Annual Report




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2016
or
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                  .
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware
95-3666267
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10990 Wilshire Boulevard, Los Angeles, California 90024
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 231-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
on which registered
Common Stock (par value $1.00 per share)
New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes        No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer            Accelerated filer        Non-accelerated filer        Smaller reporting company  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  
The aggregate market value of the voting common stock held by non-affiliates of the registrant on May 31, 2016 was $1,310,456,995 , including 9,760,831 shares held by the registrant’s grantor stock ownership trust and excluding 21,665,352 shares held in treasury.
There were 85,072,695  shares of the registrant’s common stock, par value $1.00 per share, outstanding on December 31, 2016. The registrant’s grantor stock ownership trust held an additional 9,431,756  shares of the registrant’s common stock on that date.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders (incorporated into Part III).




KB HOME
FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2016
TABLE OF CONTENTS
 
 
 
Page
Number
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
Item 16.
Form 10-K Summary




PART I

Item 1.
BUSINESS
General
KB Home is one of the largest and most recognized homebuilding companies in the U.S. and has been building homes for nearly 60 years. We sell and build a variety of new homes designed primarily for first-time, move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. Our homebuilding operations represent most of our business, accounting for 99.7% of our total revenues in 2016 . Our financial services operations, which accounted for .3% of our total revenues in 2016 , offer various insurance products to our homebuyers and title services in certain markets. From July 2014 until October 2016, our financial services operations provided mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through Home Community Mortgage, LLC (“HCM”), an unconsolidated joint venture we formed with Nationstar Mortgage LLC (“Nationstar”).
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. Also, as used in this report, “home” is a single-family residence, whether it is a single-family home or other type of residential property; “community” is a single development in which new homes are constructed as part of an integrated plan; and “community count” is the number of communities we have open for sales with at least five homes/lots left to sell.
The following charts present homes delivered and homebuilding revenues for the years ended November 30, 2014, 2015 and 2016:

KBH-113020_CHARTX26573A01.JPG KBH-113020_CHARTX27679A01.JPG
Markets
Reflecting the geographic reach of our homebuilding business, we have ongoing operations in the seven states and 36 major markets presented below. We also operate in various submarkets within these major markets. From time to time, we 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.

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Segment    
 
State(s)
 
Major Market(s)
 
 
 
 
 
West Coast
 
California
 
Contra Costa County, Fresno, Los Angeles, Madera, Oakland, Orange County, Riverside, Sacramento, San Bernardino, San Diego, San Francisco, San Jose, Santa Rosa-Petaluma, Stockton, Vallejo, Ventura and Yuba City
Southwest
 
Arizona
 
Phoenix and Tucson
 
 
Nevada
 
Las Vegas
Central
 
Colorado
 
Denver
 
 
Texas
 
Austin, Dallas, Fort Worth, Houston and San Antonio
Southeast
 
Florida
 
Daytona Beach, Jacksonville, Lakeland, Orlando, Palm Coast, Punta Gorda, Sarasota, Sebastian-Vero Beach and Tampa
 
 
North Carolina
 
Raleigh
Segment Operating Information. The following table presents certain operating information for our homebuilding reporting segments for the years ended November 30, 2016 , 2015 and 2014 (dollars in millions, except average selling price):
 
Years Ended November 30,
 
2016
 
2015
 
2014
West Coast:
 
 
 
 
 
Homes delivered
2,825

 
2,258

 
1,913

Percentage of total homes delivered
29
%
 
27
%
 
27
%
Average selling price
$
579,900

 
$
587,000

 
$
569,700

Total revenues (a)
$
1,638.1

 
$
1,402.3

 
$
1,089.9

Southwest:
 
 
 
 
 
Homes delivered
1,559

 
1,311

 
736

Percentage of total homes delivered
16
%
 
16
%
 
10
%
Average selling price
$
287,000

 
$
284,600

 
$
271,100

Total revenues (a)
$
447.5

 
$
398.2

 
$
199.5

Central:
 
 
 
 
 
Homes delivered
3,744

 
3,183

 
3,098

Percentage of total homes delivered
38
%
 
39
%
 
43
%
Average selling price
$
270,100

 
$
252,200

 
$
223,800

Total revenues (a)
$
1,018.5

 
$
809.7

 
$
698.4

Southeast:
 
 
 
 
 
Homes delivered
1,701

 
1,444

 
1,468

Percentage of total homes delivered
17
%
 
18
%
 
20
%
Average selling price
$
281,400

 
$
281,900

 
$
263,600

Total revenues (a)
$
478.9

 
$
410.8

 
$
401.9

Total:
 
 
 
 
 
Homes delivered
9,829

 
8,196

 
7,215

Average selling price
$
363,800

 
$
354,800

 
$
328,400

Total revenues (a)
$
3,582.9

 
$
3,021.0

 
$
2,389.6

(a)
Total revenues include revenues from housing and land sales.
Additional financial and operational information related to our homebuilding reporting segments, including revenues, pretax income (loss), inventories and assets, is provided below in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report.

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Unconsolidated Joint Ventures. The above table does not include homes delivered or revenues from unconsolidated joint ventures in which we participate. These unconsolidated joint ventures acquire and develop land in various markets where our homebuilding operations are located and, in some cases, build and deliver homes on the land developed.
Strategy
In the 2016 fourth quarter, we outlined a plan for returns-focused growth that is designed to drive higher revenues and improvement in our operating income margin, return on invested capital, return on equity and leverage ratio, and we established three-year financial targets for these metrics. The plan’s main components are (1) executing our core business strategy; (2) improving our asset efficiency and (3) monetizing our significant deferred tax assets. We believe implementing this plan will, among other things, accelerate internal cash generation that will support a balanced approach to investing in land and land development and reducing our debt.
Executing Our Core Business Strategy . Our core business strategy, which we refined in 2016 and call KB 2020, is to expand our scale within our current geographic footprint to establish a top-five market share position in each of our served markets (based on homes delivered) by building communities that offer a compelling combination of affordability, choice and personalization. This strategy is grounded in a systematic, fact-based and process-driven approach to homebuilding and encompasses the following key principles with respect to customers, land, products and operations:
Customers . For each of our served markets, we gain a detailed understanding of consumers’ location and product preferences, as well as product price-to-value perceptions, through ongoing customer surveys and other market research. Our primary focus is on first-time and first move-up buyers. First-time buyers have comprised nearly 60% of our homes delivered over the past 10 years. In addition, our Built-to-Order™ homebuying process provides our buyers with a wide range of choices in the major aspects of their future home, together with a personalized customer experience through our in-house community teams. These teams are made up of sales representatives, design consultants and other personnel who partner closely with each buyer and maintain constant communication from the initial sale of their home to its delivery.
Land . We seek to manage our working capital and reduce our operating risks by primarily acquiring entitled land parcels at reasonable prices within attractive submarkets as identified by our market research activities. We typically focus on metropolitan areas with favorable long-term economic and population growth prospects that we believe have the potential to sustain a minimum of 800 homes delivered per year, and target land parcels that provide a two- to three-year supply of lots per community and meet our investment return standards. Identified consumer preferences and home sales activity largely direct where our land acquisition teams search for available land. We leverage the relationships we have with land owners, developers and brokers in our served markets to acquire land, and use our experience in working with municipalities to efficiently obtain entitlements and any other required development approvals, typically before or concurrently with closing on a parcel.
Products . We offer our customers a base product with a standardized set of functions and features at a competitive and relatively affordable price that generally aligns with the local area’s median household income level. Our Built-to-Order approach provides customers the opportunity to select their lot location, floor plan, elevation and structural options, and to personalize their homes with numerous interior design options and upgrades in our design studios. Our design studios, generally centrally located within our served markets, are a key component of our Built-to-Order process, and the mix of design options and upgrades they offer are primarily based on the preferences identified by consumer survey and purchase frequency data. 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. Our architectural group has developed a core series of flexible floor plans and elevations that we can offer across many of our served markets, which helps us understand the cost to build our products and enables us to compare and implement best practices across divisions or communities. We also incorporate energy-efficient features into our product designs to help lower the total cost of homeownership for our buyers and to reduce our homes’ impact on the environment, as further discussed below. As used in this report and elsewhere, the term “product” encompasses a home’s floor plan design and interior/exterior style, amenities, functions and features.
Operations . In addition to differentiating us from other high-production homebuilders, our Built-to-Order process helps to drive low-cost production. We generally commence construction of a home only after we have a signed purchase contract with a buyer and have obtained preliminary credit approval or other evidence of the buyer’s financial ability to purchase a home, and seek to build a backlog of sold homes. Maintaining a healthy backlog, along with centralized scheduling and standardized reporting processes, helps us sustain an even-flow production of pre-sold homes, which reduces our inventory risk, enhances efficiencies in the construction process and our relationships with independent subcontractors, and provides us with greater visibility and predictability on future deliveries.

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We consider our strategy to be integral to our success in the homebuilding industry. However, there may be market-driven circumstances where we believe it is necessary or appropriate to temporarily deviate from certain of its principles. These deviations may include starting construction on a small number of homes in a community before corresponding purchase contracts are signed with buyers to more quickly meet customer delivery expectations and generate revenues; or acquiring land parcels in peripheral neighborhoods of a core metropolitan area that otherwise fit our growth strategy and meet our investment return standards. In addition, other circumstances could arise in the future that may lead us to make specific short-term shifts from these principles.
Improving Asset Efficiency . We have had an ongoing focus on, and will continue our efforts in 2017 for, improving our asset efficiency, including, among other things, generating higher net orders per community and greater profitability per home delivered by balancing sales pace and selling prices, and managing our direct construction costs, within our communities; structuring land acquisitions to minimize upfront costs, as further discussed below; reactivating communities that have been held for future development; and selling non-core assets.
We have achieved significant progress in reactivating communities over the past several years and plan to reactivate additional communities in 2017. As of November 30, 2016, our land held for future development represented 11% of our total inventories, down from 16% at November 30, 2015 and from its peak of 43% at November 30, 2011. Our objective is to reduce our land held for future development, through reactivations and land sales, to less than 4% of our total inventory by 2019.
In line with this objective, in the 2016 fourth quarter, we announced our decision to sell more than 20 land parcels that no longer fit into our business plans due to one or more of the following reasons: the land is in excess of near-term requirements; we now believe the necessary incremental investment in development is not justified; the land is located in areas outside of our served markets; and/or the land is entitled for certain product types that are not aligned with our primary product offerings. Actions required to complete the planned sales have been or will soon be initiated, with the objective of closing these transactions within one year. As discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, we recognized inventory impairment charges to reduce the carrying values of these land parcels to their estimated fair values, less associated costs to sell.

While reactivations and land sales can have a negative impact on our housing gross profit margin, they are generally accretive to earnings and returns, and generate cash that we can redeploy for investments in land that are expected to generate a higher return and grow our business. Such growth should enable us to leverage greater operating efficiencies that are expected to accompany a larger scale. The cash proceeds from activations and land sales can also be used to reduce our debt, consistent with our plan.
Monetizing Our Deferred Tax Assets. By increasing our scale and further improving our asset efficiency, the anticipated associated revenue and pretax income growth will enable us to accelerate the utilization of our deferred tax assets, which totaled $739 million at November 30, 2016. We believe we can realize $300 million to $400 million in tax cash savings by the end of 2019, and intend to productively deploy the cash to invest in our business and/or to reduce debt.
Key Three-Year Financial Targets. We have set the following specific financial targets for 2019 that we believe will result from executing on our returns-focused growth plan:
Housing revenues greater than $5 billion.
Operating income margin of 8% to 9%.
Return on invested capital in excess of 10%.
Return on equity in the low-to-mid double-digit range.
Net debt-to-capital ratio of 40% to 50%.
We believe that our plan provides a clear roadmap for achieving these targets, and the potential to produce a meaningful increase in long-term stockholder value. By increasing our scale while improving our asset efficiency, we expect to generate higher revenues, profitability and internal cash flows, both from operations and from using our deferred tax assets. The stronger cash flows, in turn, can be directed, in a balanced manner, to invest in the further growth of our business and/or reduce debt, providing an opportunity for improved housing gross profit margins.
Promotional Marketing Strategy . Our promotional marketing efforts are centered on differentiating the KB Home brand from resale homes and from new homes sold by other homebuilders. These efforts increasingly involve interactive Internet-based applications, social media outlets and other evolving communication technologies.

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In each of our communities, we build, decorate and landscape model homes which play a key role in providing customers with a hands-on experience. Our sales teams are trained by us and have extensive knowledge of management operating policies and our products, assisting homebuyers in all aspects of their purchase.
Customer Service. Our on-site construction supervisors perform regular pre-closing quality checks and our sales representatives maintain regular contact with our homebuyers during the home construction process in an effort to ensure our homes meet our standards and our homebuyers’ expectations. We also have employees who are responsible for responding to homebuyers’ post-closing needs, including warranty claims. Information about our limited warranty program is provided in Note 15 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report.
Operational Structure. We operate our homebuilding business through divisions with experienced management teams who have in-depth local knowledge of their particular served markets, which helps us acquire land in preferred locations; develop communities with products that meet local demand; and understand local regulatory environments. Our division management teams exercise considerable autonomy in identifying land acquisition opportunities; developing land and communities; implementing product, marketing and sales strategies; and controlling costs. To help maintain consistent execution within the organization, our division management teams and other employees are continuously trained on KB2020 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 systems; and investor and media relations. 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.
Community Development and Land Inventory Management
Developable land for the production of homes is a core resource for our business. Based on our current strategic plans, we seek to own or control land sufficient to meet our forecasted production goals for the next three to five years. In 2017, we intend to continue to invest in and develop land positions within attractive submarkets and selectively acquire or control additional land that meets our investment return standards. However, we may decide to sell certain land interests or monetize land previously held for future development as part of our returns-focused growth plan, or for other reasons.
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 buyers. Historically, our community development process has typically ranged from six to 24 months in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. 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.
Although they vary significantly in size and complexity, our communities typically consist of 30 to 250 lots ranging in size from 1,900 to 11,500 square feet. In our communities, we typically offer three to 15 home design choices. We also generally build one to three model homes at each community so that prospective buyers can preview the various products available. Depending on the community, we may offer premium lots containing more square footage, better views and/or location benefits. Some of our communities consist of multiple-story structures that encompass several attached condominium-style units.
Land Acquisition and Land Development. We continuously evaluate land acquisition opportunities against our investment return standards, while also 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 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.

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As noted above, we target geographic areas for potential land acquisitions and community development based on the results of periodic surveys of both new and resale homebuyers in particular markets, prevailing local economic conditions and home sales activity, the supply and type of homes that are available for sale, and other market research activities. Local, in-house specialists analyze specific geographic areas to identify desirable land acquisition targets, or to evaluate whether to dispose of an existing land interest. We also use studies performed by third-party specialists.
We generally structure our land acquisition and land development activities to minimize, or to 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. Information related to our land option contracts and other similar contracts is provided in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report.
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, 2016 and 2015 :
 
Homes Under
Construction and Land
Under Development
 
Land Held for Future
Development or Sale
 
Land Under
Option
 
Total Land
Owned or
Under Option
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
West Coast
5,192

 
4,526

 
2,202

 
2,768

 
3,510

 
4,126

 
10,904

 
11,420

Southwest
4,912

 
6,349

 
2,525

 
1,871

 
901

 
761

 
8,338

 
8,981

Central
13,090

 
13,793

 
1,058

 
1,254

 
4,124

 
2,700

 
18,272

 
17,747

Southeast
3,453

 
3,999

 
3,150

 
3,500

 
708

 
1,752

 
7,311

 
9,251

Total
26,647

 
28,667

 
8,935

 
9,393

 
9,243

 
9,339

 
44,825

 
47,399

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 controlled under option as of November 30, 2016 :
KBH-113020_CHARTX28861A01.JPG KBH-113020_CHARTX29785A01.JPG

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Home Construction and Deliveries. Following the acquisition of land and, if necessary, the development of the land into finished lots, we typically begin constructing model homes and marketing homes for sale. To minimize the costs and risks of unsold homes in production, we generally begin construction of a home only after we have a signed purchase contract with a buyer and have obtained preliminary credit approval or other evidence of the buyer’s financial ability to purchase the home. However, cancellations of home purchase contracts prior to the delivery of the underlying homes, the construction of attached products with some unsold units, or specific strategic considerations will result in our having unsold completed or partially completed homes in our inventory.
We act as the general contractor for the majority of our communities, and engage outside general contractors in all other instances. We, or the outside general contractors we engage, contract with a variety of independent subcontractors, who are typically locally based, to perform all land development and home construction work through their own employees or subcontractors. We do not self-perform any land development or home construction work. These independent subcontractors also supply some of the building materials required for such production activities. Our contracts with these independent subcontractors require that they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, and follow local building codes and permits.
Raw Materials . Outside of land, the principal raw materials used in our production process are concrete and forest products. Other primary materials used in home construction include drywall and plumbing and electrical items. We source all of our building materials from third parties. 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. Although our purchasing strategies have helped us in negotiating favorable prices for raw materials, in recent years we have encountered higher prices for certain raw materials.
Backlog
Our “backlog” consists of homes that are under a purchase contract but have not yet been delivered to a buyer. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes delivered during the current period. Our backlog at any given time will be affected by cancellations, homes delivered and our community count. Our cancellation rates and the factors affecting such rates are further discussed below in both the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report. The number of homes we deliver has historically increased from the first to the fourth quarter in any year. Substantially all of our homes in backlog at November 30, 2016 are expected to be delivered during the year ended November 30, 2017.
Our backlog at November 30, 2016 increased 11% to 4,420 from 3,966 homes at November 30, 2015 , largely due to a year-over-year increase in our net orders in 2016. Our backlog at November 30, 2016 represented potential future housing revenues of approximately $1.52 billion , a 19% increase from approximately $1.28 billion at November 30, 2015 , reflecting the larger number of homes in our backlog and a higher average selling price of those homes.
The following charts present our ending backlog (number of homes and value) by homebuilding reporting segment as of November 30, 2015 and 2016 :

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KBH-113020_CHARTX30653A01.JPG KBH-113020_CHARTX32131A01.JPG
Employees
At December 31, 2016 and 2015, we had approximately 1,790 and 1,680 full-time employees, respectively. None of our employees are represented by a collective bargaining agreement.
Competition, Seasonality, Delivery Mix and Other Factors
Competition. The homebuilding industry and housing market are highly competitive with respect to selling homes; contracting for construction services, such as carpentry, roofing, electrical and plumbing; and acquiring attractive developable land, though the intensity of competition can vary and fluctuate between and within individual markets and submarkets. We compete for homebuyers, construction resources and desirable land against numerous homebuilders, ranging from regional and national firms to small local enterprises. As to homebuyers, we primarily compete with other homebuilders on the basis of selling price, community location and amenities, availability of financing options, home designs, reputation, home construction cycle time, and the design options and upgrades that can be included in a home. In some cases, this competition occurs within larger residential development projects containing separate sections designed, planned and developed by other homebuilders. 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 heavy construction activity, there can be severe craft and skilled trade shortages that limit independent subcontractors’ ability to supply construction services to us, which in turn tends to drive up our costs and/or extend our production schedules. Elevated construction activity has also contributed to measurable increases in the cost of certain building materials, such as lumber, drywall and concrete. Since 2013, we also have seen higher prices for desirable land amid heightened competition with homebuilders and other developers and investors, particularly in the land-constrained areas we are strategically targeting. We expect these upward cost trends to continue in 2017 if and as housing market activity grows and there is greater competition for these resources.
Seasonality. Our performance is affected by seasonal demand trends for housing. Traditionally, there has been more consumer demand for home purchases and we tend to generate more net orders in the spring and early summer months (corresponding to most of our second quarter and part of our third quarter) than at other times of the year. With our distinct homebuying approach and typical home construction cycle times, this “selling season” demand results in our 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). On a relative basis, the winter and early spring months within our first quarter and part of our second quarter usually produce the

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fewest net orders, homes delivered and revenues, and the sequential difference from our fourth quarter to our first quarter can be significant.
Delivery Mix and Other Factors. In addition to the overall volume of homes we sell and deliver, our results in a given period are significantly affected by the geographic mix of markets and submarkets in which we operate; the number and characteristics of the communities we have open for sales in those markets and submarkets; and the products we sell from those communities during the period. While there are some similarities, there are differences within and between our served markets in terms of the quantity, size and nature of the communities we operate and the products we offer to consumers. These differences reflect, among other things, local homebuyer preferences; household demographics (e.g., large families or working professionals; income levels); geographic context (e.g., urban or suburban; availability of reasonably priced finished lots; development constraints; residential density); and the shifts that can occur in these factors over time. These factors in each of our served markets will affect the costs we incur and the time it takes to locate, acquire rights to and develop land, open communities for sales, and market and build homes; the size of our homes; our selling prices (including the contribution from homebuyers’ purchases of design options and upgrades); the pace at which we sell and deliver homes and close out communities; 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.
Financing
Our operations have historically been funded by internally generated cash flows, public equity and debt issuances, land option contracts and other similar contracts and land seller financing, and performance bonds and letters of credit. We also have the ability to borrow funds under our unsecured revolving credit facility with various banks (“Credit Facility”). Depending on market conditions and available opportunities, we may obtain project financing, or secure external financing with community or other inventory assets that we own or control. By “project financing,” we mean loans that are specifically obtained for, or secured by, particular communities or other inventory assets. We may also arrange or engage in bank loan, project debt or other financial transactions and/or expand the capacity of the Credit Facility or our cash-collateralized letter of credit facility with a financial institution (the “LOC Facility”) or enter into additional such facilities.
Environmental Compliance Matters and Sustainability
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 may, from time to time, acquire property that requires us to incur environmental clean-up costs after conducting appropriate due diligence, including, but not limited to, using detailed investigations performed by environmental consultants. In such instances, we take steps prior to our acquisition of the land to gain reasonable assurance as to the precise scope of 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. Based on these practices, we anticipate that it is unlikely that environmental clean-up costs will have a material effect on our consolidated financial statements. 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. We have not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by us are identified by the U.S. Environmental Protection Agency (or similar state or local agency) as being a “Superfund” (or similar state or local) clean-up site requiring remediation, which could have a material effect on our future consolidated financial statements. Costs associated with the use of environmental consultants are not material to our consolidated financial statements.
We have made a dedicated effort to further differentiate ourselves from other homebuilders and resale homes through our ongoing commitment to become a leading national company in environmental sustainability. We continually seek out and utilize innovative technologies and systems to further improve the energy and water efficiency of our homes, as well as 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. Under our commitment to sustainability, we, among other things:
build energy- and water-efficient new homes;
developed an Energy Performance Guide®, or EPG®, that informs our homebuyers of the relative energy efficiency and the related estimated monthly energy costs of each of our homes as designed, compared to typical new and existing homes;

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advanced home automation technologies, components and systems that can increase convenience for our homebuyers; and
created and are adding more net-zero energy and zero freshwater design options, under a program called Double ZeroHouse™ 3.0, that are available in select markets.
More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. We intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with our commitment and believe our sustainability initiatives can help put us in a better position, compared to resale homes and homebuilders with less-developed programs, to comply with evolving local, state and federal rules and regulations intended to protect natural resources and to address climate change and similar environmental concerns.
Access to Our Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on Forms 3, 4 and 5 and proxy statements, as well as all amendments to those reports are available free of charge through our investor relations website at investor.kbhome.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations department at investorrelations@kbhome.com or at our principal executive offices. We intend for our investor relations website to be the primary location where investors and the general public can obtain announcements regarding, and can learn more about, our financial and operational performance, business plans and prospects, our board of directors, our senior executive management team, and our corporate governance policies, including our articles of incorporation, by-laws, corporate governance principles, board committee charters, and ethics policy. We may from time to time choose to disclose or post important information about our business on or through our investor relations website, and/or through other electronic channels, including social media outlets, such as Facebook® (Facebook.com/KBHome) and Twitter® (Twitter.com/KBHome), and other evolving communication technologies. The content available on or through our primary website at www.kbhome.com, our investor relations website, including our sustainability reports, 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. Our SEC filings are also available to the public over the Internet at the SEC’s website at www.sec.gov. The public may also read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.
Item 1A.
RISK FACTORS
The following important economic and market, strategic, operational, and legal and regulatory risk factors could adversely impact our business. These factors could cause our actual results to differ materially from the forward-looking and other statements that (a) we make in registration statements, periodic reports (including this report) and other filings with the SEC and from time to time in our news releases, annual reports and other written reports or communications, (b) we post on or make available through our websites and/or through other electronic channels, and (c) our personnel and representatives make orally from time to time.
Economic and Market Risks
Soft or negative economic or housing market conditions generally or in our served markets may materially and adversely affect our business and consolidated financial statements.
As in 2016, we expect future home sales activity and selling price appreciation (or depreciation) to vary in strength between markets and within submarkets based to a substantial degree on their specific economic and housing environments, which may also reflect national, state and/or regional factors. These variations may be significant and unfavorable, and could be more pronounced and/or prolonged in our served markets due to changes in conditions that are outside of our control, including, but not limited to, the following:
Employment levels and job and wage growth, particularly for individuals and households who make up our core first-time and first move-up homebuyer demographic groups. If the recent upward trends in employment and income levels for these demographic groups weaken or reverse, a corresponding reduction in demand for homes could negatively impact our business, and the impact may be greater for us than for homebuilders that target more-experienced and/or higher-income buyers.
Negative population growth, household formations or other demographic changes that can impair demand for housing.

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Diminished consumer confidence in general or specifically with respect to purchasing homes, or lack of consumer interest in purchasing a home compared to other housing alternatives.
Inflation, which could result in our production costs increasing at a rate or to a level that we cannot recover through the selling prices of our homes. Inflation may also cause increases in mortgage loan interest rates, and in the interest rates we may need to accept to obtain external financing for our business.
Shortages or rising prices of building materials and construction services, including independent contractor or outside supplier capacity constraints. These conditions could increase our costs and/or extend our construction and home delivery schedules, and we may be unable to raise the selling prices of our homes to cover the impact of such cost increases and/or delays.
Seasonality, which as discussed above in the “Competition, Seasonality, Delivery Mix and Other Factors” section in this report, generally results in fluctuations in our quarterly operating results, with a significant proportion of our homes delivered and revenues generated in our third and fourth fiscal quarters. While this pattern reflects when consumers have generally preferred to buy homes, we can provide no assurance that this historical seasonality will occur in 2017 or beyond, if at all.
Civil unrest and acts of terrorism, and government responses to such acts, as well as inclement weather, natural disasters, and other environmental conditions can delay the delivery of our homes and/or increase our costs.
If economic or housing conditions become more challenging generally or in our served markets, due to the factors listed above, whether individually or collectively, or otherwise, or home sales or selling prices do not continue to advance at the same pace as in recent years or decline, there would likely be a corresponding adverse effect on our business and our consolidated financial statements, including, but not limited to, our net orders, the number of homes we deliver, our average selling prices, the revenues we generate, our housing gross profit margins and our ability to operate profitably, and the effect may be material. In addition, adjustments to federal government economic, taxation and spending laws, policies or programs by the newly elected administration and U.S. Congress may negatively impact the financial markets, consumer spending and/or the housing market, and, in turn, materially and adversely affect our operating results and consolidated financial statements.
Tight mortgage lending standards and/or interest rate increases could adversely affect the availability or affordability of mortgage loans for potential buyers of our homes and thereby reduce our net orders, homes delivered and revenues. The poor performance of third-party mortgage lenders could delay our delivery of homes and recognition of revenues from those homes.
We depend on third-party lenders to provide mortgage loans to our buyers who need such financing to purchase our homes, and our dependence on such lenders is greater than for other homebuilders that operate a captive mortgage lender, have a mortgage banking services joint venture, or have secured a marketing relationship with a lender or loan originator. Buyers’ ability to obtain financing largely depends on prevailing mortgage loan interest rates, the credit standards that mortgage lenders use and the availability of mortgage loan programs provided by federal government agencies (such as Federal Housing Administration (“FHA”)- or Veterans Administration-insured mortgage loans), or government-sponsored enterprises (such as the Federal National Mortgage Association (also known as “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (also known as “Freddie Mac”)), which have been a critical source of liquidity for the mortgage finance industry and an important factor in marketing and selling many of our homes. Although mortgage loan interest rates have been at historically low levels for the last few years, they have trended higher since the 2016 fourth quarter. If mortgage loan interest rates increase further, credit standards are tightened and/or the federal government reduces or terminates its mortgage loan programs, the affordability of and demand for homes, including our homes, would likely be adversely impacted, and the impact could be material to our business and consolidated financial statements.
Our buyers may obtain mortgage financing for their home purchases from any lender of their choice. However, we can provide no assurance as to third-party lenders’ ability or willingness to complete, in a timely fashion or at all, the mortgage loan originations they start for our homebuyers. Lenders’ inability or unwillingness may result in mortgage loan funding issues that delay deliveries of our homes and/or cause cancellations, which could in the aggregate have a material adverse effect on our business and our consolidated financial statements.
The homebuilding industry and housing market are very competitive, and competitive conditions could adversely affect our business and consolidated financial statements.
We face significant competition in several areas of our business from other homebuilders, sellers of existing homes, and other participants in the overall housing industry, including landlords and other rental housing operators. These competitive conditions can result in, among other things, our selling and delivering fewer homes; our reducing the selling prices of our homes and/or offering or increasing sales incentives; our being unable to acquire desirable land that meets our investment return standards; and

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our being unable to obtain construction resources at acceptable prices or when needed to meet our production schedules. These competitive conditions could have a material adverse effect on our business and consolidated financial statements by decreasing our revenues and housing gross profit margins; impairing our ability to successfully implement our current strategies, initiatives or actions; increasing our costs; and/or diminishing growth in our business.
Strategic Risks
Our ability to execute on our primary strategies is inherently uncertain, and we may be unable to achieve our goals.
We can provide no assurance that our strategies, and any related initiatives or actions, will be successful, that they will generate growth or earnings or returns at any particular level or within any particular time frame, or that we will achieve in 2017 or beyond positive operational or financial results or results in any particular metric or measure equal to or better than our 2016 performance, or perform in any period as well as other homebuilders. We also cannot provide any assurance that we will be able to maintain our strategies, and any related initiatives or actions, in 2017 and, due to unexpectedly favorable or unfavorable market conditions or other factors, we may determine that we need to adjust, refine or abandon all or portions of our strategies, initiatives or actions, though we cannot guarantee that any such changes will be successful. The failure of any one or more of our present strategies, or any related initiatives or actions, or the failure of any adjustments that we may pursue or implement, would likely have an adverse effect on our ability to increase the value and profitability of our business; on our ability to operate our business in the ordinary course; on our overall liquidity; and on our consolidated financial statements, and the effect in each case could be material.
The success of our present strategies depends on the availability of developable land that meets our investment return standards.
The availability of developable land, particularly finished and partially finished lots, meeting our investment return standards depends on several factors, including, among other things, land availability in general, geographical/topographical/governmental constraints, land sellers’ business relationships and competition for desirable property. Should suitable land become less available, the number of homes we deliver could be reduced. In addition, the cost of attractive land could increase and adversely impact our housing gross profit margins and our ability to maintain ownership or control of a sufficient supply of land to meet our production goals. A lack of available suitable land could also affect the success of our current strategies, and related initiatives, including our ability to grow our scale and share in our served markets; to expand our community count; to maintain or increase our revenues; and to maintain or improve our profitability in 2017 and beyond, and could have a material adverse effect on our business and consolidated financial statements.
Our business is concentrated in certain geographic markets and declines in one or more of our key served markets could materially affect our business and consolidated financial statements.
Home sales activity and selling prices in some of our key served markets have varied from time to time for market-specific and other reasons, including adverse weather, high levels of foreclosures, short sales and sales of lender-owned homes, and lack of affordability or economic contraction. If home sales activity or selling prices decline in one or more of our key served markets, including California, Florida, Nevada or Texas, our costs may not decline at all or at the same rate and, as a result, our consolidated financial statements may be materially and adversely affected.
Adverse conditions in California, which makes up our West Coast homebuilding reporting segment, would have a particularly significant effect as our average selling price in this segment is the highest among all of our homebuilding reporting segments, a large percentage of our housing revenues is generated from this segment, and a significant proportion of our investments in land and land development have been made, and in 2017 are expected to be made, in that state. In addition, as some of the areas we serve in California are, or have until recently been, experiencing extreme or exceptional drought conditions, we can offer no assurance as to the conservation measures, including impact fees or penalties, that might be imposed by local water agencies/suppliers that could limit, impair or delay our ability to sell and deliver homes; increase our production costs; or decrease the value of land we own or control, which may result in inventory impairment or land option contract abandonment charges, or both. These impacts, individually or collectively, could adversely affect our overall business and consolidated financial statements, and the effect could be material. Moreover, as California is one of the most highly regulated and litigious states in the country, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than for other homebuilders with a less significant California presence.

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Operational Risks
We may have difficulty in obtaining additional financing and/or may be restricted in accessing external capital, and to the extent we can access external financing, it may increase our capital costs or result in stockholder dilution. Under certain circumstances, our obligations to repay our indebtedness may be accelerated and we may be unable to do so.
Our homebuilding operations and our present strategies require significant amounts of cash and/or the availability of external financing. We have historically supported our operations with internally generated cash flows, public equity and debt issuances, land option contracts and other similar contracts and land seller financing. In addition, we have entered into the Credit Facility and the LOC Facility and obtained performance bonds for certain ordinary course aspects of our operations. While we believe we can meet our forecasted capital and operating requirements from our cash resources, expected future cash flows from our operations and anticipated available external financing sources, we can provide no assurance that we will be able to do so at all or without incurring substantially higher costs.
Capital market conditions in 2017 and beyond may significantly limit our ability to obtain additional external financing and/or maintain or, if necessary or appropriate, expand the Credit Facility’s or the LOC Facility’s capacity, or enter into additional or similar such facilities, or obtain performance bonds, in each case on acceptable terms or at all. The relatively low market value of our common stock and volatility in the securities markets could impede our access to such markets or increase the dilution our stockholders would experience if we believe it is necessary or appropriate to issue additional equity securities. As of the date of this report, our credit rating by Fitch Ratings is B+, with a stable outlook, our credit rating by Moody’s Investor Services is B2, with a positive outlook, and our credit rating by Standard and Poor’s Financial Services is B, with a stable outlook. Downgrades of our credit rating by any of these firms may also make it more difficult and costly for us to access external financing sources. The adverse effects of these conditions or events could be material to our business and our consolidated financial statements.
If we fail to comply with the covenants and other requirements imposed by the Credit Facility and the other instruments governing our indebtedness, the participating financial institutions and/or investors could terminate the Credit Facility, cause borrowings under the Credit Facility, if any, or the outstanding principal and unpaid interest under our senior notes, if applicable, to become immediately due and payable and/or could demand that we compensate them for waiving instances of noncompliance. In addition, a default under the Credit Facility or under any series of our senior notes could in certain cases accelerate the maturity of all of our senior notes and restrict borrowings under the Credit Facility, as well as result in penalties and additional fees.
If any such covenant noncompliance or default occurs, it would likely have a material adverse impact on our liquidity, on our ability to operate our business in the ordinary course and on our consolidated financial statements. In addition, we may need to curtail our investment activities and other uses of cash to maintain compliance with the covenants and other requirements under the Credit Facility and the other instruments governing our indebtedness, which could impair our ability to achieve our strategic growth goals.
As described in Note 13 – Notes Payable in the Notes to Consolidated Financial Statements in this report, if a change of control or if a fundamental change were to occur prior to the stated maturity date of our senior notes, we may be required to offer to purchase certain of our senior notes, plus accrued interest and unpaid interest, if any. In such circumstances, if we are unable to generate sufficient cash flows from our operations, we may need to refinance and/or restructure with our lenders or other creditors all or a portion of our outstanding debt obligations on or before their maturity, which we may not be able to do on favorable terms or at all, or raise capital through equity or convertible security issuances that could significantly dilute existing stockholders’ interests, and the impact of such circumstances on our liquidity and consolidated financial statements would be material and adverse.
We have a substantial amount of indebtedness in relation to our tangible net worth and unrestricted cash balance, which may restrict our ability to meet our operational and strategic growth goals.
The amount of our debt overall and relative to our total stockholders’ equity and unrestricted cash balance could have important consequences. For example, it could limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service obligations or other business needs; limit our ability to maintain compliance with the Credit Facility’s financial covenants, or to renew or expand the capacity of the Credit Facility; require us to dedicate a substantial portion of our cash flows from our operations to the payment of our debt service obligations and reduce our ability to use our cash flows for other purposes; impact our flexibility in planning for, or reacting to, changes in our business; limit our ability to successfully implement our current strategies, initiatives or actions, in part due to competition from others with greater available liquidity; place us at a competitive disadvantage because we have more debt than some of our competitors; and make us more vulnerable in the event of a downturn in our business or in general economic or housing market conditions.
Our ability to meet our debt service and other obligations necessary to operate our business in the ordinary course will depend on our future performance. As of the date of this report, our next scheduled maturity of senior notes is on September 15, 2017

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with respect to $165.0 million in aggregate principal amount of our 9.100% senior notes due 2017 (“9.10% Senior Notes due 2017”), reflecting our optional early redemption of $100.0 million in aggregate principal amount of the notes outstanding in January 2017.
Reduced home sales may impair our ability to recoup development costs or force us to absorb additional costs.
Depending on the stage of development a land parcel is in when acquired, we may incur expenditures for developing land into a community, such as entitling and finishing lots and installing roads, sewers, water systems and other utilities; taxes and other levies related to ownership of the land; constructing model homes; and promotional marketing and overhead expenses to prepare the community to open for home sales. If the rate at which we sell and deliver homes slows or falls, or if our opening of communities for home sales is delayed due to adjustments in our investment strategy, protracted governmental approval processes or utility service activations, or other reasons, we may incur additional costs, which would adversely affect our housing gross profit margins, and it will take a longer period of time for us to recover our costs.
The value of the land and housing inventory we own or control may fall significantly.
The value of the land and housing inventory we currently own or control depends on market conditions, including estimates of future demand for, and the revenues that can be generated from, this inventory. The value of our inventory can vary considerably because there is often a significant amount of time between our acquiring control or taking ownership of land and the delivery of homes on that land, particularly undeveloped and/or unentitled land. If, in 2017, the present economic or housing environment weakens, if particular markets or submarkets experience challenging or unfavorable changes in prevailing business conditions, including an increase in inflation, if we are unable to sell our land held for sale at its current estimated fair value, or if we elect to revise our strategy relating to certain land positions, we may need to record charges against our earnings for inventory impairments or land option contract abandonments, or both, which occurred in 2016. We may also decide to sell certain land at a loss and record a corresponding charge. In addition, we may record charges against our earnings in connection with activating or selling certain land held for future development in connection with our current strategic initiatives. Any such charges could have a material adverse effect on our consolidated financial statements.
Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.
In the ordinary course of our homebuilding business, we are subject to home warranty and other construction defect claims. We rely upon independent subcontractors to perform actual construction of our homes and in some cases, to select and obtain building materials. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. However, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly, and, in our case, have relatively high self-insured retentions that limit coverage significantly.
Because of the uncertainties inherent to these matters, including our ability to obtain recoveries for home warranty or other construction defect claims from responsible independent contractors and/or their or our insurers, our recorded warranty and other liabilities may not be adequate to address all of our expenditures associated with such claims in the future, and any such inadequacies could negatively affect our consolidated financial statements, including from potentially recording charges to adjust our warranty liability. Home warranty and other construction defect issues may also generate negative publicity in various media outlets, including social media, websites, Internet blogs and newsletters, that could be detrimental to our reputation and adversely affect our efforts to sell homes.
We can provide no assurance that in 2017 we will not face additional home warranty and other construction defect claims and/or incur additional related repair and other costs, or experience negative publicity/reputational harm or be successful in obtaining any recoveries of related repair and other costs, and that any of these items — if they occur, or with respect to recoveries of related repair and other costs, fail to occur — could, individually or collectively, have a material and adverse impact on our business and consolidated financial statements.
We may not realize our significant deferred income tax assets. In addition, our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
At November 30, 2016, we had deferred tax assets of $739.0 million , net of a $24.8 million valuation allowance. Our ability to realize our deferred tax assets is based on the extent to which we generate future taxable income and prevailing corporate income tax rates, and we cannot provide any assurance as to when and to what extent we will generate sufficient future taxable income to realize our deferred tax assets, whether in whole or in any part. Changes in existing tax laws or enacted corporate income tax rates could impact such realization as well as the value of our deferred tax assets in our consolidated balance sheets, and these impacts could be material.

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The benefits of our deferred tax assets, including our net operating losses (“NOLs”), built-in losses and tax credits, would be reduced or potentially eliminated if we experienced an “ownership change” under Internal Revenue Code Section 382 (“Section 382”). We currently believe that an ownership change has not occurred. However, if an ownership change were to occur, the annual limit Section 382 may impose on the amount of NOLs we could use to reduce our taxable income could result in a material amount of our NOLs expiring unused. This would significantly impair the value of our net deferred tax assets and, as a result, have a material negative impact on our consolidated financial statements.
Our ability to attract and retain talent is critical to the success of our business and a failure to do so may materially and adversely affect our performance.
Our officers and employees are important resources, and we see attracting and retaining a dedicated and talented team as crucial to our success. If we are unable to continue to retain and attract qualified employees, or, alternatively, if we are required or believe it is appropriate to reduce our overhead expenses through significant personnel reductions or adjustments to compensation and benefits, our performance, our ability to achieve our strategic growth goals, our business and our consolidated financial statements could be materially and adversely affected.
Information technology failures and data security breaches could harm our business.
We use information technology and other computer resources to carry out important operational activities and to maintain our business records. Many of these resources are provided to us and/or maintained on our behalf by third-party service providers pursuant to agreements that specify to varying degrees certain security and service level standards. Although we and our service providers employ what we believe are adequate security, disaster recovery and other preventative and corrective measures, our ability to conduct our business may be impaired if these resources, including our websites or e-mail system, are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption or failure or error or poor product or vendor/developer selection (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources.
A significant and extended disruption could damage our reputation and cause us to lose customers, orders, deliveries of homes and revenues, result in the unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information, and require us to incur significant expenses to address and remediate or otherwise resolve these kinds of issues. The release of confidential information may also lead to litigation or other proceedings against us by affected individuals, business partners and/or regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings and cause us reputational harm, could have a material and adverse effect on our business and consolidated financial statements. Depending on its nature, a data security breach may result in the unauthorized use or loss of our assets or financial resources, and such unauthorized use(s) or loss(es), which could be significant, may not be detected for some period of time. In addition, the costs of maintaining adequate protection against data security threats, based on considerations of their evolution, pervasiveness and frequency and/or government-mandated standards or obligations regarding protective efforts, could be material to our consolidated financial statements in a particular period or over various periods.
Legal and Regulatory Risks
We are subject to substantial legal and regulatory requirements regarding the development of land, the homebuilding process and the protection of the environment, which can cause us to suffer production delays and incur costs associated with compliance, and/or prohibit or restrict homebuilding activity in some regions or areas. Our business is also subject to a number of local, state and federal laws, statutes, ordinances, rules, policies and other legal and regulatory requirements. The impact of such requirements or our failure to comply with such requirements, individually or collectively, could be adverse and material to our consolidated financial statements.
Our homebuilding business is heavily regulated and subject to a significant amount of local, state and federal regulation including, among other things, zoning, building designs, worksite health and safety and home construction methods, as well as governmental taxes, fees and levies on the acquisition and development of land. These regulations often provide broad discretion to government authorities that oversee these matters, which can result in unanticipated delays, restrictions, penalties for non-compliance and/or increases in the cost of a development project in particular markets. We can provide no assurance that these regulations will not be interpreted or revised in ways that will require us to change our present strategies or operations, incur significant compliance costs or record charges against our earnings, have a negative impact on our reputation or our relationships with relevant agencies or government authorities, and/or restrict the manner in which we conduct our activities. Any such actions or events, and associated costs and charges, could adversely and materially affect our consolidated financial statements. Also, there have been significant cuts to government departments, subsidies, programs and public employee staffing levels, limiting economic growth and/or resulting in significant delays and/or higher costs in obtaining required inspections, permits or approvals

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with respect to the development of our communities. These actions or events could adversely affect our ability to generate orders and revenues and/or to maintain or increase our housing gross profit margins, and the impact could be material and adverse to our consolidated financial statements.
In addition, we are subject to a variety of local, state and federal laws, statutes, ordinances, rules and regulations concerning the environment. These requirements and/or evolving interpretations thereof, may cause production delays, may cause us to incur substantial costs, and can prohibit or restrict homebuilding activity in certain areas; any of which could also reduce the value of the affected inventory and require us to record significant impairment charges. Environmental laws may also impose liability for the costs of removal or remediation of hazardous or toxic substances whether or not the developer or owner of the property knew of, or was responsible for, the presence of those substances. The actual or potential presence of those substances on or nearby our properties may prevent us from selling our homes and we may also be liable, under applicable laws and regulations or lawsuits brought by private parties, for hazardous or toxic substances on land that we have sold in the past.
We are also involved in legal, arbitral or regulatory proceedings or investigations incidental to our business, the outcome or settlement of which could result in 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 such adverse results could be beyond our expectations and/or accruals at particular points in time and material to our business and consolidated financial statements. Unfavorable litigation, arbitral or administrative outcomes may also generate negative publicity in various media outlets, including social media, websites, Internet blogs and newsletters, that could be detrimental to our reputation and adversely affect our efforts to sell homes.
The mortgage banking operations of HCM are heavily regulated and subject to rules and regulations promulgated by a number of governmental and quasi-governmental agencies. If there is a finding that Nationstar, which provided management oversight of HCM’s operations, or HCM materially violated any applicable rules or regulations, or mortgage investors seek to have HCM buy back mortgage loans or compensate them for losses incurred on mortgage loans HCM has sold based on claims that it breached its limited representations or warranties, HCM could face significant liabilities, which could exceed its reserves and cause us to recognize additional losses with respect to our equity interest in HCM.
Tax law changes could make home ownership more expensive or less attractive.
Under current tax law, significant expenses of owning a home, including mortgage loan interest costs and real estate taxes, generally are deductible expenses for the purpose of calculating an individual’s or household’s federal, and in some cases state, taxable income subject to various limitations. If the federal government or a state government changes its income tax laws by eliminating, limiting or substantially reducing these income tax benefits, the after-tax cost of owning a home could increase substantially. Any increases in personal income tax rates and/or tax deduction limits or restrictions enacted at the federal or state levels could adversely impact demand for and/or selling prices of new homes, including our homes, and the effect on our consolidated financial statements could be adverse and material.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
We lease our corporate headquarters in Los Angeles, California. Our homebuilding division offices (except for our San Antonio, Texas office) and our design studios are located in leased space in the markets where we conduct business. We own the premises for our San Antonio office.
We believe that such properties, including the equipment located therein, are suitable and adequate to meet the needs of our businesses.
Item 3.
LEGAL PROCEEDINGS
Our legal proceedings are discussed in Note 16 – Legal Matters in the Notes to Consolidated Financial Statements in this report.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.

16



EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information regarding our executive officers as of December 31, 2016:
Name
 
Age
 
Present Position
 
Year
Assumed
Present
Position
 
Years
at
KB
Home
 
Other Positions and Other
Business Experience within the
Last Five Years (a)
 
From – To
 
 
 
 
 
 
 
 
 
 
 
 
 
Jeffrey T. Mezger
 
61
 
Chairman, President and Chief Executive Officer (b)
 
2016
 
23
 
President and Chief Executive Officer (b)
 
2006-2016
Nicholas S. Franklin
 
48
 
Executive Vice President, Strategic Operations
 
2015
 
2
 
Executive Vice President, Next Generation Experience, Walt Disney Parks and Resorts Worldwide, Inc. (an international family entertainment and media enterprise)
 
2009-2014
Jeff J. Kaminski
 
55
 
Executive Vice President and Chief Financial Officer
 
2010
 
6
 
 
 
 
Albert Z. Praw
 
68
 
Executive Vice President, Real Estate and Business Development
 
2011
 
20
 
 
 
 
Brian J. Woram
 
56
 
Executive Vice President and General Counsel
 
2010
 
6
 
 
 
 
William R. Hollinger
 
58
 
Senior Vice President and Chief Accounting Officer
 
2007
 
29
 
 
 
 
Thomas F. Norton
 
46
 
Senior Vice President, Human Resources
 
2009
 
8
 
 
 
 
(a)
All positions described were with us, unless otherwise indicated.
(b)
Mr. Mezger has served as a director since 2006. He was elected Chairman of our board of directors in August 2016.

There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.
PART II
Item 5.
MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of December 31, 2016, there were 600 holders of record of our common stock. Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” The following table presents, for the periods indicated, the price ranges of our common stock, and cash dividends declared and paid per share:
 
Year Ended November 30, 2016
 
Year Ended November 30, 2015
 
High
 
Low
 
Dividends
Declared
 
Dividends
Paid
 
High
 
Low
 
Dividends
Declared
 
Dividends
Paid
First Quarter
$
14.50

 
$
9.04

 
$
.0250

 
$
.0250

 
$
17.57

 
$
11.76

 
$
.0250

 
$
.0250

Second Quarter
14.92

 
12.20

 
.0250

 
.0250

 
16.37

 
13.21

 
.0250

 
.0250

Third Quarter
16.76

 
13.66

 
.0250

 
.0250

 
17.42

 
13.50

 
.0250

 
.0250

Fourth Quarter
16.57

 
14.06

 
.0250

 
.0250

 
15.53

 
12.72

 
.0250

 
.0250

The declaration and payment of cash dividends on shares of 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 from our operations, capital requirements, access to external financing, debt structure and adjustments thereto, covenants and other requirements under the Credit Facility or other of our debt obligations, operational and financial investment strategy and general financial condition, as well as general business conditions.
Information regarding the shares of our common stock that may be issued under our equity compensation plans is provided below in the “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” section in this report.
The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2016:

17



Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
September 1-30
 

 
$

 

 
1,627,000

October 1-31
 
54,405

 
15.23

 

 
1,627,000

November 1-30
 

 

 

 
1,627,000

Total
 
54,405

 
$
15.23

 

 
 
As we publicly reported, on January 12, 2016, our board of directors authorized us to repurchase a total of up to 10,000,000 shares of our outstanding common stock. As of November 30, 2016 , we had repurchased 8,373,000 shares of our common stock pursuant to this authorization, at a total cost of $85.9 million .
The shares purchased during the three months ended November 30, 2016 were previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards as well as shares forfeited by individuals upon their termination of employment. These transactions are not considered repurchases under the board of directors’ authorization.
Stock Performance Graph
The following graph compares the five-year cumulative total return of KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index for the periods ended November 30:

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

KBH-113020_CHARTX58580A01A02.JPG
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
KB Home
$
100

 
$
198

 
$
243

 
$
245

 
$
198

 
$
224

S&P 500 Index
100

 
116

 
151

 
177

 
182

 
196

Dow Jones US Home Construction Index
100

 
175

 
183

 
220

 
250

 
220

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 $15.84 per share on November 30, 2016 and $14.09 per share on November 30, 2015. The performance of our common stock

18



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, 2011 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index, including reinvestment of dividends.
Item 6.
SELECTED FINANCIAL DATA
The data in this table should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” sections in this report.
KB HOME
SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
 
Years Ended November 30,
 
2016
 
2015
 
2014
 
2013
 
2012
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
$
3,582,943

 
$
3,020,987

 
$
2,389,643

 
$
2,084,978

 
$
1,548,432

Financial services
11,703

 
11,043

 
11,306

 
12,152

 
11,683

Total
$
3,594,646

 
$
3,032,030

 
$
2,400,949

 
$
2,097,130

 
$
1,560,115

Operating income (loss):
 
 
 
 
 
 
 
 
 
Homebuilding
$
152,401

 
$
138,621

 
$
115,969

 
$
92,084

 
$
(20,256
)
Financial services
7,886

 
7,332

 
7,860

 
9,110

 
8,692

Total
$
160,287

 
$
145,953

 
$
123,829

 
$
101,194

 
$
(11,564
)
Pretax income (loss)
$
149,315

 
$
127,043

 
$
94,949

 
$
38,363

 
$
(79,053
)
Net income (loss) (a)
105,615

 
84,643

 
918,349

 
39,963

 
(58,953
)
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
$
1.23

 
$
.92

 
$
10.26

 
$
.48

 
$
(.76
)
Diluted
1.12

 
.85

 
9.25

 
.46

 
(.76
)
Cash dividends declared per common share
.1000

 
.1000

 
.1000

 
.1000

 
.1375

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Homebuilding
$
5,121,125

 
$
5,072,877

 
$
4,846,083

 
$
3,309,558

 
$
2,693,434

Financial services
10,499

 
14,028

 
10,486

 
10,040

 
4,455

Total
$
5,131,624

 
$
5,086,905

 
$
4,856,569

 
$
3,319,598

 
$
2,697,889

Notes payable
$
2,640,149

 
$
2,601,754

 
$
2,550,622

 
$
2,125,254

 
$
1,708,252

Stockholders’ equity
1,723,145

 
1,690,834

 
1,595,910

 
536,086

 
376,806

Homebuilding Data:
 
 
 
 
 
 
 
 
 
Net orders
10,283

 
9,253

 
7,567

 
7,125

 
6,703

Unit backlog
4,420

 
3,966

 
2,909

 
2,557

 
2,577

Homes delivered
9,829

 
8,196

 
7,215

 
7,145

 
6,282

(a)
Net income for the year ended November 30, 2014 included the impact of an $825.2 million deferred tax asset valuation allowance reversal in the 2014 fourth quarter.


19



Item 7.
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):
 
Years Ended November 30,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs 2015
 
2015 vs 2014
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
$
3,582,943

 
$
3,020,987

 
$
2,389,643

 
19
 %
 
26
 %
Financial services
11,703

 
11,043

 
11,306

 
6

 
(2
)
Total
$
3,594,646

 
$
3,032,030

 
$
2,400,949

 
19
 %
 
26
 %
Pretax income:
 
 
 
 
 
 
 
 
 
Homebuilding
$
144,849

 
$
115,419

 
$
86,403

 
25
 %
 
34
 %
Financial services
4,466

 
11,624

 
8,546

 
(62
)
 
36

Total
149,315

 
127,043

 
94,949

 
18

 
34

Income tax benefit (expense)
(43,700
)
 
(42,400
)
 
823,400

 
(3
)
 
(a)

Net income
$
105,615

 
$
84,643

 
$
918,349

 
25
 %
 
(91
)%
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
1.23

 
$
.92

 
$
10.26

 
34
 %
 
(91
)%
Diluted
$
1.12

 
$
.85

 
$
9.25

 
32
 %
 
(91
)%
(a)    Percentage not meaningful.
With favorable conditions in most of our served markets, reflecting generally positive economic and employment trends, and our steady execution on our key strategies during 2016, we significantly expanded both our revenues and earnings compared to 2015. Within our homebuilding operations, housing revenues grew 23% year over year to $3.58 billion , as the number of homes we delivered increased 20% to 9,829 and the overall average selling price of those homes rose 3% to $363,800 . Our housing gross profit margin for 2016 decreased 10 basis points year over year to 16.2% . Our selling, general and administrative expense ratio for 2016 improved 90 basis points year over year to 10.9% of housing revenues, reflecting enhanced operating leverage on fixed costs due to successful cost containment efforts and corresponding higher housing revenues. Homebuilding operating income for 2016 increased 10% to $152.4 million , including total inventory-related charges of $52.8 million in 2016, compared to $9.6 million in the year-earlier period. The year-over-year increase in total inventory-related charges was largely due to inventory impairment charges associated with our decision in the 2016 fourth quarter to monetize certain non-strategic land parcels through land sales as part of our returns-focused growth plan, which is described in the “Business” section of this report, and inventory impairment and land option contract abandonment charges associated with the wind down of our Metro Washington, D.C. operations. For the year ended November 30, 2016, we posted net income of $105.6 million , up 25% from 2015, and diluted earnings per share of $1.12 , up 32% from a year ago.
During 2016, we invested $1.36 billion in land and land development to expand the number of our community openings in 2017 and beyond. In 2015, such investments totaled $967.2 million . Approximately 46% of our total investment in 2016 related to land acquisitions, compared to approximately 32% in the year-earlier period.
The following table presents information concerning our net orders, cancellation rate, ending backlog, and community count for the years ended November 30, 2016 and 2015 (dollars in thousands):

20



 
 
Years Ended November 30,
 
 
2016
 
2015
Net orders
 
10,283

 
9,253

Net order value (a)
 
$
3,813,155

 
$
3,255,170

Cancellation rate (b)
 
25
%
 
27
%
Ending backlog — homes
 
4,420

 
3,966

Ending backlog — value
 
$
1,519,089

 
$
1,281,478

Ending community count
 
235

 
247

Average community count
 
238

 
244

(a)
Net order value represents the potential future housing revenues associated with net orders generated during a period as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.
(b)
The cancellation rate represents the total number of contracts for new homes canceled during a period divided by the total (gross) orders for new homes generated during the same period.
Net Orders . In 2016, net orders from our homebuilding operations increased 11% from 2015, despite a decrease in our average community count. The combination of higher net orders and a higher overall average selling price resulted in the value of our 2016 net orders increasing 17% from 2015. Our cancellation rate for 2016 also showed improvement compared to the previous year.
Backlog . The number of homes in our backlog at November 30, 2016 rose 11% from the previous year, largely due to a year-over-year increase in our net orders in 2016. The potential future housing revenues in our backlog at November 30, 2016 grew 19% from the prior year, reflecting the larger number of homes in our backlog and the higher average selling price of those homes. Substantially all of the homes in our backlog at November 30, 2016 are expected to be delivered during the year ending November 30, 2017.
Communit y Count . Our ending and average community counts for 2016 decreased 5% and 2% , respectively, each on a year-over-year basis. The majority of these decreases occurred in our Southeast homebuilding reporting segment due to the wind down of our Metro Washington, D.C. operations as well as fewer community openings during 2016.
In the 2016 second quarter, we announced that we had begun a transition out of the Metro Washington, D.C. market. This transition is expected to be completed in 2017. We decided to wind down our operations in this market in order to reallocate our resources to markets where we believe we can generate stronger returns. Our operations in the Metro Washington, D.C. market consisted of communities in Maryland and Virginia, which are included in our Southeast homebuilding reporting segment and represented 2% and 3% of our consolidated homebuilding revenues in 2016 and 2015, respectively. We are constructing and delivering homes in our remaining communities in this market. We also have other land interests in this market that we intend to build out or sell.
HOMEBUILDING
The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):

21



 
Years Ended November 30,
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
Housing
$
3,575,548

 
$
2,908,236

 
$
2,369,633

Land
7,395

 
112,751

 
20,010

Total
3,582,943

 
3,020,987

 
2,389,643

Costs and expenses:
 
 
 
 
 
Construction and land costs
 
 
 
 
 
Housing
(2,997,073
)
 
(2,433,683
)
 
(1,940,100
)
Land
(44,028
)
 
(105,685
)
 
(45,551
)
Total
(3,041,101
)
 
(2,539,368
)
 
(1,985,651
)
Selling, general and administrative expenses
(389,441
)
 
(342,998
)
 
(288,023
)
Total
(3,430,542
)
 
(2,882,366
)
 
(2,273,674
)
Operating income
$
152,401

 
$
138,621

 
$
115,969

Homes delivered
9,829

 
8,196

 
7,215

Average selling price
$
363,800

 
$
354,800

 
$
328,400

Housing gross profit margin as a percentage of housing revenues
16.2
%
 
16.3
%
 
18.1
%
Adjusted housing gross profit margin as a percentage of housing revenues
21.1
%
 
21.0
%
 
22.5
%
Selling, general and administrative expenses as a percentage of housing revenues
10.9
%
 
11.8
%
 
12.2
%
Operating income as a percentage of homebuilding revenues
4.3
%
 
4.6
%
 
4.9
%
The following tables present homes delivered, net orders, cancellation rates, net order value, average community count, and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):
 
 
Years Ended November 30,
 
 
Homes Delivered
 
Net Orders
 
Cancellation Rates
Segment
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
West Coast
 
2,825

 
2,258

 
3,000

 
2,403

 
18
%
 
21
%
Southwest
 
1,559

 
1,311

 
1,758

 
1,592

 
20

 
22

Central
 
3,744

 
3,183

 
3,881

 
3,536

 
30

 
33

Southeast
 
1,701

 
1,444

 
1,644

 
1,722

 
29

 
26

Total
 
9,829

 
8,196

 
10,283

 
9,253

 
25
%
 
27
%

 
 
Net Order Value
 
Average Community Count
Segment
 
2016
 
2015
 
Variance
 
2016
 
2015
 
Variance
West Coast
 
$
1,756,945

 
$
1,378,644

 
27
 %
 
59

 
53

 
11
 %
Southwest
 
507,870

 
455,918

 
11

 
37

 
37

 

Central
 
1,075,586

 
943,568

 
14

 
90

 
93

 
(3
)
Southeast
 
472,754

 
477,040

 
(1
)
 
52

 
61

 
(15
)
Total
 
$
3,813,155

 
$
3,255,170

 
17
 %
 
238

 
244

 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

22



 
 
November 30,
 
 
Backlog – Homes
 
Backlog – Value
Segment
 
2016
 
2015
 
Variance
 
2016
 
2015
 
Variance
West Coast
 
913

 
738

 
24
 %
 
$
526,840

 
$
407,972

 
29
 %
Southwest
 
804

 
605

 
33

 
227,822

 
167,425

 
36

Central
 
1,979

 
1,842

 
7

 
559,172

 
494,836

 
13

Southeast
 
724

 
781

 
(7
)
 
205,255

 
211,245

 
(3
)
Total
 
4,420

 
3,966

 
11
 %
 
$
1,519,089

 
$
1,281,478

 
19
 %
Revenues. Homebuilding revenues totaled $3.58 billion in 2016, up 19% from 2015, which had increased 26% from 2014. The year-over-year growth in our homebuilding revenues in 2016 reflected an increase in our housing revenues that was partly offset by a decrease in revenues from land sales in the current year. In 2015, the year-over-year growth in homebuilding revenues was driven by increases in both housing and land sale revenues.
Housing revenues in 2016 rose 23% from the previous year, reflecting a 20% increase in the number of homes delivered and a 3% increase in the overall average selling price of those homes. In 2015, housing revenues grew 23% from 2014 due to a 14% increase in the number of homes delivered and an 8% increase in the overall average selling price. We delivered a total of 9,829 homes in 2016, up from 8,196 in 2015. This year-over-year increase primarily reflected the 36% higher backlog of homes we had at the beginning of 2016 as compared to the previous year and an 11% increase in our net orders during the current year. In 2015, the number of homes delivered rose from 7,215 in 2014 mainly as a result of the 14% higher backlog of homes we had at the beginning of 2015 and a 22% increase in our net orders during 2015.
The overall average selling price of homes delivered rose to $363,800 in 2016 from $354,800 in 2015, which had increased from $328,400 in 2014. The year-over-year increases in our overall average selling price in both 2016 and 2015 resulted from a strategic focus on positioning our new home communities in attractive, land-constrained locations that feature higher-income homebuyers; higher median home selling prices; our actions to balance sales pace and selling prices within our communities to optimize revenues and profits; and generally favorable market conditions.
Land sale revenues totaled $7.4 million in 2016, $112.8 million in 2015 and $20.0 million in 2014. The higher land sale revenues in 2015 as compared to 2016 and 2014 reflected our execution on opportunistic transactions in each of our four homebuilding reporting segments aligned with ongoing efforts to improve our asset efficiency. The transactions in 2015 were mainly comprised of the sale of a large land parcel in northern California and sales of other non-strategic land parcels that had previously been held for future development. 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.
Operating Income. Our homebuilding operating income increased 10% to $152.4 million in 2016 compared to $138.6 million in 2015, which had increased 20% from $116.0 million in 2014. As a percentage of homebuilding revenues, homebuilding operating income was 4.3% in 2016, 4.6% in 2015 and 4.9% in 2014. The year-over-year growth in homebuilding operating income for 2016 was due to an increase in housing gross profits that was partly offset by an increase in selling, general and administrative expenses, and land sale losses. Our homebuilding operating income included total inventory-related charges of $52.8 million in 2016, compared to $9.6 million in the year-earlier period. In 2015, the year-over-year growth in our homebuilding operating income reflected higher housing gross profits and improved land sale results that were partly offset by higher selling, general and administrative expenses.
In 2016, housing gross profits increased by $103.9 million , or 22% , from $474.6 million in 2015 due to the higher volume of homes delivered, partly offset by a slight decrease in the housing gross profit margin. Housing gross profits for 2016 included $16.2 million of inventory impairment and land option contract abandonment charges. In 2015, our housing gross profits increased by $45.0 million , or 10% , from $429.5 million in the previous year due to the higher volume of homes delivered, partly offset by a lower housing gross profit margin. Housing gross profits for 2015 included $9.6 million of inventory impairment and land option contract abandonment charges, compared to $12.8 million of such charges for 2014.
Our housing gross profit margin for 2016 declined 10 basis points to 16.2% from 16.3% in the previous year, primarily due to higher construction and land costs (approximately 20 basis points), as well as increases in both inventory-related charges (approximately 10 basis points) and the amortization of previously capitalized interest (approximately 10 basis points), partly offset by improved operating leverage on fixed costs as a result of our higher volume of homes delivered and corresponding higher housing revenues (approximately 30 basis points). In 2015, the housing gross profit margin decreased by 180 basis points as

23



compared to 18.1% in 2014, primarily due to higher construction and land costs (approximately 210 basis points) and an increase in the amortization of previously capitalized interest (approximately 60 basis points), partly offset by a decrease in inventory-related charges (approximately 30 basis points) and improved operating leverage on fixed costs as a result of our higher volume of homes delivered and corresponding higher housing revenues (approximately 60 basis points). Sales incentives did not have a significant impact on our year-over-year housing gross profit margin comparisons in 2016 or 2015.
Excluding the amortization of previously capitalized interest associated with housing operations of $160.6 million , $126.8 million and $90.8 million in 2016, 2015 and 2014, respectively, and the above-mentioned inventory-related charges in the applicable periods, our adjusted housing gross profit margin increased 10 basis points to 21.1% in 2016 from 21.0% in 2015, which had decreased 150 basis points from 22.5% in 2014. 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 sales generated losses of $36.6 million in 2016, profits of $7.1 million in 2015 and losses of $25.5 million in 2014. The land sale results in 2016 included inventory impairment charges of $36.7 million , most of which were recognized in the fourth quarter associated with our decision to monetize certain non-strategic land parcels through land sales as part of our returns-focused growth plan, which is described in the “Business” section of this report. These land parcels, which were classified as land held for sale at November 30, 2016, included land in excess of our near-term requirements; land where we now believe the necessary incremental investment in development is not justified; land located in areas outside of our served markets; and/or land entitled for certain product types that are not aligned with our primary product offerings. The majority of these land parcels are located in our Southeast homebuilding reporting segment. We also recorded inventory impairment charges in the 2016 second quarter associated with the planned future sales of two land parcels in the Metro Washington, D.C. market as a result of our decision to wind down our operations in this market, and in the 2016 first quarter related to the sales of our last remaining land parcels in the Rio Grande Valley area of Texas that closed in the second quarter. The land sale results in 2014 included inventory impairment charges of $26.6 million related to then-planned land sales, all of which had closed as of November 30, 2015.
As discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, we recognized total inventory impairment charges (including those associated with the above-mentioned land sales) of $49.6 million in 2016, $8.0 million in 2015 and $37.6 million in 2014, and land option contract abandonment charges of $3.2 million in 2016, $1.6 million in 2015 and $1.8 million in 2014.
Selling, general and administrative expenses totaled $389.4 million in 2016, up from $343.0 million in 2015, which had increased from $288.0 million in 2014. The year-over-year increases in selling, general and administrative expenses in 2016 and 2015 mainly reflected higher variable expenses associated with the increases in the volume of homes delivered and corresponding housing revenues. Also contributing to the year-over-year increase in 2015 were higher staffing levels and new community and related operating platform investments to support both the strategic expansion of our community count that year and anticipated growth in homes delivered, the acceleration of compensation expense associated with stock options due to certain recipients meeting retirement provisions, and legal settlements. As a percentage of housing revenues, selling, general and administrative expenses were 10.9% in 2016, 11.8% in 2015 and 12.2% in 2014. The percentages improved on a year-over-year basis in both 2016 and 2015 largely due to improved operating leverage on fixed costs from the increased volume of homes delivered and corresponding higher housing revenues in each of those years and our ongoing efforts to contain our overhead costs to the extent possible.
Interest Income. Interest income, which is generated from short-term investments, totaled $.5 million in each of 2016 and 2015 and $.4 million in 2014. 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.
Interest Expense. Interest expense results principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. Our interest expense, net of amounts capitalized, decreased to $5.9 million in 2016 compared to $21.9 million in 2015, which had decreased from $30.8 million in 2014. In 2016, the year-over-year decrease in interest expense reflected a slight decrease in interest incurred and an increase in the amount of interest capitalized due to a higher amount of inventory qualifying for interest capitalization in the current year. In 2015, interest expense decreased on a year-over-year basis as an increase in interest incurred, stemming from our higher average debt level, was more than offset by an increase in the amount of interest capitalized due to a higher amount of inventory qualifying for interest capitalization.
For the years ended November 30, 2016, 2015 and 2014, the average amount of our inventory qualifying for interest capitalization was lower than our average debt level; therefore, a portion of the interest we incurred was reflected as interest expense. In both 2016 and 2015, the amount of inventory qualifying for interest capitalization increased more than our debt level increased, each as compared to the previous year, primarily as a result of our substantial investment in land and land development as well as the activation of land previously held for future development in each of those years. Accordingly, our interest expense decreased on a year-over-year basis in both 2016 and 2015.

24



Interest incurred decreased 1% to $185.5 million in 2016 from $186.9 million in 2015, which rose 9% from $171.5 million in 2014. The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and/or the interest rate on that debt. We capitalized $179.6 million , $165.0 million and $140.8 million of the interest incurred in 2016, 2015 and 2014, respectively. The percentage of interest capitalized was 97% in 2016, 88% in 2015 and 82% in 2014. The percentage of interest capitalized generally fluctuates based on the amount of our inventory qualifying for interest capitalization and the amount of debt outstanding.
Interest amortized to construction and land costs associated with housing operations totaled $160.6 million in 2016, $126.8 million in 2015 and $90.8 million in 2014. The increases in interest amortized in 2016 and 2015 reflected year-over-year increases in the number of homes delivered and higher overall construction and land costs attributable to those homes. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 4.5% for 2016, 4.4% for 2015 and 3.8% for 2014. Additionally, interest amortized to construction and land costs in 2016 and 2015 included $.7 million and $16.4 million , respectively, of amortization of previously capitalized interest related to land sales that occurred during those years.
Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint ventures totaled $2.2 million in 2016 and $1.8 million in 2015. In 2014, our equity in income of unconsolidated joint ventures of $.7 million included a $3.2 million gain on the sale of our interest in an unconsolidated joint venture in Maryland. 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.
Non-GAAP Financial Measures
This report contains information about our adjusted housing gross profit margin and ratio of net debt to capital, neither of which are calculated in accordance with generally accepted accounting principles (“GAAP”). We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in 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 the adjusted housing gross profit margin and the ratio of net debt to capital are not calculated in accordance with GAAP, these financial measures 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, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):
 
Years Ended November 30,
 
2016
 
2015
 
2014
Housing revenues
$
3,575,548

 
$
2,908,236

 
$
2,369,633

Housing construction and land costs
(2,997,073
)
 
(2,433,683
)
 
(1,940,100
)
Housing gross profits
578,475

 
474,553

 
429,533

Add: Amortization of previously capitalized interest (a)
160,633

 
126,817

 
90,804

Inventory-related charges (b)
16,152

 
9,591

 
12,788

Adjusted housing gross profits
$
755,260

 
$
610,961

 
$
533,125

Housing gross profit margin as a percentage of housing revenues
16.2
%
 
16.3
%
 
18.1
%
Adjusted housing gross profit margin as a percentage of housing revenues
21.1
%
 
21.0
%
 
22.5
%
(a)
Represents the amortization of previously capitalized interest associated with housing operations.
(b)
Represents inventory impairment and land option contract abandonment charges associated with housing operations.
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) amortization of previously capitalized interest associated with housing operations and (2) 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

25



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 amortization of previously capitalized interest associated with housing operations, and 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 amortization of previously capitalized interest associated with housing operations, and 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.
Ratio of Net Debt to Capital. The following table reconciles our ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net debt to capital (dollars in thousands):
 
November 30,
 
2016
 
2015
Notes payable
$
2,640,149

 
$
2,601,754

Stockholders’ equity
1,723,145

 
1,690,834

Total capital
$
4,363,294

 
$
4,292,588

Ratio of debt to capital
60.5
%
 
60.6
%
 
 
 
 
Notes payable
$
2,640,149

 
$
2,601,754

Less: Cash and cash equivalents and restricted cash
(592,086
)
 
(568,386
)
Net debt
2,048,063

 
2,033,368

Stockholders’ equity
1,723,145

 
1,690,834

Total capital
$
3,771,208

 
$
3,724,202

Ratio of net debt to capital
54.3
%
 
54.6
%
The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash equivalents and restricted cash, by capital (notes payable, net of homebuilding cash and cash equivalents and restricted cash, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations.
HOMEBUILDING REPORTING SEGMENTS
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.
West Coast . The following table presents financial information related to our West Coast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

26



 
Years Ended November 30,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs 2015
 
2015 vs 2014
Revenues
$
1,638,078

 
$
1,402,264

 
$
1,089,857

 
17
  %
 
29
  %
Construction and land costs
(1,386,270
)
 
(1,179,222
)
 
(889,345
)
 
(18
)
 
(33
)
Selling, general and administrative expenses
(100,425
)
 
(84,875
)
 
(69,774
)
 
(18
)
 
(22
)
Operating income
$
151,383

 
$
138,167

 
$
130,738

 
10
  %
 
6
  %
 
 
 
 
 
 
 
 
 
 
Homes delivered
2,825

 
2,258

 
1,913

 
25
  %
 
18
  %
Average selling price
$
579,900

 
$
587,000

 
$
569,700

 
(1
) %
 
3
  %
Housing gross profit margin
15.4
%
 
16.4
%
 
20.5
%
 
(100
)bps
 
(410
)bps
This segment’s revenues in 2016 and 2014 were generated entirely from housing operations. In 2015, revenues were generated from both housing operations and land sales. Housing revenues of $1.64 billion in 2016 grew 24% from $1.33 billion in 2015, which had increased from $1.09 billion in 2014. The year-over-year growth in housing revenues in 2016 reflected an increase in the number of homes delivered primarily from our southern California operations, stemming from the higher backlog of homes at the beginning of 2016 and a higher volume of net orders in the current year. The 2016 average selling price decreased slightly from the previous year due to a shift in product and geographic mix, with a greater proportion of homes delivered from communities located in our inland submarkets. In 2015, housing revenues increased 22% from 2014 due to an increase in the number of homes delivered and an increase in the average selling price of those homes. The year-over-year increase in the number of homes delivered in 2015 occurred mostly in our coastal submarkets and reflected the higher backlog of homes at the beginning of 2015. The average selling price for 2015 rose from the previous year due to the combination of a greater proportion of homes delivered from higher-priced communities located in our coastal submarkets, a shift in product mix, and generally rising home prices. This segment generated land sale revenues of $76.8 million in 2015, primarily reflecting sales of a large parcel in northern California and a parcel located in an inland southern California submarket.
In 2016, this segment’s operating income increased by $13.2 million from the previous year, reflecting an increase in housing gross profits that was partly offset by a decline in land sale results and higher selling, general and administrative expenses. The increase in housing gross profits reflected a higher volume of homes delivered, partly offset by a decline in the housing gross profit margin. The year-over-year decrease in the housing gross profit margin was mainly due to an increase in inventory impairment and land option contract abandonment charges, higher construction and land costs and a shift in product and geographic mix of homes delivered. Inventory-related charges impacting the segment’s housing gross profit margin totaled $8.4 million in 2016, compared to $1.0 million in 2015. Land sale losses of $.6 million in 2016 reflected inventory impairment charges related to land held for sale. In 2015, land sales generated profits of $6.2 million . Selling, general and administrative expenses for 2016 rose from the previous year, primarily due to higher variable expenses associated with the increased volume of homes delivered and corresponding higher housing revenues.
In 2015, operating income increased by $7.4 million from 2014, reflecting improved land sale results, partly offset by an increase in selling, general and administrative expenses and a decrease in housing gross profits. The year-over-year decrease in housing gross profits in 2015 reflected a decline in the housing gross profit margin, partly offset by the impact of an increase in the number of homes delivered. The housing gross profit margin decreased mainly due to higher construction and land costs, a shift in product and geographic mix, including the close-out of certain higher-margin communities in the latter part of 2014, and increased pricing pressures in some markets, partly offset by increased operating leverage on fixed costs as a result of the higher home delivery volume and corresponding higher housing revenues. Inventory impairment and land option contract abandonment charges impacting the segment’s housing gross profit margin totaled $1.0 million in 2015 and $4.6 million in 2014. Land sales produced profits in 2015, compared to losses of $23.2 million in 2014 that reflected an inventory impairment charge related to the then-planned sale of the inland southern California land parcel noted above, and as further described in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report. Selling, general and administrative expenses for 2015 rose from 2014 primarily due to increased variable expenses associated with the increases in both the number of homes delivered and corresponding housing revenues, and higher staffing levels to support delivery growth.
Southwest . The following table presents financial information related to our Southwest homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

27



 
Years Ended November 30,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs 2015
 
2015 vs 2014
Revenues
$
447,473

 
$
398,242

 
$
199,504

 
12
  %
 
100
  %
Construction and land costs
(371,509
)
 
(329,203
)
 
(162,560
)
 
(13
)
 
(103
)
Selling, general and administrative expenses
(35,786
)
 
(31,228
)
 
(22,069
)
 
(15
)
 
(42
)
Operating income
$
40,178

 
$
37,811

 
$
14,875

 
6
  %
 
154
  %
 
 
 
 
 
 
 
 
 
 
Homes delivered
1,559

 
1,311

 
736

 
19
  %
 
78
  %
Average selling price
$
287,000

 
$
284,600

 
$
271,100

 
1
  %
 
5
  %
Housing gross profit margin
17.4
%
 
18.4
%
 
18.5
%
 
(100
)bps
 
(10
)bps
In 2016 and 2014, this segment’s revenues were generated entirely from housing operations. In 2015, revenues were generated from both housing operations and land sales. Housing revenues of $447.5 million in 2016 grew 20% from the previous year, primarily due to substantial year-over-year growth in the number of homes delivered from both our Arizona and Nevada operations. Housing revenues of $373.1 million for 2015 rose 87% from 2014, largely driven by increases in the number of homes delivered from both our Arizona and Nevada operations as we delivered homes from more communities in those markets. In addition, the average selling price of the homes delivered increased from the previous year, primarily due to a shift in the product and geographic mix of homes delivered. In 2015, revenues included $25.2 million associated with land sales in Nevada.
In 2016, operating income from this segment grew $2.4 million from 2015, reflecting an increase in housing gross profits that was partly offset by an increase in selling, general and administrative expenses and land sale losses in the current period. Housing gross profits increased in 2016 primarily due to the higher volume of homes delivered, partly offset by a decrease in the housing gross profit margin. The margin decrease resulted from higher construction and land costs and a shift in product mix, partially offset by improved operating leverage on fixed costs from the increased volume of homes delivered, a decrease in inventory-related charges, and a decrease in sales incentives as a percentage of housing revenues. Housing gross profits in 2016 included $1.5 million of inventory impairment and land option contract abandonment charges, compared to $3.3 million of inventory impairment charges in 2015. Land sale losses of $1.9 million in 2016 reflected inventory impairment charges related to land held for sale at November 30, 2016. In 2015, land sales produced gross profits of $.3 million . Selling, general and administrative expenses for 2016 rose from the previous year, primarily due to higher variable expenses associated with the increased volume of homes delivered and corresponding higher housing revenues, partly offset by a favorable legal settlement in 2016.
In 2015, operating income rose $22.9 million from the previous year as the impact of an increase in housing gross profits was partly offset by an increase in selling, general and administrative expenses. Housing gross profits increased in 2015 primarily due to the higher volume of homes delivered as the housing gross profit margin was nearly even with 2014. In 2015, housing gross profits included $3.3 million of inventory impairment charges, while housing gross profits in 2014 included $6.4 million of such charges. Sales incentives as a percentage of housing revenues in 2015 were slightly lower on a year-over-year basis. The land sale activity in 2015 generated gross profits of $.3 million . Selling, general and administrative expenses rose in 2015 from 2014, primarily due to increases in the number of homes delivered and corresponding housing revenues, and higher community opening-related expenses in connection with the strategic expansion of our community count in 2015.
Central . The following table presents financial information related to our Central homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 
Years Ended November 30,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs 2015
 
2015 vs 2014
Revenues
$
1,018,535

 
$
809,738

 
$
698,429

 
26
  %
 
16
  %
Construction and land costs
(830,368
)
 
(657,316
)
 
(578,711
)
 
(26
)
 
(14
)
Selling, general and administrative expenses
(102,300
)
 
(82,400
)
 
(72,742
)
 
(24
)
 
(13
)
Operating income
$
85,867

 
$
70,022

 
$
46,976

 
23
  %
 
49
  %
 
 
 
 
 
 
 
 
 
 

28



 
Years Ended November 30,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs 2015
 
2015 vs 2014
Homes delivered
3,744

 
3,183

 
3,098

 
18
  %
 
3
  %
Average selling price
$
270,100

 
$
252,200

 
$
223,800

 
7
  %
 
13
  %
Housing gross profit margin
19.6
%
 
19.0
%
 
17.2
%
 
60
bps
 
180
bps
In 2016, 2015 and 2014, revenues for this segment were generated from both housing operations and land sales. Housing revenues in 2016 rose 26% to $1.01 billion from $802.6 million in 2015, reflecting increases in both the number of homes delivered and the average selling price of those homes. The year-over-year growth in the number of homes delivered in 2016 reflected increases from both our Colorado and Texas operations. The average selling price rose from 2015, primarily due to a greater proportion of homes delivered from higher-priced communities, a shift in product mix and generally rising home prices. In 2015, housing revenues rose 16% from $693.3 million in 2014 due to increases in both the number of homes delivered and the average selling price of those homes. The year-over-year growth in the number of homes delivered for 2015 primarily reflected an increase in our Colorado operations as a result of a higher number of communities within those operations delivering homes. The increase in the average selling price from 2014 was mainly due to a greater proportion of homes delivered from higher-priced communities and generally rising home prices. Land sale revenues totaled $7.3 million in 2016, $7.1 million in 2015 and $5.2 million in 2014.
The operating income generated by this segment in 2016 increased $15.8 million from 2015, primarily due to growth in housing gross profits that was partly offset by an increase in selling, general and administrative expenses and land sale losses in the current year. The year-over-year growth in housing gross profits reflected the increased volume of homes delivered and improvement in our housing gross profit margin. The housing gross profit margin for 2016 improved on a year-over-year basis largely due to improved operating leverage on fixed costs and lower overall construction and land costs, partly offset by unfavorable warranty adjustments. Land sale losses totaled $10.5 million in 2016, primarily due to inventory impairment charges related to land held for sale at November 30, 2016 and the sales of our last remaining parcels in the Rio Grande Valley area of Texas, both as further described in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report. Selling, general and administrative expenses for 2016 rose from 2015, mainly due to higher variable expenses associated with the increased volume of homes delivered and corresponding higher housing revenues, and an increase to a legal accrual, partly offset by lower overhead costs as a result of our cost containment efforts.
In 2015, operating income improved by $23.0 million from 2014, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. The housing gross profit margin increased to 19.0% from 17.2% for 2014, mainly due to an increased proportion of homes delivered from higher-margin communities, and improved operating leverage on fixed costs from the increased volume of homes delivered and corresponding higher housing revenues. Housing gross profits included $.2 million of land option contract abandonment charges in 2015, compared to $1.0 million of such charges included in 2014. Land sale activity in 2015 generated nominal profits. The year-over-year increase in selling, general and administrative expenses for 2015 was primarily due to higher variable expenses associated with the increase in housing revenues.
Southeast. The following table presents financial information related to our Southeast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 
Years Ended November 30,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs 2015
 
2015 vs 2014
Revenues
$
478,857

 
$
410,743

 
$
401,853

 
17
  %
 
2
  %
Construction and land costs
(446,539
)
 
(367,668
)
 
(351,634
)
 
(21
)
 
(5
)
Selling, general and administrative expenses
(58,361
)
 
(57,552
)
 
(54,412
)
 
(1
)
 
(6
)
Operating loss
$
(26,043
)
 
$
(14,477
)
 
$
(4,193
)
 
(80
) %
 
(245
) %
 
 
 
 
 
 
 
 
 
 
Homes delivered
1,701

 
1,444

 
1,468

 
18
  %
 
(2
) %
Average selling price
$
281,400

 
$
281,900

 
$
263,600

 

 
7
  %
Housing gross profit margin
11.7
%
 
10.4
%
 
13.6
%
 
130
bps
 
(320
)bps
This segment’s revenues in 2016, 2015 and 2014 were comprised of revenues from both housing operations and land sales. Housing revenues in 2016 grew 18% to $478.7 million from $407.1 million in 2015. The year-over-year growth in housing revenues in 2016 was due to increases in the number of homes delivered, as the average selling price was essentially flat year over

29



year. The growth in the number of homes delivered for 2016, compared to the year earlier period, was attributable to our Florida operations. In 2015, housing revenues grew 5% from $387.0 million in 2014 due to an increase in the average selling price, as the number of homes delivered was nearly flat with the year-earlier period. The year-over-year increase in the average selling price for 2015 was primarily due to a greater proportion of homes delivered from higher-priced communities, a change in product mix and generally rising home prices. This segment generated land sale revenues of $.1 million , $3.6 million and $14.8 million in 2016, 2015 and 2014, respectively.
In 2016, this segment’s operating results declined $11.6 million , reflecting land sale losses and a slight increase in selling, general and administrative expenses that were partially offset by an increase in housing gross profits. The growth in this segment’s housing gross profits was due to the increase in the number of homes delivered and an improvement in the housing gross profit margin. The housing gross profit margin increased on a year-over-year basis primarily due to improved operating leverage on fixed costs from the increased volume of homes delivered and corresponding higher housing revenues, and lower construction and land costs, partly offset by an increase in inventory-related charges. In 2016, inventory-related charges impacting the housing gross profit margin totaled $5.8 million and were largely related to the wind down of our Metro Washington, D.C. operations. In 2015, the housing gross profit margin was impacted by $5.1 million of inventory impairment and land option contract abandonment charges. Land sale losses totaled $23.6 million for 2016, compared to land sale profits of $.6 million for the previous year, primarily due to inventory impairment charges associated with the land held for sale at November 30, 2016, including two land parcels in the Metro Washington, D.C. area that we plan to sell in connection with the wind down of our operations in this market, as further described in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report. In 2016, selling, general and administrative expenses rose from the previous year primarily due to higher variable expenses associated with the increase in housing revenues and a legal accrual. In 2015, selling general and administrative expenses included an increase in the accrual for a Florida legal inquiry that was resolved in February 2016, as further described in Note 15 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report.
In 2015, the operating loss increased by $10.3 million from 2014 as a result of a decrease in housing gross profits and an increase in selling, general and administrative expenses. These impacts were partly offset by a year-over-year improvement in land sale results. The year-over-year decrease in housing gross profits reflected a decline in the housing gross profit margin primarily due to the combined impact of higher land and construction costs, lower margins on homes delivered from recently activated communities that were previously held for future development, $5.1 million of inventory impairment and land option contract abandonment charges, and unfavorable warranty adjustments in 2015. In addition, sales incentives as a percentage of housing revenues in 2015 were slightly higher on a year-over-year basis. In 2014, inventory impairment and land option contract abandonment charges impacting this segment’s housing gross profit margin totaled $.8 million . Land sale profits were $.6 million in 2015, compared to land sale losses of $2.6 million in 2014, which included an inventory impairment charge of $3.4 million related to the then-planned land sale of our last remaining land parcel in Atlanta, Georgia. Selling, general and administrative expenses rose from 2014, primarily due to increased variable expenses associated with the increase in housing revenues, higher overhead costs to support new community openings, and the above-mentioned increase in the accrual for the estimated minimum probable loss with respect to a Florida legal inquiry that has since been resolved.
FINANCIAL SERVICES REPORTING SEGMENT
The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):
 
Years Ended November 30,
 
2016
 
2015
 
2014
Revenues
$
11,703

 
$
11,043

 
$
11,306

Expenses
(3,817
)
 
(3,711
)
 
(3,446
)
Equity in income (loss) of unconsolidated joint ventures
(3,420
)
 
4,292

 
686

Pretax income
$
4,466

 
$
11,624

 
$
8,546

 
 
 
 
 
 

30



 
Years Ended November 30,
 
2016
 
2015
 
2014
Total originations (a):
 
 
 
 
 
Loans
3,320

 
4,460

 
1,501

Principal
$
847,905

 
$
1,132,479

 
$
374,263

Percentage of homebuyers using HCM
37
%
 
62
%
 
61
%
Average FICO score
713

 
718

 
716

 
 
 
 
 
 
Loans sold (a):
 
 
 
 
 
Loans sold to Nationstar
3,730

 
4,168

 
1,035

Principal
$
966,155

 
$
1,055,551

 
$
252,583

Loans sold to other third parties
234

 
161

 

Principal
$
47,936

 
$
38,608

 
$

Mortgage loan origination mix (a):
 
 
 
 
 
Conventional/non-conventional loans
43
%
 
45
%
 
52
%
FHA loans
38
%
 
38
%
 
26
%
Other government loans
19
%
 
17
%
 
22
%
 
 
 
 
 
 
Loan type (a):
 
 
 
 
 
Fixed
100
%
 
98
%
 
91
%
ARM
%
 
2
%
 
9
%
(a)
Loan originations and sales occurred within HCM, which began operations in July 2014. In the 2016 fourth quarter, we and Nationstar began the process to wind down HCM and transfer HCM’s operations and certain assets to Stearns Lending, LLC (“Stearns Lending”).
Revenues. Our financial services reporting segment generates revenues primarily from insurance commissions and title services. These operations also earned marketing services fees, pursuant to a marketing services agreement with a preferred lender, until July 2014. The year-over-year growth in our financial services revenues for 2016 reflected an increase in title services revenues, partly offset by a decrease in insurance commissions. In 2015, the year-over-year decrease in our financial services revenues was due to the absence of marketing services revenues, which was largely offset by an increase in insurance commissions and title services revenues. In 2014, marketing services fees totaled $1.1 million and represented the fair value of the services we provided in connection with the marketing services agreement.
Expenses. General and administrative expenses totaled $3.8 million in 2016, $3.7 million in 2015 and $3.4 million in 2014.
Equity in Income (Loss) of Unconsolidated Joint Ventures. The equity in loss of unconsolidated joint ventures was $3.4 million in 2016, compared to equity in income of unconsolidated joint ventures of $4.3 million in 2015 and $.7 million in 2014. The equity in income (loss) of unconsolidated joint ventures for each of the years ended November 30, 2016, 2015 and 2014 was primarily related to HCM. The equity in loss of unconsolidated joint ventures in 2016 reflected fewer loan originations and higher overhead costs as well as the wind down of HCM, which, as noted above, began in the 2016 fourth quarter, and included an increase in HCM’s reserves for potential future losses on certain loans it originated. While we believe we will not need to record any additional charges, it is reasonably possible that we may incur further losses with respect to our equity interest in future periods as the wind down of HCM is completed. Although we are currently unable to estimate the amount or range of such losses, if any, we believe they would not have a material impact on our consolidated financial statements.
In the 2016 fourth quarter, a subsidiary of ours and a subsidiary of Stearns Lending entered into an agreement to form a mortgage banking joint venture in which we each have a 50.0% ownership interest. The unconsolidated joint venture, which had no impact on our consolidated statement of operations for the year ended November 30, 2016, is expected to begin offering services, including mortgage loan originations, to our homebuyers in most of our served markets by the end of our 2017 second quarter, subject to obtaining all requisite regulatory approvals and clearances.
Based on the number of homes delivered in 2016, approximately 37% of our homebuyers who obtained mortgage financing used HCM to finance the purchase of their home, compared to approximately 62% that used HCM in 2015 and approximately 61% that used HCM or Nationstar in 2014. The year-over-year decrease in 2016 was primarily due to HCM’s transition to a new

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loan origination system that limited its ability to originate certain loans, insufficient staffing in certain markets, and its wind down. The year-over-year decrease in the percentage of homebuyers that used HCM did not have a significant impact on our orders, cancellation rate or the number of homes we delivered in 2016.
INCOME TAXES
Income Tax Expense. Our income tax expense and effective income tax rate were as follows (dollars in thousands):
 
Years Ended November 30,
 
2016