KB Home (NYSE:KBH) president and CEO Jeffrey Mezger said Friday that while the company is seeing "some" signs that the housing market has begun to improve, he does not yet believe that a bottom has been reached.
"Buyers have become more active," said Mezger during a morning conference call with analysts to discuss the company's fiscal first quarter results. The company reported a 26% increase year-over-year in new orders for the quarter, the first such increase in 13 quarters.
Mezger pointed to data showing a 5% rise in existing home sales traffic released by the National Association of Realtors earlier in the week, record-low mortgage rates and KB's own experience with buyer traffic and sales, saying, "These early indicators are encouraging."
Another of the positive signs was that there was no "significant" decline in prices on new orders, according to senior vp and chief accounting officer Bill Hollinger.
Still, the KB executive team said it would not likely report another year-over-year sales increase for its fiscal second quarter, primarily due to unfavorable comps caused by its current diminished community count, which stood at 120 at quarter's end, down 46% from a year ago. KB has suspended home building at many of its communities as it retools for the rollout of its Open Series entry-level homes nationwide. The team said it does expect year-over-year increases in sales to return during the fiscal third and fourth fiscal quarters as the community count gradually rises to 150. It does expect sequential sales increases to continue, however.
Mezger was decidedly upbeat about the company's new Open Series, built-to-order, energy efficient smaller homes that are positioned to compete directly with foreclosures and re-sales for first-time home buyers.The series has been rolled out in 30 communities, he said, and it accounted for 20% of the company's built-to-order sales for the quarter.
That sales pace, Mezger continued, continued into the beginning of the second fiscal quarter on March 1. Moreover, in each of the communities that are offering the new line, sales outpaced those of the previous product. The company expects Open Series homes to account for 50% of its sales by the end of the fiscal year.
"We believe first-time buyers represent the most attractive segment of the market," said Mezger. During the quarter, 70% of deliveries were made to first-time buyers, up from 53% during the same period last year.
The Open Series was conceived to address that market with smaller footprints and lower price points coupled with Energy Star Certification and the ability of the buyer to customize the home at KB design studios. The smaller footprint has forced KB back to the drawing board in communities where larger lot sizes were meant to accommodate bigger homes, but Mezger said that the company has so far been able to maintain margins on the new line due to its decreased cost and quicker cycle time. "We believe homes must change with the times," said Mezger.
Regarding the $8,000 federal tax credit for first-time buyers, Mezger said, "We do not believe the tax credit alone is having a material effect." But he praised the $10,000 California state tax credit for buyers of all homes, which, he said, "is helping contribute to increased sales in the state."
Commentary on the financials was less upbeat, but still positive. The company said its cash flow would turn negative during the middle of the fiscal year but again turn positive in the fourth quarter to end the year with approximately $1.1 billion in cash, slightly more than it posted at the end of the first quarter. It does not expect to tap its revolver, which at quarter's end had no borrowings outstanding.
Lot count is down to 44,300, 77% owned, roughly a four-year supply, a 6% reduction from yearend fiscal 2008 and down 26% from a year ago.
The better-than-expected results--KB beat Wall Street earnings estimates by six cents a share--were aided by an income tax refund of $221 million during the quarter. The company still has roughly $175 million invested in a total of 24 joint ventures with aggregate debt exposure of some $750 million.
"While we are not there yet, we are approaching break-even," said Mezger.