KB Home (NYSE:KBH) Q3 2023 Earnings Call Transcript

Jeff Mezger: When the markets were stronger, it’s a combination of strong markets, but also leveraging our technology and what we can do now with the Internet where the brokers aren’t as critical. Consumers still go to them. They help them negotiate the deal and our — I think Jeff shared it in his comments that our commissions were up a little bit. Primarily in that we — when you’re selling a completed inventory home, you’re really competing with other retailers, it’s a house versus a house and we go to whatever the market commissions are for brokers on those homes. So it did tick up our realtor commissions 20 bps, I think it was in the quarter 30 bps, but our participation rate really hasn’t changed. It’s been running around 65% as a company and it’s been there for years.

So even when we were paying a little less in commission, the participation rate didn’t go down and it — with it taking up, it’s holding about the same. But it’s a different business approach when are selling a spec and not Built to Order.

Operator: Thank you. And our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Buck Horne: Hey, thanks. Good evening, guys. Looking at the community count acceleration that you’re expecting for 2024, just thinking about the mix of those communities, would those be geared more towards again entry level first-time buyer type product? And/or would you potentially gear those towards or jumpstart those new communities with additional spec home starts to get those absorption rates to your target levels?

Jeff Mezger: Buck, the communities we are opening are spot on with our current product and price strategy. We try to target the median household income in that submarket and if it’s a land constrained, very desirable with no inventory, you can go a little above median income, where we try to hold median income, which means our communities are going to target first-time and affordable first move-up primarily and that’s where we are going to stay. As to the spec homes to get them going, we find that those are the hardest homes to sell as you open the community. So unless it’s a new product series in a city where we are opening up and we want to shakedown the framing design if you will, and make sure the structures are all designed the right way and value engineered, we will go start inventory in those situations, but they’re are very limited. But we go as fast we can get the models built. We open the store, we get sales going and we build houses.

Buck Horne: All right, perfect. Thanks for the color there. And I think I probably know the answer to this question, but I’ll ask it anyway. Just wondering if you’ve had any recent discussions or having any thoughts about single-family rental partnerships, or you’ve had any inbound discussions with rental operators that are looking for some capacity recently?

Jeff Mezger: Well, we are always looking at that, Buck. And every time we’ve looked at it, we find that we get the best return to building it for sale and sticking to our knitting. So, we are really not interested in going there. Some of the deal flow we are seeing on lots is single-family rental companies that need to offload some assets. So that would suggest that whether it’s the financing side, and getting our communities developed or whether it’s the financial returns and rents and whatever, maybe their strategy has changed a bit, but some of the losses we are seeing right now are deal flow coming from those companies.

Operator: Thank you. And the next question comes from Joe Ahlersmeyer with Deutsche Bank. Please proceed with your question.

Joe Ahlersmeyer: Hey, thanks. Good afternoon, everybody. Just a quick one on the fiscal 2024 revenue guide. Would you be willing to at least discuss that somewhat in terms of price versus volume? And I ask because I’m looking at your delivery ASP relative to your backlog, I think this is the first quarter where it’s actually been below the backlog ASP. And then you’re sort of guiding for it to be in line. So should we maybe just think about the more recent order prices as indicative of where you heading in ’24 for closings, or how would you sort of disaggregate that?

Jeff Kaminski: Sure. Yeah, right now we normally during this call, just kind of give a big range on the revenue side without diving into too many details. We are still — we are finding some of those plans right now and we want to see how the fourth quarter shapes up, and then we’ll give you tons of detail on all that ASPs, units, revenues and all during the fourth quarter call.

Joe Ahlersmeyer: Okay, understood. And then thinking about the community count guide, especially in light of the comment around some of the crowding out of the infrastructure spending, those contractors are sort of busy with that. If we see an acceleration in that spend next year, which I think is what many in that industry have been calling for, would that represent an incremental risk to you hitting that target, or is that acceleration sort of baked into your considerations at this point?

Jeff Kaminski: Yeah, I think any sort of worsening in supply conditions would be an incremental risk. Again, community count is a very difficult number to peg, there’s a lot of moving pieces, not just on the grand opening side and how many communities get opened, but just on sales pace and with the selling environments like as well, how many closeouts you are going to have. So, we think right now, it’s pretty much middle of the road estimate for end-of-year community count is to be up about 15% from this year, and we’ll see how it goes. There’s some challenges out there. Rob highlighted a few of them. Jeff talked about a couple on the development side. But there’s always on getting communities open. We’ve been doing a pretty good job staying on track in most of our openings, particularly the last couple of quarters, and hope to continue down that path and achieve a new community count and new community portfolio that will support future growth for the company.

That’s the objective.

Operator: Thank you. And our final question comes from the line of Jay McCanless with Wedbush Securities. Please proceed with your question.

Jay McCanless: Hey, thanks, everyone. So my first question, I think you may have answered this when you talked about the mix of what’s closing in the fourth quarter, but last quarter you guys had said that the third quarter was probably going to be the trough in gross margins. Was it just the cycle times improving on some of the to-be-built homes or, can you walk us through why the trough got moved to fourth quarter from third quarter?

Jeff Kaminski: Yeah, I talked a little bit about it during the prepared remarks. There was a pull forward to higher margin closings into the quarter. We overachieved on deliveries and a lot of those deliveries were sold earlier last year before some of the price increases came into effect that would have otherwise closed in the fourth quarter is probably as simple as that.

Jay McCanless: And then the other question I had, in the areas where you’re having to cut prices still, is there an opportunity maybe to put some smaller square footage plans out there, or are you just trying to sell through what you have now and then reset to square footages when you start up in the new communities?