KB Home plans to reduce its net debt to capital over three years

By Devika Patel

Knoxville, Tenn., Sept. 28 – KB Home has an eye on its leverage measurements and is seeking to reduce its debt-to-capital ratios.

“We are very mindful of our leverage objective and we’re targeting between 40% to 50% net debt to capital within the next three years and we’re calling that our mid-term target,” president and chief executive officer Jeffrey T. Mezger said at the Deutsche Bank 24th Annual Leveraged Finance Conference in Scottsdale, Ariz., on Wednesday.

“As we’ve looked at how we’re positioned both versus mid-cap peers and against the peer group in general in the industry, we are a highly leveraged company than what you see in the space.

“We have had a lot of comments from equity holders, analysts, etc. over the past few years that people are applying a bit of an equity discount as a result of that, which is something that we obviously don’t enjoy.

“Another very important factor is that it [the leverage] is providing a bit of drag on our overall gross margins.

“So when we look at our mid-cap peers – the amortization of the interest that is basically embedded in our cost of goods sold – we’re at about a two full percentage point differential to our midcap peers, so it’s about 200 basis points in our amortization versus our midcap peers which is dropping right into the gross margin line and all the way down the operating margin lines. So in some respects [the decision to reduce debt to capital ratios] is in reaction to that.”

KB Home is a Los Angeles-based homebuilder.

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