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

Business Wire, August 5, 2005

NEW YORK -- Fitch Ratings affirms KB Home (KBH) as follows:

-- Senior unsecured debt 'BB ';

-- Senior subordinated debt 'BB-';

-- Rating Outlook Positive.

The ratings reflect KB Home's solid, consistent profit performance in recent years and the expectation that the company's credit profile will continue to improve as it executes its business model and embarks on a new period of growth. The ratings also take into account KB Home's broadened customer mix (entry level, move-up, active adult), its conservative building practices, and effective utilization of return on invested capital criteria as a key element of its operating model. In recent years, KB Home has improved its capital structure and increased its geographic diversity and has better positioned itself to withstand a meaningful housing downturn. Fitch also has taken note of KB Home's role as an active consolidator within the industry. Risk factors also include the cyclical nature of the homebuilding industry and KB Home's rising off-balance sheet activities. Fitch expects leverage (excluding financial services) to remain comfortably within KB Home's stated debt to capital target of 45%-55%.

KB Home has expanded EBITDA margins over the past several years on steady price increases, volume improvements and reductions in SG&A expenses. Also, KB Home has produced record levels of home closings, orders and backlog as the housing cycle extended its upward momentum. KB Home realizes a significant portion of its revenue from California, a region that has proved volatile in past cycles. But KB Home has reduced this exposure as it has implemented its growth strategy and currently sources 16% of its deliveries from California, compared with 69% in fiscal 1995 and 88% in fiscal 1993. Over recent years KB Home shifted toward a presale strategy, producing a higher backlog/delivery ratio and reducing the risk of excess inventory and debt accumulation in the event of a slowdown in new orders. The strategy has also served to enhance margins. KB Home maintains a 4.7 year supply of lots (based on deliveries projected for 2005), 48% of which are owned and the balance controlled through options. Inventory turnover, as of fiscal year-end, has been consistently at or above 1.5 times (x) during the past nine years.

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

As the housing cycle progresses, creditors should benefit from KB Home's solid financial flexibility supported by $76.3 million in cash and equivalents and $362.6 million available under its $1 billion domestic unsecured credit facility, net of $209.9 million of outstanding letters of credit, as of May 31, 2005. In addition, liquid, primarily pre-sold work-in-process inventory totaling $4 billion provides comfortable coverage for construction debt of $2.4 billion. KB Home's debt is well-laddered and the revolving credit facility matures in October 2007.

Management's share repurchase strategy has been aggressive at times, but has not impaired KB Home's financial flexibility. KB Home repurchased $81.9 million of stock in fiscal 1999, $169.2 million in 2000, $190.8 million in 2002, $108.3 million (two million shares) in fiscal 2003 and $66.1 million (one million shares) in fiscal 2004. At the end of May 2005, one million shares remained under the board of directors' repurchase authorization. Notwithstanding these repurchases, book equity has increased $1.6897 billion since the end of 1999, while construction debt grew $1.3678 billion.

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

KB Home ranked as fifth largest homebuilder in the U.S. in 2001, 2002, 2003 and 2004. Its average home selling price through the first six months of fiscal 2005 is $231,800. It is on pace to construct about 38,000 homes in fiscal 2005. KB Home operates homebuilding operations within the U.S. and France (49% ownership of Kaufman and Broad S.A.). Kaufman and Broad S.A. also does commercial construction in France and KB Home currently operates KB Home Mortgage Company domestically. (KB Home is in the process of selling its mortgage subsidiary to Countrywide Home Loans, a principal subsidiary of Countrywide Financial Corp.