FinanceLooker

Excrept from filing document 2023-11-30

The aggregate market value of the voting common stock held by non affiliates of the registrant on May 31 2023 was 3 783 365 796 including 6 705 247 shares held by the registrant s grantor stock ownership trust and excluding 13 704 091 shares held in treasury
There were 75 867 028 shares of the registrant s common stock par value 1 00 per share outstanding on December 31 2023 The registrant s grantor stock ownership trust held an additional 6 705 247 shares of the registrant s common stock on that date
KB Home is one of the largest and most recognized homebuilding companies in the U S We have been building homes for more than 65 years with over 680 000 homes built since our founding in 1957 We build a variety of new homes including attached and detached single family residential homes townhomes and condominiums designed primarily for first time and first move up as well as second move up and active adult homebuyers 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 5 of our total revenues in 2023 Our financial services operations which accounted for the remaining 5 of our total revenues in 2023 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 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 community count is the number of communities we have open for sales with at least five homes lots left to sell and product encompasses a home s floor plan design and interior exterior style amenities functions and features
The following charts present homebuilding revenues net income and diluted earnings per share for the years ended November 30 2019 2021 and 2023 and book value per share as of November 30 2019 2021 and 2023
Reflecting the geographic span of our homebuilding business we have 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
Contra 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
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
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 what they value and how they want to live at a price they can afford gives us a meaningful and distinct competitive advantage over other homebuilders and resale and rental homes In addition we find our homebuyers can have a strong emotional attachment to our products when they create a personalized home with the features and finishes they select
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 and target land parcels that meet our investment return standards We focus on investments that provide a one to three year supply of land or lots per product line per community and individual assets that are generally between 50 to 300 lots in size Our land investment is sensitive to and will shift with local or national housing market environments or broader economic conditions generally increasing when we are experiencing or expecting strong growth and decreasing when we are experiencing or expecting slower growth Though we evaluate new markets to enter our primary focus is on our existing geographic footprint We leverage the relationships we have with landowners developers and brokers to find and acquire land parcels and use our experience in working with municipalities to efficiently obtain development approvals
We offer our customers a variety of homes with a standardized set of functions and features generally priced to be affordable for those with household incomes within a range of the local area s median level with the goal of being attainable for the largest demand segments 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 each of which may be at a premium added to a home s selling price and to personalize their homes beyond our base offerings by adding numerous design options and upgrades available 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 library of standardized plans facilitates our ability to shift with local demand which may include adding smaller square footage homes at communities to offer more affordable choices to buyers and or project site attributes such as the size and location of developable lots This library also enables 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
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 To help moderate construction related cost inflation we to the extent practicable 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
There have been and may in future periods be circumstances where we deviate from certain of the above principles These include starting construction on a certain number of homes in a community before corresponding purchase contracts are signed with homebuyers to more quickly meet customer delivery expectations and generate revenues particularly in markets with low resale home inventory as we saw during 2023 Generally we target having roughly 65 to 70 Built to Order homes in production with the remainder consisting of homes started without a corresponding buyer and partially constructed homes where the initial buyer cancelled their home sales contract with us We may also acquire land parcels in peripheral neighborhoods of a core metropolitan area that otherwise fit our growth strategy and meet our investment return standards Significant supply chain disruptions beginning in 2020 primarily due to the 2019 coronavirus disease COVID 19 pandemic and related public health control efforts substantially lengthened our average construction cycle time and hindered our even flow home production process into 2023 During this period we experienced building materials and construction services
shortages delays with respect to state and municipal permitting inspection and utility processes unpredictable shipment schedules and other issues that prompted us to revise the sequencing of construction steps from time to time and in some cases order items in advance of starting a home to mitigate delays In 2023 we achieved a meaningful sequential improvement in our construction cycle times each quarter beginning with the second quarter driven by a stabilizing supply chain and improved construction services availability as well as our ongoing initiative to simplify our product offerings particularly our design options and upgrades Similar and other circumstances could arise that may lead us to make specific short term shifts from our KB Edge principles
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 increasing inventory turns to the extent practical balancing pace price and construction starts at each community to optimize our return on each inventory asset within its market context 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
We believe the best new homes start with the people who will 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 ambition 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 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
We ascertain homebuyer product design and location preferences partly 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 product offerings 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 building materials construction techniques structural and non structural systems and components and devices that are aligned with the preferences identified in our surveys and other data sources
From our synthesis of the foregoing consumer research and related activities we give our homebuyers a wide array of choices 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 options and upgrades that will help personalize their home When customers build a new home with us they also enjoy choosing exactly what they want and paying only for what matters most to them This helps to meet homebuyers priorities at price points attainable to them
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 sales counselors design consultants construction supervisors 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
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 outside survey firms In 2023 we continued to be one of the highest ranked national homebuilders for customer satisfaction in third party surveys which we believe reflects the effective dedication we have to our homebuyers
To emphasize the distinct combination of innovative design sustainability personalization affordability and partnership we offer to our homebuyers and the importance we place on customer satisfaction we have 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
We believe we offer homebuyers product designs that distinctively blend contemporary consumer preferred elements such as open floor plans flexible living spaces indoor outdoor flow and extra storage quality construction standards and advanced technological features and devices as compared to some other new and resale homes
Our homes are engineered to be highly energy efficient and include features that support healthier indoor environments Our homes are designed to be ENERGY STAR certified a standard that fewer than 10 of new homes nationwide meet offering greater comfort well being and utility cost savings than new homes without certification
We give our homebuyers the ability to personalize their new home from floor plans to exterior styles and from design choices to where they live in the community Additionally at our KB Home Design Studios our homebuyers have the opportunity to select from a broad range of included features design options and upgrades
We offer our customers a variety of homes with a standardized set of functions and features generally priced to be affordable for those with household incomes within a range of the local area s median level In addition in many of our communities we can readily introduce smaller square footage floor plans to enable more customers to select and design a personalized home within their budget 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
Our dedicated team of sales counselors design consultants construction superintendents and customer service representatives as well as KBHS loan officers work closely with our customers throughout the homebuying process
We typically sell our homes through salaried and or commissioned sales associate employees from sales offices located in or adjacent to furnished model homes in each community or through outside brokers We also use electronic sales capabilities and technology to give our customers a variety of convenient ways to shop for and purchase a new KB home including among other things
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 several years we have eliminated a significant amount of paper from our home sales contract by reducing the number of forms required to complete the process and digitizing as many of the remaining forms as possible
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 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 our website and other evolving communication technologies We also use print media and advertising billboards and radio in our served markets
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 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 2023 these homebuyers accounted for 74 of our deliveries as shown in the following chart
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
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 three to five years In 2024 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 We may periodically sell certain land interests or monetize land previously held for future development to strategically balance our land portfolio in line with local or national market environments or for other reasons We may also decide not to exercise certain land option contracts and other similar contracts due to market conditions and or changes in our marketing strategy
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 For example in 2022 and 2023 we modified our land development strategy electing where appropriate to build in smaller phases and in some cases to defer the start of the next phase of lots in a community to align with expected demand In calibrating our investments to evolving market conditions we increased our investments in land acquisition and land development in the 2023 second half as compared to the 2023 first half We believe the conditions we experienced in 2023 will generally persist next 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 150 lots per product line with lots ranging in size from 1 800 to 11 000 square feet In our communities we typically offer four 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
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 proximity to major employment and retail centers and site design and product home designs and specifications plans that are among other things consistent with our focus on building highly energy and water efficient homes as discussed below under Environmental Social and Governance
We generally seek to 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 2023 and 2022
Land under option as of November 30 2023 and 2022 includes 6 260 and 5 543 lots respectively under land option contracts or other similar contracts where the associated deposits were refundable at our discretion
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 2023
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 As discussed above under Business Strategy we generally commence construction of a home 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 sales 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 Although our typical cycle time from home sale to delivery has historically ranged from six to seven months supply chain disruptions and other production related issues contributed to our build times and overall cycle times remaining extended in 2023 and 2022 We achieved meaningful improvement in our build times beginning in the 2023 second quarter driven by a stabilizing supply chain and improved construction services availability and remain committed to further reducing our build times in 2024 and moving closer to our historical levels of between four to five 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
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 to the extent feasible select products with sustainability certifications or attributes 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
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 home sales contract 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
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 some of which are larger and have greater financial resources than us 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 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 can increase the 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 lumber drywall and concrete or finished products We expect these upward cost trends to continue in 2024 particularly if and as there is greater competition for these resources across a disrupted global supply chain
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 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 combination of rapidly rising mortgage interest rates elevated inflation and other macroeconomic and geopolitical concerns disrupted our usual seasonal patterns in 2022 with our 2022 second half net orders negatively impacted by many prospective buyers electing to pause on their homebuying decision and a 2022 fourth quarter slowdown that was more pronounced than
normal Demand began to improve in the 2023 second quarter due to among other things constrained resale home inventory favorable demographic trends buyer interest in homes at our price points and our selective implementation of targeted sales strategies including pricing adjustments and other homebuyer concessions particularly mortgage related concessions such as interest rate buydown or lock programs to help drive order activity and minimize cancellations We can provide no assurance whether or to what extent typical seasonal performance trends will occur in 2024 or at all
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
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
At November 30 2023 and 2022 we had approximately 2 205 and 2 366 full time employees respectively None of our employees are represented by a collective bargaining agreement For fiscal 2023 our turnover rate was 27 made up of 16 voluntary turnover and 11 involuntary turnover For fiscal 2022 our turnover rate was 21 made up of 19 voluntary turnover and 2 involuntary turnover We believe these rates are reasonable for our industry and market conditions at the time
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 environment that offers our employees satisfying work with meaningful opportunities for career growth and development rewarding short and long term compensation programs that are aligned with achieving our business goals employee home purchase and referral programs and employment milestone service awards 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 consulting firms to objectively evaluate our programs and benchmark them against peers and other similarly sized organizations
Our top division and regional leaders average nearly 12 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 have an average tenure of 21 years 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
We are committed to achieving our business goals with integrity and high ethical standards that apply to our directors officers and employees All employees are required to complete training on our Ethics Policy which includes their affirming compliance with the guidelines contained therein In addition we maintain an ethics committee that is focused on compliance and ethics matters for our business We also have an independently operated hotline and reporting website through which our employees and third parties can anonymously report ethics related concerns
In addition to our strong talent and career development programs that drive a high rate of internal promotions within KB Home we are constantly working to attract the best possible candidates to add to our employee team Through our efforts to engage top talent we have proactively increased the diversity of our workforce while adding specialized skills and experiences to our team In addition to recruiting experienced homebuilding industry candidates we have invested in several programs with the objectives of deepening our bench of talent to bring new ways of thinking into the mix and expanding the ethnic and gender diversity of our team In recent years we have invested in both our college university and military veteran recruiting programs We are also a founding supporter of the Building Talent Foundation which was established by the Leading Builders of America to address the severe and persistent labor shortage across skilled trades by creating a sustainable workforce in residential construction
To promote an inclusive workforce and the professional growth of the diverse individuals who join us our employment policies prohibit discrimination based on race color religion national origin ancestry familial status age veteran status physical disability mental disability medical condition gender gender identity sexual orientation marital status or any other legally protected status
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 2023 females made up approximately 42 of our workforce and 33 of our managerial employees with ethnic and racial minorities making up approximately 37 of our workforce and 22 of our managerial employees In addition 45 of our board of directors are women or ethnic minorities 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
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 KBU with a broad portfolio of written audio visual and interactive enterprise wide and discipline specific policy and training materials that provides all employees with access to training development and other resources to help them elevate their performance and careers We believe training through KBU not only supports employee job performance and development but also sustains and enhances our inclusive culture and strengthens our brand We believe these programs which include environmental sustainability programs ethics training and more help our team work better together This platform includes a library of approximately 412 self directed courses and virtual instructor led programs for employees at all levels of our organization and 50 leadership and managerial training topics New employee orientations functional role training and our required annual ethics training and certification are provided on this platform In 2023 69 managers at various levels across our divisions and departments attended KB Home s 6 session Managing Essentials training series in our live virtual classroom bringing the total number of managers who have completed this comprehensive program to more than 413 over the past ten years During 2023 our team members completed more than 28 169 courses in total an average of approximately 13 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 the members of which have significant experience and insight into human capital management talent development and executive compensation across a variety of organizational structures as well as strong backgrounds in executive leadership
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 Our wellness program offerings are available online
so that every employee has 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 2023 with wellness challenges and monthly wellness webinars and see it as a positive way to create and strengthen internal connections with and among our employees
As an outcome of the disruption of the COVID 19 pandemic we saw a hybrid approach of in office and remote participation as the predominant way work environments are structured Since 2022 we have operated our business utilizing a flexible work program in our division and corporate office locations that establishes a certain number of in office workdays and is intended to help our employees maintain a reasonable professional personal life balance as we continue to invest in and protect our strong company culture
For more than 16 years we have made a dedicated effort to be an industry leader in sustainability which encompasses our ESG practices We believe our 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 We have established an Environmental Management System EMS through which we focus on continually improving the energy efficiency of our homes so among things there are less greenhouse gas GHG emissions associated with their use over their multi decade life cycle Our EMS and its related manuals and other documentation provides a framework for planning implementing measuring evaluating and refining these efforts over time In addition to our internal executive team who implements and operates within the EMS we monitor evolving trends and gather input and guidance for our initiatives through our National Advisory Board which is a panel of external advisors we established in 2009 solely for these purposes These advisors who have a broad and diverse set of personal and professional perspectives experiences and expertise help us shape our sustainability priorities and reporting as well as our approach to stakeholder engagement
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 According to the U S Energy Information Administration about 22 of total energy use in the U S in 2022 was due to daily residential living With most of the energy consumption during a home s multi decade life occurring after we deliver the home to the customer our products energy efficiency is a key part of our efforts to help minimize a home s impact on the environment including the GHG and other carbon emissions produced from its day to day use
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 a broad commitment to building ENERGY STAR certified homes and have built over 188 000 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 without certification Each certified home is estimated by the EPA to produce approximately 3 287 pounds 1 5 metric tons per year less GHG emissions than a typical home Based on our energy use analysis our homes currently save our homeowners an estimated average of 1 400 annually on utility bills compared to typical resale homes
We have a goal to reduce the estimated GHG emissions metric tons per year produced through the use 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 creates less 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 goal if we lower 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
We built our first solar home in 2005 and introduced our first all solar community in 2011 We have delivered more than 20 000 homes with solar paneled power systems producing an estimated total of 860 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 2023 we built over 3 000 solar homes in California representing roughly 100 of our homes built in the state that year As of November 30 2023 approximately 90 of our model homes and sales offices in California were powered by solar energy
We are building all electric homes in many areas across the country in response to consumer demand and in some cases local building code requirements Each all electric home produces approximately 3 800 pounds less CO
per year compared to dual fuel homes minimizing the GHG emissions generated over the life cycle of our homes In 2023 approximately 38 of our total homes delivered were all electric incorporating heat pumps and other energy efficient technology
In recent years we have expanded our sustainability portfolio to include enhancing our homes indoor environment with air sealing designs and high performance ventilation systems and low or zero VOC products Every KB home incorporates high performance ventilation that regularly introduces fresh outdoor air and together with comprehensive air sealing helps to reduce indoor air pollutants In addition since mid 2021 we have included MERV 13 rated air filters one of the highest rated residential air filters on the market as standard in the homes we build in 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 KB homes also feature interior door hardware with antimicrobial protection intended to inhibit the growth of microbes such as bacteria mold and mildew on product surfaces
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
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 and have made a commitment to using WaterSense labeled products in our homes According to the EPA WaterSense labeled products use at least 20 percent less water compared to products that are not WaterSense labeled We were also the first national homebuilder to implement in 2021 the new WaterSense Labeled Homes Program Version 2 under which homes are to be at least 30 more water efficient than a typical new home In July 2022 we committed to building WaterSense labeled homes in all our future Arizona California and Nevada communities
In 2023 we built more than 2 800 WaterSense labeled homes compared to 1 760 in 2022 with all these homes in both years following the WaterSense Labeled Homes Program Version 2 To date we have built over 21 800 WaterSense labeled and Water Smart homes which we believe is more than any other homebuilder and installed over 1 1 million WaterSense labeled fixtures collectively helping to save an estimated 1 7 billion gallons of water per year based on calculations derived from WaterSense program and supplier data This initiative helps homeowners use less water as well as lower their utility bills in some of the most drought affected areas of the country
We strive to use natural resources and building materials in the most efficient manner possible which not only conserves precious natural resources but also reduces costs for our business We also seek to reduce waste on our construction jobsites and in our offices along with mitigating or diverting potential pollution and e waste By prioritizing sustainable practices and encouraging suppliers to do the same we may be able to reduce our environmental impact
2023 WaterSense Sustained Excellence Award We were once again the only national homebuilder to receive this honor in 2023 which is the highest level of recognition given by the EPA WaterSense program This is the 13th consecutive year we have been recognized for our achievements in constructing water efficient homes
Newsweek s 2024 list of America s Most Responsible Companies We were once again named by Newsweek as one of America s most responsible companies the only homebuilder to make this distinguished list four years in a row This recognition is based on our industry leading environmental and social practices
Newsweek s 2023 list of America s Most Trustworthy Companies This is the second consecutive year we have received this recognition which is based on three main public pillars customer trust investor trust and employee trust
USA Today s 2023 List of America s Climate Leaders We were the highest ranked homebuilder on the inaugural list in consideration of among other things our annualized reductions in emission intensity and carbon disclosure rating and
Fortune s 2023 Change the World List We were the first and only homebuilder on the list which recognizes companies that have created a positive impact on society through activities such as sustainability that are part of their core business strategies We were honored for building the first residential microgrid communities of all electric solar and battery powered homes in California
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
Safety is a priority for our employees our homebuyers and our independent contractors To monitor 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 In addition to our on site construction managers conducting safety inspections weekly each operating division has a designated representative who has successfully completed the Occupational Safety and Health Administration s 30 hour training course which provides supervisors with a greater depth and variety of training on an expanded list of topics associated with the recognition avoidance abatement and prevention of workplace hazards Since 2014 we have partnered with IBACOS a nationally recognized expert in home construction quality and performance to conduct annual jobsite safety reviews
Our commitment to the communities we serve is not solely about the homes we build as we strive to also make social contributions that intersect with the nature of our business Our KB Cares philanthropic program has four key focus areas shelter community sustainability environment and construction skills employment KB Cares helps to build strong social ties by among other things providing our employees a means of giving back to the areas in which we operate 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 work with Sackcloth Ashes an organization that donates a blanket to a local homeless shelter for every blanket we purchase as a housewarming gift for our new homeowners In 2023 we partnered with the National Forest Foundation and their mission to plant 50 million trees to help restore public lands and conserve America s mature and old growth forests
e are also 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 without the use of any involuntary or forced labor Our Supplier Code of Conduct also encourages our suppliers to operate in an efficient and environmentally responsible manner conserve natural resources and minimize waste and the use of environmentally harmful materials
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
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 A liability for environmental remediation and other environmental costs is accrued when we consider it probable that a liability has been incurred and the amount of loss can be reasonably estimated However environmental costs and accruals were not material to our operations cash flows or financial position in 2023 2022 or 2021
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
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
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 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 X 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
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 The order in which we discuss the risks below should not be taken as any indication of their relative importance likelihood or impact
Adverse conditions in our served markets or nationally could be caused or worsened by factors outside of our control including slow or negative economic growth sustained elevated mortgage loan interest rates and inflation and various other macroeconomic as well as geopolitical concerns such as military conflicts in Ukraine and the Middle East the 2024 U S presidential and other elections and the federal government s functional stability Among other impacts a severe or sustained economic contraction may trigger a rise in home sales contract cancellations which we and the homebuilding industry experienced in our 2022 second half and 2023 first quarter resulting in significantly lower net orders as compared to corresponding year earlier periods In addition these conditions along with heightened competition from other homebuilders and sellers and landlords of existing homes as discussed below may lead us to reduce our home selling prices or offer other concessions to attract or retain buyers which we did selectively in 2023 particularly mortgage related concessions such as interest rate buydown or lock programs and expect to continue doing in 2024 to varying degrees negatively affecting our revenues and margins An extended downturn in the U S housing market could result in an oversupply of new home and resale inventory and greater foreclosure activity which would further impair our ability to sell homes at the same volume prices and margins as in prior periods
While employment has mostly grown since mid 2020 it may rise more slowly or decline in 2024 If it does our core first time and first move up homebuyer segments could be particularly affected impacting us more severely than homebuilders targeting a different buyer demographic
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 and home selling price perceptions particularly in markets that experienced rapid home price appreciation employment instability or otherwise Consumers may also decide not to search for a new home or cancel their home sales contracts with us due to economic or personal financial uncertainty The combination of sharply higher mortgage interest rates since early 2022 several years of rising housing prices volatility across financial markets elevated inflation and various other macroeconomic and geopolitical concerns have weighed on consumer budgets and confidence In addition homeowners who purchased their home with a relatively low mortgage interest rate as was generally the case from mid 2020 to mid 2022 may be reluctant to move given the sharp rate increases in 2022 and 2023 With housing affordability at an all time low in July 2023 these conditions are expected to remain and possibly worsen in 2024
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 further increase which they did in 2022 and 2023 reflecting the U S Federal Reserve s focus on moderating inflation and investors concerns about the federal government s debt level 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
During 2022 and 2023 insurance companies exited or significantly reduced 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 such as in California and Florida If potential homebuyers are unable to obtain affordable homeowner insurance coverage they may not be able to or decide not to pursue purchasing a home or may cancel a home sales contract with us
We depend on third party lenders including GR Alliance Ventures LLC GR Alliance a subsidiary of Guaranteed Rate Inc and 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 sales contract cancellations If GR Alliance or KBHS perform poorly and our customers use another lender the income from and value of our KBHS equity interest would decline
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 At the same time favorable tax law changes will not necessarily increase demand or allow for higher selling prices for homes generally or for the homes we sell
We face significant competition for customers from other homebuilders sellers of resale homes and other housing industry participants including single family and other rental housing operators This competitive environment may among other things cause us to reduce our home selling prices or offer other concessions to attract or retain buyers While the historically low level of resale home inventory reduced the competition from sellers of resale homes in 2023 we can provide no assurance that this favorable factor will continue to the same degree or at all in 2024 In addition volatility in buyer demand in 2022 and 2023 increased competitive pressures for our business and is expected to continue into the next fiscal year
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 recent years this pattern may not continue in the future at all or to the same degree as in the past
Since 2021 product and labor costs and general inflation in the economy have increased and remained elevated compared to the prior decade In turn we experienced rising land and construction costs particularly for building materials and construction service providers rates warranty repair costs and compensation and benefit expenses to attract and retain talent These trends are expected to continue to an extent in 2024 though they may worsen compared to prior years Inflation has also tempered consumer demand for homes disrupted credit and lending markets and may increase our financing costs as borrowings if any under our unsecured revolving credit facility with various banks Credit Facility and our senior unsecured term loan with the lenders party thereto Term Loan typically accrue interest at a variable rate based on short term Secured Overnight Financing Rate SOFR While we attempt to pass on increases in our costs through increased selling prices including for design options and upgrades market forces and buyer affordability constraints can limit our ability to do so If we are unable to raise selling prices enough to compensate for higher costs or our borrowing costs increase significantly our revenues housing gross profit margin and net income could be adversely affected
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 Reflecting the housing market slowdown in the 2022 second half and 2023 first quarter we and other homebuilders reduced land acquisition spending during the period With market conditions having improved since the 2023 first quarter we and other homebuilders have increased land investments pressuring availability and pricing Whether we increase decrease or maintain our current pace of land spend we expect to continue to face competition for desirable land in our served markets in 2024 and beyond limiting our ability to profitably develop communities and sell homes on such land
Our business relies on a network of suppliers and trade partners to source materials and services to build homes However our industry and the U S economy have experienced since mid 2020 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 garage doors insulation electrical materials cabinets HVAC equipment and water heaters as well as delays with respect to state and municipal construction permitting inspections and utility processes Such constraints cost pressures and delays have increased our costs reduced our revenues in particular reporting periods and in some instances led to home sales contract cancellations or lower customer satisfaction and these trends could continue into 2024 In an effort to manage our construction cycle times and deliver homes to our homebuyers we among other things expanded our supplier base and added new construction service providers worked with our national suppliers to get products and materials or available temporary or permanent substitutes delivered including communicating in real time with them ordered items in advance of starting homes implemented construction process workarounds simplified our design options and upgrades paced lot releases to align with our production capacity and balanced pace price and construction starts to enhance margins Although we achieved a meaningful sequential improvement in our construction cycle times in 2023 they remain extended relative to our historical average and we continue to experience delays in opening communities and delivering homes We believe these challenging conditions may persist to a certain degree into and potentially throughout 2024 as discussed below under Outlook We may also face increased 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
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 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 or volatile capital or financial market conditions may hinder our ability to obtain external financing or performance bonds 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 Term Loan 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 on favorable terms or at all
Our debt and ratio of 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 The Term Loan will mature on August 25 2026 or earlier under certain circumstances The Credit Facility will mature on February 18 2027 Our next senior note maturity is our 300 0 million in aggregate principal amount of 6 875 senior notes due June 15 2027 6 875 Senior Notes due 2027
We may not have access to financial resources if there is a failure of the banks or other financial institutions where we have placed cash and cash equivalent deposits or the banks or other financial institutions or any substitute or additional banks or financial institutions participating in our Credit Facility or LOC Facility Under our Credit Facility non defaulting lenders are not obligated to cover or acquire a defaulting lender s respective commitment to fund loans or to issue letters of credit and may not issue additional letters of credit if we do not enter into arrangements to address the risk with respect to the defaulting lender which may include cash collateral If the non defaulting lenders are unable or unwilling to cover or acquire a defaulting lender s respective commitment potentially due to other demands they face under other credit instruments to which they are party or because of regulatory restrictions among other factors we may not be able to access the Credit Facility s full borrowing or letter of credit capacity to support our business needs Similarly if the applicable lender fails to meet its commitment to provide payment guarantees for us under the LOC Facility we may not be able to access its full issuance capacity to carry out important operational processes In addition if a party to the warehouse line of credit and master repurchase agreements KBHS uses to fund mortgage originations fails or is unable or unwilling to fulfill their obligations KBHS may be limited in its ability or unable to provide mortgage loans to our homebuyers which may prevent them from closing on their home at the time expected or at all Also if there is a failure of the lender of the revolving line of credit to one of our unconsolidated joint ventures for it to finance its land acquisition development and construction activities the unconsolidated joint venture may be delayed or unable to complete the project
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
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 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
The federal government has imposed and may in the future impose new or increased import tariffs or sanctions and other countries have implemented retaliatory measures raising the cost and reducing the supply of several home construction items For example the U S European Union and other countries have imposed wide ranging sanctions on Russian business sectors financial organizations individuals and raw materials due to the military conflict in Ukraine that in combination with restrictions caused by the hostilities contributed to higher costs and shortages of building materials Military conflicts and other attacks in the Middle East region including in or near shipping channels may have a similar impact on the cost and availability of raw or finished building materials and components 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 as described above could increase further
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 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
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 including a recent National Labor Relations Board proposal for determining joint employer status under the National Labor Relations Act to impose such external labor related obligations on us could create substantial exposure for us in situations beyond our control
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 the highly volatile business environment of the past few years and as may occur in 2024 due to significant inflation interest rate and financial market volatility or political or social 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 sourcing or supply chain disruptions that result in extended times to build our homes as compared to other homebuilders due to our commitment to sustainability as discussed above under Environmental Social and Governance However we expect there could be an unfavorable reputational impact if we do not maintain our sustainability programs including if we decide not to construct homes that are designed to be ENERGY STAR certified or are otherwise as energy efficient as those we currently build fail to achieve ENERGY STAR certification or any other voluntarily elected or mandatory energy efficiency standard for our homes which has occurred in a few instances in recent years or if we fail to meet our sustainability objectives including our GHG emissions related goals 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
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 climate 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 difficult 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 newly built homes have solar 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 In 2022 the California Air Resources Board adopted a plan to eliminate installing natural gas appliances in new homes built in 2026 and beyond In addition the state s energy commission issued new energy efficiency standards requiring all new residences to be electric ready for heating cooling cooking clothes drying and water heating systems California and certain of its local governments have implemented restrictions on or disincentives for 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 These efforts have and could further significantly increase our land acquisition and development costs and along with 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 including as a result of its public utilities commission s decision to significantly reduce net metering payments to homeowners for the rooftop solar power they export to the grid from systems installed
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 We also consider whether our buyers may face higher costs for or may be unable to obtain fire flood or other hazard insurance coverage in certain areas due to local environmental conditions or historical events 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 and or from operating in areas with more extensive regulatory requirements such as California or certain climates 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 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 based on an Arizona state order in June 2023 new housing subdivisions will not be permitted in some parts of Phoenix unless developers like us secure water supplies other than local groundwater While we have health and 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 all new homes have solar power systems and agency requirements for all electric readiness and plans to potentially eliminate natural gas appliances in new homes built in the state by 2026 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 the past few years such as with paint garage doors insulation electrical materials cabinets HVAC equipment 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 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 or the state adopt such bans and as we implement the state s all electric readiness requirements as discussed above 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 though we have not as of the date of this report identified or experienced any particular material impact whether singular or in combination to our consolidated financial statements from climate change or the associated regulatory physical transition and other risks discussed above 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
Further we expect that as concerns about climate change and other environmental issues continue to increase homebuilders will be required to comply with new and extensive laws and regulations including recently enacted climate disclosure laws in California as well as any climate related disclosure rules ultimately adopted by the SEC each of which we anticipate will result in additional significant compliance costs In October 2023 California enacted the Climate Corporate Data Accountability Act SB 253 which mandates the disclosure of GHG emissions including Scope 1 Scope 2 and Scope 3 emissions and the Climate Related Financial Risk Act SB 261 which mandates the disclosure of climate related financial risks and measures adopted to reduce and adapt to such risks Both California laws require initial disclosures in 2026 California also enacted a third climate disclosure law that requires entities that operate in the state and make net zero emissions claims carbon neutral claims or significant GHG reduction claims to disclose starting in 2024 information about those claims and the purchase or use of voluntary carbon offsets used to achieve those claims
We may also 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 Such severe weather events can delay home construction increase construction costs reduce the availability of building materials and damage roads and or cause transportation delays that stress our supply chain and negatively impact the demand for new homes in affected areas as well as slow down or otherwise impair the ability of utilities and local government agencies to provide approvals and service to new communities Further if our insurance does not fully cover our costs and other losses from such events our earnings liquidity or capital resources could be adversely impacted
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 Inflation 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
Our future income tax rates and expense can fluctuate or be adversely affected due to legislative and regulatory changes government or court interpretations of new or existing tax laws and regulations changes in available tax credits adjustments to estimated taxes in finalizing our tax returns and or due to new regulatory guidance as occurred in our 2023 fourth quarter changes in non deductible expenses particularly those associated with compensation tax benefits related to stock based compensation the realization of our deferred tax assets and the resolution of tax audits with federal or state tax authorities based on among other things tax positions we have taken
In prior years we have recognized federal tax credits from our building energy efficient new homes In some periods these tax credits were not available because Congress had not renewed the program The 2022 Inflation Reduction Act IRA extended this federal tax credit under Internal Revenue Code Section 45L Section 45L to 2032 At the same time the legislation newly tied qualifying for the Section 45L tax credit on and after January 1 2023 to new homes achieving ENERGY STAR certification In late September 2023 the Internal Revenue Service IRS issued guidance setting a higher qualifying ENERGY STAR version for single family homes built in California than for any other state Under this guidance significantly fewer of our homes built in California in 2023 satisfy the Section 45L qualifications Our income tax expense for the 2023 fourth quarter reflected the cumulative impact of the September 2023 guidance Subject to future guidance regulation or legislation we may not be able to realize Section 45L tax credits for our homes even if they attain ENERGY STAR
certification at the same level as in prior years or we may incur additional costs to build homes that can qualify Further should the Section 45L tax credit be reduced or repealed or if the qualification standards are revised or we adjust how we build our homes such that even fewer of our homes qualify for the Section 45L or other energy efficiency related tax credits our income tax rate and expense would likely increase which would reduce our net income and cash flow and may have a material adverse impact on our consolidated financial statements
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
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
We use IT resources to carry out important operational activities and maintain our business records Third parties provide and maintain many of our IT resources including disaster recovery and business continuity services intended to safeguard 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 senior IT executives also periodically update the audit and compliance committee of our board of directors on our cybersecurity practices and risks most recently in January 2024 A reporting process has been established and periodically tested and refined with the assistance of outside experts to escalate notice within our organization of and coordinate our response to IT security events Depending on the severity of an event our incident reporting process includes informing as early as practicable our senior corporate management and members of our board of directors
Our systems have faced a variety of phishing denial of service and other attacks and occasional theft of encrypted employee laptops To help counter the growing volume and sophistication of cyberattacks including the potential of fraudulently inducing our employees customers trade partners and other third parties to disclose information or unknowingly provide access to systems or data as well as state and other actors using artificial intelligence technology we have implemented administrative physical and multi layered technical controls and processes to help address and mitigate cybersecurity risks and protect our IT resources including employee education and awareness training as well as third party assessments Our technical defense layers are designed to provide multiple overlapping measures to protect against exploitation of a vulnerability that may arise or if a security control fails For these defenses we rely on a combination of artificial intelligence machine learning computer network monitoring malware 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 but cannot guarantee are capable of performing the protective service for which we have engaged them We conduct periodic incident response tabletop exercises with third party support and reviews and have established communication channels with KBHS security personnel and key partners regarding their breach and incident response processes In addition we perform an annual cybersecurity risk assessment to identify potential areas of focus We also depend on our service providers GR Alliance and other mortgage lenders 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 particularly our cloud service provider which hosts many of our IT resources 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 While to date we have not had a significant cybersecurity breach or attack
that had a material impact on our business or consolidated financial statements there can be no assurance our efforts to maintain the security and integrity of these systems will be effective or that attempted security breaches cyber attack data theft or disruptions would not occur in the future be successful or damaging
Beyond our service providers we depend on independent third parties to handle certain processes required to complete land purchases and home closings including title insurers and escrow settlement companies In November and December 2023 two national title insurance and escrow settlement companies experienced cybersecurity incidents that substantially impaired their ability to provide those services resulting in delays in our and others land purchase and home closing transactions Should these third parties as well as independent mortgage lenders and other firms involved in real property transactions experience their own cybersecurity incidents or IT resource failures that disrupt or prevent their performance of necessary real estate transaction services our ability to close on land transactions or our customers ability to close on their homes as well as our production schedules and delivery forecasts may be significantly disrupted and have a material impact on our operations or consolidated financial statements including by causing home sales contract cancellations
We have invested significant resources over the past few years to develop and implement a new enterprise resource planning ERP system designed to improve the efficiency of our internal operational and administrative activities While all of our operations have transitioned to the new ERP system as of November 30 2023 we expect to continue to enhance and expand the scope of the system and may incur appreciable additional costs in doing so
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 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 governance 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 We may also face similar reputational impacts if our sustainability initiatives or objectives and or our social or governance practices do not meet the standards set by investors or third party rating services Additionally low third party ratings could result in our common stock being excluded from certain indexes or not being recommended for or selected by investors with certain mandates or priorities
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 and federal courts are the exclusive forum for any action asserting a claim arising under the Securities Act of 1933 as amended These provisions 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 address 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 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 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 or the proposed SEC rules mentioned above if adopted 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
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 are currently or may initially be seen as immaterial could also have a material adverse impact on our business consolidated financial statements and or common stock s market price
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
As of November 30 2022 we were authorized to repurchase up to 150 0 million of our outstanding common stock under a share repurchase program approved by our board of directors in April 2022 On March 21 2023 our board of directors authorized us to repurchase up to 500 0 million of our outstanding common stock replacing the prior board of directors authorization which had 75 0 million remaining as further discussed in Note 19 Stockholders Equity in the Notes to Consolidated Financial Statements in this report In the 2023 fourth quarter we purchased 3 584 795 shares of our common stock pursuant to this authorization at a total cost of 161 8 million bringing our total repurchases in 2023 to 9 244 437 shares at a total cost of 411 4 million As of November 30 2023 we were authorized to repurchase up to 163 6 million of our outstanding common stock
During the three months ended November 30 2023 we also purchased certain 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
The IRA imposed a nondeductible 1 excise tax on the net value of certain stock repurchases made after December 31 2022 All dollar amounts presented in the table above and in this report related to our share repurchases and our share repurchase authorizations exclude such excise taxes to the extent applicable unless otherwise indicated
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 52 10 per share on November 30 2023 and 31 39 per share on November 30 2022 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 2018 in KB Home common stock the S P 500 Index and the Dow Jones US Home Construction Index including reinvestment of dividends
Our discussion and analysis below is focused on our 2023 and 2022 financial results including comparisons of our year over year performance between these years Discussion and analysis of our 2021 fiscal year specifically as well as the year over year comparison of our 2022 financial performance to 2021 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 2022 filed with the SEC on January 20 2023 which is available on our investor relations website at investor kbhome com and the SEC website at www sec gov
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
We generated solid financial results in 2023 as we remained focused on balancing pace price and construction starts at each community to optimize our return on each inventory asset within its market context amid a mixed operating environment over the course of the year
We began the year navigating challenging housing market conditions stemming from the combination of rising mortgage interest rates elevated inflation and various other macroeconomic and geopolitical concerns These factors significantly depressed housing demand during the 2022 second half and into the 2023 first quarter Demand began to improve in the 2023 second quarter due to among other things constrained resale home inventory favorable demographic trends buyer interest in homes at our price points and our selective implementation of targeted sales strategies including pricing adjustments and other homebuyer concessions particularly mortgage related concessions such as interest rate buydown or lock programs throughout the year to help drive order activity and minimize cancellations As a result our total net orders for 2023 of 11 084 were up 2 compared to 2022 with year over year net order comparisons improving each quarter as the year progressed The positive sales trends continued in our 2023 fourth quarter with net orders and net order value increasing 176 and 157 respectively compared to the depressed levels in the year earlier quarter Though they increased on a year over year basis our 2023 fourth quarter net orders were lower than expected reflecting the significant negative impact on demand from mortgage interest rates rising each week from late September through the end of October Our cancellation rate as a percentage of gross orders for the 2023 fourth quarter improved to 28 from a historically high 68 for the 2022 fourth quarter While we believe they were beneficial to our selling efforts the pricing adjustments and other homebuyer concessions we utilized in 2023 contributed to year over year decreases in both the average selling price of homes delivered and our housing gross profit margin
Homebuilding revenues for 2023 were comprised of housing revenues and 10 7 million of land sale revenues In 2022 homebuilding revenues were generated entirely from housing revenues Housing revenues of 6 37 billion were down 7 from the previous year due to a 4 decrease in the number of homes delivered to 13 236 and a 4 decline in the overall average selling price of those homes to 481 300 Approximately 49 of our homes delivered in 2023 were to first time homebuyers Homebuilding operating income for 2023 was 718 7 million compared to 1 04 billion for 2022 and as a percentage of homebuilding revenues was 11 3 compared to 15 1 Our homebuilding operating income margin for 2023 reflected a decrease in our housing gross profit margin to 21 2 compared to 24 3 for the previous year and a 70 basis point increase in selling general and administrative expenses as a percentage of housing revenues to 9 9 Net income and diluted earnings per share for 2023 were down 28 and 23 respectively each as compared to 2022 Our diluted earnings per share for 2023 reflected the favorable impact of our common stock repurchases over the past several quarters
Our return on equity ROE for 2023 was 15 7 compared to 24 6 for 2022 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
We believe our strong balance sheet and liquidity position helped provide us with the flexibility to operate effectively through the evolving market conditions during the year and expect they will continue to do so in 2024 In 2023 we generated 1 08 billion of cash from operating activities reflecting in part our reduced investments in land acquisition and land development in 2023 which decreased 25 year over year to 1 80 billion Our investments declined in the 2023 first half as a result of pivoting our land investment strategy beginning in the 2022 third quarter in response to then softening housing market conditions to emphasize developing the land positions we already owned or controlled under land option contracts and other similar contracts With the improving business environment as described above we increased our investments in land and land development in the 2023 second half Our investments in land and land development for the 2023 second half were up 36 from the 2023 first half and up 4 from the corresponding year earlier period Reflecting our balanced approach to capital allocation in 2023 we repurchased approximately 9 2 million shares of our common stock at a total cost of 411 4 million As of November 30 2023 we had 163 6 million remaining under our current common stock repurchase authorization Additionally in July 2023 our board of directors increased the quarterly cash dividend on our common stock by approximately 33 to 20 per share from 15 per share We ended 2023 with total liquidity of 1 81 billion comprised of 727 1 million of cash and cash equivalents and 1 08 billion of available capacity under our Credit Facility With net repayments of 150 0 million under the Credit Facility in 2023 we had no cash borrowings outstanding under the Credit Facility at November 30 2023
In 2023 with the significant disruptions we had experienced since mid 2020 in our supply chain for certain building materials and construction services shortages largely subsiding and our ongoing initiative to simplify our product offerings we achieved meaningful sequential improvement in our construction cycle times each quarter beginning with the 2023 second quarter We remain committed to further reducing our build times Though we are encouraged by these improvements ongoing supply chain related challenges for certain items may continue to negatively affect our land development and home construction activities in 2024 and it is possible they may worsen in that and in later periods
In 2023 housing revenues were down 7 from the previous year due to decreases of 4 in both the number of homes delivered and their overall average selling price The year over year decline in the number of homes delivered reflected a 20 decrease in our West Coast homebuilding reporting segment partly offset by increases of 4 4 and 2 in our Southwest Central and Southeast segments respectively The decline in our West Coast homebuilding reporting segment mainly resulted from a 47 year over year decrease in this segment s backlog of homes at the beginning of the year The lower average selling price primarily reflected product and geographic mix factors mainly the reduced deliveries from our higher priced West Coast homebuilding reporting segment and pricing adjustments and other concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies
We generated 10 7 million of land sale revenues in 2023 compared to no such revenues in 2022 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
Our homebuilding operating income was down 31 in 2023 as compared to the previous year primarily due to lower housing gross profits In 2023 and 2022 homebuilding operating income included total inventory related charges of 11 4 million and 37 3 million respectively as discussed in Note 7 Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report As a percentage of homebuilding revenues our homebuilding operating income for 2023 decreased 380 basis points year over year to 11 3 Excluding inventory related charges for both periods our homebuilding operating income margin declined 420 basis points to 11 4 in 2023 from 15 6 in 2022
Housing Gross Profits In 2023 housing gross profits of 1 35 billion declined 19 from the previous year reflecting decreases in both our housing revenues and housing gross profit margin Housing gross profits for 2023 and 2022 included inventory related charges associated with housing operations of 11 4 million and 34 8 million respectively
Our housing gross profit margin for 2023 was 21 2 down 310 basis points from the previous year primarily due to pricing adjustments and other homebuyer concessions higher construction costs and product and geographic mix shifts partly offset by a decrease in inventory related charges As a percentage of housing revenues the amortization of previously capitalized interest associated with housing operations was 1 9 for 2023 and 2 0 for 2022 Excluding the inventory related charges associated with housing operations described above our adjusted housing gross profit margin was 21 4 in 2023 compared to 24 8 in 2022 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
Land Sale Profits Losses Land sale profits totaled 1 2 million for 2023 In 2022 land sale losses of 2 6 million were comprised solely of an inventory impairment charge related to a parcel of land held for sale
Selling general and administrative expenses for 2023 were nearly even with the prior year as higher marketing and commission expenses were largely offset by lower general and administrative expenses Marketing expenses in 2023 rose from the prior year primarily due to higher costs to support our higher average community count Our selling general and administrative expenses as a percentage of housing revenues increased 70 basis points in 2023 mainly reflecting reduced operating leverage due to our lower housing revenues as compared to the previous year
Interest income which is generated from short term investments increased to 13 8 million in 2023 compared to 7 million in 2022 due to our higher average balance of cash equivalents and a higher average interest rate in 2023 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
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 the interest rate on that debt In 2023 total interest incurred of 107 1 million decreased from 120 9 million incurred in 2022 due to our lower average debt level partly offset by our higher average interest rate All interest incurred during 2023 and 2022 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 2023 or 2022 Further information regarding our interest incurred and capitalized is provided in Note 6 Inventories in the Notes to Consolidated Financial Statements in this report
Our equity in loss of unconsolidated joint ventures was nominal for both 2023 and 2022 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
In 2022 we recognized a 3 6 million loss on the early extinguishment of debt associated with the retirement of 350 0 million in aggregate principal amount of our then outstanding 7 50 senior notes due September 15 2022 7 50 Senior Notes due 2022 before their maturity date pursuant to the optional redemption terms specified for such notes Further information regarding this transaction is provided in Note 15 Notes Payable in the Notes to Consolidated Financial Statements in this report
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
Net orders from our homebuilding operations rose 2 from 2022 as a 10 increase in our average community count was largely offset by a slower pace of monthly net orders per community of 3 8 in 2023 compared to 4 1 in 2022 The value of our 2023 net orders was down 5 year over year due to a 7 decline in the overall average selling price of net orders to 482 400 partially offset by the increase in net orders In 2023 the year over year growth in our overall net orders reflected increases of 19 and 14 in our West Coast and Southwest homebuilding reporting segments respectively largely offset by decreases of 19 and 1 in our Central and Southeast segments respectively
In the 2022 second half and 2023 first quarter the combination of relatively high mortgage interest rates elevated inflation and various other macroeconomic and geopolitical concerns significantly depressed demand Although ongoing elevated mortgage interest rates and inflation continued to negatively affect housing affordability and temper demand our year over year net order comparisons improved each quarter of 2023 as the year progressed Our 2023 fourth quarter net orders increased 176 from the corresponding period of 2022 reflecting improved demand and a lower cancellation rate as compared to the year earlier quarter when the combination of rapidly rising mortgage interest rates ongoing inflation and other macroeconomic concerns caused many prospective buyers to pause on their homebuying decision We believe our performance also reflected the targeted sales strategies including pricing adjustments and other homebuyer concessions particularly mortgage related concessions such as interest rate buydown or lock programs we selectively implemented in 2023 Though they increased on a year over year basis our 2023 fourth quarter net orders were lower than expected reflecting the significant negative impact on demand from mortgage interest rates rising each week from late September through the end of October Despite the uneven market conditions we experienced across 2022 and 2023 our cancellation rate as a percentage of gross orders for the year ended November 30 2023 was even with the previous year
The number of homes in our backlog at November 30 2023 decreased 28 from the previous year The potential future housing revenues in our backlog at November 30 2023 were also down 28 year over year reflecting fewer homes in our backlog and an average selling price of those homes that was essentially even with the previous year The number of homes in backlog and backlog value decreased in three of our four homebuilding reporting segments with decreases in value ranging from 18 in our Southwest segment to 65 in our Central segment Backlog value in our West Coast segment increased 11 year over year due to a 20 increase in the number of homes in backlog partly offset by a 7 decline in the average selling price of those homes Substantially all the homes in our backlog at November 30 2023 are expected to be delivered during the year ending November 30 2024
Our average community count for 2023 increased 10 from the previous year and our ending community count decreased 2 The slight year over year decrease in our ending community count primarily reflected the number of communities selling out over the past 12 months exceeding the number of new community openings On a sequential basis our ending community count increased 5 from the 2023 third quarter as the number of new community openings exceeded the number of communities selling out during the three months ended November 30 2023 Our community
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
As discussed above under Item 1 Business in this report the composition of our homes delivered net orders and backlog shifts with the product and geographic 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 changing as new communities open and existing communities wind down or sell out in the ordinary course 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 product premiums and the design studio options and upgrades buyers select in the community These intrinsic 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
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 142 6 million in 2023 145 3 million in 2022 and 148 9 million in 2021
The financial results of our homebuilding reporting segments for 2023 were negatively impacted to varying degrees by homebuyer concessions we selectively extended to buyers in conjunction with our targeted sales strategies as well as product and geographic mix shifts of homes delivered Segment financial results for 2023 were also affected by construction services availability constraints and building material cost pressures as well as supply chain disruptions and other production related challenges though these impacts lessened in the 2023 second half compared to the 2023 first half and the 2022 second half periods as described above under Overview
This segment s revenues for 2023 declined 24 from 2022 due to decreases in both the number of homes delivered and their average selling price Operating income for 2023 was also down year over year reflecting lower housing gross profits partially offset by reduced selling general and administrative expenses and the absence of a 2 6 million land sale loss included in the prior year As a percentage of revenues this segment s 2023 operating income decreased from the previous year reflecting a 460 basis point decline in the housing gross profit margin to 18 6 and a 100 basis point increase in selling general and administrative expenses as a percentage of housing revenues to 7 1 The housing gross profit margin decline was primarily driven by pricing adjustments and other homebuyer concessions higher relative construction costs product and geographic mix shifts of homes delivered and reduced operating leverage from lower housing revenues partly offset by a decrease in inventory related charges and lower relative amortization of previously capitalized interest In 2023 inventory related charges associated with housing operations decreased to 4 9 million in 2023 compared to 24 8 million in 2022 The year over year increase in selling general and administrative expenses as a percentage of housing revenues was mainly due to higher costs to support our higher average community count reduced operating leverage and higher sales commissions
This segment s revenues in 2023 were comprised of both housing revenues and land sale revenues Revenues for 2022 were generated solely from housing operations Housing revenues for 2023 rose 5 year over year to 1 16 billion reflecting increases in both the number of homes delivered and their average selling price Land sale revenues totaled 6 0 million in 2023 Operating income was down from the previous year primarily due to lower housing gross profits and higher selling general and administrative expenses partially offset by a land sale gain of 1 1 million As a percentage of revenues operating income decreased from 2022 primarily due to a 550 basis point decrease in the housing gross profit margin to 23 4 partially offset by a 10 basis point improvement in selling general and administrative expenses as a percentage of housing revenues to 7 3 The year over year decline in the housing gross profit margin mainly reflected pricing adjustments and other homebuyer concessions and product and geographic mix shifts of homes delivered partly offset by increased operating leverage from higher housing revenues
In 2023 this segment s revenues were comprised of housing revenues and 4 7 million of land sale revenues In 2022 revenues were generated solely from housing operations Housing revenues for 2023 improved 4 from the prior year to 1 83 billion reflecting increases in both the number of homes delivered and the average selling price of those homes Operating income decreased from 2022 mainly due to higher selling general and administrative expenses As a percentage of revenues operating income declined from the previous year reflecting a 110 basis point decrease in the housing gross profit margin to 22 5 and a 40 basis point increase in selling general and administrative expenses as a percentage of housing revenues to 8 4 The year over year decline in the housing gross profit margin was mainly driven by higher construction costs product and geographic mix shifts of homes delivered and increased homebuyer concessions partly offset by increased operating leverage from higher housing revenues The housing gross margin for 2023 included inventory related charges of 2 5 million compared to 3 3 million in 2022 The year over year increase in this segment s selling general and administrative expenses as a percentage of housing revenues was primarily due to increased sales commissions and higher costs to support our higher average community count partly offset by increased operating leverage from higher housing revenues
This segment s revenues for 2023 grew from 2022 due to increases in both the number of homes delivered and the average selling price of those homes Operating income was down from 2022 reflecting higher selling general and administrative expenses partly offset by higher housing gross profits As a percentage of revenues operating income decreased from 2022 primarily due to a 170 basis point decline in the housing gross profit margin to 22 9 that mainly reflected higher construction costs product and geographic mix shifts of homes delivered and increased homebuyer concessions partly offset by decreased inventory related charges and improved operating leverage from higher housing revenues The housing gross margin for 2023 included inventory related charges of 4 0 million compared to 5 7 million in 2022 Selling general and administrative expenses as a percentage of housing revenues increased 10 basis points year over year to 9 0
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 2023 reflected increases in both title services revenues and insurance commissions
Our financial services pretax income for 2023 increased slightly from the previous year as improved results from our insurance and title services businesses were partly offset by a decrease in the equity in income of unconsolidated joint ventures In 2023 the equity in income of our unconsolidated joint ventures declined 25 year over year as a result of a decrease in KBHS income KBHS income declined from the previous year primarily due to losses of 16 0 million in the fair value of interest rate lock commitments IRLCs in 2023 compared to gains of 20 3 million in 2022 The gains in the previous year reflected a greater number of customers who elected to lock their mortgage interest rates for relatively extended periods aligned with their expected home delivery date due to the sharp rise in such rates during 2022 Partly offsetting the negative year over year impact from the IRLCs in 2023 was a 9 increase in the principal amount of loan originations mainly due to an increase in the percentage of homebuyers using KBHS 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
Our effective tax rate for 2023 decreased from the previous year mainly due to a 3 7 million increase in excess tax benefits related to stock based compensation and a 2 6 million increase in Section 45L tax credits we recognized from building energy efficient homes partly offset by a 2 5 million increase in non deductible compensation expense
On August 16 2022 the IRA was enacted into law The IRA contains significant tax law changes including a corporate alternative minimum tax CAMT of 15 on adjusted financial statement income for applicable corporations and a 1 excise tax on stock repurchases after December 31 2022 If applicable the CAMT will not be effective for us until our fiscal year ending November 30 2024 The IRA also extended the Section 45L tax credit for building new energy efficient homes for homes delivered from January 1 2022 retroactively through December 31 2032 as well as modified and increased it starting in 2023 Previously the Section 45L tax credit expired for homes delivered after December 31 2021 The Section 45L tax credits we recognized in 2023 and 2022 reflected the impact of the extension and modifications as applicable under the IRA We are currently evaluating the other potential effects of the IRA on our consolidated financial statements
The IRA tied Section 45L tax credit qualification for energy efficient homes built on and after January 1 2023 to new homes achieving ENERGY STAR certification In late September 2023 the IRS issued Notice 2023 65 which provided guidance on the Section 45L tax credit qualifications for ENERGY STAR homes built on or after January 1 2023 This guidance retroactively effective for the year resulted in a reduction in our estimated Section 45L tax credits for 2023 primarily due to fewer of the ENERGY STAR homes we built in California meeting the heightened qualifications the IRS selected for homes built in that state relative to other states Our income tax expense for the 2023 fourth quarter reflected the cumulative
On February 9 2022 California enacted legislation restoring the California net operating loss NOL deduction for tax years beginning on or after January 1 2022 which was effective for our 2023 fiscal year The California NOL deductions for tax years 2022 and 2021 had been suspended by previous legislation Although the restoration of California NOL deductions did not have an impact on our income tax expense for the year ended November 30 2023 it contributed to the year over year decrease in the amount of taxes we paid in 2023
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
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 is a non GAAP financial measure which we calculate by dividing housing revenues less housing construction and land costs excluding housing inventory impairment and land option contract abandonment charges as applicable recorded during a given period 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 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 This financial measure assists us in making strategic decisions regarding community location and product mix product pricing and construction pace
As of November 30 2023 we had 1 34 billion in aggregate principal amount of outstanding senior notes no borrowings outstanding under the Credit Facility and 360 0 million in aggregate principal amount of borrowings outstanding under the Term Loan Our obligations to pay principal and interest on the senior notes and borrowings if any under the Credit Facility and the Term Loan 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 the Credit Facility and the Term Loan
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 and Term Loan 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 the Credit Facility and the Term Loan 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
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 can require significant cash outflows for land acquisition entitlements land development and construction of roads utilities landscaping model homes and other items Because these costs are capitalized as a component of our inventories and are not recognized in our statement of operations until a home is delivered we incur significant cash outflows prior to recognizing earnings from a delivered home As homes are delivered which in some cases may be a year or more after the related land development or entitlement work commences 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 2023 with total liquidity of 1 81 billion including cash and cash equivalents and 1 08 billion of available capacity under the Credit Facility Cash and cash equivalents grew to 727 1 million at November 30 2023 compared to 328 5 million at November 30 2022 primarily reflecting an increase in net cash provided by operating activities partly offset by an increase in net cash used in financing activities as described below Cash equivalents included in the total increased to 508 2 million at November 30 2023 from 15 8 million at November 30 2022 and were mainly invested in interest bearing bank deposit accounts and money market funds We had no cash borrowings outstanding under the Credit Facility as of November 30 2023 Based on our financial position as of November 30 2023 and our business forecast for 2024 as discussed below under Outlook we have no material concerns related to our liquidity 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
We have outstanding variable rate borrowings under the Term Loan and outstanding fixed rate senior notes and mortgages and land contracts due to land sellers and other loans with varying maturities As of November 30 2023 our notes payable had an aggregate principal amount of 1 70 billion with 3 4 million payable within 12 months Future interest payments associated with the Term Loan and our senior notes together with the unused commitment fee associated with our Credit Facility totaled 522 2 million as of November 30 2023 with 102 1 million payable within 12 months The Term Loan will mature on August 25 2026 Our next senior note maturity is our 300 0 million in aggregate principal amount of 6 875 Senior Notes due 2027 Further information regarding our notes payable is provided in Note 15 Notes Payable in the Notes to Consolidated Financial Statements in this report
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 2023 the future minimum payments required under these leases totaled 28 6 million with 11 9 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
As of November 30 2023 we had inventory related obligations totaling 41 5 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 9 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
Our investments in land and land development decreased 25 to 1 80 billion in 2023 compared to 2 40 billion in 2022 reflecting a 46 year over year decrease in the first half of the year that was partly offset by a 4 year over year increase in the second half of the year In 2023 land acquisition expenditures which are included in our investments in land and land development decreased 44 to 465 8 million from 827 2 million in the year earlier period Our reduced investments in land and land development in the 2023 first half reflected a pivot in our land investment strategy beginning in the 2022 third quarter in response to then softening housing market conditions to emphasize developing land positions we already own or control under land option contracts and other similar contracts As part of this pivot we also evaluated our transaction pipeline and renegotiated pricing and terms for many deals while abandoning others that no longer met our investment return standards As we calibrated our investments to evolving market conditions and our outlook we increased our investments in land and land development by 36 in the 2023 second half as compared to the 2023 first half In the 2023 fourth quarter our investments in land and land development were up 9 year over year to 483 3 million compared to 442 7 million as land acquisition expenditures increased 100 In addition we modified our land development strategy electing where appropriate to build in smaller phases and in some cases defer the start of the next phase of lots in a community to align with expected demand
Approximately 26 of our total investments in land and land development in 2023 were related to land acquisitions compared to approximately 34 in 2022 While we made strategic investments in land and land development in each of our homebuilding reporting segments during 2023 and 2022 approximately 56 and 50 respectively of these investments for each year were made in our West Coast homebuilding reporting segment
In 2024 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 standards While we expect our land acquisition activity to increase in 2024 as compared to 2023 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
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
The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at November 30 2023 decreased year over year reflecting homes delivered in 2023 as well as the above mentioned pivot in our land investment strategy which included our abandonment of 9 650 previously controlled lots in 2023 Our lower inventory level at November 30 2023 also reflected fewer homes under construction due to improved build times The number of lots in inventory as of November 30 2023 included 6 260 lots under contract where the associated deposits were refundable at our discretion compared to 5 543 of such lots at November 30 2022 Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 27 at November 30 2023 compared to 30 at November 30 2022 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
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 if applicable forfeit our deposits without further penalty or obligation to the sellers If we were to acquire all the land we had under land option contracts and other similar contracts at November 30 2023 we estimate the remaining purchase price to be paid would be as follows 2024 740 8 million 2025 213 3 million 2026 158 2 million 2027 52 1 million 2028 59 1 million and thereafter 0
Our financial leverage as measured by the ratio of debt to capital was 30 7 at November 30 2023 compared to 33 4 at November 30 2022 The ratio of debt to capital is calculated by dividing notes payable by capital notes payable plus stockholders equity
We maintain an LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business Under the LOC Facility we may issue up to 75 0 million of letters of credit On August 10 2023 we entered into an amendment to the LOC Facility that extended the expiration date from February 13 2025 to February 18 2027 As of November 30 2023 and 2022 we had letters of credit outstanding under the LOC Facility of 12 5 million and 36 4 million respectively
Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report we had 1 32 billion and 1 27 billion of performance bonds outstanding at November 30 2023 and 2022 respectively
We have a 1 09 billion Credit Facility that will mature on February 18 2027 The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of 1 29 billion under certain conditions including obtaining additional bank commitments 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 2023 we had no cash borrowings and 6 7 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
Under the terms of the Credit Facility and the Term Loan 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 the Term Loan and can differ in certain respects from
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 2 09 billion plus b an amount equal to 50 of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after November 30 2021 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 November 30 2021
Leverage Ratio We must also maintain a Leverage Ratio of less than or equal to 60 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 and the Term Loan
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 and the Term Loan 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 and the Term Loan for the four most recently ended fiscal quarters in the aggregate
In addition under the Credit Facility and the Term Loan our equity investments in joint ventures and Non Guarantor Subsidiaries and other unconsolidated entities 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 for so long as we do not hold an investment grade credit rating as defined under the Credit Facility and the Term Loan the Credit Facility and the Term Loan do not permit our borrowing base indebtedness which subject to certain exceptions is the aggregate principal amount of our and certain of our subsidiaries 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 and the Term Loan represent the most restrictive covenants 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 the Term Loan and our actual levels or ratios as applicable with respect to those covenants and other requirements in each case as of November 30 2023
The indenture governing our senior notes does not contain any financial covenants Subject to specified exceptions the indenture contains certain restrictive covenants that among other things limit our ability to incur secured indebtedness or engage in sale leaseback transactions involving property above a certain specified value In addition the indenture contains certain limitations related to mergers consolidations and sales of assets
As of the date of this report we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Facility the Term Loan the senior notes the indenture the LOC Facility and the mortgages and land contracts due to land sellers and other loans Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend in part on our ability to remain in such compliance Our ability to access the Credit Facility s full borrowing capacity as well as the LOC Facility s full issuance capacity also depends on the ability and willingness of the applicable lenders and financial institutions including any substitute or additional lenders and financial institutions to
There are no agreements that restrict our payment of dividends other than the Credit Facility and the Term Loan which would restrict our payment of certain dividends such as cash dividends on our common stock if a default under the Credit Facility or the Term Loan exists at the time of any such payment or if any such payment would result in such a default other than dividends paid within 60 days after declaration if there was no default at the time of declaration
Depending on available terms we finance certain land acquisitions with purchase money financing from land sellers or with other forms of financing from third parties At November 30 2023 we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of 3 8 million secured primarily by the underlying property which had an aggregate carrying value of 30 5 million
We have a 360 0 million Term Loan with the lenders party thereto that will mature on August 25 2026 or earlier if we secure borrowings under the Credit Facility without similarly securing the Term Loan subject to certain exceptions The Term Loan is further described in Note 15 Notes Payable in the Notes to Consolidated Financial Statements in this report
As discussed in Note 9 Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located As of November 30 2023 one of our unconsolidated joint ventures had borrowings outstanding under a revolving line of credit with a third party lender and secured by the underlying property and related project assets None of our other unconsolidated joint ventures had outstanding debt at November 30 2023
Our credit ratings are periodically reviewed by rating agencies In April 2023 Standard and Poor s Financial Services reaffirmed our BB credit rating and changed its rating outlook to stable from positive
Generally our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability Our net cash provided by operating activities in 2023 mainly reflected net income of 590 2 million and a net decrease in inventories of 426 8 million partly offset by a net decrease in accounts payable accrued expenses and other liabilities of 62 2 million and a net increase in receivables of 12 9 million Net cash provided by operating activities in 2022 primarily reflected net income of 816 7 million and a net increase in accounts payable accrued expenses and other liabilities of 53 1 million partly offset by a net increase in inventories of 785 6 million and a net increase in receivables of 19 9 million
In 2023 our net cash used in investing activities included 35 5 million for net purchases of property and equipment and 27 7 million for contributions to unconsolidated joint ventures These uses of cash were partially offset by a 5 1 million return of investments in unconsolidated joint ventures In 2022 our uses of cash included 45 2 million for net purchases of property and equipment and 28 4 million for contributions to unconsolidated joint ventures These uses of cash were partly offset by a 1 9 million return of investments in unconsolidated joint ventures
In 2023 our uses of cash included stock repurchases totaling 411 4 million net repayments under the Credit Facility of 150 0 million dividend payments on our common stock of 56 8 million tax payments associated with stock based compensation awards of 14 2 million and payments on mortgages and land contracts due to land sellers and other loans of 3 8 million The cash used was partially offset by 8 9 million of issuances of common stock under employee stock plans In 2022 net cash was used for the repayment of 700 0 million in aggregate principal amount of our senior notes stock repurchases totaling 150 0 million dividend payments on our common stock of 52 5 million tax payments associated with stock based compensation awards of 15 9 million payments of debt issuance costs of 11 1 million and payments on mortgages and land contracts due to land sellers and other loans of 6 million The cash used was partially offset by borrowings under the Term Loan of 360 0 million cash provided from our public offering of 350 0 million in aggregate
In the 2023 first and second quarters our board of directors declared quarterly cash dividends of 15 per share of common stock Our board of directors approved an increase in the quarterly cash dividend on our common stock to 20 per share in the 2023 third quarter and declared quarterly dividends at the new higher rate for the third and fourth quarters of 2023 In 2022 our board of directors declared four quarterly cash dividends of 15 per share Quarterly cash dividends declared during the years ended November 30 2023 and 2022 totaled 70 and 60 per share of common stock respectively All dividends declared during 2023 and 2022 were also paid during those years The declaration and payment of future cash dividends on our common stock whether at current levels or at all are at the discretion of our board of directors and depend upon among other things our expected future earnings cash flows capital requirements access to external financing debt structure and any adjustments thereto operational and financial investment strategy and general financial condition as well as general business conditions
On July 10 2023 we filed an automatically effective universal shelf registration statement 2023 Shelf Registration with the SEC As with our prior shelf registration statements the 2023 Shelf Registration registers the offering of securities that we may issue from time to time in amounts to be determined Our ability to issue securities is subject to market conditions and with respect to debt securities other factors impacting our borrowing capacity We have not made any offerings of securities under the 2023 Shelf Registration
On April 7 2022 our board of directors authorized us to repurchase up to 300 0 million of our outstanding common stock This authorization replaced a prior board of directors authorization which had 331 400 shares remaining for repurchase In 2022 we repurchased 4 927 499 shares of our common stock on the open market pursuant to this authorization at a total cost of 150 0 million As of November 30 2022 there was 150 0 million of remaining availability under this share repurchase authorization In the 2023 first quarter we repurchased 1 965 442 shares of our common stock on the open market pursuant to this authorization at a total cost of approximately 75 0 million
On March 21 2023 our board of directors authorized us to repurchase up to 500 0 million of our outstanding common stock This authorization replaced the prior board of directors authorization which had 75 0 million remaining In the 2023 second third and fourth quarters we repurchased 7 278 995 shares of our common stock on the open market pursuant to this authorization at a total cost of 336 4 million bringing our total repurchases for the year ended November 30 2023 to 9 244 437 shares of common stock at a total cost of approximately 411 4 million Repurchases under the current authorization may occur periodically through open market purchases privately negotiated transactions or otherwise with the timing and amount at management s discretion and dependent on market business and other conditions This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors and does not obligate us to purchase any shares As of November 30 2023 we were authorized to repurchase up to 163 6 million of our outstanding common stock in additional transactions
As of the date of this report we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business In 2024 we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions During this time we may also engage in capital markets bank loan project debt or other financial transactions including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs The amounts involved in these transactions if any may be material In addition as necessary or desirable we may adjust or amend the terms of and or expand the capacity of the Credit Facility or the LOC Facility or enter into additional letter of credit facilities or other similar facility arrangements in each case with the same or other financial institutions or allow any such facilities or loans to mature or expire Our ability to engage in such transactions may be constrained by volatile or tight economic capital credit and or financial market conditions or other factors including those described below under Outlook and or our liquidity leverage and net worth and we can provide no assurance as to successfully completing the costs of or the operational limitations arising from any one or series of such transactions
The accompanying consolidated financial statements were prepared in conformity with GAAP The preparation of these financial statements requires the use of estimates judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented Actual results could differ from those estimates and assumptions See Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report for a discussion of our significant accounting policies The
following are accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant estimates judgments and or other assumptions in their application
We recognize homebuilding revenue by applying the following steps in determining the timing and amount of revenue to recognize 1 identify the contract s with a customer 2 identify the performance obligations in the contract 3 determine the transaction price 4 allocate the transaction price to the performance obligations in the contract if applicable and 5 recognize revenue when or as we satisfy a performance obligation
Our home sale transactions are made pursuant to contracts under which we typically have a single performance obligation to deliver a completed home to the homebuyer when closing conditions are met Revenues from home sales are recognized when we have satisfied the performance obligation within the sales contract which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date Little to no estimation is involved in recognizing such revenues
We may periodically elect to sell parcels of land to third parties if such assets no longer fit into our strategic operating plans or are zoned for non residential development Revenues from land sales are recognized when we have satisfied the performance obligation s within the sales contract which is generally when title to and possession of the land and the risks and rewards of ownership are transferred to the land buyer on the closing date Certain land sales contracts may require management judgment in determining the appropriate revenue recognition but the impact of such transactions is generally immaterial
Housing and land inventories are stated at cost unless the carrying value is determined not to be recoverable in which case the affected inventories are written down to fair value or fair value less associated costs to sell Fair value is determined based on estimated future net cash flows discounted for inherent risks associated with the real estate assets or other valuation techniques Due to uncertainties in the estimation process and other factors beyond our control it is possible that actual results could differ from those estimated Other than model homes our inventories typically do not consist of completed unsold homes However as discussed above under Item 1 Business in this report we may have unsold completed or partially completed homes in our inventory
We rely on certain estimates to determine our construction and land costs and resulting housing gross profit margins associated with revenues recognized Construction and land costs are comprised of direct and allocated costs including estimated future costs for the limited warranty we provide on our homes and certain amenities within a community Land acquisition land development and other common costs are generally allocated on a relative fair value basis to the homes or lots within the applicable community or land parcel Land acquisition and land development costs include related interest and real estate taxes
In determining a portion of the construction and land costs recognized for each period we rely on project budgets that are based on a variety of assumptions including future construction schedules and costs to be incurred It is possible that actual results could differ from budgeted amounts for various reasons including construction delays construction resource shortages increases in costs that have not yet been committed changes in governmental requirements unforeseen environmental hazards or other unanticipated issues encountered during construction and other factors beyond our control While the actual results for a particular construction project are accurately reported over time variances between the budgeted and actual costs of a project could result in the understatement or overstatement of construction and land costs and homebuilding gross profits in a particular reporting period To reduce the potential for such distortion we have set forth procedures that collectively comprise a critical accounting policy These procedures which we have applied on a consistent basis include assessing updating and revising project budgets on a monthly basis obtaining commitments to the extent possible from independent contractors and vendors for future costs to be incurred reviewing the adequacy of warranty accruals and historical warranty claims experience and utilizing the most current information available to estimate construction and land costs to be charged to expense Variances to the budgeted costs after an estimate has been charged to expense that are related to project costs are generally allocated on a relative fair value basis to the remaining homes to be delivered within the community or land parcel while such variances related to direct construction costs are generally expensed as incurred The variances between budgeted and actual costs have historically not been material to our consolidated financial statements We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of construction and land costs
Each community or land parcel in our owned inventory is assessed to determine if indicators of potential impairment exist Impairment indicators are assessed separately for each community or land parcel on a quarterly basis and include but are not limited to the following significant decreases in net orders average selling prices volume of homes delivered gross profit margins on homes delivered or projected gross profit margins on homes in backlog or future deliveries significant increases in budgeted land development and home construction
costs or cancellation rates or projected losses on expected future land sales If indicators of potential impairment exist for a community or land parcel the identified asset is evaluated for recoverability
When an indicator of potential impairment is identified for a community or land parcel we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset The undiscounted future net cash flows are impacted by then current conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated These factors may include recent trends in our orders backlog cancellation rates and volume of homes delivered as well as our expectations related to the following product offerings market supply and demand including estimated average selling prices and related price appreciation and land development home construction and overhead costs to be incurred and related cost inflation
Generally a community must have a projected gross profit margin percentage below 5 to potentially not meet the recoverability test and proceed to the fair value evaluation described below Our overall housing gross profit margin in the 2023 fourth quarter was 20 7 and as of November 30 2023 only a few communities had gross margins below 5 However if there is a sustained economic slowdown or other factor s that lead to moderate or significant decreases in new home prices in certain submarkets more communities could begin to approach gross margin levels where we would conduct a fair value analysis Any resulting impairment s from such an analysis es could be material Additionally we have 63 5 million of deposits and pre acquisition costs at November 30 2023 related to land option contracts and other similar contracts If there are events that lead to moderate or significant decreases in new home prices we could elect to cancel several such contracts resulting in the write off of the related deposits and pre acquisition costs
The following table presents information regarding inventory impairment and land option contract abandonment charges included in construction and land costs in our consolidated statements of operations dollars in thousands
There were no inventory impairment charges in 2023 The inventory impairment charges in 2022 and 2021 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities mainly by accelerating the overall pace for selling building and delivering homes therein including communities on land previously held for future development
As further described in Note 7 Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report given the inherent challenges and uncertainties in forecasting future results our inventory assessments at the time they are made take into consideration whether a community or land parcel is active meaning whether it is open for sales and or undergoing development or whether it is being held for future development or held for sale
We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate These real estate assets are written down to fair value which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset or other valuation techniques
We record an inventory impairment charge on land held for sale when the carrying value of the real estate asset is greater than its fair value These real estate assets are written down to fair value less associated costs to sell The fair value of such real estate assets is generally based on bona fide letters of intent from outside parties executed sales contracts broker quotes or similar information
Our inventory controlled under land option contracts and other similar contracts is assessed to determine whether it continues to meet our investment return standards Assessments are made separately for each optioned land parcel on a
quarterly basis and are affected by the following factors relative to the market in which the asset is located among others current and or anticipated net orders average selling prices and volume of homes delivered estimated land development and home construction costs and projected profitability on expected future housing or land sales When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and or changes in our marketing strategy we write off the related inventory costs including non refundable deposits and unrecoverable pre acquisition costs
The estimated remaining life of each community or land parcel in our inventory depends on various factors such as the total number of lots remaining the expected timeline to acquire and entitle land and develop lots to build homes the anticipated future net order and cancellation rates and the expected timeline to build and deliver homes sold While it is difficult to determine a precise timeframe for any particular inventory asset based on current market conditions and expected delivery timelines we estimate our inventory assets remaining operating lives to range generally from one year to in excess of 10 years and expect to realize on an overall basis the majority of our inventory balance as of November 30 2023 within five years The following table presents as of November 30 2023 and 2022 respectively the estimated timeframe of delivery for the last home in an applicable community or land parcel and the corresponding percentage of total inventories such categories represent within our inventory balance dollars in millions
The inventory balances in the 0 2 years and 3 5 years categories were located throughout all of our homebuilding reporting segments though mostly in our West Coast Southwest and Central segments These categories collectively represented 96 and 93 of our total inventories as of November 30 2023 and 2022 respectively The inventory balances in the 6 10 years and greater than 10 years categories were primarily located in our Central and Southeast segments and together totaled 201 0 million at November 30 2023 compared to 387 2 million at November 30 2022 The inventories in the 6 10 years and greater than 10 years categories as of November 30 2023 and 2022 were mostly comprised of active multi phase communities with large remaining land positions
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances particularly as to land held for future development it is possible that actual results could differ substantially from those estimated especially in periods of volatile housing market or economic conditions
Deterioration in the supply and demand factors in the overall housing market or in an individual market or submarket or changes to our operational or selling strategy at certain communities may lead to additional inventory impairment charges future charges associated with land sales or the abandonment of land option contracts or other similar contracts related to certain assets Due to the nature or location of the projects land held for future development that we activate as part of our strategic growth initiatives or to accelerate sales and or our return on investment or that we otherwise monetize to help improve our asset efficiency may have a somewhat greater likelihood of being impaired than other of our active inventory
We believe the carrying value of our inventory balance as of November 30 2023 is recoverable Our considerations in making this determination include the factors and trends incorporated into our impairment analyses and as applicable the prevailing regulatory environment competition from other homebuilders inventory levels and sales activity of resale homes and the local economic conditions where an asset is located In addition we consider the financial and operational status and expectations of our inventories as well as unique attributes of each community or land parcel that could be viewed as indicators for potential future impairments However if conditions in the overall housing market or in a specific market or submarket worsen in the future beyond our current expectations including among other things from increases in mortgage interest rates higher inflation worsening supply chain and or other production related challenges or if future changes in our business strategy significantly affect any key assumptions used in our projections of future cash flows or if there are material changes in any of the other items we consider in assessing recoverability we may recognize charges in future periods for inventory impairments or land option contract abandonments or both related to our current inventory assets Any such charges could be material to our consolidated financial statements
We provide a limited warranty on all of our homes The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each
home is recognized In assessing our overall warranty liability at a reporting date we evaluate the costs for warranty related items on a combined basis for all of our previously delivered homes that are under our limited warranty program
Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience Factors that affect our warranty liability include the number of homes delivered historical and anticipated rates of warranty claims and cost per claim We periodically assess the adequacy of our accrued warranty liability which is included in accrued expenses and other liabilities in our consolidated balance sheets and adjust the amount as necessary based on our assessment
Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience and considers our home construction quality and customer service initiatives and outside events
Based on this assessment we may from time to time adjust our warranty accrual rates which would be applied on a prospective basis to homes delivered Although adjustments to the accrual rates are generally infrequent they may be necessary when actual warranty expenditures have increased or decreased on a sustained basis as was the case in recent years when we reduced our warranty accrual rates to reflect favorable trends in our warranty expenditures Based on our assessment we may also make adjustments to our previously recorded accrued warranty liability Such adjustments are recorded in the period in which the change in estimate occurs In 2023 we made adjustments to increase our accrued warranty liability by 4 0 million In 2021 we made adjustments to reduce our accrued warranty liability by 4 0 million There were no such adjustments during 2022 While we believe we may 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 as discussed above under Item 1A Risk Factors in this report as of the date of this report we have not made any adjustments to our accrued liabilities associated with this potential risk We have not made any material changes in the methodology used to establish our accrued warranty liability during 2023 2022 and 2021 Our accrued warranty liability is presented on a gross basis for all years without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties if any Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties if any are recorded as receivables when such recoveries are considered probable
While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate unanticipated changes or developments in the legal environment local weather land or environmental conditions quality of materials or methods used in the construction of homes or customer service practices and or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates
We maintain and require the majority of our independent contractors to maintain general liability insurance including construction defect and bodily injury coverage and workers compensation insurance These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities subject to certain self insured retentions deductibles and other coverage limits We self insure a portion of our overall risk through the use of a captive insurance subsidiary In Arizona California Colorado and Nevada our contractors general liability insurance primarily takes the form of a wrap up policy under a program where eligible independent contractors are enrolled as insureds on each community Enrolled contractors generally contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work
We record liabilities based on the estimated costs required to cover reported claims claims incurred but not yet reported and claim adjustment expenses These estimated costs are based on an actuarial analysis of our historical claims and expense data as well as industry data Our self insurance liabilities are presented on a gross basis without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties if any
The amount of our self insurance liability is based on an analysis performed by a third party actuary that uses our historical claim and expense data as well as industry data to estimate these overall costs These estimates are subject to uncertainty due to a variety of factors the most significant being the long period of time between the delivery of a home to a homebuyer and when a structural warranty or construction defect claim may be made and the ultimate resolution of any such construction defect claim Though state regulations vary construction defect claims are reported and resolved over a long period of time which can extend for 10 years or more As a result the majority of the estimated self insurance liability based on the actuarial analysis relates to claims incurred but not yet reported Therefore adjustments related to individual existing claims generally do not significantly impact the overall estimated liability Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs During 2023 2022 and 2021 we recorded adjustments to increase our previously recorded liabilities by 6 5 million 7 0 million and 6 8 million respectively The adjustments in 2023 2022 and 2021 resulted from changes in estimates due to actual claims experience differing from previous actuarial projections and in turn impacting actuarial estimates for existing and potential future claims We have not made any material changes in our methodology used to establish our self insurance liabilities during 2023 2022 or 2021
The projection of losses related to these liabilities requires the use of actuarial assumptions Key assumptions used in developing these estimates include claim frequencies severities and resolution patterns which can occur over an extended period of time These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made and the ultimate resolution of such claim uncertainties regarding such claims relative to our markets and the types of product we build and legal or regulatory actions and or interpretations among other factors Due to the degree of judgment involved and the potential for variability in these underlying assumptions our actual future costs could differ from those estimated In addition changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis which could be material to our consolidated financial statements A 10 increase in the claim frequency and the average cost per claim used to estimate the self insurance liability would result in increases of approximately 28 6 million in our liability and approximately 9 9 million in our receivable as of November 30 2023 and additional expense of approximately 18 7 million for 2023 A 10 decrease in the claim frequency and the average cost per claim used to estimate the self insurance liability would result in decreases of approximately 25 8 million in our liability and approximately 7 6 million in our receivable as of November 30 2023 and a reduction to expense of approximately 18 2 million for 2023
Estimates of insurance recoveries and amounts we have paid on behalf of other parties if any are recorded as receivables when such recoveries are considered probable These estimated recoveries are principally based on actuarially determined amounts and depend on various factors including among other things the above described claim cost estimates our insurance policy coverage limits for the applicable policy year s historical third party recovery rates insurance industry practices the regulatory environment and legal precedent and are subject to a high degree of variability from year to year Because of the inherent uncertainty and variability in these assumptions our actual insurance recoveries could differ significantly from amounts currently estimated
We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable Assessing the probability of losses and estimating probable losses requires analysis of multiple factors including in some cases judgments about the potential actions of third party claimants regulatory agencies mediators arbitrators responsible third parties and or courts as the case may be Recorded contingent liabilities are based on the most recent information available and actual losses in any future period are inherently uncertain If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims we would record additional charges during the period in which the actual loss or change in estimate occurred In addition to contingent liabilities recorded for probable losses we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability While we cannot predict the outcome of pending legal matters with certainty we do not believe any currently identified claim or proceeding either individually or in aggregate will have a material impact on our results of operations financial position or cash flows
As discussed in Note 14 Income Taxes in the Notes to the Consolidated Financial Statements in this report we evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a more likely than not standard with respect to whether deferred tax assets will be realized This evaluation considers among other factors our historical operating results our expectation of future profitability the duration of the applicable statutory carryforward periods and conditions in the housing market and the broader economy The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible The value of our deferred tax assets in our consolidated balance sheets depends on applicable income tax rates We base our estimate of deferred tax assets and liabilities on current tax laws and rates In certain cases we also base this estimate on business plan forecasts and other expectations about future outcomes Changes in positive and negative evidence including differences between our future operating results and estimates could result in the establishment of an additional valuation allowance against our deferred tax assets Accounting for deferred taxes is based upon estimates of future results Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and or tax returns Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated financial statements Also changes in existing federal and state tax laws and corporate income tax rates could affect future tax results and the realization of deferred tax assets over time
We recognize accrued interest and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of the provision for income taxes Our liability for unrecognized tax benefits combined with accrued interest and penalties is reflected as a component of accrued expenses and other liabilities in our consolidated balance sheets Judgment is required in evaluating uncertain tax positions We evaluate our uncertain tax positions quarterly based on various factors including changes in facts or circumstances tax laws or the status of audits by tax authorities Changes in the recognition or measurement of uncertain tax positions could have a material impact on our consolidated financial statements in the period in which we make the change
Since 2021 product and labor costs and general inflation in the economy have increased and remained elevated compared to the prior decade In turn we experienced rising land and construction costs particularly for building materials and construction service providers rates warranty repair costs and compensation and benefit expenses to attract and retain talent These trends are expected to continue to an extent in 2024 though they may worsen compared to prior years We generally enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes a significant period of time before development and or sales efforts commence Accordingly to the extent land acquisition costs are fixed subsequent increases or decreases in our home selling prices will affect our profits As the selling price of each of our homes is fixed at the time a buyer enters into a home sales contract and because we generally commence construction of a home only after we have a signed sales contract with a homebuyer any interim construction related cost inflation can result in lower housing gross profit margins In order to help but not entirely moderate that effect we typically enter into fixed price contracts with our larger trade partners and building material suppliers for specified periods of time
Inflation is often accompanied by higher and more volatile interest rates which may negatively impact housing affordability and the confidence of potential homebuyers and adversely impact demand for our homes Inflation may also increase our financing costs as borrowings under our Credit Facility if any and Term Loan typically accrue interest at a variable rate based on SOFR
We expect the inflationary pressures on our business to continue in 2024 While we attempt to pass on increases in our costs through increased home selling prices including for design options and upgrades market forces and buyer affordability constraints can limit our ability to do so If we are unable to raise selling prices enough to compensate for higher costs or our borrowing costs increase significantly our revenues housing gross profit margin and net income could be adversely affected
We believe several long term housing market fundamental factors remain positive including favorable demographics a decade plus underproduction of new homes in relation to population growth and constrained resale home inventory Beginning with the 2023 second quarter supported by these positive factors and even with elevated mortgage interest rates demand was relatively steady for new homes and for homes at our price points There is considerable uncertainty regarding the near term direction of mortgage interest rates inflation consumer confidence and the general economy and the degree to which these factors individually or collectively may impact demand for our homes in 2024 However we believe we are well positioned to meet changing market conditions with our differentiated highly customer centric Built to Order business model and operational capabilities affordable product offerings lot supply strong balance sheet and liquidity We also believe with our substantial backlog value of 2 67 billion at November 30 2023 improved construction cycle times normalizing cancellation rates and planned community count growth we can achieve our projected results for 2024 subject to the factors and risks described in this report
We plan to continue to focus on generating cash flows from our homebuilding operations and on balancing pace price and construction starts at each community to optimize our return on each inventory asset within its market context We anticipate the pricing adjustments and other homebuyer concessions we have selectively employed since the 2022 second half will contribute to a year over year decrease in the average selling price of homes delivered in 2024 Our use of such concessions in 2024 will depend on among other things market dynamics including mortgage interest rates and overall housing affordability as well as community specific considerations including the size and construction stage of the backlog net order pace and lots remaining available for sale We are committed to further reducing our build times in 2024 and moving closer to our historical levels of between four and five months While we expect our land acquisition activity to increase during 2024 as compared to 2023 our investments in land and land development will depend significantly on market conditions and available opportunities that meet our investment return standards
We intend to maintain a balanced approach to capital allocation designed to maximize long term stockholder value In this regard we ended 2023 with approximately 163 6 million remaining under our current board of directors share repurchase authorization This provides us flexibility to continue to repurchase our common stock in 2024 with the volume and timing based on considerations of our operating cash flow liquidity outlook land investment opportunities and needs the market price of our common stock and the housing market and general economic environments
Since our 2023 fiscal year ended housing demand has improved significantly in conjunction with a steady decline in mortgage interest rates Through the first six weeks of our 2024 first quarter we generated 1 170 net orders compared to 568 in the year earlier period From this trend we anticipate our full 2024 first quarter year over year net order comparison will be favorable though at a more moderate level than we have generated in our first six weeks due to the depressed net order activity we experienced in the same prior year period Our present outlook for the 2024 first quarter and full year as to certain metrics are as follows
We expect to generate housing revenues in the range of 1 40 billion to 1 50 billion compared to 1 38 billion for the corresponding 2023 period and anticipate our average selling price to be approximately 477 000 compared to 494 500 in the year earlier period
In addition to factors discussed elsewhere in this report our future performance and the strategies we implement and adjust or refine as necessary or appropriate will depend significantly on prevailing economic employment homebuilding industry and capital credit and financial market conditions and on a fairly stable and constructive political and regulatory environment particularly in regard to housing and mortgage loan financing policies For instance the Federal Reserve s aggressive raising of the federal funds interest rate and other measures during 2022 and 2023 to moderate persistent U S inflation created significant and ongoing headwinds for the housing market tempering consumer demand for homes and disrupting credit and lending markets In addition while we experienced improvement with respect to supply chain related disruptions as described in this Management s Discussion and Analysis of Financial Condition and Results of Operations we believe they will persist to a certain degree in 2024 The potential extent and effect of these factors on our business is highly uncertain unpredictable and outside our control and our past performance including in 2023 should not be considered indicative of our future results on any metric or set of metrics including but not limited to our net orders backlog revenues and returns
Investors are cautioned that certain statements contained in this report as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts stockholders and others during presentations are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 the Act Statements that are predictive in nature that depend upon or refer to future events or conditions or that include words such as expect anticipate intend plan believe estimate hope and similar expressions constitute forward looking statements In addition any statements that we may make or provide concerning future financial or operating performance including without limitation future revenues community count homes delivered net orders selling prices sales pace per new community expenses expense ratios housing gross profits housing gross profit margins earnings or earnings per share or growth or growth rates future market conditions future interest rates and other economic conditions ongoing business strategies or prospects future dividends and changes in dividend levels the value of our backlog including amounts that we expect to realize upon delivery of homes included in our backlog and the timing of those deliveries the value of our net orders potential future asset acquisitions and the impact of completed acquisitions future share issuances or repurchases future debt issuances repurchases or redemptions and other possible future actions are also forward looking statements as defined by the Act Forward looking statements are based on our current expectations and projections about future events and are subject to risks uncertainties and assumptions about our operations economic and market factors and the homebuilding industry among other things These statements are not guarantees of future performance and we have no specific policy or intention to update these statements If we update or revise any such statement s no assumption should be made that we will further update or review that statement s or update or revise any other such statement s In addition forward looking and other statements in this report and in other public or oral disclosures that express or contain opinions views or assumptions about market or economic conditions the success performance effectiveness and or relative positioning of our strategies initiatives or operational activities and other matters may be based in whole or in part on general observations of our management limited or anecdotal evidence and or business or industry experience without in depth or any particular empirical investigation inquiry or analysis
Actual events and results may differ materially from those expressed or forecasted in forward looking statements due to a number of factors The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward looking statements include but are not limited to the following
material and trade costs and availability including building materials and appliances and delays related to state and municipal construction permitting inspection and utility processes which have been disrupted by key equipment shortages
changes in interest rates including those set by the Federal Reserve which the Federal Reserve has increased sharply over the past year and may further increase to moderate inflation and those available in the capital markets or from financial institutions and other lenders and applicable to mortgage loans
the ability and willingness of the applicable lenders and financial institutions or any substitute or additional lenders and financial institutions to meet their commitments or fund borrowings extend credit or provide payment guarantees to or for us under the Credit Facility or LOC Facility
any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government s operations also known as a government shutdown and financial markets and businesses reactions to any such failure
government actions policies programs and regulations directed at or affecting the housing market including the tax benefits associated with purchasing and owning a home and the standards fees and size limits applicable to the purchase or insuring of mortgage loans by government sponsored enterprises and government agencies the homebuilding industry or construction activities
changes in existing tax laws or enacted corporate income tax rates including those resulting from regulatory guidance and interpretations issued with respect thereto such as the IRS recent guidance regarding heightened qualification requirements for federal tax credits for building energy efficient homes
disruptions in world and regional trade flows economic activity and supply chains due to the military conflicts and other attacks in the Middle East region and in Ukraine including those stemming from wide ranging sanctions the U S and other countries have imposed or may further impose on Russian business sectors financial organizations individuals and raw materials the impact of which may among other things increase our operational costs create and or exacerbate building materials and appliance shortages and or reduce our revenues and earnings
costs and or charges arising from regulatory compliance requirements or from legal arbitral or regulatory proceedings investigations claims or settlements including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards penalties fines or other direct or indirect payments or injunctions consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and or accruals
our ability to successfully implement our current and planned strategies and initiatives related to our product geographic and market positioning gaining share and scale in our served markets and in entering into new markets
our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives including those discussed in this report or in any of our other public filings presentations or disclosures
the ability of our homebuyers to obtain homeowners and flood insurance policies and or typical or lender required policies for other hazards or events for their homes which may depend on the ability and willingness of insurers or government funded or sponsored programs to offer coverage at an affordable price or at all
the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services which may depend on the ability and willingness of lenders and financial institutions to offer such loans and services to our homebuyers
an epidemic pandemic or significant seasonal or other disease outbreak and the control response measures that international federal state and local governments agencies law enforcement and or health authorities implement to address it which may precipitate or exacerbate one or more of the above mentioned and or other risks and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period
We enter into debt obligations primarily to support general corporate purposes including the operations of our subsidiaries We are subject to interest rate risk on our debt For fixed rate debt changes in interest rates generally affect the fair value of the debt instrument but not our earnings or cash flows Conversely for variable rate debt changes in interest rates generally do not impact the fair value of the debt instrument but may affect our future earnings and cash flows We generally have no obligation to prepay our debt before maturity and as a result interest rate risk and changes in fair market value should not have a significant impact on our fixed rate debt until we are required or elect to refinance or repurchase such debt Under our current policies we do not use interest rate derivative instruments to manage our exposure to changes in interest rates
The following tables present principal cash flows by scheduled maturity weighted average effective interest rates and the estimated fair value of our debt obligations as of November 30 2023 and 2022 dollars in thousands
a The interest rate for our variable rate debt which is solely comprised of the Term Loan represents the weighted average interest rate in effect at November 30 2023 Based upon the amount of variable rate debt outstanding at November 30 2023 and holding the variable rate debt balance constant each 100 basis point increase in the interest rate would increase the interest we incur by approximately 3 6 million per year
b The interest rates for our variable rate debt which was comprised of borrowings outstanding under the Credit Facility and the Term Loan represents the weighted average interest rates in effect at November 30 2022
The tables above do not include debt of our unconsolidated joint ventures For a discussion pertaining to the debt of our homebuilding and financial services unconsolidated joint ventures see Note 9 Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report
Our financial services unconsolidated joint venture KBHS is exposed to interest rate risk as it relates to its lending activities including originating mortgage loans and providing IRLCs to customers KBHS enters into best efforts forward sale commitments with secondary market investors to manage the risk of adverse interest rate movements that could impact the fair value of IRLCs Best efforts forward sale commitments allow KBHS to agree on the sales price of the underlying loans that will be realized upon their sale into the secondary market KBHS does not engage in speculative or trading derivative activities KBHS entire loan portfolio is held for sale and subject to best efforts forward sale commitments Further information is provided in Note 9 Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report
Separate combined financial statements of our unconsolidated joint venture activities have been omitted because if considered in the aggregate they would not constitute a significant subsidiary as defined by Rule 3 09 of Regulation S X
KB Home is a builder of attached and detached single family residential homes townhomes and condominiums As of November 30 2023 we conducted ongoing operations in Arizona California Colorado Florida Idaho Nevada North Carolina Texas and Washington We also offer property and casualty insurance and in certain instances earthquake flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments and provide title services in the majority of our markets located within our Southwest Central and Southeast homebuilding reporting segments We offer mortgage banking services including mortgage loan originations to our homebuyers indirectly through KBHS which is an unconsolidated joint venture between us and a third party
Our consolidated financial statements have been prepared in accordance with GAAP and include our accounts and those of the consolidated subsidiaries in which we have a controlling financial interest All intercompany balances and transactions have been eliminated in consolidation Investments in unconsolidated joint ventures in which we have less than a controlling financial interest are accounted for using the equity method
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes Actual results could differ from those estimates
We consider all highly liquid short term investments purchased with an original maturity of three months or less to be cash equivalents Our cash equivalents totaled 508 2 million at November 30 2023 and 15 8 million at November 30 2022 At November 30 2023 and 2022 our cash equivalents were mainly invested in interest bearing bank deposit accounts and money market funds
We record receivables net of an allowance for doubtful accounts This allowance for potential losses is established or maintained for expected uncollectible receivables The allowance is estimated based on our evaluation of the receivables taking into account historical collection experience general economic conditions specific credit risk of the counterparties and other relevant information
Property and equipment are recorded at cost and are depreciated using the straight line method over their estimated useful lives as follows computer software and equipment two to 15 years model furnishings and sales office improvements two to three years office furniture and equipment three to 10 years and leasehold improvements life of the lease Repair and maintenance costs are expensed as incurred Depreciation expense totaled 36 4 million in 2023 32 3 million in 2022 and 28 6 million in 2021
We recognize homebuilding revenue by applying the following steps in determining the timing and amount of revenue to recognize 1 identify the contract s with a customer 2 identify the performance obligations in the contract 3 determine the transaction price 4 allocate the transaction price to the performance obligations in the contract if applicable and 5 recognize revenue when or as we satisfy a performance obligation
Our home sale transactions are made pursuant to contracts under which we typically have a single performance obligation to deliver a completed home to the homebuyer when closing conditions are met Revenues from home sales are recognized when we have satisfied the performance obligation within the sales contract which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date Under our home sales contracts we typically receive an initial cash deposit from the homebuyer at the time the sales contract is executed and receive the remaining consideration to which we are entitled through a third party escrow agent at closing Customer deposits related to sold but undelivered homes are included in accrued expenses and other liabilities
Concurrent with the recognition of revenues in our consolidated statements of operations sales incentives in the form of price concessions on the selling price of a home or mortgage related concessions are recorded as a reduction of revenues When we provide sales incentives in the form of free products or services to homebuyers the costs of the free products or services are reflected as construction and land costs because such incentives are identified in our home sales contracts with homebuyers as an intrinsic part of our single performance obligation to deliver and transfer title to their home for the transaction price stated in the contracts Sales incentives that we may provide in the form of closing cost allowances are immaterial to the related revenues Cash proceeds from home sale closings held by third party escrow agents for our benefit typically for less than five days are considered deposits in transit and classified as cash
We may periodically elect to sell parcels of land to third parties if such assets no longer fit into our strategic operating plans or are zoned for non residential development Land sale transactions are made pursuant to contracts under which we typically have a performance obligation s to deliver specified land parcels to the buyer when closing conditions are met We evaluate each land sales contract to determine our performance obligation s under the contract including whether we have a distinct promise to perform post closing land development work that is material within the context of the contract and use objective criteria to determine our completion of the applicable performance obligation s whether at a point in time or over time Revenues from land sales are recognized when we have satisfied the performance obligation s within the sales contract which is generally when title to and possession of the land and the risks and rewards of ownership are transferred to the land buyer on the closing date Under our land sales contracts we typically receive an initial cash deposit from the buyer at the time the contract is executed and receive the remaining consideration to which we are entitled through a third party escrow agent at closing In the limited circumstances where we provide financing to the land buyer we determine that collectability of the receivable is reasonably assured before we recognize revenue
In instances where we have a distinct and material performance obligation s within the context of a land sales contract to perform land development work after the closing date a portion of the transaction price under the contract is allocated to such performance obligation s and is recognized as revenue over time based upon our estimated progress toward the satisfaction of the performance obligation s We generally measure our progress based on our costs incurred relative to the total costs expected to satisfy the performance obligation s While the payment terms for such a performance obligation s vary we generally receive the final payment when we have completed our land development work to the specifications detailed in the applicable land sales contract and it has been accepted by the land buyer
Homebuilding revenues include forfeited deposits which occur when home sales or land sales contracts if any that involve a nonrefundable deposit are cancelled Revenues from forfeited deposits are immaterial
Construction and land costs are comprised of direct and allocated costs including estimated future costs for the limited warranty we provide on our homes and certain amenities within a community Land acquisition land development and other common costs are generally allocated on a relative fair value basis to the homes or lots within the applicable community or land parcel Land acquisition and land development costs include related interest and real estate taxes
Our homebuilding operations accounted for 99 5 99 7 and 99 7 of our total revenues for the years ended November 30 2023 2022 and 2021 respectively with most of those revenues generated from home sales contracts with customers Due to the nature of our revenue generating activities we believe the disaggregation of revenues as reported in our consolidated statements of operations and as disclosed by homebuilding reporting segment in Note 2 Segment Information and for our financial services reporting segment in Note 3 Financial Services fairly depicts how the nature amount timing and uncertainty of cash flows are affected by economic factors
Housing and land inventories are stated at cost unless the carrying value is determined not to be recoverable in which case the affected inventories are written down to fair value or fair value less associated costs to sell Real estate assets such as our housing and land inventories are tested for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable Recoverability is measured by comparing the carrying value of an asset to the undiscounted future net cash flows expected to be generated by the asset These impairment evaluations are significantly impacted by estimates for the amounts and timing of future revenues costs and expenses and other factors If the carrying value of a real estate asset is determined not to be recoverable the impairment charge to be recognized is measured by the amount by which the carrying value of the affected asset exceeds its estimated fair value For land held for sale if the fair value less associated costs to sell exceeds the asset s carrying value no impairment charge is recognized
Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers as applicable In the case of land held for future development and land held for sale applicable interest is expensed as incurred
Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable For these real estate assets fair value is determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset or other valuation techniques
Our financial instruments consist of cash and cash equivalents corporate owned life insurance outstanding borrowings under the Credit Facility if any and the Term Loan senior notes and mortgages and land contracts due to land sellers and
other loans Fair value measurements of financial instruments are determined by various market data and other valuation techniques as appropriate When available we use quoted market prices in active markets to determine fair value
Our financial services reporting segment which includes the operations of KB HOME Mortgage Company generates revenues primarily from insurance commissions and title services Revenues from title services are recognized when policies are issued which generally occurs at the time each applicable home sale is closed We receive commissions from various third party insurance carriers for arranging for the carriers to provide homeowner and other insurance policies for our homebuyers that elect to obtain such coverage In addition each time a homebuyer renews their insurance policy with the insurance carrier we receive a renewal commission Revenues from insurance commissions are recognized when the insurance carrier issues an initial insurance policy to our homebuyer which generally occurs at the time each applicable home sale is closed As our performance obligations for policy renewal commissions are satisfied upon issuance of the initial insurance policy insurance commissions for renewals are considered variable consideration Accordingly we estimate the probable future renewal commissions when an initial policy is issued and record a corresponding contract asset and insurance commission revenues We estimate the amount of variable consideration based on historical renewal trends and constrain the estimate such that it is probable that a significant reversal of cumulative recognized revenue will not occur We also consider the likelihood and magnitude of a potential future reversal of revenue and update our assessment at the end of each reporting period The contract assets for estimated future renewal commissions are included in other assets within our financial services reporting segment
We provide a limited warranty on all of our homes We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience Factors that affect our warranty liability include the number of homes delivered historical and anticipated rates of warranty claims and cost per claim We periodically assess the adequacy of our accrued warranty liability and adjust the amount as necessary based on our assessment Our warranty liability is presented on a gross basis for all years without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties if any Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties if any are recorded as receivables when such recoveries are considered probable
We self insure a portion of our overall risk through the use of a captive insurance subsidiary We record liabilities based on the estimated costs required to cover reported claims claims incurred but not yet reported and claim adjustment expenses These estimated costs are based on an actuarial analysis of our historical claims and expense data as well as industry data Our self insurance liability is presented on a gross basis for all years without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties if any Estimates of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties if any are recorded as receivables when such recoveries are considered probable
Community sales office and other marketing and model home related costs are either recorded as inventories capitalized as property and equipment or expensed to selling general and administrative expenses as incurred Costs related to the construction of a model home inclusive of upgrades that will be sold as part of the home are recorded as inventories and recognized as construction and land costs when the model home is delivered to a homebuyer Costs to furnish and ready a model home or on site community sales facility that will not be sold as part of the model home such as costs for model furnishings community sales office and model complex grounds sales office construction and sales office furniture and equipment are capitalized as property and equipment under model furnishings and sales office improvements Model furnishings and sales office improvements are depreciated to selling general and administrative expenses over their estimated useful lives Other costs related to the marketing of a community removing the on site community sales facility and readying a completed model home for sale are expensed to selling general and administrative expenses as incurred
Legal fees associated with litigation and similar proceedings that are not expected to provide a benefit in future periods are generally expensed as incurred Legal fees associated with land acquisition and development and other activities that are expected to provide a benefit in future periods are capitalized to inventories in our consolidated balance sheets as incurred We expensed legal fees of 10 4 million in 2023 10 6 million in 2022 and 11 5 million in 2021
We measure and recognize compensation expense associated with our grant of equity based awards at an amount equal to the fair value of share based payments granted under compensation arrangements over the vesting period We estimate the fair value of stock options granted using the Black Scholes option pricing model with assumptions
based primarily on historical data We estimate the fair value of other equity based awards using the closing price of our common stock on the grant date For PSUs we recognize compensation expense ratably over the vesting period when it is probable that stated performance targets will be achieved and record cumulative adjustments in the period in which estimates change We account for forfeitures of equity based awards as they occur
The provision for or benefit from income taxes is calculated using the asset and liability method under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required This evaluation is based on the consideration of all available positive and negative evidence using a more likely than not standard with respect to whether deferred tax assets will be realized The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible The value of deferred tax assets in our consolidated balance sheets depends on applicable income tax rates
The accumulated balances of other comprehensive loss in the consolidated balance sheets as of November 30 2023 and 2022 were comprised solely of adjustments recorded directly to accumulated other comprehensive loss related to our benefit plan obligations Such adjustments are made annually as of November 30 when our benefit plan obligations are remeasured
We compute earnings per share using the two class method which is an allocation of earnings between the holders of common stock and a company s participating security holders Our outstanding nonvested shares of restricted stock contain non forfeitable rights to dividends and therefore are considered participating securities for purposes of computing earnings per share pursuant to the two class method We had no other participating securities at November 30 2023 2022 or 2021
In June 2016 the Financial Accounting Standards Board FASB issued Accounting Standards Update No 2016 13 Financial Instruments Credit Losses Topic 326 Measurement of Credit Losses on Financial Instruments ASU 2016 13 which changes the impairment model for most financial assets and certain other instruments from an incurred loss approach to a new expected credit loss methodology On December 1 2020 we adopted ASU 2016 13 using the modified retrospective method and recorded a cumulative effect adjustment to decrease beginning retained earnings by 2 million net of tax to establish an allowance for credit losses for certain receivables on our consolidated balance sheet The adoption of ASU 2016 13 did not materially impact our consolidated statements of operations or cash flows
In November 2023 the FASB issued Accounting Standards Update No 2023 07 Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures ASU 2023 07 which is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses The guidance is effective for fiscal years beginning after December 15 2023 and interim periods within fiscal years beginning after December 15 2024 Early adoption is permitted The guidance is to be applied retrospectively to all prior periods presented in the financial statements Upon transition the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures
In December 2023 the FASB issued Accounting Standards Update No 2023 09 Income Taxes Topic 740 Improvements to Income Tax Disclosures ASU 2023 09 which modifies the rules on income tax disclosures to require entities to disclose 1 specific categories in the rate reconciliation 2 the income or loss from continuing operations before income tax expense or benefit separated between domestic and foreign and 3 income tax expense or benefit from continuing operations separated by federal state and foreign ASU 2023 09 also requires entities to disclose their income tax payments to international federal state and local jurisdictions among other changes The guidance is effective for annual periods beginning after December 15 2024 Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance ASU 2023 09 should be applied on a prospective basis but retrospective application is permitted We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures
An operating segment is defined as a component of an enterprise for which separate financial information is available and for which segment results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance We have identified each of our homebuilding divisions as an operating segment Our homebuilding operating segments have been aggregated into four homebuilding reporting segments based primarily on similarities in economic and geographic characteristics product types regulatory environments methods used to sell and construct homes and land acquisition characteristics We also have one financial services reporting segment Management evaluates segment performance primarily based on segment pretax results
Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first time first move up and active adult homebuyers Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers They also earn revenues from the sale of land
Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services We offer mortgage banking services including mortgage loan originations to our homebuyers indirectly through KBHS our unconsolidated joint venture with GR Alliance a subsidiary of Guaranteed Rate Inc We and GR Alliance each have a 50 0 ownership interest with GR Alliance providing management oversight of KBHS operations The financial services reporting segment is separately reported in our consolidated financial statements
Corporate and other is a non operating segment that develops and oversees the implementation of company wide strategic initiatives and provides support to our reporting segments by centralizing certain administrative functions Corporate management is responsible for among other things evaluating and selecting the geographic markets in which we operate consistent with our overall business strategy allocating capital resources to markets for land acquisition and development activities making major personnel decisions related to employee compensation and benefits and monitoring the financial and operational performance of our divisions Corporate and other includes general and administrative expenses related to operating our corporate headquarters A portion of the expenses incurred by Corporate and other is allocated to our homebuilding reporting segments
Our reporting segments follow the same accounting policies used for our consolidated financial statements as described in Note 1 Summary of Significant Accounting Policies The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent stand alone entity during the periods presented nor are they indicative of the results to be expected in future periods
In 2023 2022 and 2021 no outstanding stock options were excluded from the diluted earnings per share calculation Contingently issuable shares associated with outstanding PSUs were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied
These receivables typically relate to infrastructure improvements we make with respect to our communities We are generally reimbursed for the cost of such improvements when they are accepted by the utility company improvement district or municipality or after certain events occur depending on the terms of the applicable agreements These events may include but are not limited to the connection of utilities or the issuance of bonds by the respective improvement districts or municipalities
Homes completed or under construction is comprised of costs associated with homes completed or in various stages of construction and includes direct construction and related land acquisition and land development costs Land under development primarily consists of land acquisition and land development costs Land development costs include capitalized interest and real estate taxes When home construction begins the associated land acquisition and land development costs are included in homes under construction
Land under development at November 30 2023 and 2022 included land held for future development of 17 0 million and 10 2 million respectively Land held for future development principally relates to land where development activity has been suspended or has not yet begun but is expected to occur in the future These assets are generally located in submarkets where
conditions do not presently support further investment or development or are subject to a building permit moratorium or regulatory restrictions or are portions of larger land parcels that we plan to build out over several years and or that have not yet been entitled
Each community or land parcel in our owned inventory is assessed to determine if indicators of potential impairment exist Impairment indicators are assessed separately for each community or land parcel on a quarterly basis and include but are not limited to the following significant decreases in net orders average selling prices volume of homes delivered gross profit margins on homes delivered or projected gross profit margins on homes in backlog or future deliveries significant increases in budgeted land development and home construction costs or cancellation rates or projected losses on expected future land sales If indicators of potential impairment exist for a community or land parcel the identified asset is evaluated for recoverability We evaluated five five and one communities or land parcels for recoverability as of November 30 2023 2022 and 2021 respectively The carrying values of those communities or land parcels evaluated as of November 30 2023 2022 and 2021 were 89 3 million 118 7 million and 29 9 million respectively In addition we evaluated land held for future development for recoverability as of November 30 2023 2022 and 2021 Inventory impairment charges are included in construction and land costs in our consolidated statements of operations
When an indicator of potential impairment is identified for a community or land parcel we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset The undiscounted future net cash flows are impacted by then current conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated These factors may include recent trends in our orders backlog cancellation rates and volume of homes delivered as well as our expectations related to the following product offerings market supply and demand including estimated average selling prices and related price appreciation and land development home construction and overhead costs to be incurred and related cost inflation Based on these recoverability considerations we recognized no inventory impairment charges in 2023 With respect to the year ended November 30 2022 our expectations considered the weakening in U S housing demand in the year s second half rising interest rates and inflation levels and significant year over year decreases in our net orders per community in the 2022 third and fourth quarters driven in part by a substantial increase in cancellations We also considered the year over year decline in our year end backlog both in number of homes and value estimated average selling prices and housing gross profit margins based on the then current and anticipated conditions in the markets where assessed assets are located and ongoing supply chain disruptions and delays with respect to state and municipal permitting inspection and utility processes on our construction cycle times Based on these recoverability considerations we recognized inventory impairment charges for certain inventory assets in the 2022 fourth quarter as described below Our inventory is assessed for potential impairment on a quarterly basis and the assumptions used are reviewed and adjusted as necessary to reflect the market conditions and trends and our expectations at the time each assessment is performed
Given the inherent challenges and uncertainties in forecasting future results our inventory assessments at the time they are made take into consideration whether a community or land parcel is active meaning whether it is open for sales and or undergoing development or whether it is being held for future development or held for sale Due to the short term nature of active communities and land held for sale as compared to land held for future development our inventory assessments generally assume the continuation of then current market conditions subject to identifying information suggesting significant sustained changes in such conditions Our assessments of active communities at the time made generally anticipate net orders average selling prices volume of homes delivered and costs for land development and home construction to continue at or near then current levels through the particular asset s estimated remaining life Inventory assessments for our land held for future development consider then current market conditions as well as subjective forecasts regarding the timing and costs of land
development and home construction and related cost inflation the product s to be offered and the net orders volume of homes delivered and selling prices and related price appreciation of the offered product s when an associated community is anticipated to open for sales We evaluate various factors to develop these forecasts including the availability of and demand for homes and finished lots within the relevant marketplace historical current and expected future sales trends for the marketplace and third party data if available The estimates expectations and assumptions used in each of our inventory assessments are specific to each community or land parcel based on what we believe are reasonable forecasts for their particular performance and may vary among communities or land parcels and may vary over time
We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate These real estate assets are written down to fair value which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset or other valuation techniques Inputs used in our calculation of estimated discounted future net cash flows are specific to each affected real estate asset and are based on our expectations for each such asset as of the applicable measurement date including among others expectations related to average selling prices and volume of homes delivered The discount rates we used were impacted by one or more of the following at the time the calculation was made the risk free rate of return expected risk premium based on estimated land development home construction and delivery timelines market risk from potential future price erosion cost uncertainty due to land development or home construction cost increases and other risks specific to the asset or conditions in the market in which the asset is located
We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value These real estate assets are written down to fair value less associated costs to sell The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties executed sales contracts broker quotes or similar information
The following table summarizes ranges for significant quantitative unobservable inputs we utilized in our fair value measurements with respect to impaired communities other than land held for sale written down to fair value during the years presented
Based on the results of our evaluations we recognized no inventory impairment charges in 2023 In 2022 we recognized inventory impairment charges of 24 1 million related to four communities with a post impairment fair value of 41 3 million In 2021 we recognized inventory impairment charges of 9 9 million related to two communities with a post impairment fair value of 18 0 million The impairment charges in 2022 and 2021 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities mainly by accelerating the overall pace for selling building and delivering homes therein including communities on land previously held for future development If we change our strategy or if there are changes in market conditions for any given asset it is possible that we may recognize additional inventory impairment charges
As of November 30 2023 the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was 73 9 million representing five communities and various other land parcels As of November 30 2022 the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was 102 9 million representing eight communities and various other land parcels
Our inventory controlled under land option contracts and other similar contracts is assessed to determine whether it continues to meet our investment return standards Assessments are made separately for each optioned land parcel on a quarterly basis and are affected by the following factors relative to the market in which the asset is located among others current and or anticipated net orders average selling prices and volume of homes delivered estimated land development and home construction costs and projected profitability on expected future housing or land sales When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and or changes in our marketing strategy we write off the related inventory costs including non refundable deposits and unrecoverable pre acquisition costs Based on the results of our assessments we recognized land option contract abandonment charges of 11 4 million in 2023
The estimated remaining life of each community or land parcel in our inventory depends on various factors such as the total number of lots remaining the expected timeline to acquire and entitle land and develop lots to build homes the anticipated future net order and cancellation rates and the expected timeline to build and deliver homes sold While it is difficult to determine a precise timeframe for any particular inventory asset based on current market conditions and expected delivery timelines we estimate our inventory assets remaining operating lives to range generally from one year to in excess of 10 years and expect to realize on an overall basis the majority of our inventory balance as of November 30 2023 within five years
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances particularly as to land held for future development it is possible that actual results could differ substantially from those estimated especially in periods of volatile housing market or economic conditions
We participate in joint ventures from time to time that conduct land acquisition land development and or other homebuilding activities in various markets where our homebuilding operations are located Our investments in these joint ventures may create a variable interest in a variable interest entity VIE depending on the contractual terms of the arrangement We analyze our joint ventures under the variable interest model to determine whether they are VIEs and if so whether we are the primary beneficiary Based on our analyses we determined that one of our joint ventures at November 30 2023 and 2022 was a VIE but we were not the primary beneficiary of the VIE Therefore all of our joint ventures at November 30 2023 and 2022 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest
In the ordinary course of our business we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes The use of these contracts generally allows us to reduce the market risks associated with direct land ownership and development and reduce our capital and financial commitments including interest and other carrying costs Under these contracts which generally do not contain provisions requiring our specific performance we typically make a specified option payment or earnest money deposit in consideration for the right to purchase land in the future usually at a predetermined price
We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and if so whether we are the primary beneficiary Although we do not have legal title to the underlying land we are required to consolidate a VIE if we are the primary beneficiary In determining whether we are the primary beneficiary we consider among other things whether we have the power to direct the activities of the VIE that most significantly impact the VIE s economic performance Such activities would include among other things determining or limiting the scope or purpose of the VIE selling or transferring property owned or controlled by the VIE or arranging financing for the VIE As a result of our analyses we determined that as of November 30 2023 and 2022 we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts
In addition to the cash deposits presented in the table above our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre acquisition costs of 18 5 million at November 30 2023 and 33 1 million at November 30 2022 These pre acquisition costs and cash deposits were included in inventories in our consolidated balance sheets
For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model we consider whether such contracts should be accounted for as financing arrangements Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third party
land financiers or developers in conjunction with such third parties acquiring a specific land parcel s on our behalf at our direction and those with other landowners where we or our designee make improvements to the optioned land parcel s during the applicable option period For these land option contracts and other similar contracts we record the remaining purchase price of the associated land parcel s in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel s In making this determination with respect to a land option contract we consider the non refundable deposit s we have made and any non reimbursable expenditures we have incurred for land improvement activities or other items up to the assessment date additional costs associated with abandoning the contract and our commitments if any to incur non reimbursable costs associated with the contract As a result of our evaluations of land option contracts and other similar contracts for financing arrangements we recorded inventories in our consolidated balance sheets with a corresponding increase to accrued expenses and other liabilities of 21 5 million at November 30 2023 and 5 1 million at November 30 2022
We have investments in unconsolidated joint ventures that conduct land acquisition land development and or other homebuilding activities in various markets where our homebuilding operations are located We and our unconsolidated joint venture partners make initial and or ongoing capital contributions to these unconsolidated joint ventures typically on a pro rata basis according to our respective equity interests The obligations to make capital contributions are governed by each such unconsolidated joint venture s respective operating agreement and related governing documents Our partners in these unconsolidated joint ventures are unrelated homebuilders and or land developers and other real estate entities or commercial enterprises These investments are designed primarily to reduce market and development risks and to increase the number of lots we own or control In some instances participating in unconsolidated joint ventures has enabled us to acquire and develop land that we might not otherwise have had access to due to a project s size financing needs duration of development or other circumstances While we consider our participation in unconsolidated joint ventures as potentially beneficial to our homebuilding activities we do not view such participation as essential
For distributions we receive from these unconsolidated joint ventures we have elected to use the cumulative earnings approach for our consolidated statements of cash flows Under the cumulative earnings approach distributions up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows
We typically have obtained rights to acquire portions of the land held by the unconsolidated joint ventures in which we currently participate When an unconsolidated joint venture sells land to our homebuilding operations we defer recognition of our share of such unconsolidated joint venture s earnings losses until we recognize revenues on the corresponding home sale which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date At that time we account for the earnings losses as a reduction increase to the cost of purchasing the land from the unconsolidated joint venture We defer recognition of our share of such unconsolidated joint venture losses only to the extent profits are to be generated from the sale of the home to a homebuyer
We share in the earnings losses of these unconsolidated joint ventures generally in accordance with our respective equity interests In some instances we recognize earnings losses related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture This typically arises from our deferral of the unconsolidated joint venture s earnings losses from land sales to us or other items
We had investments in six unconsolidated joint ventures as of November 30 2023 2022 and 2021 The following table presents combined condensed information from the statements of operations for our homebuilding unconsolidated joint ventures in thousands
a As of both November 30 2023 and 2022 one of our unconsolidated joint ventures had borrowings outstanding under a revolving line of credit it entered into with a third party lender in April 2022 to finance its land acquisition development and construction activities Borrowings under this line of credit which has a maximum commitment of 62 0 million are secured by the underlying property and related project assets The line of credit is scheduled to mature on April 19 2026 unless extended or terminated pursuant to its applicable terms None of our other unconsolidated joint ventures had outstanding debt at November 30 2023 or 2022
We provide certain guarantees and indemnities to the lender in connection with the above described revolving line of credit including a guaranty of interest and carry costs a guaranty to complete the construction of phases of the improvements for the project as such phases are commenced a guaranty against losses suffered due to certain bad acts or failures to act by the unconsolidated joint venture or its partners and an indemnity from environmental issues Except to the extent related to the foregoing guarantees and indemnities we do not have a guaranty or any other obligation to repay borrowings under the line of credit or to support the value of the underlying collateral However various financial and non financial covenants apply under the line of credit and with respect to the related guaranty and indemnity obligations and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations As of the date of this report we were in compliance with the relevant covenants We do not believe that our existing exposure under our guaranty and indemnity obligations related to outstanding borrowings under the line of credit is material to our consolidated financial statements
The following table presents combined condensed information from the statements of operations for our financial services unconsolidated joint ventures mostly comprised of KBHS s activities in thousands
Revenues are primarily generated from fees earned on mortgage loan originations interest earned for the period loans are held by KBHS and gains on the sales of mortgage loans held for sale Gains on the sales of mortgage loans held for sale include the realized and unrealized gains and losses associated with changes in the fair value of such loans and any related derivative financial instruments
Originated mortgage loans expected to be sold into the secondary market in the foreseeable future are reported as mortgage loans held for sale and carried in KBHS balance sheets at fair value with changes in fair value recognized within revenues in KBHS statements of operations
KBHS enters into IRLCs in connection with originating certain mortgage loans held for sale at specified interest rates and within a specified period of time with customers who have applied for a mortgage loan and meet certain credit and underwriting criteria KBHS accounts for IRLCs as free standing derivatives and does not designate any for hedge accounting As a result IRLCs are recognized in KBHS balance sheets at fair value and gains or losses resulting from changes in fair value are recognized within revenues in KBHS statements of operations The fair value of IRLCs is based on market prices which includes an estimate of the fair value of the associated mortgage servicing rights adjusted for estimated costs to originate the underlying mortgage loans as well as the probability that the mortgage loans will fund within the terms of the IRLCs The fair value of IRLCs included in other assets in KBHS balance sheets was 13 9 million at November 30 2023 and 29 8 million at November 30 2022 The changes in the fair value of IRLCs which were reported in revenues for the applicable periods were losses of 16 0 million for 2023 and gains of 20 3 million and 2 8 million for 2022 and 2021 respectively
KBHS manages the interest rate and price risk associated with its outstanding IRLCs by entering into best efforts forward sale commitments under which mortgage loans locked with a borrower are simultaneously committed to a secondary market investor at a fixed price subject to the underlying mortgage loans being funded These best efforts forward sale commitments do not meet the definition of derivative financial instruments and are therefore not recorded in KBHS balance sheets If the mortgage loans underlying the IRLCs do not fund KBHS has no obligation to fulfill the secondary market investor commitments
KBHS maintains warehouse lines of credit and master repurchase agreements with various financial institutions to fund its originated mortgage loans with its mortgage loans held for sale pledged as collateral under these agreements The agreements contain covenants which include certain financial requirements including maintenance of minimum tangible net worth minimum liquid assets maximum debt to net worth ratio and positive net income as defined in the agreements KBHS was in compliance with these covenants as of November 30 2023 In addition to its compliance with these covenants KBHS also depends on the ability and willingness of the applicable lenders and financial institutions including any substitute or additional lenders and financial institutions to extend such credit facilities to KBHS to fund its originated mortgage loans KBHS intends to renew these facilities when they expire at various dates in 2024 The warehouse lines of credit and master repurchase agreements are not guaranteed by us or any of our Guarantor Subsidiaries
Represents liabilities for financing arrangements discussed in Note 8 Variable Interest Entities as well as liabilities for fixed or determinable amounts associated with TIFE assessments As homes are delivered our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer As such these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature
We lease certain property and equipment for use in our operations We recognize lease expense for these leases generally on a straight line basis over the lease term and combine lease and non lease components for all leases Lease right of use assets and lease liabilities are recorded in our consolidated balance sheets for leases with an expected term at the commencement date of more than 12 months Some of our leases include one or more renewal options the exercise of which is generally at our discretion Such options are excluded from the expected term of the lease unless we determine it is reasonably certain the option will be exercised Lease liabilities are equal to the present value of the remaining lease payments while the amount of lease right of use assets is based on the lease liabilities subject to adjustment such as for lease incentives Our leases do not provide a readily determinable implicit interest rate therefore we estimate our incremental borrowing rate to calculate the present value of remaining lease payments In determining our incremental borrowing rate we considered the lease term market interest rates current interest rates on our senior notes and the effects of collateralization Our lease population at November 30 2023 was comprised of operating leases where we are the lessee primarily real estate leases for our corporate offices division offices and design studios as well as certain equipment leases Our lease agreements do not contain any residual value guarantees or material restrictive covenants
Lease expense is included in selling general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms of more than 12 months as well as short term leases with terms of 12 months or less For the years ended November 30 2023 2022 and 2021 our total lease expense was 22 1 million 20 7 million and 17 3 million respectively and included short term lease costs of 8 6 million 7 7 million and 4 7 million respectively Variable lease costs and external sublease income for the years ended November 30 2023 2022 and 2021 were immaterial
The following table presents our lease right of use assets lease liabilities and the weighted average remaining lease term and weighted average discount rate incremental borrowing rate used in calculating the lease liabilities dollars in thousands
Represents lease right of use assets within our homebuilding operations and financial services operations of 24 7 million and 1 million respectively at November 30 2023 and 25 5 million and 1 million respectively at November 30 2022
Represents lease liabilities within our homebuilding operations and financial services operations of 26 5 million and 1 million respectively at November 30 2023 and 27 5 million and 1 million respectively at November 30 2022
In 2023 our income tax expense and effective tax rate included the favorable impacts of 25 2 million of Section 45L tax credits we recognized primarily from building energy efficient homes and 5 5 million of excess tax benefits related to stock based compensation partly offset by 12 2 million of non deductible executive compensation expense In 2022 our income tax expense and effective tax rate reflected the favorable impacts of 22 6 million of Section 45L tax credits we recognized primarily from building energy efficient homes and 1 8 million of excess tax benefits related to stock based compensation partly offset by 9 7 million of non deductible executive compensation expense In 2021 our income tax expense and effective tax rate reflected the favorable impacts of 49 5 million of Section 45L tax credits we recognized primarily from building energy efficient homes and 7 1 million of excess tax benefits related to stock based compensation partly offset by 11 3 million of non deductible executive compensation expense
On August 16 2022 the IRA was enacted into law The IRA contains significant tax law changes including a CAMT of 15 on adjusted financial statement income for applicable corporations and a 1 excise tax on stock repurchases after December 31 2022 If applicable the CAMT will not be effective for us until our fiscal year ending November 30 2024 The IRA also extended the Section 45L tax credit for building new energy efficient homes for homes delivered from January 1 2022 retroactively through December 31 2032 as well as modified and increased it starting in 2023 Previously the Section 45L tax credit expired for homes delivered after December 31 2021 The Section 45L tax credits we recognized in 2023 and
The IRA tied Section 45L tax credit qualification for energy efficient homes built on and after January 1 2023 to new homes achieving ENERGY STAR certification In late September 2023 the IRS issued Notice 2023 65 which provided guidance on the Section 45L tax credit qualifications for ENERGY STAR homes built on or after January 1 2023 This guidance retroactively effective for the year resulted in a reduction in our estimated Section 45L tax credits for 2023 primarily due to fewer of the ENERGY STAR homes we built in California meeting the heightened qualifications the IRS selected for homes built in that state relative to other states Our income tax expense for the 2023 fourth quarter reflected the cumulative impact of the September 2023 guidance
On February 9 2022 California enacted legislation restoring the California NOL deduction for tax years beginning on or after January 1 2022 which was effective for our 2023 fiscal year The California NOL deductions for tax years 2022 and 2021 had been suspended by previous legislation Although the restoration of California NOL deductions did not have an impact on our income tax expense for the year ended November 30 2023 it contributed to the year over year decrease in the amount of taxes we paid in 2023
Deferred income taxes result from temporary differences in the financial and tax basis of assets and liabilities Significant components of our deferred tax liabilities and assets are as follows in thousands
We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a more likely than not standard with respect to whether deferred tax assets will be realized Our evaluation considers among other factors our historical operating results our expectation of future profitability the duration of the applicable statutory carryforward periods and conditions in the housing market and the broader economy In our evaluation we give more significant weight to evidence that is objective in nature as compared to subjective evidence Also more significant weight is given to evidence that directly relates to our then current financial performance as compared to indirect or less current evidence The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible The value of our deferred tax assets depends on applicable income tax rates
Our deferred tax assets of 136 4 million at November 30 2023 and 178 0 million at November 30 2022 were partially offset in each year by valuation allowances of 16 9 million and 17 1 million respectively The deferred tax asset valuation allowances at November 30 2023 and 2022 were primarily related to certain state NOLs that had not met the more likely than not realization standard at those dates As a result of our utilization of certain state NOLs we reduced the valuation allowance by 2 million in 2023 As of November 30 2023 we would need to generate approximately 496 0 million of pretax income in future periods before 2042 to realize our deferred tax assets Based on the evaluation of our deferred tax assets as of November 30 2023 and 2022 we determined that most of our deferred tax assets would be realized
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets The accounting for deferred tax assets is based upon estimates of future results Changes in positive and negative evidence including differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time
The majority of the tax benefits associated with our NOLs can be carried forward for 20 years and applied to offset future taxable income Depending on their applicable statutory period the state NOL carryforwards of 33 8 million if not utilized will begin to expire between 2025 and 2043 State NOL carryforwards of 1 million and 2 million expired in 2022 and 2021 respectively No state NOL carryforwards expired in 2023
Gross unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized for accounting purposes A reconciliation of the beginning and ending balances of gross unrecognized tax benefits including interest and penalties is as follows in thousands
We had unrecognized tax benefits of 2 4 million as of November 30 2023 1 0 million as of November 30 2022 and 9 million as of November 30 2021 Our unrecognized tax benefits are included in accrued expenses and other liabilities in
our consolidated balance sheets We recognize accrued interest and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of the provision for income taxes
If these unrecognized tax benefits reverse in the future they would have a beneficial impact on our effective tax rate at that time During the next 12 months it is possible that the amount of unrecognized tax benefits will change but we are not able to provide a range of such change The potential change if any will be related to increases due to new tax positions taken and the accrual of interest and penalties Our total accrued interest and penalties related to unrecognized income tax benefits was approximately 1 million at November 30 2023 and less than 1 million at November 30 2022 Because of the impact of deferred tax accounting other than interest and penalties the disallowance of the shorter deductibility period would not affect our annual effective tax rate but would accelerate the payment of cash to a tax authority to an earlier period The fiscal years ending 2020 and later remain open to federal examinations while 2019 and later remain open to state examinations
The benefits of our deferred tax assets including our NOLs built in losses and tax credits would be reduced or potentially eliminated if we experienced an ownership change under Section 382 Based on our analysis performed as of November 30 2023 we do not believe that we have experienced an ownership change as defined by Section 382 and therefore the NOLs built in losses and tax credits we have generated should not be subject to a Section 382 limitation as of this reporting date
We have a 1 09 billion Credit Facility that will mature on February 18 2027 The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of 1 29 billion under certain conditions including obtaining additional bank commitments The Credit Facility also contains a sublimit of 250 0 million for the issuance of letters of credit Interest on amounts borrowed under the Credit Facility accrues at an adjusted term SOFR or a base rate plus a spread that depends on our Leverage Ratio as defined under the Credit Facility Interest is payable quarterly base rate or each month or three months adjusted term SOFR The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging from 15 to 35 of the unused commitment based on our Leverage Ratio Under the terms of the Credit Facility we are required among other things to maintain compliance with various covenants including financial covenants relating to our consolidated tangible net worth Leverage Ratio and either an Interest Coverage Ratio or a minimum level of liquidity each as defined therein Our obligations to pay borrowings under the Credit Facility are guaranteed on a joint and several basis by our Guarantor Subsidiaries 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 2023 we had no cash borrowings and 6 7 million of letters of credit outstanding under the Credit Facility
Therefore as of November 30 2023 we had 1 08 billion available for cash borrowings under the Credit Facility with up to 243 3 million of that amount available for the issuance of letters of credit As of November 30 2022 the weighted average annual interest rate on our outstanding borrowings under the Credit Facility was 5 1
We have a Term Loan with the lenders party thereto On November 14 2022 we borrowed 360 0 million under the Term Loan and on November 15 2022 we used the proceeds toward the redemption of our then outstanding 350 0 million in aggregate principal amount of 7 625 Senior Notes due 2023 at par The Term Loan will mature
on August 25 2026 or earlier if we secure borrowings under the Credit Facility without similarly securing the Term Loan subject to certain exceptions Interest under the Term Loan accrues at an adjusted term SOFR or a base rate plus a spread that depends on our Leverage Ratio Interest is payable quarterly base rate or each month or three months adjusted term SOFR The Term Loan contains various covenants that are substantially the same as those under the Credit Facility The proceeds drawn under the Term Loan are guaranteed on a joint and several basis by our Guarantor Subsidiaries As of November 30 2023 and 2022 the weighted average annual interest rates on our outstanding borrowings under the Term Loan were 6 8 and 5 6 respectively
We maintain an LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business Under the LOC Facility we may issue up to 75 0 million of letters of credit On August 10 2023 we entered into an amendment to our LOC Facility that extended the expiration date from February 13 2025 to February 18 2027 As of November 30 2023 and 2022 we had letters of credit outstanding under the LOC Facility of 12 5 million and 36 4 million respectively
All the senior notes outstanding at November 30 2023 and 2022 represent senior unsecured obligations that are guaranteed by certain of our subsidiaries and rank equally in right of payment with all of our and our Guarantor Subsidiaries existing unsecured and unsubordinated indebtedness All of our senior notes were issued in underwritten public offerings Interest on each of these senior notes is payable semi annually
At our option these notes may be redeemed in whole at any time or from time to time in part at a redemption price equal to the greater of i 100 of the principal amount of the notes being redeemed and ii the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed exclusive of interest accrued to the applicable redemption date discounted to the redemption date at a defined rate plus in each case accrued and unpaid interest on the notes being redeemed to but excluding the applicable redemption date except that six months prior to the stated maturity date for these notes the redemption price will be equal to 100 of the principal amount of the notes being redeemed plus accrued and unpaid interest on the notes being redeemed to but excluding the applicable redemption date
At our option these notes may be redeemed in whole at any time or in part from time to time prior to July 15 2025 at a redemption price equal to 100 of the principal amount of the notes being redeemed plus a make whole premium plus accrued and unpaid interest if any to the redemption date In addition at any time or from time to time prior to July 15 2025 an amount not to exceed the net proceeds of qualified equity offerings may be used at our option to redeem up to 40 of the aggregate principal amount of these notes at a redemption price equal to 107 250 of the principal amount of the notes to be redeemed plus accrued and unpaid interest if any to but excluding the redemption date We may also elect to redeem the notes in whole at any time or in part from time to time on or after July 15 2025 at the applicable specified redemption price including accrued and unpaid interest if any to the redemption date
If a change in control occurs as defined in the instruments governing our senior notes we would be required to offer to purchase all of our outstanding senior notes at 101 of their principal amount together with all accrued and unpaid interest if any
On June 22 2022 we completed the underwritten public offering of 350 0 million in aggregate principal amount of 7 25 Senior Notes due 2030 at 100 of their aggregate principal amount Net proceeds from this offering totaled 345 5 million after deducting the underwriting discount and our expenses relating to the offering Interest on the 7 25 Senior Notes due 2030 is payable semi annually in arrears on January 15 and July 15 and commenced on January 15 2023 These notes will mature on July 15 2030
On July 7 2022 we used the net proceeds from the issuance of the 7 25 Senior Notes due 2030 together with cash on hand to retire our then outstanding 350 0 million in aggregate principal amount of 7 50 Senior Notes due 2022 before their September 15 2022 maturity date by redemption pursuant to the optional redemption terms specified for such notes We paid
353 6 million to redeem the notes and recorded a charge of 3 6 million for the early extinguishment of debt in the 2022 third quarter primarily due to a make whole premium paid to redeem these senior notes
The indenture governing our senior notes does not contain any financial covenants Subject to specified exceptions the indenture contains certain restrictive covenants that among other things limit our ability to incur secured indebtedness or engage in sale leaseback transactions involving property above a certain specified value In addition the indenture contains certain limitations related to mergers consolidations and sales of assets
As of the date of this report we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Facility the Term Loan the senior notes the indenture the LOC Facility and the mortgages and land contracts due to land sellers and other loans Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend in part on our ability to remain in such compliance Our ability to access the Credit Facility s full borrowing capacity as well as the LOC Facility s full issuance capacity also depends on the ability and willingness of the applicable lenders and financial institutions including any substitute or additional lenders and financial institutions to
meet their commitments to fund loans extend credit or provide payment guarantees to or for us under those instruments There are no agreements that restrict our payment of dividends other than the Credit Facility and the Term Loan which would restrict our payment of certain dividends such as cash dividends on our common stock if a default under the Credit Facility or the Term Loan exists at the time of any such payment or if any such payment would result in such a default other than dividends paid within 60 days after declaration if there was no default at the time of declaration
On July 10 2023 we filed the 2023 Shelf Registration with the SEC As with our prior shelf registration statements the 2023 Shelf Registration registers the offering of securities that we may issue from time to time in amounts to be determined Our ability to issue securities is subject to market conditions and with respect to debt securities other factors impacting our borrowing capacity We have not made any offerings of securities under the 2023 Shelf Registration
Fair value determined using significant observable inputs such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data by correlation or other means
Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the years ended November 30 2023 and 2022 in thousands
Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period as of the date that the fair value measurements were made The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date
The following table presents the fair value hierarchy carrying values and estimated fair values of our financial instruments except those for which the carrying values approximate fair values in thousands
The fair values of our senior notes are generally estimated based on quoted market prices for these instruments The carrying values reported for cash and cash equivalents outstanding borrowings under the Credit Facility if any and the Term Loan and mortgages and land contracts due to land sellers and other loans approximate fair values The carrying value of corporate owned life insurance is based on the cash surrender value of the policies and accordingly approximates fair value
We provide a limited warranty on all of our homes The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business We generally provide a structural warranty of 10 years a warranty on electrical heating cooling plumbing and certain other building systems each varying from two to five years based on geographic market and state law and a warranty of one year for other components of the home Our limited warranty program is ordinarily how we respond to and account for homeowners requests to local division offices seeking repairs of certain conditions or defects including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home Our warranty liability covers our costs of repairs associated with homeowner claims made under our limited warranty program These claims are generally made directly by a homeowner and involve their individual home
We periodically assess the adequacy of our accrued warranty liability which is included in accrued expenses and other liabilities in our consolidated balance sheets and adjust the amount as necessary based on our assessment Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience and considers our home construction quality and customer service initiatives and outside events While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate unanticipated changes or developments in the legal environment local weather land or environmental conditions quality of materials or methods used in the construction of homes or customer service practices and or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates
In the normal course of our business we issue certain representations warranties and guarantees related to our home sales and land sales Based on historical experience we do not believe any potential liability with respect to these representations warranties or guarantees would be material to our consolidated financial statements
We maintain and require the majority of our independent contractors to maintain general liability insurance including construction defect and bodily injury coverage and workers compensation insurance These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities subject to certain self insured retentions deductibles and other coverage limits We also maintain certain other insurance policies Costs associated with our self insurance programs are included in selling general and administrative expenses In Arizona California Colorado and Nevada our contractors general liability insurance primarily takes the form of a wrap up policy under a program where eligible independent contractors are enrolled as insureds on each community Enrolled contractors generally contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work To the extent provided under the wrap up program we absorb the enrolled contractors general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self insurance
We self insure a portion of our overall risk through the use of a captive insurance subsidiary which provides coverage for our exposure to construction defect bodily injury and property damage claims and related litigation or regulatory actions up to certain limits Our self insurance liability generally covers the costs of settlements and or repairs if any as well as our costs to defend and resolve the following types of claims
Construction defect claims which represent the largest component of our self insurance liability typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting two or more homes within the same community or they involve a common area or homeowners association property within a community These claims typically involve higher costs to resolve than individual homeowner warranty claims and the rate of claims is highly variable
Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our operations Such claims may occasionally include those made against us by owners of property located near our communities
Our self insurance liability at each reporting date represents the estimated costs of reported claims claims incurred but not yet reported and claim adjustment expenses The amount of our self insurance liability is based on an analysis performed by a third party actuary that uses our historical claim and expense data as well as industry data to estimate these overall costs Key assumptions used in developing these estimates include claim frequencies severities and resolution patterns which can occur over an extended period of time These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made and the ultimate resolution of such claim uncertainties regarding such claims relative to our markets and the types of product we build and legal or regulatory actions and or interpretations among other factors Due to the degree of judgment involved and the potential for variability in these underlying assumptions our actual future costs could differ from those estimated In addition changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis which could be material to our consolidated financial statements Though state regulations vary construction defect claims are reported and resolved over a long period of time which can extend for 10 years or more As a result the majority of the estimated self insurance liability based on the actuarial analysis relates to claims incurred but not yet reported Therefore adjustments related to individual existing claims generally do not significantly impact the overall estimated liability Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs
Our self insurance liability is presented on a gross basis for all years without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties if any Estimated probable insurance and other recoveries of 31 1 million and 32 7 million are included in receivables in our consolidated balance sheets at November 30 2023 and 2022 respectively These self insurance recoveries are principally based on actuarially determined amounts and depend on various factors including among other things the above described claim cost estimates our insurance policy coverage limits for the applicable policy year s historical third party recovery rates insurance industry practices the regulatory environment and legal precedent and are subject to a high degree of variability from year to year Because of the inherent uncertainty and variability in these assumptions our actual insurance recoveries could differ significantly from amounts currently estimated
Represents net changes in estimated probable recoveries related to self insurance which are recorded in receivables to present our self insurance liability on a gross basis and an adjustment to increase our previously recorded liability by 6 5 million in 2023 7 0 million in 2022 and 6 8 million in 2021 The 2022 amount was largely impacted by a change in the actuarially determined estimate of probable recoveries associated with higher self insured retention levels in our more recent coverage years and an insurance carrier s payment of a portion of a townhome claim settlement reached in the 2022 first quarter
For most of our claims there is no interaction between our warranty liability and self insurance liability Typically if a matter is identified at its outset as either a warranty or self insurance claim it remains as such through its resolution However there can be instances of interaction between the liabilities such as where individual homeowners in a community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join together to initiate or potentially initiate a legal process with respect to that condition or issue and or the repair work we have undertaken In these instances the claims and related repair work generally are initially covered by our warranty liability and the costs associated with resolving the legal matter including any additional repair work are covered by our self insurance liability
The payments we make in connection with claims and related repair work whether covered within our warranty liability and or our self insurance liability may be recovered from our insurers to the extent such payments exceed the self insured retentions or deductibles under our general liability insurance policies Also in certain instances in the course of resolving a claim we pay amounts in advance of and or on behalf of an independent contractor s or their insurer s and believe we will be reimbursed for such payments Estimates of all such amounts if any are recorded as receivables in our consolidated balance sheets when any such recovery is considered probable
In addition to the risk that is effectively self insured through our captive insurance subsidiary we often obtain project specific insurance coverage for construction defect risk on attached projects e g condominiums or townhomes with policy deductibles generally ranging from 50 000 to 250 000 We record estimated liabilities and recoveries for projected losses related to these projects on a gross basis including for known claims as well as estimates for claims incurred but not yet reported to the extent such amounts are considered probable and estimable
We and certain of our trade partners continue to receive claims from attorneys on behalf of individual owners of our homes and or homeowners associations that allege pursuant to Chapter 558 of the Florida Statutes various construction defects with most relating to stucco and water intrusion issues The claims primarily involve homes in our Jacksonville Orlando and Tampa operations Under Chapter 558 homeowners must serve written notice of a construction defect s and provide the served construction and or design contractor s with an opportunity to respond to the noticed issue s before they can file a lawsuit Although we have resolved many of these claims without litigation and a number of others have been resolved with applicable trade partners or their insurers covering the related costs as of November 30 2023 we had approximately 484 outstanding noticed claims and some are scheduled for trial over the next few quarters and beyond In addition some of our trade partners insurers in some of these cases have informed us of their inability to continue to pay claims related costs At November 30 2023 we had an accrual for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries including an estimate for claims incurred but not yet reported While it is reasonably possible that our losses could exceed the amounts accrued and our recoveries could be less than the amounts recorded at this time we are unable to estimate the total amount of the loss in excess of the accrued amount and or associated with a shortfall in the recoveries that is reasonably possible as each of these is dependent on several factors including the extent of additional claims to be reported in future periods the nature of any specific claims our evaluation of the particular facts surrounding each such claim and the actions of third parties over which we have no control
We are often required to provide to various municipalities and other government agencies performance bonds and or letters of credit to secure the completion of our projects and or in support of obligations to build community improvements such as roads sewers water systems and other utilities and to support similar development activities by certain of our unconsolidated joint ventures At November 30 2023 we had
performance bonds and 19 1 million of letters of credit outstanding At November 30 2022 we had 1 27 billion of performance bonds and 43 0 million of letters of credit outstanding If any such performance bonds or letters of credit are called we would be obligated to reimburse the issuer of the performance bond or letter of credit We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called Performance bonds do not have stated expiration dates Rather we are released from the performance bonds as the underlying performance is completed The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations Most letters of credit however are issued with an initial term of one year and are typically extended on a year to year basis until the related performance obligations are completed
In the ordinary course of business we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes At November 30 2023 we had total cash deposits of 45 0 million to purchase land having an aggregate purchase price of 1 27 billion Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance
On October 2 2023 we received a subpoena from the U S Department of Justice Civil Division dated September 27 2023 to produce certain documents and testimony with respect to the inspection rating marketing and advertising of our ENERGY STAR homes including our contracts and or communications with U S EPA and third party ENERGY STAR rating companies real estate brokers real estate appraisers financial institutions and other parties as well as inspection related guidelines instructions methods policies processes and procedures We are cooperating with the government producing documents and information As of the date of this report we are unable to predict what actions the government will take if any the timing or nature of the ultimate outcome in this matter or the impact if any such outcome may have on our business or consolidated financial statements As a result while a loss or penalty if any is reasonably possible in this matter it is not considered to be probable or estimable
We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages We believe the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that as of November 30 2023 it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated financial statements We evaluate our accruals for litigation and regulatory proceedings at least quarterly and as appropriate adjust them to reflect a the facts and circumstances known to us at the time including information regarding negotiations settlements rulings and other relevant events and developments b the advice and analyses of counsel and c the assumptions and judgment of management Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made Our accruals for litigation and regulatory proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties if any Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties if any are recorded as receivables when such recoveries are considered probable Based on our experience we believe the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability The outcome of any of these proceedings including the defense and other litigation related costs and expenses we may incur however is inherently uncertain and could differ significantly from the estimate reflected in a related accrual if made Therefore it is possible that the ultimate outcome of any proceeding if in excess of a related accrual or if an accrual had not been made could be material to our consolidated financial statements Pursuant to SEC rules we will disclose any proceeding in which a governmental authority is a party and that arises under any federal state or local provisions enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment only where we believe that such proceeding will result in monetary sanctions on us exclusive of interest and costs above 1 0 million or is otherwise material to our consolidated financial statements
To help protect the benefits of our NOLs and other deferred tax assets from an ownership change under Section 382 we have in place a rights agreement and distributed a dividend of one preferred share purchase right for each outstanding share of common stock
Subject to the terms provisions and conditions of the rights agreement if the rights become exercisable each right would initially represent the right to purchase from us 1 100th of a share of our Series A Participating Cumulative Preferred Stock for a purchase price of 85 00 Purchase Price If issued each fractional share of preferred stock would generally give a stockholder approximately the same dividend voting and liquidation rights as does one share of our common stock However prior to exercise a right does not give its holder any rights as a stockholder including without limitation any dividend voting
or liquidation rights The rights will not be exercisable until the earlier of a 10 calendar days after a public announcement by us that a person or group has become an Acquiring Person as defined under the rights agreement and b 10 business days after the commencement of a tender or exchange offer by a person or group if upon consummation of the offer the person or group would beneficially own 4 9 or more of our outstanding common stock
Until these rights become exercisable Distribution Date common stock certificates and or book entry shares will evidence the rights and may contain a notation to that effect Any transfer of shares of our common stock prior to the Distribution Date will constitute a transfer of the associated rights After the Distribution Date the rights may be transferred other than in connection with the transfer of the underlying shares of our common stock If there is an Acquiring Person on the Distribution Date or a person or group becomes an Acquiring Person after the Distribution Date each holder of a right other than rights that are or were beneficially owned by an Acquiring Person which will be void will thereafter have the right to receive upon exercise of a right and payment of the Purchase Price that number of shares of our common stock having a market value of two times the Purchase Price After the later of the Distribution Date and the time we publicly announce that an Acquiring Person has become such our board of directors may exchange the rights other than rights that are or were beneficially owned by an Acquiring Person which will be void in whole or in part at an exchange ratio of one share of common stock per right subject to adjustment
At any time prior to the later of the Distribution Date and the time we publicly announce that an Acquiring Person becomes such our board of directors may redeem all the then outstanding rights in whole but not in part at a price of 001 per right subject to adjustment Redemption Price The redemption will be effective immediately upon the board of directors action unless the action provides that such redemption will be effective at a subsequent time or upon the occurrence or nonoccurrence of one or more specified events in which case the redemption will be effective in accordance with the provisions of the action Immediately upon the effectiveness of the redemption of the rights the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price with interest thereon Per the rights agreement as amended the rights issued thereunder will expire on the earliest of a the close of business on April 30 2024 b the time at which the rights are redeemed c the time at which the rights are exchanged d the time at which our board of directors determines that a related provision in our Restated Certificate of Incorporation is no longer necessary and e the close of business on the first day of a taxable year of ours to which our board of directors determines that no tax benefits may be carried forward
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 a prior board approved share repurchase program In 2021 we repurchased 4 668 600 shares of our common stock on the open market pursuant to this authorization at a total cost of 188 2 million
On April 7 2022 our board of directors authorized us to repurchase up to 300 0 million of our outstanding common stock This authorization replaced the 2021 board of directors authorization which had 331 400 shares remaining for repurchase In 2022 we repurchased 4 927 499 shares of our common stock on the open market pursuant to the 2022 authorization at a total cost of 150 0 million As of November 30 2022 there was 150 0 million of remaining availability under this share repurchase authorization In the 2023 first quarter we repurchased 1 965 442 shares of our common stock on the open market pursuant to this authorization at a total cost of approximately 75 0 million On March 21 2023 our board of directors authorized us to repurchase up to 500 0 million of our outstanding common stock This authorization replaced the 2022 board of directors authorization In the 2023 second third and fourth quarters we repurchased 7 278 995 shares of our common stock on the open market pursuant to the 2023 authorization at a total cost of 336 4 million bringing our total repurchases for the year ended November 30 2023 to 9 244 437 shares of common stock at a total cost of approximately 411 4 million Repurchases under the current authorization may occur periodically through open market purchases privately negotiated transactions or otherwise with the timing and amount at management s discretion and dependent on market business and other conditions This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors and does not obligate us to purchase any shares As of November 30 2023 we were authorized to repurchase up to 163 6 million of our outstanding common stock in additional transactions
In the 2023 first and second quarters our board of directors declared quarterly cash dividends of 15 per share of common stock Our board of directors approved a 05 per share increase in the quarterly cash dividend on our common stock to 20 per share in the 2023 third quarter and declared quarterly dividends at the new higher rate for the 2023 third and fourth quarters of 2023 In 2022 and 2021 our board of directors declared four quarterly cash dividends of 15 per share All dividends declared during 2023 2022 and 2021 were also paid during those years
In addition to the shares purchased pursuant to our share repurchase program we acquired 14 2 million 15 9 million and 12 3 million of our common stock in 2023 2022 and 2021 respectively A portion of the common stock acquired in 2023 2022 and 2021 consisted of previously issued shares delivered to us by employees to satisfy their withholding tax obligations on the vesting of PSUs and restricted stock awards or of forfeitures of previous restricted stock awards Treasury stock is recorded at cost Differences between the cost of treasury stock and the reissuance proceeds are recorded to paid in capital These transactions are not considered repurchases under the share repurchase program described above
Most of our employees are eligible to participate in the KB Home 401 k Savings Plan 401 k Plan under which we match employee contributions up to 6 of eligible compensation per payroll period The aggregate cost of the 401 k Plan to us was 8 3 million in 2023 8 2 million in 2022 and 7 2 million in 2021 The assets of the 401 k Plan are held by a third party trustee with an affiliate of the trustee managing some fund options offered by the 401 k Plan The 401 k Plan participants may direct the investment of their funds among one or more of the several fund options offered by the 401 k Plan As of November 30 2023 2022 and 2021 approximately 5 3 and 4 respectively of the 401 k Plan s net assets at each period were invested in our common stock
At our Annual Meeting of Stockholders held on April 20 2023 our stockholders approved the Amended and Restated KB Home 2014 Equity Incentive Plan Amended and Restated 2014 Plan confirming among other things an aggregate share grant capacity for stock based awards to our employees non employee directors and consultants of 18 200 000 shares through approving and incorporating the base amount of 12 300 000 shares under the predecessor Amended KB Home 2014 Equity Incentive Plan and adding 5 900 000 shares In addition if an award made under the Amended and Restated KB Home 2014 Equity Incentive Plan subsequently expires or is canceled forfeited or settled for cash then any shares associated with such award may to the extent of such expiration cancellation forfeiture or cash settlement be used again for new grants under the plan and shares tendered or withheld to satisfy tax withholding obligations with respect to a full value award may be used again for new grants under the plan The Amended and Restated 2014 Plan is our only active equity compensation plan As with the Amended KB Home 2014 Equity Incentive Plan under the Amended and Restated 2014 Plan grants of stock options and other similar awards reduce the share grant capacity on a 1 for 1 basis and grants of restricted stock and other similar full value awards reduce the share grant capacity on a 1 78 for 1 basis Any shares that again become available for grant will be added back to the equity incentive plan s available grant capacity in the same manner in which they were initially deducted
With the approval of the management development and compensation committee consisting entirely of independent members of our board of directors we have provided compensation benefits to certain of our employees in the form of stock options restricted stock and PSUs Certain stock based compensation benefits are also provided to our non employee directors pursuant to the Non Employee Directors Compensation Plan Director Plan Compensation expense related to equity based awards is included in selling general and administrative expenses in our consolidated statements of operations
There were no stock options granted in 2023 2022 or 2021 We have not granted any stock option awards since 2016 The total intrinsic value of stock options exercised was 17 4 million in 2023 and 22 1 million in 2021 There were no stock options exercised in 2022 The aggregate intrinsic value of both stock options outstanding and stock options exercisable was 40 6 million at November 30 2023 26 5 million at November 30 2022 and 40 9 million at November 30 2021 The
From time to time we grant restricted stock to various employees as a compensation benefit During the restriction periods these employees are entitled to vote and to receive cash dividends on such shares The restrictions imposed with respect to the shares granted lapse in installments within or in full at the end of three years after their grant date if certain conditions are met
As of November 30 2023 we had 18 6 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a weighted average period of approximately three years
On October 5 2023 we granted PSUs to certain employees Each PSU grant corresponds to a target amount of our common stock Award Shares Each PSU entitles the recipient to receive a grant of between 0 and 200 of the recipient s Award Shares and will vest based on our achieving over a three year period commencing on December 1 2023 and ending on November 30 2026 specified levels of a cumulative adjusted earnings per share b average adjusted return on invested capital and c revenue growth performance relative to a peer group of high production public homebuilding companies The grant date fair value of each such PSU was 44 10 Upon vesting each PSU recipient is entitled to receive a proportionate amount of credited cash dividends that are paid in respect of one share of our common stock with a record date between the grant date and the date the compensation committee of our board of directors determines the applicable performance achievements if any On November 14 2022 we granted PSUs to certain employees with similar terms as the 2023 PSU grants except that the applicable performance period commenced on December 1 2022 and ends on November 30 2025 The grant date fair value of each such PSU was 30 12 On October 7 2021 we granted PSUs to certain employees with similar terms as the 2022 PSU grants except that the applicable performance period commenced on December 1 2021 and ends on November 30 2024 The grant date fair value of each such PSU was 39 31
The number of shares of our common stock actually granted to a recipient if any when a PSU vests will depend on the degree of achievement of the applicable performance measures during the applicable three year period The shares of our common stock that were granted under the terms of PSUs that vested in 2023 included an aggregate of 267 674 additional shares above the target amount awarded to the eligible recipients based on our achievement of certain levels of the three above described metrics over the three year period from December 1 2019 through November 30 2022 The shares of our common stock that were granted under the terms of PSUs that vested in 2022 included an aggregate of 265 782 additional shares above the target amount awarded to the eligible recipients based on our achievement of certain levels of the three above described metrics over the three year period from December 1 2018 through November 30 2021 The shares of our common stock that were granted under the terms of PSUs that vested in 2021 included an aggregate of 119 733 additional shares above the target amount awarded to the eligible recipients based on our achievement of certain levels of the three above described metrics over the three year period from December 1 2019 through November 30 2020 The PSUs do not have dividend or voting rights during the performance period Compensation cost for PSUs is initially estimated based on target performance achievement and adjusted as appropriate throughout the performance period Accordingly future compensation costs associated with outstanding PSUs may increase or decrease based on the probability and extent of achievement with respect to the applicable performance measures At November 30 2023 we had 42 0 million of total unrecognized compensation cost related to unvested PSUs which is expected to be recognized over a weighted average period of approximately three years
We have granted stock appreciation rights SARs and deferred common stock awards to our non employee directors pursuant to the terms of the Director Plan and elections made by each director All these awards were fully vested as of November 30 2016 SARs which have not been granted since April 2014 as they ceased being a component of non employee director compensation after that date were stock settled had terms of up to 15 years and were granted at an exercise price equal to the closing price of our common stock on the date of grant There were no SARs outstanding at November 30 2023 or 2022 At November 30 2021 the aggregate outstanding SARs were 70 849 At November 30 2023 2022 and 2021 the aggregate outstanding deferred common stock awards granted under the Director Plan were 271 683 409 648 and 469 171 respectively In addition we have granted common stock on an unrestricted basis to our non employee directors on the grant date pursuant to the Director Plan and elections made by each director
We have a grantor stock ownership trust Trust administered by a third party trustee that holds and distributes the shares of common stock acquired to support certain employee compensation and employee benefit obligations under our existing stock option plan the 401 k Plan and other employee benefit plans The existence of the Trust does not impact the amount of benefits or compensation that is paid under these plans
For financial reporting purposes the Trust is consolidated with us and therefore any dividend transactions between us and the Trust are eliminated Acquired shares held by the Trust remain valued at the market price on the date of purchase and are shown as a reduction to stockholders equity in the consolidated balance sheets The difference between the Trust share value and the market value on the date shares are released from the Trust is included in paid in capital Common stock held in the Trust is not considered outstanding in the computations of earnings per share The Trust held 6 705 247 shares of common stock at both November 30 2023 and 2022 The trustee votes shares held by the Trust in accordance with voting directions from eligible employees as specified in a trust agreement with the trustee
We have a supplemental non qualified unfunded retirement plan the KB Home Retirement Plan Retirement Plan effective as of July 11 2002 pursuant to which we have offered to pay supplemental pension benefits to certain designated individuals consisting of current and former employees in connection with their retirement The Retirement Plan was closed to new participants in 2004 We also have an unfunded death benefit plan the KB Home Death Benefit Only Plan DBO Plan implemented on November 1 2001 for certain designated individuals consisting of current and former employees The DBO Plan was closed to new participants in 2006
In connection with these plans and two other minor benefit programs we have purchased cost recovery life insurance contracts on the lives of the designated individuals The insurance contracts associated with the Retirement Plan and DBO Plan are held by a trust The trust is the owner and beneficiary of such insurance contracts The amount of the insurance coverage under the contracts is designed to provide sufficient funds to cover all costs of the plans if assumptions made as to employment term mortality experience policy earnings and other factors as applicable are realized The cash surrender value of the Retirement Plan life insurance contracts was 33 1 million at November 30 2023 and 35 3 million at November 30 2022 We recognized an investment gain on the cash surrender value of the Retirement Plan life insurance contracts of 1 million in 2023 and investment losses of 3 1 million and 1 1 million in 2022 and 2021 respectively In 2023 2022 and 2021 we paid 2 3 million 2 0 million and 1 9 million respectively in benefits under the Retirement Plan to eligible former employees The cash surrender value of the DBO Plan life insurance contracts was 16 9 million at November 30 2023 and 16 8 million at November 30 2022 We recognized an investment gain on the cash surrender value of the DBO Plan life insurance contracts of 1 million in 2023 and investment losses of 1 5 million and 3 million in 2022 and 2021 respectively In 2022 we paid 7 million in benefits under the DBO Plan We did not pay out any benefits under the DBO Plan in 2023 or 2021
The net periodic benefit cost of our Retirement Plan and DBO Plan is included in selling general and administrative expenses in our consolidated statements of operations and consisted of the following in thousands
The liabilities related to these plans were 60 1 million at November 30 2023 and 61 4 million at November 30 2022 and are included in accrued expenses and other liabilities in the consolidated balance sheets For the years ended November 30 2023 and 2022 the discount rates we used for the plans were approximately 5 2 and 4 8 respectively
Benefit payments under our Retirement Plan and DBO Plan are expected to be paid during each year ending November 30 as follows 2024 3 1 million 2025 3 6 million 2026 4 6 million 2027 4 7 million 2028 4 7 million and for the five years ended November 30 2033 24 2 million in the aggregate
We have audited the accompanying consolidated balance sheets of KB Home the Company as of November 30 2023 and 2022 the related consolidated statements of operations comprehensive income stockholders equity and cash flows for each of the three years in the period ended November 30 2023 and the related notes collectively referred to as the consolidated financial statements In our opinion the consolidated financial statements present fairly in all material respects the financial position of the Company at November 30 2023 and 2022 and the results of its operations and its cash flows for each of the three years in the period ended November 30 2023 in conformity with U S generally accepted accounting principles
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the Company s internal control over financial reporting as of November 30 2023 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report dated January 19 2024 expressed an unqualified opinion thereon
These financial statements are the responsibility of the Company s management Our responsibility is to express an opinion on the Company s financial statements based on our audits We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud Our audits included performing procedures to assess the risks of material misstatement of the financial statements whether due to error or fraud and performing procedures that respond to those risks Such procedures included examining on a test basis evidence regarding the amounts and disclosures in the financial statements Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements We believe that our audits provide a reasonable basis for our opinion
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that 1 relates to accounts or disclosures that are material to the financial statements and 2 involved our especially challenging subjective or complex judgments The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements taken as a whole and we are not by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates
At November 30 2023 the Company s self insurance liability was 179 8 million and receivables for estimated probable insurance and other recoveries related to self insurance claims totaled 31 1 million As disclosed in Note 17 to the consolidated financial statements the Company s self insurance liability for construction defects is based on an analysis prepared by a third party actuary that uses historical claim and expense data as well as industry data to estimate the cost of all unpaid losses including estimates related to claims incurred but not yet reported Key assumptions used in developing these estimates include claim frequencies severities and resolution patterns which can occur over an extended period of time Self insurance recoveries are principally based on actuarially determined amounts and consider the claim cost estimates described above applicable insurance policy coverage limits historical recovery rates and other factors
Auditing the Company s self insurance liability and related recoveries is complex and highly judgmental due to the complexity of the actuarial methods used to estimate the losses and related recoveries and degree of subjective judgment required to assess the underlying assumptions which required us to involve our actuarial specialists These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made and ultimately resolved uncertainties regarding such claims relative to the markets and types of products built and legal or regulatory actions and interpretations among other factors
We obtained an understanding evaluated the design and tested the operating effectiveness of controls over the Company s self insurance liability and recoveries estimation process including controls over the data and assumptions used in the analysis
To test the Company s self insurance liability and related recoveries our audit procedures included among others testing the completeness and accuracy of the underlying claims and recovery data utilized by the Company s third party actuary testing the existence and terms of third party insurance policies and involving our actuarial specialist to assist in our evaluation of the methodologies and assumptions applied by management s third party actuary Additionally we compared the Company s recorded self insurance liability and related recoveries to estimated ranges which our actuarial specialist developed based on independently selected assumptions
We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934 as amended Exchange Act is recorded processed summarized and reported within the time periods specified in the SEC s rules and forms and accumulated and communicated to management including our Chief Executive Officer Principal Executive Officer and Chief Financial Officer Principal Financial Officer as appropriate to allow timely decisions regarding required disclosure Under the supervision and with the participation of senior management including our Principal Executive Officer and Principal Financial Officer we evaluated our disclosure controls and procedures as such term is defined under Rule 13a 15 e promulgated under the Exchange Act Based on this evaluation our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of November 30 2023
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a 15 f under the Exchange Act Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP Our management recognizes that there are inherent limitations in the effectiveness of any internal control and that effective internal control over financial reporting may not prevent or detect misstatements In addition because of changes in conditions the effectiveness of internal control over financial reporting may vary over time Under the supervision and with the participation of senior management including our Principal Executive Officer and Principal Financial Officer we evaluated the effectiveness of our internal control over financial reporting based on the
established by the Committee of Sponsoring Organizations of the Treadway Commission Based on the evaluation under that framework and applicable SEC rules our management concluded that our internal control over financial reporting was effective as of November 30 2023
Ernst Young LLP the independent registered public accounting firm that audited our consolidated financial statements included in this annual report has issued its report on the effectiveness of our internal control over financial reporting as of November 30 2023 which is presented below
We have audited KB Home s internal control over financial reporting as of November 30 2023 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework the COSO criteria In our opinion KB Home the Company maintained in all material respects effective internal control over financial reporting as of November 30 2023 based on the COSO criteria
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the 2023 consolidated financial statements of the Company and our report dated January 19 2024 expressed an unqualified opinion thereon
The Company s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management s Annual Report on Internal Control Over Financial Reporting Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audit in accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects
Our audit included obtaining an understanding of internal control over financial reporting assessing the risk that a material weakness exists testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances We believe that our audit provides a reasonable basis for our opinion
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles A company s internal control over financial reporting includes those policies and procedures that 1 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company 2 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and 3 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the company s assets that could have a material effect on the financial statements
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
As discussed above under Item 1A Risk Factors in this report we have invested significant resources over the past few years to develop and implement a new custom ERP system designed to improve the efficiency of our internal operational and administrative activities While the implementation is nearly completed and the new ERP system has become an increasing component of our business the related internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes We continue to rely upon a combination of our old and new ERP systems for financial statement reporting purposes Other than the new ERP system implementation there have been no changes in our internal control over financial reporting during the quarter ended November 30 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting
None of our directors or executive officers adopted or terminated a Rule 10b5 1 trading arrangement or a non Rule 10b5 1 trading arrangement during the quarter ended November 30 2023 as such terms are defined under Item 408 a of Regulation S K Additionally we did not adopt or terminate a Rule 10b5 1 trading arrangement during the quarter ended November 30 2023
The information for this item for executive officers is provided above in the Executive Officers of the Registrant section in this report Except as stated below the other information for this item will be provided to the extent applicable in the
Corporate Governance and Board Matters Election of Directors Ownership of KB Home Securities and Annual Meeting Voting and Other Information sections in our 2024 Proxy Statement and is incorporated herein by this reference
We have adopted an ethics policy for our directors officers including our principal executive officer principal financial officer and principal accounting officer and employees The ethics policy is available on our investor relations website at investor kbhome com Stockholders may request a free copy of the ethics policy from
Within the time period required by the SEC and the New York Stock Exchange we will post on our investor relations website any amendment to our ethics policy and any waiver applicable to our principal executive officer principal financial officer or principal accounting officer or persons performing similar functions and our other executive officers or directors
We have adopted corporate governance principles which are available on our investor relations website Stockholders may request a free copy of the corporate governance principles from the address phone number and e mail address stated above under Ethics Policy
The information for this item will be provided in the Corporate Governance and Board Matters and Compensation Discussion and Analysis sections in our 2024 Proxy Statement and is incorporated herein by this reference
The number of shares in column a reflects outstanding stock options and 1 225 415 outstanding PSUs at target amount as of November 30 2023 as described in Note 21 Employee Benefit and Stock Plans in the Notes to Consolidated Financial Statements in this report For the outstanding PSUs the number of shares approved for grant will depend on our performance on the applicable measures during the relevant performance periods and we cannot predict the extent to which any shares under these awards will ultimately vest The weighted average exercise price in column b does not take into account the outstanding PSUs
Indenture relating to our Senior Notes among us the Guarantors party thereto and Sun Trust Bank Atlanta dated January 28 2004 filed as an exhibit to our Registration Statement No 333 114761 on Form S 4 is incorporated by reference herein
Fifth Supplemental Indenture dated August 17 2007 relating to our Senior Notes by and between us the Guarantors named therein and the Trustee filed as an exhibit to our Current Report on Form 8 K dated August 22 2007 File No 001 09195 is incorporated by reference herein
Sixth Supplemental Indenture dated as of January 30 2012 relating to our Senior Notes by and between us the Guarantors named therein and the Trustee filed as an exhibit to our Current Report on Form 8 K dated February 2 2012 File No 001 09195 is incorporated by reference herein
Seventh Supplemental Indenture dated as of January 11 2013 relating to our Senior Notes by and among us the Guarantors named therein and the Trustee filed as an exhibit to our Current Report on Form 8 K dated January 11 2013 File No 001 09195 is incorporated by reference herein
Eighth Supplemental Indenture dated as of March 12 2013 by and among us the Guarantors party thereto the Additional Guarantors named therein and U S Bank National Association as Trustee filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended May 31 2013 File No 001 09195 is incorporated by reference herein
Ninth Supplemental Indenture dated as of February 28 2014 by and among us the Guarantors party thereto the Additional Guarantors named therein and U S Bank National Association as Trustee filed as an exhibit to our Post Effective Amendment No 4 to Form S 3 Registration Statement No 333 176930 is incorporated by reference herein
Tenth Supplemental Indenture dated as of January 22 2019 by and among us the Guarantors party thereto the Additional Guarantors named therein and U S Bank National Association as Trustee filed as an exhibit to our 2018 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Form of officers certificates and guarantors certificates establishing the form and terms of the 6 875 Senior Notes due 2027 filed as an exhibit to our Current Report on Form 8 K dated February 20 2019 File No 001 09195 is incorporated by reference herein
Form of officers certificates and guarantors certificates establishing the form and terms of the 4 800 Senior Notes due 2029 filed as an exhibit to our Current Report on Form 8 K dated November 4 2019 File No 001 09195 is incorporated by reference herein
Form of officers certificate and guarantors certificates establishing the form and terms of the 4 00 Senior Notes due 2031 filed as an exhibit to our Current Report on Form 8 K dated June 9 2021 File No 001 09195 is incorporated by reference herein
Description of KB Home Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934 filed as an exhibit to our 2019 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Amended Rights Agreement effective as of April 8 2021 made by and between KB Home and Computershare Inc as Rights Agent filed as Exhibit 4 1 to our Amended Registration Statement on Form 8 A A dated April 13 2021 File No 001 9195 is incorporated by reference herein
Eleventh Supplemental Indenture dated as of January 20 2022 by and among us the Guarantors party thereto the Additional Guarantors named therein and U S Bank National Association as Trustee filed as an exhibit to Post Effective Amendment No 1 to the Registration Statement on Form S 3 Registration Statement No 333 239778 File No 001 09195 dated February 4 2022 is incorporated by reference herein
Form of officers certificate and guarantors certificates establishing the form and terms of the 7 250 Senior Notes due 2030 filed as an exhibit to our Current Report on Form 8 K dated June 22 2022 File No 001 09195 is incorporated by reference herein
Twelfth Supplemental Indenture dated as of January 19 2023 by and among us the Guarantors party thereto the Additional Guarantor named therein and Regions Bank as Trustee filed as exhibit to our 2022 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Trust Agreement between Kaufman and Broad Home Corporation and Wachovia Bank N A as Trustee dated as of August 27 1999 filed as an exhibit to our 1999 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
KB Home Nonqualified Deferred Compensation Plan with respect to deferrals prior to January 1 2005 effective March 1 2001 filed as an exhibit to our 2001 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
KB Home Nonqualified Deferred Compensation Plan with respect to deferrals on and after January 1 2005 effective January 1 2009 File No 001 09195 filed as an exhibit to our 2008 Annual Report on Form 10 K is incorporated by reference herein
KB Home Change in Control Severance Plan as amended and restated effective January 1 2009 filed as an exhibit to our 2008 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Policy Regarding Stockholder Approval of Certain Severance Payments adopted July 10 2008 filed as an exhibit to our Current Report on Form 8 K dated July 15 2008 File No 001 09195 is incorporated by reference herein
Amendment to Trust Agreement by and between KB Home and Wachovia Bank N A dated August 24 2009 filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended August 31 2009 File No 001 09195 is incorporated by reference herein
Form of Stock Option Agreement under the KB Home 2014 Equity Incentive Plan filed as an exhibit to our Current Report on Form 8 K dated October 14 2014 File No 001 09195 is incorporated by reference herein
Form of Performance Cash Award Agreement under the KB Home 2014 Equity Incentive Plan filed as an exhibit to our Current Report on Form 8 K dated October 14 2014 File No 001 09195 is incorporated by reference herein
Form of Restricted Cash Award Agreement under the KB Home 2014 Equity Incentive Plan filed as an exhibit to our Current Report on Form 8 K dated October 14 2014 File No 001 09195 is incorporated by reference herein
Amended KB Home 2014 Equity Incentive Plan effective April 7 2016 filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended May 31 2016 File No 001 09195 is incorporated by reference herein
Fifth Amended and Restated KB Home Non Employee Directors Compensation Plan effective as of July 11 2019 filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended August 31 2019 File No 001 09195 is incorporated by reference herein
Form of Performance Based Restricted Stock Unit Award Agreement under the Amended KB Home 2014 Equity Incentive Plan filed as an exhibit to our Current Report on Form 8 K dated October 13 2020 File No 001 09195 is incorporated by reference herein
Second Amendment to the KB Home Nonqualified Deferred Compensation Plan effective December 1 2020 filed as an exhibit to our 2020 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Third Amendment to Trust Agreement by and between KB Home and Wells Fargo Bank N A as Trustee dated January 1 2021 filed as an exhibit to our 2020 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Fourth Amendment to Trust Agreement by and between KB Home and Wells Fargo Bank N A as Trustee dated January 11 2022 filed as an exhibit to our 2021 Annual Report on Form 10 K File No 001 09195 is incorporated by reference herein
Fourth Amended and Restated Revolving Loan Agreement dated February 18 2022 among us the banks party thereto and Citibank N A as Administrative Agent filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended February 28 2022 File No 001 09195 is incorporated by reference herein
Term Loan Agreement dated as of August 25 2022 among us the banks party thereto and Wells Fargo Bank National Association as Administrative Agent filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended August 31 2022 File No 001 09195 is incorporated by reference herein
Amended and Restated KB Home 2014 Equity Incentive Plan effective April 20 2023 filed as an exhibit to our Quarterly Report on Form 10 Q for the quarter ended May 31 2023 File No 001 09195 is incorporated by reference herein
Amended and Restated KB Home 2014 Equity Incentive Plan Performance Based Restricted Stock Unit Award Agreement filed as an exhibit to our Current Report on Form 8 K File No 001 09195 dated October 11 2023 is incorporated by reference herein
Amended and Restated KB Home 2014 Equity Incentive Plan Restricted Stock Award Agreement filed as an exhibit to our Current Report on Form 8 K File No 001 09195 dated October 11 2023 is incorporated by reference herein
Pursuant to the requirements of Section 13 or 15 d of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated

Company Name	KB HOME Vist SEC web-site
Category	OPERATIVE BUILDERS
Trading Symbol	KBH