KB Home: Buyers
Lose Confidence

KB Home, one of the nation's largest home builders, reported a much wider than expected quarterly loss, as home prices sank and the company took a massive tax charge.

The Los Angeles home builder said Tuesday it had a net loss of $772.7 million, or $9.99 a share, for its fiscal fourth quarter ended Nov. 30, versus a net loss of $49.6 million, or 64 cents a share, a year earlier. Year-earlier results included 40 cents in earnings from discontinued operations.

The mean estimate of analysts surveyed by Thomson Financial was for a loss of $1.08 a share on revenue of $1.77 billion. Revenue dropped 31% to $2.07 billion, with home deliveries falling 22% to 8,132

KB Home President and Chief Executive Jeffrey Mezger said, "2008 will be another tough year for the home-building industry."

The builder's fourth-quarter results paint a bleak picture for the home-building industry, which has been buffeted by the constricting of the mortgage market, a lack of consumer confidence and plummeting home values.

Now, KB and the other builders have another problem to contend with: They are being forced to take a charge on reserves that they have set aside for tax benefits that they planned to use against future taxes. The builders have accumulated these tax benefits on their books, as they have been taking large losses on their land and home values, amid the housing slump.

But many of the builders' auditors are now saying that the companies cannot continue to carry these reserves because their taxable income is shrinking and shows no sign of increasing in the foreseeable future.

KB's tax-related charge totaled $514 million in the fourth quarter, in addition to $403 million of inventory write-downs which were likely driven by falling home prices. KB's average sale price dropped 12% to $247,800 in 2007 from a year earlier.

KB said it needs a waiver under its revolving credit line because of the impairment and tax-asset loss. KB said it expects a deal to be reached with its banks by the end of the fiscal first quarter.

In late-morning trading, KB's shares were off 6.7% at $17.24 on the New York Stock Exchange, although some analysts took comfort in the builder's ability to generate cash and reduce its debt. The company increased its cash balance by $625.2 million from a year earlier, while its ratio of debt to total capital improved to 31% from 43.2% a year earlier.

Cash generation and debt reduction will critical for the home builders' survival, as the housing slump may worsen in the coming months and an economic recession seems more likely. The builders' banks are more likely to renegotiate credit terms. Smaller, less-well-capitalized builders may have a tougher sell convincing their lenders to hold out.

The banks recently reduced the builder D.R. Horton Inc.'s credit line to $2.25 billion from $2.5 billion, while agreeing to drop a previous interest coverage ratio requirement. Meantime, WCI Communities Inc. said it has until Jan. 16 to negotiate a new agreement with its banks on its revolving credit line. "We expect to finalize discussions regarding the anticipated longer-term amendment that would provide financial flexibility,'' WCI said in a statement. The Florida-based builder has gained new waivers on its revolving credit line every month since Nov. 7.

While the tax and land charges drove KB's losses, the builder also reported that its orders for new homes slid 33%, which was worse than the 14% decline forecast by some analysts. The larger-than-expected drop in orders likely means the home builder will continue to slash prices to move its homes.

It could grow increasingly more difficult for home builders if a broader economic recession takes hold. While economists are divided about whether the economy will dip into recession, the share prices of many builders – including KB's -- are hitting 52-week lows, indicating that many investors believe a recession is likely.

Job losses could damp housing demand because unemployed families likely can't afford new homes. Few builders will be spared. Buyers seeking higher-end homes, or retirement properties, will have difficulty selling their current homes to first time home buyers without jobs

One bright spot for KB Home are the Martha Stewart homes that it builds in six states. The company is also launching a Disney-themed line of home products, including wall coverings, lighting and flooring that are exclusive to KB Home buyers. Analysts say KB's marketing acumen will help it compete for buyers' attention during the protracted downturn.

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