originally appeared in Zacks Equity Research:
KB
Home, one of the leading homebuilding companies in the U.S., recently
acquired lands for 100 luxury homes in the sought after community of
Playa Vista in Westside, Los Angeles. The construction of homes will
start in spring.
The company intends to build three story
detached homes of 2,800 square feet. The homes will have four bedrooms
and three and half baths. The company also intends to build single floor
condominium homes of 2,000 square feet with private elevator access for
each home.
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Owing
to its operational business model KBnxt, KB Home always begins
construction only after a purchase agreement is executed. As such, the
consumers buying KB homes in Playa Vista will get the liberty to plan
their homes according to their preference.
This process also
helps the company turn over its inventory more quickly than its peers,
thereby supplying capital for reinvestment. In the long run, this
reduces the risk of unsold inventory leading to higher returns on
invested capital.
Playa Vista is one of the most sought after
luxurious communities in Westside, Los Angeles. The acquisition of land
in Los Angeles’ Westside is in line with KB Home’s strategic shift in
its geographic footprint. The focus is to place the communities in
highly desirable land-constrained submarkets that enable it to sell
larger, higher-priced homes, thus driving a strong increase in average
selling price.
The rising demand for new homes has led to a
favorable situation in the housing market, where inventory levels are
dropping and prices are moving up. The demand has been particularly
strong for luxury homes. Toll Brothers, Inc., another leading luxury
homebuilder in the US, has been witnessing strong overall growth over
the past few quarters.
Therefore, building adequate number of new
homes is necessary in order to maintain the required level of inventory
to meet the growing demand for homes. Acquiring lots and lands in the
Playa Vista community will help the company to capitalize on the
increasing housing demand.
With housing market recovery gaining
momentum, KB Home believes its strategic initiatives including overhead
reduction, margin expansion, and land investments in higher-priced,
better-located communities; and increasing backlog will help it achieve
profitability in the upcoming quarters. Though we have faith in KB
Home’s strategic initiatives, we believe that it may take time to
achieve sustainable profitability as the housing market recovery process
is erratic and uneven.
We currently have a Neutral recommendation on KB Home. The stock carries a Zacks #3 Rank (a short-term Hold rating).
