High levels of deliveries, significantly improved build times, and steady demand in the third quarter is pushing KB Home to a more profitable year than expected, said the No. 6 company on the 2023 BUILDER 100.
The home builder outperformed analyst expectations for the quarter for the third consecutive period, reporting revenues of $1.6 billion and profits per share of $1.80.
“While our year-over-year comparisons reflect the record results we achieved in the prior-year quarter, we expect this quarter’s solid performance to contribute to a more profitable 2023 fiscal year than we have previously anticipated,” said Jeff Mezger, president and CEO of KB Home.
Demand remained strong throughout the quarter for the builder, despite the typical seasonal slowdown and the impacts of overall economic conditions and high mortgage rates on prospective buyers. Net orders in the quarter increased 52% to 3,097, and net order value increased 54% year over year to $1.51 billion.
Homes delivered decreased 7% year over year to 3,375, and the average selling price fell to $466,300 from $508,700 in the third quarter of 2022.
During the builder’s earnings call, executive vice president and chief financial officer Jeff Kaminski said the decreased average selling price could be attributed to a shift away from the higher-priced West Coast region along with “lower year-over-year pricing and higher mortgage interest rate and other concessions.”
Kaminski said the builder expects prices will increase in the fourth quarter due to an expected shift toward higher-price West Coast deliveries.
Executive vice president and co-chief operating officer Rob McGibney said the builder remains committed to a strategy of “optimizing each asset” on a community-by-community basis, balancing pace, price, and margin.
“We offered mortgage concessions as needed, primarily in cases where the buyer did not qualify,” McGibney said. “Anecdotally, we hear from our teams in the field that buyers are compelled by the combination of the best price and value, not just the best interest rates, which is aligned with our business model and our culture of selling built-to-order homes.”
Gross orders for the quarter increased 25% year over year to 3,939, and the cancellation rate as a percentage of gross orders improved to 21% from 35% in the prior-year period. The cancellation rate also represented a 100-basis-point sequential improvement from the second quarter of 2022.
During the earnings call, Mezger said the acute shortage of homes and positive demographic factors contributed to cancellation rates returning to historical levels and “strong absorption.”
“Demand was steady throughout the quarter, leading to a community absorption pace of 4.3 net orders per month, even though mortgage interest rates rose as the quarter progressed,” Mezger said. “With the choice, flexibility, and affordability that our Built to Order model offers our buyers, we believe we are well positioned to navigate the potential for shifting housing market conditions.”
The company’s ending backlog homes totaled 7,008 at the end of the third quarter, compared with 10,756 in the prior-year period. Ending backlog value was $3.40 billion, compared with $5.26 billion. The builder’s average community count increased 9% to 240.
Supply Chain and Build Times
McGibney said KB Home achieved a 35-day sequential reduction in its build times during the third quarter. The improvement brings current build cycle times to approximately six months, nearing KB Home’s historical levels of between four and five months.
“Further improvement remains a priority, which we expect to achieve by simplifying and refining our product offerings while leveraging the even flow production inherent in our built-to-order model and the long-term relationships we have developed with our trade partners and suppliers,” McGibney said.
“We are essentially back to business as usual with our supply chain, outside of some specific challenges related to roofing materials and electrical equipment—specifically transformers—which has been widely discussed across our industry.”
In addition to cycle time and supply chain improvements, McGibney said KB Home reduced direct costs by over $20,000 in the first half of 2023 relative to peak levels in August. The reduction in costs has helped offset price reductions made to generate sales earlier in 2023.
“Costs on homes started in the third quarter held steady despite pressure from certain items, including concrete, roofing materials, and diesel fuel,” he added.
KB Home’s investment in land and land development, $554.5 million in the third quarter, was essentially equal to the third quarter of 2022. Land and land development spending did increase by 40% on a sequential basis, driven by a doubling of land acquisition expenditures.
“We sequentially increased our land investment by about $100 million, spending approximately $550 million to both acquire and develop land while remaining diligent with respect to our underwriting criteria, product strategy, and price points,” Mezger said. “We expect to accelerate our investment activity in the fourth quarter and beyond to support our future growth targets.”
KB Home’s lots owned or under contract totaled 57,132 at the end of the quarter, compared to 68,795 in the prior-year period. The decrease reflects homes delivered, reduced land acquisition, and the abandonment of previously controlled lots on a year-over-year basis. Of the company’s total lots, approximately 75% were owned and 25% were under contract.
“We continue to focus on developing lots in smaller phases to limit our capital outlays and balance our development phasing with our starts pace to manage our inventory of finished lots,” Mezger said. “We believe we are well positioned as we currently own or control the vast majority of the lots we need to achieve our delivery growth targets through 2025 and are working on filling the gaps for 2026.”