Q3 2020 Forestar Group Inc Earnings Call
Good afternoon, and welcome to four four stars third quarter 2020, <unk> earnings Conference call. At this time all participants are the listen only mode. I question answer session will follow the foreign visitation.
Any watch require operator systems during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the call over to Jessica Hansen, Vice President Investor Relations for D.R. Horton the majority shareholder of Forestar.
Thank you sorry, we welcome each of you did the call to discuss four stores financial results along with 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 is 1995.
Other force or 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 to force or on the date of this conference call and first 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 enforcers annual report on form 10-K, and subsequent quarterly reports on form 10-Q, all of which are filed with the securities and Exchange Commission.
This afternoons earnings releases on first serves website under investor that for sure Dotcom and the 10-Q is planned to be filed mid next week. After this call. We will post an updated investor presentation to four stars Investor Relations website under events and presentations for your reference now I will turn the call over date, Dan Bar talk.
CEO of for sure.
Thank you Jessica and good afternoon, everyone.
This is a Jessica I'm pleased to be joined on the call today by Jim Allen, Our Chief Financial Officer, who joined the Forestar team last quarter and by Collin Dawson D.R. Horton Vice President of corporate Finance and Treasurer.
To begin we'd like to get express our good 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 and our priority continues to be the health and safety of our people and the communities that we serve.
Now, we'll talk about the current environment and our quarterly results.
Because we indicated on our last call a lot sales pace decline throughout the second half of March and April as homebuilder slowed their purchases of lots to adjust to expected lower levels of home sales as a result of the pandemic.
As housing markets can did consider because housing market conditions improved in May and June forestar was able to quickly respond to the increased demand for residential lots and deliver solid third quarter results a lot sales pace increased steadily throughout the quarter, resulting in third quarter lot.
Deliveries of over 2000 lots.
An increase the 75% from the same quarter in the prior year.
Even with the improvement in market conditions in demand, we remain cautious as to the impact Cobot 19 may have on our operations or on the overall economy in the future.
However, we believe that we are well positioned to successfully operate during changing market conditions because of our low net leverage and strong liquidity position or low overhead model and our relationship with the R. Horton.
We remain uniquely positioned to consolidate market share and the underserved lot development market that wax well capitalized international participants.
Jim will now discuss our third quarter financial results.
Thank you Dan.
Third quarter net income attributable to Forestar increased 46% to $10.1 million or 21 cents per diluted share compared to $6.9 million or 16 cents per diluted share in the prior year quarter.
The current quarter results included 2.3 million dollar income tax benefit related to the end well carry back provisions of the recently enacted shares Act.
[noise] Forestar third quarter revenues increased 102% from the prior year quarter to $178 million, which included $13.4 million of revenues from residential tract sold.
Residential lots sold during the quarter total 2023 lots an increase of 75% from the prior year quarter.
The average lot sales price for the quarter was $79900.
77% of lots sold in the quarter were from development projects with the remainder from lot banking.
Forestar total lots sold approximately 2000 lots were sold to D.R. Horton during the quarter.
Our pretax income for the quarter was $10.3 million with the pretax profit margin of 5.8%.
Our gross profit margin was 11.7% in the third quarter and SGN a expense as a percentage of revenues was 6.3%.
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.
Okay.
It's too early to predict the ultimate impact of the pandemic on the economy and on future market prices in terms for residential lots.
Second half of March and April we worked with our customers would just lot sales contracts to delay the timing of take downs as builders adjusted to fewer home sales as a result of the pandemic.
Since then how's the housing market conditions have improved and the velocity of our lot sales increase throughout the quarter.
We have not seen broad based home price reductions and therefore, we have not experienced any material changes to the pricing of our finished lots.
As we managed through these evolving market conditions, we will continue to work closely with each D.R. Horton division and our other builder customers on a project by project basis to balance our finished lot prices and absorptions to maximize the returns on our inventory investments.
Although we temporarily restricted our land purchase activity in late March April and May we have now returned to more normalized levels of land and lot development investment.
We also paused our hiring efforts during that time, but our back to recruiting and hiring for the further expansion of four stars operations. We're pleased with the progress we have made so far building out our local teams are really excited to continue doing so.
As we noted last quarter due to the uncertainty in the U.S. economy, and our business operations from covert 19, we withdrew our guidance for fiscal 2020 and 2021.
Although we don't yet have enough visibility to reinstate full guidance today.
Based on today's market conditions, we now expect to deliver between 80 709000 lots for the full year of fiscal 2020.
And to grow a lot deliveries to a range of 10000 511500 lots in fiscal 2021.
We plan to provide more guidance for fiscal 2021, and we have sufficient visibility in the market conditions.
During the third quarter investments in lots land and development totaled $230 million of which $100 million was for land and $130 million was for land development.
For the nine months ended June investments in lots land and development totaled $730 million.
First there is lot position at June Thirtyth was 50700 lots of which 38300 lots are owned and 12400 lots are controlled through purchase contracts.
14100, or 37% enforcers owned lots or under contract to sell the deal fortune, representing approximately $1 billion CJR Forestar revenue.
Another 15500 enforcers owned lots are subject to a rider for suffered a deal Horton under the master supply agreement.
For sure is targeting a three to four year owned inventory Atlanta and lot Jen.
Forestar remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage at June Thirtyth, we had approximately $700 million of liquidity, including $350 million of unrestricted cash and approximately $350 million of available capacity on a revolving credit facility.
Debt at June Thirtyth totaled $641 million with no senior note maturities until fiscal 2024, and our net debt to capital ratio at quarter end was 25.2%.
At June Thirtyth, stockholders' equity was $846 million and book value per share was $17.61 up 6% from one year ago fan.
Forestar is uniquely positioned to consolidate market share in the highly fragmented lots development industry through housing market and economic cycles.
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 with long term pre tax profit margins of approximately 10%.
Before we turn to questions I'd like to briefly touch on Forestar is investment highlights again from my perspective.
We have a unique lot manufacturing business model very different than a typical land developer we have no unentitled land.
We are focused on developing lots for affordably priced housing.
We haven't experienced management team that knows how to navigate through market cycles.
We have a strong balance sheet and liquidity position with low net leverage we're profitable at current operating levels and continue to expect to manage our business at an S.G. and 8% is lower than a typical homebuilder.
And most importantly, we have a unique competitive advantage due to our relationship with D.R. Horton, which de risks the expansion of our operating platform allows us to have a footprint that is more geographically diverse than most public homebuilders.
In closing and as I've already mentioned Forestar is extremely well positioned to operate too uncertain economic conditions because of our low net leverage strong liquidity position low overhead model and relationship with the art.
Cherie at this time, we'll now open up the line for questions.
Thank you if he would like to ask your question. Please press star one of your telephone keypad.
For me to tell indicate your line is in the question. Keith You May Press Star too if you relate to remove your question from the Q.
Participants using speaker equipment may be necessary to pick up your handset before pressing the star is we ask that you. Please limit to one question and one follow up question. Our first question is from Dod level with Bank of America. Please proceed.
Hey, guys. Thank you for taking my questions Tonight. The first one Dan if I heard the outlook correctly for 10000 deliveries in 2020 like this and I think I'm, sorry, I apologize.
That was the prior guidance was 88.7 to 9000 versus 10000 prior and then.
For 2021, it looks like that guidance was brought down slightly as well I mean is that just simply conservatism just given the current environment, where there is uncertainty or is there something else that we should consider.
Well clearly I think when market conditions are uncertain.
We did take a little pause in and buying land and and took our foot off the gas.
On the last development.
But really returned to normal conditions, but yes, I would say that primarily it's really uncertainty as we look forward.
Okay. That's helpful and then on the G and H side, it looks like that was pretty flat sequentially. Despite the uptick in revenue where their costs that you were able to pull out that were sort of.
Onetime in nature, if you will equate in other words that will kind of come back in as as we proceed to the next couple of quarters or is that level sort of sustainable.
I think that.
Our continued to hiring you know obviously, we slowed up our hiring.
During that quarter as compared to prior quarters. So I think that as we continue to build out our platform you'll see some increase in the and the total dollars of DNA as kind of on the other saying prior trend and obviously as a percentage of revenue I think as we've said many times you know the it could be lumpy from from month to month and quarter to.
Quarter, but we think we're on a pretty good trend right now it's John for reference through employee count at the ended June was 128, which was only up seven people during the quarter, which reflects the hiring positive data. If you look at December to March their head count was actually up closer to 25 or 30 people.
Got it that's helpful. If I could squeeze one more on here Dan I think you had mentioned 146 sales lot sales from.
April 1st April 23rd, which would imply somewhere around 940 year 950 per month in May and June is there any anything that would stop you guys from from doing above that level in the and then two next quarter here on a monthly basis.
I don't think there's anything that stops us.
We do have the developed lots on the ground.
Clearly it was it was a quarter that was was hurt in the early part of the quarter, but no I feel I feel good about where we stand at a go forward basis, the inventories there and a lot following those are under development.
Great. Thanks, very much guys.
Our next question is from Ryan Gilbert with BT Ita. Please proceed.
Hey, Thanks, guys.
So I guess just building on the last question there I think one of the themes in the last couple of months has banned the pickup in demand that we've seen as Ben Thank a lot stronger than many of us money at bats have expected, including homebuilders and so you're seeing homebuilders really start to celebrate their land.
Development land acquisition activity.
On demand and the same time it seems like you also cause land acquisition development activities and our.
I guess, you know trying to reaccelerate that so I'm just I'm wondering about or I guess, if you can just talk about the opportunity that you're seeing.
You really need that stronger demand for lots from homebuilders as they try to meet homebuyer demand and then the extent that you can reaccelerate your own land development land acquisition activities.
And then maybe just thinking about the original divisional pre cobot guidance around to billing that land spend on it that still it seems like based on that on the third quarter spend I should still be on the table, but yes, you could just if you just talked about that you really helpful. Thanks.
I guess, starting with your with your last point there.
Yeah, it's still pretty lumpy, but I feel pretty good about regaining that original intended land and development spend for the year I think that billion dollars is clearly in line with where it where we expect to be.
And again, I think as as positioning ourselves well just about a couple of that no. One as you know what's I buy that piece of land, it's usually a year before my first revenue event. So I don't really see it having much impact in the near term that slight pause we took.
And I think that we have the lot inventory meal with over 36000 lots owned.
And over 50000 owned and controlled I feel very good about being able to hit demand as it as it develops.
Again, it's it's kind of strange times out there is as we all know a known would have expected. The this kind of demand when were what was what's happening in the economy in the cold it but I think we're well positioned to meet that demand if it materializes.
And Ryan their monthly land land back in development will be broken out in the presentation that that's on the website after the call, but just for reference all in they spent 52 million in April 56 million in may and that jumped up to 119 million in June.
So they really did in a tone it back really mainly on the land purchase side and still spent in a decent land development dollars, but then picked it back up and Jan.
Okay got it and I guess just following up there are you seeing higher demand from builders materializing or is this still lot at an event that's still to be D.
I'd say that today, we are seeing higher demand.
Not only not only from Horton, but as we've talked about third party building before I think my phone is ringing more now than it ever has as we've heard at looking looking for positions.
So I, so I I feel really good about where we are I think we're really well positions.
Yes, I feel good.
Okay, Great and then just lastly, the on sequential drop and gross margin I I think was a little surprising just given it looks like that the land banking percentage down sequentially could you talk about.
What what drove that that sequential depth.
It's really just a function it attracts during the quarter. So if you think about attract sales similarly to lot banking in that their underwriting that's where a return not sure gross margin and they didn't hold that track sales for very long instead. The gross margin was was pretty low but the return with attractive.
Got it okay. Thanks very much.
Our next question is from Truman Patterson with Wells Fargo. Please proceed.
Hey, good afternoon, and this is actually trade routes non for chairman. Thank you for taking my question. My first question is given the strong homebuilder demand we have seen recently wouldn't care about potential constraints when it comes to labor and equipment for development over the next coming quarters are you anticipating any increased competition and therefore increased cost for development.
Caf here.
At this point, we're not most of the development that we are are undertaking right now has already been contracted for I'm actually was every as all the other developers and those kind of hit the stopped button, we did a pause and did some repricing, but continued developing and I think that we actually got some price.
Concessions.
For some future development.
Well things and increase later in the year. They may the good news for US is that even if costs go up most of those lots haven't been priced shifts or weeks should be able to account for that and in our pricing policy.
Okay, Great second given the strong demand again that we've been saying.
Would expect given builders thirst for lots of the time that lots would be selling at more of a premium or you actually seeing any changes in lot prices and do you have any lots that aren't already spoken for I contract is there any difference in pricing between those lots and lots of got under contract.
Yeah.
To the extent that we have lots under contract obviously, we're not seeing any change in those were definitely seeing some increased demand and some pricing power.
It is lots that we have on the ground that are ready to be delivered today and we're taking advantage of that where we can.
Okay, Great and then if I could sneak just one more in.
Can you talk about any variance you're seeing by region are you seeing eye in specific areas that are looking like and opportunity going forward. Thank you.
Well I think you would generally it's pretty broad based but I think Florida, Texas in the Carolinas have shown the best strength, which is where we're really well positioned and I think that that strategy has paid off.
When you look at a you know what's happened with with demand in the in the northeast and I think in California is probably where its weakest and we got we just don't have big positions there right now.
Okay, great. Thank you.
Our next question is from Anthony Pettinari with Citi. Please proceed.
Hey, good afternoon.
Builders and talked about who the delays.
Couple of days due to a couple of weeks to their cycle times.
Orders that the Liberty in terms the timeframe from initial capital outlay, maybe the first phase delivery is covert occur could related restrictions pushed out.
Times at all or do you anticipate that going forward.
Well, we really haven't seen any push out as of right now.
No actually what we saw the little maybe acceleration in development time as other builders kind of stopped development projects, we were able to pick up multiple crews uncertain sites, which allowed us to develop faster, but I also don't see that as a long term change I think it was kind of a blip here over the last few months and we'll probably continue maybe for another couple of.
Months.
In the long term I think we have really good relationships with our contractors.
Leveraging a little bit in some cases hortons relationships with our site contractors and I don't really see any increased development times at this point.
Okay. That's helpful. And then just pulling on the last question maybe.
Well has been made of kind of post.
Dehumanization as a trend and I'm just wondering if you've seen that sort of manifest itself in greater interest.
Perfect types of lobster price points or sciences or geographies.
In terms of mixes this recovery kind of playing out maybe differently than we were expecting pretty cold and or is it.
Maybe to split though.
Why don't I don't think get changes our strategy at all I mean, we have been focused on kind of the suburban affordable price points I think that.
You know if the de urbanization trends continue I think we're well positioned to capitalize on that because that is really where our where our land a lot positions is that.
Okay. That's helpful I'll turn it over.
And our next question is from Michael runoff.
My again please proceed.
Hi, This is a lot helmet on for Mike Congrats in the quarter Hope you all are going well and thanks for taking my question.
My first question was just the higher mix of delivery hand development projects this quarter I know it.
So see volatile quarter to quarter that 77%.
But just curious if in the new guidance, you gave I still expecting it to sort of come out two thirds.
Development projects.
Over the last couple of yes.
Well I think it will vary from quarter to quarter, but at this point I think I think that that is probably still good guidance is a two thirds one third.
Okay, Great and my second question is just down it could provide a little more color on the residential track sales this quarter.
What was the thought process behind that demand was pretty strong in may and June and.
How should we think about the level of residential tract sales for the rest of the year and and next year.
Well, it's really not our core business of selling off track. So this particular situation was the land parcel we tied up that was actually adjacent to a D.R. Horton property and we were trying to figure out a way to co develop it ends up being much more complicated and as we figured it out over the three month period.
We thought the best execution was run prestigious sell that parcel and the and move on.
I think youre, we only held that for a couple of months, but made a good return on it and the it just seemed to be there really getting rid of the complexity of and we're trying to have things that are shovel ready and really move our inventory quickly and we knew that that one wasn't going to fit that box.
So it was it was time to move on instead attract they'll they'll be lumpy don't expect them every quarter as Dan said not part of their core business, but they could still have some here in here.
Okay, great. Thank you.
Yeah, we do have a follow up question from Ryan Gilbert with BTG. Please proceed.
Hey, Thanks, guys.
I just wanted to get a progress update on building out or I guess your efforts building out the.
Corporate and back office functions. So you can start reliant on the shared services agreement somewhat less and maybe timing for having a fully built out a corporate office. Thanks.
Well, we've been we've made a lot of progress I ask that you know obviously getting Jim onboard was it was a big plus for us Menzies starting to build out a team under him, which I think from an accounting support was going to accelerate.
Less reliance on the Horton back office, there are certain pieces, we look to maintain like IR and HR and 90, so those things we'd like to keep as long as they will allow us to.
I think it all the other areas, we're making good progress I don't really have a timeline in mind, yet, but but we are we I think we're making good progress.
Great. Thank you.
Yeah, we tend to break even a session I would like to turn the call back over to Dan Brown for closing remarks.
Thank you Sherry.
Thank you everyone on the forced our 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 on the call today and look forward to speaking with you again in November to share our year end results. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.