管理層發言
Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home fiscal 26 Second Quarter Earnings Conference Call. All participant lines are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. This conference call is being recorded and a replay will be on the KB Home website until July 23, 2026. We will now turn the call over to Jill S. Peters, Senior Vice President, Investor Relations.
Thank you. You may begin.
Thank you, Jill.
Good afternoon, everyone, and thank you for joining us today to review our results for the second quarter of fiscal 26. On the call are Jeffrey T. Mezger, Executive Chairman; Robert V. McGibney, President and Chief Executive Officer; William R. Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. 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 various factors, including those detailed in today's press release and in our 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, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin as well as any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our site at kbhome.com. And finally, please note all figures are based on our quarter ended May 31 and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here is Jeffrey T. Mezger.
Thank you, Jill, and good afternoon, everyone. We are pleased to report second quarter results that met or exceeded the midpoint of our key guidance ranges and reflected sequential improvement in our adjusted housing gross profit margin. Operationally, our execution remains strong as we achieved double-digit year-over-year community count growth, and further reduced our build times. We exceeded our expected mix of built-to-order sales during the quarter. And with the return to this core business model, we expect to have more predictability in deliveries at better gross margins than we would achieve by relying on selling inventory homes. At a high level, our second quarter results included total revenues of $1.1 billion and diluted earnings per share of $0.43. With our significant financial flexibility, we remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders. We repurchased 1.4 million shares of our common stock at an average price below our current book value per share. We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, contributing to improving our return on equity over time. Inclusive of dividends, we returned over $90 million in capital to our shareholders in the second quarter. In addition, we continue to expand our book value per share to nearly $62. At this time, let me turn the call over to Robert.
Thank you, Jeffrey. Our teams continue to execute well balancing pace and price in response to market conditions, driving further efficiencies in build times and managing our direct cost with discipline. I will spend most of my time today talking about our strategic return to what KB Home does best in utilizing a built-to-order model. One year ago, on our second quarter fiscal 25 earnings conference call, we shared our intention to return to a predominantly built-to-order business. We acknowledged that doing so would create a temporary trough in deliveries, which we believe is now behind us. Our built-to-order approach and the benefits of it extend beyond any single quarter's results. It is a structural repositioning of our company that we believe will enable stronger, more sustainable performance over time and across market cycles. The fundamental premise of our built-to-order model is putting the customer at the center from day one. Our buyers choose their lot, floor plan, and personalized finishes. The result is a home that has real, specific value to the people who will live in it. Homes built to customer specifications do not require heavy incentives to sell. The buyers are already invested in and feel a connection to the homes they created. This is in contrast to a speculative business model where incentives are used to create value. In that model, the builder increases the incentives to the point at which the buyers believe they have been adequately compensated for features and finishes they did not choose. Our low cancellation rate reinforces this point. Buyers who commit to a built-to-order home are genuinely invested in it, which means our backlog converts into closings. Critically, for how we run the business, built-to-order creates a sold backlog before a single foundation is poured. Of the 3.32 thousand (3,320) net orders we generated in the second quarter, 73% were built-to-order homes. This is not just a mixed metric. It is the result of a deliberate focus on creating a backlog of sold, not-yet-started homes, which we believe has three principal benefits. First, it gives us visibility and predictability. We enter our construction cycle with certainty about the key variables: the buyer, the price, our cost to build, and the expected close date. When a buyer commits and we lock in the purchase price, our direct costs are established before a shovel hits the ground. We are not exposed to material or labor cost increases for that home after construction begins. Crucially, we know the margin we will achieve at delivery before we start. We view this as a fundamentally lower risk profile than a speculative model where a builder starts a home with an assumption of the future sales price and then finds later at the time of sale that market conditions may require price reductions or heavy incentives, which compress the margin that looked attractive when construction began. The visibility and predictability that built-to-order provides translates directly into more efficient operations and more dependable margins on deliveries. Second, it gives us leverage with our trade partners. We currently have over 1.5 thousand (1,500) sold homes that have not yet started construction. This pipeline of pending starts is an asset we can leverage in negotiations, particularly when starts are lower in most of our markets as they are now. Our trade partners want volume and predictable workflow, and we can offer both. In exchange, we secure better cost, keep skilled crews on our job sites, and maintain the even-flow production cadence of weekly starts per community that drives efficiency across our entire build cycle. Third, it supports margin quality over time. We can produce better margins on built-to-order homes because we are building homes for buyers who have made choices for themselves, with the personalization and value that matter to them. A predominantly built-to-order business operating at scale with disciplined execution is the foundation that enables us to expand our margins over time. We focused our selling efforts in our second quarter on built-to-order homes, and our divisions delivered solid performance that will benefit our results in the second half of our fiscal 2026. Built-to-order homes represented nearly three quarters of our net orders, as I mentioned earlier. This outcome is a clear positive in what was a challenging spring selling season. Although buyers continue to demonstrate the desire for homeownership and the ability to qualify, consumer confidence remains low driven by a variety of factors, from elevated mortgage interest rates and affordability pressures to rising inflation and geopolitical uncertainties. We continue to attract a healthy level of traffic to our communities, signaling both consumers' interest in purchasing a home and the appeal of our locations and products. Our cancellation rate was stable, reflecting high-quality committed buyers who can close. However, market conditions precipitated a less-than-optimal conversion of traffic to sales as many consumers lacked the confidence to purchase, resulting in a community absorption rate of four net orders per month. Looking at our net orders in more detail, we shared on our last earnings call that sales in March had started out a little slower sequentially. This contributed to average weekly sales for the month of March that were softer than February, which we attributed to a further weakening in consumer confidence associated with the start of the conflict in the Middle East combined with rising mortgage interest rates. Moving into April, average weekly sales rebounded, helped by lower interest rates as well as steps we took to improve affordability; adjusting pricing in certain communities allowed us to capture more of the market. While market conditions became more challenging in May with mortgage rates moving higher and inflation accelerating, our sales remained resilient. We view this as an encouraging result given the overall environment. We ended the second quarter with 280 active communities, up 11% year-over-year. We achieved the high end of our target for new communities, including the grand opening of Meridian with five different product lines in Henderson, Nevada, one of the two large land parcels in the Southwest that we acquired last year. The second of these parcels, Sandstone in North Las Vegas, with four distinct product lines, is scheduled to open later this year. With more than 70 new communities in the first half of this year, we had also attained our peak community count during our second quarter as planned. As we stated on our last earnings call, depending on the pace of sellouts, we expect community count to step down in the second half of this year and we estimate our third quarter ending community count will be between 270 and 280. Our backlog at quarter end was 4.53 thousand (4,530) homes, which grew 26% sequentially. With the level of built-to-order net orders that we achieved in the second quarter we are moving closer to growing our backlog year-over-year and narrowed the gap significantly as compared to our first quarter. Looking ahead, we expect to continue growing our backlog sequentially in the third quarter and believe this will also be the quarter in which we return to year-over-year backlog growth. This will support our projected sequential increase in deliveries during the second half of fiscal 26 and positions us favorably entering fiscal 27. Our production is as well balanced across the various stages of construction as we have seen in a long time. Having this cadence is another important aspect of our even-flow production and ability to negotiate costs with our trade partners. We have a total of 3.99 thousand (3,990) homes in process, 77% of which are sold. We reduced our finished unsold inventory to 11% of our total production as compared to 25% in the first quarter, having sold through much of our aged inventory. Our teams continue to get better and better in efficiently constructing our homes and further reduced our build times in the second quarter by eight days sequentially to 100 days from home start to completion on built-to-order homes. The ongoing progress made on this key metric is remarkable, driving build times that are now at their lowest levels in more than a decade. This is an important factor in the customer value proposition of a built-to-order home, sharply reducing the differential in the time that it takes to build a personalized home versus purchasing a resale home, historically our largest competitor. Shorter build times also allow our customers to lock their mortgage rates more easily and cost-efficiently. With faster build times, we can sell later in the year for year-end delivery. In 2025, it took us about five months to build a home, which meant early spring was the latest we could sell built-to-order homes for same-year delivery. Today, with build times closer to three months, we could continue selling built-to-order homes into the summer for same-year delivery. By capturing more volume and revenue in the current year, we can better leverage our cost thereby improving our margins and increasing our cash flow. As to direct cost, they have improved significantly in the past three years. The magnitude of improvement varies by division as regional mix and product types impact results. In certain divisions, we have reduced our directs by as much as 15%. More recently, we have seen some pressure on material costs, in particular lumber, which we are working to offset with savings in trade labor costs. Our lumber strategy is diversified with a variety of wood species and lock periods that helped us mitigate the volatility in lumber for homes that we started in the second quarter. Our teams are drawing on our deep supplier relationships to limit cost increases while also actively rebidding and negotiating our local and national contracts to help manage directs very tightly. In addition, value-engineering our products and simplifying our studio offerings are offsetting some of the increases in material cost. Moving on, I will review the credit profile of our buyers who finance their mortgages through our joint venture KBHS Home Loans. These metrics have remained consistent and favorable over the past year, starting with our capture rate, with 83% of buyers who financed their home in the second quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 15% was fairly steady as compared to prior quarters and equated to about $70 thousand. On average, the household income of customers who use KBHS was about $136 thousand and they had a FICO score of 741. Even with one-half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or pay in cash. About 8% of our deliveries in the second quarter were to all-cash buyers. Before I wrap up, let me spend a moment on how we see the remainder of the year unfolding. As we anticipated and is evident in our guidance, we are expecting sequential growth in deliveries, revenue and gross margin in our third quarter and again in our fourth quarter. Specific to our third quarter deliveries, more than 80% of these homes are already in our backlog. Although Bill will provide the details of our guidance in a moment, let me share some context around our Bay Area business. We expect to be a meaningful gross margin contributor in the back half of this year and beyond. We took a patient selective approach to investment in this market given the longer entitlement and development timelines. That positioning is now paying off with a select group of new communities with high ASPs at healthy margins. These communities are now selling and as deliveries ramp up through the second half of fiscal 26 and into fiscal 27, we expect them to be a meaningful driver of the margin expansion we are discussing today. In conclusion, while we are managing through a difficult market environment, we are also reestablishing our operating identity as a company that builds homes based on decisions that buyers make, creating real value for them. This model enables backlog visibility, cost leverage, and margin predictability that we believe are meaningful differentiators and support stronger performance over time, both operationally and financially. We acknowledge that we have more work to do on further improving our gross margin, which we are building toward with intention, and with second quarter results that demonstrate the start of what we expect to be ongoing progress. And with that, I will turn the call back over to Jeffrey.
Thanks, Robert. We have a favorable lot position, owning or controlling over 59 thousand lots at the end of our second quarter, 38% of which were controlled, and with only one community with approximately 100 lots that was land banked. Our long-standing approach has been to self-finance our land acquisitions, as we believe that only in certain situations does land banking make economic sense for our company given the gross margin erosion and limited risk transfer from the transaction. This approach has the added benefit of a balance sheet that is more transparent. Our growth strategy remains primarily centered on expanding our share within our existing markets with the geographic footprint that we believe is positioned for long-term economic and demographic growth. That said, with the success we have had in selectively entering new markets over the past five years in Seattle, Boise, and Charlotte, with deliveries that are expected to represent about 10% of our fiscal 2026 volume, this year marks our return to Atlanta. This is a top-10 housing market, characterized by strong demand as well as population and job growth. Our local team is led by a division president with 25 years of experience in this market with deep relationships with landowners and sellers that he developed through his years of working for both national and local homebuilders. We are excited to expand our growth in our Southeast region in this thriving market and we are off to a solid start. We have recently acquired our first land parcel in Atlanta, with a projected community opening date in early 27. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested just under $500 million in land acquisition and development in the second quarter, with roughly 75% of our investment going toward the development and fees for land we already own. In closing, I would like to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they have been executing our built-to-order model, which we believe will result in a stronger company going forward. Our year is progressing with expected further sequential improvement in quarterly deliveries, revenues, and gross margin in the back half of fiscal 26. In addition, anticipated backlog growth will lay the groundwork for fiscal 27. We are rewarding our shareholders with a steady return of capital and we plan to continue our share repurchase program with between $50 million and $100 million of repurchases planned for our third quarter. We remain optimistic about the long-term housing market, the favorable demographics underpinning higher demand over time, and the ongoing structural undersupply of homes supporting our opportunity for meaningful future growth. We are committed to delivering long-term shareholder value and we look forward to updating you as the year continues to unfold. And now I will turn the call over to William R. Hollinger for the financial review.
Thank you, Jeffrey. In the fiscal 26 second quarter, we generated housing revenues of $1.11 billion, net income of $27.3 million, and diluted earnings per share of $0.43. We continued our balanced approach to capital allocation with land-related investments and returning capital to shareholders through share repurchases and dividends. We also kept our debt-to-capital ratio at a healthy level. As you recall, last quarter we provided limited guidance for the 2026 full year. With greater clarity following our second quarter results, including the softer-than-expected spring selling season, we have refined our 2026 outlook and are providing detailed guidance for both the third quarter and full year. Our housing revenues for the second quarter were just above the midpoint of our guidance range, declining 27% compared to $1.52 billion in the prior period. This result reflects a 23% decrease in the number of homes delivered and a 5% decline in their overall average selling price, primarily driven by general market conditions. The 2.4 thousand (2,400) homes we delivered in the quarter represented a backlog conversion rate of 66% compared to 70% a year ago. The modestly lower conversion rate was expected this quarter as we continued our strategic shift to a higher mix of built-to-order homes delivered. In the second quarter, we exceeded our expected mix of built-to-order net orders. Our renewed focus on built-to-order continues to drive sequential backlog growth with our total number of homes in backlog up 45% since the beginning of the year. This trend reflects both our buyers contracting earlier in the construction cycle and provides greater visibility into future deliveries. And as Robert noted, based on this momentum, we expect our year-over-year ending backlog comparison to turn positive in the third quarter. Our overall average selling price of homes delivered for the quarter was $462 thousand, up 2% sequentially due to product and geographic mix. Let me address the anticipated trajectory of our average selling price for the rest of the year. We believe our average selling price will continue rising sequentially, with the increase becoming more pronounced in the fourth quarter as a larger share of deliveries comes from our higher-price West Coast region, including Northern California, as Robert highlighted. With the current scale of our business, even modest shifts in regional mix can meaningfully impact our average selling price, and we expect these dynamics to work in our favor as the year progresses. Based on our current outlook, we expect third quarter homes delivered to range from 2.6 thousand to 2.8 thousand and our housing revenues to range from $1.2 billion to $1.35 billion. For the 2026 full year, we are updating the guidance we provided last quarter. For our homes delivered, we are maintaining the same midpoint while narrowing the expected range to 10.5 thousand to 11 thousand homes. We have also narrowed our range of expected housing revenues to $4.9 billion to $5.3 billion. Homebuilding operating income for the second quarter was $28.2 million compared to $131.5 million for the prior year quarter. Operating income in both the current and year-earlier quarters included total inventory charges of $5.6 million. In the current quarter, these charges included a $3.1 million inventory impairment related to a single community which was not due to any market factors. Our homebuilding operating income margin for the quarter was 2.5% compared to 8.6% for last year's second quarter, mainly due to our lower housing gross profit margin and selling, general and administrative expenses as a percentage of revenues. Our second quarter housing gross profit margin was 15.2% compared to 15.3% in the first quarter and 19.3% for the year-earlier quarter. The year-over-year decrease primarily reflected pricing pressures, higher relative land costs, and reduced operating leverage. Excluding inventory-related charges, our housing gross profit margin was 15.7%, which came in just above our guidance range and reflected a modest sequential improvement from the 15.5% for the first quarter. For comparison, the housing gross margin excluding inventory-related charges in the year-earlier quarter was 19.7%. We are forecasting our housing gross profit margin for the fiscal 26 third quarter in the range of 16.0% to 16.6% and for the full year in the range of 16.1% to 16.5%, assuming no inventory-related charges. Our full year outlook reflects our expectation of a more pronounced sequential margin improvement as the year progresses, supported by increased operating leverage, a growing proportion of built-to-order homes delivered, and a favorable mix shift toward higher-price, higher-margin West Coast communities, particularly in Northern California. As these factors take hold, we anticipate the year-over-year housing gross margin gap to continue to narrow over the balance of the year. Let me take a moment to expand on the sequential margin progression that we anticipate for the remainder of the year. The midpoint of our third quarter guidance at 16.3% represents a 60-basis-point sequential improvement. We expect our third quarter margin to benefit mainly from an increase in operating leverage of roughly 30 basis points along with a lift from a higher mix of built-to-order deliveries. Our full year margin guidance implies a further step up in the fourth quarter; at the midpoint about 100 basis points of sequential expansion. We anticipate this improvement to be driven primarily by roughly 60 basis points of positive operating leverage along with more meaningful contribution from our expanding built-to-order mix and additional upside from a favorable mix shift toward higher-priced, higher-margin West communities. The projected sequential improvement also reflects some modest offsets which are incorporated into our guidance. Our selling, general, and administrative expense ratio for the fiscal 26 second quarter was 12.7%, at the midpoint of our guidance. SG&A for the quarter included $1.5 million of expenses related to the planned relocation of our corporate headquarters to Tempe, Arizona in 2027, which we announced in April. We anticipate recognizing additional relocation-related expenses each quarter until the move is fully completed. We will outline the estimated total costs in our second quarter Form 10-Q which we plan to file on or about July 9. These anticipated expenses are included in our guidance. While our total overhead for the quarter decreased from a year ago, our SG&A ratio increased mainly due to lower operating leverage. We are forecasting our fiscal 26 third quarter SG&A ratio to be in the range of 11.3% to 11.9% and our 2026 full year ratio to be in the range of 11.4% to 11.8%. We expect our SG&A ratio to continue to improve sequentially in the second half of the year, mainly due to increased volume and resulting higher revenues. Our income tax expense of $9.9 million for the quarter represented an effective tax rate of 26.6% compared to 24.2% for the year-earlier quarter. A higher-than-expected rate versus our previous guidance was primarily due to lower benefits from stock-based compensation reflecting fewer stock option exercises than anticipated. All our outstanding stock options are set to expire in October. We expect our effective tax rate to range from 19% to 21% for the fiscal 26 third quarter which assumes the exercise of all outstanding stock options. For the full year, we anticipate our effective tax rate will be approximately 22% to 24%, slightly lower than last quarter's guidance. As we noted on our previous earnings call, our tax rate in the second half will reflect the reduced impact of energy tax credits due to their elimination for homes delivered after June 30, 2026. As I previously mentioned, we generated net income of $27.3 million and diluted earnings per share of $0.43. This compares to net income of $107.9 million and diluted earnings per share of $1.50 for the same quarter of last year. Our diluted average share count for the current quarter was down 12% year-over-year reflecting the impact of our share repurchase activity. Turning to the balance sheet, we continued our balanced approach to capital allocation, investing in future growth and returning excess capital to shareholders. In the second quarter, our investment in land acquisition and development was nearly $500 million, bringing our year-to-date total to $1.06 billion. This is down 26% from last year's first half when we purchased the two large land parcels in our Southwest region, as Robert referred to earlier. We ended the quarter with an inventory balance of approximately $5.7 billion, up slightly from where we ended 2025. During the quarter, we repurchased 1.4 million shares of our common stock at a total cost of $75 million, bringing our total year-to-date repurchases to 2.2 million shares at a total cost of $125 million. With $775 million remaining under our current board authorization and a solid balance sheet, we have the flexibility to continue to repurchase shares. In the second quarter, we also paid roughly $15 million in dividends representing an annualized yield of approximately 2%. We ended the quarter with total liquidity of $1.12 billion, including $200 million of cash and $923 million available under our unsecured revolving credit facility with $275 million of cash borrowings outstanding. Our debt-to-capital ratio was 34.1% at the end of the quarter, compared to 30.3% at the end of 2025 reflecting the credit facility borrowings. We have no debt maturities until June 2027. With our land position, liquidity, and well-laddered debt maturities, we feel prepared to manage through the current environment. These strengths support a balanced and disciplined approach to capital allocation in 2026 and beyond and our continued focus on long-term value creation for our shareholders. For the remainder of 2026, the volume pace and timing of land investments, share repurchases, and financing activities will depend on several factors, including our operating cash flow, liquidity outlook, land investment opportunities and needs, our share price, and broader housing market and economic conditions. To wrap up, while the spring selling season was softer than expected given consumer affordability challenges and an uptick in mortgage interest rates and broader macroeconomic and geopolitical uncertainty, we made meaningful progress in returning to a predominantly built-to-order business and positioning our operations for future profitable growth. With the first half of the year now behind us and our backlog up sequentially over that period, we have greater clarity on the drivers shaping the remainder of 2026 and believe we are poised to deliver on our outlook. We will now take your questions. John, please open the lines.
分析師問答
Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 if you would like to remove a question from the queue. We ask that you limit yourself to one question and one follow-up. Thank you. One moment, please, while we poll for questions. Thank you. And the first question comes from the line of John Lovallo with UBS. Please proceed with your question.
Good evening, guys, and thank you for taking my questions. The gross margin walk that you guys provided from 2Q to 3Q and 3Q to 4Q was really helpful, so I appreciate that. But I guess the question I have is, I believe you mentioned 30 basis points of sequential operating leverage 2Q to 3Q and then 60 basis points from 3Q to 4Q. How would this compare in your mind to kind of a normal year? In other words, is there anything unusual in this expected leverage?
Yeah, John, I think it is a pretty normal trend. We always deliver more in a second half than we do in the first half. There was probably less leverage in Q2 because we had the trough in deliveries than we would have in a normal Q2. We have an overhead structure in place that can continue to handle the scale as we get into 2027 as well. So in part, it is what we are seeing in Q3 and Q4, but we think we can continue to benefit looking ahead.
Okay, that is helpful. And then you did a nice job of answering my next question as well, but maybe I could just ask it a little bit differently. That is the fourth-quarter delivery ASP—you talked about some of the drivers of that. It seems like it is going to approach somewhere around $500 thousand which would be up about $30 thousand sequentially. You talked about built-to-order and some of the Bay Area deliveries. Is there any way to parse out the benefit from just built-to-order versus the Bay Area deliveries? And is there anything else we should consider in that step up in ASP?
I think you have really got all three there, John. Between the leverage from the scale, the built-to-order shift, and then what we are expecting is a mix change that is favorable for both ASP and margin and revenue in Q4.
We have not really parsed outside of the leverage piece the specific drivers for that incremental step up.
And the next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good afternoon, everyone. Thanks for taking the questions. Kind of similar line of questioning on the built-to-order mix and California mix. I think I heard you say for the fourth quarter gross margin, the midpoint is around 17.3%. In that fourth quarter, is the built-to-order mix kind of at the targeted run rate so we can use that as a jump-off point for 2027? And on the California mix, similar question: I think I heard you say you expect benefits there into 2027. So kind of finer points on your Q4 expectations and what it means for 2027 on both those fronts. Thank you.
As far as the built-to-order mix, I would not say we will be fully there. We expect the built-to-order deliveries to be around the 70% range when we get to Q4, plus or minus. I think there is some potential upside beyond that, and we will still have some spec coverage that we are doing likely as we get into Q4. Was there another part to the question?
We talked about this a little bit on our last call. We see that playing through. Specifically for our Northern California, really the Bay Area business, the teams there have done a good job of growing the lot pipeline. We are coming off a few years where that lot pipeline was a little thinner and deliveries were a little thinner, but we are seeing a good book of business that is coming through with high ASPs and strong margins. We do not see that as a Q3/Q4 event only; we see it more as a structural change that will be with us for a long time now that we have discipline and rhythm back in that area of the country.
Awesome. Great, thanks for that color. And then secondly, I wanted to touch a little bit on the comments around the spring selling season. I think you said there were some price adjustments in April, then you said in May there might have been additional challenging market conditions. Could you draw that into June—anything you have seen more recently? Also, are these factors included in the margin guidance for 2026 or could any of these pricing adjustments still bleed into what you see in 2027?
We have put everything we see into our guidance as we see it today. We have greater visibility than in prior years because of the backlog resulting from our shift to built-to-order, so it is fully baked into our guidance and projections for the back half of 26. As far as June goes, we are not really seeing any surprising changes from how things trended in the second quarter. We are seeing the typical seasonality trends coming out of the spring selling season, but our order pace has been steady and is tracking right in line with our expectations. Nothing in the cadence through June has given us any cause for concern; it is playing out about the way we would expect so far and supports our plan and our guidance for the back half of the year. On top of that, our built-to-order mix continues to build as a percentage of orders, which we are pleased with.
And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Thanks very much, guys. Appreciate all the color. Jill, nice to hear you on the call again. My first question, I will start with the Bay Area deliveries and the communities: you indicated that this is going to provide a positive impact not just this year but beyond. I wanted to make sure I am understanding that you have a pipeline of similar communities in your land holdings behind that, so I am not going to see things drop back once these communities sell out. Can you talk about the pipeline of the communities at that price point and what drove the change and the period where you did not have those communities?
Sure. As far as the communities themselves, we generally have larger lot counts in the community portfolio and more of them coming, some on structured take-downs. As we look at how this area has developed for us, the second part of your question is getting back to what we once were in this Bay Area business. We had some changes with the management teams there over the last several years. We are happy with the team we have now. They have been delivering good deal flow. We have been pleased with the communities they have opened, and we have continued to invest in those areas. There was a time when the core South Bay was one of our most profitable divisions for a long time and it had really shrunk down to a pretty small business. We have been growing that back, and we are just now getting to the point where we are seeing the results of that flow through to deliveries. So it was a bit of a trough in deliveries coming out of that specific region that we have now got back on track, and we are pleased with the progress.
Yeah.
That sounds really great. Kind of more of a normalization then. That is great.
We try to target a three- to five-year supply of lots. There are ins and outs with that, and if it is the right deal, we may go longer than that. We certainly buy deals that are closer to just a year's worth of deliveries. As far as the lots we have chosen to walk away from, it is really about staying disciplined to our approach and making sure that as we are focused on driving growth, that is profitable growth. The market has been choppy and things have moved around a lot, and we are not afraid to walk away from deals that we have under option or under contract if they no longer make financial sense. Our first salvo is to approach the landowner or the seller and renegotiate a better price or better terms, but we do not always get that. That is really the driver of why we have walked away from some of the lots you are referring to. Most of them have been deals that we tied up with a deposit and were in feasibility or due diligence and had not gotten a lot of money invested. We are not going to keep proceeding down a path on a deal that we do not see as meeting our return hurdles. Thank you.
And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.
Hi. Thanks for taking my questions. Sorry for the repetitive ones on California, but can you remind us maybe what percentage of deliveries and revenues that division used to represent for you, what it dropped down to these past couple of years, and when you talk about having the pipeline, does that assume you have similar communities behind it? Can you help quantify what percentage of mix this represents?
Mike, we do not really have that detailed data at hand on the call. The reason we specifically called out the Bay Area in the second quarter is that we had a challenged situation up there; our team was not delivering and results eroded. We did not want to use that as an excuse on calls—we powered through it and rebuilt the business. For years, the South Bay division was 10% to 15% of our profit just as one division. A lot of that went away and now it is coming back. It is a combination of a high-ASP, high-margin area that is also performing very well right now; it is one of the best housing markets in the country. We are calling it out now because at our current scale, the change in ASP can be pretty significant as you see in our guide for Q4. The pipeline is there, and we expect continued improvement in future years.
Yeah. Okay. I hear you, Jeffrey. I think a finer point at some point might be helpful to underscore confidence that this will be a go-forward run rate or continued improvement lever. I guess shifting gears back to demand, appreciate the comments on June being seasonal. Can you be more specific about where May sat given you were at four net orders per month for the quarter, and when you say June was seasonal, was that seasonal relative to a typical Q3 versus Q2, or seasonal off of a weaker-than-normal May?
March is usually one of our best selling months, and that was the one we saw softness in, which we attributed to macro events in late February including the start of the conflict in the Middle East. Sales rebounded in April and May, which were stronger than March. As we have gotten into June, things have continued about where we ended up in May. Orders have been strong and in line with expectations. It is about this time of year we usually start to see more of a seasonal summer slowdown. Without getting into specific weekly sales results, what we are seeing right now is aligned with that typical seasonal pattern.
And the next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, good afternoon. Appreciate all the details. Your lot count is down quite a bit over the last four to five quarters, down over 20% from where it peaked early last year. As we think about community count beyond this year, how should we think about the impact of the decline in lot count over the last five quarters? Could that result in some compression or an air pocket in community count out in '27 or '28? And more broadly in the land market, have you seen any relief or correction in land prices that would get you excited about opportunities to rebuild the pipeline over the next few quarters?
Alan, I will take the first half and then hand it to Robert for the current environment. If you think about it, lots owned and controlled started going down as the market started going down. As things got very volatile with pricing and consumer sentiment, we had trouble getting things to underwrite. Back in 2021 and 2022 the market was moving the other way and it was easier to underwrite so we tied up a lot of deals. As we sit here today, we are actively looking at deals each week. We intend to grow the company; our balance sheet supports it and we have growth targets for 2027 and 2028 that divisions are pursuing. What is interesting is we are seeing some opportunities for finished lot deals as markets reset where we can get into things and get to deliveries sooner than longer entitlement plays. The market is irrational in places and there are finished-lot opportunities; we are chasing those right now.
As far as the overall land market goes, we are beginning to see more than we have seen over the past couple of years as sellers start to come to terms with the current market. I would not say it is fully adjusted such that you can go out and start adding lots at scale that meet our underwriting hurdles today, but we are certainly seeing better terms in some cases, prices coming down in places, and perhaps less competition for some lots. Overall the sellers are starting to get a little more constructive on tethering their land price to current finished-lot values. There is more work to do and it is a market-by-market story. Some markets have softened more than others, especially where house prices have come down, but overall there's more rational thinking as far as land sellers and value.
Great. I appreciate the color, guys. Thanks a lot.
And the next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question. Can you provide the percent of deliveries that were built-to-order in the second quarter and maybe the cadence for the back half of the year?
Are you talking orders or deliveries? Deliveries in the second quarter that were built-to-order were 60%. We see that progressing and continuing to ramp up. By the time we get to Q4, I would expect about 70% of our deliveries to be built-to-order.
Great, that is helpful. And then on the outlook for gross margin, you mentioned starting to see some lumber inflation. What are the assumptions in terms of stick-and-brick costs and land inflation as you move through the back half of this year?
When we put guidance together we base everything on today's sales prices and today's costs. We do not have a crystal ball for where commodities might go. There has been talk about fuel-related price increases; we have been pushing those off and negotiating them. Now fuel prices have come down. So our guidance is based on what we see today for revenues and costs.
We are seeing a pretty significant decline in starts year-over-year across most of our markets. I mentioned the 1.5 thousand (1,500) homes that we have sold and not started yet. I view that as a great asset and a powerful tool we can leverage for better cost. Generally, when starts come down, our trade partners get hungrier for work and that will either keep a lid on cost or potentially drive them down from today's levels.
And the next question comes from the line of Paul Przybylski with Wolfe Research. Please proceed with your question.
Thanks. Good afternoon. Congratulations again on the built-to-order shift. Historically, built-to-order has had a 300- to 500-basis-point gross margin premium to spec. Are you seeing that spread continue to hold or did you have to shrink the spread somewhat to get the increased mix? And on the Atlanta reentry, how long do you think it will take to scale and why now? Any other markets on your radar?
We have not seen that spread change materially over the better part of two years; it is within that range and the midpoint of about four percentage points is about right for the typical spread between built-to-order and spec, even within the same community and product. On Atlanta, we had a successful startup in Seattle several years ago that became a top-three position for us. We would like to replicate that in Atlanta and follow a similar playbook. Atlanta is very new; we just acquired our first land deal there. I do not have a specific prediction on how big or how fast, but it is a top-10 housing market and we have a template from Seattle and Boise to follow. We are excited about the opportunity.
And the next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thank you. On the San Francisco market, which is one of the strongest real estate markets in the country, what is the sustainability of your community count and land supply in the market, and what is the current demand outlook you are seeing?
We are happy with the footprint and portfolio we have developed there. It really comes down to acquiring new deals as we sell through and deliver the assets we have. Our teams are out there; we feel like we have a strong land team in that market that knows entitlements and the processes and is well connected. Our approach is to grow from where we are today. It had shrunk down, and we did not like that; we are happy to get it back to stable and now growing. Our focus is continuing to grow it as long as we can find profitable land deals.
And could you quantify by what magnitude you expect to ramp up land investment in the Bay Area?
No, I am going to stay away from quantifying that specifically. We are looking to grow across all our cities, divisions, and regions. We do not allocate capital by saying we will allocate X to a division. We look at every deal. We are open for business every Monday in land committee, and if a deal meets our hurdles, we will do it. But we do not define a certain level of land acquisition we are after in a specific market.
And the next question comes from the line of Jay McCanless with Citizens Bank. Please proceed with your question.
Hey, good afternoon. With the high level of M&A we have seen this year, is that opening up any potential tailwinds for KB or creating headwinds as consolidation continues?
Jay, for us, it's business as usual. We do not want to comment on what others have done. We see our real opportunities to grow staying focused on KB Home. A logo change does not change our approach. We are always looking at private builders, but most of the time it is difficult to get deals to pencil because sellers want a premium for their communities; if you pay the premium you do not get the margin. We are turning over all the rocks and seeing what we can find. We are open to M&A, but we have not found one that works in the last couple of years.
Understood. Okay, thanks for taking my question.
Thank you. Ladies and gentlemen, that is the end of the question-and-answer session. That also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.