Forestar Group Q4 2024 Earnings Call Transcript

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Provided by Quartr
October 29, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to Forestar 4th Quarter and Fiscal 20 24 Earnings Conference Call. Please note this conference is being recorded. I will now turn the call over to Katie Smith, Vice President of Finance and Investor Relations for Forestar.

Speaker 1

Thank you, Jenny. Good morning, and welcome to the call to discuss Forestar's 4th quarter and fiscal year 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 Forestar 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 and 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 filed with the Securities and Exchange Commission. Our earnings release is available on our website at investor. Forestar.com, and we plan to file our 10 ks in the next few weeks. After this call, we will post an updated investor presentation to our Investor Relations site under Events and Presentations for your reference.

Speaker 1

Now, I will turn the call over to Andy Oxley, our President and CEO.

Speaker 2

Thanks, Katie. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer and Mark Walker, our Chief Operating Officer. As always, we appreciate your interest in Forestar and taking the time to discuss our Q4 fiscal year results. The 4 Star team finished especially strong delivering over 5,300 lots in the Q4 and more than 15,000 lots for the full fiscal year.

Speaker 2

Fiscal 2024 diluted earnings per share increased 20% to $4 and pre tax income increased 22 percent to $270,100,000 Our return on equity improved 60 basis points to 13.8% and our book value per share increased 15% from a year ago to $31.47 We improved our profitability and returns in fiscal 2024 despite extended cycle times and investing heavily in building our team and our platform for future growth. Over the last 5 years, Forestar has invested approximately $6,700,000,000 in land acquisition and development and delivered over 70,000 finished lots to over 60 local, regional and national homebuilders. Over the same time period, our returns on equity have nearly tripled and our book value per share increased 87%. These results reflect the strength of our business model and the market leading teams we have built across our national footprint. Thank you to all of the Forestar team members for your efforts this year.

Speaker 2

In fiscal 2025, we will continue to execute our strategic plan by investing for future growth, turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Forestar is well positioned both financially and operationally to capitalize on builder demand for finished lots. Jim will now discuss our Q4 and fiscal 2024 results in more detail.

Speaker 3

Thank you, Andy. In the Q4, net income increased 13% to $81,600,000 or $1.60 per diluted share. For the year, net income increased 22 percent to $203,400,000 or $4 per diluted share. Revenues for the Q4 totaled $551,400,000 flat with the prior year quarter. The current quarter includes $23,400,000 in tracked sales and other revenues and $4,500,000 in revenue from deferred development projects.

Speaker 3

Revenue totaled $1,500,000,000 in fiscal 2024, which includes $42,000,000 of tracked sales and other revenue and $8,100,000 in revenue from deferred development projects. Lots sold during the quarter increased 8% to 5,374 lots and for the year lots sold increased 7% to 15,068 lots. Our average lot sales price for the quarter was $97,300 and was $96,600 for the year. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Mark?

Speaker 4

Our gross profit margin this quarter was 23.9%, up 290 basis points from a year ago. Our gross profit margin was positively impacted by lot sales from an unusually high margin project. Gross profit margin for the year was 23.8 percent, up 260 basis points from the prior year. In fiscal 2024, gross margin was positively impacted by non recurring revenue items with unusually high margins, including selling excess sewer capacity and land contract assignment fees. During fiscal 2023, we recorded $19,400,000 of non cash real estate impairment charges to cost of sales.

Speaker 4

Excluding the effects of those items, our full year gross profit margin would have been approximately 23% compared to 22.5% for fiscal 2023. Jim?

Speaker 3

Our 4th quarter pre tax income increased 14 percent to $108,500,000 compared to $95,400,000 in the prior year quarter and our pre tax profit margin improved 230 basis points to 19.7%. Our pre tax profit margin this quarter was positively impacted by a gain on sale of assets of $4,500,000 Pre tax income for the year totaled $270,100,000 compared to $221,600,000 in fiscal 2023 and our pre tax profit margin for the year improved 250 basis points to 17.9%. Our pre tax profit margin this year was positively impacted by a total gain on sale of assets of $9,500,000 Excluding the effects of the non recurring revenue items with unusually high margins and the gain on sale of assets, our full year pre tax profit margin would have been approximately 16.5%. Katie?

Speaker 1

In the Q4, SG and A expense increased 21% from the prior year quarter to $32,000,000 SG and A expense as a percentage of revenues was 5.8% compared to 4.8% in the prior year quarter. For the year, SG and A expense was $118,500,000 or 7.9 percent as a percentage of revenues, up 110 basis points from 6.8% in the prior year. Our employee count increased 30% from a year ago, which will support the continued expansion of our platform, including entering new markets and increasing community count. Roughly 80% of new hires in fiscal 2024 are in local market operations. We are pleased with the progress we have made building our team and our ability to attract high quality talent.

Speaker 1

We remain focused on efficiently managing our SG and A while investing in our teams to support our continued growth. Mark?

Speaker 4

The supply of new and existing homes at affordable price points remains generally limited and demographic supporting housing demand remain favorable despite elevated mortgage interest rates and inflationary pressures. Mortgage rate buy down incentives offered by builders combined with low resale supply relative to historical norms continue to be a driver of buyers choosing new construction. Our ongoing focus is to develop lots for homes at affordable price points. Availability of contractors and necessary materials has improved over the past several months, but we have not seen overall reductions in the cost of developing land. While we have started to see some improvement in cycle times, governmental delays continue to extend cycle times above historical norms.

Speaker 4

We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible. Homebuilders are competing to secure land and lot positions and many are looking to replace current closeout communities to position themselves for future growth. As a result, we have not seen any softening in land prices. However, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities. Jim?

Speaker 3

Doctor Horton is our largest and most important customer. 16% of the homes Doctor Horton started this year were on a 4 star developed lot. With a mutually stated goal of 1 out of every 3 homes Doctor Horton sells to be on a lot developed by 4 star, we have a significant opportunity to grow our market share within Doctor Horton. We also continue to work on expanding our relationships with other homebuilders. We sold 1801 lots or 12 percent of our deliveries to more than 20 other customers in fiscal 2024.

Speaker 3

Katie?

Speaker 1

Forestar'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 Q4, we invested approximately $450,000,000 in land and land development, of which $320,000,000 was for land development and $130,000,000 was for land. For the full year, we invested approximately $1,600,000,000 in land and land development, of which 65% was for land development and 35% was for land. In fiscal 2025, we currently expect to invest approximately $2,000,000,000 in land acquisition and development. Mark?

Speaker 1

Our lot position

Speaker 4

at September 30th was 95,100 lots, of which 57,800 or 61 percent are owned and 37,300 or 39 percent are controlled repurchase contracts. 6,300 of our own lots are finished. Consistent with our focus on capital efficiency, we target owning a 3 to 4 year supply of land and lots and manage our development in phases to deliver lots at a pace that matches market demand. Owned lots in our contract to sell increased 40% compared to a year ago to 21,000 lots or 36% of our own lot position. Dollars 172,000,000 of hard earnest money deposits secure these contracts, which are expected to generate approximately $1,900,000,000 of future revenue.

Speaker 4

Another 30% of our own lots are subject to a right of first offer to Doctor Horton based on executed purchase and sale agreements. Jim?

Speaker 3

We have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with approximately $860,000,000 of liquidity, including an unrestricted cash balance of $480,000,000 $380,000,000 of available capacity on our undrawn revolving credit facility. Total debt at September 30 was $706,000,000 with no senior note maturities until fiscal 2026, and our net debt to capital ratio was 12.4%. We ended the quarter with $1,600,000,000 of stockholders' equity, and our book value per share increased 15% from a year ago to $31.47 Forestar's capital structure is one of our biggest competitive advantages 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, which impacts the majority 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, particularly in an elevated interest rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I'll now turn it back to you for closing remarks.

Speaker 2

Thanks, Jim. Thank you to the 4 Star team for delivering a record year of profitability. Fiscal 2024 was also a year of building for the future. We grew the size of our team by 30% and deepened our bench of local market leaders. We were pleased that over 50% of those leaders were internal promotions.

Speaker 2

We increased our investment in land acquisition and development by 65% year over year. And we further diversified our geographic footprint by entering Virginia and reentering Washington, Oregon and Utah. These investments in our people and platform have positioned Forestar to grow faster than the market. However, there are still challenges in the entitlement and permitting processes resulting in lengthening development timelines. As we look forward to fiscal 2025 based on current market conditions, we expect to deliver between 16,000,016,500 lots and to generate $1,600,000,000 to $1,650,000,000 of revenue.

Speaker 2

We currently expect our Q1 will be our lowest delivery quarter of the year and we expect our revenues in the second half of the year of fiscal twenty twenty five to be higher than the first half. The variability we experienced throughout fiscal twenty twenty four illustrates the quarter to quarter fluctuations that can occur in the delivery of finished lots. We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project. We are the market leader in a highly fragmented and undercapitalized industry and are uniquely positioned to take advantage of builder demand for finished lots. Our goal remains the same, to double our market share to 5% over the intermediate term.

Speaker 2

We expect to aggregate significant market share over the next few years while maintaining our disciplined approach with investing capital to enhance the long term value of Forestar. With a clear strategic direction, a dedicated team and a strong operational and financial foundation in place, I'm excited about Forestar's future. Jenny, at this time, we'll open the line for questions.

Operator

Thank you very much. We will now be conducting our question and answer session. Your first question is coming from Carl Reichardt of BTIG. Carl, your line is live.

Speaker 5

Thanks. Hey, everybody. Nice to talk to you. Thank you for the time. I have a couple here.

Speaker 5

One is, as you look at your 2025 guide, is your expectation that the percentage of lots you actually deliver to customers other than D. R. Horton going to grow in 2025?

Speaker 1

Not really. We really do expect to stay at around 85% to 90% of our lots going to Horton over the near term as we look to increase our market share within D. R. Horton. Until we get closer to delivering about 30% of their lot needs, I think that will stay in that 85% to 90% range.

Speaker 5

Okay, great. Thank you, Katie. And then Mark, if you or anyone wants to put a few numbers around this idea of cycle times, so I sort of understand them for the vertical side of home construction. But for land development, if we break it out into say the beginning of lot acquisition to starting grading and then grading to finished lot and I know it varies a lot. How long is it taking to do both of those elements on average?

Speaker 5

And then what is the difference today versus say what it was 4 or 5 years ago as the market has changed?

Speaker 4

Yes. Karl, I'll give you a couple of those questions. So from grading basically, that typically takes about 120 days And that depends again on the project and the market. That can change with geography up north and out west. But typically, I'd say it's 120 days.

Speaker 4

A historical cycle time has been about 12 months. I would say 4 or 5 years ago, it could have even been maybe 9 months, but that has grown over the years. The biggest challenge today is really just government approvals. And that timeline has elongated. It would typically take you about 30 days to get a final plat recorded with a lot basically substantially complete and approved by jurisdiction.

Speaker 4

Today that's ranging anywhere from 30 to 180 days depending on geography. So that's our biggest challenge. I can say our cycle times were reduced over the past 60 days by I'm sorry, over the past quarter by 60 days. So that's a lot of progress we're making and then they're off or they're down about 90 days off of our peak. So 60 days improvement over the quarter and 90 day improvement over the peak.

Speaker 5

Great. That is very helpful, those specifics. And then last if I can ask just one more. When you think about your relative pricing power now today compared to right after COVID, do you think it's changed meaningfully one way or the other? Thanks.

Speaker 2

I would say that we have seen improvement, not necessarily on the hard costs, but on vendor availability, trades looking for work.

Speaker 1

Carl, did you mean on the development cost side or on the finish?

Speaker 5

Well, actually, I meant pricing to customers really as you sort of think about it, but sure, the cost side too would be helpful. Then I guess at the end of the day, it really comes down to net.

Speaker 4

Yes. Our relative price in terms of our lot price to homebuilders ASP has remained pretty constant, I would say, over the past several years. That range is somewhere around, let's call it 25%. That can fluctuate up or down based off of geography. But typically that lot to home ratio is somewhere in the mid to high 20s.

Speaker 4

Historically, it used to be in the low to mid-20s.

Speaker 5

Yes. Okay, great. I really appreciate the help guys. Thanks a bunch.

Operator

Thank you very much. Your next question is coming from Anthony Pettinari of Citigroup. Anthony, your line is live.

Speaker 6

Hi, this is Asher Stonehen on for Anthony. Thanks for taking my questions. Just maybe as you think about your development pipeline for 2025, are there any markets you would call out as maybe a little bit oversupplied right now or any other markets where you may be pulling back from in terms of new land acquisition? I think there's a lot of attention on Florida and Texas right now.

Speaker 2

Not really. I mean in affordable price points, we're not seeing any buildup in inventory. Our customer demand is pretty robust across the whole country. So we're not really calling out any caution in any parts of the country right now. Obviously, the hurricanes had a little bit of impact.

Speaker 2

We were fortunate that we didn't have any of our family members affected, but certainly our hearts go out to those communities that were affected.

Speaker 6

Yes. Thank you. And then switching gears, do you kind of have a sense of an updated timeline for maybe for deconsolidation? I think I noticed you guys had a shelf filing. So I don't know if that's kind of accelerated at all.

Speaker 6

And lastly, I think you previously talked about like the ability to continue growing the business pretty significantly without having to dip into the capital markets. I'm just wondering if that's still the case?

Speaker 3

Well, as far as deconsolidation, that's really a question for Doctor Horton. That's not really something that's under our control. As far as our ability to continue to grow, absolutely, and that's our plan. We do have the ability to continue to grow with our existing balance sheet. However, we do plan to continue to add debt to our capital stack as our equity balance allows that and allows us to continue to manage our debt to our net debt to total capital at a ratio of 40% or less.

Speaker 3

So we would continue to look to finance growth. Fortunately, our liquidity position allows us to be opportunistic when we do access the capital markets. We ended the year with $860,000,000 of total liquidity. So obviously that will go a long way to help finance our growth into fiscal 2025 and beyond.

Speaker 1

The shelf too, that was just more of a housekeeping item. Our old shelf expired early October and so we just renewed the shelf with exactly what we had filed previously.

Speaker 6

Got it. Thank you. That's very helpful. I'll turn it over.

Operator

Thank you very much. Your next question is coming from Trevor Allison of Wolfe Research. Trevor, your line is live.

Speaker 6

Hi, good morning. Thank you for taking my questions. First one is on land prices. You mentioned in your prepared remarks, you're not really seeing a softening on pricing. From a new home demand perspective, there's been a few geographies consistently noted as weaker.

Speaker 6

Colorado comes to mind, also some markets in Texas and Florida. In those markets specifically, the ones that have been softer, have you seen a flattening out of land prices in those markets? Or are you seeing any more favorable terms?

Speaker 4

No. Land prices continue to grow low to mid single digits year over year similar to development cost from a land pricing perspective. So specifically across the United States and specifically in those markets is consistent.

Speaker 6

Okay, got you. And then, Katie, I think you mentioned, still focusing on being the key supplier to Horton until you guys approach your 30% target you guys have talked about for a while before you start expanding more with other builders. As you think about your long term plans, what's a reasonable amount of time for you guys to get 30% of their lot needs?

Speaker 1

Well, I mean, there's a couple of different puts and takes in that. One of them is the rate of growth that Horton chooses to grow at. They're obviously growing off of a much larger number. And so us growing more than 10% is really just us trying to keep up with their lot needs. So it's hard to say.

Speaker 1

We would hope that we'd be able to 5 years or so. We think that that would be a good target for us to be able to sell 30% of our lots to other customers. And it will be a stair step approach. It's not going to be something that happens overnight. But I do think that it's important that the number of lots that we sell to other builders is going to continue to increase year over year.

Speaker 1

We sold to 8 new customers this year that we had not sold to in the past. And so we really are focused on growing and expanding those relationships with other customers.

Speaker 4

And we're also focused on expanding and growing our market share in our current markets as well. So there's significant opportunity to aggregate market share not only within Horton, I think today we're at 16% trying to get to that third as well as other builders. As Katy said, I think we added good number of builders this fiscal year as well. We continue to work on those relationships year in and year out. It takes a little bit of time to continue to grow those, which we have.

Speaker 6

Yes, makes sense. That's very helpful color. And then just maybe a quick housekeeping question. You mentioned, the 4Q margin benefited from some unusually high margin projects. Any help on what kind of impact that had to gross margin on the quarter?

Speaker 6

Thanks.

Speaker 1

We're not going to disclose the exact amount. I would say that margin would have been approximately 20

Speaker 3

Yes. Well, here's what we can say though. We underwrite to return. So margin is going to fluctuate or vary from quarter to quarter. We do see that.

Speaker 3

But over the long term and now over the last 8 to 10 quarters or so, we've seen our normalized margin and we adjust for one time items or kind of unusually high margin projects. But we've seen that kind of between the 21.5% 23% range very consistently. And I think that's kind of more where we feel like our normalized margin is.

Speaker 6

Yes, it's a very stable there. Okay, thank you for all the color. It's very helpful and good luck moving forward.

Speaker 2

Thank you. Thank you, Trevor.

Operator

Thank you very much. And our next question is coming from Alex Barron of the Housing Research Center. Alex, your line is live.

Speaker 7

Yes. Thank you and good morning. I guess my main question was, what's the general constraint to growth? Because as I look at the for example, the number of lots under contract with Gerhard, it's gone from 14,400 to 20,500 this year or year over year. Yet, I guess the guidance is going up from $15,000 last year to about $16,000 this year.

Speaker 7

So what's the kind of constraint to growing faster in general terms?

Speaker 2

It's just hard to put a lot on the ground. I mean it takes a long time from the time that you identify the track, get it under contract, get it entitled and then take it through the approval process and finally get it developed and finished. So our investment was less a couple of years ago And so that caused our overall number of available lots to go down. We reversed that and have been growing that throughout 2024 and will continue in 2025. But you really won't see the results of that until late 2025 and going into 2016.

Speaker 2

So it's a quarter over quarter building process and you just have to stay very disciplined and focus on what you can affect that quarter in building the business.

Speaker 7

What are the range of timeframes in developing lots from the time you guys acquire them in different markets? Like what's the shortest time frame and what's the longest in which market?

Speaker 4

Yes, it varies market to market, but it can range anywhere from 6 months up to 24 months. It really depends on the actual projects specific site conditions, as well as that government jurisdiction. A lot of it has to do with landscape and geographies, oil conditions, but it varies from market to market and geography.

Speaker 7

Got it. Okay. Thanks and good luck.

Speaker 2

Thank you. Thank you, Alex.

Operator

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now turn the call over to Andy Oksy, the CEO for Forestar for closing remarks.

Speaker 2

Thank you, Jenny, and thank you to everyone on the Forestar team for your focus and hard work. As we enter fiscal 2025, continue to stay disciplined, flexible and opportunistic while focusing on consolidating market share. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our Q1 results.

Operator

Thank you very much. This does conclude today's conference. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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