KB Home reports second-quarter loss; shares fall
Shares of Los Angeles home building titan KB Home fell 9% Friday as the company reported a smaller loss but disappointing orders for new homes in the second quarter, fallout from an expiring federal tax credit that had fueled sales.
Perhaps more than any major builder, KB Home has been catering to first-time purchasers frustrated with the experience of shopping for a foreclosed home in a competitive market increasingly dominated by professional investors. In March 2009, the company rolled out its Open Series, a line of scaled-back floor plans priced to compete with bank-owned properties in the Southland’s hard-hit Inland Empire and other communities.
The strategy has helped the company attract buyers in what has been a brutal market for many builders. But the company’s results for the second quarter ended May 31 underscored just how much new home sales have been driven by the popular federal tax credit in recent months. The credit expired April 30 and offered as much as $8,000 for first-time purchasers.
“What we saw in May, which is historically one of our better-selling months of the entire year, was that home buyers who missed the deadline seemed to step out of the market entirely and put their home-buying plans on hold for the time being,” KB Home Chief Executive Jeffrey Mezger told analysts in a conference call Friday. “As a result, post-tax-credit traffic levels and sales were significantly impacted.”
The company logged 2,244 new home orders in the second quarter, a 23% drop from the 2,910 orders during the same period in 2009. Orders for new homes plunged the most on the West Coast, with the company tallying 608 orders, a 35% drop from the 928 during the same period last year.
The company narrowed its second-quarter loss 61% to $30.7 million, or 40 cents a share, compared with a loss of $78.4 million, or $1.03 a share, in the second quarter of 2009. Revenues dipped 3% in the second quarter to $374.1 million compared with $384.5 million in the second quarter of 2009. The average selling price of the company’s homes dropped 4% in that period to $207,900.
Investors responded to the report by driving the company’s shares down $1.10 to $11.12. In the last year, KB Home’s share price has fallen 25%.
“California is actually two housing markets. There has been so far a more stable growing coastal market, which we still think is true,” Ken Leon, an equity analyst with Standard & Poor’s, said. “Yet the Inland Empire — and anywhere from Sacramento to east of Los Angeles — those markets have a high percentage of foreclosed properties, and a lot more of the new building is starter homes, so they probably got whacked by the expiration of the tax credit.”
Leon noted, however, that the company’s backlog of homes, despite declining 17% from the year-earlier period, remained healthy at 3,175 homes. KB Home estimated the value of that backlog at $648.2 million at the end of the second quarter, a solid potential stream of revenue if the company can deliver on those orders.
“They still have a good contract backlog,” Leon said. “But of course, orders need to turn around.”
The company finished the second quarter with about $1.1 billion worth of cash on its balance sheet, keeping it in a good position to ramp up production if demand for new homes returns. The company also kept up its acquisition of lots for new homes — 4,300 during the quarter — which should contribute to the company’s profitability over the next year to 18 months, Michael Rehaut, an analyst with JP Morgan, wrote in a research report Friday.
The KB Home earnings report follows release of data from the federal government earlier this week showing sales of newly built U.S. homes collapsed in May, falling 33%, which stirred concerns among some economists that the housing market was headed for a slump after the tax credit expiration. Despite the lowest mortgage interest rates in 60 years, sales fell in all the country’s regions and were down by more than half in the West, the Commerce Department said.
On Thursday, KB Home’s Miami-based competitor, Lennar, reported a 10% decline in new orders for the second quarter, including a 33% decline in the West, the most of any region. Lennar said its second-quarter earnings were $39.7 million, or 21 cents a share, compared with a loss of $125.2 million, or 76 cents a share, during the same period last year. Revenue declined 12% to $705.3 million.
