Q4 2020 Forestar Group Inc Earnings Call

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Additional information about issues that could lead to material changes in performance is contained enforcers 2019 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.

N.'s actions and West lot Bank.

We are consolidating market share and the undercapitalized and fragmented lot development industry.

As for Starz lots sold the D.R. Horton doubled as a percentage of dealer orders closings.

On a year over year basis.

In addition, we are pleased to report we recently closed our first project, which was sourced by a third party builder.

Point $4 million.

Residential lots sold during the quarter totaled 3977 lots an increase of 108% from the prior year quarter.

The average lock sales price for the quarter was $86000.

77% of lots sold in the quarter were from development projects with the remainder from lot banking.

For the fiscal year ended September 32020, net income attributable to Forestar was $60.8 million or $1.26 cents per diluted share compared to $33 million or 79 cents per diluted share in fiscal 2019.

Consolidated revenues for fiscal 2020 totaled $931.8 million, which included $51.1 million of revenue from residential and commercial tracks sold.

Anyone.

Driven mostly from improvement in lot sales gross margin as we expect a lower mix of lot banking and higher proportion of Forestar source development lot sales in fiscal 2021 compared to fiscal 2020.

16400, or 39% of four stars on lots are subject to a right of first operating deal Horton under the master supply agreement.

Forresters owned lot position at September Thirtyth, 39% was sourced by Forestar up from 28% a year ago.

Forestar continues to target at three to four year owned inventory of land and lot Jim.

We're still remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage.

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.

Before we turn to questions I'd like to remind everyone of four stars investment highlights.

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 have an experienced management team that knows how to navigate through market cycles movies.

We have a strong balance sheet and liquidity position with low net leverage.

Focus on just being more profitable growth or are you any help on that would be appreciated.

Well you know it.

We control the transaction whenever a builder, whether it be ortner or third party builder.

When they are bringing that deal to us they control the transaction. So they always have choices right. So they could itself developed that they could handed off to a different developer argue the transaction with US was it's more competitive and that margin.

Simply flat and not a whole lot of movement and development margin.

Got it thank you guys.

Thank you. Our next question comes from absolutely Anthony Pettinari with Citigroup. Please proceed with your question.

Hi, This is actually Ashley comment on for Anthony Thanks for taking my question I guess just first off.

Can you just talk about maybe the cadence of lot sales in the quarter and then maybe the cadence contemplated in your 2021 guidance should we think be thinking about growth at 21 is more.

Loaded with demand maybe normalizing in the back half or maybe even throughout the year or even accelerating as the year goes on and then is that kind of reflective of maybe how you think about the overall sustainability of housing demand.

Yes, again from a cadence you know, we're really not giving any monthly.

Yes, we did have a little bit earlier this year during the.

Hi to the crisis when everybody is wondering what was going to happen in the market just to kind of show that.

Variability.

I think we don't really see a lot of seasonality in our in our numbers. So I think that when you I look forward to the guidance that we've given.

Then on for Mike Congrats on the quarter and thanks for taking my questions first I think you'd mentioned that you're expecting less lot baking next year and in the past you talked about the mix between lot development than lot banking has roughly two thirds and one third I'm just curious if you know what you're kind of thinking.

For for 2021 at this point.

<unk>, just wondering what I see as being so 20% I'm getting a lot of it.

Weve used a lot baking to put our cash to work, while we build our pipeline. So at this point, we're we're using it less to put that money to work I see being so 20% this year.

Okay, great. So that just following up on that I think pre Cove in 19, you had guided to pre tax margins of roughly 10% and if now you're having a higher mix of lot development, which are generally you've had a much higher margin.

Well, just wondering kind of what what could be impacting the pre tax margin. There any any color you could give on on how to think about those puts and thanks. Thanks.

Well I think what we're guiding back to that approximate 10% number I think that what we what we saw before coal with Oh, we feel we feel strong about being able to regain that kind of performance I think that's.

On a go forward basis, that's the model that we expect to be able to see which as you know between margins are a shape versus over that.

So.

Thanks, Mark in compared to this year that will be approximately 260 basis point improvement so a pretty substantial driver on a year over year basis.

Okay. Thank you.

We've taken some actions that tried to save that off hopefully it won't last long because generally it's kind of tied to petroleum prices, which have stay.

Pretty consistent I think it is a little bit of over demands and maybe some of the plants are producing the pipe shutdown for awhile, which created a shortage. So I don't see it being a long term problem at this point.

So right now we feel really good about the ability to continue to put us on the ground.

Okay. So you're a third party developer costs aren't necessarily increasing in.

Are you actually seen the development timely.

Timeline lengthened.

No.

We're seeing we're seeing cost a relatively the same often often we're asking people to move to the next phase in their own pricing from the prior face.

And against it if they're not put lots of underground quick enough, where should we start looking for alternatives because we try to keep it.

I don't base.

Okay. Okay. Now that's really helpful. And then a couple of follow ups.

One on the builders of just had very robust pricing recently.

How well are you all position to participate.

And the upside I'm really thinking could you walk us through what portion of your portfolio has faced price escalators and are those escalators tied the market pricing.

This is no no automatic.

Later is tied to market pricing well.

Well, we do is we price phase by phase So we're not locked into long and then.

Evaluate on a project by project basis, where we stand.

With our inventory we look at what the builders inventory is there need in there velocity for sales and when we were just look for those opportunities to push pricing, where we can but.

But again I always cognizant that we're more returns focused on where margin focus we want to make sure that the velocity that they're selling AD has improved continues to improve our returns as well as theirs.

And there is a bit.

Maybe the third at four stars pipeline, though that is not under contract or both of today and that entire third it hasn't even been negotiated yet so that's where they can definitely take advantage of them about that housing market and conditions and then on some portion of the profile as well but.

But definitely the full third that's not contacted.

Okay. Okay, and then finally, just with the Bill.

The land markets, becoming a bit more competitive I realize you guys focus on a bit long.

Deals, but are there any areas that you would say are are getting overheated or frothy and then I know every land deals.

<unk>, but what sort of inflation all you've seen.

There again it goes market by market I was out in California, a few weeks ago and it feels like I think the landowners are they're trying to push pricing a little more than anywhere else.

Police from the some of the things I've seen word on the street is where within about 10%.

<unk> inflation in the market is that we were looking at but I haven't seen it hit those kind of numbers anywhere else yet again, we're not very we're not very deep in California to begin with.

Alright, that's extremely helpful and good luck on the upcoming year.

Thanks I appreciate it.

Thank you. Our next question comes from Ryan Gilbert with B T. I G. Please proceed with your question.

Hi, Thanks for taking the follow up.

It was a little surprising to see your cash balance increase in the fourth quarter from the third and it looked like there was a nice pick up an inventory turnover is that just a function of doing more of my options as a percentage of your lots of controlled or is there anything else that point to that that's that's gotten that turns out.

I think it was the fact that we sold almost 4000 last last quarter most attributed entirely to the.

It's a very strong quarter for us sales were strong.

We are continuing to use a lot option contracts for our purchases as a higher percentage of our control.

But it was really it was just a function of sales, which is really strong last quarter and Ryan. Thanks for pointing out the increase in terms is that really is the main driver attended 260 basis point year began pregnant in return on equity that Dan called out in his prepared remarks.

Okay, Great and then last one for me.

[noise] interested to hear that you've signed your first project with a third party builder or your your first first slot deal with a third party builder I'm just wondering if there's any color that you cannot there and then maybe how you're thinking about you know market sizing for for our.

Market potential, they're pretty builders versus urine.

Yeah.