 million on $2 billion in sales that were 31 percent below the same period a year ago. Its cancellation rate during that quarter was 58 percent, and KB reported a $403.4 million pretax charge to cover its impairments related to land sales, joint-ventures and the abandonment of land options. Those impairment charges lowered the company's quarterly margin to negative 4.3 percent; even excluding those charges, KB's margin for the quarter fell seven percentage points to 10.1 percent.
Its fourth-quarter loss is also attributable to a $514.2 million charge to establish a valuation allowance for $700 million in deferred tax assets on KB's books. Mezger and Dom Cecere, KB's CFO, said that, based on the builder's historical earnings performance, the company would be able to take advantage of this allowance as it returns to profitability, which Mezger identified as KB's "primary goal."
From its peak of first quarter 2006, KB has reduced its land holdings to 66,000 lots from 186,000, and now owns only 45,000 of those lots. (The company's land assets have declined to $3.3 billion from $7.2 billion during the peak period.) KB's sale of its 49 percent stake in its French home building operations reaped after-tax income of $485.4 million. The builder cut its debt, net of cash, last year by 62 percent to $837 million. KB ended 2007 with 6,000 homes in production, of which only 16 percent were unsold. Cecere claims that is one of the lowest levels of spec inventory among large public builders.
One result of these asset reductions was that KB ended its fiscal year with a $1.33 billion cash balance, an increase of $625.2 million. That balance works out to $17 for every share of stock outstanding, and that war chest leaves the builder in a position to capitalize on land deals as they become available at lower prices, says Mezger. (Any purchases, though, would be in existing markets.)
KB is focusing on first-time buyers, and "strategically moved" towards lower price points and smaller houses last year, said Mezger. The company"s median home price fell in 2007 by 9.1 percent to $261,600. Mezger believes KB"s product is going to be more attractive to prospective buyers who currently rent. The company also broadened its brand last year through its alliance with Martha Stewart Living (it currently has Stewart communities in six states), and with The Disney Co., whose branded product KB offers through its design studios.
Learn more about markets featured in this article: Los Angeles, CA.