Please ensure Javascript is enabled for purposes of website accessibility

KB Home (KBH) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribers - Mar 24, 2021 at 11:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

KBH earnings call for the period ending February 28, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

KB Home (KBH -6.43%)
Q1 2021 Earnings Call
Mar 24, 2021, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon. My name is Devin and I will be your conference operator today. I would like to welcome everyone to KB Home's 2021 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company's opening remarks we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the Company's website at through April 24th.

Now I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Jill Peters -- Senior Vice President, Investor Relations

Thank you, Devin. Good afternoon everyone and thank you for joining us today to review our results for the first quarter of fiscal 2021. 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.

Before we begin, let me note that during this call items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results and the Company does not undertake any obligation to update them. Due to factors outside of the Company's control, including those detailed in today's press release and in filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at

And with that, I will turn the call over to Jeff Mezger.

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Thank you, Jill, and good afternoon everyone. 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.

With that, I'll now turn the call over to Jeff for the financial review. Jeff?

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Thank you, Jeff and good afternoon, everyone. 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.

We will now take your questions. Please open the lines.

Questions and Answers:


[Operator Instructions] Our first question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question.

Truman Patterson -- Wolfe Research -- Analyst

Hey. Good afternoon, everyone. Thanks for taking my questions. I appreciate it. First, Jeff, Jeff, orders in the first quarter, I believe you all said were up about 44% in the first six weeks. It looks like they were basically flattish in the final six weeks. Could you just really walk us through what's driving this? It sounds like internal initiatives driving pricing or maybe capping production and limiting lot sales. But on the flip side, if I heard you correctly, it doesn't sound like interest rates have had any real negative impact to demand yet. So if you could just walk us through what's really driving that? And I don't think I heard a March to-date order update.

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Truman, I can talk to that and ask Jeff pile on. A couple of things going on with order comp. As we shared back in January with our year-end call, our January and February last year were very good. And, yes, our comp was up 40%-some at that point in the quarter, but we knew it would come down because last year, frankly, February demand was as good as it is today and our orders were very strong. So we had a much tougher comp.

We had favorable numbers through the quarter. Demand remained strong through the quarter, no sign of slowing up. So we had this math on the comp while at the same time we did take some steps in February in particular to slow down sales a bit and capture the price opportunity that's out there.

We have a large backlog. We're balancing our starts with our sales and our backlog. And we elected to go for more price and more margin opportunity and still generated a pretty significant orders per community for the quarter at 6.4. So I think that answered your question on the comp, right? Actually the comp ended up about where we guided in the first-quarter call, because we said it would come down.

We didn't talk specifically to margin that as everyone on the call knows, we had a very disrupted Q2 last year and for the quarter the comp is going to be very large. But it isn't really a reflection on what we're doing now. It's a reflection on the speed bump we had in orders last year. So rather than give a distorted number I'd just share that demand trends remain very strong right now. We're not seeing any impact from interest rates. Affordability is still favorable. And as you look at our Q2 from last year, the comp is going to be incredible.

Truman Patterson -- Wolfe Research -- Analyst

Okay. Okay. And maybe asked another way, you all did a little bit on your 4,300 orders and you are matching starts to orders. Is that a level that you're comfortable with?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Yeah. Our starts were up 40% in the first quarter and we will continue to keep our starts and our sales in line. If we can keep starts in that pace we are able to keep selling at the pace we are in.

Truman Patterson -- Wolfe Research -- Analyst

Okay. Okay. And on your community count, I believe you said at the year end of '21 up low to mid single-digits and then in 2022 you're comfortable with 10% growth. Could you just run through what absorptions is included in that guidance? And could you just talk a little bit or characterize the health of the horizontal land developers and the municipalities regulatory process? Are you seeing any incremental tightness that might delay some community openings?

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Right. I can talk a little bit about the community count. And maybe Jeff if you want to comment on the land development. But as far as the community count numbers go, the largest variable, like always, has been our close-outs. So our focus right now is on getting our openings up and running and driving count based on that.

If we get to the end of the year and we have some variance in count up or down, it's just going to be a trade-off between the community count and our backlog numbers, frankly. So if the pace continues at the current levels or even goes higher than what we've seen, we may close out a few more communities with those sales would obviously end up in backlog and that really impacts either current year revenues or next year revenues. We think we'll still be around the same number. So we're just driving toward that.

The -- as far as cadence goes, we do expect to see sequential improvement and not only sequential improvement through the end of the year but out into 2022 as well. And as we're getting deeper into '21, we're starting to really shore up our plans for next year. We have a large number of grand openings on the docket again. And we do expect next year to see the close-outs moderate a little bit as we have some larger lot counts to start the year in some of those communities than we did in this year, which you'll see, I'd call, an abnormal number or level of close-outs in the current year.

So as we try to forecast out, I guess, getting back to your original question, we try to consider current absorption pace in the numbers and take into account seasonality a bit in that and do the best job we can on forecasting those close-outs. But actually the grand openings are much more impactful on the future of the business and the growth in the community count than the close-outs. Those would just be timing.


Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Matthew Bouley -- Barclays Capital -- Analyst

Yeah. Good afternoon. Congrats on the quarter. Thanks for taking the questions. Want to go back, I guess, to the sales pace of 6.4. You talked about -- obviously the 10 days in Texas is impacting the deliveries. Did it have an impact on the sales pace as well?

And overall just, Jeff, you're talking going forward about matching starts and -- in order to continue to keep this pace elevated. Is -- and you had the 40% in the quarter. So has the capacity to get those starts in the ground, has that changed at all versus how you guys were thinking a couple of months ago given everything we're seeing around labor and materials and all that? Kind of a two-parter on sales pace in Texas and start space. Thank you.

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Okay. All right. Thanks, Matt. I'll make a few comments and refer it so Matt can give you the color on the capacity. But in Texas in February, it impacted deliveries more than they would impact sales. Sales are in the queue for a while and it's more of a paper process. You can do it virtually. People can do it from their apartment and we can do it remotely as well.

On the delivery side where we got pinched was the last group of city finals, the last group of appraisals that you need when the home is completed, those type of things. So I would say that there was a slight speed bump in deliveries and I shared that we've already closed the vast majority of them here in March.

Whether it's land development that Truman asked about or here on the operational side, in general I can say that the industry and the municipalities and everyone has responded in ways to navigate through this post-COVID environment that we're in and the hits that we took and the delays actually were last summer and fall. And we've now got a much more predictable business. We're continuing to work on ways to compress things whether it's on the land development side, whether it's on the permit side where the cities are doing far better and in turn on the construction side as well. So it's not -- we're not feeling the stress on our capacity right now. It's making sure things just go in their normal rhythm and we're a more predictable business right now.

But, Matt, do you want to give him some color on build times and what we're doing?

Matt Mandino -- Executive Vice President and Chief Operating Officer

Sure. As Jeff touched on, what -- all of our divisions are very focused on expanding our overall capacity. That's simply recruiting additional trades, getting them onboard. And now I think as we progress through the year, we're going to see a reduction in cycle time as we can take advantage of that additional capacity.

On the municipality side, as the economy starts to open up and staffing with the cities improves, we will see a reduction there. So I think there are -- while there are certainly some challenges still in front of us in this environment, there are many things coming that as we progress that our cycle time, which has been running around seven months, can get back to our norm of six months. We're not assuming that improvement within the guidance we provided. But we've got enough things in place that we're optimist that we can start to get back to our norm.

Matthew Bouley -- Barclays Capital -- Analyst

Perfect. Thanks for the details, for hitting both parts of my question there. Second one on the gross margin, just thinking a little more near term. The guide suggests a step lower in the second quarter. I'm just curious to the extent you're guiding deliveries higher sequentially, so perhaps some greater fixed leverage. Clearly, the pricing trends have been on the favorable side. Is the expectation that just cost has gotten that much worse such that the price versus cost is a little less favorable in Q2 or is it more just mix? Any more color on that? Thank you.

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Right. Yeah. The dynamic between Q1 and Q2 is mainly mix. We had a beating of the first quarter guide, our first quarter forecast by quite a bit. A lot of that was just the units that were closed. So we closed higher-margin units in the first quarter. Obviously, those will not be closed now in the second quarter and some of the lower-margin units will be. So it's mainly mix.

If you really look at the guide for the full year, the second-half margin is going to be closer to 22% margin and the first half margins all together for the first six months to be closer to 21%. And we are seeing improvements sequentially as we go from Q2 to Q3 to Q4. So actually the outlook is quite positive and quite favorable as far as continued strength on the margin side and we were quite pleased to be able to lift that guidance by 70 basis points this quarter based on our backlog -- what we're seeing in the backlog, success of our new communities and very importantly the pricing versus construction cost inflation dynamic that we've been experiencing and able to control quite effectively up to now.


Our next question comes from the line of Stephen Kim with Evercore. Please proceed with your question.

Stephen Kim -- Evercore ISI -- Analyst

Yeah. Thanks, guys. Strong results, obviously. Jeff, I guess it would be fair to say that the pricing environment and the sales environment is about as strong as we've ever seen in history and you go back a long way, obviously. But my guess is you could probably sell every home you can build.

But you made a comment that I thought was very interesting about the existing home market, pricing being up a little more very aggressively. And in general my thought is that in the existing market every home that sells is effectively an auction whereas builders generally have an asking price and they generally don't sell over the asking price. But recently we heard that some major builders, or at least in some communities, actually having -- they were -- they are selling the communities down for additional sales. But if you are willing to pay a surcharge of tens of thousands of dollars, they'll go ahead and actually sell it to you. And I'm curious as to whether you're doing that or whether you are -- would consider doing auctions or not, and if not, why not?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Stephen, that's a good question. For starters what you're describing is not very customer-centric and you can get more price on that sale, but you're going to lose brand over time. I am very sensitive to that because we've got a great brand.

What we will do is and it's part of what I touched on with our metered sales releases, what we'll do is drop back to reservation where we can gauge the interest level at different price ranges and do some whisper pricing, if you will, and if we get strong enough interest it -- you open up for sale with a much higher price. And people are on a waiting list and we go through the waiting list right now. But I'd rather keep the good relationships with the customer base and the realtor community and go through our process to capture our prices. It's not that we're -- we're taking a lot of price right now. But it's in a -- it's in a controlled way to make sure we retain the relationships with the customers.

Stephen Kim -- Evercore ISI -- Analyst

Okay. Have you heard of what I'm describing happening and is this something that you are actually competing against or is it something that you have not heard of yet?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

I saw -- to me, it's more of a one-off that was covered on another builder's analyst coverage. But it's certainly not something we're seeing broad based or that we would entertain.

Stephen Kim -- Evercore ISI -- Analyst

Got it. Great. And then secondly, Jeff Kaminski, you had given the guide for 2Q gross margins. And obviously gross margins have been like a balloon that's -- that you're trying to catch. I mean it just keeps going up and up here a little faster than you can expect. And I'm curious as to whether maybe part of the reason for that is because there are increased sales going on in the design studio perhaps or other sorts of things which happen after the home has been sold that you're maybe not quite capturing in your methodology and whether that dynamic which drove nearly 100 basis point better gross margin in the first quarter than you thought three months ago could possibly play a role again in 2Q or if there's some reason why you don't think the upside surprise we saw in 1Q is repeatable?

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Right. Look, I never say doing better than what we say is not repeatable. There is always potential which we kind of call it how we see it. We have a large backlog and pretty consistent backlog that closes. Again, we did see some mix shift in the quarter and the total units came in a little lower than what we had expected. So that certainly had an impact.

The other impact that we see every quarter is we do have a certain number of units that sell and close within the quarter. So, as you know, we're a build-to-order builder, but typically we will have 70% build-to-order, about 30% inventory. And of the inventory, about a third of that sells and closes in the same quarter. So we'll see some variability there. And typically we will forecast slightly lower margins on that. And frankly in the first quarter the environment was so strong we didn't really take a haircut on those sales and closings. So there is potential for that.

But, again, we call like we see it. We'd only cushion it. We're showing up 70 basis points for the full year, reflecting the strong sales that we saw in the quarter and the cost containment and everything else all together. So we will standby our guidance for the second quarter and full year and are enjoying the more favorable outlook and more favorable forecast. It's driving not only margins but returns up quite significantly as well for the full year. So we're happy about that.


Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Alan Ratner -- Zelman & Associates -- Analyst

Hey, guys. Good afternoon and congrats on the very strong results. Jeff, maybe first question kind of similar to the last one on margin. I was just curious, a few other builders have kind of talked to this idea that as communities close out they generally generate the strongest gross margins over the life of that project for a multitude of reasons. You've got, obviously, price appreciation, but also kind of some true-ups of accruals over the course of the life of the project. And you guys are turning your communities quite a bit this year. You're closing out a lot and you're also opening up quite a bit and obviously a lot of the new openings probably won't be deliveries until next year. But I was just hoping you could kind of talk through what impact, if any, that turnover in community count is potentially going to have on your gross margin over the next, call it, 12 to 18 months.

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Sure. Yeah, one of the positives really about the communities we're opening today are the time when they went through our underwriting. It was pre-pandemic and pre-market run-up. So they had fairly, I'd say, modest ASPs involved. Obviously, we've seen some cost inflations since that time, but more so on the price. So they are a little bit better than how we underwrote.

And quite frankly, our base community portfolio is in the same boat. With the improving market conditions, we're seeing more strength in those margins as well. So as far as the trade-off goes, I'm optimistic about the new communities. They are performing very well. The vast majority of them are performing above the land book and really contributing to that low 20%s gross margin that we're now enjoying. And I don't see any real risk of that like coming off the rails just because we opened a bunch of new communities and it's been so far so good.

We've closed quite a few communities. Over the last two or three quarters have closed out and the replacements that have come in have been -- haven't really missed a beat. We've been right there on the margin side.

So as far as the portfolio and stuff goes, it's solid and it's improving. I like what I'm seeing for the plan with new openings. And the fact that most of our deliveries next year will still be generated off, what I'll call, pre-pandemic. Land price is another real positive, I think, for the overall health of the community portfolio.

Alan Ratner -- Zelman & Associates -- Analyst

Right. That's very helpful. I appreciate that. Second question maybe for Jeff. I'm just -- obviously your built-to-order model, your buyers are sitting in your backlog for a while and rates have moved. I know you don't seem overly concerned about that. But I'm curious your can rate right now is probably at all-time lows, if not pretty close to it. So have you seen any increased chatter or call volume from buyers in backlog that are asking questions about locking in rates or what they could do to lock in rates to prevent further increases going forward or anything that would be a potential warning sign about -- that there is some skittishness unfolding there?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Yeah. I wouldn't call it skittishness necessarily. They are coming in now and asking to lock the rates, which when rates are sliding, they don't like to do and as soon as the rates are going up, they will lock. And the lock program we have covers the time to build the home. So if they think rates are going up and they want to come in and lock we accommodate that.

Matt, do you want to add any other color you want to give on that?

Matt Mandino -- Executive Vice President and Chief Operating Officer

Yeah. Alan, taking a look at our pipeline of what we have currently, the percentage of buyers who have elected to lock is 10% to 15% and that's very comparable to where we were a year ago. So even with the headlines on rates and rates potentially moving up, it has not triggered our buyers to make an additional step.

But the good thing is we have a program in place. The buyer elects to do that. We can put them in that lot, but have not seen that happen yet, Alan.


Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Susan Maklari -- Goldman, Sachs & Co. -- Analyst

Thank you. Good afternoon, everyone. My first question is can you talk a little bit about the construction cost that you're seeing, how inflation kind of came through in the quarter and how you're thinking about that as we look through the next couple of quarters?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer


Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Sure. As far as construction costs go, the percentage of overall average selling price has remained incredibly steady and constant for quite a time now. So what we've been saying and doing, we continue to see which is offsetting inflation on the construction cost side with selling prices and that's working quite effectively.

There are concern that obviously in a tight market and a hot market like we're seeing now, there is a lot of pressure on the supply chain, both in materials and certain commodity categories as well as in labor. Our purchasing folks are very, very busy right now trying to manage that and they're doing a really good job. It's very challenging. It's a challenging environment. But they get paid to solve problems and they have been solving the problems.

So I think what we're really seeing now is just our ability to just continue to rely on our long-term relationships and whether they are with some of the large national suppliers that we've had in partnership or that we've been in partnership with for a long time or some of the large local labor providers and subcontractors, we've just really gotten tight with the supply base and providing a lot of visibility. We have a big backlog build. So it's a huge advantage for us. We know exactly what we're building, where we're building it and we share those backlog details with our suppliers so that they can plan accordingly.

And it's a tough environment, but so far so good and it's a high-class problem much rather be facing this than trying to go out and get sales or anything else that you can think of. And so far the operations have been doing, I would say, an outstanding job managing through it, not only getting their deliveries and try to compress the cycle times and also controlling as much as possible the inflation on that side of it.

Susan Maklari -- Goldman, Sachs & Co. -- Analyst

Okay, that's very helpful color. And then my next question is, going back to the question around higher rate, one of the things that we have heard is that with the savings rate having risen pretty significantly last year and stimulus money coming through and the fact that just home prices overall have risen some people that are either doing a move up or some moving from an existing home to a new home are putting more down payment down to help obfuscate the -- or to help mitigate the impact of the higher rates. And I know you mentioned that your average down payment is around 13% or so. Have you seen that change at all? Are you seeing that people are able to put more down? And is that to any extent kind of helping in terms of the rate environment and their ability to get in there and get all the options and the upgrades and all those kinds of things that they still want?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Susan, I don't know that the 13% has changed much in the last couple of years. Maybe a percentage point, no more. But if you put it in the context of 65% of the buyers were first-time buyers in the quarter and our average selling price is about $400,000. So they're putting $50,000, down on their home purchase and in the traditional lens a first-time buyer is going FHA putting down the minimum because that's all they have. This is a well-heeled first-time buyer and it's what's been catering to for the last couple of years.

So FICO score of 724, they can borrow more, they're not stressed in qualifying and I don't think they are joining the bank or closing either. I think they have a liquidity leftover. Matt, do you have any other color on that relative to studio or --

Matt Mandino -- Executive Vice President and Chief Operating Officer

Just as you think about the loan product that they're selecting their -- a year ago they were 55% conventional and we're still seeing that. So there just has not been a significant movement over the last six quarters on the loan that they're selecting. And as Jeff touched on in his comments, this is a high credit score. This is a buyer in a very strong position and ready to move forward. And is this the millennial who waited and has now been able to accumulate a very strong deposit good credit score, that's what we're seeing.


And our next question comes from the line of John Lovallo with Bank of America. Please proceed with your question.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thank you for taking my questions tonight. Obviously you're performing at a very high level, which is encouraging. I just have a question just rounding out the affordability conversation here.

If we think back to 2018, the economy was improving, homebuilding demand was solid and also improving, fiscal stimulus was expected to put more money in buyers' pockets and offset the effect of higher rates and ASPs. Everything felt pretty good from a homebuilding standpoint. And then the music sort of stopped in the fall.

So I guess the question is what were some of the early signs, if you can recall, that things were kind of coming to a hit and getting ready to pause? Any thoughts around that?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

It was -- as we look back on it John there is a couple of things that are different. Back then interest rate has ticked up more than they have right now, but -- and builders were pushing price. There is a couple of other things going on. One, there is literally no inventory. And back in '18 and '19 inventory was more plentiful and in balance. And I think the maturing of the millennials and the starting the family and saving the money, there is significantly more demographic demand today than there was back in '18 and '19.

And we've shared a story when we saw the slowdown and I would say our traffic probably ticked down a little or people took a little longer to buy. You will see things like that, but we quickly moved to reposition our model parts to smaller homes that were lower priced, more affordable where we would go from a 2,200 foot model down to a 1,700 or 1,800 foot model, put it in the model park. It would have a similar room count, albeit a little smaller rooms but would live the same and we were ready for this affordability crunch. And the buyer came back after about 120 days. I think it was more the adjustment to the rate at the time because rates didn't come back down when our sales picked up again.

So we were positioned for a tougher affordability environment and the buyer came right back. Rates then did come down and we didn't need to take advantage of what we have done in our average home size today. It's similar to what it was back in '18 and '19. But we're well positioned if it were to happen again because we still have the product out there and can move just as quickly. And we've actually done a lot of look-back research right now because this was so topical.

And if you look at many of our markets, we took same communities where we've moved price but rates are lower and in some cases the payment right now, year-over-year is up $30. I think the worst one I saw was up $180 in that community. So the -- this move with interest rates while it has come up a little bit, it's still pretty compelling out there and affordability is still, as I said in my comments, still very favorable.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful, Jeff. And then maybe one other one. I think you mentioned that your land purchases are pretty consistent with recent history at sort of one to two-year supply per community. One of the things that we heard from folks in the field is that other builders may not be being quite as disciplined and are buying lots in greater size and paying up quite a bit for some of these lots. Are you seeing any of this kind of land grab in any of the markets that you're competing in?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Well, we are seeing larger purchases occur and if somebody wants to do that that's their strategy. Hopefully it works out for them. We like our approach. We like to be in the community, make your money being a homebuilder, turn the asset, move on. And we think over time that's part of why our return on equity is increasing so well where we're now up north of 18% and we call it a returns-focused growth. And if you can keep turning your assets, generate your profits, generate your cash, move on to the next one like we've effectively done, you can get to very nice returns along the way and we think our approach is the right one.


Our next question comes from the line of Michael Rehaut with J.P. Morgan. Please proceed with your question.

Michael Rehaut -- J.P. Morgan Securities -- Analyst

Thanks. Good afternoon, everyone. Just a couple of questions here, maybe more clarifications. On the guidance, I was just curious on the raising of the revenues, which is obviously encouraging, given some of the timing issues in first quarter, second quarter, but at the same time it sounded interesting that you did not lower SG&A which typically all else equal, would have some operating leverage against that higher revenue. So any comments around that would be helpful.

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Right. Yeah, the leverage impact on the $150 million raise is not terribly significant. We are trying to prepare the Company and moving the Company to a larger scale. So we're pushing that pretty hard. And as we're scaling up the business, we're trying to scale up the resources at the same time. So you're seeing a little bit of SG&A like dollar build as you go through the year.

We also have a lot of new communities opening. As Jeff mentioned we're looking to open about 150 communities this year. That's about 50% up on what we've seen last year and in fact over the last two or three years it's a pretty large step-up and you end up -- you put in a little more expense upfront on that. But we're seeing a pretty nice leverage. We're going to see a nice step-down in SG&A second quarter as compared to second quarter of last year. And for the full year we'll see some progress on the SG&A side as well. So we're pleased with that and it's driving a very strong operating margin for us as well as we go through the year.

We'll continue to look for opportunities and continue to cost contain on the SG&A side, but first and foremost for us is to get this operating model scaled up and we'll continue to invest to get it scaled up. And we're seeing a lot of success, obviously, on the order side and the construction side now with our starts basically matching our sales pace. So we want to continue to support it with the Company resources as we move forward.

Michael Rehaut -- J.P. Morgan Securities -- Analyst

That's great, Jeff. Thank you for that. Secondly, I just wanted to zero in a little bit on current demand trends and I know obviously been discussed a lot so far in this call and noted -- you've noted that you basically haven't seen much of an impact or any of an impact from rate so far. Demand trends remain strong. So are we to take that you did that 6.4 orders per month per community in the first quarter. Should we be expecting something similar or even slightly stronger as you typically get some improvement as we go through the spring selling season? Is that a fair expectation?

Again, obviously you're trying to match sales pace with starts. So maybe the answer is we're seeing a capacity limit on starts and expect a similar sales pace. But just trying to get a sense for how we should think about 2Q on that regard because again you've said demand does remain strong. You are looking to maintain this starts pace. So just trying to -- I mean, logic would say perhaps that you would be able to hit a similar sales pace, if not a little bit stronger, just given the general seasonal improvement.

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Michael, there is a couple of things to qualify that. If market conditions remain as they are today we'll continue to be opportunistic and frankly take pace and price, like we did in the first quarter. If you think of our business model and our stated blended absorptions five a month and the spring is the stronger time of year, so on average five a month for a year, you're going to be six, six-and-a-half, in our second quarter. So I think it's fair to assume similar absorptions to what we saw in Q1. And at that level we hit the starts everywhere and we're in a nice balance and a nice rhythm to deliver on the year and set up a growth for '22. I think that's a reasonable assumption.


And our final question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Michael Dahl -- RBC Capital Markets -- Analyst

Yeah. Thanks for squeezing me in and appreciate the color so far. I guess, Jeff, just a quick follow-up on that. I wanted to ask about just how the kind of phasing of lot releases plays into the pace and maybe if you could give any quantification around what percentage of your communities you have shifted to a phased release model? And anything around kind of what those phases or timing of those phases actually look like compared to say three or six months ago if they are either shorter or longer periods in between when you release the next set of lots?

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Yeah. Matt, do you want to take that?

Matt Mandino -- Executive Vice President and Chief Operating Officer

Sure. As we look at our business, we just -- we think about each community and how we underwrote that deal and what was that -- what was that pace that we used to underwrite it. We will toggle as we move forward and occasionally tap the brakes, so to speak, and restrict some of the releases within a given week. But it does vary by community and it's fluid. And I don't mean to be vague because in some cases, we will elect to continue to run it at an accelerated pace if we secured an additional community that could be in the same submarket. If that community is progressing and is going to be in place, we will take that current community and run it at a slightly accelerated pace.

So it is a weekly community by community type analysis and review that I do with all of our Division Presidents in trying to meter it out, but also make sure that we are positioning ourselves for growth as we're moving through the year. So, Mike, I don't know if that hit what you were looking for. If not, feel free to clarification question.

Michael Dahl -- RBC Capital Markets -- Analyst

That helps, Matt. Thank you. My second question, I know you guys have spoken numerous times throughout the call around kind of your -- around the cost side and price cost side and matching price with cost so that clearly exceeding cost with your pricing based on the margin guide. I was wondering if I could get a little more color on your overall ASP you expect to be up 5% for the year. Clearly there is some mix impact there. Any quantification that you could provide on what your underlying price per square foot trends would be doing or any other way that you would kind of normalize that and help us understand a bit better what kind of the true core pricing power is?

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Sure. Yeah, the number one driver on the cost side has been lumber, as we all know. When you look outside of that across all the other commodity categories there has been ups and downs, including labor costs, but it really hasn't moved the needle much. So the whole game, the whole story on cost has been on lumber and it's a pretty -- it's a commodity and that's a market where there is future pricing and everything else and they are expected to come down as we go through the year but who knows.

What I can tell you is when you look at our forecast we're fairly consistent in our total cost percentage of ASP relative to the quarterly cadence as we go through the year, Q1 through Q4. So it's about matching, on a percentage basis, what you're seeing on the selling price side of what we're currently forecasting. But just caution, a lot of variability on the lumber.

I think at a point in time the total lumber issue is going to become more of a tailwind for the industry and for everyone than what we've seen. I think there is a limit to how high it can go. I am not sure what that limit is just yet, I'm not sure the timing of it. But I do believe that's going to come back into a range we're more accustomed to. And I think there is going to actually be some upside coming off of that.

But for now it's been satisfying and we're very thankful that we've been able to manage costs as well as we have given the big pressures on lumber and continuing to keep the construction machine going and the costs and fairly -- I think going to stay in [Phonetic] control given the margin expansion that we're seeing and being able to take advantage of what we're seeing in the market and offsetting the cost inflation. So no, I'm not overly concerned at this point. In fact, we've been confident enough and thought about the year favorably enough to lift the margin guidance as we go. So we're actually even feeling a little bit better about our profitability than we were three months ago.


[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Jill Peters -- Senior Vice President, Investor Relations

Jeffrey T. Mezger -- Chairman of the Board, President and Chief Executive Officer

Jeff Kaminski -- Executive Vice President and Chief Financial Officer

Matt Mandino -- Executive Vice President and Chief Operating Officer

Truman Patterson -- Wolfe Research -- Analyst

Matthew Bouley -- Barclays Capital -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Susan Maklari -- Goldman, Sachs & Co. -- Analyst

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Michael Rehaut -- J.P. Morgan Securities -- Analyst

Michael Dahl -- RBC Capital Markets -- Analyst

More KBH analysis

All earnings call transcripts

AlphaStreet Logo

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

KB Home Stock Quote
KB Home
$31.84 (-6.43%) $-2.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.