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KBH to Build Lakestone Village

TOL KBH

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One of the leading homebuilding companies in the U.S., KB Home (KBH - Analyst Report) recently acquired 65 lots in Fuquay-Varina, southwest of Raleigh, North Carolina to build a new community called Lakestone Village early next year. Lakestone Village will be an addition to the company’s existing communities in Raleigh-Durham area.

The company intends to build one and two story single family homes of 1,900 square feet to 3,300 square feet with prices starting from $180,000s. The homes will have up to six bedrooms and four baths.

Owing to its operational business model KBnxt, KB Home always begins construction only after a purchase agreement is executed. Therefore, consumers buying KB homes in Lakestone Village will get the liberty to plan their homes according to their preference. They will be able to choose homesites, floor plans and other features like faucets and fixtures. They can also opt for an additional bedroom, bath or study, according to their individual 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.

The acquisition of land for Lakestone Village 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.

As such, KB Home has been aggressively investing in land assets and communities, activating communities which were held for future development, increasing revenues per community, and strengthening management teams with additional resources. For instance, KB Home recently acquired 45 finished lots and 160 undeveloped lands in Copperfield community in Converse.

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., (TOL - Analyst Report), another leading luxury homebuilder in the US, has been witnessing strong overall growth over the past few quarters.

This has necessitated the building of adequate number of new homes to maintain the required level of inventory to meet the growing demand. Acquiring lots and lands 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).

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