KB Home has no plans to access markets other than to refinance

By Paul Deckelman

New York, Jan. 13 – KB Home’s debt balance held steady at $2.58 billion during the recently completed 2014 fiscal fourth quarter. But the Los Angeles-based homebuilder said that a key leverage measure, its ratio of debt to capital, improved considerably versus a year ago, although this was largely due to a one-off accounting maneuver reversing a prior writedown of assets.

Valuation move boosts results

“We were able to achieve our goal of reversing a significant portion of our deferred tax asset valuation allowance during the fourth quarter,” the company’s executive vice president and chief financial officer, Jeff. J. Kaminski, declared on its Tuesday conference call following the release of its financial results for the fiscal quarter ended Nov. 30, “and we ended the year with a net debt-to-capital ratio of 57.9%.”

That was down from 74.6% a year ago.

The company's ratio of total debt to capital also improved to 61.8% at the end of the quarter from 80% in the year-ago period.

During the quarter, KB Home – which had generated net deferred tax assets of about $833 million as of the end of its fiscal third quarter on Aug. 31, assets that could be used to potentially offset about $2.1 billion of future taxable income – moved to reverse almost all of that. In investor presentation materials that the company compiled and distributed in November, it said that its balance sheet “will be significantly enhanced with [the] expected fourth-quarter reversal of a significant amount of the deferred tax asset valuation allowance.”

KB projected at that time that “assuming a full reversal of the deferred tax asset valuation allowance,” the ratio of net debt to capital would improve from 75% to 59% at the end of the 2014 fiscal third quarter, with its statement of third-quarter shareholders’ equity more than doubling pro forma for the reversal from the $745 million actually reported at the end of the period to an estimated $1.58 billion.

The company said on Tuesday that it had booked an $825.2 million deferred tax asset valuation allowance reversal for the fourth quarter, producing an income tax benefit of $824.2 million. That was included in KB Home’s net income for the quarter of $852.8 million, or $8.36 per diluted share – well up from $28.12 million, or 31 cents per share, in the year-earlier period. That deferred tax asset valuation allowance reversal-enhanced net income also jumped sequentially from $26.66 million, or 31 cents per share, in the fiscal third quarter.

It was the eighth consecutive quarter that the company had generated year-over-year bottom-line improvement.

Bonds dominate debt structure

The company’s debt balance of $2.58 billion of notes and mortgages payable at Nov. 30 was unchanged from where it had stood at the end of the third quarter and was up from $2.15 billion a year earlier, mainly due to its underwritten public issuance of $400 million of senior notes in the 2014 fiscal second quarter.

KB priced its issue of 4¾% senior notes due 2019 at par last March 20, yielding 4.748%. The regularly scheduled forward calendar offering, marketed to potential investors via a roadshow, was upsized from an originally announced $300 million. Proceeds were slated for general corporate purposes, including the purchase and development of land.

Apart from $42.88 million of mortgages and land contracts due to land sellers, as well as other modestly sized loans, the company’s capital structure consisted solely of various tranches of outstanding notes, according to its 10-Q filing with the Securities and Exchange Commission covering the fiscal third quarter. The total amount was unchanged in the fourth period.

Besides the new notes sold in March, these included $199.88 million of 6¼% notes scheduled to come due on June 15 of this year, the company’s closest maturity.

KB also had outstanding nearly $263 million of 9.1% notes due 2017, almost $300 million of 7¼% notes due 2018, a little more than $346 million of 8% notes due 2020, $450 million of 7% notes due 2021 and $350 million of 7½% notes due 2022.

In addition to those junk bonds, the structure also included $230 million of outstanding 1.375% convertible senior notes due in 2019.

KB Home further has a $200 million unsecured revolving credit facility that will mature in March 2016, but the company had no borrowings outstanding on it as of the end of the fiscal fourth quarter. Up to $100 million of that amount is available for the issuance of letters of credit, but there were none outstanding against the facility.

Kaminski told analysts on the call that liquidity at quarter’s end came to more than $550 million, consisting of $356.37 million of unrestricted cash and cash equivalents plus its revolver availability.

The company also had restricted cash of $27.24 million at Nov. 30, bringing its total cash balance to $383.6 million, versus $329.5 million at the end of the fiscal third quarter and $572 million a year ago.

Looking to monetize assets

During the conference call, Kaminski and KB Homes’ long-time president and chief executive officer, Jeffrey T. Mezger, spoke about the company’s efforts to monetize non-strategic assets. Mezger noted for instance that the company had sold its last remaining land position in Atlanta, a market where it no longer has any ongoing operations.

The latest results included $34.2 million of inventory impairment charges, of which $23.2 million was related to the planned future sale of a non-strategic asset – an 80-acre land parcel located in the inland Coachella Valley area of Southern California, near Palm Springs, a market that Mezger said “has not recovered as quickly as we had anticipated.”

He said that “this particular property, which was earmarked as an active adult community, is not aligned with our core business and will require significant additional investment dollars in land development and infrastructure for an extended period of time to build out.”

The rest of the $34 million of charges is attributable to six other similarly non-strategic assets to be unloaded.

Mezger said the company has also “increased our efforts to reactivate properties previously held for future development in various markets where we continue to operate.”

Kaminski said that “our strategic prioritization of asset efficiency will place additional focus on asset monetization opportunities as well as balancing land investment and managing growth within our capital structure goals.”

Given some softness in demand in some of the markets it serves, KB Home will be targeting a lower rate of land investment in 2015, with the CFO estimating a range of $1.1 billion to $1.4 billion, “which we believe will support our revenue growth objectives.”

He said that other than in connection with the planned refinancing of the 6¼% notes coming due in June, “we have no anticipated capital raises for the foreseeable future and have no plans to issue equity.

“In addition, our target net debt-to-capital ratio – in the 40% to 50% range – remains consistent with past comments.”

During the question-and-answer portion of the call following the formal presentations by the two executives, Mezger was asked whether his stated goal of improving KB Home’s asset efficiency and generating a greater return on invested capital might include, besides generating more free cash flow, possibly paying down debt or buying back stock.

He did not directly address either of the latter two options one way or another.

Instead, he said that “we think we can drive our growth with our own cash generation, whether it is some of the things we’ve talked about – monetizing old assets, whether it’s selling some lots where we’re lot-heavy in a location – to just a general review every month of our balance sheet: where our assets are, what their status is and what can we do to monetize things, while continuing to grow our business.”

The CEO said that “we want to drive our business with our balance sheet – and not have to go access the markets anymore.”

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