Q4 2019 Earnings Call

This time, all participants are in listen only mode.

And then answer session will follow the formal presentation.

Once you require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

Now I'll turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton the majority owner Forestar.

Well assumptions.

No assurances actual outcomes will not be materially different.

All forward looking statements are based upon information available before starting the data this conference call it forced or does not undertake any obligation to publicly update or revise any forward looking statements.

Additional information about issues that could lead to material changes in performance is contained in first started 2018 annual report on Form 10-K T.

And the subsequent quarterly reports on Form 10-Q , all what's your filed with the Securities Exchange Commission.

It's afternoons earnings releases unforced errors website and Investor Forestar Dotcom.

<unk> 10-K is planned to be filed in about two weeks.

After this call we will present updated investor presentation to four stars Investor Relations site excuse me Investor Relations website under events and presentations for your reference now I will turn the call over to Danbury <unk> the CEO of Forestar.

Thank you Jessica and good afternoon, everyone.

Before we talk about the business results for the quarter and full year well what to address the 8-K that we filed yesterday.

Chuck Gale four stars CFO since 2015 has decided to leave the company to pursue other opportunities.

I played a key role for many years unforced, our team and help us begin the transition into the <unk> manufacturing we are today.

Wish him all the best that's future endeavors.

As noted in the 8-K trucks resignation was not a result of any issue concerns or disagreement with the Companys strategy operation accounting financial reporting or other internal controls.

Just to see transparency in our financial reporting are extremely high priorities for four searching.

Revaluating, our alternatives to fill the CFO role and then how could it and our ability to fulfill four stars obligations.

The public company and our responsibilities for shareholders.

Additionally, D.R. Horton currently provides us accounting financial reporting and Treasury support treating a shared services agreement between two companies.

Under that agreement and out of temporary basis, yes important <unk> CFO , Bill, we and controller and all of them.

Looking at it affects both financial and accounting office you're right.

Now, let's move onto the business and our results.

Our team is making great progress and finished the year and a strong position.

For the year, we delivered results that exceeded all of our fiscal 2019 guidance metrics that we have shared in our prior communications.

We will discuss these results in detail.

First I'd like to remind everyone about four stars unique business model and how it differentiates our company in the marketplace.

Unlike other land developers, we bring a production oriented focus germs focused manufacturing mindset to the land development process.

We are focused on short duration fully entitled residential lot development.

We develop our project and they stays manner.

Typically having signed purchase agreement for me known buyer prior to making any significant new investments.

Approach to land development as lower risk and other public land developers and will produce more consistent cash flow and returns while we achieve scale.

[noise] Forestar also has a unique strategic relationship with D.R. Horton the nations largest builder.

Our relationship with D.R. Horton de risks the expansion of our operating platform allows us to heavy footprint that is more geographically diverse and most public homebuilders.

Yeah weren't has an immense appetite for finished lots and we're leveraging the strategic relationship to deliver topline revenue growth.

That is unmatched within the broader homebuilding land development universe.

I'll turn it over Jessica now to discuss some of our financial highlights I.

Thank you Dan in the fourth quarter net income attributable to Forestar was $12.7 million.30 per diluted share compared to $54.9 million or $1.31 cents per diluted share in the prior quarter.

Forresters fourth quarter revenues increased 634% to $236.3 million for $32.2 million in the prior year quarter.

Residential lots sold during the quarter totaled 1908, like an increase of 351% from the prior quarter.

The average lot sales price for the quarter was $90400, 53% of lots sold in the quarter, where from development project with the remainder for lot banking.

For the fiscal year ended September Thirtyth 2019, net income attributable to for Starwood $33 million or 79 cents per diluted share compared to $51.2 million or one dollar in 22 cents per diluted share in the 12 month ended Septemberthirty 2018.

Fiscal 2019 revenues increased 292% to $428.3 million from $109.2 million in the 12 months ended Septemberthirty 2018.

Residential lots sold during fiscal 2019 totaled 4132 lot an increase of 223% and the 12 months ended Septemberthirty 2018.

The average lot sales price for the year was $84200 and 63% lots sold in fiscal 2019 were from development projects.

A four stars total lots sold approximately 1800 were sold in D.R. Horton during the September quarter, and approximately 3700 were sold during the fiscal year Dan.

[noise], there's our goal to build a company that will produce consistent returns.

During this early period of rapid growth, we expect our quarter to quarter results they have significant variability.

However, we are focused on generating consistent returns through our low risk high turnover production oriented lot manufacturing model.

Our pre tax income for the quarter was $16 million when they pretax profit margin of 6.8%.

And our pretax income for all of fiscal 2019, this $45.7 million, but a pretax profit margin of 10.7%.

Our gross profit margin was 9.8% into fourth quarter and 15.3% for the year.

<unk> expenses as a percentage of revenues for the quarter was 3.9%.

For the year asked you know expenses were 6.7% of revenues.

We currently expect our pretax profit margin in fiscal 2020 to be in the mid to high single digit percentage range as we mentioned in our last call. We expect significant quarterly fluctuations in our gross in pre tax margins during fiscal 2022, the mix of our inventory and lot deliveries.

[noise], we still anticipate approximately two thirds of our lot deliveries will be from lot development projects, which typically generate gross margins ranging from 14% to 22%.

Our current development project portfolio is heavily weighted to shorter duration projects not sourced by Forestar, which will produce margins at the lower end of this range.

Additionally.

Short term lot banking projects are expected to be roughly one third of lot deliveries during fiscal 2020.

A lot banking is expected to generate 12% to 16% annual returns with gross margins ranging from 3% to 9% due to the short duration of our current portfolio.

Finally, the continued build out of our platform infrastructure will require increased SG today to support our ability to achieve scale.

We are focused on managing our restaurant efficiently while building out our infrastructure to support our significant growth.

At scale, we believe we will manage our business at an S.G., hey percentage lower than a typical homebuilder Jessica for certain underwriting criteria for new development project includes a minimum 15% email pretax return on inventory and a return of the initial cash and that's not looking at 36 nine.

During the fourth quarter investments in lot land and development totaled $170 million.

<unk> $80 million was for land acquisition and $90 million was for land development during fiscal 2019, Forestar invested $850 million and land and land development.

In fiscal 2024 star expects to invest approximately $1 billion subject to market conditions.

For sure is currently operating in 51 markets and 20 States, which is an increased 27 markets in six states from just a year ago.

For sure as more diversified today, and then more markets and most homebuilders.

For sure is your Green efforts to date has been very successful and the company. Now has 12 Division office is up and there was a tremendous opportunity for growth through first started existing market in the relationship with your working.

At September Thirtyth for certain lot position consisted of 38300 lot of which 29700, <unk> and an 8600 or controlled through purchase contracts.

12800, or 43% of course started to own blocks are already under contract to sell the D.R. Horton representing approximately $1 billion feature remedy.

Another 10600, a first started to unlock are subject to a right of first offered in de <unk> under the master supply agreement enforce our currently expects to own a three to four your inventory Atlanta month Dan.

Well, we grow our platform and scale rapidly we're focused on maintaining sufficient liquidity and modest leverage at September Thirtyth, we had approximately $720 million of liquidity.

Including $380 million of unrestricted cash and approximately $340 million of available capacity under our revolving credit facility.

Subsequent to yearend, we amended our revolving credit facility to extend its maturity date to October 2022.

Our net debt to capital ratio at year end was 8.8%.

[noise], we continue to be focused on building a strong balance sheet that will utilize modest leverage during the quarter. We issued approximately 6 million shares of our common stock.

Net proceeds for this offering for approximately $100 million.

This equity raise provides forestar growth capital for fiscal 2022 and be a and as a result of this assumes issuance D.R. Horton is ownership of our outstanding common stock decreased from 75% to approximately 66%.

The added equity also creates additional debt capacity within our balance sheet leverage target.

[noise] subject to market conditions, we expect to Opportunistically access to capital markets provide additional capital for long term growth, while managing to a net leverage ratio of 40% or less.

At September Thirtyth, or stockholders' equity was $808 million and book value per share was $16, an 84 sets up 5% from a year ago.

[noise] Forestar is uniquely positioned to consolidate marketshare and the highly fragmented lot development industry through housing market and economic cycles, we expect to deliver 10000 lots.

And generate 750 $850 million of revenue in fiscal 2020.

And to deliver approximately 12000 lives and generate $900 million the $1 billion of revenue in fiscal 2021.

At scale, we expect our operating model to produce financial results and returns that are similar to or better than most mid cap homebuilders.

Long term pre tax profit margins of approximately 10%.

As I indicated earlier, we currently expect our pretax profit margin to be in a mid to high single digit percentage range for fiscal 2020 at approximately 10% by fiscal 2021.

Before we turn to questions I'd like to summarize for starters investment highlights from my perspective.

We have unique lot manufacturing business model very different than a typical land developer.

We have a strategic relationship with the R. Horton the nations largest older.

In a significant growth trajectory.

Your geographically diversified.

We're focused on developing watch for affordably priced housing the heart of the market.

We have an experienced management team.

Sorry did about our opportunities and we have a strong balance sheet and liquidity position [noise].

Put simply we are executing on our plans and we are positioned for success.

[noise] there'll at this time, we'll now open up for questions.

Thank you at this time, we will be conducting a question and answer session. We would like to ask the question. Please press star one on your telephone keypad.

Information total indicate your line isn't the question Q.

Hey Press star to if he would like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Q.

To be respectful of time, please limit yourself to one question and one follow up question.

You so much one moment, please probably poll for questions.

Our first question comes from the line of John Lovallo from Bank of America. Please proceed with your question.

Hey, guys. This is actually spend your comment on for John . Thank you for the questions on and congrats on another good quarter wants to start with D.A.S. piece of about 90.4 thousand in the quarter, that's pretty high relative to the past few quarters. So just curious was driven primarily by lot banking sales and should we be thinking about modeling a higher U.S.P. and.

First half of 2020, just given their meeting whopping sales.

Yeah, I think that we've always kind of guide into a lot of change and and volatility from quarter to quarter basis that would say that the $90000 in the fourth quarter was due to a higher mix of lot baking in some of that was kind of west coast oriented. So I don't think I would I would look at 90000 as a good run right.

Okay that makes sense and then if we could go back to the role as CFO for second I know the timing was pretty unfortunately I'm sure that just given the shared service agreement a billing arm and probably too far away from the process anyways, but I'm curious give us some thoughts as to how you guys you're thinking about the roll it CFO .

If I remember correctly I don't think you guys actually need one, but I'm just any thoughts as to how you guys are thinking about that whether that be a meal filling that.

Internally externally and maybe sometime a timeline for that that'd be helpful. Thanks.

Yeah, you know weird, we're just made aware of Chuck's departure recently, so we don't really have any near term expectations on how we're going to fill that role.

I think when you take a little time are going and I really evaluate the role obviously, it's great to have the shared services and flexibility behind us in order to.

It really had no concern of dropping any balls or not being able to get the information that we need so I feel really good about that I think right now would take a little bit and they're really evaluate the at the right person for that rule.

Great. Thanks, guys and good luck.

Hi.

Our next question comes from the line up Truman Patterson from Wells Fargo. Please proceed with your question.

Hi, good afternoon, everybody, Dan Congratulations on a sub 4% Oh I see in a ratio and and Jessica I imagine this is giving D.R. Horton something to shoot for right [laughter]. The money started chairman [laughter] no just just wanted to dig into us.

She and I I'm, a little bit and the leverage that's inherent in this model you know could you just discuss did the 59 million dollar residential tract sale impact. This at all I'm really just trying to.

Figure out how we should think about this ratio going forward over the next.

A few quarters or so I believe Dan you said that you guys might be adding some costs as well near term to build out your infrastructure.

Yeah, we're continuing to build out or infrastructure I'd say, we've made a lot of progress now having 12 division offices open, but you know we need to continue staffing those up.

I think as I've said, all along you know we're a wholesale business, we really expect to operate at a lower SGN a percentage than than a typical homebuilder.

Yes, and this quarter I would look at the 3.9% having that having oh.

A definite influenced by the track sales that we had in the fourth quarter, but I wouldn't expect 3.9% ever quarterly basis, that's for sure.

Okay. Okay, and then going forward I believe you said long term you want to be about two thirds of your lot sales as development sales.

You know I'm trying to understand more near term a land banking has increased as a portion of your sales you know again over the next few few quarters, how that should look in and you know could you maybe just walk us through or why you rotated more towards land or lot banking near term.

Got it number one I don't think that two thirds. One third is the long term goal I think that's really our expectation maybe over the next year, maybe two years I mean, I really it really has to do with our available capital as we continue to grow our land development opportunities you know when we obviously had some.

You know lumps of cash coming we did a bond issuance this year and an equity issuance. This year, we want to get that money to work as best as we can.

Then were beat when we're very returns focused so having the having those investments in lot banking gives us some solid return on those dollars and you know that's the same time is allowing us to learn some new markets and build relationships with no with the various local divisions of <unk> Horton. So we think it's a great use of our cash in it and it.

We'll miss from quarter to quarter based on you know when those lots are in demand by by the home builder. So we think Oh, yeah. We think it was a great use of our money.

But really don't see it has a wonderful right now that's just really because right now we have cash during this rapid growth period and it's specific to Q4 really was just as Dan indicated timing based on the win and the overwritten divisions wanted those lots and Sally seminars got pulled into Q4 and it was a heavier mix than we would've originally and.

Dissipated for the fourth quarter.

Okay. Okay, and then just one one final follow up Dan you mentioned the equity issuance you guys have a large amount of capital to deploy only 9% not that the total capital. It could you just walk us through how long you think it'll take either actually deploy that capital into more of a you know development lots and you know just run through.

Cadence.

Yeah.

I think back you know, we I think we're guiding to spending a billion dollars between land acquisition a lot development.

Obviously some of that is coming from inventory turn and others have it is both capital and so I don't know that I haven't exact timeframe in my head, but I would expect that over the next one to two quarters, you know that that that available cash is being up and being deployed.

Then obviously, we all have to decide how things are looking in the capital markets versus beginning to utilize our our debt facility.

Okay. Thank you.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question comes from the line of Ryan Gilbert of B T. G. Please proceed with your question.

Hi, Thanks, guys good afternoon.

So first question you know we've heard from a number of homebuilders. This quarter I guess, one expressed interest and wrapping land spend and community count on it.

Hi between 18, and the 2020 and also increasing their entry level next and I guess I'm not I'm. The one and this is good for Forestar, because you own I'm a lot of lots of these buildings with would need to open entry level communities on the other had it could could make <unk> I guess, the environmental more difficult to source nuance on so I guess.

No. One are you seeing more interest from homebuilders.

I guess, just generally for entry level lots and lots of communities that you're developing into is that impacting your ability to source new lots.

Yeah, I don't know that seeing more interest from all builders, it's pretty much from day, one it's been it's been a constant no interest in how we can help deliver last other homebuilders. My phone has always been ringing now that we're building out our teams in local markets I think our capabilities to deliver those.

The other builders is expanding aon in some markets you know that those discussions are pretty progress than in some of that forestar source transactions like I feel really good about how that's playing out.

As far as you know the availability to find transactions, yeah, I'm, not really saying it be that difficult some markets are tighter than others, but that's one of the beauties of being that having the footprint that we do in different markets and no right. You know right now what some markets are producing a lot of opportunities out there might be little tires, I think that real.

He plays to the.

The other geographic diversity that that were that we plan for so overall I feel really good about it.

Okay, and do you think it would be fair to say than that on on balance there hasn't been too much the change in the competitive landscape just one as you're at your outsourcing lots.

I I, Yeah, I would say in balance I have not seen much of a competitive change right. Now. So we're I think we just continue to the scope for plan and you know the rearview mirror Yeah, we've done pretty good at that I expect to continue hitting our plan.

Got it and then just.

The land Bank overall, you know great growth on a year over year basis in the fourth quarter on it looks like where we kind of flattened out around 30000 lots, which is no more than enough to meet the 2020 and 2021 targets that you put out there.

I guess is a high thirtys low 40000.

Controlled bought.

Landbank kind of in the <unk> is that how how we should think about the land bank for.

2020, or do you think you needed to move at higher to fund or did I wouldn't I would <unk>.

Yeah, I would continue to guide towards that three to four years of owned inventory based on our future deliveries and it might be it was that we kind of maybe I won't say then right now, but you know we had we had some money we had some really strong sales in the last quarter, but I think that's really what I would from a modeling standpoint.

So it has stick to that three to four years of future deliveries and we would expect their total owned and controlled position to continue to increase overtime.

Great. Thank you.

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

[noise]. Thank you Darryl and thank you everyone on the four start team for your focus at a hard work I think it was a tremendous quarter a tremendous here, we look forward to working together to continue growing and improving our operations over the coming years. We appreciate everyone's time on the call today and look forward to speaking with you again in January .

Sure our first quarter results.

Thank you.

This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful leaving.