KB Home

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2021 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website, kbhome.com, through February 12th. Now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Alex. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter of fiscal 2021. On the call are Jeff Mesger, Chairman, President, and Chief Executive Officer, Nat Mandino and Rob McGidney, Executive Vice Presidents and Co-Chief Operating Officers, Jeff Kaminski, Executive Vice President and Chief Financial Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, the reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and or on the investor relations page of our website at kbhome.com. And with that, here is Jeff Mesker.

Thank you, Jill. Good afternoon, everyone, and Happy New Year. We had a remarkable year in 2021, producing revenue growth in excess of 35%, and an increase in our earnings per share of more than 90%. We achieved our objectives of expanding our scale and profitability, driving our return on equity up by over 800 basis points to 20%. Our results are even more notable, considering they were accomplished despite the supply chain challenges and municipal delays that were pervasive throughout the year, as our teams have been successfully navigating these issues. As we begin 2022, we are poised to continue delivering returns-focused growth. Our backlog value of $5 billion, which grew 67% year-over-year, provides a strong base to support our roughly $7.4 billion in expected revenues in 2022. This represents substantial top line expansion, which, combined with our expectation of a dramatic increase in our gross margin to nearly 26%, will drive our return on equity meaningfully higher. With respect to the fourth quarter, we generated total revenues of $1.7 billion and diluted earnings per share of $1.91, representing a year-over-year increase of more than 70% on the bottom line. We achieved an operating income margin approaching 12%, resulting in a 28% expansion in our operating profit per unit to over $56,000. In addition to that significant profit growth, our business is generating a healthy level of cash flow and we remain consistent in our balanced approach toward allocating this capital. Discipline investment and community count growth is our top priority, and in 2021, we put over $2.5 billion to work in land acquisition and development. We expanded our lot position to nearly 87,000 lots under control, which is almost 30% higher from year-end 2020. Our lot position is diversified both across and within our regions, and we own all of the lots that we need for our anticipated 2022 delivery goals. We also now owner control the lots that we need for sustained growth in 2023. In addition to reinvesting in our business, we return over $240 million in cash to stockholders, through the share repurchases that we completed in our third quarter, along with our quarterly dividend. And we reduced our debt during the year by over $60 million. Throughout 2021, we implemented price increases across nearly all of our communities, along with managing lot releases to balance pace, price, and production in order to optimize each asset. Although costs rose as we moved through the year, our pricing strength outpaced the rate of cost inflation, driving our backlog margins higher. This dynamic continued in our fourth quarter, contributing to a rise in our net order value of 12% year over year, despite net orders decreasing 10%, a level similar to the decline in our community count. This increase in net order value contributed to a backlog value that is more than 65% higher. With the extension of our cycle times, most of the pricing power we experienced in 2021 will be reflected in our gross margin beginning in our 2022 second quarter. In addition, our results will continue to benefit from structural tailwinds, including the performance of our more recently opened communities where margins are running in excess of the company average, the ongoing rotation into a higher quality mix of assets as the impact from reactivated communities continues to diminish, a reduction in amortized interest, and the impact that higher monthly deliveries per community has on field overhead. All of these factors combined are driving our expectation of a gross margin of nearly 26% for this year. We successfully opened 130 new communities in 2021, our largest number in many years, including 33 in the fourth quarter. The higher lot count that I mentioned will enable us to accelerate our new community openings in 2022. As a result, we now expect to end 2022 with about 265 communities, up over 20% year over year, and ahead of our initial projection that we shared in September. In addition to supporting our roughly 30% increase in revenue plans for 2022, our community count expansion will also contribute to our growth in 2023. Our monthly absorption per community of 5.5 net orders during the fourth quarter reflected a typical seasonal pattern sequentially. For the year, Our absorption pace averaged 6.3 net orders per community per month, the best annual rate we have seen in more than a decade. Homebuyers value the choice and personalization inherent in our built order model, which we believe is the primary reason that we've long generated among the highest absorption rates in the industry. With the expectation that interest rates will rise this year, And with the strong home price appreciation the market has experienced, it is appropriate to spend a moment addressing affordability. Our strategy is to target the median household income of a submarket, positioning our homes to be attainable by the largest segment of buyers. We strive to be below the median new home price and add a reasonable premium to the median resale price when we open a community and then the opportunistic and raising price based on demand at that location once opened. Our average selling price on deliveries rose about 9% year-over-year in 2021, well below the reported increase for overall pricing levels nationally, highlighting the affordability of our locations and products. As we've discussed on previous calls, we track a number of internal key indicators to gauge changes in consumer behavior that could signal affordability challenges, which we are not seeing at this time. One of the most telling of these is the square footage of homes that buyers are selecting, as they will typically rotate down to a smaller home if they need to in order to achieve home ownership. Although we offer floor plans below 1,600 square feet in about 80% of our communities, buyers continue to choose larger footage homes. Over the past year, our deliveries have averaged between 2,000 and 2,100 feet, consistent with our historical trend. And our homes in backlog are slightly above that range. We also look at our studio revenues and lot premiums, which we view as discretionary spending for our buyers. We would expect to see a decline if buyers are stretched, but our studio revenues and lot premiums have increased, even as base prices have risen. On a combined basis, buyers spent about $48,000 per home in these two categories in the fourth quarter, a solid enhancement to our revenues. Finally, and perhaps most importantly, is the credit profile of our buyers. Their average FICO score in the quarter was 732, an all-time high. In addition, About two-thirds of our buyers qualified for a conventional mortgage, and our buyers overall are averaging a down payment of over $67,000. Taken together, these metrics illustrate our buyers' strong credit. I'll also note that the recent increases in loan limits, both conventional and FHA, should help with mortgage financing, providing an incremental benefit to the industry. We started over 3,800 homes during the quarter as we worked to position our production for growth in 2022 deliveries. At year end, we had over 9,100 homes in production with 90% of these homes already sold. Generally, our cancellation rate once we start the home is extremely low, and at 5% in the fourth quarter, it remained so. reflecting our customers' strong desire to purchase their personalized homes. As to build times, while they extended about two weeks sequentially in the quarter, we are encouraged to see some signs of stabilization. Construction times in November and December were consistent with September and October, pointing to a leveling out over the last four months. Our projections for this year assume that we hold at these levels, and depending on timing, any improvement in build times could increase our expected closings in the latter part of this year. Our backlog is comprised of over 10,500 homes with a value of $5 billion, representing the bulk of our revenues expected for 2022. One aspect of our built-to-order business model that tends to get overlooked is is the dynamic between our revenue growth and community count. In our count, we do not include communities that we consider to be sold out, meaning that they have less than five homes left as well. That doesn't mean the community is closed out, in that those communities will continue to contribute to our revenues and profits. In fact, our backlog includes almost 1,900 homes from 150 sold-out communities that will deliver approximately $1 billion in 2022 revenues. Since we are well into our first quarter at the time of this call, we typically provide an update on net orders. While we have not seen a slowdown in demand across our geographic footprint in the past couple of months, and we foresee a strong spring selling season ahead, a combination of factors has resulted in a negative year-over-year net order comparison for the first six weeks of this quarter at 17 percent in the prior year net orders throughout december and into 2021 were particularly strong creating a difficult comparison as the first quarter progresses and we benefit from the additional community openings we have scheduled along with easier weekly comparisons we similar to our anticipated decline in average community count for the quarter. The favorable demographics, low mortgage interest rates, and particularly for first-time buyers continue to drive demand.