Kb Home (KBH) Q1 2022 Earnings Call Transcript

Kb Home  (NYSE: KBH) Q1 2022 earnings call dated Mar. 23, 2022

Corporate Participants:

Jill Peters — Senior Vice President, Investor Relations

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

Robert McGibney — Executive Vice President and Chief Operating Officer

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Analysts:

John Lovallo — UBS — Analyst

Truman Patterson — Wolfe Research — Analyst

Alan Ratner — Zelman & Associates — Analyst

Mike Rehaut — J.P. Morgan — Analyst

Stephen Kim — Evercore ISI — Analyst

Matthew Bouley — Barclays — Analyst

Deepa Raghavan — Wells Fargo — Analyst

Susan Maklari — Goldman Sachs — Analyst

Presentation:

Operator

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2022 First Quarter Earnings Conference Call. [Operator Instructions] Today’s conference call is being recorded and will be available for replay at the Company’s website, kbhome.com, through April 23.

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, Alex. Good afternoon, everyone and thank you for joining us today to review our results for the first quarter of fiscal 2022. On the call are Jeff Mezger, Chairman, President, and Chief Executive Officer; Rob McGibney, Executive Vice Presidents 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.

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, 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 kbhome.com.

And with that, let me turn the call over to Jeff Mezger.

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

Thank you, Jill. Good afternoon, everyone. We delivered solid results in our first quarter that drove year-over-year growth in many key metrics, including revenue, operating margin and diluted earnings per share. Our revenues were up 23% and we produced significant margin expansion, increasing our operating margin to over 12%. We overcame the impact from lower than expected deliveries, which I will address momentarily, to drive a 44% increase in our diluted earnings per share to $1.47.

With our backlog value expanding 55% year-over-year to $5.7 billion, its highest level in 15 years, we have sold almost all the homes we need to achieve our projected $7.4 billion in revenues. We continue to focus on managing to our construction capabilities by aligning our sales to our starts. Over the past 12 months, we have started roughly 16,800 homes. We have 46% more homes in production at the beginning of the second quarter, relative to the prior year and with these homes being further along in their construction cycle, we believe we are well positioned to achieve our guidance this year.

Market conditions are strong and along with our expected growth in community count throughout the remainder of the year, we believe we have the foundation in place to drive further scale and profitability growth in 2022 and beyond. I want to provide some context for our shortfall in deliveries and then I will ask Rob to go a little deeper into the discussion.

The guidance that we provided in January assume that we would at least hold fourth quarter cycle times. While we were not counting on relief from the supply chain challenges, neither did we expect that they would worsen, we underestimated the degree towards the Omicron variant would exacerbate and already constrained supply chain and workforce across our trade partners, municipalities, utility companies and even our own employees.

While we take responsibility for our deliveries being below our prior expectations, at the same time, we acknowledge that the variant was a significant contributing factor. In the last six weeks of our first quarter, we lost approximately two weeks in our construction cycle, primarily in the finishing stages. While our foundation and frame segment held to the fourth quarter timelines.

At a run rate of about 250 deliveries per week, this two-week extension and build times was meaningful. Our team has adapted to the changing conditions, resequencing construction when necessary. We continue to be proactive to the extent possible to mitigate the impact of these issues going forward and are committed to regain our previous construction efficiencies over time.

Let me turn it over to Rob, to share some details, Rob?

Robert McGibney — Executive Vice President and Chief Operating Officer

Thank you, Jeff. In addition to the strain on the labor base that affected both our contractors and our own employees, there were several issues with respect to the availability of material during the first quarter, and I will begin by sharing a couple of specific examples with you.

Flexible ductwork, which is used in the heating and air-conditioning deemed limited supply due to the lack of stainless steel, a primary component used in the manufacturing. We experienced shortages of flex-duct in most of our divisions during the first quarter and our field teams found effective solutions to progress the construction of homes while waiting for this product, albeit at a slower pace, as the mechanical trim and other components of the home cannot be finished until the flex duct didn’t install. We are beginning to see improvement in the availability of flex-duct, although our teams are not depending on relief in this area to achieve their current delivery forecast.

Appliance manufacturers have not increased their production capacity to satisfy demand. This was compounded in the first quarter by a shortage of double ovens due to a retooling process, required to meet a change in federal regulation. In January, we were notified by our supplier, we would be short hundreds of ovens for homes that were scheduled for delivery in the first quarter. Our divisions moved quickly to identify work arounds, including purchasing ovens directly from retailers, where available, and we were able to cover most of the shortfall. This retooling issue appears to be a one-time event, and we expect the supply of double ovens to improve in the near term.

Garage doors, windows, cabinets, HVAC equipment, and signing, all remain constrained within the supply chain. However, we have identified alternate suppliers to supplement many of our product needs with comparable items and in some cases, we are ordering items well in advance of starting homes to mitigate delays, as lead times had extended significantly. Our teams were creative in developing work arounds issues emerged and we quickly implemented these practices across our divisions. We’ve also improved our visibility as to how homes are tracking through each stage of the build cycle and the daily run rate we need within each of those stages to achieve our plan which improves our ability to both forecast and execute.

We expect shortages of materials will stay with us throughout this year and we will continue to aggressively address any new issues that arise. Over the years, we have taken great pride in our build times and the predictability of our centralized scheduling system. We have to temporarily adjust our reliance on this system to include more manual processes due to the lack of predictability and getting materials delivered. While the supply chain issues are preventing us from returning to our historical build times in the short term, we are committed to restoring those levels longer term.

With that, I’ll turn the call back over to Jeff.

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

Thanks, Rob. Our biggest challenge today is completing homes, not selling them, as demand continues to be robust. Favorable demographics provide an important tailwind as the largest subset of millennials is nearing the peak age for first-time home ownership and the oldest of the Gen Zs are entering their homebuying years.

In addition to demographics, employment and wage growth have both continued to improve and the shift to working from home is another factor supporting demand. On the supply side, retail inventory remains very limited at 1.7 months and supply chain challenges have hampered the industry’s efforts to catch up on the production of new homes.

At 6.6 net orders per community, our monthly absorption rate was seasonally very strong in the first quarter, up from 6.4 in last year’s first quarter, even as we continued to implement price increases across the vast majority of our communities and interest rates began to rise. A particular note is our West Coast region performance, where a healthy increase in our base and the highest growth in our net order value, illustrate the strength of our business in California, both in land and along the coast.

Our pricing power is strong, while our pace is solid and we continue to work toward optimizing each asset. Our order rates speak to the magnitude of the demand and also signals that our price points are still attainable. In addition the base price increases, we are capturing higher lot premiums and studio revenues which taken together, contributed to a 15% rise in our net order value to $2.2 billion. Net orders in the first quarter were 4,210 down slightly versus the prior year. We are pleased with this outcome, given the difficult comparison to the year-ago quarter and an outperforming the projection that we shared in January. Our net orders increased sequentially each month and we exited the quarter strong, underlying our view that the spring selling season will be robust.

In this environment of ongoing strength and market conditions, we are continuing to experience a more rapid pace of community selling out. Our ability to replace these communities and then grow our community count, requires ongoing investment through a disciplined process. With an own lot position of over 51,000 lots and control of an additional 37,000 lots, we have what we need to drive their higher volumes that we expect in 2022 and 2023. We adhere to consistent underwriting criteria, targeting the median household income and assuming an absorption pace per community of between four and six per month depending on the specifics of the investment, utilizing current selling prices and construction costs, focusing on communities that provide a two to three year lot supply and staying geographically close to where we currently operate.

Affordability for our homes remains reasonable as the key measures that we track for sizable affordability pressures remain consistent with historical levels. One of the most important of these is the credit profile of our buyers. About two-thirds of our buyers qualified for a conventional mortgage and loan-to-value ratios are stable at 85%, which translates to an average down payment of over $70,000. In addition, our buyers average FICO score in the quarter held at all time highs of 732. Given that our buyers are well qualified, they have room to adjust if they need to in the type of mortgage product they choose or in their personalization selection in our built-to-order model. Our buyers rotate to a smaller square footage home at lower price and this choice provides an added layer of flexibility, which is key if affordability become stretched.

We ended the quarter with a backlog of nearly 11,900 homes at a value of $5.7 billion, up 55%. As I noted earlier, almost all the homes that we need to achieve our delivery and margin expectations for the year, are already in backlog and our cancellation rate after start of 5% remains well below historical levels. Our backlog reflects committed buyers with loan approvals on their personalized homes and they generally are closing upon completion.

Before I conclude my comments, I’d like to thank the entire KB Home team for their tireless efforts and dedication to serving our homebuyers. I would also like to recognize and thank Matt Mandino for his years of leadership and many contributions, as well as to congratulate him on his retirement.

Although we acknowledge, we are operating in a time of changing dynamics, given geopolitical issues, inflationary pressures, rising interest rates, and the fluid nature of COVID-19, we also recognize the health and resilience of the housing market. We are prime to deliver meaningful returns focused growth in 2022, with an expectation of expanding our scale to $7.4 billion, an increase in our operating margin above 16%, which would drive a return on equity of over 27%. We look forward to updating you as the year progresses.

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 highlights of our 2022 first quarter financial performance, as well as provide our second quarter and full year outlook. We are pleased that despite increasing supply chain challenges during the back half of the first quarter, we generated a meaningful increase in our housing revenues, which combined with an improved operating margin, drove 44% growth in our diluted earnings per share, compared to the prior year quarter.

In addition, sustained strong net order absorptions during the quarter, along with our substantial beginning backlog, produced a 55% year-over-year increase in our quarter-end backlog, supporting our revenue and margin outlook for 2022.

In the first quarter, our housing revenues of $1.39 billion rose 23% from a year ago, driven entirely by a 22% rise in the overall average selling price of homes delivered as a number of homes delivered was about even with the year-earlier quarter. Reflecting the broad strength of our operations and the overall housing market, housing revenues were up significantly across all four of our regions with increases ranging from 12% in the Southwest region to 36% in the Southeast.

Looking ahead to 2022 second quarter, we expect to generate housing revenues in the range of $1.55 billion to $1.65 billion. For the full year, we are reaffirming our housing revenue range of $7.2 billion to $7.6 billion, assuming no change in supply chain conditions during the remaining quarters of the year. We believe we are well positioned to achieve this topline performance, supported by our first quarter ending backlog value of approximately $5.7 billion and our expectation of continued favorable housing market conditions.

In the first quarter, our overall average selling price of homes delivered expanded 22% year-over-year to approximately $486,000, reflecting increases across the business, ranging from 16% in our Southwest region to 24% in our West Coast region.

For the 2022 second quarter, we are projecting an average selling price of approximately $490,000. We believe our overall average selling price for the full year will be in a range of $490,000 to $500,000. Homebuilding operating income for the first quarter grew 49% to $169.6 million from $114.1 million for the year-earlier quarter. The current quarter included nominal inventory related charges, versus $4.1 million a year ago. Our homebuilding operating income margin improved to 12.2% compared to 10.0% for the 2021 first quarter. Excluding inventory related charges, our operating margin for the current quarter increased 180 basis points year-over-year, reflecting improvements in both our gross margin and SG&A expense ratio, which I will cover in more detail in a moment.

For the 2022 second quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges, will be in a range of 14.3% to 14.7%. For the full year, we expect this metric to be in a range of 16.0% to 16.6%, which represents an improvement of 450 basis points at the midpoint, as compared to the prior year and a slight increase from our prior guidance.

Reflecting our strategy of balancing pace and price to drive higher returns, our 2022 first quarter housing gross profit margin improved 160 basis points to 22.4%. Excluding inventory related charges, our gross margin expanded by 130 basis points from 21.1% for the prior year quarter. This improvement reflected the favorable impact of higher selling prices outpacing construction cost inflation, particularly elevated lumber prices and lower amortization of previously capitalized interest, partially offset by greater expenses to support our current operations and expected growth.

Assuming no inventory related charges, we are forecasting housing gross profit margin for the 2022 second quarter in a range of 24.4% to 25.0%. We anticipate significant sequential expansion in quarterly gross margin during 2022, mainly driven by price increases that have outpaced cost pressures in our established communities, strong selling margins in recently opened communities and an expected reduction in amortization of previously capitalized interest. We expect our full year gross margin, excluding inventory related charges, to be in the range of 25.5% to 26.3%, up 410 basis points at the midpoint year-over-year.

Our selling, general and administrative expense ratio of 10.2% for the first quarter improved 50 basis points from a year ago, mainly due to operating leverage from higher housing revenues, partially offset by higher costs associated with resources to support growth. We are forecasting our 2022 second quarter SG&A ratio to be in a range of 10.0% to 10.5% and expect that our full year SG&A expense ratio will be approximately 9.2% to 9.8%, which represents an improvement of 60 basis points at the midpoint compared to the prior year.

Our income tax expense of $43.8 million for the first quarter represented an effective tax rate of approximately 25%, which increased from roughly 21% in the year earlier quarter, largely due to the expiration of federal tax credits for building energy efficient homes. We continue to expect our effective tax rate for both the 2022 second quarter and full year to be approximately 25%, assuming the tax credit is not extended. Overall, we reported net income of $134.3 million or $1.47 per diluted share for the first quarter, compared to $97.1 million or $1.02 per diluted share for the prior year period.

Turning now to community count. Our first quarter average of 213 was down 4% from the corresponding 2021 quarter, primarily due to strong net order activity driving accelerated sell of communities over the past 12 months. We ended the quarter with 208 communities, essentially even from a year ago. We believe our first quarter — we believe our first quarter end community count represents a low point for the year as grand openings are expected to outpace sellouts during each of the remaining quarters. We expect this dynamic to result in a small sequential increase by the end of the second quarter and low-to-mid single-digit percentage growth year-over-year in the second quarter average community count. We believe we are well positioned for the spring selling season with a growing portfolio of attractive communities across the country.

We now expect continued favorable market conditions to drive higher current year net orders in year-end backlog as compared to our prior expectation, resulting in additional community sell-outs during the remainder of the year. We continue to anticipate sequential increases in ending community count for each of the remaining quarters at approximately 255 open selling communities at year end. Given current housing market conditions, our land pipeline and schedule of new community openings, we are confident that we will achieve expansion of our community count to support future market share gains and growth in housing revenues.

During the first quarter to drive future community openings, we invested $705 million in land and land development, including a 33% year-over-year increase in land acquisition investments to $366 million. In January 2022, Standard and Poor’s financial services reaffirmed our BB credit rating and changes rating outlook to positive from stable. In February, we completed an amendment to our unsecured revolving credit facility, increasing its borrowing capacity by $290 million to $1.09 billion and extending its maturity to February 2027. This upsize in term extension supports our strategy to operate the business with a more efficient level of cash as we continue to drive returns focused growth.

Under the new credit facility, we had $250 million outstanding at the end of the first quarter and expect to end our 2022 fiscal year with no borrowings outstanding, At quarter-end, total liquidity was approximately $1.07 billion including $831 million of available capacity under the unsecured revolving credit facility. Our quarter-end stockholders’ equity was $3.13 billion and our book value per share increased 18% year-over-year to $35.37. Given our current backlog, community opening plans, and the expected continued strength in the housing market, we are confident that we will generate meaningful year-over-year improvements in our key 2022 financial metrics. We plan to continue to execute on the principles of our return focused growth strategy with an emphasis on improving our returns by increasing our community count and topline, while producing further growth in our operating margin.

In summary, for the 2022 full year, using the midpoint of our guidance ranges, we expect a 30% year-over-year increase in housing revenues and a 450 basis point expansion of our operating margin to 16.3%, driven by improvements in both gross margin and our SG&A expense ratio. These anticipated results would in turn, drive a substantially higher year-end book value per share and a return on equity of over 27%, up in excess of 700 basis points from 19.9% in 2021.

We will now take your questions. Alex, please open the lines.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of John Lovallo with UBS. Please proceed with your question.

John Lovallo — UBS — Analyst

Hey, guys. Thank you for taking my questions. Maybe the first one, it sounds like you haven’t seen any or experienced any slowing in demand in any of your markets yet. But I’m curious, do you anticipate some moderation given interest rates, where do you think that you’d see that first and has there been any incremental use of adjustable rate mortgages in five to seven year arms that you’ve seen?

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

John, as I shared in the prepared comments, the buyer profile is very strong in our business today and I think it’s in part, the locations that we’re operating in and it’s in part the demographics, I touched on, and it’s a very strong credit profile buyer. So far — and rates have moved, but so far, we’re not seeing any evidence of a shift in product type. We’re not seeing any stress on the borrower’s ability to qualify for a loan or not having to do anything other than make a loan happen and get their approval. So, when you put that in the context of no houses available and the strong demographics, I think we’re catering to a higher tier for the first time buyers or the first move up buyers, where it’s a strong mix of buyers. So we’re seeing no change in behavior so far. We all have a crystal ball on what will happen if rates keep rising, but so far we’re seeing no sign of things slowing down.

John Lovallo — UBS — Analyst

Okay. That’s encouraging. Just given that bullish outlook, your stock is trading at 20%, 25% discount to book. I mean, why aren’t you guys going in and buying a ton of stock?

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

For starters, as we always share, we take a balanced approach to our capital allocation strategy. And first and foremost, for us is to continue to profitably grow the Company and improve our returns. And if you sort through the various metrics that Jeff shared in his commentary, we’re going to be creating incredible value in this Company this year whether it’s return on equity or the growth in book value. And that’s job one for us.

In the past, we’ve talked about returns focused growth and improving our debt ratios. We think we’ve now done that and our ratio is going to continue to improve through equity growth and we don’t see the need for a lot of debt reduction. We’re still generating operating cash and in addition to investing in future growth, if you look back at ’21, we paid dividends and we also did retire some outstanding stock. So we’ll continue to navigate based on our operating needs, what’s our excess cash, what’s the state of play in the market, like we’ve always done and continue to have a balanced approach. Jeff, you want to add anything.

Jeff Kaminski — Executive Vice President and Chief Financial Officer

No I think you pretty well covered it.

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

Okay.

John Lovallo — UBS — Analyst

Okay, thank you, guys.

Operator

Our next 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. Just want to follow up on John’s first question there. Digging a little deeper but, rates have clearly moved higher in March and we generally think of California is the most affordability constrained state in the nation. New home sales today, February sales fell in the West. You all had orders down about 6%. I’m hoping that you can dig into color in California, either submarket, northern, southern, etc., on current March demand in traffic in the state. It sounds like, as of now, you are not seeing any sort of push back. Is that correct?

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

Yeah, that’s correct, Truman. If you think the California, highest price point, so obviously it’s the most affordably constrained market, but it’s also the most supply challenged market of any of the states. So again, you have demand far in excess of supply. And because it’s a land constrained environment, you can’t replace your communities as easily, will tilt more to price over pace. And I think when you look at our order value, it reflects that. We’re not letting the communities run hard. We’re going for price and take an advantage of the opportunity, because you can’t replace the community. If you look at the actual sales, I think it was community count driven more than anything else. Our absorption rates were very strong and I would say that the coastal areas, the urban coastal areas are every bit as strong as more inland areas. Their both sides are working very well today.

Truman Patterson — Wolfe Research — Analyst

Okay, thank you for that. And then, could you help us think through your order versus starts cadence? Generally at the community level, how quickly do you get the home started after the buyer signs a contract and generally speaking, how long do you have just costs locked in for with that start?

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

Rob, as the operator expert on the call, you want to take that one.

Robert McGibney — Executive Vice President and Chief Operating Officer

Sure. Yeah. So, Truman, yeah, it depends on the division, sometimes depends on the product. But typically, we’re getting that home started on a built to order sale between 30 and 60 days. And generally, we’ve got — when that how starts, our costs are locked. Over the past year, there has been a minor amount of exposure to lumber and a few other things, but generally at or shortly after the start, we’re locked on that. So the majority of our backlog is locked down on the cost side.

Operator

Thank you. 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. Thanks for taking my questions. So last couple of days I’ve seen popping up on a few builder website some incentives related to closing costs and kind of rate lock periods. And I’m sure a lot of this is marketing and it’s probably not very widespread at this point. But I’m just curious in terms of your backlog and kind of your margin outlook for the rest of the year, are you guys baking in any conservatism around potentially having to fund some closing cost for maybe skittish buyers in backlog that might be reluctant to move forward If rates continue on the upward trajectory they are on right now?

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

Actually, Alan, year-over-year our closing costs were down. We — as you know, we don’t do a lot of incentives at all in our business model. And so our closing costs were down a tenth or two. But if you put it in the context of the — our average buyers putting 70 gram down, paying $1,000 or $2,000 of closing cost, doesn’t really move the needle, Rob, I don’t know if you’re hearing any color in the field on the incentive gamer others moving houses through closing costs, I’m not hearing it right now.

Robert McGibney — Executive Vice President and Chief Operating Officer

No, Jeff. I’m — not either. The demand just continues to be so far ahead of supply that I don’t think, — we certainly haven’t gone there.

Alan Ratner — Zelman & Associates — Analyst

Great. Okay, that’s good to hear. Second, I think, you gave a data point last quarter that you kind of analyze your backlog and a one point increase in rates, really wouldn’t have any impact on them. And here we are one point higher and that seems to certainly be the case. Do you have an updated analysis on that, just kind of where, if and when that would become problematic for the buyers that you currently have in backlog right now? I know you cite the FICO scores and the overall health of the buyer. But I would imagine at some point, there’s got to be an inflection where the monthly payment gets prohibitive.

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

What, I’ll let Rob answer. I think he has been working directly with our JV people.

Jeff Kaminski — Executive Vice President and Chief Financial Officer

KBHF, but if you look at our buyer profile, what I shared in the prepared comments, buyers that moved to arms at all, there is still, it’s a fixed-rate loan. It’s heavily conventional and the rate goes up and they still qualify and they want to be a homeowner, so they buy the house. So when you say if rates go up a point, what does it do to qualify? For first buyers, it will go to — that we need to put more down or go to an adjustable-rate mortgages. They still want to be a homeowner and there’s still no inventory out there. So I don’t think we’re anywhere here, a stress point because of rates going up, away a lot of the media is hammering right now. But, Rob, you want to walk him through the details on the rate increase and what we do?

Robert McGibney — Executive Vice President and Chief Operating Officer

Sure. Yeah, I mean, obviously, rate increases have some level of impact. But for qualifying buyers at the new rates every day and while qualifications become more challenging for some of the buyers, I think the strength of the markets, especially in our operating footprint has allowed us to continue achieving our sales targets and even while we’re lifting price too, it’s situation where one buyer doesn’t qualify, there are more buyers lined up behind them to step in.

And as far as the stress testing that we do with our backlog and just based on the strong financial position that Jeff mentioned earlier that our buyers have, we — I don’t have a number for you, but we think we will see minimal fallout if the rate increases are gradual and as buyers would just likely to adjust and pay down debt or they obtain a co-borrower, they select a different loan program or with our business model, they can simply spend less in the studio or shift to a smaller lower priced home.

Operator

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

Mike Rehaut — J.P. Morgan — Analyst

Thanks, good afternoon, everyone. My first question, I guess just kind of looking at the trajectory of gross margins, which effectively, you’ve kind of reiterated, as you look into the back half of the year. If I’m interpreting it right, I mean, obviously, you’re effectively reiterating it, I think you raised it by 10 basis points. You know, just trying to get a sense of some of the moving pieces because obviously, you most likely incurred some additional costs as you still have some supply chain issues impacting the business, at the same time, it looks like you’re continuing to execute price. So, is it safe to say that in terms of thinking the different moving pieces that, in effect, cost continue to go up and you’re just able to continue to offset that with price and obviously your full year ASP up 10 grand, it’s kind of proof positive of that. Is that the right way to think about that?

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

Yes, Mike, it is and that’s a primary factor. Right. What’s happening on the selling price side relative to costs, and we’ve been dealing with that as a company, as an industry now for a couple of years. So it’s been a really positive dynamic for — it’s actually at the end of the day. But, you know, at the same factors we’ve been seeing that’s driving improved margins, and there really hasn’t been much change in the outlook from last quarter and the full year margin, other than cost move probably a little bit more than we thought, but price also moved based on your observation and which is accurate, that the ASPs up a little bit.

The other things we’re seeing, we’re seeing really strong performance out of our recently opened communities. It’s been very pleasing to see vast majority, almost all of them opening at a land book levels and with really strong gross margins that are actually incremental to the whole and as those start delivering out in the back half of the year, we’ll start seeing some advantage of that running through the P&L.

Interest, amortization, it’s been a long-term trend for us if improvement that’s continuing. And something I didn’t actually mention in the script, but I think there’s a pretty good potential for us to pick up on a little bit of additional leverage on our fixed costs and gross margin. Again, predominantly, well, really it’s starting in the second quarter, running right through the end of the year. So a lot of good positives and a nice positive momentum and really just a continuation of the trends that we’ve seen. That’s given us the margin lift that we’re seeing in 2022 relative to 2021. the same thing in 2021 relative to 2020. So, continuation there, we’re very pleased about it.

Mike Rehaut — J.P. Morgan — Analyst

Right. Great, thanks for that. Jeff, I guess, secondly, there has been some talk recently about trying to triangulate. How much of current demand that’s out there is from a primary buyer versus a — either — in effect that an investor, there is obviously, you know, aside from individual investors, you have the entire kind of single-family rental operator and build-to-rent operators that are out there. But, I guess, more just on a micro level, can you give us a sense today versus perhaps a year ago or two years ago, what percent of your buyers are owner-occupied type purchases versus investors that would be renting out the property?

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

Yeah, Mike, and maybe, Rob has that number. I don’t, because we do not really promote investor activity. We definitely don’t sell to the single-family for rent people and I think the vast majority of our buyers have been and continue to be owner-occupied, as people who want to house for their family and want to live in that neighborhood. Rob, as you track the delivery, do you get the data on what percent of investor? Do you have any…

Robert McGibney — Executive Vice President and Chief Operating Officer

No, Jeff, I don’t have a data point on that, but just from working with the operators in the regional teams, it’s very limited, not having a number. I hesitate to put one out there. But I’d say it’s low single digits, where we’ve got investor sales. It’s generally all owner occupied.

Operator

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

Stephen Kim — Evercore ISI — Analyst

Yeah. Thanks a lot, guys. I appreciate it. I guess, my first question relates to your land positioning. I was curious if you could give us a sense for what percent of the land that you took ownership this quarter was through options, exercising options versus just buying it out in the open market? And if you have to take a stab at what percent of your land that you currently own, reflects pricing from, let’s say, early to mid 2020, what percent would you say of the land that you own, meets that kind of criteria?

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

Yeah. Pretty specific questions as far as dissecting the land portfolio, I would say, in the first question, most of the land that we end up taking down at some point as an option. Right. So you’re at some point optioning up land on refundable deposits and gone through due diligence and that type of activity and I’d say, pretty much all of our land at 1.9 was an option. If you’re talking just pure rolling option, quarterly takes, it’s a relatively low percentage because those type deals have, I wouldn’t say all, pretty much all disappeared in the slight land market right now. So that’s sort of the condition on that. When you look at our land portfolio and the churn that we’re seeing in community, specifically in communities, we do tend the turn, you know, half to two-thirds of our communities every year, and you start getting more and more current on your land.

When you’re looking out to third and fourth quarter deliveries, a lot of that land was actually locked up and prices were locked in 2020. There were some deferred land closings in 2020. So it’s actually even a little bit longer on the tail of that vintage, if you will, land, where after the pandemic first hit, we went in and just kicked out a lot of the closings and sellers were pretty cooperative and we feel we have really good business relationship and good partnerships with a lot of those sellers and a lot of the — you know, take a little bit of uncertainty out of the outlook in all that before we close the land.

So we’re still operating business so with some of the newer communities coming in were not really at 2020 March. So the margins are still holding. We’re seeing an upward trajectory on margins. We’re looking at exiting 2022 in a very, very healthy margin rate that we think will carry into 2023. And we’re — I’d say, quite a way away from seeing really high land prices running through the P&L. At the same time, I think it’s also important to point out that as land has appreciated in value, selling prices have moved quite significantly, and actually staying ahead of those land price inflation. So, we think there’s some runway ahead of us for good solid gross margin performance out in the future.

Stephen Kim — Evercore ISI — Analyst

Yeah, thanks, Jeff. So what I heard from you, which I thought was interesting was that you sort of suggested there were the factors at play in early 2020, such that, you know, the land you may even bought in mid-2020, or maybe even as late as a third quarter, reflected very much pre-pandemic kind of price [Speech Overlap].

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

Absolutely. The bulk of those purchases through the back half of ’21, even into early or back half of ’20, excuse me, even into early 2021, reflected some land prices that were locked up quite a bit earlier in many cases pre-pandemic. And don’t forget, our prices didn’t start moving immediately after COVID came on either. It took a few months for things to settle, and I would say the real, severe land price inflation even start seeing until the back half of ’20. So we’re — overall, we’re in great shape in land portfolio, really happy with the margins kicking off, super happy with the performance in new communities and seem to run way out of this funnel.

Stephen Kim — Evercore ISI — Analyst

Yeah, no, that’s great. Appreciate that. My second question relates to what I guess, I would characterize a bit of a dislocation between or a significant disagreement between the way you see your future business prospects and the way the market seems to be valuing your stock. John, earlier sort of alluded to the question about buybacks, whether or not this would be a good time to be stepping in a little bit more aggressively, and I think the answer was that, look, there is opportunities to grow the business and I think you’ve laid out a very compelling case that there is reasons to think that demand is going to be strong and you’re in a good position to capture that.

But by the same token, it does also seem that if that is correct and that proves to be correct, that the way the market is valuing your shares, is probably demonstrating the biggest gap versus your perception or your perspective, than we’ve almost ever seen. And because you have done a pretty good job bringing your leverage down to the level it is that, and the likelihood, it will be even lowered by year end, curious if you could talk a little bit more about weighing — competing incentives of growing the Company versus taking advantage of mis-pricing that the market has provided, how you think about that at a high level, sort of philosophically?

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

So I guess, it’s an interesting question. I think there is a lot of factors that go into it. Right. And the primary factor is, where we’re heading and how best to build long-term value for our shareholders. And growth is a very important factor. We want to maintain scale. We’ve been fighting hard for a number of years to re-grow this Company and really get ahead of the curve and community count growth and topline. And it’s paying off in a big way right now with the metrics.

We definitely believe, keep putting points on the scoreboard and sooner or later, the market will recognize that on the one hand. On the other hand, we have not been afraid in the past to go in and make opportunistic buybacks. When we did feel there was a large dislocation, at the same time, you know, we’re not going to debate it on an open conference call of timing and when we do something like that.

But, we are constantly aware of it. We constantly discuss and we’ve made several moves on that over the past few years. So I think you probably just leave it at that for now. But, it’s obviously a focus point for us. Honestly, it’s hard to even explain the dislocation that we’re seeing right now with how our business is doing. And, when I look at the metrics and where we’ve taken this Company to, it’s discouraging at times to see it. But also at the same time, I know, we’re playing a long-term game and we’ll continue to grow the value and strengthen the Company and we’re pretty happy with that. I’m proud of that.

Operator

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

Matthew Bouley — Barclays — Analyst

Good afternoon, everyone. Thank you for taking the questions. So on the affordability topic, I know you mentioned your measures of affordability have been consistent, home sizes and upgrades and all that. And then obviously, buyers have sort of their own flexibility with your built-to-order model as well. But just thinking about kind of a go-forward view, I think of late 2018, where, for example, you introduced the smaller square footage plan, kind of, get ahead of that rate increase at the time. I guess today are there any other proactive steps that you can take with your products to again sort of get ahead of what could happen here in a higher rate scenario? Thank you.

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

Matt, we’re constantly mindful of household incomes and it is a math equation. People can only afford so much. And it’s the combo of supply and demand and affordability. So we get that and a lot of markets, we’ve moved to a smaller lots, more townhomes, done things like that to keep the prices down and attainable by the median household incomes. While we went through that exercise and move very quickly in the past with our product, as we had rolled out, we had built new models. We presented to the market, long hold interest rates came back down. And so it is out there, and it’s a strategy that demonstrates how quickly we can move and then we really didn’t need it at the time and have a need a pin. The good news is all those products are completed on the shelf.

And if we have to quickly rollout smaller models and reset our pricing in a community, we can do that in relatively short order. So it’s all out there still on it. I like the flexibility in our approach. Now the buyer can choose less things in studio. They can take a lot with a lower lot premium. They can take a smaller home at a lower price point or they can change whatever mortgage instrument they decide on to acquire their home. All those things moving together. There is a lot of flexibility for the consumer and for us right now. So we think we’re positioned well if rates were to continue to run.

Matthew Bouley — Barclays — Analyst

Got it, thank you for that, Jeff. Second one on, I guess, following up on the gross margin side, just kind of zooming into the cadence here. I’m just curious, given what you’ve guided for Q2 and sort of doing the math into the second half. I’m wondering if, from an exit rate perspective, maybe Jeff K, this one is for you, if you kind of drifted to north of 28% in Q4, just now with a little bit better visibility, or just how we should kind of think about that second half cadence that you’re implying? Thank you.

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Sure. Yeah. So, starting with the second quarter guides, 24% or ‘25%, when you usually don’t get too detailed on the back half or quarterly, but, obviously, if you just do the math, third quarter is going to be about 26% and fourth quarter will certainly be above 27% as we see it today. That is just close to about a 26% average for the year, 25.9% at the midpoint and there’ll be a pretty nice exit rate for us.

We’d be very pleased to see that come through. Keep in mind, when you look at those margin numbers, the vast majority of the dollars that we plan to close and the homes that we plan to close by the end of the year, the dollars that will turn into revenue are in backlog today. So it’s really not hypothetical, it’s really not, what was the selling price in this new community, that community. Those homes are actually in backlog and supporting those margin levels. So it’s a really nice trend. We’ve seen very strong predictability on the margins for the past couple of years. So we’re excited to see it.

Operator

Thank you. Our next question comes from the line of Deepa Raghavan with Wells Fargo. Please proceed with your question.

Deepa Raghavan — Wells Fargo — Analyst

Hey, all. Good afternoon. Thanks for taking my question. Just related to that gross margin question little bit did, the peak lumber from last spring already hit your books and now you’ve been benefiting this Q1, are you still paying for the peak pricing from last spring and therefore what we would see in Q2 and Q3 will be the benefits once it went lower, but again the recent lumber spike starts to hit at Q4, how does that lumber peak in value hit your year?

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

Right. You just trying to pretty accurately. I mean, Q4 was a real heavy quarter for us in the peak lumber. We saw some of bleed in the Q1. It affected the margins little bit in the first quarter. We’ll see some relief and some bounce back in the second and third quarters. We constantly update our cost and our backlog. So, anything that we’re seeing with the home that starts on a higher lumber price, it’s baked into our cost profile. Over that same time period, obviously, selling prices have escalated quite a bit and we even saw continued escalation in ability to increase price in the first quarter to a large degree, helping to offset that. So — but I’d like I said, you described it pretty accurately. Q4, Q1, heavy, Q2, Q3 some more relief, keep it back in a little bit in Q4, but pricing has moved as well to help offset it.

Deepa Raghavan — Wells Fargo — Analyst

That’s very helpful. Thanks for that. Staying just on the constraints. Can you help us understand how the quarter progress with respect to labor constraints? And the reason I asked is, Omicron likely impact your December quarter, maybe towards the tail end, a good chunk of January. But it looked like February was getting better. Just curious what would explain the second half incremental challenges that you faced and how does — how has March so far played out with respect to those delivery challenges? Thank you.

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

Rob, you want to take that?

Robert McGibney — Executive Vice President and Chief Operating Officer

Sure, Jeff. I think the best way is to provide some perspective on the labor, both internal and outside of KB, is just through some of the numbers that we saw within our Company. And through the fourth quarter and leading up to mid-January, we were seeing roughly 100 employees, KB employees, a month that were impacted in some way by COVID and were in a quarantine process.

And then, between mid-January and early February, that number spiked to over 500 employees or roughly a quarter of our workforce, our KB Home workforce. And we really felt the operational impact of that spike the most in the back half of the first quarter with employees out on quarantine and the COVID exposures or cases were most prevalent in our field teams. And — so, we likely had over 30% of our construction staff impacted during that spike. And of course, our trade partners, our suppliers, our inspectors, that utility crews, etc., they were also hit in a big way.

And transitioning now, you know, that number tracking, it will peak of over 500 in March were tracking numbers like 25 employees. So the Omicron variant impact was sudden. It hit in a hurry and then it was all gone quickly. But the impact to our construction in the back half of the quarter was real and today we’re seeing an improvement in both external labor and internal employee availability relative to what we saw in the back half of last quarter.

Operator

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

Susan Maklari — Goldman Sachs — Analyst

Thank you. Good afternoon, everyone. Thanks for taking the questions. My first question is, looking at the margins, you actually did a really nice job on the SG&A this quarter. You came in a little lower than what we had expected. The guide implies some further incremental leverage as we move through the year. Can you talk to the potential to continue to see some improvement there? And if things do change, what is your ability to sustain some of this relative benefit that you’ve seen?

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

Right. We are expecting continued improvement in SG&A, particularly in the back half, with higher housing revenue expectations. We’ve, as you pointed out, it’s been a nice cadence. We are investing more in the business right now because we’re in growth phase and we have community count increasing quite dramatically, and really, really healthy absorption pace in communities, so, and supporting just a grand openings and the sheer number of grand openings.

But, we definitely see our runway on that. We see definitely a single-digit SG&A number for the year and further potential to bring that down in the future as we’ve really — we believe by the end of this year, we will be at a new kind of scale level and we’ll be able to gain additional leverage benefits on the costs in the SG&A category.

Susan Maklari — Goldman Sachs — Analyst

Okay, that’s helpful. And then my second question is going back to the land market, you made the comment that you’re staying geographically close as you’re buying new parcels. But as you think about an environment where rates are rising. Obviously, home prices are going up as well. How do you think about the ability to strike the need to maintain affordability, while still also staying geographically close and managing the risk on the land side?

And I guess with that, are you seeing any signs of the industry overall is overstepping, overreaching at all on the land side? Do you think that everybody is staying fairly disciplined as it relates to that? Any signs that we’re sort of getting closer, maybe to some of the behaviors or activity that we saw in the last cycle or has it been pretty measured as you think about the growth that everyone is targeting and looking for over the next couple of years?

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

I think measured is a good word. And in our case, we’re very sensitive to not going out. My reference in our investment committee is, go out where the road ends and the road end because you’re chasing a lower price point. We’d rather stay in the more desirable sub-markets and target the incomes in those sub-markets. It’s a healthy tension with our land teams, because there’s more land available out in the lesser areas, but it’s also where the market flows first, if the market were to turn. So we stay in, I would call it, the B2B minus ring, and really work with our divisions and our land search efforts to make sure that you’re in more desirable sub-markets and it probably means it’s a little smaller deal in lot count and therefore, you got to find more of it. And it’s a healthy tension with the teams, but we’d rather go that route and go out to the real excerpts, just for a pure price play.

Operator

[Operator Closing Remarks]