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Text: On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
We hope your holidays were enjoyable and safe for you and your families.
We finished 2020 strong, producing fourth quarter results that include remarkable net order growth and gross margin expansion.
As we continue to rotate into a high-quality mix of communities, effectively manage our costs and reduce our amortized interest, we are generating significantly higher margins, and our balanced approach to optimizing price and pace in this robust demand environment is providing further support.
We begin 2021 with momentum with our backlog value up over 60% year-over-year and the potential to generate as much as $6 billion in housing revenues this year as we focus on building our scale.
We are poised for profitable returns-focused growth, given the composition of our backlog, a strong lineup of community openings and our leaner, more efficient cost structure, all contributing to an expected double-digit operating margin this year.
As for the details of the quarter, we generated total revenues of $1.2 billion, and diluted earnings per share of $1.12.
While our deliveries and revenues were down year-over-year, this was expected, reflecting the COVID-related disruption in our second quarter net orders and housing starts.
Having said this, we earn more on a per unit basis with a housing gross margin of 21%, excluding inventory related charges, up 110 basis points year-over-year.
The strength of our gross margin was the key factor driving improvement in your operating income per unit to over $44,000, a sequential increase of $7,000 per home.
Our balance sheet is in excellent shape and we are clearly in a solid position [Indecipherable] expansion of our scale.
Investing in land acquisition and development remains our top priority for deploying the substantial operating cash flow we are generating.
In the fourth quarter, we increased our land investments by over 60% year-over-year to $650 million.
With disciplined execution, we grew our lot position by 7,000 lots since the third quarter to end the year with over 67,000 lots owned and controlled.
Our lot position is well-diversified both across and within our regions, with our own lots representing 3.8 years of supplies and a higher level of option lots now comprising 40% of our total.
We own all of the lots that we need for the sizable increase in delivery volume anticipated for 2021 and owner control all of the lots we need for further delivery growth in 2022.
In addition to investing in our future, we continue to focus on increasing shareholder return with another substantial increase in our quarterly cash dividend implemented in the fourth quarter.
This is the second consecutive year we have meaningfully increased our dividend which is now six times its level from two years ago.
Our goal with respect to expanding our scale is to increase our market position in each of our served markets.
While we expect our growth to come primarily from our existing markets we're also selectively entering new markets.
Seattle is a good illustration of our organic approach to growth.
We began with a small start-up operation, less than three years ago, which turned profitable by the end of year two.
This division is now on a path to more than double its profit this year and contribute more significantly to our overall performance.
We are encouraged by the success we've had in Seattle and we are extending our market strategy in the Carolinas, an area that we already know well.
With the improved execution in our Raleigh business over the past couple of years we have now reentered Charlotte, with a similar start-up approach.
Charlotte is a top 10 homebuilding market and we hired an industry veteran with deep roots and an extensive network to lead this effort, which has allowed us to move quickly on three land deals.
We expect first deliveries in Charlotte in 2022.
Our top priority is to expand our community count and we successfully opened 38 new communities in the fourth quarter, including 4 communities that opened ahead of schedule.
As of '21, we expect a low point in our ending community count to occur in the first quarter with sequential growth in each quarter thereafter, resulting in year-over-year community count expansion in our third and fourth quarters.
Looking beyond 2021, we are well-positioned with the lots we own and control to sustain its growth sequentially throughout 2022 and we are committed to growing our community count a minimum of 10% next year; a target that we believe is realistic, given our balance sheet, cash-flow, level of profitability and the infrastructure already in place.
Our monthly absorption pace per community accelerated to 5.6 net orders during the fourth quarter representing a year-over-year increase of 51%.
We achieved this higher pace, even as we increased prices in over 90% of our communities, balancing pace and price in each community to optimize our assets and returns.
Our absorption pace has consistently ranked among the highest in the industry for many years.
We believe our success is driven by choice and personalization, delivered at an affordable price point, which are the cornerstones of our Built-to-Order model.
Given the increased focus that investors have had with respect to affordability, in the past few months, let me spend a moment sharing our thoughts on this point.
Our long-standing approach to product positioning is to target the median household income in each submarket, and to remain flexible in adjusting our products offerings, through higher density and slightly smaller footprint to stay close to the median income levels.
By doing so, we believe we make homeownership attainable for the largest demand segments, the millennials and Gen Z. Our divisions are executing well on our product strategy, enabling us to generate solid margin at our targeted absorption rates with our average selling price in nearly every division, below the median new home price and in many cases, below the median resale price as well.
This last point is particularly resonant, as resale is our largest competitor.
Given these dynamics, we believe that our homes remain affordable.
The prices continue to rise, we are well-positioned.
During the buyer pause of late 2018, and early 2019, when in fact they're both rising home prices, and rising interest rates hindered affordability, we proactively took steps to reposition our product offerings.
We quickly entered in smaller square footage plans from our product series as modeled.
We expanded the choices available to our buyers across the square footage band, and lowered the specification levels for standard features in most of our communities.
Together, these steps reduce the starting base price in many of our communities, thereby broadening our affordability.
Today, we continue to offer these smaller square footage plans, with nearly 60% of our communities offering plans below 1,500 square feet.
Moving just a little off the footage plans, above 75% of our community offer plans that are below 1,600 square feet.
Floor plans in this 1,500 to 1,600 foot range are well suited for millennials.
In addition to offering more choice in the size of our floor plan, the flexibility in our Built-to-Order model, whether an extra bedroom with a full bathroom, a Home Office or a den provides options that meet the needs of today's buyers.
With respect to the macro environment, as I've already mentioned, housing market conditions remain robust, as the pandemic has helped to fuel demand for homeownership.
The existing single-family home inventory has been, and continues to decline, now sitting at just 2.3 months supply and below that level in many of our markets, particularly at our price points.
This limited level of resale inventory and an underproduction of new homes over the last decade, together with favorable demographic trends, especially with respect to first time buyers, should continue to drive demand for the foreseeable future.
We believe this last point is very favorable for us given our experience in serving first time buyers, who accounted for 61% of our delivery in the fourth quarter, an increase of eight percentage points year-over-year.
At the time of our last earnings call in September, our net orders were on 32% for the first three weeks of our fourth quarter.
Demand remained strong throughout the quarter, resulting in year-over-year net order growth of 42% to nearly 4,000 homes.
While we experienced some seasonality in the quarter, it was negligible as November's order activity held close to October's levels, which is atypical, illustrating the depths of demand for our homes.
Geographically, our strength extended across our footprint with healthy year-over-year growth in each of our four regions.
Similar to the trends we experienced in the third quarter, the underlying buyer data for our orders in the fourth quarter remain favorable.
Millennial buyers continue to lead our buyer cohorts, representing 57% of our net orders, increasing six percentage points year-over-year.
In addition, buyers continue to demonstrate a preference for Built-to-Order homes, which represented over 90% of our net orders, compared to just under, 70% in the prior-year period.
Net order growth in the fourth quarter drove a 50% year-over-year increase in our net order value, which in turn fueled the expansion of our backlog value to $3 billion, an increase of 63% year-over year on roughly 7,800 units.
Given this higher backlog, we are confident in our increased revenue expectations for this year.
We accelerate our pace and home starts in the fourth quarter by 40% year-over-year and that's continued to do so in the first quarter, as we line our starts to net orders.
Given our strong net order trends throughout the fourth quarter, our backlog continues to be more heavily weighted to the early stages of construction, either un-started or a foundation with those two buckets comprising roughly 55% of our backlog, as compared to about 44%, in the year-ago quarter.
This will affect our backlog conversion, relative to historical first quarter levels.
Although, we are expecting a sequential increase in deliveries, in our first quarter, for the first time in my KB Home career.
As the net orders in the first quarter of 2021, they are up 44% for the first six weeks over the comparable prior year period.
Demand remains solid through the holidays and into the New Year.
As a result, we expect our note order growth to moderate by the end of the quarter from its current level.
On the mortgage side, our joint venture KBHS Home Loans, wrapped up another very productive year.
The growth in the JV's capture rate to 81% in the fourth quarter produced a 20% year-over-year increase in its income, despite the lower deliveries in the quarter, reflecting a more profitable business.
The JV is steadily increasing its contribution to our overall performance and for the full year, generated year-over-year income growth of over 70% to $21 million.
In closing, we finished 2020 strong and we are poised for a tremendous 2021, and the resumption of our growth into a larger more profitable company.
While we remain very mindful that the pandemic is not over, and that it retains the potential to disrupt our business until it's brought under control, we are also confident in the strength of our position.
We will expand our scale with our considerable backlog, together with continued robust market conditions contributing to the potential for as much as $6 billion in revenues in 2021.
We have multiple factors supporting our higher gross margin this year, including the composition of our backlog, overhead leverage from a higher revenue, effective cost management and lower amortized interest, as well as margin enhancements specific to our Built-to-Order model, such as lot premium and studio revenue.
As a result, we're expecting our operating margin to hit double digits, thereby driving our projected return on equity to above 17% compared to roughly 12% in 2020.
Simply put, we are in the strongest position we have been in over a decade with an experienced dedicated team, solid balance sheet, the healthy lot position, the cash flow to invest in community count growth and a business model that generates high customer satisfaction and has demonstrated appeal to homebuyers.
We are excited about 2021 and look forward to sharing our results as the year unfolds.
I will now cover highlights of our financial performance for the 2020 fourth quarter as well as provide our 2021 first quarter and full year outlook.
During the fourth quarter, we continued to produce sequential improvement in our key profitability and credit metrics and generated outstanding growth in our net orders, which contributed to a significant year-over-year increase in backlog value to its highest level in 15 years.
In the fourth quarter, our housing revenues of $1.19 billion were down 23% from a year ago, reflecting a decrease in homes delivered that was partially offset by a 5% increase in the overall average selling price of those homes.
The lower delivery volume was due to the negative impact, the onset of the COVID-19 pandemic and public health control measures had on our second quarter net orders and housing starts.
Looking ahead to the 2021 first quarter, we expect to generate housing revenues in a range of $1.14 billion to $1.22 billion.
For the 2021 full year, we are forecasting housing revenues in a range of $5.5 billion to $6 billion, up $450 million at the midpoint as compared to our prior guidance.
Having ended our 2020 fiscal year with a backlog value of approximately $3 billion, we believe we are well-positioned to achieve this topline performance.
In the fourth quarter, our overall average selling price of homes delivered increased to approximately $414,000.
For the 2021 first quarter, we are projecting an average selling price of approximately $390,000 due to a regional mix shift of homes delivered.
We believe our overall average selling price for the 2021 full year will be in the range of $400,000 to $410,000.
Homebuilding operating income for the fourth quarter totaled $115.7 million compared to $162.5 million for the year earlier quarter.
The current quarter included inventory related charges of $11.7 million versus $4.1 million a year ago.
Our homebuilding operating income margin was 9.7% down 80 basis points from the 2019 fourth quarter.
Excluding inventory related charges, our operating margin was 10.7% for both periods as the gross margin improvement in the current year quarter was entirely offset by an increase in our SG&A expense ratio that reflected reduced operating leverage from lower housing revenues.
For the 2021 first quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges will be in the range of 9% to 9.3%.
For the 2021 full year, we expect this metric to be in the range of 10.4% to 11%, which represents a year-over-year improvement of 230 basis points at the midpoint.
Our 2020 fourth quarter housing gross profit margin improved 40 basis points to 20%.
Excluding inventory related charges, our gross margin for the quarter increased by 110 basis points to 21% from 19.9% for the prior year quarter.
This improvement primarily reflected the impact of higher selling prices, shifts in the geographic and community mix of homes delivered and lower amortization of previously capitalized interest.
Assuming no inventory related charges, we are forecasting a housing gross profit margin for the 2021 first quarter in a range of 20% to 20.3%, up more than 200 basis points as compared to the prior year period.
We expect our 2021 full year gross margin, excluding inventory related charges to be in the range of 20.5% to 21.1% with margins of 20% or above in each quarter.
Our selling, general and administrative expense ratio of 10.3% for the fourth quarter was up 120 basis points from a year ago, mainly due to the unfavorable impact of decreased operating leverage from lower housing revenues, partly offset by the effects of our ongoing focus on reducing overhead costs.
We are forecasting our 2021 first quarter SG&A expense ratio to be in the range of 10.8% to 11.2% as we continue to prioritize containing overhead costs and expect to realize favorable leverage impacts from an anticipated year-over-year increase in housing revenues.
We expect that our 2021 full year SG&A expense ratio will be approximately 9.9% to 10.3%.
Our income tax expense of $20 million for the fourth quarter, which was favorably impacted by $8.6 million of federal energy tax credits represented an effective tax rate of approximately 16%.
We currently expect our effective tax rate for both the 2021 first quarter and full year to be approximately 24%.
In December, federal legislation was enacted which, among other things, extended the availability of energy tax credits for building energy efficient homes through December 31, 2021.
With our industry leadership and sustainable home building and energy efficiency, the extension of the tax credits will favorably impact of 2021 effective tax rate and is reflected in our first quarter and full year estimates.
Overall, we reported net income of $106.1 million or $1.12 per diluted share for the fourth quarter compared to $123.2 million or $1.31 per diluted share for the prior year period.
For the 2020 full year, our net income of $296.2 million or $3.13 per diluted share rose 10% compared to 2019.
Turning now to community count, our fourth quarter average was 234 -- of 234 was down, 8%, from 253 in the corresponding 2019 quarter, primarily due to accelerated close-outs in the second half of the year, driven by strong net order activity in both the third and fourth quarters.
We ended the year with 236 communities, down 6% from a year ago with approximately half of this decline, due to a reduction in the number of communities that were previously classified as land held for future development.
We expect our community count to decrease sequentially in the first quarter to what we believe will be the low point for 2021 as close-outs resulting from expected continued strong net orders outpace openings for the period.
On a year-over-year basis, we anticipate our 2021 first quarter average community count will be down by a low double-digit percentage.
We expect a quarter end community count to increase sequentially starting in the second quarter and continuing through the remainder of the year.
We anticipate ending the year with a mid to high single-digit percentage increase in our community count, supporting additional topline growth in 2022.
As Jeff mentioned, our goal is to drive an increase in community count of at least 10% in 2022 to support further market share gains and growth in housing revenues.
During the fourth quarter, to drive future community openings, we invested $651 million in land and land development with $376 million or 58% of the total representing land acquisitions.
In 2020, we invested nearly $1.7 billion in land acquisition development and generated $311 million of net operating cash flow.
At year-end, total liquidity was approximately $1.5 billion including $788 million of available capacity under our unsecured revolving credit facility.
Our debt-to-capital ratio was 39.6% at year end and we expect further improvement in 2021 given our anticipated earnings growth.
We expect to generate significant cash flow in the current year to fund levels of land investment sufficient to support our targeted 2021 and 2022 growth in community count and housing revenues.
Our year-end stockholders' equity was $2.67 billion as compared to $2.38 billion at the end of the prior year, and our book value per share increased by nearly 10% to $29.09.
Given our current community profile and backlog, along with expected continued strength in the housing market, we are very confident in our ability to significantly improve our profitability, credit and return metrics in 2021.
During the year, we plan to further execute on the principles of our returns-focused growth strategy, with an emphasis on significantly increasing our returns by expanding our community count and top line, while continuing to improve our operating margin.
In summary, using the midpoints of our guidance ranges, we expect a 39% year-over-year increase in housing revenues and significant expansion of our operating margin to 10.7%, driven by improvements in both gross margin and our SG&A expense ratio.
These anticipated scale and margin improvements, should drive our return on equity to above 17%, up over 500 basis points year-over-year.
These expected results reflect our view that our continued emphasis on a returns focused growth strategy will enable us to further enhance long-term stockholder value.
Devin, please open the lines.

user
q4 earnings per share $1.12.
q4 revenue $1.2 billion versus refinitiv ibes estimate of $1.14 billion.
expects to achieve significant growth in its scale and profits in 2021.
expect meaningfully higher revenue and earnings in 2021 to drive significant expansion of return on equity.
backlog value increased 63% to $3.0 billion at quarter end.
inventories increased 5% to $3.90 billion as of november 30, 2020.
net order value rose 50% in quarter.

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