Forestar Group Q1 2025 Earnings Report

Forestar Group EPS Results

• Actual EPS: $0.32
• Consensus EPS: $0.65
• Beat/Miss: Missed by -$0.33
• One Year Ago EPS: N/A

Forestar Group Revenue Results

• Actual Revenue: $250.40 million
• Expected Revenue: $318.00 million
• Beat/Miss: Missed by -$67.60 million
• YoY Revenue Growth: -18.10%

Forestar Group Announcement Details

• Quarter: Q1 2025
• Date: 1/21/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, January 21, 2025
• Conference Call Time: 11:00AM ET

Forestar Group (NYSE:FOR) operates as a residential lot development company in the United States. The company acquires land and develops infrastructure for single-family residential communities. It sells its residential single-family finished lots to local, regional, and national homebuilders. The company was incorporated in 2005 and is headquartered in Arlington, Texas. Forestar Group Inc. operates as a subsidiary of D.R. Horton, Inc.

Forestar Group Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to Forestar's First Quarter 2025 Earnings Conference Call. Please note this conference is being recorded. I will now turn the call over to Chris Hibbett, Vice President of Finance and Investor Relations for Forestar. Chris?

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

Thank you, Jenny. Good morning and welcome to the call to discuss Forestar's 1st quarter results. Before we get started, I want to remind everyone that 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. 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.

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

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 Commission. Our earnings release is on our website at investor. Forestar.com and we plan to file our 10 Q later this week. 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.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

Thanks, Chris, and welcome to the team. For those

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

who haven't met Chris yet, he joined our team in December as part of a planned transition with Katie Smith joining D. R. Horton on January 1. I'm also joined on the call today by Jim Allen, our Chief Financial Officer and Mark Walker, our Chief Operating Officer. The 4 Star team delivered 2,333 lots generating revenues of $250,400,000 during the quarter and earnings per diluted share of $0.32 Demand for finished lots remains solid and our owned lots under contract have doubled from a year ago and the percentage of our owned lots under contract is at the highest level since June of 2020.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

The 4 Star team continues to expand our operating platform including making significant investments in land acquisition and development and adding key personnel in our local markets and entering new markets. Our owned lot position has increased 23% compared to a year ago and our community count has increased 25% over the same period. We remain focused on investing in compelling land parcels, turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Forestar's unique blend of financial strength, operating expertise and geographic reach is a significant competitive advantage enabling us to be in the leading supplier of finished lots. Jim will now discuss our Q1 results in more detail.

[James Allen, Executive VP, CFO at Forestar Group]

Thank you, Andy. In the Q1, net income was $16,500,000 or $0.32 per diluted share compared to $38,200,000 or $0.76 per diluted share in the prior year quarter. Our pre tax income was $21,900,000 compared to $51,200,000 in the Q1 of last year and our pre tax profit margin this quarter was 8.7% compared to 16.7% in the prior year quarter as a result of reduced operating leverage. Revenues for the quarter totaled $250,400,000 compared to $305,900,000 in the prior year quarter. We sold 2,333 lots in the quarter with an average sales price of $105,500 We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries.

[James Allen, Executive VP, CFO at Forestar Group]

We continue to expect that the Q1 will be our lowest delivery quarter of fiscal year. Our gross profit margin for the quarter was 22% compared to 23.8% for the same quarter last year. The prior year quarter was positively impacted by an unusually high margin lot sales related to the closeout of a legacy community. Excluding the high margin lot sales from that legacy community, our prior year Q1 gross profit margin was approximately 22.8%. Chris?

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

In the Q1, SG and A expense increased 29% from the prior year quarter to $36,000,000 primarily due to a 30% increase in employee count to 427 employees compared to 329 employees a year ago. We have increased our employee count to support the expansion of our operating platform including entering new markets and increasing community count. SG and A expense as a percentage of revenues was 14.4% compared to 9.2% in the prior year quarter primarily as a result of the year over year decrease in lot deliveries. We are pleased with the progress we have made building our team and we continue to attract high quality talent. We remain focused on efficiently managing our SG and

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

A while investing in our teams to support continued growth. Mark? Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points generally remains limited and demographic supporting housing demand remains favorable despite continued affordability challenges. Mortgage rate buy down incentives offered by builders have helped to address affordability and spur demand. Our ongoing focus remains to develop lots, primarily for homes at affordable price points.

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

Availability of contractors and necessary materials has improved and the cost of developing land has stabilized. While we continue to see modest improvement in cycle times, government delays continue to extend cycle times above historical norms. 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.

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

However, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities. Jim?

[James Allen, Executive VP, CFO at Forestar Group]

Doctor Horton is our largest and most important customer. 15% of the homes Doctor 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 Doctor Horton sells to be on a lot developed by Forestar, we have significant opportunity to grow our market share within Doctor Horton. We also continue to work on expanding our relationships with other homebuilders. 9% of our Q1 deliveries are 2 21 lots were sold to other homebuilders, including 2 new customers.

[James Allen, Executive VP, CFO at Forestar Group]

Chris?

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

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. We are positioning to return to strong volume growth in future periods supported by our increased investments in land acquisition and development over the last several quarters. During the Q1, we invested approximately $685,000,000 in land and land development, which was a 50% increase from the prior year quarter. 57% of our investment was for land acquisition and 43% was for land development. Our land acquisition pipeline is front end loaded this fiscal year and we expect the pace of our investment in land acquisition to moderate for the remainder of the year.

[Chris Hibbetts, Vice President of Finance and Investor Relations at Forestar Group Inc]

We still expect to invest approximately $2,000,000,000 in land acquisition and development in fiscal 2025 subject to market conditions.

[Mark Walker, Executive VP & COO at Forestar Group]

Mark? Our total lot position at December 31 increased 29% from a year ago to 106,000 lots of which 68,300 or 64 percent was owned and 37,700 or 36 percent were controlled through purchase contracts. 8,100 of our owned lots were finished at quarter end. Consistent with our focus on capital efficiency, we target owning a 3 to 4 year supply of land and lots and manage our development phases to deliver finished lots at a pace that matches market demand. Own lots under contract to sell increased 51% from a year ago to 25,200 lots or 37 percent of our own lot position.

[Mark Walker, Executive VP & COO at Forestar Group]

$207,000,000 of hard earnest money deposits secured these contracts, which were expected to generate approximately $2,200,000,000 of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 28% of our own lots are subject to a right of first offer to Doctor Horton based on executed purchase and sale agreements. Jim?

[Jim Allen, Chief Financial Officer at Forestar Group]

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with $645,000,000 of liquidity, including an unrestricted cash balance of $132,000,000 $513,000,000 of available capacity on our revolving credit facility. In December, the company amended its credit facility, which among other things extended the maturity date from October 2026 to December 2029, reduced pricing and increased the aggregate lender commitments from $410,000,000 to $640,000,000 We were also pleased to receive an upgrade to our corporate credit rating from S and P earlier this month, taking us from a B plus to BB- Total debt at December 31 was $807,000,000 with no senior note maturities until May 2026, and our net debt to capital ratio was 29.5%. We ended the quarter with $1,600,000,000 of stockholders' equity and our book value per share increased 13% from a year ago to $31.84 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 and have become more expensive in recent years impacting most of our competitors.

[Jim Allen, Chief Financial Officer at Forestar Group]

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

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

Thanks, Jim. We are pleased with the continued expansion of our operating platform. We have made significant investments in land and land development, growing our team with best in class talent, entered new markets alongside D. R. Horton's footprint and have a breadth of new opportunities being evaluated by our team.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

I believe there's tremendous opportunity ahead. Forestar is uniquely positioned to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans combined with constrained finished lot supply across the majority of our diverse national footprint positions us for further success. Our guidance for fiscal 2025 remains unchanged. 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.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

We expect our Q1 will be our lowest delivery quarter of the year and we still expect our revenues in the second half of fiscal twenty twenty five to be higher than the first half. The variability we experienced throughout fiscal 2024 illustrates the quarter to quarter fluctuations that can occur in delivery of finished lots. We are closely monitoring each of our markets as we strive to balance pace and price to maximize returns

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

for each project.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

We are the market leader in a highly fragmented and undercapitalized industry and 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. We expect to aggregate significant market share over the next few years while maintaining our disciplined approach when 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. At this time, we will be conducting our question and answer session. Your first question is coming from Carl Reichardt of BTIG. Carl, your line is live.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

Thanks. Hey, guys. Nice to talk to you. So I wanted a little more detail on the stabilization of costs in land development. Andy, can you expand on that a little bit, the particular aspects of horizontal development where you're starting to see that kind of stabilization?

[Carl Reichardt, Managing Director - Equity Research at BTIG]

And just as a follow on, I'm assuming the cycle time issue as we discussed before is really related to the entitlement and approval process and not other dynamics.

[Mark Walker, Executive VP & COO at Forestar Group]

Hey, Karl, it's Mark. In terms of the cost of stabilization, we've seen that really over the past trailing 12 months. Our development costs have been stable. Our teams have done a great job making sure the budgets are updated throughout the life of the project. We're not really seeing price increases come across our desk like we were maybe 12 months ago.

[Mark Walker, Executive VP & COO at Forestar Group]

So that's a very positive sign for KAWS. In terms of cycle times, we decreased our cycle times again 30 days this quarter. So that's about 120 days off the peak. And so the cycle times we continue to see come down. We still are seeing the entitlement hang ups, particularly at substantial completion with the government jurisdictions.

[Mark Walker, Executive VP & COO at Forestar Group]

That's something we're going to continue to work on this fiscal year with the hope that we can get down to a normalized cycle time by the end of the fiscal year.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

Thank you, Mark. And then on the cost leverage, obviously recognizing the negative leverage this quarter, 30% increase in employee count and new market setup. How are you thinking about the growth in that employee count in new markets as you look the next year or 2? Should we expect an improvement in that leverage that's more substantial especially back half of this year as you build out that pool of lots you have coming? Or is that something we'd expect to see in the next couple of years?

[Carl Reichardt, Managing Director - Equity Research at BTIG]

And then I have one more after that.

[James Allen, Executive VP, CFO at Forestar Group]

Carl, yes, we would expect to see our SG and A expense moderate for the remainder of the year. We're still based on our revenue guidance, we would still expect it to be kind of high single digits for the year.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

Thanks, Jim. And then last just on dollars, but we model revenue per lot versus pricing just because it's a little easier. But this seems like particularly high relative to last year's revenue per lot. Was there something particular this quarter that drove that higher? I think Courten talked about 3% increase in lot supply, although obviously it's a lag to you.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

What are you seeing or what can we expect in terms of revenue per lot as we go through the year recognizing there might be some ball in it depending on the particular land that you sell?

[James Allen, Executive VP, CFO at Forestar Group]

It was really just mix for this quarter. We had one particular infill project with pretty significant lot prices that skewed that ASP up for the

[James Allen, Executive VP, CFO at Forestar Group]

quarter. And we're pretty much predicting that lowtomidsingledigit escalate raise in lot price.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

All right. I appreciate it guys. Thanks so much.

[James Allen, Executive VP, CFO at Forestar Group]

Thank you, Carl. Thank

[Operator]

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

[Operator]

live.

[Asher Sohnen, Analyst at Citigroup]

Hi,

[Asher Sohnen, Analyst at Citigroup]

this is Ashish Sonnen on for Anthony. So thanks for taking my question. I just wanted to ask, how has builder demand been kind of trending year to date? And then have you seen Horton or any of your other customers maybe delay or otherwise alter their scheduled lock takedowns?

[Mark Walker, Executive VP & COO at Forestar Group]

Yes. Builder demand remains strong, particularly where we can get new communities open and on board, Builders are winding up at the door essentially to get into new communities. In existing communities, we're seeing the same. There are on occasion when we deal with this quarter over quarter some inventory buildup and it's project by project. If there's ability to bring in a new builder, we will do that.

[Mark Walker, Executive VP & COO at Forestar Group]

We have been doing that in the past, but builder demand is strong overall. Demand for finished lots remains solid.

[Asher Sohnen, Analyst at Citigroup]

Great. Great. That's good. And then just separately, are you able to just help us a little bit more with and you talked about this a little bit in the prepared remarks, but details on kind of the cadence of deliveries over the balance of the year just given the softness in the Q1?

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

Well, it was really we had a really strong Q4. And so October was a little softer. It improved in November. December got pretty much back to normal. And then as we go through, what we've seen over the last several years is that we have that Q1 seasonally is our lowest.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

And we have a majority of our deliveries in the second half of the year. So we see that same progression pretty much similar to what 2024 was.

[Asher Sohnen, Analyst at Citigroup]

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

[Operator]

Thank you very much. Okay. I'm not seeing anyone else come into the queue for questions. I will now turn the call back over to Andy for any closing remarks.

[Anthony W. Oxley, President and CEO at Forestar Group Inc]

Thank you, Jenny, and thank you to everyone on the Forestar team for your focus and hard work. Stay disciplined, flexible 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 Q2 fiscal 2025 results.

[Operator]

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

Participants

Executives

• Chris Hibbetts, Vice President of Finance and Investor Relations
• James Allen, Executive VP, CFO
• Mark Walker, Executive VP & COO
• Jim Allen, Chief Financial Officer

Analysts

• Anthony W. Oxley, President and CEO at Forestar Group Inc
• Carl Reichardt, Managing Director - Equity Research at BTIG
• Asher Sohnen, Analyst at Citigroup