Q2 2022 Forestar Group Inc Earnings Call
Yeah.
Good afternoon, and welcome to <unk> second quarter 2022 earnings Conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
Now I'll turn the call over to Katy Smith director of Finance and Investor Relations for four star.
Thank you John Good afternoon, everyone and welcome to the call to discuss <unk> second quarter results. Thank you for joining us.
Before we get started today's call include forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
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 four star on the date of this conference call and we do not undertake any obligation to update or revise any forward looking statements publicly.
Additional information about issues that could lead to material changes in performance is contained in <unk> annual report on Form 10-K .
Its most recent quarterly report on Form 10-Q , both of which are filed with the Securities and Exchange Commission.
This afternoon's earnings releases on our website at Investor <unk> Com and we plan to file the 10-Q tomorrow.
After this call we will post an updated investor presentation to our Investor Relations site under events and presentations for your reference now I will turn the call over to Dan Bartok CEO .
Thank you Katie and good afternoon, everyone.
In addition to Katie I am pleased to be joined on the call today by Jim Allen, Our Chief Financial Officer.
Before start team delivered a strong second quarter with net income increasing 68% from the prior year to $47 $8 million or <unk> 96 per diluted share.
We also achieved a 68% increase in pre tax income.
So $63 2 million and our pre tax profit margin expanded 190 basis points year over year to 15%.
Revenue increased 47% to $421 $6 million, primarily driven by a 61% increase in lot deliveries to 5788 lots sold.
Okay.
We continue to make progress expanding our customer base to that point I'm excited to announce that during the quarter four star sold a package of 787 undeveloped and partially developed loss from seven projects located across Texas for a total purchase price of $54 $7 million.
A lot for marketed to the purpose built single family rental segment of the market.
As part of the sale four star will complete development of those lots.
However, the buyer is funding the remaining development cost to <unk>.
<unk> not being finished we transacted at very favorable terms.
Additionally, we will recognize the revenue in development profit over time.
Without committing the additional capital required to complete the infrastructure.
<unk>, we refer to this as a deferred development projects in our financial statements.
This quarter four-star recognized all 787 lots in our delivery numbers and $12 5 million of the revenue.
We significantly improved our capital efficiency and these communities with this type of structure. We are pleased with our ability to monetize a portion of each project earlier than if it had been solved.
Lots were fully developed.
<unk> has built an excellent land position and some of the most attractive areas in the country and we will continue to pursue and capitalize on compelling opportunities.
Our increasing profitability and focus on capital efficiency is translating into higher returns for our shareholders.
For STAAR achieved a 14, 5% return on equity for the trailing 12 months ended March 31 2022.
This was a 490 basis point improvement from.
From the same period, a year ago, and our eighth consecutive quarter of ROE improvement.
This continued improvement further demonstrates that our high turnover low risk manufacturing strategy is fundamentally stronger and that would be traditional land developer.
We expect our platform, we'll gain additional maturity and scale as our teams continue to capture market share in their respective markets driving further improvements for our returns on equity and inventory.
People are key to our business and our outstanding second quarter results are a direct result of the team's capabilities and commitment to four star.
The operating environment was more challenging this quarter due to continued supply chain constraints combined with rising material costs.
I wanted to thank everyone, especially our development teams and our contractor base for their strong execution over the last several months. They made these results possible.
We will now discuss our second quarter financial results in more detail Jim.
Thank you Dan.
In the second quarter four stars net income increased 68% to $47 8 million or <unk> 96 per diluted share compared to $28 4 million or <unk> 59 per diluted share in the prior year quarter.
Consolidated second quarter revenues increased 47% to $421 6 million.
Lots sold increased 61% year over year to 5788 lots with an average sales price of $81900.
Excluding <unk> sales from deferred development projects lots sold increased 39% to 5001 locks.
Our average sales price this quarter was lower than the first quarter due to the mix of lot deliveries from communities and lower price point markets.
We expect our average sales price will continue to fluctuate quarter to quarter based on the geographic location and lot size mix of our deliveries.
We are pleased that we continued to make progress delivering more lots from projects sourced by four star 30.
<unk>, 39% of lots sold in the quarter were four star source compared to 23% in the second quarter of 2021.
82% of <unk> second quarter lot deliveries were sold to D. R. Horton down from 94% in the second quarter of fiscal 2021.
We grew our lots sold to D. R. Horton as a percentage of D. R. Horton closings, both year over year and sequentially.
We sold 1017 lots to 12 customers other than D. R. Horton during the quarter, which was a 342% increase in lots sold to other customers compared to the prior year quarter.
Dan.
Our pre tax income for the second quarter was $63 $2 million with a pre tax profit margin of 15%.
This was an improvement of 190 basis points over the prior year quarter.
Our gross profit margin expanded 220 basis points to 28%.
Compared to 18, 6% a year ago.
We recorded a noncash real estate impairment charge.
Charge of $3 $8 million, this quarter, which reduced our gross profit margin by 90 basis points. The impairment charge was an isolated issue.
Ladies the cost overruns in one project in Colorado.
Excluding the impairment our gross profit margin expanded 310 basis points to 21, 7%.
Several factors contributed to this quarters gross margin improvement. In addition to the lot sales from deferred development projects. This improvement was primarily due to increased margins a lot sales from four-star source development projects.
Additionally, interest charged to cost of sales decreased by approximately 40 basis points compared to the prior year quarter.
Partially attributed to our senior notes refinancing last year.
Finally, the market has remained strong.
With significant demand for lots from homebuilders.
Our SG&A expense as a percentage of revenues in the first quarter was five 8% compared to five 7% in the prior year quarter.
We are extremely pleased with the progress we have made building our team and we continue to attract high quality talent.
We remain focused on efficiently managing our SG&A are investing in our teams to support our continued growth.
We believe we will continue to manage our business at a mid single digit SG&A percentage.
Katy.
<unk> underwriting criteria for new development projects, including minimum 15% annual pre tax return on inventory and returning to the initial cash investment within 36 months.
During the second quarter investment in land and land development totaled $336 million of.
Of which $86 million was for land and $250 million for land development.
We started lot position at March 31 was 96500 lots.
Of which 64200 lots are owned and 32300 lots are controlled through purchase contracts.
At quarter end, we had 5100 finished lots of hands.
Slots have accounted for less than 10% of <unk> owned portfolio for six consecutive quarters illustrating continued strength in demand.
At March 31, 55% of our owned lots were sourced by four start up from 48% a year ago.
As Jim said, 39% of lots sold in the quarter or some projects sourced by four star up from 23% a year ago.
That percentage will continue to trend higher as more four-star sourced projects start.
Lots.
Gross enforced our source project supports further improvement in our gross margins and we expect that percentage of our portfolio to continue to increase over time.
We also have good visibility into future revenues.
64200, unlocked, 30% under contract to sell to D. R Horton, representing approximately $1 $5 billion in future revenue.
Another 27% of our owned lots are subject to a right of first offer to D. R. Horton based on executed purchase and sale agreements.
Our acquisition teams are finding ample opportunity.
Youre writing criteria however.
However, we remain very disciplined when investing in new projects.
We plan to invest approximately $1 $75 billion in land and land development during fiscal 2022 subject to market conditions and are continuing to target a three to four year owned inventory of land and lot Jim.
<unk> remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage.
At quarter end, we had approximately $580 million of liquidity, including $230 million of unrestricted cash and $350 million of available capacity on our revolving credit facility.
Total debt at March 31 was $705 million with no senior note maturities until 2026, and our net debt to capital ratio at quarter end was 29, 9%.
Yes.
In recognition of our improving financial profile, Moody's recently upgraded <unk> corporate credit rating and senior unsecured notes rating to be a three.
Standard and Poor's also upgraded <unk> corporate credit rating and senior unsecured notes rating during the quarter to be plus and double b minus respectively.
<unk> access to capital is one of our key competitive advantages and allows us the ability to price lots later in the development process.
With our access to institutional corporate level financing Forrester has unparalleled flexibility in the lot development industry.
Most traditional land developers are encumbered by project level financing, which inhibits them from pricing lots of closer to completion after development costs are finalized.
Additionally project level financing makes it more difficult to react to changing market conditions, while adding complexity and administrative costs.
At quarter end stockholders' equity was $1 $1 billion and our book value per share increased to $22 24 up 16% from a year ago Dan.
As I said in my opening remarks, the environment has become more challenging since the earnings call in late January .
We believe supply chain disruptions will continue to impact us throughout fiscal 2022 and potentially into 2023.
However, our teams are relentless problem solvers, and they continued to navigate the environment exceptionally well.
In addition to ordering materials earlier in the development cycle. We are substituting materials. If there is an available alternative and are modifying development plans as needed.
We expect to see further increases in development costs as a result of the supply demand imbalance and rising fuel prices.
Consistent with prior quarters, we plan to pass through any cost increases into our future lot pricing.
Despite the inflationary environment and rising interest rates, we have not seen any softening in demand.
We remain positive on the demand outlook for finished lots, which is supported by our strong backlog.
We affirm our guidance for fiscal 2022 deliveries of between 19000 520000 lots this year Jeff.
<unk> approximately $1 $7 billion of revenue.
However, we now expect our pre tax profit margin to be between 14% 14, 5% for the year.
Up from our prior guidance of 13, 5% to 14%.
We expect our revenue and pre tax profit margins to be higher in the fourth quarter compared to the third quarter.
Due to the quarterly mix of expected lot deliveries and to a lesser extent operating leverage.
Finally, we still expect our effective tax rate in fiscal 2022 to be approximately 24, 5%.
Our teams and contractors continue to outperform our expectations.
The accomplishments of the four star team.
And with our growth plan and proven business model gives me confidence in our ability to execute throughout the remainder of our fiscal year and beyond.
We are extremely excited about the opportunities ahead of us.
<unk> is uniquely positioned to continue gaining market share.
Increasing our annual profitability and generating meaningful value for our shareholders.
John at this time, we will now open up the line for questions.
Thank you ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone, we ask that while posing your question you. Please pickup your handset if listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
Yes.
And the first question is coming from Truman Patterson with Wolfe Research Your line is live.
Good afternoon actually possible ski.
I guess first of all I was wondering if you could provide any additional color on that.
Our transaction.
How do those economics compare to the for sale a lot given the operator is going to fund.
That development and then how scalable do you think that businesses moving forward and are you seeing interest from multiple operators or just this one.
Paul It was.
It was somewhat of an experiment for us we identified several opportunities that we thought would be well suited for the build for rent.
Markets.
Looking around what other people are doing they're obviously all on four-star source transactions, where we had the opportunity to actually take these to market. They had different characteristics and to some extent, we were trying to understand where and how the demand for these lots and or just the land parcels was really going to develop.
It was from our perspective it was a really successful transaction one we learned a bunch we learned a lot about how people are looking at values in land opportunities and different types of geographies.
Think of really set us up well to look at these things in the future and identify opportunities that we think will continue to drive value for us.
A big part of it.
For me a big part of the transaction was the capital efficiency of it getting really we monetize the land upfront as well as that putting our own equity into finishing developing lots just really drive a lot of value for us.
And our margins were higher.
Not going to disclose specific margins, but I can tell you. They were that margins were more favorable than at least from our perspective of what we would have that would lead to sold them as a for sale builder.
Okay great.
And then I guess.
Given the higher rate environment have you seen from your competitors or the homebuilders themselves any inflection.
The land market is there.
Then any deceleration in land price inflation here over the past four to six weeks or have you seen any any deals maybe get kicked kicked back that were underwritten more aggressively in the lower rate environment.
At this point, we have not really seen any falloff in demand for lots.
From our perspective, although.
Obviously need to be cautious right. We're all seeing interest rates go up but at this point that the builders are still giving us thumbs up demand is strong for housing and they still they still want more starts so from that perspective, I feel really good as far as land parcels and land pricing have not really seen any fall off at this.
Point.
Starting to hear a little rumblings of builders, maybe that closing on deals, but nothing that I can put my finger on yet, but there is there is some scuttlebutt going around that some deals are starting to fall out.
Okay I appreciate it thank you.
Thank you.
The next question is coming from Carla Ryker.
<unk> Your line is live.
Thanks, very much Hey, Dan Jim and Katy.
I was going to ask Paul's question, but let me see if I can turn to the nuance he asked about.
Scalability, so I guess, what I'd say is if you look.
If I look at what you've learned from this transaction and look at your current lot position, how well do you feel it.
The cost of those lots, how well do you feel that jibes with what you learned from this from this from this singular transaction and I guess is this a new channel you feel today comfortably that you could develop and build over time or if you had to bet would you say this is kind of a one off and this is an occasional type of business, we might do and not a long term business.
This line.
Well again, we've learned we learned a lot and I think that when I look at our land portfolio across the country. There are definitely other opportunities that we look to.
Try to capitalize on I think it also we learned and.
Maybe in different parcels as we're looking for characteristics of the things that we want to look for so I think it will modify somewhat our acquisition targets.
So I think that it's a process that.
Whether it's going to be a trend or a scale at this point I think it's too early to tell.
Some of that onetime somebody told me one time as a number two times as a coincidence three times of the trends so when I get to my third portfolio sale I'll tell you the trend Okay fair enough. Thank you.
And then I haven't.
Seen a lot of the public builders, who have been shipped into option, but my sense is that.
Lot of the portfolios are really being done with land bankers, where where costs have been have been falling and I'm curious.
Whether or not.
This is giving you an opportunity to gain more share from finished lot developers and whether or not youre seeing builders look at you and say, we don't want to buy your product because margins to us are lower we can do this with the land banker and self develop.
I'm just trying to get a sense of how the land bankers are competing with you and with other finished lot developers for builder business given that the builders seem to be moving more towards land banking and away from finished lots because they can't get the volume.
Frankly, I don't think I compete with.
A lot banker land banker.
What are the things that I think when you look at our results and what we've been able to do that.
But I think it's.
We're kind of proving it out I think we're just really good at delivering lots.
Maybe it's been locked but again kind of the one times a number to that if we are starting to be a trend that we are able to deliver lots I think more efficiently and effectively than a builder.
Sure.
Okay.
And probably other developers in the same bucket land bankers are providing that service. It's really it's really a financing transaction that they want to bring in a land banker to buy buy finished lots and hold them for a longer period of time I'm fine with that.
It helps me monetize faster so I don't really see that in competing with those guys for opportunities we are providing a different product. Okay. Okay. Thank you Dan and then if you go it does me one more.
In talking to a couple of other folks.
I had been hearing that there were some land developers out there.
Long term project guys, who are now asking bill there is not only for half year deposits, but also to share and potential development cost overruns. So the contracted price could change two years from now if the developer incurred more significant cost overruns.
There wouldn't be a fixed price here the building would have to to share those costs I'm curious if that's something that you've seen or are doing at all.
Right now.
Yes.
I can't say that we have never asked a builder or our customer to help us if theres been something wrong in the budget I'm, not saying, but we are not contracting for that upfront.
One of our I think one of our benefits and the way that were capitalized as our ability to price lots a little later in the process. When most of those costs are identified.
So that we're able to set the prices correctly upfront.
The problem is when you go back to that building and again, you can try to get them to agree to upfront and in some cases youll probably get that.
But the best thing is to be able to do what you say and when you blend when you say it.
That's really what we've been focused on is trying to really make sure. We're delivering what we know obviously our costs have gone up but we've been able to again, mostly through a little bit later pricing been able to push all of those costs plus a little bit through the through the pricing model.
Okay, Yes, thanks really super helpful. I really appreciate it thanks very much.
Karl Thanks.
Okay next we have detailed ragavan.
With Wells Fargo Securities.
<unk> Your line is live.
Hi, good afternoon, everyone. Thanks for taking my call.
Janet.
Things are pretty good at this time.
But are you starting to slow.
We're seeing land or thinking about purchase is much more cautiously.
And Relatedly is this so far experiment a defensive move on your part.
I'm going to take the second part of that question first no I don't think its defensive at all I think that we always look for opportunities to improve.
Improve our capital efficiency and look for ways to offer new products and markets into the marketplace. I think it was the opposite of defensive I think it was.
Maybe maybe a little bit sub started a new trend, we'll see when we do the third one but.
No I think we all we were very thoughtful in how we put the package together, we really looked at how we can learn the both to make it something that we can hopefully capitalize even more on into the future because clearly there's a lot of money out there looking to invest in the build for rent space and we'd like to get our fair share of it.
As far as slowing our land and being more cautious I think we've always been cautious.
We're very carefully underwriting.
I will say that our land acquisition in this past quarter was less than in prior quarters. Some of that is is maybe deals that underwriting and we did drop a few deals as you probably noticed our total lot count and control loss was down a little bit.
There were some deals we had under contract that when we got into due diligence. It just didn't make sense to us. So we didn't try to force them through the through the process. We just we were.
We just moved on but I think we've always been cautious.
And the other thing that I've seen is.
It is a little bit of things that I was hearing before and now we're actually starting to see it as it is taking a little bit longer to get entitlements and permitting completed on projects.
And as you know, we don't like to buy until those all those permits are in hand, so we have deferred the purchase of those properties until we get the upside probably another one of the things that leads up to us having less owned and controlled lots at the end of the quarter compared to the prior quarter.
Okay, that's fair.
Just staying on the defense team incentive.
What are some of the moves you could take.
To protect margins and ROE should we go into a slowdown.
Okay.
Well I think what.
<unk> margin.
Okay.
Again, I guess I look at our strategy and the way we price lots to be a good way to do that I think are our core strategy of trying to make sure. We really know our costs before we set that pricing.
If you'll recall that the faster than we've been defensive all along.
We don't want that margin erosion, we are trying to protect them as much as possible. It is challenging I mean, he is rising costs, it's it's challenging and that normally when youre going to get materials. It has definitely changed the landscape of how how you price in these things and we're seeing more and more differences but.
Yes.
Good I think having good land positions, having good customers and being in the affordable price points and.
And having a product that we believe we can deliver on time and on budget is going to keep us keep us well positioned.
Got it one final housekeeping question.
Deferred purchases.
Lot sorry.
787.
Is that accounted for in the guide.
Yes.
Yes, so the 787 lots.
Were counted as sales in quarter, two even though all the revenue and gain from those lots. So the lot count is in this quarter sales.
And the future revenues and margins would be included in future quarters, because some either 700 separate projects.
Probably be over a 12 month period or so that all of that revenue and profit will be recognized so yes. It is accounted for in our guidance.
Got it thanks, very much I'll pass it on.
Thank you.
Next we have Pettinari with Citi. Your line is live.
Hi, good afternoon.
Anthony.
Dan you talked about supply chain challenges during the quarter and you talked about permits and entitlements, maybe taking a little bit longer in some cases I'm. Just wondering were there any sort of incremental constraints in the quarter from a supply chain perspective that werent expected do you see supply chain conditions worsening and when.
You think about what could potentially get you to the maybe the higher or lower end of the guide.
Are you maybe more concerned about just kind of demand materializing from your from your builder customers or.
Is the cost.
Labour permitting bottlenecks, maybe more of a swing factor.
Let's see how do I pass that one.
But as far as the supply chain constraints.
It's been spotty from market to market. Some submarkets, what mark you might not be able to get big pipe. Another one the concrete structures might be tough to get another one.
It might be concrete and some markets are having a hard time getting concrete when we want and we have to schedule differently, probably the one thing that I would say over the last quarter that has materialized to be on a broader scale.
Electrical transformers and the ability for the utility companies as we get out there and get get power to the lots.
I'm seeing that in more and more of the markets across the country. So I say that is the one challenging thing.
That is and again, we're it's hard to control that one year. So just kind of in the hands of the utility companies. So.
We're doing our best to try to stay ahead of it we are trying to convince them to order transformers sooner or whatever but I think again it depends on the power company and some of them have transformers no problem and the others are.
It didn't do a good job of.
Ordering ahead, so that's the one as far as the product goes out I think is.
There is more widespread than anything else and the other one so we've learned a lot of lessons and ordering earlier in China's substitute some things that are.
Like using factory type instead of plastic pipe in certain instances, our steel instead of plastic or vice versa, depending on what's more readily available for that particular situation.
As far as the as far as costs.
I mean, I'm always worried about rising costs.
Obviously at this point, we've been able to continue to pass through our higher cost.
The higher prices.
I'm not a rocket science to say interest rates are going up.
There is a fear that.
Zinc prices are going up and at what point does that may be.
Lead to lower housing demand.
At this point I haven't seen it and what we're hearing on the ground is there's still demand for those houses and as our releasing the houses for sale. There is still people bidding on houses so.
We're cautious we're thinking about it we've got our area of the ground, but not really seeing any of those impacts on us yet.
Okay, that's very helpful.
And apologies if I missed this but is there a specific percentage of sales to third parties that is baked into your guidance or maybe realistic for for for 'twenty two.
Are there kind of one or two key things that you need to do to drive penetration. Among third party builders is it just sort of more of a matter of time and relationship building or can you just maybe talk a little bit more about that yeah. We haven't really given any guidance on those numbers that we have kind of said over the long term, we'd like to see us get to about a 30.
Percent of non Horton customers.
How does that make the 30 I'll probably raise that number but we just think <unk> is a good number to try to target for us.
Obviously, the first constraint is forced our source deals so as I have forced our source deals I have some lots of.
That arent being offered to Horton first and then I can a little bit bigger projects, where I can have multiple builders.
I think this is continuing to execute and I think youll see those trends, you'll see them continue I mean, this one quarter.
Kind of added onto by this by this the BC BFR sale, probably I wouldn't say that's a trend.
This last quarter was probably a little high.
Higher in third party sales and what Youll see in the next couple of quarters, but.
We're continuing to try to broaden our customer base, which again is really done to help us accelerate sales in communities by offering multiple product types.
We love for either a great customer for us.
<unk>.
And I just want more good customers.
Got it got it that's very helpful I'll turn it over.
I'd now like to turn the call back over to Dan Bartok for closing remarks.
Thank you Chad.
Thank you to everyone on the <unk> team for your focus and your hard work, we look forward to working together as we strive for increased efficiencies, while continuing our growth.
We appreciate everyone's time on the call today, and we look forward to speaking with you again in July to share our third quarter results. Thanks, everybody.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.