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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2021
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 .
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware95-3666267
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10990 Wilshire Boulevard, Los Angeles, California 90024
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 231-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s)Name of each exchange
on which registered
Common Stock (par value $1.00 per share)KBHNew York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred StockNew York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes    No  
The aggregate market value of the voting common stock held by non-affiliates of the registrant on May 31, 2021 was $4,627,090,889, including 6,705,247 shares held by the registrant’s grantor stock ownership trust and excluding 1,303,141 shares held in treasury.
There were 88,220,848 shares of the registrant’s common stock, par value $1.00 per share, outstanding on December 31, 2021. The registrant’s grantor stock ownership trust held an additional 6,705,247 shares of the registrant’s common stock on that date.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders (incorporated into Part III).




KB HOME
FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2021
TABLE OF CONTENTS
 
  Page
Number
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.


PART I

Item 1.BUSINESS
General
KB Home is one of the largest and most recognized homebuilding companies in the U.S. We have been building homes for 65 years, with over 655,000 homes delivered since our founding in 1957. We build a variety of new homes designed primarily for first-time and first move-up, as well as second move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. Our homebuilding operations represent the majority of our business, accounting for 99.7% of our total revenues in 2021. Our financial services operations, which accounted for the remaining .3% of our total revenues in 2021, offer various insurance products to our homebuyers in the markets where we build homes and provide title services in certain of those markets. Our financial services operations also provide mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), which is an unconsolidated joint venture between us and a third party.
Unless the context indicates otherwise, the terms “we,” “our” and “us” used in this report refer to KB Home, a Delaware corporation, and its predecessors and subsidiaries. We also use the following terms in our business with the corresponding meanings: “home” is a single-family residence, whether it is a single-family home or other type of residential property; “homes delivered” are homes for which the sale has closed and title has passed to a customer; “community” is a single development in which new homes are constructed as part of an integrated plan; and “community count” is the number of communities we have open for sales with at least five homes/lots left to sell.
The following charts present homebuilding revenues, homes delivered, net income and diluted earnings per share for the years ended November 30, 2017, 2019 and 2021, and book value per share as of November 30, 2017, 2019 and 2021:
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Markets
Reflecting the geographic reach of our homebuilding business, we have ongoing operations in the nine states and 47 major markets presented below. We also operate in various submarkets within these major markets. We may refer to these markets and submarkets collectively as our “served markets.” For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast.
SegmentStatesMajor Market(s)
West CoastCaliforniaContra Costa County, Fresno, Hollister, Los Angeles, Madera, Modesto, Oakland, Orange County, Riverside, Roseville, Sacramento, Salinas, San Bernardino, San Diego, San Francisco, San Jose, Santa Rosa-Petaluma, Stockton, Vallejo, Ventura and Yuba City
IdahoBoise
WashingtonOlympia and Seattle
SouthwestArizonaPhoenix and Tucson
NevadaLas Vegas
CentralColoradoDenver, Erie, Firestone and Loveland
TexasAustin, Dallas, Fort Worth, Houston and San Antonio
SoutheastFloridaFort Myers, Jacksonville, Lakeland, Melbourne, Orlando, Palm Coast, Sarasota and Tampa
North CarolinaCharlotte, Durham-Chapel Hill and Raleigh
Business Strategy
Overview. Our core business strategy, which we refer to as KB Edge, is to expand our scale primarily within our current geographic footprint to achieve a top-five position in each of our served markets (based on homes delivered). KB Edge is a systematic, fact-based and process-driven approach to homebuilding that is grounded in gaining a detailed understanding of consumers’ location and product preferences and product price-to-value perceptions. In our business, we use the term “product” to mean and encompass a home’s floor plan design and interior/exterior style, amenities, functions and features.
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KB Edge consists of the following key principles with respect to customers, land, products and operations:
Customers. With our Built-to-Order® homebuying process, we provide each of our homebuyers with a highly personalized experience where they can make a wide range of structural and design choices for their future new home, as discussed further below under “Customer Obsession.” We believe this highly interactive, “customer-first” experience that puts our homebuyers firmly in control of designing the home they want based on how they live and what they value, at an affordable price, gives us a meaningful and distinct competitive advantage over other homebuilders and resale and rental homes.
Land. We seek to manage our working capital and reduce our operating risks by primarily acquiring entitled land parcels within attractive submarkets identified by our market research. We typically focus on metropolitan areas with favorable long-term economic and population growth prospects that we believe have the potential to sustain a minimum of 800 homes delivered per year, and target land parcels that meet our investment return standards. Identified consumer preferences and home sales activity largely direct where our land acquisition teams search for available land. We focus on investments that provide a one- to two-year supply of land or lots per product line, per community, and individual assets that are generally between 50 to 200 lots in size. Though we evaluate new markets to enter, our primary focus is on our existing geographic footprint. We leverage the relationships we have with land owners, developers and brokers to find and acquire land parcels, and use our experience in working with municipalities to efficiently obtain development approvals.
Products. We offer our customers a variety of homes with a standardized set of base functions and features generally priced to be affordable for those with household incomes within a range of the local area’s median level. With our Built-to-Order approach, our customers have the opportunity to select their lot location within a community, floor plan, elevation and structural options, and to personalize their homes beyond our base offerings with numerous interior design options and upgrades in our KB Home Design Studios. Our design studios, generally centrally located within our served markets, are a key component of our Built-to-Order process, with the mix of design options and upgrades we offer at each studio primarily based on the preferences identified by our market survey and purchase frequency data, as discussed further below under “Customer Obsession.” We utilize a centralized internal architectural group that designs homes to meet or exceed customers’ price-to-value expectations while being as efficient as possible to construct. To enhance the simplicity and efficiency of our products and processes, our architectural group has developed a core series of high-frequency, flexible floor plans and elevations that we can offer across many of our served markets. Our standardized plans allow us to more effectively shift with local demand and particular site attributes, such as the size and location of developable lots, enabling us to better understand in advance the cost to build our products and to compare and implement best land development and home construction practices across divisions and communities. We also incorporate energy-efficient features into our product designs to help lower our homebuyers’ total cost of homeownership and reduce our homes’ impact on the environment, as discussed below under “Environmental, Social and Governance.”
Operations. In addition to differentiating us from other high-production homebuilders, our Built-to-Order process helps drive low cost production. We generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home, and seek to build a backlog of sold homes. In order to help moderate construction-related cost inflation, we typically enter into fixed-price contracts with our larger trade partners and building material suppliers for specified periods of time. By maintaining a substantial backlog, along with centralized scheduling and standardized reporting processes, we have established a disciplined and scalable operational platform that helps us sustain an even-flow production of pre-sold homes. This reduces our inventory risk, promotes construction efficiencies, enhances our relationships with independent contractors and other business partners, and provides us with greater visibility and predictability on future deliveries as we grow.
There may be market-driven circumstances where we believe it is necessary or appropriate to temporarily deviate from certain of the above principles. These deviations may include starting construction on a small number of homes in a community before corresponding purchase contracts are signed with homebuyers to more quickly meet customer delivery expectations and generate revenues; or acquiring land parcels in peripheral neighborhoods of a core metropolitan area that otherwise fit our growth strategy and meet our investment return standards. Throughout 2021, we experienced significant supply chain disruptions and construction services shortages that, in conjunction with high customer demand, impacted our operations in many markets by, among other things, impairing our even-flow home production process; causing appreciable delays in opening new communities and delivering homes; and prompting us to narrow the design options and upgrades offered in our design studios and provide substitutes for unexpectedly unavailable items, in some cases on an interim basis. Other circumstances could arise in the future that may lead us to make specific short-term shifts from our KB Edge principles.
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Asset Efficiency. In implementing our KB Edge business strategy, a key tenet of our approach is to enhance asset efficiency. We do this by calibrating home sales rates and selling prices at each of our communities to improve profitability; focusing on controlling direct construction costs within our communities; increasing inventory turns to the extent practical; balancing pace, price and construction starts at each community; structuring land acquisitions to minimize upfront costs where possible, as discussed below under “Community Development and Land Inventory Management”; and deploying excess cash flow from operations to help fuel additional revenue growth or reduce debt, among other steps. Raising our asset efficiency also supports utilization of our valuable deferred tax assets, allowing us to realize substantial tax cash savings that can be productively deployed in our business or to enhance our capital structure.
Customer Obsession. Based on more than 60 years of experience, we believe the best homes start with the people who live in them. Our customer-centric approach comes from a deep-rooted operational philosophy and company culture motivated by a paramount objective: to be the most customer-obsessed homebuilder in the world. Driven by this ambitious guidepost, our team seeks to provide a compelling, simple and personalized homebuying process distinguished by phenomenal customer service. We want our customers to know they have a real partner when buying a home with us, and to feel that once their home is built, they can see themselves in their new home. Our team members, supported through our training and development programs, are encouraged to make decisions intended to produce the best results for our customers and our organization. Our customer obsession mindset is built around the following key principles:
Find out what customers want and offer them choice to attain it. Design plays an important role in the homes we build for our customers. We ascertain homebuyer product design and location preferences through surveys we conduct of recent buyers of both new and resale homes across our served markets. We also obtain data from our own homebuyers’ selections and post-sale feedback. We use this information on what matters most to homebuyers when making purchase and trade-off decisions to develop and refine our products, as well as our land acquisition targets.
We also cultivate and leverage close supplier and business partner relationships to integrate into or offer with our products architectural elements (such as flex spaces that can serve multiple purposes, quiet zones or home offices), building materials, construction techniques, and structural and non-structural systems, components and devices that are aligned with the preferences identified in our surveys and other data sources, including with the design options and upgrades we offer. With our focus on affordability, we seek out innovative techniques, materials and items to help meet homebuyers’ priorities at attainable price points.
From our synthesis of the foregoing consumer research and related activities, we give our homebuyers a wide array of choice to craft the new home that fits their particular lifestyle and priorities, including their homesite, floor plan, elevation and structural options. Our homebuyers can visit our KB Home Design Studios, where they get both advice and the opportunity to select from a broad range of included features, design upgrades and options that will help personalize their home.
Create collaborative customer relationships. In our view, we are not just selling a house. We are in the business of delivering an exceptional, personalized experience that enables our customers to achieve perhaps the most meaningful purchase they will ever make and an important landmark in their life’s journey — their own home. From this perspective, we strive to form close relationships with our homebuyers. We endeavor to learn key details about what they want, their top priorities today and where they see themselves in the future, so we can co-create a home for their day-to-day lives. We support each person or family, whether it is their first time or they have already been homeowners, with a dedicated community team of construction supervisors, sales representatives, design consultants and other personnel. This team is available to guide each homebuyer through each major step of the design, construction and closing of their KB home and aims to make the process as easy and straightforward as possible.
Continue to listen to customers after the sale is done. To help learn and improve our customer experience, we schedule follow up visits with our customers 30 days after they move in, as well as three, six, 10 and 18 months later, to hear about their experience in their new home and to address any concerns they may have, including warranty claims. Information about our KB Home 10-year Limited Warranty program is provided in Note 17 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report.
We believe our approach differentiates us in the homebuilding industry and, along with our company culture that sustains it, enhances customer satisfaction. We are proud of the high levels of satisfaction our homebuyers have reported to us and on outside surveys. In 2021, we achieved the top rank for customer satisfaction among homebuilders in third-party surveys, which we believe reflects the effective dedication we have to our homebuyers.
Promotional Marketing Strategy. To emphasize the distinct combination of innovative designs, personalization, affordability and partnership we offer to our homebuyers and the importance we place on customer satisfaction, we have
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centered our external brand identity and messaging around Built on Relationships®. Built on Relationships also encapsulates the importance of customer, as discussed above, and other key relationships – with suppliers, trade contractors, land sellers and municipalities – to the success of our business. The key components we highlight as part of our brand identity include:
Offering Innovative Designs. We believe we offer homebuyers product designs that distinctively blend consumer-preferred elements, such as open floor plans, flexible living spaces and extra storage, as discussed above under “Customer Obsession;” quality construction standards; and superior energy efficiency, compared to other new homes and resale homes with which we compete.
A Personalized Home. We give our homebuyers considerable ability to personalize their new home from floor plans to design features to where they live in the community. At our KB Home Design Studios, our homebuyers are able to get both advice and the opportunity to select from a broad range of included features, design upgrades and options that will help personalize their home.
Affordable Today and a Lower Cost of Homeownership Tomorrow. We offer our customers a variety of homes with a standardized set of base functions and features generally priced to be affordable for those with household incomes within a range of the local area’s median level. Our ENERGY STAR® certified homes can provide long-term significant savings on utility bills compared to typical resale homes and to competitive new homes that are not ENERGY STAR certified.
A Partner Every Step of the Way. Our dedicated team of sales counselors, design studio consultants, construction superintendents and customer service representatives, as well as KBHS loan officers, work closely with our homebuyers throughout the homebuying process.
We typically sell our homes through commissioned sales associate employees from sales offices located in or adjacent to furnished model homes in each community. We also use electronic sales capabilities, which we have progressively enhanced since 2020, as the outbreak of the 2019 coronavirus disease (“COVID-19”) pandemic and the related responses by public health and governmental authorities to contain and combat its outbreak and spread (“COVID-19 control responses”) accelerated our use of technology to give our customers a variety of convenient ways to shop for and purchase a new KB home, including, among other things:
Offering virtual home tours for prospective homebuyers;
Providing access to interactive floor plans available at their desired community;
Enabling live chats with sales counselors;
Conducting virtual appointments and tours of the design studios with our studio professionals;
Having KBHS pre-qualify our homebuyers for mortgages, and utilizing online tools and/or contactless methods to serve homebuyers where possible;
Organizing virtual events with the broker community to introduce new communities;
Presenting homebuyers with the ability to virtually see and walk through their home at various points during its construction and prior to closing; and
Arranging virtual or drive-through closings, where permitted.
In addition, as part of our commitment to sustainability, which is discussed further below under “Environmental, Social and Governance,” and providing our customers a simple path to homeownership, we continue to work towards the goal of paperless homebuying. Over the past few years, we have eliminated a significant amount of paper from our home purchase contract by reducing the number of forms required to complete the process and digitizing as many of the remaining forms as possible. We plan to make additional investments in our digital sales and marketing tools in 2022.
We market our homes to prospective homebuyers and real estate brokers through a variety of media, and use data analytics to target our advertising and measure its effectiveness and efficiency in terms of generating leads and net orders. In recent years and in response to the growing number of millennial and Generation Z homebuyers, we have increased our emphasis on digital marketing, through search engine marketing, interactive Internet-based applications, email, social media outlets, our website and other evolving communication technologies. We also use print media, billboards, radio, magazine and newspaper advertising in our served markets, as necessary.
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Homebuyer Profile. We focus on offering a variety of homes with a standardized set of base functions and features that are generally priced to be affordable for those with household incomes within a range of the local area’s median level in order to position our products to be attainable for the largest demand segments of the relevant submarket. Our product portfolio for customers ranges from smaller, higher density homes, with average selling prices typically suited for first-time homebuyers, to larger homes in premium locations with additional amenities and higher average selling prices that generally attract a first or second move-up homebuyer. We also offer a variety of single-story floorplans that typically appeal to an active adult homebuyer age 55 and over, as well as multi-story floorplans that attract a wide range of homebuyers. For more than a decade, first-time and first move-up homebuyers have accounted for an average of over 75% of our annual deliveries ; in 2021, these homebuyers accounted for 81% of our deliveries, as shown in the following chart:
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Operational Structure. We operate our homebuilding business through divisions with experienced management teams who have in-depth local knowledge of their particular served markets, which helps us acquire land in preferred locations; develop communities with products that meet local demand; and understand local regulatory environments. Our division management teams exercise considerable autonomy in identifying land acquisition opportunities; developing land and communities; implementing product, marketing and sales strategies; and controlling costs. To help maintain consistent execution within the organization, our division management teams and other employees are continuously trained on KB Edge principles and are evaluated, in part, based on their achievement of relevant operational objectives.
Our corporate management and support personnel develop and oversee the implementation of company-wide strategic initiatives, our overall operational policies and internal control standards, and perform various centralized functions, including architecture; purchasing and national contracts; treasury and cash management; land acquisition approval; risk and litigation management; accounting and financial reporting; internal audit and compliance activities; information technology (“IT”) systems; marketing; and investor and media relations.
Community Development and Land Inventory Management
Developable land for the production of homes is a core resource for our business. Based on our current strategic plans, we seek to own or control land sufficient to meet our forecasted production goals for the next four to six years. In 2022, we intend to continue to invest in and develop land positions within attractive submarkets and selectively acquire or control additional land that meets our investment return standards. However, we may periodically sell certain land interests or monetize land previously held for future development.
Our community development process generally consists of four phases: land acquisition, land development into finished lots for a community (if necessary), home construction and delivery of completed homes to homebuyers. Historically, our community development process has typically ranged from 12 to 24 months in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. The development process in our West Coast homebuilding reporting segment is typically longer than in our other segments due to the municipal and regulatory requirements that are generally more stringent in California. Our community development process varies based on, among other things, the extent and speed of required government approvals and utility service activations, the overall size of a particular community, the scope of necessary site preparation activities, the type of product(s) that will be offered, weather conditions, time of year, promotional marketing results, the availability of construction resources, consumer demand, local and general economic and housing market conditions, and other factors. In 2021, as noted above under “Business Strategy,” we experienced extended community development timelines due to nationwide supply chain disruptions that created shortages of
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certain construction materials and other products; construction services availability constraints; and delays with respect to state and municipal construction permitting, inspections and utilities, and we believe these challenging conditions will generally persist into 2022 and potentially throughout the year, as discussed below under “Outlook.”
Although they vary significantly in size and complexity, our single-family residential home communities typically consist of 50 to 200 lots per product line, with lots ranging in size from 1,700 to 11,000 square feet. In our communities, we typically offer three to 15 home design choices. We also generally build one to three model homes at each community so that prospective homebuyers can preview the various products available. Depending on the community, we may offer premium lots containing more square footage, better views and/or location benefits. Some of our communities consist of multiple-story structures that encompass several attached condominium-style units.
Land Acquisition and Land Development. We continuously evaluate land acquisition opportunities against our investment return standards, while balancing competing needs for financial strength, liquidity and land inventory for future growth. When we acquire land, we generally focus on parcels with lots that are entitled for residential construction and are either physically developed to start home construction (referred to as “finished lots”) or partially finished. However, depending on market conditions and available opportunities, we may acquire undeveloped and/or unentitled land. We may also invest in land that requires us to repurpose and re-entitle the property for residential use, such as urban in-fill developments. We expect that the overall balance of undeveloped, unentitled, entitled, partially finished and finished lots in our inventory will vary over time, and in implementing our strategic growth initiatives, we may acquire a greater proportion of undeveloped or unentitled land in the future if and as the availability of reasonably priced land with finished or partially finished lots diminishes.
As part of the decision-making process for approving a land purchase, we review extensive information about a proposed project, including past use; assessment of environmentally-sensitive areas and areas that may be suitable for parks, trails, and open space preservation areas; assessment of site development required, including any work needed to comply with storm water regulations; distance to major employment and retail centers; and site design and product (home designs and specifications) plans that are consistent with our commitment to building 100% ENERGY STAR homes using 100% WaterSense® labeled fixtures, as discussed below under “Environmental, Social and Governance.”
We generally structure our land acquisition and land development activities to minimize, or defer the timing of, expenditures in order to reduce both the market risks associated with holding land and our working capital and financial commitments, including interest and other carrying costs. We typically use contracts that, in exchange for a small initial option payment or earnest money deposit, give us an option or similar right to acquire land at a future date, usually at a pre-determined price and pending our satisfaction with the feasibility of developing and selling homes on the land and/or an underlying land seller’s completion of certain obligations, such as securing entitlements, developing infrastructure or finishing lots. We refer to land subject to such option or similar contractual rights as being “controlled.” Our decision to exercise a particular land option or similar right is based on the results of our due diligence and continued market viability analysis after entering into such a contract.
The following table presents the number of inventory lots we owned, in various stages of development, or controlled under land option contracts or other similar contracts by homebuilding reporting segment as of November 30, 2021 and 2020:
Homes Under ConstructionLand Under DevelopmentLand Under Option (a)Total Land
Owned or Under Option
 20212020202120202021202020212020
West Coast2,838 2,128 10,617 8,467 10,084 6,395 23,539 16,990 
Southwest1,895 1,265 7,207 6,975 3,237 4,050 12,339 12,290 
Central3,194 2,363 13,082 11,947 12,685 9,389 28,961 23,699 
Southeast1,718 976 7,974 5,926 12,237 7,157 21,929 14,059 
Total
9,645 6,732 38,880 33,315 38,243 26,991 86,768 67,038 
(a)Land under option as of November 30, 2021 and 2020 includes 12,434 and 10,254 lots, respectively, under land option contracts or other similar contracts where the associated deposits were refundable at our discretion.
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The following charts present the percentage of inventory lots we owned or controlled under land option contracts or other similar contracts by homebuilding reporting segment and the percentage of total lots we owned and had under option as of November 30, 2021:
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Home Construction and Deliveries. Following the acquisition of land and, if necessary, the development of the land into finished lots, we typically begin constructing model homes and marketing homes for sale. To minimize the costs and risks of unsold homes in production, we generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home. Other than model homes, our inventories typically do not consist of a significant number of completed unsold homes. However, cancellations of home purchase contracts prior to the delivery of the underlying homes, the construction of attached products with some unsold units, or specific marketing or other strategic considerations will result in our having some unsold completed or partially completed homes in our inventory. Our cycle time from home sale to delivery is typically six to seven months.
We, or outside general contractors we may engage, contract with a variety of independent contractors, who are typically locally based, to perform all land development and home construction work through these independent contractors’ own employees or subcontractors. We do not self-perform any land development or home construction work. These independent contractors also supply some of the building materials required for such production activities. Our contracts with these independent contractors require that they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, follow local building codes and permits, and abide by our Ethics Policy referenced under Item 10 – Directors, Executive Officers and Corporate Governance in this report.
Raw Materials. Outside of land, the principal raw materials used in our production process are concrete and forest products. Other primary materials used in home construction include drywall, and plumbing and electrical items. We source all of our building materials from third parties, and seek out products that provide independent sustainability assessments. In addition, our lumber suppliers generally certify that their wood was not sourced from endangered forests or is certified by recognized programs. We attempt to enhance the efficiency of our operations by using, where practical, standardized materials that are commercially available on competitive terms from a variety of outside sources. In addition, we have national and regional purchasing programs for certain building materials, appliances, fixtures and other items that allow us to benefit from large-quantity purchase discounts and, where available, participate in outside manufacturer or supplier rebate programs. When possible, we arrange for bulk purchases of these products at favorable prices from such manufacturers and suppliers.
Backlog
Our “backlog” consists of homes that are under a purchase contract but have not yet been delivered to a homebuyer. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes delivered during the current period. Our backlog at any given time will be affected by cancellations, homes delivered and our community count. Backlog value represents potential future housing revenues from homes in backlog. Our cancellation rates and the factors affecting such rates are further discussed below under both Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.
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The following charts present our ending backlog (number of homes and value) by homebuilding reporting segment as of November 30, 2020 and 2021:
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Competition, Seasonality, Delivery Mix and Other Factors
Competition. The homebuilding industry and housing market are highly competitive with respect to selling homes; contracting for construction services, such as carpentry, roofing, electrical and plumbing; and acquiring attractive developable land, though the intensity of competition can vary and fluctuate between and within individual markets and submarkets. We compete for homebuyers, construction resources and desirable land against numerous homebuilders, ranging from regional and national firms to small local enterprises. As to homebuyers, we primarily compete with other homebuilders on the basis of selling price, community location and amenities, availability of financing options, home designs, reputation, home construction cycle time, and the design options and upgrades that can be included in a home. In some cases, this competition occurs within larger residential development projects containing separate sections other homebuilders design, plan and develop. We also compete for homebuyers against housing alternatives to new homes, including resale homes, apartments, single-family rentals and other rental housing.
In markets experiencing extensive construction activity, including areas recovering from earthquakes, wildfires, hurricanes, flooding or other natural disasters, there can be craft and skilled trade shortages that limit independent contractors’ ability to supply construction services to us, which in turn tends to drive up our costs and/or extend our production schedules. Elevated construction activity, and reallocations of staff for public safety priorities after natural disasters or otherwise, has also contributed to measurable increases in the amount of time needed to obtain governmental approvals or utility service activations and, combined with tariffs imposed or increased by the U.S. and other governments, the cost of certain raw building materials, such as steel, Canadian lumber, drywall and concrete, or finished products. Since 2020, we have experienced intensifying building material cost pressures, particularly for lumber, and production capacity issues with some of our main product suppliers, reflecting sustained high levels of homebuilding and renovation activity combined with supply chain disruptions stemming from international and domestic COVID-19 control responses and economy-wide labor shortages in the U.S. In addition, since 2013, we have seen higher prices for desirable land amid heightened competition with homebuilders and other developers and investors (both domestic and international), particularly in the land-constrained areas where we operate. We expect these upward cost trends to continue in 2022, if and as housing market activity grows and there is greater competition for these resources across a disrupted global supply chain.
Seasonality. Our performance is affected by seasonal demand trends for housing. Traditionally, there has been more consumer demand for home purchases and we tend to generate more net orders in the spring and early summer months
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(corresponding to most of our second quarter and part of our third quarter) than at other times of the year. This “selling season” demand results in our typically delivering more homes and generating higher revenues from late summer through the fall months (corresponding to part of our third quarter and all of our fourth quarter). However, as illustrated in the table below, the outbreak of COVID-19 and the related COVID-19 control responses beginning in mid-March 2020 disrupted our usual seasonal patterns in 2020, with our 2020 second quarter net order activity measurably constrained followed by a significant rebound in our 2020 third and fourth quarters, resulting in a higher percentage of net orders in those quarters, compared to corresponding quarters in previous years. The seasonal pattern of our homes delivered and housing revenues in 2021 was slightly more in line with typical historical trends. However, we can provide no assurance whether or to what extent typical seasonal performance trends will return in 2022, or at all.
First QuarterSecond QuarterThird QuarterFourth Quarter
Net Orders
202126 %27 %25 %22 %
202026 %13 %32 %29 %
201921 %32 %26 %21 %
Homes Delivered
202121 %26 %26 %27 %
202026 %23 %24 %27 %
201918 %23 %26 %33 %
Housing Revenues
202120 %25 %26 %29 %
202026 %22 %23 %29 %
201918 %23 %25 %34 %
Delivery Mix and Other Factors. In addition to the overall volume of homes we sell and deliver, our results in a given period are significantly affected by the geographic mix of markets and submarkets in which we operate; the number and characteristics of the communities we have open for sales in those markets and submarkets; and the products we sell from those communities during the period. While there are some similarities, there are differences within and between our served markets in terms of the number, size and nature of the communities we operate and the products we offer to consumers. These differences reflect, among other things, local homebuyer preferences; household demographics (e.g., large families or working professionals; income levels); geographic context (e.g., urban or suburban; availability of reasonably priced finished lots; development constraints; residential density); and the shifts that can occur in these factors over time. These factors in each of our served markets will affect the costs we incur and the time it takes to locate, acquire rights to and develop land, open communities for sales, and market and build homes; the size of our homes; our selling prices (including the contribution from homebuyers’ purchases of design options and upgrades); the pace at which we sell and deliver homes; the rate at which communities are sold out; and our housing gross profits and housing gross profit margins. Therefore, our results in any given period will fluctuate compared to other periods based on the proportion of homes delivered from areas with higher or lower selling prices and on the corresponding land and overhead costs incurred to generate those deliveries, as well as from our overall community count.
Human Capital Resources
At November 30, 2021 and 2020, we had approximately 2,244 and 1,752 full-time employees, respectively. None of our employees are represented by a collective bargaining agreement. For fiscal 2021, our turnover rate was 16%, made up of 15% voluntary turnover and 1% involuntary turnover.
Our Culture. In order to achieve our strategic goals, it is essential for us to attract, promote and retain qualified personnel, particularly the local division leaders who manage our businesses in our served markets and partner with all constituents. Therefore, we strive to create an engaging internal environment that offers our employees satisfying work, with meaningful opportunities for career growth and development, and rewarding short- and long-term compensation programs that are aligned with achieving our business goals. In addition, we offer our employees benefit programs, which include medical, dental and vision insurance, a savings/retirement plan, life and disability insurance, and tuition reimbursement, along with an array of voluntary benefits designed to meet individual needs. We engage nationally recognized outside compensation and benefits
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consulting firms to objectively evaluate our programs and benchmark them against peers and other similarly sized organizations. We believe our position as an industry leader in sustainability also supports our ability to both attract and retain high-caliber talent.
Our top division and regional leaders average more than 11 years of tenure with us, and the local leaders responsible for land acquisition, entitlement, and development average over nine years with us. In addition, our named executive officers who are responsible for setting our overall strategy average 19 years of tenure with us and more than two decades in the homebuilding industry. Our leadership team’s long service history provides consistency in managing our business and helps reinforce and sustain our company culture through all levels of the organization.
Diversity. We are committed to supporting a work culture that treats all employees fairly and with respect, promotes inclusivity, provides equal opportunities for the professional growth of the diverse individuals who join us, and advancement based on merit. At November 30, 2021, based on information available to us, females made up approximately 40% of our workforce and 32% of our managerial employees, with ethnic and racial minorities making up approximately 35% of our workforce and 21% of our managerial employees. We intend to continue using a combination of targeted recruiting, talent development and internal promotion strategies to expand the diversity of our employee base across all roles and functions.
Learning and Development. To help advance our employees’ personal growth and drive consistent execution of our business strategy, including our customer obsession philosophy, we provide training opportunities that align with team members’ responsibilities over the arc of their careers with us. We support a dedicated Internet-based learning platform with a broad portfolio of written, audio-visual and interactive enterprise-wide and discipline-specific policy and training materials. This platform includes a library of more than 300 self-directed courses and virtual, instructor-led programs for employees at all levels of our organization. New employee orientations, functional role training, and our required annual ethics training and certification, are provided on this platform. During 2021, our team members completed more than 26,000 courses in total, an average of approximately 12 courses per employee. Managers and supervisors are provided training to help their direct reports progress in their professional development.
To recognize and promote outstanding employees, we conduct a comprehensive talent and succession planning review process on an annual basis, focused on identifying top-performing, high-potential, and diverse team members for advancement to key field and corporate leadership roles. This review process is overseen by the management development and compensation committee of our board of directors, which also guides updates and refinements to our human capital investment and development strategies.
Employee Safety. We strive to provide a safe working environment for our employees, as well as our trade partners, as discussed below under “Social Practices.” In addition to the benefits programs described above, we offer a wellness program designed to support our team members’ general health. To help our team members mitigate stressors arising from the outbreak of the COVID-19 pandemic and the related COVID-19 control responses, we expanded our wellness program offerings and made them available online so that every employee had access to them. Monthly interactive webinars address topics such as holistic health, including nutrition, and preventive care. We have continued to enhance our wellness program throughout 2021, and see it as a positive way to create and strengthen internal connections with and among our employees.
During 2020, we implemented various steps to address the safety and health of our workforce due to the COVID-19 pandemic. Some examples include the following: temporarily closed our offices and established new safety protocols and procedures; maintained regular communication regarding the impacts of the pandemic on our team members and operations; developed and refined a playbook to guide the safe return to offices, communities, and work sites; provided paid time off for those directly impacted by COVID-19 and instructed those who are infected to stay home; offered additional paid time off for employees to receive their COVID-19 vaccines and recover from resulting side effects; increased cleaning protocols across all locations; established physical distancing procedures, modifying workspaces, and providing personal protective equipment and cleaning supplies for employees who need to be onsite; and invested in our IT systems to support a working environment that encompasses a mix of remote and in-person arrangements. We continued, and in some instances, expanded these efforts throughout 2021 to help enhance our employees’ well-being and productivity.
Environmental, Social and Governance (“ESG”)
For nearly 15 years, we have made a dedicated effort to become a leading national company in sustainability, which encompasses our ESG practices. We believe our longstanding, industry-leading sustainability initiatives provide tangible benefits for our customers, our operations and the environment, and distinctly differentiate us from other builders of new homes and from resale homes. In addition to our internal executive team, we monitor evolving trends and gather input and guidance for our initiatives through a panel of external advisors that we call our National Advisory Board, which we established in 2009 solely for these purposes. These advisors, who have a broad and diverse set of personal and professional perspectives,
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experiences and expertise, help us shape our sustainability priorities and reporting, as well as our approach to stakeholder engagement.
Environmental Practices. We are committed to building energy-efficient homes and have progressively expanded our sustainability program and use of technological advancements to make renewable solar energy, water efficiency, waste reduction and indoor environments that support personal wellness available to our buyers. As most of the energy consumed during a home’s multi-decade life occurs after we deliver the home to our customers, we have made energy efficiency central to our efforts to help reduce carbon and other greenhouse gas (“GHG”) emissions, and see enhancing the conservation of natural resources in a home’s day-to-day use as a key part of our business strategy.
ENERGY STAR Commitment. The cornerstone of our energy-efficiency initiatives is building 100% ENERGY STAR certified new homes, a standard to which we committed in 2008. ENERGY STAR is a voluntary U.S. Environmental Protection Agency (“EPA”) and Department of Energy program that seeks to help consumers, businesses and industry save money and protect the environment through the adoption of energy-efficient products and practices. We were the first national homebuilder to make every new home we build ENERGY STAR certified, and have built over 160,000 high-performance ENERGY STAR certified new homes since 2000, more than any other builder in the nation. By comparison, the EPA estimates only about 10% of all new homes in the U.S. were ENERGY STAR certified in the past three years. According to the EPA, ENERGY STAR certified new homes achieve a 20% energy efficiency improvement on average compared to new homes built to local code, and even more compared to resale homes. Each certified home is estimated by the EPA to reduce GHG emissions by approximately 3,287 pounds (1.5 metric tons) per year compared to a typical home. Based on our energy use analysis, our homes currently save our homeowners an estimated average of $1,300 annually on utility bills compared to typical resale homes. Our commitment to building ENERGY STAR certified homes has also enabled us to earn significant federal energy tax credits.
GHG Emission Reductions. We have a goal to reduce the estimated GHG emissions (metric tons per year) of our average home built in 2025 by 0.5 metric tons per year, or 8%, from the estimated 6 metric tons per year average for a KB home built in 2020. Our benchmark for measuring the achievement of this goal is the Home Energy Rating System (HERS®) Index, as each HERS Index score point reduction equates to a 1% improvement in energy efficiency relative to a standard new home and potentially reduces GHG emissions by an average of 0.1 metric tons (as calculated based on the states in which we operate). Therefore, we expect to attain our GHG emissions reduction goal if we reduce our national average HERS Index score by five points, from 50 in 2020 to a target of 45 for 2025. For comparison, a typical resale home today has a HERS Index score of 130.
Solar. We built our first solar home in 2005 and introduced our first all solar community in 2011. We have delivered more than 14,000 homes with solar-paneled power systems, producing an estimated total of 557 million kilowatt hours of electrical power. In recent years, we have added higher efficiency solar panels that generate more power using the same roof space. In 2020, we were the first national homebuilder to offer a complete roof-integrated solar-paneled system. In 2021, we built over 3,000 solar homes in California, representing nearly 80% of our homes built in the state that year. As of November 30, 2021, approximately 72% of our model homes and sales offices in California were powered by solar energy.
Indoor Environments. In recent years, we have expanded our sustainability portfolio to include enhancing our homes’ indoor environment with high-performance ventilation systems and low- or zero-VOC products. In 2020, we announced a partnership with Well Living Lab, a collaboration between Delos Living LLC, a wellness real estate and technology company, and the Mayo Clinic, an academic medical center. The Well Living Lab focuses exclusively on researching how indoor environments can improve human health and well-being. Under this partnership, in 2021, we built a concept home in Phoenix, Arizona to demonstrate how advancements in design and construction materials as well as wellness intelligence ecosystems and biometric smart devices can make a significant potential contribution to the overall health of the home’s residents. Separately, beginning in mid-2021, we included MERV-13 rated air filters, one of the highest rated residential air filters on the market, as standard at all of our new communities. These filters are designed to remove dust, pollen, mold and certain bacteria and viruses for better air quality compared to lower-rated air filters, and exceed current ENERGY STAR requirements.
Consumer Awareness. To assist customers in understanding the energy-efficiency benefits of our homes, we include a KB Home Energy Savings Comparison™, or ESC, with each home that provides an estimate of its monthly energy costs and monthly savings compared to a typical resale home. We also engage in campaigns and other educational efforts, sometimes together with other companies, organizations and groups, to increase consumer awareness of the importance and impact of sustainability in selecting a home and the products within a home. We intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with our sustainability commitment, and believe our initiatives in this area can help put us in a better position, compared to resale homes and homebuilders with less-developed programs, to comply with evolving regulations directed at addressing climate change and similar environmental concerns, and to meet growing consumer demand for resource-efficient products, as discussed below under Item 1A – Risk Factors in this report.
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Water Conservation. As a homebuilder operating in some of the most water-challenged regions of the country, we also prioritize water conservation. We provide water-saving features in our homes that reduce our homeowners’ bills and may help to mitigate strain on local communities’ water resources. As water availability is an important consideration for local governments in approving new-home developments, we believe our leadership in this area has positioned us to effectively address water-related development concerns and help preserve this critical resource.
We were the first national homebuilder to join the EPA’s WaterSense program, which is a voluntary partnership program that is both a label for water-efficient products and a resource for helping conserve water. According to the EPA, WaterSense labeled products use at least 20% percent less water compared to products that are not labeled. To date, we have built over 18,000 WaterSense and Water Smart homes, more than any other homebuilder, and installed over 900,000 WaterSense labeled fixtures, collectively helping to save an estimated 1.6 billion gallons of water per year. We were the first national homebuilder to implement the new WaterSense Labeled Homes Program, Version 2, which was released in February 2021 and requires homes to be at least 30% more water efficient than a typical new home.
Awards and Recognition. We have been recognized with major national awards for our leading sustainability practices, including:
2021 ENERGY STAR Partner of the Year – Sustained Excellence Award – Our 11th consecutive award for demonstrating leadership in energy-efficient construction;
2021 ENERGY STAR Certified Homes Market Leader Awards – A record 25 awards in all, one in each of our primary markets nationwide, recognizing excellence in energy-efficient home building;
2021 WaterSense Sustained Excellence Award – The seventh consecutive year we have received this award for our achievements in constructing water-efficient homes;
Newsweek 2021 and 2022 lists of America’s Most Responsible Companies – We were the only national homebuilder to receive this distinction each year for the past two years for demonstrating leading ESG practices, specifically, our industry-leading environmental initiatives, dedication to social responsibility and strong corporate governance standards.
Our annual sustainability reports, which we have published on our website since 2008, contain more information about our programs, goals, and achievements.
Social Practices. As discussed above under “Human Capital Resources,” we maintain a human capital strategy that supports a diverse and inclusive workforce with equal opportunity and programs for training and career advancement, strong benefits, incentives, and health, safety and wellness initiatives. We have published a Human Rights Statement that outlines our commitment to maintaining a work culture that treats all employees fairly and with respect, promotes inclusivity, provides equal opportunities for the professional growth of the diverse individuals who join us, and advancement based on merit. We earned a place on Forbes’ 2021 list of America’s Best Midsize Employers, the only national homebuilder to receive this distinction. In 2021, we were also the only national homebuilder named to The Wall Street Journal’s “Management Top 250” list, which identifies the most effectively managed U.S. companies, as developed by the Drucker Institute. Management Top 250 measures corporate effectiveness by examining performance in the areas of customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.
Safety is a priority for our employees, our homebuyers and our independent contractors. To get a sense of our independent contractors’ compliance with their safety obligations, we track nearly 50 checkpoints across key aspects of jobsite safety, including safety documentation, personal protective equipment, scaffolding and ladders, fall protection, trenching and excavation, hazard assessment protocol, first aid and emergency plan, electrical safety and material safety.
Our commitment to our communities is not solely about the homes we build. Our KB Cares philanthropic program helps to build strong social ties through efforts ranging from assisting people in challenging circumstances to educating the next generation. We have partnered with local nonprofits and community organizations to contribute to the long-term social fabric of the areas in which we build. For instance, we are one of the founding partners of the Building Talent Foundation, whose mission is to advance the education, training and career progression of young people and people from underrepresented groups as skilled technical workers and business owners in residential construction.
We have a Supplier Code of Conduct that builds upon the principles, guidelines and standards within our Ethics Policy, including operating in accordance with applicable laws; treating all workers fairly and with dignity and respect; and providing a clean, safe and healthy work environment. Our Supplier Code of Conduct also encourages our suppliers to operate in an
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efficient and environmentally responsible manner, conserve natural resources and minimize waste and the use of environmentally harmful materials.
Corporate Governance Practices. Our board of directors maintains a robust governance framework and leading practices to oversee the management of our business and, among other things, oversees our sustainability initiatives as part of our overall business strategy. Our approach to corporate governance aligns with the principles of the Investor Stewardship Group, a coalition of some of the world’s largest investors and asset managers, as follows:
Stewardship PrincipleWhat We Do
Boards are accountable to stockholders.
Our board is unclassified and directors stand for election annually under a majority voting standard in an uncontested election.
Stockholders approved measures with potential “anti-takeover” effects to protect valuable deferred tax assets.

Stockholders should be entitled to voting rights in proportion to their economic interest.
We have one class of outstanding voting securities that allow each holder one vote for each share held.
Boards should be responsive to stockholders and be proactive in order to understand their perspectives.
Stockholders may communicate with us and our board.
We proactively engage with stockholders year-round. In 2021, many stockholder dialogues included discussions on our ESG programs’ progress.
Boards should have a strong, independent leadership structure.
Our board has a strong independent lead director with significant responsibilities and authority.
Independent directors lead all board committees.
Boards should adopt structures and practices that enhance their effectiveness.
Directors have extensive and relevant experience and skills.
92% of directors are independent; 42% are women or racial or ethnic minorities.
Stockholders elected three new candidates at our 2021 Annual Meeting, and a new director joined the board later in 2021, promoting its refreshment.
Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
At our 2021 Annual Meeting, our proposal to approve named executive officer compensation received 85% support.
Management compensation is designed to advance our long-term strategic goals.
More information concerning our corporate governance can be found in our Proxy Statement for the 2022 Annual Meeting of Stockholders (“2022 Proxy Statement”).
Government Regulations and Environmental Matters
Our operations are subject to myriad legal and regulatory requirements concerning land development (including governmental permits, taxes, assessments and fees), the homebuilding process, employment conditions and worksite health and safety. These requirements often provide broad discretion to government authorities, and they could be interpreted or revised in ways that delay or prohibit project development or home sales, and/or make these activities more costly. The costs to comply, or associated with any noncompliance, are, or can be, significant and variable from period to period.
Under applicable environmental laws (including those aimed at protecting against climate change impacts), we may be responsible for, among other things, removing or remediating hazardous or toxic substances even where we were not aware of their presence or on land we previously owned. In addition to incurring clean-up costs, the presence of harmful substances on or near our properties may prevent us from performing land development or selling homes. Also, we are subject to federal, state and local rules that can require us to undertake extensive measures to prevent or minimize discharges of stormwater and other materials from our communities, and to protect wetlands and other designated areas.
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As part of our due diligence process for land acquisitions, we often use third-party environmental consultants to investigate potential environmental risks, and we require disclosures, representations and warranties from land sellers regarding environmental risks. We also take steps prior to our acquisition of the land to gain reasonable assurance as to the precise scope of any remediation work required and the costs associated with removal, site restoration and/or monitoring. To the extent contamination or other environmental issues have occurred in the past, we will attempt to recover restoration costs from third parties, such as the generators of hazardous waste, land sellers or others in the prior chain of title and/or their insurers. However, despite these efforts, there can be no assurance that we will avoid material liabilities relating to the existence or removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned or controlled by us, and no estimate of any potential liabilities can be made.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on Forms 3, 4 and 5 and proxy statements, as well as all amendments to those reports are available free of charge through our investor relations website at investor.kbhome.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). They can also be found at the SEC’s website at www.sec.gov. We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations department at investorrelations@kbhome.com or at our principal executive offices. We intend for our investor relations website to be the primary location where investors and the general public can obtain announcements regarding, and can learn more about, our financial and operational performance, business plans and prospects, our board of directors, our senior executive management team, and our corporate governance policies, including our articles of incorporation, by-laws, corporate governance principles, board committee charters, and ethics policy. We may from time to time choose to disclose or post important information about our business on or through our investor relations website, and/or through other electronic channels, including social media outlets, such as Facebook® (Facebook.com/KBHome) and Twitter® (Twitter.com/KBHome), and other evolving communication technologies. The content available on or through our primary website at www.kbhome.com, our investor relations website, including our sustainability reports, Human Rights Statement, Supplier Code of Conduct and other ESG-related policies, or social media outlets and other evolving communication technologies is not incorporated by reference in this report or in any other filing we make with the SEC, and our references to such content are intended to be inactive textual or oral references only.
Item 1A.RISK FACTORS
Although we have operated through a number of varying economic cycles, there are several risks that could affect our ability to conduct our business, which we discuss below. If any of these risks materialize, they could, among other things, (a) materially and adversely impact our results of operations and consolidated financial statements; and (b) cause our results to differ materially from the forward-looking and other statements we make in our SEC filings; in our news releases and other public reports and communications, including those we post on or make available through our websites or other electronic channels; or orally through our personnel and representatives. These risks, and other factors outside of our control, could also create or increase volatility in our common stock’s market price.
Consumer Demand Risks. The following could negatively affect consumer demand for our products, thereby unfavorably impacting our net orders, homes delivered, average selling prices, revenues and/or profitability:
Soft or negative economic or housing market conditions. Adverse conditions in our served markets or nationally could be caused or worsened by factors outside of our control, including, for example, due to the imposition and/or continuation of federal, state and/or local orders for individuals to substantially restrict daily activities and for businesses to significantly curtail or cease normal operations to address COVID-19 or other disease outbreaks or civil unrest, or a federal government shutdown or failure to approve additional COVID-19-related relief or stimulus measures, and financial markets’ and businesses’ reactions thereto. Among other impacts, a severe economic contraction may also trigger a rise in home purchase cancellations.
Reduced employment levels and job and wage growth. While employment levels have improved since the onset of the COVID-19 pandemic in the 2020 second quarter, these trends may weaken or reverse in 2022, particularly if there are sustained or renewed COVID-19 outbreaks. If they do, our core first-time and first move-up homebuyer segments could be particularly affected, impacting us more severely than homebuilders that target a different buyer demographic.
Lower population growth, household formations or other unfavorable demographic changes. These may be driven by, among other things, birth rate changes, economic factors or U.S. immigration policies.
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Diminished consumer confidence, whether generally or as to purchasing a home. Consumers may be reluctant to purchase a home compared to housing alternatives (such as renting apartments or homes, or remaining in their existing home) due to location or lifestyle preferences, affordability perceptions (particularly in markets experiencing rapid home price appreciation), employment instability or otherwise. Consumers may also decide not to search for a new home when there are significant public health risks in doing so in their area, which we saw across our served markets in the 2020 second quarter with the outbreak of COVID-19.
Rising home selling prices. Steady demand for housing since 2013 combined with declining home inventories, in part reflecting a low supply of new homes compared to historical levels, has helped drive above-average home price appreciation across most markets for the past several years, and especially since the 2020 third quarter. If home selling prices, including our homes’ selling prices, increase at a faster rate than consumer incomes, consumers, including and perhaps particularly those in our core first-time and first move-up homebuyer segments, may not be able to afford to purchase a home, including our homes.
Tightened availability or affordability of mortgage loans and homeowner insurance coverage. Most of our buyers need a mortgage loan to purchase their home. Their ability to obtain a mortgage loan is largely subject to prevailing interest rates, lenders’ credit standards and appraisals, and the availability of government-supported programs, such as those from the Federal Housing Administration, the Veterans Administration, Federal National Mortgage Association (also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). If mortgage loan interest rates increase, credit standards are tightened, appraisals for our homes are lowered or mortgage loan programs are curtailed, potential buyers of our homes may not be able to obtain necessary mortgage financing to be able to purchase a home from us.
Insurance companies are increasingly drawing back from issuing, or are measurably raising premiums for, homeowner insurance policies in areas that have experienced, or are thought to be at risk of experiencing, significant wildfires, hurricanes, flooding or other natural disasters. If potential homebuyers are unable to obtain affordable homeowner insurance coverage, they may decide not to pursue purchasing a home or may cancel a home purchase contract with us.
Poor lender performance. We depend on third-party lenders, including our third-party partner in KBHS, to provide mortgage loans to our homebuyers, unlike homebuilders with a wholly-owned mortgage lender. These lenders may be unable or unwilling to complete, timely or at all, the loan originations they start for our homebuyers. Poorly performing lenders can significantly delay home closings, disrupting our production schedules and delivery forecasts, or cause home purchase contract cancellations. If KBHS performs poorly and our customers use another lender, the income from and value of our KBHS equity interest would decline.
On March 1, 2021, Guaranteed Rate, Inc. (“Guaranteed Rate”) acquired the parent company of Stearns Ventures, LLC (“Stearns”), our KBHS partner prior to that date. In October 2021, Stearns was renamed as GR Alliance Ventures, LLC (“GR Alliance”). While we are not aware of any significant changes with respect to GR Alliance (f/k/a Stearns) or its operations as a result of the transaction being completed, we can offer no assurance that KBHS’ operations will continue in their current form or that KBHS’ performance will not be negatively affected by post-acquisition integration activities and/or related management or other personnel changes, which, in turn, could result in one or more of the impacts described in the foregoing paragraph.
Adverse tax law changes. If federal or state laws are changed to eliminate or reduce the income tax benefits associated with homeownership, such as personal tax deductions for mortgage loan interest costs and real estate taxes, the after-tax cost of homeownership could measurably increase and diminish consumer interest in buying a home, as could increases in personal income tax rates, which the current presidential administration may consider.
Competition. We face significant competition for customers from other homebuilders, sellers of resale homes and other housing industry participants, including rental-housing operators. This competitive environment may, among other things, cause us to reduce our home selling prices or offer incentives to attract or retain buyers.
Seasonality. As discussed above under Item 1 – Business in this report, we historically have experienced fluctuations in our quarterly operating results with measurably more homes delivered and revenues generated in our third and fourth fiscal quarters. However, as was the case in 2021 and 2020, this pattern may not continue in the future at all or to the same degree as in the past.
Inflation. We and the homebuilding industry in general may be adversely affected during periods of high inflation, primarily because of higher land and construction costs, as we experienced throughout 2021, and with increased intensity. Inflation may also raise our financing costs. In addition, higher mortgage loan interest rates can affect the affordability of mortgage financing to prospective homebuyers. While we attempt to pass on increases in our costs
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through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage loan interest rates increase significantly, our revenues, housing gross profit margin and net income could be adversely affected.
Supply Risks. The following could negatively affect our ability to increase our owned and controlled lot inventory, community count, operational scale and market share, and to grow our business, if at all:
Lack of available land. Securing sufficient developable land that meets our investment return standards is critical for us to meet our strategic goals and profitably expand our business’ scale. Land availability depends on several factors, including geographical/topographical/governmental constraints, sellers’ business relationships and reputation within the residential real estate community, and competition from other parties, some of which can bid more for land. We expect to continue to face fierce competition for desirable land in our served markets in 2022, pressuring its availability and increasing its cost.
Supply chain and construction services shortages. Our business relies upon a network of suppliers and trade partners to source materials and services to build homes. However, since the COVID-19 pandemic began, our industry and the U.S. economy have continued to experience labor shortages, supply chain constraints, and rising and volatile raw material prices and availability, particularly related to building materials and appliances, such as with paint, HVAC systems and water heaters, as well as delays with respect to state and municipal construction permitting, inspections and utilities. Such constraints, cost pressures and delays can increase our costs, reduce our revenues in particular reporting periods, lead to higher order cancellations or result in lower customer satisfaction. In an effort to manage our cycle times and deliver homes to our homebuyers, we, among other things, expanded our supplier base; worked with our national suppliers to get products and materials, or available temporary or permanent substitutes, delivered; paced lot releases to align with our production capacity; and balanced pace, price and construction starts to enhance margins. However, we experienced measurable delays in delivering homes in 2021 because of the above-described issues, and believe these challenging conditions will generally persist into 2022 and potentially throughout the year, as discussed below under “Outlook.” We may also face increased future home warranty and construction defect claims associated with replacing or servicing substitute products or materials used in some instances to address supply shortages in certain served markets or communities.
Insufficient financial resources. Our business needs considerable cash to, among other things, acquire and develop land, build homes and provide customer service. We expect to meet our needs with existing cash, future operational cash flow, our unsecured revolving credit facility with various banks (“Credit Facility”) and unsecured letter of credit facility with certain financial institutions (“LOC Facility”), or outside sources, including loans that are specifically obtained for, or secured by, particular communities or other inventory assets, which we refer to as project financing. However, outside financing may be unavailable, costly and/or considerably dilute stockholders. For instance:
Tight capital or financial market conditions may hinder our ability to obtain external financing, or use or expand our Credit Facility and LOC Facility, on favorable terms or at all. Also, if a rating agency downgrades our credit rating or outlook, external financing may be difficult and costly for us to obtain.
Noncompliance with our Credit Facility and senior notes’ covenants may restrict our ability to borrow; accelerate repayment of our debt, which may not be feasible for us; or cause our lenders to impose significant fees or cease lending to us.
As described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report, if a change of control or fundamental change occurs before our senior notes mature, we may need to offer to purchase certain of them. This may require us to refinance or restructure our debt, which we may be unable to do at all or on favorable terms.
Our debt and debt-to-capital levels could require us to dedicate substantial cash flow to debt service; inhibit our ability to respond to business changes or adjust our debt maturity schedule; curb execution on our current strategies; and/or make us more vulnerable in a downturn than our less-leveraged competitors. Our next senior note maturity is our $350.0 million in aggregate principal amount of 7.50% senior notes due September 15, 2022 (“7.50% Senior Notes due 2022”).
Decreased land inventory value. Our land inventory’s value depends on market conditions, including our estimates of applicable future demand and revenue generation. If conditions deteriorate during the typically significant amount of time between our acquiring ownership/control of land and delivering homes on that land; if we cannot sell land held for sale at its estimated fair value; or if we make strategic changes, we may need to record inventory-related charges. We may also record charges if we decide to sell land at a loss or activate or sell land held for future development.
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In addition, our business could be negatively affected if our net orders, homes delivered or backlog-to-homes delivered conversion rate fall; if often-volatile building materials prices or construction services costs increase, which has been the trend over the past few years and was particularly the case with lumber in 2021 and 2020; or if our community openings are delayed due to, among other things, prolonged development from supply chain disruptions, construction services shortages or otherwise, our strategic adjustments, or protracted government approvals or utility service activations from staff or resource cuts or reallocations for public safety priorities (e.g., earthquakes, wildfires, flooding, hurricanes or other natural disasters).
Trade disputes and defective materials. The federal government has imposed, and may in the future impose, new or increased import tariffs, and other countries have implemented retaliatory measures, raising the cost and reducing the supply of several home construction items. In addition, shortages or rising prices of building materials may ensue from manufacturing defects, resulting in recalls of materials. If such disputes continue or recalls occur, our costs and supply chain disruptions could increase further.
Poor contractor availability and performance. Independent contractors perform essentially all of our land development and home construction work. Though we schedule and oversee such activities at our community sites, we have no control over our independent contractors’ availability or work methods. If qualified contractors are not available (due to general shortages in a tight labor market, as was the case throughout 2021 and is anticipated into 2022, competition from other builders or otherwise), or do not timely perform, we may incur production delays and other inefficiencies, or higher costs for substitute services. Also, if our trade partners’ work or materials quality does not meet our standards, we could face more home warranty and construction defect claims, and they or their insurers may not be able to cover the associated repair costs.
Potential expansion of employment-related obligations. Governmental agencies or others might assert that we should be subjected to California law and associated regulations that, in certain circumstances, impose responsibility upon direct contractors for certain wages and benefits that subcontractors of the direct contractor have failed to pay to their employees. It might also be alleged that California law and regulations impose other liabilities upon us with respect to the employees of our trade partners. Further efforts in California or elsewhere to impose such external labor-related obligations on us could create substantial exposure for us in situations beyond our control.
Strategy Risks. Our strategies, and any related initiatives or actions, and any changes thereto, may not be successful in achieving our goals or generate any growth, earnings or returns, particularly in a highly volatile business environment precipitated by a health or economic crisis, akin to the outbreak of COVID-19 or the extended supply chain disruptions and construction services shortages that marked 2021, or by social instability or distress. We may not achieve positive operational or financial results, or results equal to or better than we did in any prior period or in comparison to other homebuilders. We may also incur higher costs, or experience due to sourcing or supply chain disruptions extended times, to build our homes than other homebuilders due to our commitment to sustainability, as discussed above under “Environmental, Social and Governance.” Among other strategic risks, our business is presently concentrated in California, Florida, Nevada and Texas. Poor conditions in any of those markets could have a measurable negative impact on our results, and the impact could be larger for us than for other less-concentrated homebuilders. In addition, we may not be successful in generating positive results from our recent expansion into the Boise, Idaho market, our re-entry into the Charlotte, North Carolina market, or if we choose to enter into any other new markets, based on our relative inexperience with the local homebuilding and economic environment and the need to make a significant investment to achieve effective scale and profitable returns, which we may not be able to accomplish.
Adverse conditions in California would have particular significance to our business. We generate the highest proportion of our revenues from and make significant inventory investments in our California operations. However, we may be constrained or delayed in entitling land and selling and delivering homes in California, and incur higher development or construction costs, from water conservation or wildfire protection measures (including precautionary and event-induced electricity blackouts, temporary or extended local or regional evacuations, development moratoriums in high-risk areas, and community resiliency design requirements) that are intended to address severe drought and climatic conditions that have arisen in recent years. In addition, as large-scale wildfires and flooding due to such conditions in California, as well as hurricanes, heavy rains and other climate change-driven natural disasters in other of our served markets, become more frequent and intense, as discussed below under “Climate Risk,” we may experience greater disruption to our land development and homebuilding activities, delaying orders and home deliveries, among other impacts.
Also, California’s highly regulated and litigious business environment has made the state an increasingly challenging and uncertain place for us to operate. This includes implementing regulations under the state’s Global Warming Solutions Act of 2006 (AB32) intended to lower GHG emissions. For instance, we have and will continue to incur higher construction costs because of a state law requirement that effectively requires that all new homes permitted to build in 2020 and beyond have solar
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power systems, and we may be unable to offset (through customer leases) or cover such costs through selling price increases due to competition and consumer affordability concerns. Also, while not yet a statewide mandate, certain local jurisdictions have passed ordinances effectively eliminating natural gas in new homes by 2023 or 2024 as part of a continuing trend in California to mandate electrification of all new homes. In addition, California and certain of its local governments are considering or have implemented restrictions on or disincentives with respect to the creation or size of new suburban and exurban residential communities generally in favor of higher-density, urban developments that can be attractive to some buyers, but in many cases are on smaller parcels with higher building costs and more complicated entitlement requirements and may be subject to affordable housing mandates, prevailing wage requirements, greater local opposition and/or additional site remediation work. Depending on their scope, these efforts could significantly increase our land acquisition and development costs and, along with increasing competition from other homebuilders and investors for available developable land, limit our California operations’ growth, while making new homes less affordable to potential buyers in the state. Partially offsetting these trends, California’s governor and certain legislators have taken positions to promote new housing construction, including the adoption of SB 8, which extends into 2030 the provisions of the Housing Crisis Act of 2019 (SB 330) intended to expedite the approval process for housing development in order to address the housing shortage in California.
Climate Risk. GHG emissions are driving global climate change that is expected to have various impacts on our operations, ranging from more frequent extreme weather events to extensive governmental policy developments and shifts in consumer preferences, which have the potential individually or collectively to significantly disrupt our business as well as negatively affect our suppliers, independent contractors and customers. Experiencing or addressing the various physical, regulatory and adaptation/transition risks from climate change may significantly reduce our revenues and profitability, or cause us to generate losses. For instance, incorporating greater resource efficiency into our home designs, whether to comply with upgraded building codes or recommended practices given a region’s particular exposure to climate conditions, or undertaken to satisfy demand from increasingly environmentally conscious customers or to meet our own sustainability goals, often raises our costs to construct homes. In evaluating whether to implement voluntary improvements, we also consider that choosing not to enhance our homes’ resource efficiency can make them less attractive to municipalities, and increase the vulnerability of residents in our communities to rising energy and water expenses and use restrictions. We weigh the impact of the costs associated with offering more resource-efficient products against our priorities of generating higher returns and delivering homes that are affordable to our core first-time and first move-up buyers. In balancing these objectives, we may determine we need to absorb most or all the additional operating costs that come with making our homes more efficient. While our years of experience in sustainable homebuilding, as discussed above under “Environmental Practices,” and ability to leverage economies of scale may give us an advantage over other homebuilders in managing these absorbed costs, they may be substantial for us.
Beyond the commercial pressures implicated by climate change concerns, our operations in any of our served markets may face its potential adverse physical effects. For example, California, our largest market, has historically experienced, and is projected to continue to experience, climate-related events at an increasing frequency including drought, water scarcity, heat waves, wildfires and resultant air quality impacts and power shutoffs associated with wildfire prevention. In addition, severe cold weather in Texas in early 2021 and large hurricanes later in the year contributed to the supply chain disruptions that have significantly affected our business, as discussed above under “Strategy Risks.” While we have safety protocols in place for our construction sites and take steps to safeguard our administrative functions, including our IT resources, as described below under “Information Technology and Information Security Risks,” we can provide no assurance that we or our suppliers or trade partners can successfully operate in areas experiencing a significant weather event or natural disaster, and we or they may be more impacted and take longer, and with higher costs, to resume operations in an affected location than other homebuilders or businesses, depending on the nature of the event or other circumstances.
As discussed above under “Strategy Risks,” and below under “Legal and Compliance Risks,” international, federal, state and local authorities and legislative bodies have issued, implemented or proposed regulations, penalties, standards or guidance intended to restrict, moderate or promote activities consistent with resource conservation, GHG emission reduction, environmental protection or other climate-related objectives. Compliance with those directed at or otherwise affecting our business or our suppliers’ (or their suppliers’) operations, products or services, could increase our costs, such as with California’s requirement that effectively all new homes built in 2020 and beyond have solar power systems; delay or complicate home construction, for example, due to a need to reformulate or redesign building materials or components, or source updated or upgraded items or equipment, or specially trained or certified independent contractors, in limited or restricted supply, which has been a challenge for us in certain cases in 2021, such as with paint, HVAC systems and water heaters that have been out of stock and delayed home construction or required us to install or use temporary or permanent substitutes due to the supply chain disruptions we have experienced; or diminish consumer interest in homes mandated to include or omit certain features, amenities or appliances, particularly if home prices increase as a result.
Adapting to or transitioning from the use of certain items or methods in home construction, or adjusting the products we offer to our buyers, whether due to climate-related governmental rules affecting home construction or our supply chain, market dynamics or consumer preferences, can negatively affect our costs and profitability, production operations in affected markets
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and customer satisfaction during the transition period, which could be prolonged. For instance, in certain local markets in California where natural gas use is banned in new homes, we have faced some disruptions in reorienting our purchase order, independent contractor engagement, design studio and home construction processes to accommodate the restriction and, longer term, have implemented certain architectural design changes for all-electric homes. To the extent other jurisdictions adopt such bans, we will face similar issues.
Though practically available technology and resources allow us only to make certain estimates, and not definitive measurements, of the effectiveness and overall impact of our longstanding and broad-based environmental sustainability initiatives described above under “Environmental Practices,” we feel these initiatives and their evolution over time represent how we can best address climate change risks in the context of our business, industry and the wider, and rapidly changing, economic, social and political environment. However, climate change is an intrinsically complex global phenomenon with inherent residual risks across its physical, regulatory and adaptation/transition dimensions that cannot be mitigated given their wide-ranging, (sometimes unexpectedly) interdependent and largely unpredictable potential scope, nature, timing or duration. Therefore, we cannot provide any assurance that we have or can successfully prepare for, or are or will be able to reduce or manage, any of them to the extent they may arise. In addition, we may experience substantial negative impacts to our business if an unexpectedly severe weather event or natural disaster damages our operations or those of our suppliers or independent contractors in our primary markets, such as in California, Florida, Nevada and Texas, or from the unintended consequences of regulatory changes that directly or indirectly impose substantial restrictions on our activities or adaptation requirements.
Warranty Risks. Our homebuilding business is subject to warranty and construction defect claims. Though we have insurance coverage to partially reduce our exposure, it is limited and costly, in part due to a shrinking provider market, and we have high self-insured retentions that are expected to increase. We self-insure some of our risk through a wholly-owned insurance subsidiary.
Due to our dependence on the performance of independent suppliers and contractors to provide products and materials and carry out our homebuilding activities, and the associated risks described above under “Supply chain and construction services shortages” and “Poor contractor availability and performance,” as well as inherent uncertainties, including obtaining recoveries from responsible parties and/or their or our insurers, our recorded warranty and other liabilities may be inadequate to address future claims, which, among other things, could require us to record charges to increase such liabilities. We may also record charges to reflect our then-current claims experience, including the actual costs incurred. Home warranty and other construction defect issues may also generate negative publicity, including on social media and the Internet, that detracts from our reputation and efforts to sell homes.
Deferred Tax Asset Recovery and Tax Position Risks. Our realization of our deferred tax assets depends on our generating sufficient future taxable income, which may not occur. Also, our deferred tax assets’ value can increase or decrease with: (a) changes in the federal corporate income tax rate; (b) our undergoing a “change of ownership” under federal tax rules, which would significantly reduce and possibly eliminate their value; and (c) adjustments in statutory or taxing authority treatment of such assets. We have filed our tax returns based on certain positions we believe are appropriate, and we may owe additional taxes if taxing authorities disagree with those positions.
Human Capital Risks. Our directors, officers and employees are important resources. If we cannot attract, retain and develop talent at reasonable pay and benefits levels or, alternatively, if we need to implement personnel or compensation reductions, our performance, profitability and ability to achieve our strategic goals could be significantly impaired. In addition, in many of our served markets, we need to have personnel with certain professional licenses, including building contractor and real estate brokerage licenses. Our home selling and construction activities may be severely disrupted or delayed if we do not have sufficient licensed individuals in our workforce.
Information Technology and Information Security Risks. We use IT resources to carry out important operational activities and maintain our business records. Third parties maintain many of our IT resources, including disaster recovery and business continuity services intended to safeguard our access to and use of our IT resources during a general or local network outage, under agreements with evolving security and service level standards.
Our systems have faced a variety of phishing, denial-of-service and other attacks. We have administrative, physical and multi-layered technical controls and processes in place to address and mitigate cybersecurity risks and help protect our IT resources, including employee education and training, as well as third-party assessments. Our technical defense layers are designed to provide multiple, redundant measures to protect against exploitation of a vulnerability that may arise or if a security control fails. We rely on artificial intelligence, machine learning computer network monitoring and antivirus resources, firewall and intrusion detection systems, vendor cloud service defenses, Internet address and content filtering monitoring software that secures against known malicious websites and potential data exfiltration, and a variety of cyber intelligence threat monitoring sources that provide ongoing updates, all provided from third parties that we believe are capable of performing the protective service for which we have engaged them. We also depend on our service providers, GR Alliance and other mortgage lenders
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with whom we share some personal identifying and confidential information to secure our information and the homebuyer information they collect from us. Our IT security costs, including cybersecurity insurance, are significant and will likely rise in tandem with the sophistication and frequency of system attacks.
However, our, GR Alliance’s and our service providers’ measures may be inadequate and possibly have operational or security vulnerabilities that could go undetected for some period of time. If our IT resources are compromised by an intentional attack, natural or man-made disaster, electricity blackout, IT failure or systems misconfiguration, service provider error, mismanaged user access protocols, personnel action, or otherwise, we may be severely limited in conducting our business and achieving our strategic goals for an extended period, experience internal control failures or lose access to operational assets or funds. A substantial disruption, or security breach suffered by GR Alliance/KBHS or a service provider, could damage our reputation and result in the loss of customers or revenues, in sensitive personal information being publicly disclosed or misused and/or legal proceedings against us. We may incur significant expenses to resolve such issues.
We have invested significant resources over the past few years to develop and implement a new custom enterprise resource planning (“ERP”) system designed to improve the efficiency of our internal operational and administrative activities. There are inherent risks in undertaking this type of broad-based IT project and we have experienced complications and delays during the implementation process. We expect these will continue as we progress and expand the scope of the system in 2022 and that we will incur appreciable additional costs in doing so. In addition, the testing and use of the new system during this rollout could increase our exposure to the security risks and consequences discussed in the foregoing paragraph.
Legal and Compliance Risks. As discussed above under Item 1 – Business in this report, our operations are subject to myriad legal and regulatory requirements, which can delay our operational activities, raise our costs and/or prohibit or restrict homebuilding in some areas. For example, certain of our Texas operations are subject to rules mandating enhanced flood management practices stemming from recent large hurricanes and rainstorms. These requirements often provide broad discretion to government authorities, and they could be interpreted or revised in ways unfavorable to us. The costs to comply, or associated with any noncompliance, are, or can be, significant and variable from period to period. With respect to environmental laws, in addition to the risks and potential operational costs discussed above, we have been, and we may in the future be, involved in federal, state and local air and water quality agency investigations or proceedings for potential noncompliance with their rules, including rules governing discharges of materials into the air and waterways; stormwater discharges from community sites; and wetlands and listed species habitat protection. We could incur penalties and/or be restricted from developing or building at certain community locations during or as a result of such agencies’ investigations or findings.
Additionally, we are involved in legal, arbitral or regulatory proceedings or investigations incidental to our business, the outcome or settlement of which could result in material claims, losses, monetary damage awards, penalties, or other direct or indirect payments recorded against our earnings, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices. Any adverse results could be beyond our expectations, insurance coverages and/or accruals at particular points in time. Unfavorable outcomes, as well as unfavorable investor, analyst or news reports related to our industry, company, personnel or operations, may also generate negative publicity, including on social media and the Internet, damaging our reputation and resulting in the loss of customers or revenues.
To reduce the risks and expected significant costs of defending intra-corporate proceedings in multiple venues and to help ensure that such matters are considered within a well-established body of law, our By-laws provide that, subject to certain exceptions, Delaware state courts are the exclusive forum for specified internal corporate affairs actions. This may limit a stockholder’s ability to bring a claim in their favored forum. At the same time, if a court were to allow for an alternative forum, or we waive the provision’s application, for a particular matter, we may incur additional costs associated with resolving an otherwise relevant action in another jurisdiction(s).
The European Union and state governments, notably California and Nevada, have enacted or enhanced data privacy regulations, and other governments are considering establishing similar or stronger protections. These regulations impose certain obligations for securing, and potentially removing, specified personal information in our systems, and for apprising individuals of the information we have collected about them. We have incurred costs in an effort to comply with these data privacy risks and requirements, and our costs may increase significantly as risks become increasingly complex or if new or changing requirements are enacted, and based on how individuals exercise their rights. For example, in November 2020, California voters approved Proposition 24 (Consumer Personal Information Law and Agency Initiative), which will increase data privacy requirements for our business when its provisions take effect in 2023. Despite our efforts, any noncompliance could result in our incurring substantial penalties and reputational damage.
KBHS’ operations are heavily regulated. If GR Alliance, which oversees KBHS’ operations, or KBHS is found to have violated regulations, or mortgage investors demand KBHS repurchase mortgage loans it has sold to them, or cover their losses,
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for claimed contract breaches, KBHS could face significant liabilities, which, if they exceed its reserves, could result in our recognizing losses on our KBHS equity interest.
Our financial results may be materially affected by the adoption of new or amended financial accounting standards, and regulatory or outside auditor guidance or interpretations. In addition, to the extent we expand our disclosures on our sustainability initiatives in line with certain private reporting frameworks and investor requests, our failure to report accurately or achieve progress on our metrics on a timely basis, or at all, could adversely affect our reputation, business, financial performance and growth.
Pandemic Risks. An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a material adverse impact on our consolidated financial statements. We experienced significant impacts to our business during 2020, beginning in mid-March, due to the outbreak of COVID-19 and the related COVID-19 control responses by international, federal, state and local public health and governmental authorities, including quarantines, “stay-at-home” orders and similar mandates.
In response to the initial COVID-19 control responses in our served markets, we temporarily closed our sales centers, model homes and design studios to the general public, shifted to an appointment-only personalized home sales process and prioritized our warranty service activities to respond to emergency repair requests, and otherwise on a by-exception basis, in each case as and where permitted and following recommended distancing and other health and safety protocols when meeting in person with a customer. We also leveraged our virtual sales tools to give customers the ability to shop for a new KB home from their mobile device or personal computer. In addition, we shifted our corporate and division office functions to work remotely. We limited our construction operations largely to authorized activities with increased safety measures and experienced a reduction in the availability, capacity and efficiency of municipal and private services necessary to the progress of developing land, building homes, completing mortgage loans and delivering homes to varying degrees depending on the scope of the restrictions local authorities established.
Although we gradually resumed nearly all of our operations with the relaxing of the early COVID-19 control responses beginning late in our 2020 second quarter and for the remainder of the fiscal year, the magnitude and duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 have produced ongoing uncertainty about the overall operating environment going forward and made it more challenging for our management to estimate the future performance of our business and to develop strategies to generate growth. Moreover, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent, particularly in response to any resurgence in infections, whether due to the spread of any variants of the virus or otherwise, combined with the seasonal flu, that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period, including due to the reduced availability of contractors, employees and other talent, which may result from infections or medically necessary or recommended self-quarantining, which we have experienced in a few locations at various times during 2021. This could result in our recognizing charges in future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our inventory assets.
Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes delivered, average selling prices, revenues and profitability, as we did during our 2020 second quarter, and such impacts could be material to our consolidated financial statements. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our served markets, we could generate few or no orders and deliver few, if any homes during the applicable period, which could be prolonged. Along with an increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under the Credit Facility, our senior notes and the related indenture, and/or mortgages and land contracts due to land sellers and other loans; service our outstanding debt; or pay any dividends to our stockholders. Such a circumstance could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.
Other Risks. The risk factors described above are not our only salient risks. Political events, war, terrorism, weather or other natural/environmental disasters, and other risks that are currently unknown or seen as immaterial, could also have a material adverse impact on our business, consolidated financial statements and/or common stock’s market price.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
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Item 2.PROPERTIES
None.
Item 3.LEGAL PROCEEDINGS
Our legal proceedings are discussed in Note 18 – Legal Matters in the Notes to Consolidated Financial Statements in this report.
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
Information about our Executive Officers
The following table presents certain information regarding our executive officers as of December 31, 2021:
NameAgePresent PositionYear
Assumed
Present
Position
Years
at
KB
Home
Other Positions and Other
Business Experience within the
Last Five Years
From – To
Jeffrey T. Mezger66
Chairman, President and Chief Executive Officer (a)
201628
Jeff J. Kaminski60
Executive Vice President and Chief Financial Officer
201011
Matthew W. Mandino57Executive Vice President and Co-Chief Operating Officer201810Regional President, Southwest2016-2018
Robert V. McGibney47Executive Vice President and Co-Chief Operating Officer202121Regional President2018-2021
Division President and Regional General Manager2016-2018
Albert Z. Praw73Executive Vice President, Real Estate and Business Development201125
Brian J. Woram61
Executive Vice President and General Counsel
201011
(a)Mr. Mezger has served as a director since 2006.
There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.
PART II
Item 5.MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” As of December 31, 2021, there were 569 holders of record of our common stock.
Information regarding the shares of our common stock that may be issued under our equity compensation plans is provided below under Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this report.
The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2021:
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares That May Yet be Purchased Under the Plans or Programs
September 1-30— $— — 331,400 
October 1-3185,050 41.00 — 331,400 
November 1-30— — — 331,400 
Total85,050 $41.00 — 
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As of November 30, 2020, we had 2,193,947 shares authorized for repurchase under a share repurchase program approved by our board of directors in 2018. On July 8, 2021, our board of directors authorized us to repurchase up to 5,000,000 shares of our outstanding common stock. This authorization reaffirmed and incorporated the then-current balance of 2,193,947 shares that remained under the prior authorization. In the 2021 third quarter, we purchased 4,668,600 shares of our common stock pursuant to this authorization at a total cost of $188.2 million. As of November 30, 2021, we had 331,400 shares authorized for repurchase.
The shares purchased during the three months ended November 30, 2021 were previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases under the board of directors’ authorization.
Stock Performance Graph
The following graph compares the five-year cumulative total return of KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index for the periods ended November 30:

Comparison of Five-Year Cumulative Total Return
Among KB Home, S&P 500 Index and
Dow Jones US Home Construction Index

kbh-20211130_g10.jpg
201620172018201920202021
KB Home$100 $199 $134 $224 $231 $267 
S&P 500 Index100 123 131 152 178 228 
Dow Jones US Home Construction Index100 179 128 186 228 304 
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The above graph is based on the KB Home common stock and index prices calculated as of the last trading day before December 1 of the year-end periods presented. The closing price of KB Home common stock on the New York Stock Exchange was $39.99 per share on November 30, 2021 and $35.20 per share on November 30, 2020. The performance of our common stock as presented above reflects past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 2016 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index, including reinvestment of dividends.
Item 6.[RESERVED]
Item 7.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussion and analysis below is focused on our 2021 and 2020 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2019 fiscal year specifically, as well as the year-over-year comparison of our 2020 financial performance to 2019, are located under Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended November 30, 2020, filed with the SEC on January 22, 2021, which is available on our investor relations website at investor.kbhome.com and the SEC’s website at www.sec.gov.
RESULTS OF OPERATIONS
Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):
 Years Ended November 30,Variance
 2021202020192021 vs 20202020 vs 2019
Revenues:
Homebuilding$5,705,029 $4,167,702 $4,537,658 37 %(8)%
Financial services19,901 15,472 15,089 29 
Total$5,724,930 $4,183,174 $4,552,747 37 %(8)%
Pretax income:
Homebuilding$656,911 $331,500 $325,189 98 %%
Financial services38,435 32,543 22,986 18 42 
Total 695,346 364,043 348,175 91 
Income tax expense(130,600)(67,800)(79,400)(93)15 
Net income $564,746 $296,243 $268,775 91 %10 %
Earnings per share:
Basic$6.22 $3.26 $3.04 91 %%
Diluted$6.01 $3.13 $2.85 92 %10 %
In 2021, housing market conditions were positive, with healthy demand, particularly from millennial and Generation Z demographic groups, a limited supply of new and resale inventory and relatively low mortgage loan interest rates driving strong results for our business. Considerable demand for our homes enabled us to lift selling prices in the vast majority of our communities and, in combination with our focus on balancing pace, price and construction starts at each community, helped us to enhance the performance of our inventory assets and improve returns, despite supply chain challenges and rising construction services and building materials costs. Reflecting these actions, the value of our net orders for 2021 grew 45% year over year to $7.68 billion due to a 21% increase in net orders and a 20% rise in their overall average selling price. The year-over-year increase in our net order volume was due to higher net orders per community, partly offset by a lower average community count for the year. Our lower average community count reflected the accelerated sell-out of communities that resulted from our exceptionally strong monthly net order pace, which rose 37% to 6.3 in 2021 from 4.6 in 2020, even as we paced lot releases to
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align with our production capacity, as well as delays in new community openings during 2021, as further described below. Compared to 2020, our average community count for 2021 decreased 12%, and our ending community count declined 8%.
Since 2020, we have experienced intensifying building material cost pressures, particularly for lumber, and production capacity issues with some of our main product suppliers, reflecting sustained high levels of homebuilding and renovation activity combined with supply chain disruptions stemming from international and domestic COVID-19 control responses and economy-wide labor shortages in the U.S. Our housing gross profit margin on homes delivered in the latter part of 2021 were especially impacted by high lumber costs during the period in which these homes were started. In 2021, the continuing supply chain disruptions, combined with construction services availability constraints and delays with respect to state and municipal construction permitting, inspections and utilities, extended our construction cycle times by several weeks and delayed many expected deliveries and new community openings during our fiscal year. We believe these challenging conditions will generally persist into 2022 and potentially throughout the year. We have incorporated these trends into our performance expectations, as presented below under “Outlook.”
Homebuilding revenues for 2021 grew 37% from the previous year due to an increase in housing revenues that reflected 26% growth in the number of homes delivered to 13,472 and a 9% increase in the overall average selling price of those homes to $422,700. In 2021, homebuilding operating income rose 109% year over year to $661.3 million and, as a percentage of homebuilding revenues, improved 400 basis points to 11.6%. The increase in our homebuilding operating income margin was driven by significant improvements in both housing gross profit margin and selling, general and administrative expenses as a percentage of housing revenues. Our pretax income margin improved 340 basis points to 12.1%, and net income and diluted earnings per share increased 91% and 92%, respectively, each as compared to 2020. Our 2021 results included a $5.1 million loss on early extinguishment of debt associated with our purchase, pursuant to a tender offer that expired on June 8, 2021, of $269.8 million in aggregate principal amount of our 7.00% senior notes due 2021 (“7.00% Senior Notes due 2021”) prior to their maturity date. . Our 2020 results included severance charges of $6.7 million, as described below under “COVID-19 Pandemic Impact.”
Our return on equity (“ROE”) for 2021 improved 810 basis points to 19.9%, compared to 11.8% for 2020. ROE is calculated as net income for the year divided by average stockholders’ equity, where average stockholders’ equity is based on the ending stockholders’ equity balances of the trailing five quarters.
COVID-19 Pandemic Impact. The COVID-19 pandemic and related COVID-19 control responses considerably disrupted global and national economies, the U.S. housing market, and our business in the 2020 second quarter. During that period, we experienced a sizable reduction in net orders and backlog as well as supply chain disruptions and construction cycle time extensions in most of our served markets that resulted in home delivery delays. With the uncertainty surrounding the COVID-19 pandemic, and in prioritizing cash preservation and liquidity, we limited our land investments and curtailed our overhead expenditures, partly through workforce realignment and reductions. Due to these workforce-related actions, our selling, general and administrative expenses for the 2020 second quarter included severance charges of $6.7 million.
With the easing to varying degrees of restrictive public health orders in our served markets beginning in May 2020, our net orders began to rebound significantly following a low point in April 2020, as steadily increasing demand drove our 2020 third- and fourth-quarter net orders to then-15-year highs. The sharp rise in net orders over these periods substantially expanded the number of homes in our backlog as well as our backlog value. In 2021, demand for our homes remained strong, with the value of our net orders for the year up 45% year over year to $7.68 billion. Our ending backlog value at November 30, 2021 increased 67% to approximately $4.95 billion, our highest fourth-quarter level since 2005, supporting our expectation for significant year-over-year growth in our scale, profitability and returns in 2022, as described below under “Outlook.” With the ongoing strong demand, we continued to increase our land acquisition and development investments in 2021, as we did in the latter part of 2020, to measurably expand our lot pipeline and support future community count growth.
While we continue to experience construction services availability constraints, supply chain disruptions and rising and volatile raw material prices and availability, particularly with respect to lumber, other building materials and appliances, as well as delays related to state and municipal construction permitting, inspections and utilities, that could negatively impact our growth, margins and financial results in future periods, and there remains a risk that significant COVID-19 pandemic-related disruptions could emerge or re-emerge, we believe we are well-positioned to operate effectively through the present environment.
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HOMEBUILDING
Financial Results. The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):
 Years Ended November 30,
 202120202019
Revenues:
Housing$5,694,668 $4,150,793 $4,510,814 
Land10,361 16,909 26,844 
Total5,705,029 4,167,702 4,537,658 
Costs and expenses:
Construction and land costs
Housing(4,466,053)(3,365,509)(3,683,174)
Land(3,258)(14,942)(25,754)
Total(4,469,311)(3,380,451)(3,708,928)
Selling, general and administrative expenses(574,376)(470,779)(497,350)
Total(5,043,687)(3,851,230)(4,206,278)
Operating income 661,342 316,472 331,380 
Interest income1,049 2,554 2,158 
Equity in income (loss) of unconsolidated joint ventures(405)12,474 (1,549)
Loss on early extinguishment of debt(5,075)— (6,800)
Homebuilding pretax income$656,911 $331,500 $325,189 
Homes delivered13,472 10,672 11,871 
Average selling price$422,700 $388,900 $380,000 
Housing gross profit margin as a percentage of housing revenues21.6 %18.9 %18.3 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues21.8 %19.6 %18.7 %
Adjusted housing gross profit margin as a percentage of housing revenues24.4 %22.7 %22.2 %
Selling, general and administrative expense as a percentage of housing revenues10.1 %11.3 %11.0 %
Operating income as a percentage of homebuilding revenues11.6 %7.6 %7.3 %
Revenues. Year-over-year growth in homebuilding revenues to $5.71 billion in 2021 reflected an increase in housing revenues, partly offset by a decrease in land sale revenues. Housing revenues in 2020 were negatively impacted by the COVID-19 pandemic and related COVID-19 control responses.
Housing revenues in 2021 advanced 37% from the previous year, due to a 26% increase in the number of homes delivered and a 9% increase in the overall average selling price of those homes. The higher volume of homes delivered was largely due to our backlog of homes at the beginning of the year (“beginning backlog”) increasing 54% from 2020, as well as strong net order growth in 2021. In addition, the number of homes delivered in 2020 was tempered primarily by the negative impact of the COVID-19 pandemic and related COVID-19 control responses. The year-over-year increase in the overall average selling price of our homes delivered in 2021 reflected strong housing market conditions, which enabled us to raise prices in the vast majority of our communities, as well as product and geographic mix shifts of homes delivered.
Land sale revenues for 2021 decreased 39% from 2020. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions.
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Operating Income. Our homebuilding operating income grew 109% in 2021, as compared to the previous year, due to an increase in housing gross profits, partly offset by an increase in selling, general and administrative expenses. In 2021 and 2020, homebuilding operating income included total inventory-related charges of $12.0 million and $28.7 million, respectively, as discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report. In 2020, our homebuilding operating income also included severance charges of $6.7 million associated with workforce reductions made during the 2020 second quarter, as discussed above under “COVID-19 Pandemic Impact.” As a percentage of homebuilding revenues, our homebuilding operating income for 2021 improved 400 basis points year over year to 11.6%. Excluding inventory-related charges for both periods and the above-mentioned severance charges in 2020, our homebuilding operating income margin improved 340 basis points to 11.8% in 2021 from 8.4% in 2020.
Housing Gross Profits – In 2021, housing gross profits increased by $443.3 million, or 56%, to $1.23 billion from $785.3 million in 2020. The year-over-year increase in 2021 reflected the higher volume of homes delivered and an increase in the housing gross profit margin. Housing gross profits for 2021 and 2020 included the respective inventory-related charges described above.
Our housing gross profit margin for 2021 increased 270 basis points from the previous year, mainly as a result of a favorable pricing environment that more than offset higher construction services and building materials costs (approximately 110 basis points); lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 50 basis points); a decrease in inventory-related charges (approximately 50 basis points); an increase in operating leverage due to higher housing revenues (approximately 40 basis points); and other miscellaneous factors (approximately 20 basis points). As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.6% for 2021 and 3.1% for 2020. Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges for the applicable periods, our adjusted housing gross profit margin increased 170 basis points to 24.4% in 2021 from 22.7% in 2020. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”
Selling, General and Administrative Expenses – The following table presents the components of our selling, general and administrative expenses (dollars in thousands):
Years Ended November 30,
2021% of Housing Revenues2020% of Housing Revenues2019% of Housing Revenues
Marketing expenses $117,481 2.1 %$116,590 2.8 %$129,733 2.9 %
Commission expenses (a)217,608 3.8 164,507 3.9 174,338 3.8 
General and administrative expenses239,287 4.2 189,682 4.6 193,279 4.3 
Total$574,376 10.1 %$470,779 11.3 %$497,350 11.0 %
(a)Commission expenses include sales commissions on homes delivered paid to internal sales counselors and/or external real estate brokers.
Selling, general and administrative expenses for 2021 increased 22% from the prior year, mainly due to an increase in commission expenses associated with our higher housing revenues, and an increase in general and administrative expenses. The year-over-year increase in general and administrative expenses primarily reflected higher costs associated with performance-based employee compensation plans, as well as expenses incurred to support current operations and expected growth, partly offset by a $4.3 million benefit from an Employee Retention Credit (“ERC”), which is discussed in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report, recognized in early 2021 and the severance charges of $6.7 million recorded in 2020. As a percentage of housing revenues, our selling, general and administrative expenses improved 120 basis points in 2021 as compared to 2020, largely reflecting increased operating leverage due to our higher housing revenues, partly offset by the above-mentioned higher expenses.
Interest Income/Expense. Interest income, which is generated from short-term investments, totaled $1.0 million in 2021 and $2.6 million in 2020. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.
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We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and/or the interest rate on that debt. In 2021, interest incurred totaled $120.5 million, down 3% from $124.1 million in 2020, mainly due to both our lower average interest rate and lower average debt level. All interest incurred during 2021 and 2020 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period. As a result, we had no interest expense for 2021 or 2020. Further information regarding our interest incurred and capitalized is provided in Note 6 – Inventories in the Notes to Consolidated Financial Statements in this report.
Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint ventures totaled $.4 million in 2021, compared to equity in income of unconsolidated joint ventures of $12.5 million in 2020. This year-over-year change mainly resulted from a decrease in the number of homes delivered from an unconsolidated joint venture in California. This unconsolidated joint venture, which delivered its last home in the 2021 second quarter, delivered 10 homes in 2021, compared to 99 homes delivered in 2020. Further information regarding our investments in unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.
Loss on Early Extinguishment of Debt. Our $5.1 million loss on early extinguishment of debt in 2021 was associated with our purchase, pursuant to a tender offer that expired on June 8, 2021, of $269.8 million in aggregate principal amount of our 7.00% Senior Notes due 2021 prior to their maturity date. Further information regarding this transaction is provided in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.
Net Orders, Backlog and Community Count. The following table presents information about our net orders, cancellation rate, ending backlog, and community count for the years ended November 30, 2021 and 2020 (dollars in thousands):
Years Ended November 30,
20212020
Net orders16,206 13,404 
Net order value (a)$7,683,990 $5,299,489 
Cancellation rate (b)10 %20 %
Ending backlog — homes10,544 7,810 
Ending backlog — value$4,951,725 $2,962,403 
Ending community count217 236 
Average community count214 243 
(a)Net order value represents potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.
(b)Cancellation rate represents the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.
Net Orders. In 2021, net orders from our homebuilding operations grew 21% from 2020, reflecting a 37% increase in monthly net orders per community to 6.3, partly offset by a 12% decrease in our overall average community count, which is discussed below under “Community Count.” This higher monthly net order pace occurred even as we raised our home selling prices and paced lot releases, as described above under “Overview.” We believe our Built-to-Order homebuying process, which, as described above under Item 1 – Business in this report, provides personalization and choice, was a key contributor to our strong 2021 net order pace.
The value of our 2021 net orders rose 45% from 2020 as a result of the growth in net orders and a 20% increase in the overall average selling price of those orders. These factors drove net order value expansion in all four of our homebuilding reporting segments, ranging from 37% in our West Coast segment to 93% in our Southeast segment. The higher overall average selling price of net orders in 2021 largely reflected strong demand in most of our served markets as well as product and geographic mix shifts of net orders.
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Backlog. The number of homes in our backlog at November 30, 2021 increased 35% from the previous year, mainly due to our substantially higher backlog at the beginning of the fiscal year as well as year-over-year growth in our 2021 net orders. The potential future housing revenues in our backlog at November 30, 2021 grew 67% year over year as a result of both the higher number of homes in our backlog and a 24% increase in the average selling price of those homes. The increases in the number of homes in backlog and backlog value reflected strong growth in each of our four homebuilding reporting segments, with increases in backlog value ranging from 53% in our West Coast segment to 106% in our Southeast segment. Substantially all of the homes in our backlog at November 30, 2021 are expected to be delivered during the year ending November 30, 2022.
Community Count. Our average community count for 2021 decreased 12% from the previous year, and our ending community count declined 8%. The year-over-year decreases in our average and ending community counts primarily reflected communities that sold out earlier than planned due to an increase in our demand-driven net order pace and delays in new community openings. We substantially increased our investments in land acquisition and land development in 2021 to support future community count growth.
HOMEBUILDING REPORTING SEGMENTS
Operational Data. The following tables present information about our homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count, and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):
Years Ended November 30,
Homes DeliveredNet OrdersCancellation Rates
Segment202120202021202020212020
West Coast4,008 2,869 4,425 3,850 10 %17 %
Southwest2,574 2,385 3,247 2,668 19 
Central4,630 3,932 5,504 4,981 12 21 
Southeast2,260 1,486 3,030 1,905 11 25 
Total13,472 10,672 16,206 13,404 10 %20 %

 Net Order ValueAverage Community Count
Segment20212020Variance20212020Variance
West Coast$3,164,684 $2,302,785 37 %60 74 (19)%
Southwest1,342,562 914,770 47 36 36 — 
Central2,119,617 1,534,747 38 78 89 (12)
Southeast1,057,127 547,187 93 40 44 (9)
Total$7,683,990 $5,299,489 45 %214 243 (12)%
 
November 30,
 Backlog – HomesBacklog – Value
Segment20212020Variance20212020Variance
West Coast2,441 2,024 21 %$1,764,911 $1,152,609 53 %
Southwest2,194 1,521 44 910,583 523,705 74 
Central3,911 3,037 29 1,548,574 932,814 66 
Southeast1,998 1,228 63 727,657 353,275 106 
Total10,544 7,810 35 %$4,951,725 $2,962,403 67 %
As discussed above under Item 1 – Business in this report, the composition of our homes delivered, net orders and backlog shifts with the mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, and it changes as new communities open and existing communities wind down or sell out. In addition, with our Built-to-Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, and option and upgrade selections. These intrinsic
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variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.
Financial Results. Below is a discussion of the financial results of each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures, which is also presented in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report, and/or interest income and expense.
In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment described in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. Corporate and other had operating losses of $148.9 million in 2021, $107.2 million in 2020 and $104.1 million in 2019. The increase in 2021 as compared to 2020 reflected higher selling, general and administrative expenses, mainly due to higher costs associated with performance-based employee compensation plans, as well as expenses to support current operations and expected growth.
With strong housing market conditions from the 2020 third quarter through the 2021 fourth quarter in most of our served markets, we delivered more homes at a higher overall average selling price and significantly expanded our homebuilding operating income as a percentage of revenues in each of our homebuilding segments for 2021, as compared to the previous year. The financial results for each of our homebuilding reporting segments for the year ended November 30, 2020 were negatively affected by the impacts from the onset of the COVID-19 pandemic, as discussed in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report
West Coast. The following table presents financial information related to our West Coast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2021202020192021 vs 20202020 vs 2019
Revenues$2,552,382 $1,748,582 $1,912,146 46  %(9) %
Construction and land costs(2,044,274)(1,480,775)(1,591,896)(38)
Selling, general and administrative expenses(162,461)(129,744)(141,324)(25)
Operating income $345,647 $138,063 $178,926 150  %(23)  %
Homes delivered4,008 2,869 3,214 40   %(11) %
Average selling price$636,800 $609,400 $592,300  %  %
Operating income as a percentage of revenues13.5 %7.9 %9.4 %560 bps(150) bps
    
This segment’s revenues in 2021 were generated solely from housing operations. In 2020, revenues for this segment were generated from housing operations and nominal land sales. Housing revenues for 2021 grew 46% from the previous year due to increases in the number of homes delivered in California and Washington, and the higher average selling price of those homes. The higher average selling price reflected strong housing market conditions and product and geographic mix shifts of homes delivered.
Operating income grew significantly from 2020, reflecting higher housing gross profits, partially offset by higher selling, general and administrative expenses. As a percentage of revenues, this segment’s 2021 operating income increased from the previous year, reflecting a 460 basis-point expansion in the housing gross profit margin to 19.9%, and a 100 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.4%. The housing gross profit margin expansion was primarily driven by a favorable pricing environment that more than offset higher construction services and building materials costs, lower relative amortization of previously capitalized interest, a reduction in inventory-related charges and an increase in operating leverage due to higher housing revenues. Inventory-related charges impacting the housing gross profit margin totaled $11.0 million in 2021, compared to $21.9 million in 2020. The improvement in selling, general and administrative expenses as a percentage of housing revenues mainly reflected increased operating leverage from higher housing revenues, partly offset by higher expenses incurred to support current operations and expected growth.
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Southwest. The following table presents financial information related to our Southwest homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2021202020192021 vs 20202020 vs 2019
Revenues$965,139 $796,810 $764,816 21   %  %
Construction and land costs(702,947)(596,512)(585,880)(18)(2)
Selling, general and administrative expenses(75,375)(66,415)(67,223)(13)
Operating income $186,817 $133,883 $111,713 40   %20   %
Homes delivered2,574 2,385 2,346   %  %
Average selling price$371,300 $327,300 $322,000 13   %  %
Operating income as a percentage of revenues19.4 %16.8 %14.6 %260 bps220 bps
In 2021 and 2020, this segment’s revenues were generated from both housing operations and land sales. Housing revenues for 2021 grew 22% year over year to $955.7 million, mainly due to an increase in the number of homes delivered from our Nevada operations and a rise in the average selling price of homes delivered in both our Arizona and Nevada operations. The higher average selling price reflected strong housing market conditions and product and geographic mix shifts of homes delivered. Land sale revenues totaled $9.4 million in 2021 and $16.1 million in 2020.
This segment’s operating income for 2021 increased from the previous year, mainly due to higher housing gross profits and increased land sale profits, partially offset by higher selling, general and administrative expenses. As a percentage of revenues, operating income improved from 2020 due to a 130 basis-point increase in the housing gross profit margin to 26.7%, a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.9% and higher profits from land sales. The housing gross profit margin expansion was largely driven by a favorable pricing environment that more than offset higher construction services and building materials costs, and lower relative amortization of previously capitalized interest. Land sales generated profits of $7.1 million in 2021 and $2.0 million in 2020. The improvement in selling, general and administrative expenses as a percentage of housing revenues was mainly due to increased operating leverage from higher housing revenues.
Central. The following table presents financial information related to our Central homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2021202020192021 vs 20202020 vs 2019
Revenues$1,503,857 $1,192,869 $1,267,892 26   %(6)  %
Construction and land costs(1,172,926)(941,381)(1,015,415)(25)
Selling, general and administrative expenses(130,773)(122,712)(126,176)(7)
Operating income $200,158 $128,776 $126,301 55   %  %
Homes delivered4,630 3,932 4,291 18   %(8) %
Average selling price$324,800 $303,400 $293,500  %  %
Operating income as a percentage of revenues13.3 %10.8 %10.0 %250 bps80 bps
In 2021 and 2020, revenues for this segment were generated solely from housing operations. Housing revenues for 2021 grew 26% from the prior year, reflecting increases in the number of homes delivered in both states that comprise this segment, and the higher average selling price of those homes. The increase in the average selling price reflected strong housing market conditions and product and geographic mix shifts of homes delivered.
Operating income for 2021 increased from 2020, reflecting growth in housing gross profits, partially offset by higher selling, general and administrative expenses. In 2021, the improvement in operating income as a percentage of revenues
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reflected a 90 basis-point expansion in the housing gross profit margin to 22.0% and a 160 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.7%. The housing gross profit margin rose from the previous year primarily due to lower inventory-related charges, improved operating leverage due to higher housing revenues, and lower relative amortization of previously capitalized interest. Inventory-related charges for 2021 were nominal, compared to $5.5 million in 2020. The year-over-year improvement in selling, general and administrative expenses as a percentage of housing revenues mainly reflected increased operating leverage from higher housing revenues, and the continued impact of targeted actions we took in 2020 to reduce overhead costs in the early stages of the COVID-19 pandemic.
Southeast. The following table presents financial information related to our Southeast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2021202020192021 vs 20202020 vs 2019
Revenues$683,651 $429,441 $592,804 59  %(28) %
Construction and land costs(541,471)(355,242)(508,351)(52)30 
Selling, general and administrative expenses(64,516)(51,248)(65,902)(26)22 
Operating income$77,664 $22,951 $18,551 238 %24 %
Homes delivered2,260 1,486 2,020 52  %(26) %
Average selling price$302,100 $288,600 $293,200  %(2) %
Operating income as a percentage of revenues11.4 %5.3 %3.1 %610 bps220 bps
In 2021 and 2020, this segment’s revenues were generated from both housing operations and nominal land sales. Housing revenues for 2021 rose 59% year over year to $682.7 million due to increases in both the number of homes delivered and the average selling price of those homes. The higher average selling price in 2021 as compared to 2020 mainly reflected strong housing market conditions and product and geographic mix shifts of homes delivered.
Operating income increased from 2020, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. As a percentage of revenues, operating income rose from 2020 due to a 350 basis-point increase in the housing gross profit margin to 20.8% that mainly reflected a shift in geographic mix, improved operating leverage due to higher housing revenues, and lower relative amortization of previously capitalized interest. In addition, selling, general and administrative expenses as a percentage of housing revenues improved 260 basis points from 2020 to 9.4%, primarily due to increased operating leverage as a result of higher housing revenues, and the continued impact of targeted actions we took in 2020 to reduce overhead costs in the early stages of the COVID-19 pandemic.
FINANCIAL SERVICES REPORTING SEGMENT
The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):
 Years Ended November 30,
 202120202019
Revenues$19,901 $15,472 $15,089 
Expenses(5,055)(4,083)(4,333)
Equity in income of unconsolidated joint ventures23,589 21,154 12,230 
Pretax income$38,435 $32,543 $22,986 
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 Years Ended November 30,
 202120202019
Total originations (a):
Loans9,225 7,580 7,436 
Principal$3,252,054 $2,457,522 $2,190,823 
Percentage of homebuyers using KBHS76 %77 %70 %
Average FICO score729 723 719 
Loans sold (a):
Loans sold to Stearns/GR Alliance7,706 7,900 6,224 
Principal$2,744,685 $2,536,689 $1,827,917 
Loans sold to other third parties1,293 310 772 
Principal$420,119 $102,363 $202,349 
Mortgage loan origination mix (a):
Conventional/non-conventional loans61 %56 %58 %
FHA loans26 %28 %26 %
Other government loans13 %16 %16 %
Loan type (a):
Fixed99 %99 %98 %
ARM%%%
(a)Loan originations and sales occurred within KBHS.
Revenues. Our financial services reporting segment, which includes the operations of KB HOME Mortgage Company, generates revenues primarily from insurance commissions and title services. The year-over-year growth in our financial services revenues for 2021 reflected increases in both title services revenues and insurance commissions.
Pretax income. Our financial services pretax income for 2021 grew 18% from the previous year due to improved results from our insurance and title services businesses, and an increase in the equity in income of unconsolidated joint ventures. In 2021, our equity in income of our unconsolidated joint venture, KBHS, increased 12% year over year as a result of a substantial increase in the principal amount of loan originations and improved margins. The higher principal amount of loan originations in 2021 was primarily due to a 26% increase in the number of homes we delivered and a 9% increase in the average selling price of those homes.
On March 1, 2021, Guaranteed Rate acquired the parent company of Stearns, our KBHS partner prior to that date. In October 2021, Stearns was renamed as GR Alliance. As of the date of this report, we are not aware of any significant changes with respect to GR Alliance or its operations as a result of the transaction being completed.
INCOME TAXES
Income Tax Expense. Our income tax expense and effective income tax rate were as follows (dollars in thousands):
 Years Ended November 30,
 202120202019
Income tax expense$130,600 $67,800 $79,400 
Effective income tax rate 18.8 %18.6 %22.8 %
Our effective tax rate for 2021 increased slightly from the previous year, as the impacts of higher taxable income, a $5.6 million increase in non-deductible compensation expense and a $4.9 million decrease in excess tax benefits related to stock-based compensation were mostly offset by the favorable effect of a $30.8 million increase in federal tax credits we earned primarily from building energy-efficient homes.
The federal energy tax credits for the year ended November 30, 2021 resulted from legislation enacted in December 2020 and earlier periods. The legislation enacted in December 2020, among other things, extended the availability of a business tax
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credit for building new energy-efficient homes through December 31, 2021. Prior to this legislation, the tax credit was set to expire on December 31, 2020.
In June 2020, California enacted tax legislation that approved the suspension of California net operating loss (“NOL”) deductions for tax years 2020, 2021 and 2022. Although the suspension of California NOL deductions did not have an impact on our income tax expense for the years ended November 30, 2021 and 2020, it contributed to the year-over-year increase in the amount of income taxes we paid in 2021.
Under current accounting standards, we expect volatility in our income tax expense in future periods, the magnitude of which will depend on, among other factors, the price of our common stock and the timing and volume of stock-based compensation award activity, such as employee exercises of stock options and the vesting of restricted stock awards and performance-based restricted stock units (each, a “PSU”).
For each of the years ended November 30, 2021 and 2020, the amount of income taxes we paid was substantially less than our income tax expense primarily due to the utilization of our deferred tax assets to reduce taxable income. We anticipate the amount of income taxes we pay will be less than our income tax expense for at least the next year.
Further information regarding our income taxes is provided in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report.
NON-GAAP FINANCIAL MEASURES
This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with generally accepted accounting principles (“GAAP”). We believe this non-GAAP financial measure is relevant and useful to investors in understanding our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because it is not calculated in accordance with GAAP, this non-GAAP financial measure may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement the most directly comparable GAAP financial measure in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):
 Years Ended November 30,
 202120202019
Housing revenues$5,694,668 $4,150,793 $4,510,814 
Housing construction and land costs(4,466,053)(3,365,509)(3,683,174)
Housing gross profits1,228,615 785,284 827,640 
Add: Inventory-related charges (a)
11,953 28,669 17,291 
Housing gross profits excluding inventory-related charges
1,240,568 813,953 844,931 
Add: Amortization of previously capitalized interest (b)
149,354 129,330 156,114 
Adjusted housing gross profits
$1,389,922 $943,283 $1,001,045 
Housing gross profit margin as a percentage of housing revenues
21.6 %18.9 %18.3 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues
21.8 %19.6 %18.7 %
Adjusted housing gross profit margin as a percentage of housing revenues
24.4 %22.7 %22.2 %
(a)Represents inventory impairment and land option contract abandonment charges associated with housing operations.
(b)Represents the amortization of previously capitalized interest associated with housing operations.
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with
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housing operations, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of previously capitalized interest associated with housing operations. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
As of November 30, 2021, we had $1.69 billion in aggregate principal amount of outstanding senior notes and no borrowings outstanding under the Credit Facility. Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries (“Guarantor Subsidiaries”), which are listed on Exhibit 22. Our other subsidiaries, including all of our subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”), although we may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest. See Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes and the Credit Facility.
The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent of the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries.
Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our non-guarantor subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes and the Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release.
The following tables present summarized financial information for KB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint ventures and after the elimination of (a) intercompany transactions and balances between KB Home and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. See Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report for additional information regarding our unconsolidated joint ventures.

November 30, 2021
Summarized Balance Sheet Data (in thousands)
Assets
Cash$250,118 
Inventories4,425,531 
Amounts due from Non-Guarantor Subsidiaries323,549 
Total assets5,581,883 
Liabilities and Stockholders’ Equity
Notes payable1,682,517 
Amounts due to Non-Guarantor Subsidiaries254,717 
Total liabilities2,755,817 
Stockholders’ equity2,826,066 
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Year Ended November 30, 2021
Summarized Statement of Operations Data (in thousands)
Revenues$5,451,685 
Construction and land costs(4,250,958)
Selling, general and administrative expenses(564,112)
Interest income from non-guarantor subsidiary20,176 
Pretax income652,763 
Net income530,963 
LIQUIDITY AND CAPITAL RESOURCES
Overview. We have funded our homebuilding and financial services activities over the last several years with:
internally generated cash flows;
public issuances of debt securities;
borrowings under the Credit Facility;
land option contracts and other similar contracts and seller notes;
public issuances of our common stock; and
letters of credit and performance bonds.
We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for:

land acquisitions and land development;
home construction;
operating expenses;
principal and interest payments on notes payable; and
repayments of borrowings under the Credit Facility.
Cash flows for each of our communities depend on their stage of development and can differ significantly from reported earnings. Early stages of development or expansion require significant cash outflows for land acquisition, zoning plat and other approvals, land development, and construction of model homes, roads, utilities, landscape and other items. Because these costs are a component of our inventory and are not recognized in our income statement until a home is delivered, we incur significant cash outflows prior to the recognition of earnings. In the later stages of a community as homes are delivered, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with the land and home construction were previously incurred.
We ended 2021 with total liquidity of $1.08 billion, including cash and cash equivalents and $791.4 million of available capacity under the Credit Facility. Based on our financial position as of November 30, 2021, and our positive business forecast for 2022 as discussed below under “Outlook,” we have no material concerns related to our liquidity. While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the next 12 months.
Cash Requirements. Our material cash requirements include the following contractual and other obligations:
Notes Payable. We have outstanding fixed-rate notes payable with varying maturities. As of November 30, 2021, our notes payable had an aggregate principal amount of $1.70 billion, with $353.6 million payable within 12 months. Future interest payments associated with our notes payable totaled $443.6 million as of November 30, 2021, with $104.1 million payable within 12 months. Further information regarding our notes payable is provided in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.
Leases. We have operating leases for certain property and equipment with an expected term at the commencement date of more than 12 months. As of November 30, 2021, the future minimum payments required under these leases totaled $32.6 million, with $10.6 million payable within 12 months. Further information regarding our leases is provided in Note 13 – Leases in the Notes to Consolidated Financial Statements in this report.
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Inventory-Related Obligations. As of November 30, 2021, we had inventory-related obligations totaling $36.1 million, comprised of liabilities for inventory not owned associated with financing arrangements as discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. Approximately $27.0 million of these inventory-related obligations are payable within 12 months. However, TIFE assessment obligations are paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.
Investments in Land and Land Development. Our investments in land and land development increased to $2.53 billion in 2021, compared to $1.69 billion in 2020. Approximately 50% of our total investments in both 2021 and 2020 related to land acquisitions. While we made strategic investments in land and land development in each of our homebuilding reporting segments during 2021 and 2020, approximately 53% and 55%, respectively, of these investments for each year were made in our West Coast homebuilding reporting segment. Our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards to support home delivery and revenue growth in 2022 and beyond.
The following table presents the number of lots we owned or controlled under land option contracts and other similar contracts and the carrying value of inventory by homebuilding reporting segment (dollars in thousands):
November 30, 2021November 30, 2020Variance
SegmentLots$Lots$Lots$
West Coast23,539 $2,300,096 16,990 $1,928,500 6,549 $371,596 
Southwest12,339 875,438 12,290 688,807 49 186,631 
Central28,961 995,811 23,699 867,170 5,262 128,641 
Southeast21,929 631,484 14,059 413,005 7,870 218,479 
Total
86,768 $4,802,829 67,038 $3,897,482 19,730 $905,347 
The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at November 30, 2021 increased from November 30, 2020, primarily due to our investments in land and land development in 2021 and an increase in the number of homes under construction. The number of lots in inventory as of November 30, 2021 included 12,434 lots under contract where the associated deposits were refundable at our discretion, compared to 10,254 of such lots at November 30, 2020, reflecting ordinary course fluctuations in the number of such contracts. Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 44% at November 30, 2021 and 40% at November 30, 2020. Generally, this percentage fluctuates with our decisions to control (or abandon) lots under land option contracts and other similar contracts or to purchase (or sell owned) lots based on available opportunities and our investment return standards.
Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all of the land we had under land option contracts and other similar contracts at November 30, 2021, we estimate the remaining purchase price to be paid would be as follows: 2022 – $1.34 billion; 2023 – $318.7 million; 2024 – $51.6 million; 2025 – $78.2 million; 2026 – $1.7 million; and thereafter – $0.
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Liquidity. The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):
November 30,
20212020
Total cash and cash equivalents$290,764 $681,190 
Credit Facility commitment800,000 800,000 
Borrowings outstanding under the Credit Facility— — 
Letters of credit outstanding under the Credit Facility(8,618)(12,429)
Credit Facility availability791,382 787,571 
Total liquidity$1,082,146 $1,468,761 
The majority of our cash equivalents at November 30, 2021 and 2020 were invested in interest-bearing bank deposit accounts.
Capital Resources. Our notes payable consisted of the following (in thousands):
November 30,
20212020Variance
Mortgages and land contracts due to land sellers and other loans$5,327 $4,667 $660 
Senior notes1,679,700 1,742,508 (62,808)
Total$1,685,027 $1,747,175 $(62,148)
Our financial leverage, as measured by the ratio of debt to capital, was 35.8% at November 30, 2021, compared to 39.6% at November 30, 2020. The ratio of debt to capital is calculated by dividing notes payable by capital (notes payable plus stockholders’ equity).
On June 9, 2021, we completed the underwritten public offering of $390.0 million in aggregate principal amount of 4.00% senior notes due 2031 (“4.00% Senior Notes due 2031”) at 100% of their aggregate principal amount. Net proceeds from this offering totaled $385.2 million, after deducting the underwriting discount and our expenses relating to the offering. The 4.00% Senior Notes due 2031 will mature on June 15, 2031. On June 9, 2021, we used a portion of the net proceeds to purchase, pursuant to a tender offer that expired the previous day, $269.8 million in aggregate principal amount of our outstanding $450.0 million of 7.00% Senior Notes due 2021. We paid $274.9 million to purchase the notes and recorded a charge of $5.1 million for the early extinguishment of debt in the 2021 third quarter due to a premium paid under the tender offer and the unamortized original issue discount associated with these senior notes. On September 15, 2021, we redeemed the remaining $180.2 million in aggregate principal amount of 7.00% Senior Notes due 2021 at par value pursuant to the terms of the notes. Together, these 2021 transactions effectively extended the maturity of our senior notes by more than two years and reduced our weighted average borrowing rate by approximately 70 basis points.
LOC Facility. On August 12, 2021, we entered into an amendment to our unsecured letter of credit agreement with a financial institution (“LOC Facility”) that increased the limit of letters of credit we may issue from $50.0 million to $75.0 million and extended the expiration date from February 13, 2022 to February 13, 2025. We had $34.6 million and $29.7 million of letters of credit outstanding under the LOC Facility at November 30, 2021 and 2020, respectively.
Performance Bonds. As discussed in Note 17 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.11 billion and $897.6 million of performance bonds outstanding at November 30, 2021 and 2020, respectively.
Unsecured Revolving Credit Facility. We have an $800.0 million Credit Facility that will mature on October 7, 2023. The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of November 30, 2021, we had no cash borrowings and $8.6 million of letters of credit outstanding under the Credit Facility. The Credit Facility is further described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.
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Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants regarding our consolidated tangible net worth, consolidated leverage ratio (“Leverage Ratio”), and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum liquidity level, each as defined therein. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the Credit Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The financial covenant requirements under the Credit Facility are set forth below:
Consolidated Tangible Net Worth – We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a) $1.54 billion, plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after May 31, 2019 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after May 31, 2019.
Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .65 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility.
Interest Coverage Ratio or Liquidity – We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility, in each case for the previous 12 months. Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility, for the four most recently ended fiscal quarters in the aggregate.
In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report and under “Supplemental Guarantor Financial Information” above) as of the end of each fiscal quarter cannot exceed the sum of (a) $104.8 million and (b) 20% of consolidated tangible net worth. Further, the Credit Facility does not permit our borrowing base indebtedness, which is the aggregate principal amount of our outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets).
The covenants and other requirements under the Credit Facility represent the most restrictive provisions that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of November 30, 2021:
Financial Covenants and Other RequirementsCovenant RequirementActual
Consolidated tangible net worth>$2.08  billion$2.98  billion
Leverage Ratio<.650 .363 
Interest Coverage Ratio (a)>1.500 7.452 
Minimum liquidity (a)>$119.5  million$290.8  million
Investments in joint ventures and non-guarantor subsidiaries<$701.7  million$229.5  million
Borrowing base in excess of borrowing base indebtedness (as defined) n/a$2.12  billion
(a)