Q1 2021 Forestar Group Inc Earnings Call

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Good afternoon, and welcome to force stars first quarter 'twenty 'twenty, one and earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation and if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference.

Is being recorded and it is now my pleasure to introduce your host Jessica Hansen, Vice President of Investor Relations for D. R. Horton the majority shareholder of four star.

Thank you Paul we welcome each of you to the call to discuss force started financial results and our apologies for the brief delay as our provider experience and technical difficulties.

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 Forrester believes any such statements are based on reasonable assumptions. There is 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 force started 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 and for starters 'twenty and 'twenty annual report on form 10-K, which is filed with the Securities and Exchange Commission.

This afternoon's earnings releases, and Forrester website, and investor that Forrester and dotcom and the 10-Q is planned to be filed mid next week. After this call. We will post an updated investor presentation to force Drews Investor Relations site under events and presentations for your reference now and I will turn the call over to Dan Bartok CEO of force Sir.

Thank you Jessica and good afternoon, everyone.

And in addition to Jessica I am pleased to be joined on the call today by Jim Allen, Our Chief Financial Officer.

I'd like to first give a shout out to the four star team the size of our team has doubled and the last year during a time of social distancing and remote work. The team is working together well through the obstacles and is focused on achieving our lofty goals.

And our strong belief and force start and our unique business plan has only been surpassed by their hard work and dedication to implement and execute our plan.

We are off to a strong start for fiscal 2021, we continue to deliver on key milestones, which will create additional value for our shareholders. Our business is expanding rapidly and we are capitalizing on the strength of the residential finished lot market.

We delivered more than 10000 lots to homebuilders and fiscal 2020 and we are.

And now on track to deliver over 13005 hundred lots in fiscal 'twenty and 'twenty one.

Executing on our plan is translating into increased profitability. Our gross profit margin increased by 200 basis points year over year to 14, 4% as a result of our intentional shift towards more four-star source projects less lot banking and the overall strength of the market.

We're consolidating market share and the under capitalized and fragmented lots of development and industry four.

For starters lots sold to D. R. Horton continues to grow as a percentage of D. R. Horton closings year over year and.

And there are a lot deliveries to third party builders are at their highest level since the quarter of D. R Horton and acquisition of its interest and horsepower.

We are executing on a returns focused business model and building upon the foundation, which has been set.

High turnover lower risk manufacturing strategy led to a 140 basis point year over year improvement and four stars return on equity.

We expect to generate further growth and profits and increases and returns in fiscal 2021 assets.

And our platform continues to gain scale and our team matures.

I will now discuss our first quarter financial results and more detail Jim.

Thank you Dan.

And the first quarter four stars and net income increased 30% to $22 million or <unk> 46 per diluted share compared to $16 $9 million or 35 per diluted share and the prior year quarter.

<unk> first quarter revenues increased 24% from the prior year quarter to $307 $1 million.

The prior year quarter included $30 million of revenues from residential tract sales.

Residential lots sold during the quarter totaled 3567 lots and increase of 47% from the prior year quarter.

The average sales price for the quarter was $86000.

87% of lots sold in the quarter were from development projects up from 58% and the same quarter and the prior year.

Lots sold to D. R. Horton during the quarter represented 95% of force starts total lots sold down from <unk>, 99% and the first quarter of fiscal 2020, Dan.

Our pre tax income for the quarter was $29 $2 million with a pre tax profit margin of nine 5%.

Our gross profit margin was 14, 4% and the first quarter up 200 basis points from 12, 4% and the prior year quarter.

As I mentioned earlier, the improvement and our gross margin was primarily due to an improvement and development lot sale margin and to a lesser extent, a smaller percentage of lot banking deliveries during the quarter.

We continue to expect fluctuations and our gross and pretax margins due to the quarterly mix of our lot deliveries and the timing and track sales.

SG&A expense as a percentage of revenues and the first quarter was 5%.

Compared to four 2% and the prior year quarter.

The increase on our SG&A expense ratio was primarily due to our increased number of employees and the associated compensation costs were.

We are extremely pleased with our progress building our team and now have 179 employees double on a number of employees from a year ago.

We remain focused on managing our SG&A efficiently, while building out our infrastructure to support our significant growth and we believe we will continue to manage our business and in SG&A percentage significantly lower than most public homebuilders.

We still expect our pre tax profit margin to improve to approximately 10% for the full year on fiscal 2021.

Jessica.

Sure and underwriting criteria for new development projects includes a minimum 15% annual pretax return on inventory and a return of the initial cash investment within 36 months.

During the first quarter investments and lot land and development totaled $480 million of which $300 million was for land and $180 million was for land development.

Forrester and now expects to invest at least $1 5 billion in lots land and development and fiscal 2021 subject to market conditions.

For starters lot position at December 31 increased 74% from a year ago to 77500 lots of which 52003 hundred lots are owned and 25200 lots are controlled through purchase contracts.

And our foresters owned land position 18300 lots for 35% are under contract to sell the D. R Horton, representing at least $1 $3 billion and future revenue and.

Another 16006 hundred or 32% and first started owned lots are subject to a right of first offer to D. R. Horton under the Master supply agreement.

46% and first started and lot position at December 31 was sourced by force star up from 29% a year ago supporting future growth margin expansion.

[noise] lots controlled through purchase contracts more than doubled from a year ago to 25200 line.

Lot sales prices are not contracted for until four star owns the lives. So forster has the potential to take advantage of the rising home price environment on a portion of its land position that is controlled through purchase contracts further supporting future growth margin expansion.

First share continues to target a 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.

At December 31, we had $580 million of liquidity, including $240 million of unrestricted cash and $340 million of available capacity on our revolving credit facility.

Total debt at December 31 was $654 million with no senior note maturities until fiscal 2024, and our net debt to capital ratio at quarter end was 31, 8%.

At December 31, stockholders' equity was $893 million and our book value.

Value per share increased to $18 58 up 8% from a year ago Dan.

<unk> is uniquely positioned to consolidate market share through housing market and economic cycles, and the highly fragmented lot development industry.

Based on our first quarter results on today's market conditions, we now expect to deliver between 13000 514000 lots and to generate approximately one one to $1 $2 billion of revenue in fiscal 'twenty and 'twenty one.

Due to timing of lot development schedules, we expect our lot deliveries and the second half of the year to be higher than the first half.

As I mentioned earlier, we are still expecting our pre tax profit margin for the full year of fiscal 2021 to be approximately 10%.

At scale, we continue to expect our operating model to produce Tonight and financial results and returns that are similar to or better and most of it and 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 on entitled land.

We are focused on developing lots for affordably priced housing.

We have and 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 are consistently profitable and are managing our business at and SG&A percentage significantly lower than most public homebuilders.

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 and allows us to have a national geographic footprint.

To summarize we are continuing to execute on our plan and are positioned for continued success.

Paul at this time, we will now open up the line for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate that Youre line and then the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys and.

The interest of time, we ask that you limit yourself to one question and one follow up one moment. Please while we poll for questions.

Thank you. Our first question comes from John Lovallo with Bank of America. Please proceed with your question.

Hey, guys and thank you for taking my questions first one and Dan and I think you partially answered this one already but maybe just a little bit more color would be helpful.

13, five to 14000 delivery range or even at the high and would seem to imply sort of flat to.

And sequentially down deliveries potentially to the remainder of the year. It seems like there might be a little bit of a timing issue and the second quarter is.

Is that the extent of it or is there anything else that we should be considering.

Yes, I think thats pretty much the extent of and I think the second quarter, it's really about the timing of lot deliveries.

And but as you can see our trend for the end of the year would still be up.

Yes, it really just lot development schedules. The lots are in the pipeline being developed but theyre not ready to all get pushed into the second quarter clearly the demand is there and so the back half of the year is expected to be stronger than the first half.

Got you, Okay, and that's helpful. And then maybe just in terms of the competitive landscape for <unk>.

Land I mean, we're hearing more and more commentary from builders that getting finished lots and it's becoming more and more challenging and I think in the past you've talked about sort of the 150 to 200 lot.

And he's been with most of the competition is and you guys being sort of north of that as limited competition is that still the case or are you seeing incremental competition, even for sort of the lots that you are looking for.

I think youre starting to see.

The builders go up that scale, a little bit as land prices have been increasing we've been pretty fortunate that we had a pretty big pipeline of transactions that we've been working on for a long time.

And she can see and our growth.

Growth and lots here and this last quarter and most of that and stuff that we've been working on for quite a long time. So.

Yes, I am seeing the price.

Land go up and I am seeing builders, starting to chase a little bit bigger deals.

And the marketplace.

Got it thank you very much guys.

Thank you. Our next question comes from Anthony pattern and the Ari from Citi. Please proceed with your question.

Hi, good afternoon.

And I was wondering if you could talk a little bit about how lot pricing discussions have been kind of trending and the current environment given rising home prices and if you can talk about.

What level of pricing traction for free.

What's not under contract if theres any sort of color you can give on current trends.

Yeah, and clearly the demand for lots is at a high level right now a good portion of the lots that we have are under contract already with D. R. Horton and also with some other builders.

But as we're bringing new projects online without what contracts, we are definitely seeing some some appreciation and lot prices I think the market is very strong right now and I don't think we ended up mentioning and our scripted remarks that forced our recently closed on the second transaction with a third party builder and so not only are they having success and.

Controlling more of land through purchase contracts and increasing the amount of their own.

And position through and what.

<unk> stores and actually now closed on two third party transaction.

Okay. That's very helpful. And then you saw strong gross margin improvement on the mix up from I guess, a lot banking to development projects.

Is it possible to talk about how gross margins and each of those businesses kind of trend on on a like for like basis and has kind of the asps mixed down that we've seen from builders should we think about that as a margin headwind is it margin neutral as it and opportunity just any any thoughts there.

Well first of all I think the others.

And with all the rest of the builders moving down market, probably has helped us because we've been focused on that affordably priced products. So I think there is more people trying to play in this space that we have we have product to sell so I think that's been a good thing for us as far as as far as gross margins I think.

And our focus has really been trying to do more horsepower source transactions, where we are.

And where we get where we control the land from day, one rather than getting and assignment from a builder for that first phase. So I think continuing to so I think some future growth and gross margins and we havent, specifically disclosed the breakdown between lot and development margin and lot banking margin and but we have seen a lift in both and particularly.

And some of the lot banking deals and four stars how longer and so inherently since those are underwritten to a return to gross margins rising on that at the same time, but it is to a greater extent coming from the improvement and a lot of development margin.

Okay. That's very helpful I'll turn it over.

Thank you. Our next question comes from Ryan Gilbert with <unk>. Please proceed with your question.

Hi.

Thanks for the time, everyone on Dan I was hoping to just get a little color or maybe just if you could just dig in on a little bit on the strength of the demand that you're seeing from your homebuilder customers and maybe how the level of activity that youre seeing so far and and 2021 compares to this time last year pre COVID-19.

And maybe any markets in particular that you want to highlight.

And particularly strong.

Well I think in general it is clear that there is a lot shortage out there.

And there is the phone is ringing constantly and people trying to get into lot positions that we control.

And I've heard other builders comments on their calls and I haven't really seen anything quite like it to be honest with you.

It's been pretty phenomenal and there's really across the board. There is very few markets that were not seeing increased demand for lots and.

And whether it would be locker, whether it be our original business plan, but we were always focused on net affordably price market.

And everybody has kind of jumped over there. So it's really kind of played well and two are in.

Yeah, Ryan and I think we've put it in and press release for the first time, and we mentioned it and Thats script, but although the majority of <unk> deliveries are still going to deal and it did come down as a percentage this quarter year over year, and they sold 178 lots to builders and other than Horton, which.

May not sound like a whole lot, but it's up from 32 lots a year ago, So are making progress on that front.

Okay, that's great and maybe just quickly follow up there how does that and that's great to hear that you've signed your second deal with a third party builder.

And how does that how does the pipeline look generally is as we go into it.

A 2021.

As far as third party builders that Youre question, Yes, yes.

And again, we've put a lot more four-star sourced deals on the.

There's a development phase. So I think you will continue to see a growth in sales of third party builders and we are and we are and probably more on negotiations with builders as far as doing deals that they've sourced and brought to us. So I think youll continue to see that number trend upwards, but I think as I said last quarter and is that going to go from <unk>.

5% to 20 overnight I think youll continue to see a gradual growth.

Because.

And so much of our volume is going to go into a Horton just based on the things that they have under contract right now.

Okay got it and just a quick one on on SG&A. If you don't mind I think the sequential step up was a bit bigger than I had expected and I'm wondering if that's on.

And about $2 6 million on.

Sequential increase and SG&A as a good run rate going forward or if there was something one time and the quarter or just kind of a one time step up and you might go back to more normal.

The run rate that we saw in prior quarters.

Yes, I think I think it will pay go up from the prior quarter runway, but I also don't think it'll be at the rate of this last step up.

And again, although we're adding we're adding to our team is also.

At the kind of middle management and support levels. So I don't think that as we add head count Youll see the same overall rate and we also opened several new offices. So youre now starting to see rents and things kick in for that that will be fixed over a period of time and Ryan to John's earlier comment and conversation about volume.

And what that looks like for the year SG&A always follows volume right and the ability to leverage it or not when you think about modeling and the remainder of the year would expect and more significant SG&A leverage and the back half of the year and and not as much in Q2 and with potentially decreased volumes in Q2.

Got it okay, great. Thanks very much.

Thank you. Our next question comes from Michael Rehaut of Jpmorgan. Please proceed with your question.

Hi, This is a lot on for Mike.

First I just was curious and sorry, if I missed this but.

The mix of lot banking versus lot development projects. This quarter was 87% being development projects and I think for the remainder of the year you had mentioned Pryor being sub 20% for lot banking projects. I was wondering if this is more of a new run rate to think about for the rest of the year.

Well again, it's hard to predict from quarter to quarter, how thats going to look.

But I think that we are.

Definitely going to be sub 20.

And probably maybe even a little lower than that but it will fluctuate from quarter to quarter.

Great and then also I was curious on the gross.

Gross margin expansion and that 200 basis points and you mentioned that the majority of that was due to the lot development margin improvement.

Within that if you could just kind of break out maybe what are some of the drivers. There. If it was just mostly it's just the stronger market. If it also was more.

More force or slots or any color you can provide.

I think predominantly it is really based on the four stars or slots and that's really where we have better pricing power overall, because generally when we do that that builder source that first phase is locked in pricing.

So we really don't have any pricing power to hit to hit the current market. So it's I think it's predominantly forest are sourced transactions driving that expansion.

Great. Thanks, just one more if I could squeeze it in and I think about the growth and the business and still being strong and and.

Fiscal year 'twenty, one the closings growth being up 30% to 35% according to your guidance.

Benchmarks or.

Or are things to think about going forward in terms of what growth could look like in fiscal year, 'twenty two or beyond that.

Or how youre thinking about growth beyond this year.

Well I think we haven't really given any guidance to that but I think that with our current capital base, which we can substantiate probably a 20% growth rate without any increase to our capital structure.

And so I feel I feel good about that as long as the market holds holds good and again and they expand.

And beyond that.

We've said before we do look to.

Tap the capital markets, both on equity and debt at opportune times.

That's very helpful. Thank you.

There are no further questions at this time I would like to turn the floor back over to Dan Bartok for any closing comments.

Thank you Paul and thank you to everyone on the <unk> team for your focus and hard work, we look forward to working together to continuing 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 April to share our second quarter results. Thank you.

This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful evening.