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KB Home unexpectedly reports profit, has eye on California

The home builder cut costs and sold properties at higher prices in its fourth quarter. But its cancellation rate jumped to 29% from 17% a year earlier.

January 08, 2011|By Alejandro Lazo, Los Angeles Times

Despite a challenging period for the nation's home builders, Los Angeles-based KB Home unexpectedly reported a profit for its fiscal fourth quarter and predicted that California would be a key part of its strategy in 2011.

The building titan delivered fewer homes in the three months that ended Nov. 30 than during the same period a year earlier, and orders for new dwellings plunged. The company's cancellation rate also climbed as potential buyers were denied mortgages as underwriting criteria for loans tightened, the company said.

But KB sold properties at higher prices and cut its costs considerably. It reported net income of $17.4million, or 23 cents a share, in its fourth quarter — an 83% decline from the same period a year earlier, when the company benefited from a huge tax break.

Analysts had expected a loss, and the company's shares rose 6.4%, or 92 cents, to close at $15.25 on Friday.

"Generally, I wouldn't say that the results would suggest the housing market has recovered," said Jade Rahmani, an analyst with Keefe, Bruyette & Woods. "It would just suggest that KB Home has taken some better steps to position themselves for profitability."

Michael R. Widner, an analyst with Stifel Nicolaus, called the company's cost-cutting efforts "pretty impressive" but added that the jump in its cancellation rate to 29% from 17% in the fourth quarter of 2009 was troubling.

"It raised an eyebrow, and I think only time will tell whether this is a one-time spike, and also if it is something unique to KBH," he said, referring to the company by its ticker symbol. KB is the first major home builder to report its financial results for the quarter.

KB Chief Executive Jeffrey Mezger said he was bullish about California's coastal markets as well as "commuter corridors" more inland. He said he felt good about places such as Chino Hills and Corona in Southern California, and Sunnyvale, Fremont, Santa Clara and the East Bay in the northern part of the state.

"You have such a large population base, and land is so constrained the closer you get to the coast, that you never meet demand," Mezger said in an interview. "What we are seeing emerge is the closer you get to the coastal areas around jobs — because people still have to commute to work — the markets are stabilizing or stabilized already."

"There are less foreclosures, there is more demand, prices are flat to up and there is not a lot of inventory hanging around," said Mezger, whose company focuses on first-time buyers.

That demand will continue to move east in California as the recovery picks up steam, he added.

KB's fourth-quarter results captured a period in which home sales weakened nationally after the expiration of the federal tax credit for buyers. Revenue totaled $451 million in the quarter, down from $674.6million a year earlier.

The company posted a loss of $69.3 million for the year on revenue of $1.6 billion. In their comments to Wall Street analysts Friday, company executives gave little specific guidance as to how this year would play out, cautioning that significant risks still remained for home builders. The company said it was not likely to be profitable in the first quarter but probably would be in the black in 2011.

Freshly constructed homes are facing stiff competition from foreclosed properties. In addition, consumer sentiment remains weak and job growth has yet to pick up at a significant pace.

"We recognize that without these two drivers, the combination of soft demand and excess supply will continue to be a challenge and the overall housing recovery will be a slow one," Mezger told analysts.

The company ended the fiscal year with about 132 communities and was planning to open about 70 new communities in the first half of 2011. The West Coast was its second-best-performing market in terms of sales volume, with 583 homes delivered in the fourth quarter, down 33% from a year earlier; net orders there hit 331, down 21%.

Homes on the West Coast sold at an average of $372,700, a 16% increase from the year-earlier period and well above the $166,800 average in KB's best-performing Central sales region.

"We're back to a buyer that's value conscious and wants to put in the home what they want for features and benefits, because they intend to live there," Mezger said. "The Jacuzzi and granite are gone, and they'd rather have an extra bedroom or second bathroom."

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