KB Home (KBH) 2026財年第三季法說會：BTO占比達74%，第四季展望趨緩

重點摘要

• KB Home 公布 2026 財年第三季房屋營收為 13 億美元，年減 20%，主因交屋量下滑 19% 至 2,732 戶。
• 淨利從 1.1 億美元降至 6,500 萬美元，稀釋後每股盈餘 (EPS) 從 1.61 美元降至 1.05 美元。稀釋後平均股數減少 9%，部分反映了持續進行的庫藏股買回。
• 客製化房屋佔交屋量的 74%，高於第二季的 60%。這有助於調整後房屋毛利率從上一季的 15.7% 升至 16.8%，但仍低於去年同期的 18.9%。
• 管理層維持全年交屋量 10,500 至 11,000 戶的展望，並將房屋營收指引收窄至 49 億至 51 億美元。不計庫存相關費用，目前預計全年房屋毛利率為 16.0% 至 16.2%。
• 由於需求放緩、價格壓力、成本上升，以及高毛利的南加州社區貢獻減少，第四季展望趨於溫和。預計第四季交屋量中有超過 80% 已屬於待交屋訂單。
• KB Home 在土地收購與開發方面投資了近 7.25 億美元，同時透過庫藏股買回與股利發放向股東回饋超過 6,500 萬美元。公司計劃在第四季進行最高 5,000 萬美元的額外買回。

關鍵財務數據

業務與營運表現

隨著需求趨緩，KB Home 回歸以客製化房屋為主的模式，從而降低了庫存風險。未售出總庫存佔產量的 26%，低於去年同期的 41%。竣工未售房屋比率從 16% 降至 9%，而約 1,100 戶已售出房屋尚未開工。

客製化建案從開工到完工平均為 99 天，年減 23 天（改善 19%）。管理層繼續以 90 天為目標，但預計未來的進展將較為平緩。

第三季開工房屋的直接成本呈現季減與年減。然而，燃油成本、通膨與關稅在本季後期帶來日益增加的壓力，使管理層預計第四季交屋的直接成本將略微季增。在大多數市場中，勞動力供給並未被列為顯著的直接成本問題。

KBHS Home Loans 的捕獲率提高至 85%。其客戶的平均家庭收入約為 134,000 美元，平均 FICO 信用評分為 742 分，平均現金自備款比率為 16%（約 76,000 美元）。全現金買家約佔第三季交屋量的 8%。

KB Home 在本季末擁有或控制了超過 61,000 個建地地號。庫存增加 5% 至 60 億美元，主因公司持續投資於土地儲備與未來社區的開展。

管理層營運指引

毛利率指引假設不包含庫存相關費用。管理層預計第四季房屋毛利率將季減，儘管營運槓桿有所改善，但受價格壓力、直接與土地成本上升，以及產品與地理組合改變的影響。

公司預計在 2026 財年結束時將擁有 270 至 275 個社區，與前一年大致持平。預計該財年將開放約 115 個新社區，但會被大致相同數量的完售社區所抵銷。

管理層預計 2027 財年開局時的待交屋訂單將高於 2026 財年。由於市場狀況波動且不均勻，公司未提供正式的 2027 財年財務指引。

風險與關注焦點

管理層表示，房市狀況在 6 月法說會後有所放緩。較高的房貸利率、持續的通膨、燃油價格、地緣政治不確定性以及消費者信心下降，使潛在買家保持謹慎。

管理層指稱為 KB Home 最大競爭對手的二手屋庫存達到了十年來的最高水準。部分市場的二手屋賣方已開始降價或增加購屋優惠，從而加劇了競爭壓力。

南加州是第四季平均售價 (ASP) 展望下調的主因。第三季銷售放緩減少高價房屋的預期交屋數，加上新社區延後開放以及交屋組合改變，也拖累了該預測。

燃油成本上升影響了建材、合作廠商與土地開發。管理層已將部分增加的成本設定為明確的燃油附加費，以便在油價下跌時予以取消。

分析師問答亮點

• 毛利率變動分析：管理層指出，第四季預期的營運槓桿效益約 50 個基點，將被來自價格、成本以及產品與地理組合帶來的約 100 個基點壓力所完全抵銷。
• 長期毛利率目標：KB Home 維持 22% 的長期房屋毛利率目標，同時強調當前市場狀況並不支援短期內的毛利率擴張。
• 客製化房屋經濟效益：管理層表示，客製化房屋銷售的毛利率通常比庫存現房銷售高出約 4 個百分點，通常介於 3 到 5 個百分點之間。
• 南加州地區組合：管理層預期延後開放的高 ASP 社區將隨著時間推移而開展並作出貢獻，但未提供 2027 財年指引。
• 北加州地區：該地區表現大致符合預期。管理層預計隨著更多社區擴充營運，產品組合效益將進一步顯現，達到平衡狀態可能還需要三季到一年的時間。
• 資本配置：管理層預計，隨著多個大型專案進入開發階段，土地支出將會趨緩。未來的庫藏股買回仍將取決於流動性、營運資金、土地投資及市場狀況。

法說會完整逐字稿

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完整財報電話會議逐字稿

管理層陳述

Operator

Good afternoon. My name is John, and I'll be your conference operator today. I'd like to welcome everyone to the KB Home 2026 Third Quarter Earnings Conference Call. [Operator Instructions] This conference call is being recorded and a replay will be accessible on the KB Home website until October 22, 2026. I'll now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Jill Peters

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive 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, 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 call, to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And finally, please note all figures are based on our quarter ended August 31 and all comparisons are on a year-over-year basis unless otherwise stated.

And with that, here is Jeff Mezger.

Jeffrey Mezger

Thank you, Jill. Good afternoon, everyone. The housing market remains challenging, with conditions having weakened since our last earnings call in June. Affordability is under further pressure due to rising mortgage rates. Inflation remains persistently high, driven in part by fuel prices, which prompted the Federal Reserve to raise interest rates last week. These factors, as well as geopolitical uncertainty and broader economic headwinds, have resulted in consumers becoming more cautious about buying a home. In addition, resale inventory, which is our largest competitor, has increased to its highest levels in a decade, and we're seeing pricing starting to decline in more of our markets, adding to the tension in this environment. Against this backdrop, our third quarter financial results reflected solid sequential improvement, meeting or exceeding our guidance.

At a high level, our third quarter results included total revenues of $1.3 billion and diluted earnings per share of $1.05. We remain balanced in our capital allocation, investing nearly $725 million in land acquisition and development for future growth, while also returning capital to our shareholders. We repurchased about 890,000 shares of our common stock, or roughly 1.5% of our shares outstanding, 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, and contributing to improving our return on equity over time. Inclusive of dividends, we returned over $65 million in capital to our shareholders in the third quarter. The impact of our share repurchase program over the past five years has been meaningful, as we have returned more than $2.1 billion in total capital to shareholders from repurchases, plus our quarterly dividend, and reduced our share count by more than one-third. During the third quarter, we expanded our book value per share to over $62.

Our results in the third quarter support our expectations for full-year deliveries, housing revenues and margins to be within the ranges that we provided in June, despite moderation in our outlook for the fourth quarter, as we continue to navigate current market conditions. At this time, let me turn the call over to Rob for more details on the quarter's results and our outlook.

Jeffrey Mezger

Thank you, Jeff. A market like this one tests what a business model is built on. Our built-to-order model was designed to perform in exactly these conditions. And while we are not immune to the pressures in the operating environment, our approach did what it was supposed to do in the third quarter. It enabled us to sell before we build, know our costs before we commit capital to vertical construction, and keep our inventory risk low as demand softened. Our return to a predominantly built-to-order business is now firmly established.

BTO homes represent nearly three quarters of our deliveries in the third quarter, which contributed to a sequential improvement in our housing gross profit margin. The sales alignment with our BTO strategy across our divisions has been strong, which positions our delivery mix in the quarters ahead to be solidly within our targeted and historical range. During the quarter, buyers continue to demonstrate both the desire for home ownership and the ability to qualify. However, declining consumer confidence and lower affordability in most of our markets weighed on traffic in our communities, which, while still solid, was down year over year. We saw more caution among prospective buyers, with many moving to the sidelines. As a result, while sales in June were resilient and slightly ahead of May, sales softened sequentially in July and August, resulting in a year-over-year decline in net orders. In this environment, the value of what we offer becomes even clearer.

We build the home the buyer wants with the features, finishes, and ultimately a sales price that reflect the buyer's preferences for what they value and want to pay for. Those choices are key differentiators relative to an inventory home and also give our buyers a real tool to manage affordability, which is one reason our homes do not require heavy incentives to sell. We have remained disciplined in providing transparent pricing, adjusting price as needed to meet the market community by community while optimizing each asset for the best possible return. The same model that serves our buyers also protects our business, and it shows in our results. Our total unsold inventory is 26% of production, down from 41% a year ago, and finished unsold homes are just 9%, down from 16%. We also have roughly 1,100 homes sold but not yet started. That illustrates our BTO approach at work, building homes for buyers who have already committed, not for buyers we hope to find.

Our direct costs on started homes in the third quarter were lower both sequentially and year-over-year. That result reflects our deep supplier relationships that helped limit cost increases in fuel surcharges, active rebidding of our local and national contracts, value engineering of our products, and a simplified studio offering that drives improved efficiency. While our overall average for direct costs was lower in the third quarter, we experienced some increasing cost pressure from fuel, general inflation, and tariffs as the quarter progressed. We believe this will result in slightly higher sequential direct costs for our fourth quarter deliveries. As to our sold but unstarted homes, with starts volume declining across the industry, this backlog gives us real leverage with our trade partners, which we are utilizing to offset as much of the cost pressures as we can. I want to take a moment on build times because they speak directly to one of the most common questions about built to order: how long a buyer has to wait.

Our BTO homes averaged 99 days from start to completion in the third quarter, a slight improvement sequentially and 23 days or 19% faster than a year ago. At just over three months, our buyers are not waiting long for a home built the way they want it, and they can more easily, more cost-effectively lock in their interest rate than they could when build times were longer. Faster build times also increase our inventory turns and make us a more efficient company. We are working toward a target of 90 days with improvement from here expected to be more gradual given how much progress we have already made. This is a real accomplishment, and I want to recognize our construction teams and trade partners who made it happen. The strength of our business also shows in the quality of our buyers. Our mortgage joint venture, KBHS Home Loans, remains an important part of how we serve our customers and run our business, and its metrics have been consistent and favorable over the past year.

In the third quarter, our capture rate increased to 85%, up slightly from the second quarter. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, and we consistently see higher customer satisfaction among buyers who use our joint venture. The average cash down payment was steady at 16% or about $76,000. On average, KBHS customers had household income of about $134,000 and a FICO score of 742. Even with half of our customers purchasing their first home, we continued to attract buyers with strong credit profiles who can qualify for their mortgage and make a significant down payment or pay cash. About 8% of our third quarter deliveries went to all cash buyers. As Jeff mentioned, we are maintaining our fiscal 2026 guidance for deliveries, housing revenue, and margins within the ranges we last provided.

However, we are moderating our expectations for the fourth quarter with respect to ASP and gross margin. With over 80% of our fourth quarter deliveries already in backlog, we have solid visibility into the quarter. Starting with average sales price, the midpoint of our current guidance implies a fourth quarter ASP of approximately $480,000 compared to the roughly $500,000 implied by our prior guidance. On our last call, we said the West Coast and Northern California specifically would be a meaningful contributor to our fourth quarter ASP and gross margin. Northern California has held and continues to perform as expected, and its projected fourth quarter ASP has increased modestly since June. The change in our outlook is principally driven by Southern California for two primary reasons. First, slower sales in the third quarter relative to our expectations have reduced the number of higher-priced Southern California homes we expect to close in the fourth quarter, weighing on our overall ASP.

California communities delivering in the quarter has shifted from what we anticipated in June. Together, these factors account for roughly the $20,000 reduction in our projected fourth quarter ASP. As to our fourth quarter gross margin, we now expect it to be about 1 percentage point lower than our prior guidance implied as a result of market pressures and higher direct and land costs. We'll walk through the details of that updated outlook later in the call. We expect an ending community count in the fourth quarter of between 270 and 275 communities, roughly in line with the prior year. This projection includes approximately 115 new communities that we will have opened in fiscal 2026 by year end and a similar number of communities that will have sold out, representing a solid rotation of our assets. Our new community openings are an important part of sustaining a predominantly built-to-order delivery mix.

As we have shared in the past, prior to opening the community, we develop a list of interested potential buyers, and the anticipation and excitement that build in the months leading up to a grand opening translate into strong initial demand. As a result, our new communities generally open at a higher absorption pace, generating a strong volume of starts aligned with sales from the outset. Last year, we added two large land positions in the Las Vegas Valley, one of the most land-constrained markets in the country. The first, Meriden, sits in a highly desirable part of Henderson and is positioned to carry forward the success of our Inspirata Master Plan, also in Henderson, which is nearing closeout. Meriden is now open across all five of its product lines. Sales have been solid, and we expect first deliveries late in our fourth quarter. The second, Sandstone, is an attractive location in North Las Vegas with price points that are affordable relative to much of the Las Vegas metro.

Sandstone opens in the fourth quarter with four distinct product lines, and early demand is strong. We have built an interest list of more than 300 potential buyers, which should support a healthy absorption pace from day one. Both communities complement our broad presence across the Las Vegas Valley, including our established positions in the Southwest and Summerlin Submarkets. With one of our best teams in the company leading the way, we are confident Meriden and Sandstone will produce strong results for many years to come. While we work to finish fiscal 2026, the foundation for fiscal 2027 is also taking shape. We expect to begin the year with a higher backlog than we began fiscal 2026 and our faster build times to drive stronger results. That took us over four months to build a year ago now take just over three, which means we can convert the same backlog into deliveries more quickly and sell further into the year for same year delivery. That backlog is the heart of our built-to-order model, giving us visibility as we plan for the year.

We'll continue to match starts to our sales base, keep our unsold inventory low, and manage each community individually for the best return. We have the business model, a favorable lot position of over 61,000 owned or controlled lots, providing a solid pipeline to support future growth targets. The balance sheet to grow when this market allows it and the discipline not to chase volume while it doesn't.

Jeffrey Mezger

And with that, I will turn the call back over to Jeff for his closing remarks. Thanks, Rob. I want to thank our entire KB Home team for their ongoing commitment to serving our home buyers and the discipline with which they have been executing our business model. Our strategic positioning remains a real strength. We have a broad geographic footprint and a balance sheet that supports growth.

This provides the foundation for our long-tenured team with experience throughout varying housing market cycles to continue to navigate current conditions. And we remain poised for the opportunity we believe is ahead once conditions correct. Our full-year guidance remains largely intact, which we view as a positive in this market environment. We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program with up to $50 million of repurchases planned for our fourth quarter. We are committed to delivering long-term shareholder value, and we look forward to updating you at the end of the year. And now I'll turn the call over to Bill Hollinger for the financial review.

William Hollinger

Bill. Thank you, Jeff. Let me start by briefly addressing our outlook. As Jeff and Rob mentioned, market conditions have weakened since our last earnings call and remain challenging, with greater pressure on both demand and pricing than we had anticipated. As a result, we have adjusted our fourth quarter expectations to reflect the current. While our outlook for the quarter has moderated, our expectations for the full year remain largely unchanged, and I will provide you additional details throughout my remarks. As to the third quarter, despite the difficult operating environment, we delivered solid results that, while below the year-earlier period, met or exceeded our guidance range across all metrics. In the quarter, we generated housing revenues of $1.3 billion, net income of $65 million, and diluted earnings per share of $1.05. Our housing revenues for the quarter, which were at the midpoint of our guidance range, declined 20% from $1.6 billion for the prior period, primarily reflecting a 19% decrease in the number of homes delivered and slightly lower overall average selling price. We delivered 2,732 homes during the quarter, representing a backlog conversion rate of 60% compared to 71% a year ago.

The lower conversion rate reflected our focus on increasing the mix of built-to-order homes delivered during the quarter. We achieved our goal of returning to a predominantly built-to-order business with these homes comprising a higher than expected 74% of homes delivered, up from the 60% in the second quarter. As a result, we also generated our first year-over-year increase in our backlog in four years, providing a foundation for future deliveries. Turning to our outlook for deliveries and revenues, we expect fourth quarter homes delivered to range from 3,000 to 3,500 and housing revenues to range from $1.45 to $1.65 billion. For the full year, we expect homes delivered of 10,500 to 11,000, consistent with the outlook we provided on our last call. We have narrowed our range of housing revenues to $4.9 to $5.1 billion, reflecting our current expectations for the average selling price. For the third quarter, the overall average selling price of homes delivered was $473,000 compared to approximately $476,000 for the prior quarter and modestly higher than the second quarter.

Based on the current market conditions, the midpoint of our fourth quarter guidance implies a sequential increase in average selling price to about $480,000, as Rob mentioned. Home building operating income for the third quarter was $67 million or 5.2% of revenues compared to $131 million or 8.1% of revenues for the year earlier quarter. A year-over-year decrease primarily reflected a lower housing gross profit margin and higher selling, general and administrative expenses as a percentage of revenues. The third quarter housing gross profit margin was 16.5% compared to 18.2% for the year earlier quarter, but was up sequentially from the second quarter, excluding inventory related charges of $3 million and $11 million, respectively. Our adjusted housing gross profit margin was 16.8% compared to 18.9% a year ago, primarily reflecting pricing pressures, higher relative land costs, and reduced operating leverage. Our current quarter adjusted housing gross profit margin improved sequentially from 15.7% in the second quarter. This sequential improvement reflected a stronger than expected mix of built-to-order homes delivered, which also contributed to our margin coming in slightly above the high end of our guidance range. When we provided margin guidance on our last call, our outlook for the fourth quarter was more favorable than it is today.

At that time, we expected a sequential improvement supported by positive operating leverage, stronger contribution from our expanding BTO mix, and additional upside from a favorable shift toward higher price, higher margin West Coast deliveries. Since then, market conditions have evolved differently than we thought. We now anticipate housing gross margin to be down on a sequential basis in the fourth quarter. With the higher than expected BTO mix of homes delivered in the third quarter, we achieved our goal of returning to a predominantly built-to-order business earlier than we thought. As a result, we now expect less incremental margin benefit from BTO mix in the fourth quarter. In addition, we now anticipate a smaller contribution from our higher margin West Coast communities than previously projected. While our Northern California business continues to perform as expected, our margins in Southern California have been impacted by a more competitive environment.

And we have made pricing adjustments in response to market conditions and higher mortgage rates. More broadly, softer market conditions and greater affordability pressures have contributed to increased pricing pressures across many of our markets. And together with slightly higher costs, as stated earlier, they are creating an additional headwind to margins. While these factors have affected our fourth quarter outlook, they are less impactful to our full-year projections. Accordingly, we have slightly lowered our full-year gross margin from what we provided on our last call. We now expect our housing gross profit to be in the range of 16% to 16.6% for the fourth quarter and 16% to 16.2% for the full year, both assuming no inventory charges. Our selling, general and administrative expense ratio for the third quarter was 11.3%, which was at the low end of our guidance range.

Our SG&A ratio increased from the 10% for the year earlier period, mainly due to lower operating leverage, partly offset by lower costs associated with certain performance based employee compensation plans and a 6% year over year reduction of personnel. For the fourth quarter, we are forecasting an SG&A ratio to be in the range of 10.3% to 10.9%. For the full year, we maintain the midpoint of our prior guidance range while narrowing the range and now expect our SG&A ratio to be in the range of 11.5% to 11.7%. Included in both our fourth quarter and full-year guidance is an estimate of an accelerated equity-based compensation charge associated with certain annual equity award grants expected to be granted in the quarter. In the 2025 fourth quarter, this charge was $16 million. We generated total pre-tax income of $81 million for the third quarter compared to $143 million for the year earlier quarter. Our income tax expense was roughly $16 million, representing an effective tax rate of 19.6% compared to 23.3% for the prior period.

The tax rate was within our guidance range and reflected benefits associated with stock-based compensation as all remaining outstanding options were exercised during the quarter. Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 26% for the fourth quarter. For the full year, we anticipate an effective tax rate of approximately 23%, which is in the midpoint of our previous guidance. As I previously mentioned, we generated net income of $65 million and diluted earnings per share of $1.05. This compares to net income of $110 million and diluted earnings per share of $1.61 for the same quarter last year. Our diluted average share count for the current quarter was down 9% year over year, reflecting the impact of our share repurchase activity. Turning to our balance sheet, we maintained a disciplined and balanced approach to capital deployment during the quarter, continuing to invest in the business while returning capital to shareholders.

With our investment in land and land development since the beginning of the year, our inventory has grown to $6 billion, up 5%, and we ended the quarter with over 61,000 lots owned and under contract while returning capital to our shareholders through share repurchases and dividends as mentioned. We ended the quarter with cash of $159 million. Total liquidity was $942 million, including $783 million available under our unsecured credit facility with $415 million drawn. As a result, our debt to capital ratio was 35.7% at the end of the quarter compared to 33.2% a year ago. Despite this modest increase, we believe we have a healthy financial position, supported by substantial liquidity and a well-laddered debt maturity profile. We believe the investments we have made in our land pipeline and community portfolio positions us well for the future while providing the capacity to adapt to evolving market conditions. We will continue to evaluate land investments, share repurchases, and financing activities through the lens of liquidity, cash flow generation, market conditions, and long-term strategic objectives.

While our outlook reflects a softer demand environment primarily from continued affordability, our higher backlog provides visibility into our expected fourth quarter performance. With our success in reestablishing a predominantly built-to-order business, our focus on operational execution and the strength of our balance sheet, we believe we are well positioned to manage through the present environment. As we look ahead, we remain focused on executing our strategy, capitalizing on growth opportunities, maintaining disciplined capital allocation, and driving long-term value for our shareholders while remaining responsive to evolving market conditions. We will now take your questions. John, please open up the line.

Operator

Thank you. We will now conduct a question and answer session. [Operator Instructions] The first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

分析師問答

Matthew Bouley

Good afternoon, everyone. Thanks for taking the questions. I want to start out on the gross margin outlook. And so, kind of helpful color there. You gave the top around with sort of change around your expectations for Q4, sort of combination of changing market conditions. And on the other hand, some things have stayed the same, such as your Northern California mix. So the big picture question is, is given the state of market conditions today, is that fourth quarter kind of representative of what your mix should look like? Mix defined as build to order, defined as Northern California, Southern California, et cetera. Obviously what I'm trying to get at is kind of what the first half of '27 should look like.

And if there's any sort of additional changes in the mix, we should consider beyond Q4. Thank you.

Jeffrey Mezger

A lot embedded in that question. I'd just start with as we look at our Q4 projections across the board and our guidance, that's all based on how we see it playing out based on current market conditions. As far as the mix goes, the Northern California piece that we described on our call last quarter came through basically in line how we expected. We talked about Southern California. Being down and one of the drivers of the ASP coming down, you know, that is not something that we expect to continue. We were not pleased with the results that we've got. We're taking steps there to get those sales back and bring those deliveries back online as we look at the future. So we expect that mix to rotate back in, you know, as we look at Southern California specifically, one of the things that we didn't mention in the prepared remarks was just some missed community openings that are relatively high ASP communities.

So those will open, those will come through as we look ahead. We look out, we're not given guidance on '27. Obviously, market conditions are pretty volatile and choppy right now, but we're, we're pleased with our shift back to built-to-order. We know that that's going to continue. We're going to continue aligning starts with sales, and we'll update you on our outlook for '27 as we get closer to it.

Matthew Bouley

Okay, got it. Well, thank you for those details. Secondly, I would like to, I wanted to touch on the direct cost side between both materials and labor. I think I heard you mention that there's been some changes specifically on how you're thinking about the materials inflation into Q4, but I didn't hear you mention much about labor. Obviously, this is in context of your peer last week speaking about some challenges with, call it, immigration and, you know, maybe demand for labor from data centers and so forth. And so how is that playing out across your communities nationwide? And how are you thinking about the impact to your own labor costs, either in Q4 and beyond? Thank you.

Jeffrey Mezger

Yeah, really the pressure that we're referencing is mostly on the material side. You've got fuel prices that have gone up. That's embedded in a lot of the products, but it's also a direct cost that our, our trade partners are living with and experience in every day. So, we expect to see that creep into some of our costs on directs and, uh, and land development as well as we move throughout. And we've also set those up as direct fuel surcharges. So when and if fuel prices pull back, we can immediately extract those out. As to labor, I would say what we're seeing across most markets is that starts are down.

We really haven't had a lot of issues getting labor to our job sites. We are hearing stories just anecdotally about some of the labor challenges that are out there, but direct experience that's not been a big part of what we're seeing on the cost side of things.

Operator

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

Unknown Speaker

Hi, this is Randa on for Stephen. Thanks for taking my question. First, now that KB has achieved its goal of returning to a predominantly built-to-order business model, I wanted to ask if you have an update on your long term gross margin targets. I believe that you previously stated 22% gross margin.

Jeffrey Mezger

Yes, certainly. I mean, that is still our target. Market conditions have been not exactly conducive to listing margins lately, but as we're underwriting deals, we're sticking to our discipline there. It's one of the reasons that we've walked from many of the deals that we've had under contract because they just, land deals that is, because they just no longer met our returns. So as we look out into the future, that is still in play and still a target for us.

Unknown Speaker

Got it. Thank you. And then your land spend and the quarter rose pretty significantly, both on a year-over-year basis and a sequential one. Curious what drove the substantial investment in land this quarter, and then how should we think about that going forward?

Jeffrey Mezger

Yeah, so when you're looking at that land spend, it's comprised of really three things. It's the actual land, the raw land that you're purchasing, it's the development and then it's the fees. So most of, if not all of the increase that you're seeing, is related to development and fees that we're paying for land that was previously purchased that's working through the system.

Operator

Thank you. And the next question comes from the line of John Lovallo with UBS. Please proceed with your question.

John Lovallo

Good evening, guys. Thank you for taking my questions. The first one is on the cost side. I mean, if you're still seeing costs on homes that were started in the third quarter down versus the homes that were started in the second quarter, you know, I would expect costs to be down quarter over quarter in the fourth quarter, maybe even into the first quarter. Just help me understand why that thinking is wrong and what would be offsetting it.

Jeffrey Mezger

Yeah, John, part of it is just the speed at which we're building now. We would have more visibility if we started it. It's taking us six months to build. You know you can see that coming right now. As fast as we're building as that, those costs come and you get more pressure throughout the quarter. Like we've seen here, even though our average for homes started was down on a sequential and year over year basis, it did increase throughout. So homes that were starting later in the third quarter that will deliver in Q4, they're going to have that extra embedded cost pressure in them. So that's why we're projecting that or thinking that that's coming.

John Lovallo

Okay, understood. And then, you know, Jeff, at the top and in the press release, you guys talked about some deterioration in the market since the last quarter. That's pretty similar to what your competitor said last week. Although, you know, I've noted that our channel checks with big builders and other companies across the complex had suggested at least. Some early signs of stabilization. So I guess the question I have for you is that would you agree that the housing market is at least getting closer to a bottom here and that any reduction in oil prices or rates could be a pretty powerful catalyst on the upside?

Jeffrey Mezger

Yes, John, I think if, if you get a little jolt of consumer confidence, you'll see a lift in housing demand. The people are out there. Our traffic is down, but it's down quarter magnitude about 10%. So there's a lot of people are still looking for for homes. They're just cautious and there's, there's a lot of things going on right now that they're. Trying to digest. But if they feel better about where things are headed, I think you'll see a demand come right back. You have to deal with today and you keep an eye on it. I think they will come back.

Even since the end of our quarter in August, rates have ticked up 20, 30 bps. And every time you get a little movement like that, it takes time for the consumer to digest it. They don't want to feel like they overpaid for a house because they bought at the peak of the rates and our rates coming back down that 20 or 30%. So they wait to see if rates are coming back down and they just they digest the rate move. So, rates ticked up a little bit, that puts them on pause again. And you gotta wait for it all to get digested. But the demographics are there and the people are out there and there's still demand is just getting everybody comfortable with it all and you move.

Operator

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

Susan Maklari

Thank you. Good afternoon, everybody. My first question is on the ability to value engineer the homes, which you talked about in your prepared remarks. Can you talk a little more of what are the changes that you're making, how we should think about that coming through in future quarters and maybe the offsets there as we think about value engineering relative to the BTO model that you're that you've now really gotten into. So, um,

Jeffrey Mezger

When I think about the value engineering process and just getting more efficient building envelope that we're working with or getting more efficient with our studio offerings. It's never an event that we say that we're done with at some point. It's an ongoing process. And I feel like we've made a lot of great progress as a company over the last few years, especially starting with when the supply chain crunch hit. And some of that was just, we had to get more efficient quickly and reduce our SKUs in order to be able to get material and build the houses on a reasonable timeline. One of the big things that we're focused on today is standardization. So, when we're looking at our floor plans, there are opportunities still out there today to simplify, whether it's offsets or overhangs. If you're thinking about the outside of the building and pulling those back, as long as we can get those types of things approved through the municipalities. The municipality, the consumers still accept it, the house still looks good.

There's really no value taken away from the customer, but it does result in meaningfully lower cost. And as I said, it's always, it's an ongoing focus. I think we've been through a lot of the low hanging fruit that was out there if there was any, and now we're focused on things more related to the actual building themselves? And how do you squeeze out, you know, another few cents or dollars per square foot in the actual homes that we're building. Ongoing process with our architecture team as we seek more efficiency.

Susan Maklari

Okay, all right, that's helpful. And then one of the other things that you mentioned is the ability to actually build an interest list as you are starting to open new communities, which is in contrast to what we're hearing in terms of consumer confidence and overall conditions. Can you talk about what you're doing in order to build that interest list? Is something changed? Is there a difference in the type of buyer that's coming out there? And just anything notable within that and how you're approaching it?

Jeffrey Mezger

Yeah, it's a discipline that we've had in the company for a long time, something that we're consistently training on. But the main thing is that we start early. We've got a good runway of time leading up to a community opening. And it's very local, and we'll start within that market. Be signage in the beginning and then we're reaching out through a digital interest list of people to either call in or they'll scan a QR code on that sign and it just starts building slow. But if you imagine a new community that's coming to a parcel and we put our sign up and you start to get a little interest and you capture those people and you take them through the process and it tends to grow. The next steps would be grassroots marketing that our teams are doing with local businesses and realtors there. And you get a little more interest from that.

And then when you get your land development going, people see that that project starting to become real and it grows a little from that and then once you go vertical with the model construction, um, you see. And then you ultimately get to the point where you've got an open model. You try to bring all of that together. Pent up demand or interest that we've got in and then you start the qualification process to see how many people on that interest list are real buyers that can qualify. And the goal for us is once we open that community for sale, we're getting about two months of our expected run rate of sales in the first week to 10 days from when we grand open that community. And then keep it running on whatever our projected sales pace is for that community on an ongoing basis. So it's really, you start small, you start grassroots, it builds up as you go, but by the time that you get to that grand opening event, you've got this pool of ready, able, and willing qualified buyers ready to go.

Operator

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

Alan Ratner

Hey guys, good afternoon. Thanks for all the details so far. You know, you guys have, uh, made the pivot towards more of a base price model, I guess as opposed to, you know, the kind of the incentive burden that some of your peers have seen. And I'm curious now with build to order and your backlog of pre-sold, you know, when rates move as much as they have in a relatively short period of time, are you forced to kind of throw some incentives at the closing table at buyers in order to get them to either pull the trigger and move forward or even qualify in some cases? Because I'm imagining they probably thought they were going to come in with a lower rate, when they originally signed the contract.

Jeffrey Mezger

Yes, Alan, it happens. The first thing that we do is try to lock the buyers early on in the process as we can. And I mentioned in the earlier prepared remarks, you know, that's a little more challenging to do when your build times are longer. But when we're at roughly 90 days now. Is more visibility and it's easier, it's less expensive to lock that loan up front. So that's the first approach that we take is try to get everybody locked as early as possible. Sometimes buyers aren't on board for that. They want to play the market and hope that rates come down. And we have seen in backlog some situations where we've had to make some minor adjustments, either just to keep them in the deal or to get them qualified, but it's minimal overall, especially when we can get them locked early and up front.

Their loan's locked, that is. Okay.

Alan Ratner

Got it. That's very helpful. Second question just on kind of the balance sheet and capital allocation. You know, you guys are going to spend north of $300 million this year on buybacks and dividends. I know you don't give cash flow guidance, but you're trending well below that from a free cash standpoint for the full year. You know, just kind of curious now with leverage back at roughly 30 percent, I mean, how much longer can you continue to, uh, you know, return more capital to shareholders and cash you're bringing in the door on a free cash basis. I guess, you know, what I'm asking is how, how high are you willing to bring that leverage ratio assuming cash flow doesn't materially increase from here.

Jeffrey Mezger

Well, Alan, as we've demonstrated over the years, it's a discipline balance and you know the inputs. How much are we going to spend on land? What's our appetite to grow, what's the timing of development, what's the timing on and WIP and cash coming in and what's our revenue and profit, everything that we, we factor into it. And if you look at how our business has rotated over the last three years, our inventory has actually grown a few hundred million while our build times have come down significantly. So we took the the cash from the build times coming down and we put some of it to repurchases and we put a lot of it to, uh. Development and our R&D development has been going up the last few years. As we look ahead, we'll continue to balance all those. And I think in the current environment where the land market's been a little chunky where we have a couple of big deals we've done and we'll phase out the dev and get that back in balance. You'll probably see our land spend come down a little.

And depending on how the WIP is, that will influence how much our repurchases will be. And it'll all stay programmatic and opportunistic at the same time, depending on the, dynamics at that point in time, but our balance sheet remains solid and we'll stay focused on growing the company.

Jeffrey Mezger

Please, Michelle.

Trevor Allinson

Good afternoon. Thanks for taking my questions. You gave some helpful color on sort of fiscal '27 with the, Thank you.

William Hollinger

Okay, let me, I guess, jump in there. The bridge, let's say, from the Q3 to Q4, as we said, it's going to be down and where we ended up with Q3 at 16.8%. We're now anticipating 16.3%. It's primarily, I would say, based on that we're going to. Do as we expected last time. There will be some improvement that is going to be positive from leverage in the fourth quarter compared to the third quarter. But these are going to be more than offset that leverage. So if we're up a leverage about, let's say 50 basis points, we think we're going to then lose basically a point. And that point is going to come from a. You know, pricing pressures, higher costs as well as product and geographic mix, as we said, specifically like in our Southern California area.

So I think that there's an up and down and some noise in there. But you know, net-net, it's just a half a point.

Operator

Thank you. And the next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Buck Horne

Hey, thanks. Good afternoon, guys. I want to follow up on the tail end of that and just drill into the lot cost inflation as we're working through the bridge into the fourth quarter. You guys mentioned that lot costs were one of the factors going into the fourth quarter. What are lot costs trending? What were they up year over year in the third quarter and then, and how is that trending into the fourth quarter? So,

Jeffrey Mezger

Back to something I said earlier on the lot cost just to get everybody grounded in it, the fees is one of the bigger, it's a big cost, it's embedded between, you know, you got the three things, you've got the fees, the land development and then you've got the land and we've seen pretty significant fee increases over last year, even longer than that, in many of our markets. So I'll go year over year on the lot costs. You know if we just look at the arithmetic alone it would appear to be up pretty meaningful on a year over year basis, but especially with our business and the weighting of California, a lot of that is mixed. It's not really just pure land inflation. You know, when I look at how that gets made up, the big portion of the year over year decline in revenues was really concentrated in some of our lower lot cost markets. Like our Texas divisions where lot costs are much lower generally than certainly California or the West, but most parts of the country. But if I look at that, and you hold last year's delivery mix constant to remove that component, the increase on a year over year basis that we're looking at is really in the low single digits. So it's not a massive move.

And as I said in the beginning, a lot of that's driven by fees.

Buck Horne

Okay, that's helpful, Collar. Appreciate the extra context on that. And you guys also mentioned that you are seeing some additional pricing pressure from the resale market. I think that was cited last week as well. So there's, I guess, some sellers out there starting to, you know, rationalize with these higher rates as well. I'm just wondering if there's any specific markets, um, or your markets in particular where you're seeing that additional resale inventory become more competitive or having a more outsized impact. Yes.

Jeffrey Mezger

It really, I've said this, it's probably not a satisfying answer, but it's really submarket by submarket within all of these different regions. You know, you hear a lot about Texas and the resale markets there. I think in Texas, the resale markets have generally been more of a pay story than a price story. But we are starting to see, I would say, the sellers capitulate a little bit more and either prices come down or concessions going up. I think ultimately it's good that we're starting to see that become more in balance and work through the resale that's out there. I think in a lot of cases for the last couple of years, there have been a a lot of listings on the market, depending on what part of the country you're in, but they're listed at really high prices, probably not realistic. I would call them the make me move type of price.

And I think we're starting to see maybe the sellers, the resale homeowners get a little less patient with that and starting to adjust. So overall. I would agree, you know, resale levels have generally come up. It's becoming more of a formidable competitor than it's been over the last several years, but it really is a market by market story. You know, Florida is another one where you've got resale inventory. It's, it's still elevated in a lot of markets, even though it's improved in places like Jacksonville. So, you really have to look at the details and within a reasonable radius of each community that we have, and what that recent likely always will be one of the biggest competitors that we have out there.

Operator

For our product. Thank you. The next question comes from the line of Trevor Allinson with Wolfe Research. Please proceed with your question.

Trevor Allinson

Hi, good evening. Thank you for taking my questions. You talked about the benefit from higher Northern California communities coming through as you guys were expecting.

Jeffrey Mezger

At some point, if you equilibrium where the newness effect of that has kind of been assimilated into the business. Always looking at that as, along with all of our businesses, as an opportunity to grow. But I think we've got a few more quarters for that to really get in balance as we open up some of the new stores that we have.

Trevor Allinson

Okay, thank you for that color. And the second is on absorption pace between 3.3 and 3.4 per month for the full year. Obviously, the slowest you've been for a while is a product of a softer environment. With mortgage rates moving higher here, how should we think about your willingness to let that absorption pace slow, continue to drift lower from where it's running at this year to protect gross margin and, and kind of associated with that question, is there a pace that you all view as a floor for you guys on absorption?

Trevor Allinson

You know, the minimum run rate we need to hit each community, and that changes over time depending on what season replacing those lists. You know, over time, we get back to that, you know, the gross expanded margin. I don't have an overall company-wide target that I would set other than over time we want to hit that four per month per community. But in the meantime, with choppy market conditions, we're going to manage it asset by asset, community by community, and just gear them towards getting the best return profile for each.

Trevor Allinson

Question from the line around Northern California. So it sounds like you've still got some more communities you're looking to bring online there. Is that a backdoor way of saying that we could potentially see a mixed benefit into 2027? Uh, simply from more California, Northern California communities hitting the market.

Jeffrey Mezger

Yeah, I would expect that we will, you know, I'd say we're, you know, three quarters to a year out before we get to kind of what I would say is our equilibrium there. So, as we ramp up and we get more. Sales and deliveries out of that region, I think we will continue to see some benefit coming from that.

Trevor Allinson

That's helpful. And then switching gears here a little bit, I believe you said earlier in the call, something in the order of 80% of your closings more or less are kind of booked for the fourth quarter. Could you just give us some context on what you're assuming for your backlog margin versus what you're embedding for your home sold and closed in your quarter?

Jeffrey Mezger

For Q4, thanks. Backlog. So if I'm understanding the question right, are you asking, I think the spread between what we've got on our built-to-order sales versus our inventory sales, which has stayed pretty consistent over the last couple of years. It's right around 4%. I mean, there's a range usually between three and five, but when we distill that down, we typically see about four points better margin on a built-to-order sales than we do on inventory. Whether we're closing that, selling that and closing it within the quarter, or you sell it even earlier than that. And the guy. Yes, right. Yeah, that combination, those two put together, you know, as we've laid out our quarter is all factored into our guidance.

Operator

Thank you, and ladies and gentlemen, that concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.

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