KB Home

10990 Wilshire Boulevard
7th Floor
Los Angeles, California 90024
U.S.A.
Telephone: (310) 231-4000
Toll Free: (888) 524-6637
Fax: (310) 231-4222
Web site: http://www.kbhome.com

Public Company
Incorporated: 1957 as Kaufman and Broad Building
Company Employees: 3,500
Sales: $4.57 billion (2001)
Stock Exchanges: New York Ticker Symbol: KBH NAIC: 233210 Building Construction, Single Family;233220 Building Construction, Residential; 233320
Commercial Building Construction; 522292 Mortgage
Companies

KB Home is the largest home builder in the United States, in terms of units built. In 2001, the residential real estate developer primarily built single-family homes in the western United States and Paris, France, for the entry level and first-time trade-up markets. The company also provided mortgage banking services to its home buyers in the United States through its wholly owned subsidiary, Kaufman and Broad Mortgage Company, and offered commercial development, renovation services, condominium and apartment complex development, and single-family homes through its French subsidiary, Kaufman and Broad, S.A.

From the Ground Up: The 1950s and 1960s

Kaufman and Broad began in 1957 in Detroit, Michigan, as Kaufman and Broad Building Company. The cofounders, Don Kaufman and Eli Broad, took their initial investment of $25,000 and developed two model homes in the Detroit suburb of Madison Heights. They targeted the entry-level housing market and positioned the company as one that provided well-designed and affordable first homes. The styling and price were well matched for the market; in its first year in business, the company posted sales of $1.7 million, or about 136 homes with the average sale price of $12,500 for a new three-bedroom house. First-year net income of almost $33,000 was nearly 2 percent of sales and exceeded the cofounders’ initial investment.

In 1959, Kaufman and Broad expanded into the contract housing business and developed elderly housing and college dormitories as well as new homes for the armed forces and public housing agencies. Sales tripled from their first year in business to $5.1 million, and net income improved to 7 percent of sales. The following year, the company began building homes in Arizona. In 1961, the company went public and raised about $1.8 million in its initial public offering. Total revenue more than doubled from two years prior to $11.7 million, and net income was more than 5 percent of sales.

By the end of 1962, Broad and Kaufman had delivered more than 300 entry-level priced homes in Phoenix and Tempe, Arizona. That same year, the company introduced a new product in Detroit, “Townehouses,” which were attached single-family homes. Again, the company understood the needs of the market well; 400 townhouse units were sold in 30 days. That same year, Kaufman and Broad was listed as one of the country’s 200 fastest growing companies by Standard and Poor’s and became the first home builder to trade on the American Stock Exchange. Another first for the company in 1962 was becoming the first builder to successfully obtain financing commitments to provide qualified buyers with mortgage loans.

Kaufman and Broad continued to expand into other markets. In 1963, the company entered southern California and developed an attached townhouse community in Orange County. Sales continued to be strong, and year-end net revenue again more than doubled from the two years previous to $31.8 million. Acquisitions of smaller local and regional builders enabled the company to enter other markets such as San Francisco, Chicago, New York, and other cities in the northeast portion of the United States.

In 1964, the company moved its corporate headquarters to Los Angeles from Phoenix, where it had moved earlier in the 1960s. That same year, Kaufman and Broad opened a division in Chicago to handle sales and development in that metropolitan area. The home designs remained value-conscious as the company expanded its market focus to include the first-time trade-up buyers as well as the entry-level market. Having been successful with the financing commitments it was able to obtain and develop over a three-year period, Kaufman and Broad founded the International Mortgage Company in 1965. The creation of this wholly owned subsidiary allowed the company to provide financing directly to its customers without involving banks or other financial institutions. In the same year that Kaufman and Broad vertically integrated into mortgage services, it consolidated production activities by ceasing operations of its contract division. The division completed homes, schools, and public buildings for an Indian reservation in Fort Wingate, New Mexico, as its final project.

Diversification into other businesses continued throughout the rest of the 1960s. In 1966, the company entered into the relatively new business of cable TV franchising with the formation of its second wholly owned subsidiary, Nation Wide Cablevision. Within five years, the subsidiary was operating franchises in 51 communities on the West Coast of the United States. In 1969, the company founded Kaufman and Broad Home Systems, Inc., through which the company entered into the manufactured housing business. By 1971, Home Systems operated eight plants throughout the country and had sales of 9,000 units.

Also in the late 1960s, Kaufman and Broad’s residential housing business was growing as well. Through its acquisition of the local building company Kay Homes in 1967, the company became the largest home producer in the San Francisco Bay area. Kaufman and Broad model homes were introduced in Paris, France, in 1969, two years after the company’s first overseas office was opened there. The company’s growth during these years was due in part to customer service programs and good public relations. Kaufman and Broad was recognized by President Johnson in 1967 for its commitment to participate in low-income housing programs. In that same year, the company began offering a five-year limited home warranty, the first in the industry to do so. The following year, FHA, VA, and Fannie Mae approved International Mortgage for home mortgages, making it one of only a few builder mortgage subsidiaries with that approval.

In 1968, in an effort to better define itself as a diversified corporation, the company changed its name to Kaufman and Broad, Inc. A year earlier, the company had become the largest publicly held housing corporation, its growth attributable, in large part, to happy customers. A total of 40 percent of its sales was secured through referrals from satisfied customers. In 1969, it became the first housing builder to be listed on the New York Stock Exchange.

Fighting Recessions in the 1970s and 1980s

Additional acquisitions in 1970 of Victoria Wood Development Corporation in Toronto, Canada, and in 1971 of Sun Life Insurance Company further expanded and diversified Kaufman and Broad. Following the purchase of Sun Life, the company reorganized its onsite housing activities as a new entity, Kaufman and Broad Development Group. By 1972, Kaufman and Broad was America’s largest multinational housing producer and the largest single-family home builder in Paris. The company operated onsite divisions in more than five states, as well as Canada, France, and West Germany. In 1973, the company entered the pre-cut Custom Home market with plants in Denver, Colorado, and Minneapolis, Minnesota, and the high-rise condominium business with its construction project in New Jersey. Net housing revenues for 1973 had increased to $264.4 million with net income more than 9 percent of sales.

As a result of high interest rates and a national recession—and the concomitant soft new home sales in 1974—the company experienced its first full year net loss. Despite the loss, Kaufman and Broad maintained its new market growth and customer service efforts strategy to assure long-term profitability. In 1975, it expanded into new markets such as Brussels, Belgium, introduced new products, and offered new services such as the industry’s first ten-year homeowner warranty. By 1977, the recession had subsided and the housing market had rebounded; the company celebrated the sale of its 100,000th home, which was an industry first. Sales in Europe were growing as well. By 1977, under the direction of Bruce Karatz, president of the French division, the company celebrated the sale of its 4,000th home overseas. Under Karatz, the division staged one of what industry analysts said was the most creative advertising campaigns in home building: construction of a model home on the roof of an eight-story department store in downtown Paris. More than a half million people toured the home, which featured, among other things, a car inside the attached garage.

Company Perspectives:

Fulfilling the dream of homeownership is a very personal endeavor. For more than 40 years, KB Home has been one of the most respected and best-known companies in home-building. Throughout our history, we have taken many innovative steps to offer families the opportunity to purchase the best possible home at the best value in the communities where they want to live. Our company’s highest goal is to focus on building the one personal home for each family that has put its trust in us. We recognize that it is not important how many homes we build, but that each home meets the needs and dreams of each and every family.

As the company entered the 1980s, its growth was again threatened by high interest rates and an industry recession. In an effort to better align its diverse business interests and to improve operations, the firm was reorganized into four operating groups: Kaufman and Broad Development Group for home building; International Mortgage Company for mortgage services; Home Systems for manufactured housing; and Sun Life for life insurance. A change in executive management also occurred in 1980. Bruce Karatz, president of the French division for the past four years, returned to the states and became the president of the Kaufman and Broad Development Group. His strategy for continued growth in home building was to concentrate on select regional markets that offered strong economic fundamentals. His long-term strategy to become the top producer in those areas that had solid growth potential and exit those markets that did not resulted in Kaufman and Broad phasing out its divisions in Illinois, New Jersey, Germany, and Belgium by 1989. The recession of the early 1980s and the new management’s corporate strategy resulted in the company exiting other markets over the next several months, and by the following year Kaufman and Broad had reduced its onsite activities to California, France, and Canada. Market consolidation also was evident in the French division, where management focused its efforts within a 25-mile radius of Paris and exited areas outside the metropolitan area.

While the company was revising its operating strategies, management improved the quality control and customer service programs to increase referrals and maximize customers’ perception of improved value. Following the recovery of the national economy, Kaufman and Broad concentrated its building efforts in key markets, including the manufactured homes business segment, improving housing revenues by 55 percent in 1985. In addition, the corporation set company records for year-end financials in both revenue and net income. With the improved sales, the company had become the largest single-family home builder in California. The following year, Kaufman and Broad Land Company was formed to manage property purchasing. Home building in California continued to be strong, with communities such as East Hills in Anaheim, which sold 52 of the 54 homes available in the first weekend.

French Expansion in the Late 1980s

In 1985, the company acquired Bati-Service, an entry-level home builder in France. This purchase made Kaufman and Broad’s French division the third largest builder in the country. That same year in California, the two regional offices each divided into two new divisions. The four divisions allowed the company to address the specific needs of the local community. Corporate management efforts decentralized the divisions, so each division was held responsible for its own construction, planning, and local operations. Marketing and purchasing, however, remained a corporate focus. For the entire California market, the company introduced “The California Series,” a marketing strategy that allowed all divisions to achieve cost efficiency in advertising and promotional programs. The concept was developed to improve economies of scale, to achieve a consistent single corporate image, and to increase brand awareness of Kaufman and Broad homes throughout the state.

In 1986, the corporation again reorganized. Kaufman and Broad Development spun off from Kaufman and Broad Inc. and formed Kaufman and Broad Home Corporation. All onsite housing activities, with the exception of manufactured housing, transferred to the new organization to focus on real estate development. That same year, Kaufman and Broad Home Corporation formed a new commercial development division in Paris, Kaufman and Broad Developpement. Within two years, this new division had completed a senior citizen apartment complex and 12 office buildings in Paris.

In 1989, the French division approved plans to build Washington Plaza, a new Paris office complex, securing $600 million from pre-sales to groups of institutional investors, a transaction that represented the largest single real estate deal in that country’s history. Two new divisions were formed in Paris in 1989: Maisons Individuelles and Kaufman and Broad Renovation. The Renovation division was established to refurbish older office buildings in the downtown area. Management expanded into this new business because it felt that it provided a new growth opportunity given the scarcity of land in that area. By 1989, due in large part to the division’s commercial development activities, French revenues more than quadrupled from four years prior.

That same year, Kaufman and Broad Home Corporation split into two companies, each worth approximately a billion dollars: Broad Inc. (which later became SunAmerica) and Kaufman Broad Home. Bruce Karatz led the latter as chief executive officer.

Key Dates:

1957:

Kaufman and Broad Building Company is founded in Detroit, Michigan.

1961:

The company goes public and raises about $1.8 million in its initial public offering.

1965:

Kaufman and Broad founds the International Mortgage Company.

1967:

The company begins offering a five-year limited home warranty, the first in the industry to do so.

1969:

The company enters the manufactured housing business by founding Kaufman and Broad Home Systems, Inc.

1986:

The corporation reorganizes: Kaufman and Broad Development is spun off from Kaufman and Broad Inc. and forms Kaufman and Broad Home Corporation.

1989:

Kaufman and Broad phases out its divisions in Illinois, New Jersey, Germany, and Belgium.

1992:

The company establishes a new division in California and one in Las Vegas, Nevada, bringing the total number of divisions in the region to 11.

1993:

Kaufman and Broad opens offices in Arizona, Nevada, and Colorado, and the following year, in Utah.

1998:

The company spends $162 million to purchase PrideMark Homes, Estes Homes, and Hallmark Residential Builders, thus moving into Houston, Tucson, and Phoenix.

1999:

Kaufman and Broad purchases Lewis Homes for $544 million.

2000:

The company changes its name to KB Home.

2001:

KB Home expands into Florida with the purchase of Trademark Home Builders.

The Early 1990s: Targeting New Markets

Despite a slowing U.S. economy and uncertainty over the country’s involvement in the Persian Gulf crisis, 1990 was a record year for Kaufman and Broad. End-of-year revenues of $1.37 billion were the highest in company history. Lower sales in California were more than offset by strong French division operating results, which was led by a 57 percent increase in commercial revenues.

The following year, the French division, along with several banks, announced the $1.7 billion, four-year redevelopment project for the Esso Corporation headquarters’ property in Paris. For 1991, Kaufman and Broad’s net orders worldwide for new construction increased from the previous year, and included California, where the nation’s recession continued. Sales in California were positively impacted by the company’s expansion into the Sacramento market.

In 1992, Kaufman and Broad had record deliveries in California, up 27 percent from the previous year. The company also increased its overall percentage of the new home sales market statewide to 6 percent, the highest of any builder in the state and up from 4 percent in 1991. Market penetration in the state was solid, with the company marketing homes in 72 communities. Also in 1992, the company continued its market expansion and established a new division in California and one in Las Vegas, Nevada, bringing the total number of divisions in the region to 11. Management attributed the company’s success in 1992 to its extensive use of television advertising targeting renters, an audience that was not being reached in the real estate sections of newspapers. This was a marketing technique that few home builders had used, and it was coupled with an “off-site” telemarketing program designed to reach potential buyers who did not visit sales offices. According to company executives, the advertising spots generated more than 75,000 sales leads and resulted in approximately 700 incremental sales.

Minimizing the Boom and Bust Cycle in the 1990s

In the mid-1990s, sales continued strong in the California region despite a recession, although profits fell as the company enticed buyers with free upgrades and waived down payments. The company increasingly focused on first-time buyers, reducing its higher-priced home inventory; the average price for a Kaufman and Broad new home was typically thousands of dollars below the statewide average. Moreover, its mortgage subsidiary financed more than three-quarters of the company’s California home purchases by offering competitive mortgage programs designed for first-time buyers.

To boost profit margins, Kaufman and Broad sought to reduce costs through increased centralization. The company’s divisions had long operated almost autonomously, but were now expected to take advantage of bulk-rate discounts negotiated by headquarters for such things as appliances, bathroom fixtures, and lumber. In addition, all land purchases had to be approved by the headquarters land committee, who scrutinized the proposals closely. Marketing was emphasized, with experimentation of such new venues as catalogs, and an effort was made to create a strong brand name.

Karatz sought to stabilize the boom-and-bust cycle of housing development by expanding geographically. In 1993 Kaufman and Broad opened offices in Arizona, Nevada, and Colorado. The following year, the company moved into Utah. In each area, first-time buyers were targeted. Nevertheless, the continued slow market in California and Paris hurt the company’s bottom line: Profits fell by 38 percent in 1995, and by 1996 the company was showing a loss of $61 million. The next year, however, the company rebounded to profits of $58 million.

In 1998 Kaufman and Broad instituted KB2000, a new operating strategy that included greater choice for customers in the design and construction of their homes. The company began surveys of home buyers in its regions of operation, hoping to identify popular home designs and features. It incorporated those ideas into new home showrooms, which customers could walk through to help them choose features, such as lofts, porches, or types of flooring, that they wanted as part of their homes. Each regional division soon had a new home showroom.

The corporation began a new expansion strategy in 1998, one based on acquisitions rather than the opening of new offices. That year Kaufman and Broad entered the Houston market by purchasing Hallmark Residential Group, Inc., the parent company of Dover Homes and Ideal Builders. The $50 million deal gave the company access to approximately 4,700 lots in the Houston area and 90 employees. Kaufman and Broad also purchased Colorado-based PrideMark Homes for $65 million, raising the company to a dominant position in the Denver market. To round out that year’s purchases, the company acquired Estes Homes for $47 million, giving Kaufman and Broad an entrée into the markets in Tucson and Phoenix, Arizona. By the end of the year, the company was enjoying net income of $95 million.

In a much larger deal the following year, Kaufman and Broad purchased Lewis Homes for approximately $409 million, plus the assumption of $135 million in debt. Lewis Homes was the nation’s largest privately held home builder and dominated the markets in Las Vegas and northern Nevada. It also held significant portions of the markets in Sacramento and southern California. Kaufman and Broad expected to combine their businesses in California, benefiting from economies of scale. The company’s expansion spree and a healthy housing market helped raise the company’s revenues to $3.8 billion in 1999.

In 2000 the company’s French subsidiary, Kaufman and Broad, S.A., held an initial public offering of stock, although Kaufman and Broad Home Corporation continued as the majority shareholder, with approximately 50 percent ownership. The offering raised about $113 million. The French home builder had been enjoying booming sales of its apartments and singlefamily homes in 1999 and 2000. The subsidiary’s revenues reached $195 million in fiscal 2000. The same year, Kaufman and Broad Home Corporation initiated a repurchase plan of more than half the stock the company had issued as part of its 1999 acquisition of Lewis Homes.

Kaufman and Broad introduced its Dream Home Studios in 2000, an updated and vastly expanded version of the company’s new home showrooms. In addition to this facelift, the company changed its name to KB Home, a name many customers had already been using. New name or not, KB Home continued its steady improvement, reaching revenues of $3.93 billion and net income of $210 million in 2000. The following year, the company continued its expansion with the acquisition of northern Florida-based Trademark Home Builders, Inc., and recorded revenues of $4.57 billion.

Principal Subsidiaries

Kaufman and Broad Mortgage Company; Kaufman & Broad, S.A. (50%).

Principal Competitors

Centex Corporation; Pulte Homes, Inc.; The Ryland Group, Inc.

Further Reading

Barron, Kelly, “Building Equity?,” Forbes, August 9, 1999, p. 86.

Lubove, Seth, “Learning from Victoria’s Secret,” Forbes, December 19, 1994, pp. 60-63.

Morris, Kathleen, “This Homebuilder Is on a Spree,” Business Week, November 16, 1998, p. 190.

Posth, Mark A., “Home Alone,” California Builder, February/March, 1993.

“Professional Achievement Awards,” Professional Builder & Remodeler, January 1993.

Sinnock, Bonnie, “France’s Kaufman & Broad S.A. Sees Its Best Half-Year Since 1989,” National Mortgage News, July 10, 2000, p. 30.

Sylvester, David, “A Hot Homebuilder,” Fortune Magazine, February 13, 1989.

—Allyson S. Farquhar-Boyle

—update: Susan Windisch Brown