KB Homes Cites Faster Build Times as Key to Beating Projections

KB Home, No. 6 on the 2023 BUILDER 100 list, cited improved build times as a key catalyst to its outperformance in several key metrics during the builder’s fourth quarter ended Nov. 30, including deliveries.

“One of our most important operational achievements of this past year was a significant reduction in our build times, which favorably impacted our business in several respects,” Jeffrey Mezger, president and CEO, said during the home builder’s quarterly earnings call. “The shorter construction times helped to drive the outperformance in our deliveries and revenue relative to our expectations.”

Executive vice president and co-chief operating officer Rob McGibney said construction times improved to 5.5 months by the end of 2023, compared with 8.5 months at the end of 2022. After improving front-end build cycle times in the first half of the year, improvements in the fourth quarter included shaving two weeks off the latter stage of build cycle, from drywall to finish, according to McGibney.

The improvement in build cycle times translated to deliveries of 3,407 in the fourth quarter and revenues of $1.67 billion, both decreases on a year-over-year basis but higher than guidance figures issued by KB Home.

“We expect to continue driving efficiency throughout our construction process to return to our historical build times between four months and five months,” McGibney said. “By compressing our build times, we also reduced our direct construction cost. We finished the year with an average savings of about $18,000 per home relative to peak cost in August of 2022.”

In part due to the outperformance in deliveries and revenue, KB Home reported profits per share of $1.85, beating analyst projections by more than $0.15 per share. For the full fiscal year, KB Home produced revenues of $6.4 billion and profits per share of $7.

Sales Strategy

Mezger and McGibney both stressed an important component of the KB Home strategy in the fiscal fourth quarter was not chasing a state sales target at the expense of significantly lower margins during a period when mortgage rates hovered around 8%.

“With our built-to-order model, we work from a large backlog, which allows us to thoughtfully execute our sales strategy without the pressure of having to cover inventory at any price to achieve our quarterly delivery plans,” McGibney said.

In the fourth quarter, approximately 60% of KB Home’s orders had some form of mortgage concession associated with them. Net orders in the quarter increased 176% on a year-over-year basis to 1,909, and net order value increased 157% to $932.6 million. Monthly net orders per community improved to 2.7 from 1.0 in the fourth quarter of 2022. The cancellation rate as a percentage of gross orders improved to 28% in the quarter from 68% a year ago. The average selling price ticked down to $487,300 compared with $510,400.

At quarter-end, KB Home had 5,510 homes in backlog, compared with 7,662 at the end of the fourth quarter of 2022.

“To position ourselves for 2024 deliveries and increase the number of homes available to close during the spring selling season, we ramped up our starts during the fourth quarter,” McGibney said. “We started 2,589 homes, ending the quarter with nearly 7,000 homes in production, of which 70% are sold, consistent with our targeted range.”

Land Update

KB Home’s total investments in land and land development decreased 25% to $1.8 billion in 2023 compared with the previous year, reflecting lower land-related expenditures in the first half of the calendar year. The builder ramped up land and land development spend in the fourth quarter to $483.3 million, a 9% increase compared with the same period a year ago.

The builder’s lots owned or under contract totaled 55,976 at year-end, compared with 68,795 in the prior year. KB Home said the decrease reflects homes delivered, reduced land acquisition, and the abandonment of previously controlled lots. Of the builder’s total lots, approximately 73% were owned and 27% were under contract.

Improvements in 2024

Mezger highlighted a “meaningful sequential increase” in net orders during the first five weeks of the builder’s fiscal first quarter, with consumers responding favorably to recent declines in mortgage rates.

“For the first five weeks of our first quarter, our net orders are 904 as compared to 403 in the comparable period of the prior year. Our orders in December were higher than in November, which is unusual given that December is typically a slower sales month,” Mezger said. “To us, this speaks to the pent-up demand for homeownership.”

Mezger said the improving market conditions and KB Home’s projected community count growth in 2024 will position the builder to continue meeting buyer demand.

“The same factors that characterize the market today—low inventory levels, solid employment, and wage growth—are those that we believe will sustain the longer-term health of the housing market,” Mezgere said. “Demographics have been and will continue to be a significant factors, with the largest generational cohorts, millennials, and Gen Z, demonstrating a strong desire for homeownership.”