The best of times could even be better, says a major homebuilder, if it could just get enough material to meet what can seem like insatiable demand for its products.
"Disruptions to our supply chain intensified as the quarter progressed and, along with municipal delays, resulted in our build times extending by about two weeks sequentially," Jeff Metzger, chairman, president, and CEO of Los Angeles-based KB Home (NYSE: KBH), said in the company's third-quarter 2021 earnings call.
While the lumber shortage appears to be easing, Metzger said supply chain issues and other challenges pushed many deliveries into the current fourth quarter and subsequently will push some 4Q21 deliveries into the first quarter of next year.
Building earnings and demand
But there’s no need to shed tears for the company or its investors. Metzger noted that KB Home saw total year-over-year revenues jump nearly 50% to $1.47 billion, and its operating income margin jumped 250 basis points over the year to 12.1%. That drove profitability per unit up 40% from 3Q20 to nearly $52,000.
KB Home stock closed on Sept. 24 at $41.18 per share, right at its 52-week average, and on Aug. 15, it paid out its fourth-consecutive quarterly dividend of $0.15 a share -- good for a current yield of 1.46% -- after raising it from $.09 a share in 3Q20. It also bought back about $188 million of its own stock.
"This was accomplished even with the leverage we lost from the delayed deliveries," Metzger said. Intense demand is just pushing profitable sales a bit further out.
As of the Aug. 31 earnings call, KB Home had about 9,000 homes in production, and 93% of them were already sold. "Only 240 of these homes are unsold past the foundation stage, and our focus right now is on compressing our build times to deliver our backlog [of about 10,700 homes]," Metzger said.
Hundreds of millions of potential new homebuyers
Here's how the KB Home head says they're dealing with the supply chain issues: "We're taking aggressive steps to manage through these delays, including expanding our subcontractor base, partnering with our national suppliers, and simplifying our products to stabilize our build times."
The last item in that list sounds like assembly-line thinking, but Metzger puts that notion aside by pointing out that "insufficient level of supply exists at our price points to meet the demand for millennials and Gen Z…. These two cohorts value the personalization and choice in our built-to-order business model, which is a significant factor in why our absorption rates have consistently been among the highest in the industry."'
He also expressed confidence in the company's ability to keep selling at elevated prices, including among newly minted homebuyers.
"The credit profile of our buyers is above our historical level, with an average FICO score of 731 and down payment of 14%, translating to almost $60,000, which is noteworthy for our first-time buyer," Metzger says. "In addition, the internal indicators that we monitor for changes in customer behavior, including the square footage of homes purchased or spending in our design studios, remain stable."
The Millionacres bottom line
KB Home says it invested about $780 million in land acquisition and development and now owns or controls nearly 81,000 lots. Those numbers represent lots of confidence and lots of business. And they're not alone. Just one example: Big rival PulteGroup said in its 2Q21 report in July that it grew revenues year over year by 31% and had a backlog of more than 20,000 homes.
Real estate investors have multiple options for putting money down on the immediate and long-term future of residential growth, including real estate investment trusts (REITs) and other industry stocks.
Realtor.com just estimated that 5.24 million new homes are needed in the U.S. just to get even with demand. That's a lot to build on.