Q1 2020 Earnings Call
Greetings and welcome to be Forestar Group first quarter 2020 earnings conference call at this time, a kiss country listen only mode.
Question answer session will follow the formal presentation.
If anyone should require operator systems towards a conference. Please press star zero any telephone keypad.
As a reminder, this conference is being recorded.
It's my pleasure to introduce your host Jessica Hansen, Vice President Investor Relations for D.R. Horton, the 65% majority owner Forestar Jessica. Please go ahead.
Thank you Kevin we welcome each of you to our call dish to discuss sports stars financial results, along with the company's expected growth in capital plan.
Before we get started in today's call May include comments constitute forward looking statements as defined by the private Securities Litigation Reform Act at 1995, although Forestar believe any such statements are based on reasonable assumptions. There was no assurance that actual outcomes will not be materially different.
All forward looking statements are based upon information available before starting the data. This conference call. It four star 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 enforcers annual report on Form 10-K filed with the Securities Exchange Commission.
Afternoons earnings releases unforced errors website, and investor Dot Forestar dotcom.
Thank you as plans to be filed early next week. After this call will push and they didn't investor presentation support stars Investor Relations website under events and presentations for your reference.
Now I'll turn the call over to Dan Bar charts CEO of first sorry.
Thank you Jessica good afternoon, everyone.
In addition to Jessica I'm pleased to be joined on this call by calling Dawson D.R. Horton Vice President corporate Finance and Treasurer works closely with Jessica in me Unforced errors finance and Investor Relations effort.
Our team delivered a solid first quarter and made significant progress towards executing on our plans for fiscal 2020.
We will discuss these results in detail, but 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 returns focused manufacturing mindset.
The land development process, they're focused on short duration.
Fully entitled residential lots at all.
We develop our project today phase manner, and typically have they signed lot purchase agreement or may known buyer prior to making any significant new investments.
Our approach to land development as lower risk than other public land developers and all produced more consistent cash flow and returns as we achieved scale.
[noise] Forestar also has a unique of strategic relationship with the R. Horton nations largest builder or.
Our relationship with the R. Horton de risks the expansion of our operating platform that allows us to have a footprint that is more geographically diverse than most public homebuilders.
Yeah Horton has an immense appetite for finished lots we are leveraging the strategic relationship.
To deliver topline revenue growth that is unmatched within the broader homebuilding land development universe.
I'll turn it over to Jessica now to discuss some of our financial highlights.
Sure Dan in the first quarter net income attributable to force or increased 412% to $16.9 million.35 per diluted share compared to $3.3 million or eight cents per diluted share in the prior year quarter.
Our stores first quarter revenues increased 542% to $247 million, which included $30 million residential tract Phil.
Residential lots sold during the quarter totaled 2422 lot an increase of 368% from the prior quarter.
Average lot sales price for the quarter was $90300.
58% of lot filled in the quarter were favorable development projects with the remainder from <unk> and Kim.
A forced or total lots sold approximately 2400 were sold to D.R. Horton during the quarter Dan.
It is our goal to build a company that will produce consistent returns.
During this period of rapid growth, we expect significant variability in our quarter to quarter results.
However at scale, we are confident that are low risk high turnover production oriented lot manufacturing model will produce consistent returns.
Our pretax income for the quarter was $22.2 billion for the pretax profit margin of 9%.
Our gross profit margin was 12.4% in the first quarter.
And that's DNA expense as a percentage of revenues was 4.2%.
We continue to expect our pretax profit margin in fiscal 2020 to be in the mid to high single digit percentage range.
For the remainder of the fiscal year, we expect significant quarterly fluctuations in our gross and pre tax margins.
The quarterly mix of our lot deliveries.
Timing of track sales and the timing of incremental that's gionee, while building out our platform.
We still anticipate approximately two thirds of our lot deliveries in fiscal 2020 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 under the right.
Additionally, short term watt banking projects are expected to be roughly one third of lot deliveries during fiscal 2020.
<unk> banking is expected to generate 12 to 16 for set 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 increase SGN a support our ability to achieve scale.
At scale, we believe we will manage our business at an S.G. and eight percentage lower than a typical homebuilder.
Jessica Forresters underwriting criteria for new development projects include the minimum 15% annual pretax return on inventory in a return of the initial cash investment within 36 nights during the first quarter investments in lots land and development totaled $230 million of which $120 million would start.
Land and $110 million was for land development.
In fiscal 2024 Star continues to expect to invest approximately $1 billion subject to market conditions.
For sure is currently operating and 51 markets and 20 States, which is an increase of 16 markets enforce feeds from year ago.
Forestar is more diversified today and in more markets and most homebuilders.
Four stars recruiting efforts today continue to be very successful and the company has recently opened its 13th Division office.
There continues to be tremendous opportunity for growth, here's where started existing markets and their relationship with D.R. Horton.
First there is lot position increased 16% sequentially from September Thirtyth to 44500 lots at quarter end.
Four stars lot position at December 31st 32200, her own and 12300, a controlled through purchase contracts.
Well thousand 739% enforcers owned lots are already under contract to sell the D.R. Horton representing approximately $1 billion future revenue.
Another 12904 stars owned lots are subject to our right of first offer to D.R. Horton under the Master supply agreement.
Of course are currently expects to own a three to four your inventory Atlanta Midla Holly.
While forestar continues to grow its platform and scale rapidly. The company is focused on maintaining sufficient liquidity and modest leverage at December 31st Forestar had approximately $720 million of liquidity, including $370 million of unrestricted cash and approximately $350 million available.
Well capacity under its revolving credit facility.
Forestar net debt to capital ratio at quarter end was 9.7% and the company has $119 million of convertible senior notes maturing in March that are expected to be settled in cash at maturity.
Forestar is focused on maintaining a strong balance sheet that will utilize modest leverage subject to market conditions. The company expects to opportunistically access to public markets to provide additional capital for long term growth, while managing to a net leverage ratio of 40% or less.
At December 31st Stockholders' equity was $826 million and book value per share was $17.19 up 7% from one year ago Dan.
Well start is uniquely positioned to consolidate market share.
Highly fragmented lot development industry through housing market and economic cycles.
We now expect to deliver 10000 lots and generate 800 $850 million of revenue in fiscal 2020.
We continue to expect to deliver approximately 12000 lots generated 900 million to $1 billion of revenue.
Fiscal 2021.
At scale, we expect our operating model to produce financial results and returns that are similar to or better than most midcap homebuilders.
With long term pre tax margins of approximately 10%.
As I indicated earlier, we still expect our pretax profit margin to be at a mid to high single digit percentage range for fiscal 2020, and approximately 10% by fiscal 2021.
Before we turn to questions I'd like to remind everyone. A four stars investment highlights from my perspective.
Unique lot manufacturing business model very different than a typical land developer.
There was strategic relationship with the our order the nations largest filler.
We are any significant growth trajectory.
We are geographically diversify.
Focused on developing lots for affordably priced housing so hard to the market.
We haven't experienced management team is excited about our opportunities.
Really strong balance sheet and liquidity position.
We are profitable at our current operating levels and we will enhance our results as our portfolio matures and we continue to build scale.
Put simply we are executing on our plan and our position for continued success.
Kevin at this time, we'll now open lined up for questions.
Thank you will now be conducting your question answer session. If you like to be placing the question could you. Please press star one under telephone keypad.
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Our first question today is coming from Truman Patterson from Wells Fargo. Your line is now a lot.
Hi, good evening, everybody nice results.
Uh huh.
First just.
Just wanted to touch on lot count in 2020, very strong balance sheet over 700 million and liquidity only 10% that that the total capital.
Could you just walk us through how we should be thinking about your total lot count ending 2020.
I know this has a lot of moving parts, you're delivering 10000 lots this year that will need to be replenished.
Your your purchasing lots outright, which could take up more capital than if you decide to option, but you know how should we think of.
Total lot count ending 2020 should increase in a similar range.
As 2019, where you all had lot count increased by about 18000 year over year.
Or would that be too aggressive.
Well I think I think is really have to go back to what we're saying is our target for lot sales and remember that were really targeting a three to four year lot supply.
Yes.
No we're not we're opportunistically buying transactions as this last this last quarter was unique in our growth and owned and controlled.
Lots without a significant increase in our.
Inventory.
We're just continuing to try to execute the deal by deal.
Yes, we clearly are going to grow that platform in order to support our continued growth.
Okay is there any limiting factor and ability to find land that isn't meaning your underwriting hurdles that would kind of.
Lemaitre or cap that or is that just more of and internal.
Decision.
Well, yes, no really goes back to people in capital.
Really I think as our limiting factor to rebuilding a great team just.
We're continuing to source more forestar source transactions. In addition to the support we're getting from the Horton source transactions.
I think our pipeline is as strong as it's ever been and I feel like we're really poised for good execution and we believe the three to four year on glass supply gives them the ability as a phase developed to continue to grow into that and is sufficient for continued growth in coming years that they don't need to on more than three to four years of land.
And that's a big part as our veterans improving over the coming years is delivering more revenue and profits on a three to four year on lot supply.
Okay. Okay.
Yes.
Could you all discuss how many fully developed blocks do you have in your backlog currently.
What we've all 4100 says about 4040 100 at the end of December .
Okay, Okay, great and then.
Final one for me and then ill.
Back in Q.
Just looking over the past 12 months, what kind of lot price appreciation of you all.
Seen in some of your core markets, either what you've been able to pass through to the.
End user D.R. Horton or on the inflation side, what have you seen your costs kind of go up when you're out.
Looking at the land.
Yeah, that's that's really a hard question to answer it.
And on an individual basis most of the lots were selling today were contracted for a year to 15 months ago.
As I've seen new transactions were definitely seeing a list in pricing market by market basis, but I don't know that I really give me a percentage number on that it probably want to do a little bit more hallmark before I answer that question would it would have Paul would've ballpark and maybe some of your core markets be kind of low to mid single digits.
It also.
That's probably a good guess, yet and again I think costs have gone up concrete has gone up a little bit on some of our some of our tax rate work.
I think a little bit costing gradings I think the others, but it's really limited to certain markets, where there is really a lot of.
Development taking place.
And those submarkets, but I think we've been able to easily achieve increased pricing as it relates to the increasing costs.
Okay. Thank you all nice quarter.
Thanks, Jim and Thanks gentlemen, Thank you. My next question today is coming from Ryan Gilbert from BTG. Your line is alive.
Hi, Thanks, guys just to piggyback on treatments question are you are you seeing an ability to price above the cost increases that you're seeing in the market.
Just given.
Given how demand has been year to date.
Yes, I would say that where we're able to maintain margins in our in their projected returns.
And all of our underwriting and.
Clearly pass on any increase in cost in pricing.
Okay got it.
And then.
As I said it seems like demands been pretty good so far in 2020, and we've had that 10000 lot.
Goal out there for some time now.
And I guess I'm I'm wondering in the event that we see the demand holding up.
Throughout the year on can you talk about your ability to flex up a lot production capacity to be higher demand and potentially get about that 10000.
A lot delivery range I guess with the understand that this land development to slip business even lot manufacturing.
Yes.
Again in most markets. It takes me close to a year even on second phases. It takes me close so year to actually get lots on the ground.
We are monitoring sales pretty closely at all of our subdivisions in order to try to get ahead of any increased demand.
Couple of cases, we are accelerating when we're getting lots on the ground.
So I mean, we're hopeful that we'll be able to exceed the 10000, but we feel pretty comfortable that we'll get there.
Yes, if you look at our first quarter, new take it should be pretty easy, but we've had a great quarter and.
We've we've tried to make sure you guys all along that is going to be lumpy quarter to quarter.
Right understood and then just last one for me.
In terms of accessing the public markets in 2020 can you talk about your preference for debt versus equity capital.
Okay, well do you want to take a shot at that one sure Brian .
So our approach to the capital structure is really centered on being conservative flexible and disciplined.
Through our capital raising efforts last year together with the performance of the business Forestar is going to where in a unique in great position, where we can be opportunistic as it relates to the timing and sequencing of debt versus equity.
And certainly our approach to Joe to tapping the capital markets will will parallel our philosophy on capital structure, we're going to be opportunistic, but disciplined as we evaluate the capital markets, but certainly any decisions, we make would be centered on being maintaining a conservative capital structure, and certainly leverage less than 40%.
Matt.
Okay, great. Thank you.
Thank you. Our next question today is coming from Michael Rehaut from Jpmorgan. Your line is now live.
Hi, This is a lot on for Mike.
Nice job this quarter first time, if these are elevated again and I was curious what were the drivers of higher ASP as it makes issues again.
Maybe land banking or west coast lots.
We expect an elevated as Peter occur again into Q.
You hit it right on and it was it's definitely a mix of lots and there was a.
Somewhat of a concentration of lot baking in the west that came through this quarter had the same as last quarter PCR quarter to quarter, we exceeded 90000 ASP in both quarters.
I don't expect that to continue.
If you looked at the amount of lot baking that we did in this quarter and I think where we're staring you for the rest of the your I think you'll see a fall off in lot thinking sales for the rest of year.
Okay. Thank you and also just in terms of two to continuing any other color that you could provide in terms closings gross margin restaurant.
Now, we're really sticking with annual guidance as Dan already indicated it's going to be lumpy from quarter to quarter, although on an annual basis, it's a very significant growth trajectory.
With the timing of lot deliveries and impact of next it it's going to be lumpy quarter to quarter. So we're not planning to provide any quarterly guidance.
Okay. So just turning to the full year I was wondering what's baked into.
The revised fiscal year 28 total revenue guide in terms of residential track sales given you had another.
Big track sales this quarter.
Yeah, that's really what it was that we actually had three track sales in this quarter two small multifamily pieces in one larger residential tract.
So.
That won't be repeated so thats I'd, we feel pretty good about raising the bottom of our of our revenue guidance.
Okay. Thank you.
Thank you as a reminder, that star one could you. Please and the question Q. Our next question is coming from Alex Paris from housing research. Sir Your line is now live.
Yes. Thank you.
Yes, I guess you got answered a few of my questions because I was just trying to figure out.
Given your guidance for this year and.
I guess, we shouldn't take this quarter's revenue as the run rate than what would cause it to kind of fluctuate but wouldn't be the biggest driver.
Yeah, Alex you right. So it'd be specific on what we did this quarter since we didn't spell it out in the conference call our previous guidance, let's for 750 million to 850 million of revenue and then with what we delivered this quarter, which included $30 million of residential tract sales, which are what we've talked about mean somewhat lumpy.
And those aren't recurring every single quarter and we felt comfortable that we can lose the low end of the guidance to set to 800 from 750. So that really was just driven by solid lot deliveries this quarter couples with the $30 million.
Track sales.
Okay, and obviously, you're only kind of giving us an idea of this year and next year not beyond that but.
It would seem to me.
Growing the top line, 20%, where theres, obviously a lot of.
Demand for land than everybody is growing even faster than that it seems in orders this quarter.
What what would be the constraints why would the constraint me around 20% as it really capital or is it more people.
Well, it's back to it takes us about about a year from a day, we buy land that before we get to that first revenue event. So it's kind of that leading that leading indicator.
We just we just raised some additional capital at the end of the end of last year that money is now being put to work. So I think you'll see some impact in 2021.
We'll see the bulk of it really in 2022, it's definitely going to be a gross already for years to cannot we're just not in a position today to feel comfortable giving guidance past 21 that we do you expect us to be in growth story for a multitude of years.
Yes, it would seem that way well, thanks and best of luck.
Thank you. Thank you we reached end of our question answer session I'd like to turn the floor back over to Dan for any further a closing comments.
Okay.
Thank you Kevin.
Thank you to everyone on the Forestar team for your focus and hard work, we look forward to working together to continue growing and improving our operations over the coming years.
We appreciate everyone's time other call today and look forward to speaking with you again in April to share our second quarter results. Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your lines. This time and have a wonderful day, we thank you for your participation today.