The Sturdy House That Kaufman & Broad Built

Bruce Karatz isn't about to let anything get in the way of selling homes. Not California's worst postwar real estate slump. Not the disappearance of hundreds of savings and loans that once financed the state's builders. And certainly not a menacing pair of medieval-style crossed swords hanging over the fireplace of a poor-selling model in a new-home development in Oxnard. The morning after he visited the site, Karatz, chief executive of Kaufman & Broad Home Corp., axed the Gothic decor.

Karatz' quick reflexes, which made his company a rare success story in the housing downturn, could make it an even bigger winner in coming years, especially if President Bush's proposed tax breaks for first-time buyers are enacted (page 37 91 ).

K&B has thrived amid adversity. Single-family home starts nationally dipped 6%, to a postwar low of 841,600, last year. In California, K&B's primary market, starts slumped 29%. Yet Karatz found a deft survival strategy: Slash costs, sell off higher-cost properties, and focus on starter homes--the housing market's only speck of light.

K&B knows about first-timers. It has an aggressive television advertising campaign aimed at them. And an aggressive pricing policy. Karatz has knocked down K&B's average California home price to just under $160,000, from $196,600 in 1990, well below the state's current $200,000 average.

READY FOR RECOVERY. Such attention to marketing helped to more than quadruple K&B's profits in the fourth quarter of 1991, to $13.1 million. Buoyed by low interest rates and the big ad push, January sales jumped 49% from a year earlier. The top seller in fast-growing California since 1985, K&B has increased its market share to 4% of the state's new single-family homes, from 2.7% a year ago, positioning itself for an economic rebound. It is selling homes in 40 new developments and will open 20 more subdivisions by April.

No wonder Wall Street likes its stock, which has outstripped most other housing-industry issues lately (chart). K&B's shares have doubled in value since August and are trading at 24 1/2 on the New York Stock Exchange. And the company's 14.9% return on equity ranks it among the cream of the nation's homebuilders. With earnings picking up, Oppenheimer & Co. analyst Barbara Allen figures K&B will boost its return on equity to 29.5% this year. A few other large, publicly traded residential builders, such as Centex Corp. in Dallas and Pennsylvania's Toll Brothers Inc., are increasing market share, too. Yet their good fortune comes at the expense of hundreds of small builders that have gone bust in the recession. Other victims are large players that had too much debt, such as U.S. Home Corp., which filed for bankruptcy last year.

In addition to market savvy, Karatz' success stems from ready cash. Other builders would like to jump into his entry-level niche. But most can't get the financing now that banks and thrifts have backed away from most real estate lending. K&B relies on long-standing bank lines of credit, aided by its solid track record and clean (for a builder) balance sheet. Debt is just 60% of total capital, vs. the 68% industry average. And as a public company in an industry dominated by private operators, K&B can raise money through public offerings of stock and debt.

`STILL CAUTIOUS.' This allows K&B, unlike capital-strapped rivals, to have new developments ready if home-buying demand takes off again. The company can keep building while scooping up vacant land--often already prepared and zoned for construction--at bargain prices from sick thrifts and distressed builders.

Still, risks remain. Kaufman & Broad also builds homes and office buildings in France, which accounts for half its revenues. Housing there is in the dumps. Worse, what if the recession at home persists and the California housing market plummets anew? Says Karatz: "We're still cautious."

Karatz, 46, is used to weathering bad times. He became the homebuilder's president in 1980, amid a recession made still more abysmal by double-digit interest rates. Then, Karatz pruned K&B's sprawling eperations back to just California, France, and a small Canadian unit. The com-pany's transformation was complete in 1989 when K&B was spun off from the company's insurance operations, now named Broad Inc. and headed by K&B co-founder Eli Broad.

The Golden State rebound that K&B is counting on seems preordained by population trends. Despite recession, migration to California appears relentless--and the newcomers all need shelter. Population grew 2.5% last year and should surge 2.1% in 1992. Single-family housing starts are expected to jump 22% this year, from 1991's depressed 73,700. If so, K&B's shovels will be the first in the dirt.

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