Forestar Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
January 23, 2024

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to Forestar's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Katie Smith, Director of Finance

Speaker 1

Thank you, John. Good afternoon, and welcome to the call to discuss Forestar's Q1 results. Thank you for joining us. Before we get started, today's call includes forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Forrester believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

Speaker 1

All forward looking statements are based upon information available to Forestar on the date of this conference call, and we do not undertake any obligation to update or revise Any forward looking statements publicly. Additional information about factors that could lead to material changes in performance is contained in Forestar's annual report on Form 10 ks and its most recent quarterly report on Form 10 Q, both of which are or will be filed with the Securities and Exchange Our earnings release is on our website at investor. Forestar.com, and we plan to file our 10 Q tomorrow. After this call, we will post an updated investor presentation to our Investor Relations site under Events and Presentations for your reference. Now, I will turn the call over to Andy Oxley, our President and CEO.

Speaker 2

Thanks, Katie. Good afternoon, everyone. I'm joined on the call today by Jim Allen, our Chief Financial Officer and Mark Walker, our Chief Operating Officer. Before we discuss this quarter's results, I'd like to take a moment to introduce myself since this is my first quarterly public conference call. I joined Forestar at the beginning of the calendar year, transitioning from my prior tenure at D.

Speaker 2

R. Horton. While there, I served in numerous roles, The most recent being Senior Vice President of Business Development. In addition to being actively involved in D. R.

Speaker 2

Horton's Relationships in Strategic Land Banking and Development, I oversaw opening new markets and M and A activity, including being involved in the Darryl Horton investment in Forestar. I'm excited to have joined the Forestar team and the opportunity to serve in my new role as CEO. I have the utmost respect and appreciation for what Dan Bartone, The company's previous CEO and the Forestar team accomplished with Dan at the helm. We thank him for his many contributions to Forestar Forestar's strong balance sheet, healthy pre tax margins and robust land portfolio Position us well for future growth. With over 25 years of experience in land acquisition, development and homebuilding, I'm confident we will continue to expand Forestar's platform and operations to further strengthen our position as a leading lot developer.

Speaker 2

We remain focused on investing for future growth, turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Now on to our results. We are pleased with our Q1 results highlighted by net income increasing 84% to $38,200,000 or $0.76 per diluted share. Our pre tax income increased 84 percent to $51,200,000 and our pre tax profit margin Improved 380 basis points to 16.7%. Our consolidated revenues increased 41% To $305,900,000 while lots sold increased 39% to 3,150 lots.

Speaker 2

These results reflected significant improvement in demand for finished lots compared to the 1st fiscal quarter of 2023 When builders were reducing starts in anticipation of lower demand for new homes after mortgage interest rates rose rapidly. Jim will now discuss our Q1's financial results in more detail.

Speaker 3

Thank you, Andy. In the Q1, net income increased 84 $38,200,000 or $0.76 per diluted share compared to $20,800,000 or $0.42 per diluted share in the Consolidated revenues for the quarter increased 41% to $305,900,000 compared to $216,700,000 in the prior year quarter. Lots sold in our 1st fiscal quarter increased 39% to 3,150 lots with an average sales price of $96,400 We expect continued quarterly fluctuations in our average Sales price based on the geographic location and lot size mix of our deliveries. Our pre tax income increased 84% $51,200,000 compared to $27,900,000 in the Q1 of last year. And our pre tax profit margin this quarter was 16.7% compared to 12.9% in the prior year quarter.

Speaker 3

Our gross profit margin was 23.8%, up 280 basis points sequentially and up 190 basis points from a year ago. Gross margin was positively impacted by the closeout of the legacy community during the quarter. Excluding the legacy community lot Our first quarter gross profit margin would have been 22.8%. In the Q1, SG and A expense was $28,000,000 As a percentage of revenue, SG and A expense improved 140 basis points to 9.2% from 10.6% in the prior year quarter. We will continue to focus on controlling our SG and A costs, while ensuring that our infrastructure supports our business.

Speaker 3

Mark?

Speaker 4

As for current market conditions, the supply of new and existing homes at affordable price points is still limited. Demographic supporting housing demand remain favorable despite elevated mortgage interest rates and inflationary pressures. Builder incentives have helped bridge the affordability gap for many homebuyers and low resale supply continues to be a driver of buyers choosing new construction. Supply of vacant developed lots, especially at affordable price points, continues to be constrained across our footprint. And Forestar is uniquely positioned to take advantage of the shortage of finished lots.

Speaker 4

Our ongoing focus is to develop lots for homes At affordable price points, demonstrated by our average sales price this quarter of roughly $96,000 Availability of contractors and necessary materials has improved over the past several months, but we have not seen overall reductions We will continue value engineering our projects and work with our trade partners to develop lots in the most efficient way possible. Our development cycle times have continued to be impacted by governmental delays. Homebuilders continue to compete to secure land and lot positions and many are looking to replace current closeout communities to position for future growth. As a result, we are not seeing any softening in land prices. However, in most markets, we have seen an adjustment back The normal contract terms.

Speaker 4

Jim?

Speaker 3

Doctor Horton is our largest and most important customer. 16% of the homes D. R. Horton started in the past 12 months were on a 4 Star developed lot. With a mutually stated goal of 1 out of every 3 homes D.

Speaker 3

R. Horton to be on a lot developed by Forestar, we have significant opportunity to grow our market share within D. R. Horton. We also continue to work on expanding our relationships with other homebuilders.

Speaker 3

10% of our Q1 deliveries or 3 16 lots were sold to other homebuilders, which includes 124 lots that were sold to a lot banker who expects to sell those lots to D. R. Horton at a future date. 7% of our deliveries in the prior year quarter were sold to 3rd party customers. Katie?

Speaker 1

Forrester's underwriting criteria for new development projects remains unchanged at a minimum 15% pre tax return on average inventory and a return of our initial cash investment within 36 months. During the Q1, we invested approximately $450,000,000 in land and land development, but equally between land development and land acquisition. Given the strong demand for finished lots, this quarter's investment was almost double the prior year quarter. We still expect our investments in land position and development to total $1,500,000,000 to $1,600,000,000 in fiscal 2024 subject to market conditions. Our lot position at December 31 was 82,400 lots, of which 55,400 lots are owned and 27,000 Lots are controlled through purchase contracts.

Speaker 1

At quarter end, we had 7,300 finished lots on hand. We continue to target a 3 to 4 year owned inventory of land and lots and remain focused on managing our development in phases to deliver finished lots at a pace that matches market demand, consistent with our emphasis on capital efficiency. 30% of our owned lots are under contract to sell, representing approximately $1,600,000,000 of future revenue. These contracts have $141,000,000 of hard earnest money deposits associated with them. Another 32% of our owned loss are subject to first offer to D.

Speaker 1

R. Horton based on executed purchase and sale agreements. Jim?

Speaker 3

We have significant liquidity and are using modest leverage We ended the quarter with approximately $840,000,000 of liquidity, including an unrestricted cash balance of $460,000,000 and $380,000,000 of available capacity on our undrawn revolving credit facility. Total debt at December 31st $705,000,000 with no senior note maturities until fiscal 2026, and our net debt to capital ratio was 14.9%. We ended the quarter with $1,400,000,000 of stockholders' equity and our book value per share increased to $28.21 up 15% from a year ago. Forestar's capital structure is one of our biggest competitive And it sets us apart from other land developers. Project level land acquisition and development loans are less available today and have continued to become more expensive, impacting most of our competitors.

Speaker 3

Other developers generally use project level development loans, which are typically more restrictive, have floating rates and create administrative complexity, especially in a volatile rate environment. Our capital provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I'll hand it back to you for closing remarks.

Speaker 2

Thanks, Jim. We are pleased with 4 Star's start to fiscal 2024. Our team maintained double digit revenues while continuing to deliver growth with strong profitability. Elevated mortgage Rates continue to impact affordability, but the underlying fundamentals of a housing shortage remain in place. We believe the low supply of existing homes will continue to drive buyers to new construction and our strong relationship with D.

Speaker 2

R. Horton provides Our guidance for fiscal 2024 remains unchanged. Based on current market conditions, We expect to deliver between 14,515,500 lots and generate $1,400,000,000 to $1,500,000,000 of revenue. We are closely monitoring each market as we strive to balance We are the market leader in a highly fragmented and undercapitalized industry and uniquely positioned to take advantage of builder demand for finished lots. There is a significant opportunity To expand our presence in markets that we operate in and our goal remains the same, to double our market share to 5% Over the intermediate term, we expect to aggregate significant market share over the next few years, while maintaining a disciplined approach We're investing capital to enhance the long term value of Forestar.

Speaker 2

John, at this time, we'll open the line for questions.

Operator

Thank you. At this time, we will be conducting a question and answer Our first question comes from Truman Patterson with Wolfe Research. Please proceed.

Speaker 5

Hey, good afternoon, everyone. And Andy, congrats on the role. Look forward to working with you in the future. I realize you've only officially been in the role a short time here. But Now that you're officially in the seat, are there any kind of big picture initiative shifts in how you're thinking about the business Coming from the largest builder to now the largest land company, I'd love to hear just any thoughts there.

Speaker 5

It seems like The healthy growth initiatives that Forestar laid out previously doubling market share, Seems like those are largely unchanged. So any commentary there would be helpful.

Speaker 2

Thank you very much. I Appreciate the opportunity to be here. Our goal doesn't have does not change, as you said, which exactly it's Our goal is to achieve a 5% market share as quickly and efficiently as we can. So we're looking to grow the business.

Speaker 5

Perfect. And then with your gross margins, I realize they can be lumpy kind of I believe you all said current quarter was about 22.8%, excluding a closeout Community, which is relatively elevated higher end of history. Could you all help us understand whether There were any other kind of items or one time items during the quarter where this might not be repeatable at this level? Or Is it a little bit more sustainable given your all's cost advantages versus the smaller peers where there's tighter lending

Speaker 3

Hi, Truman. As you know, we don't Provide guidance with respect to margins and we underwrite returns not margins. So It does create some variability in margins from quarter to quarter depending on which projects deliver lots within the quarter Because we have a mix of projects with higher or lower margins. However, I mean, We can provide some historical context. And if you look at maybe the last 9 quarters, Adjusted for impairments and kind of unusually high legacy lot or land sales, Our margins have fluctuated between 18% to 23% for the last 9 quarters.

Speaker 3

In the last 5 quarters, it's been 21% to 23%. If you look at last year's our fiscal year, we reported 21.2%, but if you Exclude the impairments that we recognized in last fiscal year, that would have been 22.5% Compared to the 22.8 percent for this quarter. So you can see that our margins have actually been Fairly consistent for the last couple of years, kind of in that low 20s range.

Speaker 1

Yes. And Truman, this is Katie. There wasn't anything else in the quarter That was significant enough to call out.

Speaker 5

Okay. That's very helpful. And if I could sneak another one in on kind of the other sides of returns at an enterprise level, if you will. But Your lot delivery guidance over the next few quarters kind of implies flattish year over year, if I'm doing the math right. Seems like perhaps given some of the growth in the industry, is that a reality?

Speaker 5

Or on the You all perhaps pull forward some sales into 1Q and now you might have a little bit of a developed lot Shortage, if you will, or a gap, if you will. Just hoping to understand kind of the puts and takes of the guidance.

Speaker 3

Well, we Q1 was a good quarter, but it's still early in the year. Based on in the current market conditions, our current lot positions, our development timelines, we still believe that 14,515 It is a realistic range.

Speaker 4

Yes, Truman, it's Mark. We also expect new home starts to align with new home sales. So if homebuilder sales accelerate, we could be Higher end of our range, but we're going to monitor the spring selling season, remain flexible to capitalize on any market upside. I was saying that there could be a bottleneck in achieving that

Speaker 1

Yes. We We've alluded to it in our scripted remarks, but we've continued to see delays from municipalities' land development. So that could definitely be the bottleneck.

Operator

The next question is from Carl Reichardt with BTIG. Please proceed, Carl.

Speaker 6

Thanks, everybody. Andy, official welcome. Katie, good to have you back too. Can I let me go back to something Mark mentioned about normal contract terms and sort of a movement back that direction? Mark, can you expand on that a little bit by what you mean by Normal contract terms and what was really abnormal prior?

Speaker 5

Yes. So we're seeing more

Speaker 4

Take down schedules than we were seeing before, less bulk closings, things of that nature. So although that's It was increasingly difficult today. There's normal contract terms that have kind of gone back to what was historically the case for, I would tell you, a decade. And so we're getting land sellers that are getting a little bit more realistic. I'll give you an example.

Speaker 4

So if you had a big project and you're going to go bulk a large project, they're now giving you Time between your takedowns, to take that land down over time versus having to bulk purchase that project, that's probably one of the big Normalizations and contract terms.

Speaker 1

We've also seen more normalized due diligence time frame. So instead of 30 days, You're getting 60 or 90 days.

Speaker 6

Okay. So more efficient, it takes longer but easier to manage and more efficient For you all in terms of capital deployment and receipt of capital, is that the way to think about it

Speaker 2

as opposed to lumpier? Okay, great.

Speaker 6

Thank you. And then if I can get to Truman's question a different way on the guide for the year. So do you have lots That you think right now you'd anticipate finishing in the next two quarters that would be available for sale that don't have a buyer or contract yet? And if so, what's that number?

Speaker 1

I don't have the specific number of lots that are going to be finished that aren't under contract Right now, I can probably get that for you. I'd have to check. But we definitely do have stuff that's under development that's not been put under contract yet. In a Forrester source project, we aim to have those under contract anywhere from 3 to 6 months before delivery. And so there's definitely still opportunity to put stuff under contract that's going to close in the back half of the year.

Speaker 6

Okay. All right, great. Thank you, Katie. And then last question, you did another deal with a lot banker who's working with your largest Customer, and I'm curious about whether or not that's a potential growth area for you, whether a lot of Wenger will be working with Horton or not. We've certainly talked to plenty who are trying to deploy more capital and looking for opportunities.

Speaker 6

Can you talk about what that opportunity might be? And then I should Sidecar onto that also because I always ask about single family rental and how that business looks, if it looks interesting at all or is that still sort of a one off?

Speaker 1

I'll start and I'll let somebody else chime in if they need to. But I mean as far as the opportunity with Land Bankers, it's not really our Vision, we're not marketing our lots to land bankers, but if one of our customers wants to use a land banker to step in as an intermediary, we're Completely fine with that. It just enhances our capital efficiency and gets that inventory off of our balance sheet. So we're pretty indifferent if there's a land banker that's stepping in on behalf of a builder as long as we have All of the checks and balances in place.

Speaker 2

And as it relates to the part of your question on build for rent, Yes, we do think that that is a sustainable part of our business. If we can have Portions of a larger community, which would we could improve our pace Through selling to a customer that has built for rent components or multifamily components, That's something that we would absolutely entertain.

Speaker 6

Okay. I appreciate it all. Thanks very much.

Speaker 2

Thanks, Karl.

Operator

The next question comes from Anthony Pettinari with Citigroup. Please proceed.

Speaker 7

Hi. This is Asher Sonnen on for Anthony. Thanks for taking my question. I think you've talked in the past about The capital structure offering competitive advantage, but I'm just wondering, have you seen any concrete kind of like maybe opportunities in the land market come about or any sort of like Concrete evidence that it's sort of coming to fruition or maybe that will take a little bit longer?

Speaker 4

Yes. We're not seeing any really Concrete evidence. What we do see, it does

Speaker 2

give us a little bit more

Speaker 4

of a competitive advantage having the liquidity at hand, competing against another developer. And at times, too, The other builders are using that developer in a much smaller fashion than they're using us. They know that we have the liquidity and they'd rather look to us to develop the lots versus the other Let's call it local or regional developer. There has been times too where maybe that developer gets into a capital constraint on the following phase Some builders will look to us to see if we can step in and purchase that additional phase to keep prevent them from gapping on their home sales.

Speaker 7

Great. And then just separately, obviously, you're not guiding to our gross margins for the year. But I'm just wondering, I think Previously, we talked about increased forced source lots driving kind of a gross margin headwind. Are you sort of seeing that drive sorry, a tailwind rather. Are you seeing that tailwind kind of materializing in 2024, is that maybe more of a 2025 story?

Speaker 3

Well, we could see in 'twenty four. Definitely, the 4 Star Source loss Does give us more optionality, I guess, for the project. I don't know that we'll see. I mean, we have seen significant increases in development costs as well. So I don't know that we're going to Continue to see increased margins as a result of that because we are always trying to match price and pace or balance price and pace To improve our returns, so it's really not just about the sales price or margin.

Speaker 3

It's really more about our returns.

Speaker 7

Great. That's helpful. I'll turn it over. The

Speaker 8

Doug Wardlow on for Mike. I was wondering if you could kind of speak to any potential regional trends you've seen over the recent months, especially with The rate volatility that we've experienced, if there's been any particular regions where you've seen strength or a particular weakness?

Speaker 4

Well, that we've seen a particular weakness. Texas and Florida remain strong for us. They've been a stronghold for a long time.

Speaker 8

Great. And then in terms of you guys touched on the difficulty with municipalities and getting approval there. Is there any kind of vision moving forward when you see that easing up a tad? Or is that something that you expect to be A problem for the business moving forward, I guess, for the foreseeable future in 2024?

Speaker 4

That's a great question. Historically, it's always been a challenge. It's been delayed even I would tell you in the past 12 to 24 months, a lot of its turnover within those departments themselves. You get some folks with less It's a daily battle out in the field with our folks. A bit like anyway, I'll refrain from saying that.

Speaker 4

But it's I don't know that's going to ease up anytime in the foreseeable future. But again, I think it's market to market in terms of where we're seeing those governmental delays. Some areas we see it, some we don't. So It really fluctuates across the United States.

Speaker 1

And we've been accounting for those delays in our underwriting. So we've been looking at extended timelines

Speaker 7

in the underwriting to make sure that we're still going to be

Speaker 1

able to achieve our returns.

Operator

We have reached the end of the question and answer session. I will now turn the call over to Andy Oxley for closing remarks.

Speaker 2

Thank you, John, and thank you to everyone on the Forestar team for your focus and hard work. We will stay disciplined and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today and look forward to speaking with you again in April to share our 2nd quarter results.

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