KB Home Cuts Holdings as Market Cools

KB Home has started pruning its land portfolio in Southern California, a byproduct of a slumping housing market that is forcing big builders to reevaluate their property holdings.

The Westwood-based builder said Tuesday that it had sold its 49% stake in the massive Anaverde master-planned community in the Antelope Valley to the majority owner, Empire Cos. of Ontario.

The deal gives privately held Empire 100% ownership of the nearly 2,000-acre housing development in West Palmdale where the first 1,400 homes of a planned 5,200 are under construction by KB and other building companies. Terms of the transaction weren’t disclosed.

KB, the nation’s fifth-largest home builder, in recent years has beefed up its land-development business to capitalize on rising property values amid a six-year housing boom. Land developers typically profit by acquiring property and increasing its value by upgrading it into lots ready for construction.

But now with demand for new homes declining, major builders are under pressure from Wall Street to justify their ownership of land that isn’t already primed for building and that doesn’t have a prospective buyer lined up.

“Under current market conditions we are focusing our attention on our core business, which is home building,” said KB spokeswoman Caroline Shaw. “The sale of our interest in Anaverde furthers that objective.”

Some analysts also worry that builders could be forced to write down the value of their land if they can’t unload it, or if land values start to decline.

“Builders are trying to become more like manufacturers who want ‘just-in-time’ inventory,” said Patrick Duffy, a managing director of industry consulting firm Hanley Wood Market Intelligence.

KB said the sale would not affect its earnings in the near term. The sale still leaves KB with extensive land holdings and development operations in several states, including California.

The company will continue to sell homes at four subdivisions that it owns within Anaverde. Shaw declined to say whether the company would build other communities there in subsequent phases.

KB is still one of the largest builders and landholders in the Antelope Valley, where it is building at least 14 subdivisions in addition to those at Anaverde.

But like other Southland locales, the high desert has seen home sales drop dramatically.

In the first six months of 2006, new-home sales in the Antelope Valley fell to 1,307, down 41% from the 2,222 sold in the year-earlier period, according to Hanley Wood. Yet builders obtained permits to add 11,851 additional houses, up from 8,478 the year before.

With declining sales but more homes slated for construction, it makes sense for KB not to hold a lot of unsold lots, Duffy said. “Moreover, given their financial resources, they could always jump back into the market when things improve.”

Less demand for new homes mirrors the soft demand for land in the area, said Michel Faris, a land broker with Park Place Partners, which specializes in Antelope Valley real estate.

“A lot of the market is psychological,” he said. “Buyers are not willing to take risks now, whether with raw land or finished lots.”

One buyer confident about the market is Empire Cos., which has been involved in the development of about 30,000 homes in Southern California in the last three decades.

“We think our decision to do this speaks volumes about the region, and we are well on our way to proving our position is justified,” said Steve Walton, Empire’s chief operating officer. He added that the company was waiting for building permits to begin the second phase of the project, which will include lots for 600 homes, an elementary school and a fire station.

The home lots will then be sold to builders. But Walton acknowledged that his company was willing to sit on its lots “until we have interested buyers.”

“We don’t plan for individual market cycles, we plan several cycles ahead,” Walton said. The deal with KB, which was completed Monday, was the first land acquisition by Empire in about 18 months, the company said.

KB’s sale to Empire ends its long ownership of the Anaverde site, which the company purchased during Southern California’s last housing boom in the late 1980s. When the real estate bust wrecked demand for new homes in the early 1990s, the company -- then called Kaufman & Broad -- spent several years looking for a partner to carry out the project as it scaled down its land-development business to focus on home building.

In 2002, just as the local housing market was gaining steam, Empire Cos. agreed to buy a controlling stake in the project for $30 million. The project, which had been called City Ranch, was renamed Anaverde.

Last year, KB booked $40.3 million in revenue from land sales. Empire probably paid more than that for KB’s Anaverde stake, based on recent land sales in the area.

KB also said Tuesday that it was extending its arrangement with domestic doyenne Martha Stewart and would build homes in its Olive Grove project in Perris that feature Stewart-inspired interiors. KB previously announced similar ventures with Stewart at developments in Texas and North Carolina.