While KB Home's fiscal 2Q2011 results showed losses widening as closings and orders declined compared with last year, the upside to the earnings release was that most of the company's numbers weren't as bad as last quarter. A particularly bright spot on the balance sheet was the company's 53% sequential increase in new orders from the first quarter.
Company executives attributed the orders surge to the opening of new communities, highlighting that 320 of the company's sales during its second quarter traced to communities that opened in the first quarter. The company has opened approximately 60 new communities in the first half of fiscal 2011 and intends to open an additional 45 to 50 during the remainder of the year, the bulk of which will be concentrated in California and Texas.
Point in case was the company's announcement that it acquired effectively all of the San Antonio assets of Fieldstone Homes, which announced earlier this year that it would be exiting the market. CEO Jeff Mezger called the 1,900-lot deal an "ideal transaction," as it gives the company access to 600 developed lots across 11 communities that should result in 300 to 400 deliveries in fiscal 2012.
Mezger added the company to date has spent roughly $300 million on land acquisition in 2011, with 80% of the activity happening in California and Texas.
But if things remain consistent with what the company experienced from its first quarter to its second, the company will not experience an immediate uptick in sales following the opening of the next wave of new communities. Executives noted it was taking longer than expected for new communities to season and generate a good sales velocity; but even then, the new communities are performing on par with legacy communities at about 3.5 or 4.0 sales per community per month, on average.
"I wouldn't use the word sluggish. It's just taking a little longer for people to make a decision," said Mezger.
He added that many of the company's new communities are small lot deals, so management would prefer to have slower absorptions and push pricing rather than sell out quickly and be unable to replace the communities.
Besides new community absorptions, the other major topic of discussion during the company's earnings call Wednesday was the company's eroding liquidity position. At the end of fiscal 2Q2011, the company counted roughly $735 million in cash in its corporate coffers. However, two events are set to eat away at that stockpile by roughly $300 million by the end of the year: (1) the company has a $100 million bond maturing in August, and (2) the resolution of its South Edge joint-venture bankruptcy is estimated to cost in the ballpark of $200 million to $250 million.
Management noted it was evaluating a variety of options, including dipping into the debt and equity markets. While accessing the debt markets could further jack up its net debt-to-capital ratio, which has been on a rapid rise over the past year, analysts appeared more in favor of that option over issuing more equity. The company's net debt-to-cap was 68.3% in 2Q2011 versus 54.5% a year ago.
However, company EVP and CFO Jeff Kaminski said with the South Edge joint-venture charges still two quarters off, "We have some time to evaluate options."