Build-To-Order Back On Track As Mainstay Of KB Home Strategy

John McManus -

In a vibrant landscape, KB Home (NYSE: KBH) has demonstrated agility and strategic foresight in Q1 2024, adeptly maneuvering through the complexities of fluctuating interest rates and a robust demand for housing.

The earnings call, featuring insights from Jeff Mezger (Chairman and CEO), Rob McGibney (President and COO), and Jeff Kaminski (CFO), shed light on KB Home's strategic pillars — encompassing its core "build-to-order" model, nuanced speculative inventory strategy, and proactive land acquisition amid expectations for modest pricing power — all aimed at ensuring sustained growth and market leadership.

At the heart of KB Home's success is our build-to-order model, which empowers our customers to personalize their homes in ways that matter most to them," Mezger says. "This customer-centric approach is not just a part of our strategy; it is our strategy. It differentiates us in the marketplace, drives our operational efficiencies, and, most importantly, delivers exceptional value and satisfaction to our homeowners."

"Build-to-Order" Model and Strategic Speculative Inventory

 As Mezger says, KB Home's "build-to-order" approach empowers customers with unparalleled customization options, setting a solid foundation for its market differentiation. Recognizing the challenges posed by interest-rate volatility, KB Home has skillfully integrated speculative inventory into its offerings, addressing the needs of homebuyers seeking immediate move-in options. Mezger elucidates this strategic adaptation, stating,

Our operational flexibility allows us to judiciously balance our build-to-order and speculative inventory, ensuring we cater to diverse homebuyer preferences while navigating the ebbs and flows of interest rate changes."

Comprehensive Land Acquisition Strategy amid Rising Costs

KB Home's land acquisition strategy is particularly noteworthy, demonstrating resilience and strategic acumen in the face of escalating land prices and intense competition. The company's commitment to expanding its footprint, as evidenced by a substantial investment in land acquisition and development, underscores its growth ambitions despite the prevailing cost pressures.

The company's executives, aware of the challenges posed by escalating land prices and competition from other homebuilders, have articulated a multi-faceted strategy to ensure sustained growth and profitability through 2024, 2025, and beyond.

Jeff Mezger, Chairman and CEO, highlights the company's proactive approach to this challenge:

We invested close to $590 million to acquire and develop land during the quarter," he states, underscoring the substantial investment made despite rising costs."

This investment not only reflects KB Home's commitment to expansion but also its strategic positioning to secure land at a bearable cost basis amidst a competitive market. To navigate the cost pressures effectively, KB Home is leveraging its longstanding industry relationships and deep market knowledge.

Approximately 60% of our own lots were tied up in 2020 or prior, which provides us with a solid runway of lots at a bearable cost basis," Mezger explains, indicating the company's foresight in securing land before the recent spikes in prices.

Rob McGibney, President and COO, elaborates on the tactics being employed to mitigate land cost pressures:

Our divisions have roadmaps in place with timelines to achieve at least a top five position in each of our served markets."

This strategic goal is not just about growth for growth's sake but about achieving a scale that can drive negotiating leverage and efficiency in land acquisition processes, thereby optimizing costs. Moreover, KB Home is not merely reacting to market conditions but is actively shaping its approach through disciplined underwriting criteria that balance growth ambitions with financial prudence.

We're sticking to our disciplines on the underwriting, the location, the product type, and the returns that we need to get," Mezger emphasizes, indicating a balance between aggressive growth and maintaining profitability margins.

The strategy extends beyond mere acquisition. The focus is also on the efficient development of acquired land, ensuring that the investments translate into profitable communities rapidly. This involves a judicious phase development approach, balancing development with start pace to manage inventory effectively and mitigate financial risks associated with holding undeveloped land.

Amidst the backdrop of fluctuating interest rates, KB Home has finely tuned its pricing and incentives strategy, enriched by its speculative inventory component. This strategic pivot not only addresses the immediacy of homebuyer demand but also mitigates the potential impact of interest rate fluctuations on buyer mortgage qualification processes. Jeff Kaminski offers insights into this balance.

With approximately 30% of our production now comprising speculative homes, we are better positioned to meet the immediate needs of our buyers, ensuring our portfolio's responsiveness to market dynamics."

Land Strategy Enhanced by Speculative Inventory

The strategic land acquisition efforts of KB Home are not only about securing growth avenues but also ensuring a harmonious balance between build-to-order operations and the demand for speculative inventory. This dual focus allows KB Home to not just react to the market but actively shape its approach to meet broad consumer needs.

Our investment in land development is pivotal, accommodating both personalized and immediate homebuyer demands within our strategic growth framework," McGibney says, underlining the importance of a versatile land strategy in today's dynamic market environment.

KB Home's strategic emphasis on a balanced approach to build-to-order and speculative inventory, and a proactive and comprehensive land acquisition strategy amid rising costs positions the company for sustained growth and strengthening financial performance. Through strategic adaptability, operational excellence, and a deep understanding of market dynamics, KB Home is poised to navigate the complexities of the real estate market, ensuring long-term value creation for shareholders and fulfilling the homeownership aspirations of a diverse range of buyers across the U.S.