Q2 2020 Earnings Call
Greetings and welcome to Forestar Group second quarter, 2020 earnings call and what can I.
At this time I'm just concerned in listen only mode.
A question answer session will follow the formal presentation.
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So a pleasure trickle over to Jessica Hansen, Vice President Investor Relations for deal worth 65% majority owner or Forestar. Please go ahead just go.
Thank you Kevin we welcome each of you to the call to discuss Forresters financial results along with how the company is being managed during current market conditions.
Before we get started today's call may include comments that constitute 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's 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 enforcer does not undertake any obligation to publicly update or revise any forward looking statements.
Additional information about issues that can lead to material changes in performance is contained enforcers annual report on form 10-K, and subsequent quarterly report on form 10-Q, both of which are filed with the Securities and Exchange Commission.
This afternoons earnings release, its unforced errors website, an investor Dot Forestar dotcom and the 10-Q is planned to be filed mid next week.
After this call we will post an updated investor presentation to Forresters Investor Relations website under events and presentations for your reference.
Now I will turn the call over to Dan Bartok C O forestar.
Thank you Jessica and good afternoon, everyone.
Our team delivered a solid second quarter during an unprecedented time for the nation.
From the outside of the covert 19 pandemic our priority has been this health and safety of our people and the communities that we serve.
We remain committed to all of our stakeholders as we continue to safely operate our business.
In addition to Jessica I'm pleased to be joining on the call today by Jim Allen, Our New Chief Financial Officer, who joined Forestar, a few weeks it though I'd like to take a brief moment they have Jim introduce himself before we get started Jim.
Thank you Dan Hello, everyone.
I'm excited to be part of the Forestar team I look forward to helping the company build out its platform to achieve our goal being the largest developer of residential lots in the United States.
I'm working quickly to get up to speed on the business I look forward to getting to know our investors and analysts.
Thank you Jim.
Given that Jim just joined he will not be an active participants today, but we're very glad to have him with us as a key member of the Forestar team.
We also have cone Dawson, Yeah, Hortons, Vice president of corporate finance and Treasurer with US again this quarter.
To begin we'd like to first express my gratitude to our country's dedicated field of healthcare workers and to all who are on the front lines caring for our communities.
Our thoughts remain with those affected by this pandemic.
Now, we'll talk about the current environment before discussing our quarterly results.
[laughter] economic fundamentals in the housing the residential lot development markets remain silent throughout most of the second quarter. However, during the second half of March and to date in April the Cobot 19 pandemic has impacted our business operations and the demand for our residential lots.
Our homebuilder customers have informed us that they're slowing their purchases of lots during the current market uncertainty to adjust to decreasing home sales orders as a result was a pandemic.
[noise] in almost all municipalities across the U.S., where social distancing and other restrictions have been issued residential construction has been designated an essential business as part of critical infrastructure.
We've continued our lot development operations in those markets were allowed in order to supply homebuilders with finished lots.
We are focused on maintaining the health and safety of our employees customers and trade partners and have made appropriate adjustments to comply with social distancing and other health and safety standards.
We believe that we are well positioned to operate in this uncertain environment because of our loan that love that leverage and strong liquidity position, our low overhead model and our relationship with D.R. Horton.
During this period of uncertainty, we're limiting land acquisition and carefully managing all lot development spending based on our current inventory and anticipated future sales pace.
Our prepared to quickly respond to demand for residential lots both during and after the pandemic.
Our team delivered a solid second quarter, and we opportunistically access to credit markets in February.
We issued $300 million, a 5% senior notes due in 2028 further enhancing our liquidity position.
We will discuss our quarter results in detail, but.
But first I'd like to remind everyone about forestar is unique business model, which is designed to anticipate and adjust to fluctuations in housing market and economic cycles, and how our business model differentiates our company in the marketplace.
[noise]. Unlike other land developers, we bring a production oriented returns focused mindset land development process.
We're focused on short duration fully entitled residential lot development.
We typically have a sign lot purchase agreement from a known buyer prior to making any significant new investments.
We consider ourselves a lot manufacturer and follow a rigorous process to develop our projects in a phase manner.
Our approach to land development as lower risk than other public land developers and will produce more consistent cash flow and returns as we achieve scale.
We are in a strong liquidity position with low net leverage.
Forestar also has a unique and strategic relationship with the R. Horton the nations largest homebuilder our relationship with D.R. Horton de risks the expansion of our operating platform allows us to have a footprint that is more geographically diverse and most public homebuilders.
Yeah weren't has a strong appetite for finished lots that we will continue even during a mark to market downturn.
In the worst years at the last significant housing downturn, you weren't still close between 17000 20000 homes annually.
The majority of which were built on finished lots purchased from third parties.
We expect to leverage the strategic relationship and our strong capital position significantly increased our share of the residential lot sales market both during and after the pandemic.
I'll turn it over to Jessica now to discuss some of our financial highlights. Thank you Dan in the second quarter net income attributable to Forrester was $9.6 million or 20 cents per diluted share compared to $10.1 million or 24 cents per diluted share in the prior year quarter first or second quarter revenues.
Increased 144% from the prior quarter to $159 million.
Prior quarter results included $14.8 million of revenues from 44 commercial acres sold compared to only $2.5 million of revenues from eight commercial acres sold and the current quarter.
Residential lots sold during the quarter totaled 1951 lot an increase of 256% from the prior quarter.
The average lot sales price for the quarter was $79700, 65% of lots sold in the quarter, where from development projects with the remainder from lot banking.
Enforcers total lots sold approximately 1900 were sold to deal Horton during the quarter Dan.
Our goal is to build a company that will produce consistent returns even prior to the current market uncertainty, we expected significant variability in our quarter to quarter results during our rapid growth period.
As a result of cobot 19, we may experience, even more variability in our near term results. However.
At scale, we continued to be confident that are low risk high turnover production oriented lot manufacturing model will produce consistent returns.
We also expect that we will manage our business at an SGN a percentage lower than a typical homebuilder.
Our pre tax income for the quarter was $13.7 million with a pre tax profit margin of 8.6%.
Gross profit margin was 14.1% in the second quarter and SGN a expense as a percentage of revenues was 7%.
Our gross and pre tax margins are expected to fluctuate due to the quarterly mix of our lot deliveries and the timing of track sales.
As the builders, we work with have begun adjusting to the impacts of covert bank team. We have primarily been adjusting our lot sales contracts to delay the timing of take downs as builders adjust a fewer homes sales.
Unless we see broad based home price reductions, we would not expect significant changes to the contract pricing of our finished lots.
But it is too early to predict the impact of this disruption on future market prices and terms.
We are working closely with each D.R. Horton division and our other builder customers to determine the best course of action for each of our projects and we'll continue to adjust the mark to market conditions as necessary.
We are focused on controlling our ESG today on ensuring that our infrastructure adequately supports our business.
We have made great progress building, our local teams, but due to the current market uncertainty we have instituted a hiring freeze.
After we gain better visibility into our future revenue in each of our markets. We will then determine any expense adjustments needed to align with our revenue expectations.
As we noted our press release due to the current uncertainty in the us economy and our business operations from covert 19, we have withdrawn our guidance for fiscal 2020, and 20 to 22 on.
We expect to provide new annual guidance, when we have clear visibility into the vet business.
Jessica during the second quarter investments in lots land and development totaled $270 million of which 160 million, what's fair land and 110 million what's for land development.
During the current market conditions Forrester has temporarily restricted its land purchase activity and continues to closely manage all lot development spending.
Yes, there is lot position increased 18% sequentially from December 31st to 52300 lots at quarter end of course, there's lot position at March 31st 35800 lots our own and 16500 lots are controlled through purchase contracts.
14200, or 40% enforcers owned lots or under contract to sell the deal for representing approximately $1 billion at future revenue.
Another 14404 stars owned lots are subject to our right of first operated deal Horton under the Master supply agreement.
Forestar is targeting a three to four year owned inventory Atlanta unlocks Colin.
We're starting remained focused on maintaining a strong balance sheet with ample liquidity and modest leverage at March 31, Forestar had approximately $790 million of liquidity, including $440 million of unrestricted cash and approximately $350 million of available capacity adds revolving credit.
So.
During the quarter Forestar issued $300 million of 5% senior notes due in 2028 and repaid $119 million, the 3.75% convertible senior notes in cash at maturity.
At March 31st totaled $640 million with no senior note maturities until fiscal 2024, four start net debt to capital ratio at quarter end was 19.5%.
At March 31, stockholders' equity was $836 million and book value per share was $17.41 of 6% from one year ago Dan.
Forestar is uniquely positioned to consolidate market share in the highly fragmented lots development industry through housing market and economic cycles.
At scale, we continue to 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%.
Before we turn to questions I'd like to briefly touched on Forestar is investment highlights again from my perspective.
Well the unique lot manufacturing business model, yet different than a typical land developer we have no unentitled land.
We have a strategic relationship with D.R. Horton the nations largest builder.
We are geographically diversified.
We are focused on developing lots for affordably priced housing.
We have an experienced management team that knows how to navigate through market cycles.
It was strong balance sheet and liquidity position and we are profitable at current operating levels.
Closing and as I've already mentioned Forestar is extremely well positioned and prepare to operate through this uncertain environment because of our low net leverage strong liquidity position low overhead model and our relationship with D.R. Horton.
Kevin at this time I'd like to open line for questions.
Absolutely will now be conducting a question answer session. If you like to be placed into question could you. Please press star one under telephone keypad, a confirmation told will indicate your line is in the question Q.
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First question today is coming from Ryan Gilbert from BTG. Your line is now lives.
Hey, Thanks, guys.
I think it would be helpful. If you just talked a little bit about how lot deliveries in April are currently tracking.
Well.
I must go back a little bit and from.
Give you a little bit of monthly information from January So January we closed on 567 lots.
February 678 in March seven or six.
And it was pretty heavily front loaded to the to the first half of Mark C.C., we were on a pretty even trend leading up to that through yesterday, we closed on a 146 lots in the month of April.
Okay got it and.
Hi, just in terms of land acquisition development spend in 2020.
No I think that the number that we had last quarter was a billion for the full year, obviously were curtailing that.
But maybe you can just talk about the cash requirements are cash out the door that you expect for the remaining two quarters of 2020.
It's still pretty early to kind of provide that number we're analyzing every deal on a development basis as to whether we can sub phase those projects or whether we should actually stop development based on the inventory of each of those deals and what the current sales paces.
Land acquisition.
Literally since March 12, I don't think we bought anything yet, but it doesn't mean, we are still looking at opportunities and if we can if we can get concessions or find deals that really still makes a lot of good says to us. We'll continue some of that so it's just hard to kind of predicts that number but I agree with you clearly will be less than I think the billion dollars that we previously gave.
Guidance.
Okay got it.
Last question for me.
Can you give us a sense of what you're seeing in the landmark it just in terms of.
No changes in pricing for finished and Unentitled lots I know, we're still pretty pretty early early stages here, but just if you're seeing any any changes in pricing or if you're seeing any deals fall through that you could potentially take advantage of at some point in the near future.
We haven't really seen prices reduced yet.
As you know prices are pretty sticky and really tend to follow on prices. So we.
We really haven't seen a falloff in home prices, yet I think the those are probably even given a little bit of concessions, but nothing to really impact home at a lot prices at this point.
We are seeing almost in every case sellers willing to delay.
Diligence periods and closing periods. So risk at this point kind of just being patient the kind of see how this all unravels.
You know.
We are definitely seeking price.
Discounts on new acquisitions, but again at this point I think it's been pretty easy to get delays.
Not really seen the.
Any distress in the sale prices yet.
Okay got it thank you.
Thank you. My next question today is coming from John Lovallo from Bank of America. Your line is now live.
Hey, guys. Thank you for taking my questions as well.
First one is given the stress in the market right now and would you anticipate.
Maybe some of your smaller competitors may end up getting its is a financial stress or trouble and have an inability to access capital.
In which could allow you guys to maybe come in and consolidate industry bid to me, that's something that you're hearing or seeing at this point.
Again, it's still pretty early in the in the cycle, it's a really see anything pop up.
Clearly we have been anticipating these days, but pretty much for the last couple of years and tried to be prepared for these opportunities as they may occur.
But at this point, where we haven't really seen anything.
Anything materialize.
Okay and then in terms of just the land that you only mean, what how are you kind of thinking about the potential for impairments on any of that Atlanta.
Yes.
At this point, we are not seeing any price discounts.
Seeing a little bit of slowing in deliveries, but but again a lot of that is just really focusing on.
They are trying to adjust to what do we think the market is going to be the first reaction from the builders was hold on let's stop here unless still only take what I have to have but as there is really adjusting sales I think we're going to end up with a little better sales pace than what weve, what we've shown here.
Over the first part of the month.
I think our land acquisitions were well thought out I think that we have good good positions.
To be actually I've been pretty surprised at all in a lot of the absorptions that we're seeing in the in the last four to six weeks.
So staying pretty strong in some of our better fit our positions.
So at this point I really don't anticipate any any kind of impairments and so.
Until it back you start to see land prices are a house prices reduced substantially and John Most importantly is forced our strong liquidity profile because if you think back to the financial crisis in the last significant housing downturn noted the biggest and most significant impairments were driven by the fact that builders had to sell land to pay off debt maturities.
And if you can be patient any view ultimately expect to sell that land down the road. In this case sell finished lots down the road and not significantly different prices because you don't have to sell them to generate cash and pay off debt and that's where four stars in a very strong position that is that even if there were a correction in home prices.
And that that strong liquidity profile is going to help insulate them from significant broad based impairments.
Yeah that makes sense, maybe just one more for me is there any reason to think that the mix of development lots versus banking lots or track sales.
Not continue to shift more towards development lots.
Helping the margin as we go through the year versus what we saw kind of in the first and second quarter.
Yes, I don't really see the mix shifting again, it's on a it's really on a project by project basis, and where lots being sold and where our homes being constructed.
I think you saw a little shift.
The first is our first quarter as was obviously relatively heavy in lot banking sales than it was I think as you probably see from our average lot price. It was it was kind of west coast oriented. So I think our exposure in the West coast in California in Washington went down a little bit.
But again I don't really see a big difference between the mix of lot baking to development deals.
As to what we would normally expected for the year. So we've we've expected variability from quarter to quarter, but roughly we had talked to two thirds lot development, one third lot banking and so with some variability from quarter to quarter, that's still on a longer term basis here at least for the next year. So what we would anticipate.
Thank you guys.
Thanks for the next question is coming from Macquarie Hope from Jpmorgan. Your line is now live.
Hi, This is a lot on for Mike I was wondering first if you could just talk a little bit about your cost structure.
And variable and fixed cost and particularly what percent of.
All right percent of Cogs, we'd be sex and what percent of SK, maybe six or how to think about that.
I guess, we'll start with US you today most of our US today is really a fixed costs, it's really people and offices I guess I guess at some point you could always make adjustments to your head count.
But we feel we feel that actually pretty fortunate we've been really building a solid team of people here a lot of lot of the most recent hires are really geared towards land acquisitions.
I think we've got the right people out on the ground looking for opportunities right now and trying to find where those opportunities rats I actually feel really good about that part.
From a from a cost standpoint, it's really more about development spend because the costs our cost of goods sold is really.
Based on that development spend what are the things we have seen almost immediately is a willingness by our contractors to adjust pricing.
So much I know we've talked about this before so much of our costs is petroleum based notes. This people running big equipments, yet have big fuel bills, you see some plastics and pipes of that their costs have gone down and we basically season immediate reduction due to the I think the softness in oil prices.
As well as some of our some of our competitors and other builders out there have really stopped developing.
I've come to us the said Hey, we want to continue to work we're willing to reduce our margins are in order to keep working and we haven't done that across the board, but it's really about looking at each project, where we believe we're going to need lots and try and trying to continue to develop our weekend, but in many cases, we've already seen cost reductions.
Thanks, and then also.
How are you kind of positioning for potential recovery in the marketing and thinking about the process.
Opening up again fairly quickly or.
Just a function of land development is there anything.
Part of hiring more people Yang or just how you're thinking about that process on any of that the recovery.
You know the process really is.
I know I've said it before but it really is deal by deal I mean, we I've spent the last two weeks probably going through each deal twice with the teams on the ground to understand what our inventories are where we weren't as development process, where we might be able to cost concessions, where we should stop because there is sufficient inventory in front of us.
And really looking at each deal.
Trying to make sure that our inventory is matching where we believe that the demand for lots is going to be.
Yes, a lot of what we've done is you have had a phase that may be the 120 lots how do we break it how do we stop part of that phase and only maybe deliver 60 lots instead of 120, but still keeping an eye on how do I turn it back on to the recovery happens quick.
So I think every from a development standpoint, we are in business other than in the state of Washington.
We have been impacted.
Because everything has been stop there I think pretty much every one of our other development projects has continued.
People standpoint.
You know again, we're just going to take sit back and see how this unfolds. We believe that are really good job building a team.
And and my guess is what I don't want our growth Reaccelerates will be will be hiring to meet those needs.
Great. Thank you.
Thank you. My next question is coming from Truman Patterson from Wells Fargo. Your line is now lives.
Thanks, This is actually possible ski.
I guess as we emerge from.
The recession, however, long it.
We have to be.
Do you foresee any changes and the consumer segmentation of your you're locked pipeline.
Well, Joe again, I kind of I kind of look through the Bill maybe Jessica you want to see answer that from a homebuilder standpoint more than for myself sure. Paul I know you and I have talked about it a lot and then there's always conversation about this entry level get harder hit my certain things and the we continue to like that.
That as a big piece of our business and today and after we get through.
Current pandemic because in the entry level buyers buying out of need and they're not a discretionary buyer who that is heavily impacted by the stock market or changes in oil prices and they already have a home to live in today. So we continue to really likes that entry level focus and I think it's a core piece of our business 50 percentage.
Our homebuyers are first time homebuyers enforced Ars investments have been concentrated and to those types of projects and they've been very focused on putting finished lots on the ground for homes at affordable price points, which is where the shortage of lots is so great thing about going into whatever this looks like from a downturn perspective is there is no oversupply of finished lots.
For homes at affordable prices, and that's going to continue to be in market need both during and after the pandemic. So I would expect and Forestar I'll continue to focus on that and we'll have you know a little bit.
Elsner and their portfolio to deliver to builders that they want houses a different price points, but the majority still to be focus for homes at affordable prices.
If you have a number of.
Yes that are actively being developed today versus maybe what were developed.
Second quarter.
Well, our the number of lots that we have that are finished on the ground.
End of the core I believe was 4400, which is pretty consistent with what we've been running I think might have been 4100, the quarter before and maybe 4400 a quarter before that so it's that number has stayed pretty consistent of finished lots again generally as we're finishing them we're selling them.
As far as under development.
I don't have that number handy or or even the.
With that by heads I'd hate to guess that.
We can get back to you on that but I can get back to you on that.
Okay, and just one final one does the slowdown anyway accelerate your desire to.
Have sales the third party broker third party builders.
While we always have had the desire to do that I think I think the flip side I think the other builders may increase their desire to have wanted to buy finished lots.
So I think is.
Hi, good I.
I almost think this is going to be a good opportunity for us as we come out of this to really expand our footprint and at our at our customer base. If you think about the last downturn and D.R. Horton along with the rest of the industry generally shut off their internal development and continued to buy finished lots. So I do think that provides.
An additional opportunity for Forestar here.
Great. Thank you.
Thanks, Paul.
Thank you we reached end of our question answer session, let's turn the floor back over to Dan pretty further closing comments.
Thank you Kevin and thank you to everyone on the Forestar team for your focus and hard work during this uncertain time.
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 July to share our third quarter results. Thank you. Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.