Q4 2021 Forestar Group Inc Earnings Call

Good afternoon, and welcome to four stars fourth quarter of 2021 earnings Conference call.

I will now turn the call over to Katie Smith director of Finance and Investor Relations for four star.

Thank you John Good afternoon, everyone and welcome to the call to discuss sports stars Fourthquarter in fiscal 2021 results. Thank you for joining us.

Before we get started today's call includes forward looking statements as defined by the private Securities Litigation Reform Act of 1995.

Although forster believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different I'll forward looking statements are based upon information available for sure on the date of this conference call and we do not undertake any obligation to update and revise any forward looking statements publicly.

Additional information about factors that could lead to material changes a performance is contained enforcers annual report on Form 10-K, and its most recent quarterly report on Form 10-Q, both of what your filed with the SEC.

This afternoon's earnings releases on our website at and vector that four star Dot com.

And we plan to file our 10-K in about two weeks.

After this call, we will post and updated investor presentation to our Investor Relations site under Vincent presentations for your reference.

Now I will turn the call over to Dan Bar talk R. C E O.

Okay.

Good afternoon, everyone.

Additionally, Katie I am pleased to be joined on the call today by Gmail are cheaper therefore officer.

We are extremely proud of the forest, our team's accomplishments in the fourth quarter and full fiscal year.

We sustained our momentum in the fourth quarter and as a result, we continue to gain market share in the fragmented lots of Velvet industry.

Four star delivered more than 15900 lots to customers and physical 2021, representing a 53 per cent increase in locked deliveries you're over here.

This resulted in significant revenue growth and margin expansion, creating meaningful value for our shareholders.

We've outstanding operating leverage while improving profitability, even as we invested heavily in growing our team and platform.

We are efficiently scaling our business with physical 20th 21, SG&A expenses at 5.2% of revenue, while increasing our gross profit margin 460 basis points from physical 2020.

The demand for develop what's remains incredibly strong.

We will continue to fluctuate quarter to quarter based on the geographic location and lot size mix of our deliveries.

94% of last sold in the quarter were from development projects up from 77% in the same quarter in 2020.

But the fiscal year net income attributable to four-star increased 81% to 100 $110.2 million or $2 25 per diluted share compared to $68 million or $1.26 cents per diluted share in fiscal 2020.

Consolidated revenues for the year totaled $1.3 billion, which included $32.7 million of track sales and other revenue.

During fiscal 2021 lots sold increased 53% to 15915 lots with an average sales price of $81600.

89% of lots sold in fiscal 2021 were from development projects.

During the quarter last Solta, Dr. Horton represented 89% of four stars total lots sold down from 97% in the fourth quarter of fiscal 2020.

Sold to D. R. Horton during the fiscal year represented 93% of four stars total lots sold.

We sold lots of 14 customers other than D. R. Horton during fiscal 2021 up from 11 customers in fiscal 2020.

Dan.

Our pretax income for the quarter increased 84% to $58 $8 million with a pretax profit margin of 14%.

This was an improvement of 480 basis points over the prior year quarter.

Our pretax income for fiscal 2021 increased 88% to $146 $6 million, while our pretax profit margin improved 270 basis points to 11.1%.

Excluding the $18 $1 million loss on extinguishment of debt. The pretax income for fiscal 2021 increased 111% to $164 $7 million and our pretax profit margin improved 400 basis points to 12.4%.

Our gross profit margin was $18, 1% in the fourth quarter and was 17.3% for the fiscal year.

Representing an improvement of 540 basis points, and 460 basis points over the prior year periods respectively.

This improvement was primarily due to increased margins on lot sales from development projects, which was largely driven by capitalizing on strong demand for finished lots.

Half was for land development.

In fiscal 2022, we expect to invest at least $1 $75 billion in land and land development subject to market conditions.

Four stars lot position on September 30th was 97000 lots of which 64400 lots are owned and 32600 are controlled through purchase contracts.

Of our 64400 owned lots, 33% are under contract to soda D. R. Horton, representing approximately $1 6 billion of future revenue.

Another 28% of our owned lots are subject to a right of first offer to D. R. Horton based on executed purchase and sale agreements.

Lots of course by forced or continue to grow as a percentage of the company's own lot portfolio supporting further improvement in our gross margins.

Of the company's own lot position at September 30th 52% were sourced by four star up from 39% a year ago.

We're continuing to target a three to four year owned inventory of land and lots Jim.

Four store remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage at September 30, we had approximately $500 million of liquidity, including $150 million of unrestricted cash and $350 million of available capacity on our revolving credit facility.

Total debt at September 30 was $705 million with no senior note maturities until fiscal 2026, and our net debt to capital ratio at year end was 35, 2%.

During fiscal 2021, we issued one 4 million shares of common stock under our aftermarket equity offering program raising net proceeds of $33 4 million.

At September 30th Stockholders' equity was $1 billion and our book value per share increased to $20 47 up 13% from a year ago.

Dan.

While there have been disruptions in the supply chain, including shortages and delivery delays the core drivers of our business remain healthy.

Compared to the second half.

These are the quarterly mix of expected lot deliveries and to a lesser extent operating leverage.

Finally, we expect our tax rate in fiscal 2022 to be approximately 24.5%.

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

We have a unique plot manufacturing business model that is very different than a typical land developer we have no unentitled land.

We are focused on developing lots for the affordably priced housing market.

We have a management team that is experienced in consolidating market share and navigating through market cycles.

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

We have been increasingly profitable and are managing our business at a mid single digit SG&A percentage.

And most importantly, we have a unique competitive advantage to our relationship with Dr. Horton the nation's largest builder this.

This highly strategic relationship allows us to expand our platform nationally while minimizing risk.

To summarize we are executing on our plan and our position for continued success.

Jack at this time, we'll open up the line for questions.

Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone pressing start to remove you from the queue should your question to be answered and lastly, what posing your question. Please pick up your handset up listening on speakerphone to provide optimum sound quality. Please hold while we pull for questions.

And the first question is coming from Truman Patterson for more research.

Thanks actually this is Paul Schabowski, Dan I was wondering if you could provide any more color on the mix of revenue in pretax and 22 and and you know maybe the magnitude of.

Oh, it might be higher and lower.

Well.

Say, it's it gave me a little bit of supply chain questions going on and how things will be delivered into our best guess, we clearly believe that revenues are gonna be higher in the second half of the year. Some of that's based on your own.

Yeah.

Right.

I was just wondering you know on the flip side are there any markets that you're kind of seeing maybe builders getting a little bit more he didn't know maybe those are pulling back on their sales velocity. There, obviously supply chain kind of constricted sales across the board, but I'm just wondering if there's any markets where things are starting to you know maybe top out or maybe where you were a little bit.

And from a demand standpoint, I'm, not really seeing any slowdown anywhere to be honest with you as fast as we're getting lots on the ground people want those loss overall.

Overall market I think that if there's if there is a market that I watch closely is probably Austin, Texas I think prices have escalated faster than most places land prices have escalated a little bit faster than other places.

Been a flood of people and jobs go into that market, which so it's kind of a demand you know generated a.

<unk>, so to speak but again.

We're pretty fortunate to have some really strong land positions that we tied up a while back and are executing pretty well.

Okay.

That's helpful. Just switching gears to price I think in the corner pricing was down a little bit year over year, and you talked about that over the past quarters, you've kind of kind of I'll say timing issue, but I was just wondering if you could talk about you know looking.

What has already been contracted for 'twenty to do you can you give us a sense of what level of price growth might be baked in there.

Yeah, I think if you if you take the guidance that we provided in revenue and in a lot.

But looking overall at about a seven or 8% increase in life.

A lot prices, but again, that's I don't know how indicative that is specific markets or specific projects because we have shifted.

Well to some extent.

Their percentage of our lot sales are in Florida, and Texas and they may have been in the past, which are basically less expensive lots.

And we've also seen kind of an overall average.

Mahler lot so.

So even though the prices have held pretty consistent I think on a on a real basis, we're definitely seeing some price increases in all markets and heavier than in others.

Okay. Thanks, that's helpful I'll turn it over.

Okay.

Next question is coming from Deepa Raghavan from Wells Fargo Securities. Your line is live.

Hi, good evening, everyone. Thanks for taking my question.

What are some of the newer markets you're entering into at this time.

So where are you seeing the most expansion.

We enforced our sourced lots at this time.

Well I'll answer the second question first the markets.

Really the major markets, where we have had teams and we continue to build on the size of those teams.

And that will have people in those markets.

You know that had been outsourcing land deals, which are more coming to fruition. So I think if you just kind of name off the top markets in the country, you've got Dallas, Houston, Austin Orlando Tampa.

Phoenix is probably where we've grown the most within those markets.

Pretty much throughout Florida, I say, Orlando and Tampa that it's really pretty much throughout Florida.

Where our teams and our ability to execute have grown the most new markets I think the only new market. This past quarter was was Albuquerque, Albuquerque, and Santa Fe, which actually we were in before.

We sold out of that project.

A little bit of a land constrained markets with just took us some time to find the appropriate new projects. So even though it's a new market for the quarter. It is one that we've been in before.

That doesn't mean that I don't know of any other other new market entries.

That I would say are our recent we've done over the last year, where I think we have several new markets.

We really look at them.

Over here.

Yes.

We have one in place for the for the for the next few years coming up I think we're going to continue to be opportunistic and look at the capital markets on a regular basis and when we feel that.

That we can add value to the shareholders, we will continue to raise equity but.

But I think some of that just based on the capital markets and how things go and I would say are we feel good about our ability to place that equity into the market and get pretty quick returns when it was still a pretty robust pipeline.

But again I think we're gonna be Opportunistically, we would expect to continue raising equity.

T M program.

Got it thanks very much good luck.

Thank you.

The next question is coming from Mike Rehaut from J P. Morgan Your line is live.

Hey, Thanks, good afternoon, everyone.

First just wanted to dive in and I apologize if there's something that you hit on earlier you you're talking about the 'twenty to fiscal 'twenty two pre tax margin guidance of 13%. So I guess roughly up 100, I'm, sorry, 200 basis points year over year.

2021 'twenty two and.

Where you could be.

Over a longer period.

Ah four-star sourced owned lots at the end of the year of about 52% of our owned lots I think last year was about 39%.

And we'd expect that to continue.

I guess I meant though is as a percent of lot deliveries.

Right.

It was about 23% this past year.

Of our lot deliveries and I think it was about 10% last year.

Okay.

Cory has continued to grow you will see that there'll be a trailing effect of lot sales.

So based on what Jim.

Throughout there I would expect that there might be another 10 or 10% increase in the number of and the percentage of sales that came from four stars source deals.

Right and I guess just lastly.

Can you just remind us of the gross margin differential between the four star source than the D. R Horton sourced.

I don't think I don't think thats anything that we've that we've provided.

Okay.

One last question if I could just on the gross margin I'm sorry, the SG&A.

Youre expecting mid single digits, which more or less sounds similar to what you did this past year and is at four 9% in 2020.

Is this kind of how we should think about steady state.

Particularly as you continue to build out your network.

Or.

Is this something that over time, we could still see a little bit of of leverage as the business continues to grow.

Yeah, I mean, that's a great that's a great question.

I think I think running at.

Give or take 5% SG&A number is is extremely efficient myself.

That makes sense, that's very helpful. And then my second one is in the past I think we've kind of talked about potential for M&A to accelerate growth is there any change you know develop interest to sell to you or you know any interest on your guys' then in doing that.

You know we are we definitely have an interest in finding and and transacting on opportunities as they fit we continue to look at some opportunities, but have not found anything that really fit our model yet at a price that seem attractive, but we will continue to listen to it as part of our strategy.

That's helpful. Thanks, guys.

Okay. We have a follow up question coming from Truman Patterson from Wolfe Research. Your line is live.

This is Paul again.

I guess looking at the number of lots that you have contracted for sale can you remind us how many of those or what mix of those are.

More like a fixed price basis versus those that have costs in players and then how does the rising price of oil slashed fuel impact your development costs.

No.

I'm going to take the second one because thats probably easier we don't we haven't really seen a huge increase in our development costs as a result of rising fuel yet.

But normally you would anticipate that the contractors because their fuel costs are going up are going to pass some of that through and then also in plastic resin pipe, which.

Yes.

It's gone up quite a bit plastic resin pipe, but we think that's more due to supply chain issues and then directly the cost of the cost of oil.

Hoping that that plastic rather than actually settle down a little bit.

That's a hard one to predict so I don't really know that I've seen that I could pinpoint a number for you that how much is directly related to the cost of oil.

You know as it relates to contracts.

A little bit over the board some of our contract to sell our what I would call bulk closes.

Where the price is fixed when we deliver what they buy all of the lots and we're done others have takedown provisions, where they take so many a quarter or so many a month or every six months in all of those cases, there is a cost and flavor built into that contract.

Price so it's the base price plus an escalator.

That will that will increase over time, so that we're being somewhat compensated for holding those lots.

So all of them that have take down features have escalators.

Okay. Thank you appreciate it.