Fitch Affirms KB Home's Senior Unsecured Debt at 'BB+'; Outlook To Positive.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 26, 2003

Fitch Ratings affirms KB Home's (KBH) 'BB+' senior unsecured debt and 'BB-' senior subordinated debt ratings. The Rating Outlook has been changed to Positive from Stable. This change reflects KB Home's solid, consistent profit performance in recent years and the expectation that the company's credit profile will continue to improve as it executes its business model and embarks on a new period of growth. The ratings also take into account the company's primary focus on entry-level and first-step trade-up housing (the deepest segments of the market), its conservative building practices, and effective utilization of return on invested capital criteria as a key element of its operating model. Over recent years the company has improved its capital structure and increased its geographic diversity and has better positioned itself to withstand a meaningful housing downturn. Fitch also has taken note of KB Home's role as an active consolidator within the industry. Risk factors also include the cyclical nature of the homebuilding industry. Fitch expects leverage (excluding financial services) to remain comfortably within KB Home's stated debt to capital target of 45-55%.

The company has expanded EBITDA margins over the past several years on steady price increases, volume improvements and reductions in SG&A expenses. Also, KB Home has produced record levels of home closings, orders and backlog as the housing cycle extended its upward momentum. KB Home realizes a significant portion of its revenue from California, a region that has proved volatile in past cycles. But the company has reduced this exposure as it has implemented its growth strategy and currently sources 20% of its deliveries from California, compared with 69% in fiscal 1995. Over recent years KB Home shifted toward a presale strategy, producing a higher backlog/delivery ratio and reducing the risk of excess inventory and debt accumulation in the event of a slowdown in new orders. The strategy has also served to enhance margins. The company maintains a 4.4 year supply of lots (based on deliveries projected for 2003), 51% of which are owned and the balance controlled through options. Inventory turnover has been consistently at or above 1.7 times (x) during the past seven years.

Balance sheet liquidity has continued to improve as a result of efforts to reduce long-dated inventories, quicken inventory turns and improve returns on capital. Progress in these areas has allowed the company to accelerate deliveries without excessively burdening the balance sheet.

As the housing cycle progresses, creditors should benefit from KB Home's solid financial flexibility supported by $50.4 million in cash and equivalents and $423.6 million available under its $827.0 million domestic unsecured credit facility as of 8/31/03. (At the end of October a new $1 billion credit facility was announced.) In addition, liquid, primarily pre-sold work-in-process inventory totaling $2.4 billion provides comfortable coverage for construction debt. The $175 million in senior notes mature in 2004, but the balance of debt is well laddered and the new revolving credit facility matures in four years.

Management's share repurchase strategy has been aggressive at times, but has not impaired the company's financial flexibility. KB Home repurchased $81.9 million of stock in fiscal 1999, $169.2 million in 2000, $190.8 million in 2002 and $108.3 million (2 million shares) so far in fiscal 2003. At the end of August, 2 million shares remain under the board of directors' repurchase authorization. Notwithstanding these repurchases, book equity has increased $749.7 million since the end of 1999, while construction debt grew $439.0 million.

KBH has lowered its dependence on the state of California, but it is still the company's largest market in terms of investment. Operations are dispersed within multiple markets in the north and in the south. During the 1990s the company entered various major Western metropolitan markets, including Phoenix, Denver, Dallas, Austin and San Antonio, and has risen to a top 5 ranking in each market. In an effort to further broaden and enhance its growth prospects it has established operations (greenfield and by acquisition) in the southeastern U.S., including various markets in Florida, Atlanta and North Carolina. Most recently, the company has entered the Midwest (Chicago) via acquisition. Fitch recognizes the company as a consolidator in the industry, but expects future acquisitions will be moderate in size and largely funded through cash flow.

KB Home ranked as fifth largest homebuilder in the U.S. in 2001 and 2002. Its average home selling price through the first nine months of 2003 is $206,000. It is on pace to construct more than 27,000 homes in fiscal 2003. The company operates homebuilding operations within the U.S. and France (57% ownership of Kaufman and Broad S.A.). Kaufman and Broad S.A. also does commercial construction in France and KB Home operates KB Home Mortgage Company domestically. Year-to-date the Western region (CA) accounts for 20.9% of corporate orders, the Southwest (AZ, NV, NM) represents 26.4% of orders, the Central region (CO, IL, TX) accounts for 26.5% of orders, the Southeast (FL, GA, NC) contributes 13.0% of orders and France represents 13.2% of total net new orders.