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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're off to a strong start in 2021 with solid execution in our first quarter that highlights our ability to strike an effective balance between capturing demand in this robust housing market and measurably increasing our margins.
We are poised for profitable returns-focused growth this year based on a number of factors, most notably, our backlog, both its composition and size, the success of our newly opened communities and a compelling lineup of planned openings for the remainder of the year.
As to the details of the quarter, we generated total revenues of $1.14 billion and diluted earnings per share of $1.02, up 62% year-over-year.
Our housing revenues were at the low end of our guidance range due to the weather disruption in Texas which shifted some deliveries from our first quarter into our second quarter.
Texas is our largest market by units and the severe weather shut down our operations for roughly 10 days in mid-February.
We resumed activity in our communities by the last week of the month and nearly all of the impacted homes have already been delivered.
Our profitability was substantially higher year-over-year with a more than 400 basis point increase in our operating income margin to 10.4%, excluding inventory-related charges.
This result was driven by several key factors.
First, strong demand for our personalized products at affordable price points and our success in balancing pace and price; second, operating leverage from increasing our community absorption rate and the resulting higher revenues; third, the ongoing benefit from the cost containment efforts we put in place last spring; and finally, the continuing tailwind from lower interest amortization.
Our profitability per unit grew meaningfully to over $41,000 in the first quarter, 73% higher than in the prior-year period.
These results are also generating a healthy level of operating cash flow to fuel the expansion of our scale.
In the first quarter, we increased our land investments by 37% year-over-year to roughly $560 million.
We grew our lot position by approximately 3,000 lots since year-end to nearly 70,000 lots owned and controlled and maintained our option lots at 40% of our total.
We own and control all the lots we need to support our growth target for 2022.
And although we remain opportunistic in seeking additional lots that can provide deliveries next year, we are now primarily approving land acquisition for deliveries in 2023 and beyond.
We are achieving our objectives in growing our lot count with a higher-quality portfolio of assets and increasing our returns all at the same time.
A healthy tension exists within our divisions as they work to expand their business while staying on strategy.
We have experienced land teams in our markets who have strong local relationships with land developers and sellers and we continue to see good deal flow that meets our investment criteria.
Although every acquisition is different requiring a tailored set of assumptions regarding the sub market, the number of lots, the type of product we plan to offer and the price point, we are generally underwriting our deals to a monthly absorption of between four and five.
We're being prudent with our investment yet opportunistic with pace and price based on market conditions once each community opens.
Our long-standing approach has been to underwrite in today's dollars and as such our land deals reflect our current ASPs as well as our current costs and assume no future price appreciation or cost inflation.
Geographically, we remain in close proximity to where we've been investing in land over the past couple of years entering neighboring submarkets in order to grow our scale but without moving to the more remote submarkets of each city.
Our Las Vegas business provides a good example of this strategy.
This division has increased its annual deliveries by almost 50% in the last three years and has achieved the number one ranking in the market.
We have a large business in Henderson and in Inspirada and we are well established in Summerlin.
To expand further we are investing more heavily in the Northwest and Southwest areas adjacent to our existing submarkets which still offer good schools, shopping and amenities at more affordable prices.
In terms of deal size, we continue to acquire lots that typically represent a one to two-year supply per community, consistent with our approach over the past several years.
We remain on track with respect to our 2021 and 2022 community count goals that we shared with you in January as we execute on our growth plan.
In the first quarter, we successfully opened 22 new communities out of the approximately 150 openings we anticipate for this year.
As we look to the remainder of 2021, we continue to expect a sequential increase in our ending count each quarter and year-over-year community count growth in the fourth quarter.
We remain well positioned to extend this growth into 2022 and still expect year-over-year community count expansion of at least 10% next year.
Our monthly absorption per community accelerated to 6.4 net orders during the first quarter, a year-over-year gain of 39%.
We achieved this sales rate, even as we raised prices in the vast majority of our communities and managed lot releases in order to balance pace, price and starts as we optimize each asset.
Municipalities have increased our capacity for processing permits, heightening our ability to accelerate our starts, which were up 40% year-over-year in the first quarter.
Going forward, we expect to continue matching starts to our order rates.
While we remain sensitive to affordability levels, throughout the past year we have utilized price as our primary mechanism to manage our sales pace and to cover construction costs, which are under some pressure right now.
That being said, our ASP expectation for this year reflects only mid single-digit percentage growth year-over-year.
This modest increase in our blended ASP reflects our effective approach to our community locations and product positioning to help maintain affordability.
We are targeting the median household income in each submarket and with our built-to-order approach we provide the consumer flexibility in floor plan size and price, enabling them to quickly adjust their purchase decision if interest rates increase further.
We strive to position our communities below the new home median price and at a reasonable premium to an older resale home.
Each of our division is aligned with this strategy and in some cases, we are finding that we are actually below median resale levels as well, given the steeper appreciation in price that the existing home market has experienced.
We offer floor plans below 1,600 square feet in approximately 75% of our communities.
However, the median square footage of our homes in backlog is almost 2,100 square feet which is consistent with the median footage of homes we delivered in 2020.
Buyers are not adjusting the size of the homes they are purchasing nor have they reduced their spend in our design studios, which tells us that even with the uptick in rates affordability remains favorable.
As to overall market conditions, supply remains tight with existing home inventory down nearly 30% year-over-year.
Resale home availability is sitting at record low levels representing two-month supply and further below that level in many of our markets.
This combined with the under production of new homes over the last decade has resulted in supply being virtually non-existent.
In terms of demand, mortgage rates while higher relative to where they were in January, are down year-over-year and remain attractive generally around the low 3% range for a 30-year fixed-rate mortgage.
Most notably, demographic trends are favorable especially with respect to first-time buyers as over 70 million millennials are in their prime homebuying years with an even larger Gen Z cohort right behind them now entering their homebuying age.
As a result of all these factors, but particularly the strong demographics, we believe demand will stay healthy for the foreseeable future.
Net orders in the first quarter grew 23% year-over-year to nearly 4,300, a solid result given the strength in net orders that we experienced in the prior year's first quarter.
Net orders increased as the quarter unfolded reflecting typical seasonal trend and remained at high levels exiting the quarter.
We produced double-digit growth in each of our four regions as demand for our affordable price points remained robust across our footprint.
We continue to observe trends in our underlying order data that are consistent with the patterns that emerged in the second half of last year.
Buyers favored a personalized built-to-order home and millennials represented our largest segment of buyers.
The increasing presence of this cohort in our order activity is naturally translating into a higher percentage of deliveries to first-time buyers at 65% of our deliveries in the first quarter up 11 percentage points year-over-year.
The pent-up demand among first-time buyers and their ease of mobility is an advantage for us given our expertise in serving these buyers along with our location, products and price points.
We offer features in our homes that today's consumers value.
A prime example of these features is our advanced energy efficiency which helps to lower the total cost of homeownership.
We lead the industry in building ENERGY STAR certified new homes having delivered more than 150,000 of these homes to date as well as over 11,000 solar-powered homes.
As a result of our leadership, we were the only national homebuilder to be named to Newsweek's 2021 list of America's Most Responsible Companies in recognition of our leading ESG practices.
We were the first national builder to publish an Annual Sustainability Report and we are excited to share our latest achievements in the 14th edition of our report which is scheduled for release in conjunction with Earth Day next month.
Our backlog value grew substantially in the first quarter to $3.7 billion.
The 9,200 homes we have in backlog together with our first-quarter deliveries represent about 85% of the deliveries that were implied in our full year outlook we provided in January.
With housing market conditions still healthy, our ability to manage starts with sales and reasonable build times, we are confident that we can exceed our original volume expectation for this year.
This is driving our full-year revenue guidance higher, which Jeff will discuss momentarily.
On the mortgage side, our joint venture, KBHS Home Loans, continued its strong execution for our customers.
Our JV handled the financing for 79% of our deliveries in the first quarter, up 8 percentage points year-over-year, producing a significant increase in its income.
Consistent with the past few years, conventional loans represented the majority of KBHS volume and the credit profile of our buyers remained very healthy with an average down payment of about 13% and an average FICO score of 724 which is striking considering our high percentage of first-time buyers.
As we continue to accelerate our revenue growth over the balance of this year, we expect our income stream from the JV will grow as well.
We are positioned for remarkable 2021 and achieving our objectives of expanding our scale and improving our profitability while driving a meaningfully higher return on equity which we now anticipate will be above 18%.
I'd like to take a moment to recognize the outstanding team of individuals that are producing our strong results.
We were gratified to be recognized by Forbes in its 2021 list of America's Best Midsize Employers, again the only national builder receiving this honor.
In closing, we remain mindful that the pandemic is still present.
However, we are encouraged by the progress we are making as a country to emerge from it.
We are energized by how our year is shaping up and look forward to updating you on our progress.
I will now cover the highlights of our 2021 first quarter financial performance, as well as provide our second quarter and full-year outlook.
We are very pleased with our first quarter results with higher housing revenues and considerable expansion in our operating margin driving a 62% increase in our diluted earnings per share.
In addition, strong net orders in the quarter combined with our substantial beginning backlog resulted in a 74% year-over-year increase in our quarter-end backlog value supporting our raised revenue and margin outlook for 2021.
In the first quarter our housing revenues of $1.14 billion rose 6% from a year ago, reflecting increases in both homes delivered and the overall average selling price of those homes.
Looking ahead to the 2021 second quarter, we expect to generate housing revenues in the range of $1.42 billion to $1.5 billion.
For the full year, we are forecasting housing revenues in the range of $5.7 billion to $6.1 billion, up $150 million at the midpoint, as compared to our prior guidance.
We believe we are well positioned to achieve this top line performance supported by our first quarter ending backlog value of approximately $3.7 billion and our expectation of continued strong housing market conditions.
In the first quarter, our overall average selling price of homes delivered increased 2% year-over-year to approximately $397,000 reflecting variances ranging from a 5% decline in our West Coast region to an 11% increase in our Southwest region.
The West Coast decline was mainly attributable to product and geographic mix shifts of homes delivered.
For the 2021 second quarter we are projecting an average selling price of approximately $405,000.
We believe our overall average selling price for the full year will be in the range of $405,000 to $415,000, a relatively modest year-over-year increase and a result of our focus on offering affordable product across our footprint.
Homebuilding operating income for the first quarter increased 90% to $114.1 million from $60.2 million for the year-earlier quarter.
The current quarter included inventory related charges of $4.1 million versus $5.7 million a year ago.
Our homebuilding operating income margin improved to 10% compared to 5.6% for the 2020 first quarter.
Excluding inventory related charges, our operating margin for the current quarter increased 430 basis points year-over-year to 10.4%, reflecting improvements in both our gross margin and SG&A expense ratio which I will cover in more detail in a moment.
For the 2021 second quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges, will be in a range of 10% to 10.5%.
For the full year, we expect this metric to be in a range of 11% to 11.8%, which represents an improvement of 310 basis points at the midpoint, as compared to the prior year.
Our 2021 first quarter housing gross profit margin improved 340 basis points to 20.8%.
Excluding inventory related charges, our gross margin for the quarter increased to 21.1% from 17.9% for the prior-year quarter.
This improvement reflected the favorable impact of selling price increases outpacing construction cost inflation, increased operating leverage on fixed costs and lower amortization of previously capitalized interest.
Assuming no inventory related charges, we are forecasting a housing gross profit margin for the 2021 second quarter in a range of 20.5% to 21.1%.
We expect our full year gross margin, excluding inventory related charges, to be in a range of 21% to 22%, an improvement of 70 basis points at the midpoint compared to our prior guidance and up 190 basis points year-over-year.
Our selling, general and administrative expense ratio of 10.7% for the first quarter reflected an improvement of 110 basis points from a year ago, mainly due to the continued containment of costs following overhead reductions implemented in the early stages of the COVID-19 pandemic, lower advertising costs and increased operating leverage from higher housing revenues.
We are forecasting our 2021 second quarter SG&A ratio to be in a range of 10.4% to 10.8%, a significant improvement compared to the pandemic impacted prior-year period as we expect to realize favorable leverage impacts from an anticipated increase in housing revenues.
We still expect that our full year SG&A expense ratio will be approximately 9.9% to 10.3%, which represents an improvement of 120 basis points at the midpoint compared to the prior year.
Our income tax expense of $26.5 million for the first quarter represented an effective tax rate of approximately 21% and was favorably impacted by excess tax benefits from stock-based compensation and federal tax credits relating to current-year deliveries of energy-efficient homes, the cornerstone of our industry-leading sustainability program.
We currently expect our effective tax rate for both the 2021 second quarter and full year to be approximately 24%, including the impact of energy tax credits relating to current-year deliveries.
Overall, we reported net income of $97.1 million or $1.02 per diluted share for the first quarter compared to $59.7 million or $0.63 per diluted share for the prior-year period.
Turning now to community count.
Our first-quarter average of 223 was down 11% from the corresponding 2020 quarter primarily due to strong net order activity driving accelerated community close-outs over the past 12 months.
Consistent with our forecast, we ended the quarter with 209 communities, down 16% from a year ago.
We believe our quarter-end community count represents the low point for the year as grand openings are expected to outpace close-outs during each of the remaining quarters.
While we expect this dynamic to result in a sequential increase of five to 10 communities by the end of the second quarter, we anticipate our second-quarter average community count will be down by a low to mid double-digit percentage on a year-over-year basis.
We currently expect continued strong market conditions to drive an elevated number of community close-outs during the remainder of the year resulting in a single-digit year-over-year percentage increase in our community count at year-end.
However, we remain very focused on our goal meaningfully growing our community count.
Given our land pipeline and current schedule of community openings, we are confident that we will achieve at least a 10% increase in our 2022 community count to support further market share gains and growth in housing revenues.
During the first quarter to drive future community openings, we invested $556 million in land and land development including a 43% year-over-year increase in land acquisition investments to $275 million.
At quarter-end total liquidity was approximately $1.4 billion, including $788 million of available capacity under our unsecured revolving credit facility.
We had no borrowings under the credit facility in the 2021 first quarter.
Our debt-to-capital ratio was 38.9% at quarter-end and we expect continued improvement through the end of the year.
We still expect strong operating cash flow in the current year to fund levels of land acquisition and development investment needed to support our targeted future growth in community count and housing revenues.
Given our current community portfolio and backlog, along with expected ongoing strength in the housing market, we continue to expect significant year-over-year improvement in our revenues, profitability, credit and return metrics in 2021.
In summary, using the midpoints of our new guidance ranges, we expect a 42% year-over-year increase in housing revenues and significant expansion of our operating margin to 11.4% driven by improvements in both gross margin and our SG&A expense ratio.
In addition, achieving our new revenue and profitability expectations would drive a return on equity of over 18% for the year.
These expected results reflect our view that continued emphasis on our returns-focused growth strategy will enable us to further enhance long-term stockholder value.
Please open the lines.

user
q1 earnings per share $1.02.
q1 revenue $1.14 billion versus refinitiv ibes estimate of $1.2 billion.
inventories increased 6% to $4.12 billion as of feb 28, 2021.
quarter-end ending backlog grew 59% to 9,238 homes, driving a 74% increase in ending backlog value to $3.69 billion.
net orders for quarter grew 23% to 4,292 with net order value increasing by $486.4 million, or 35%, to $1.87 billion.

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