Q3 2022 Forestar Group Inc Earnings Call
Speaker 1: after the presentation.
Speaker 1: If you have any questions or comments during the question and answer portion of the call, please press star one on your touchstone phone. Pressing star two will remove you from the queue. Should your question be answered? I will now turn the call over to Katie Smith, Director of Finance and Investor Relations for Forestar.
Speaker 2: Thank you, John . Good afternoon, everyone, and welcome to the call to discuss four-star third-quarter results. Thank you for joining us.
Speaker 2: Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although 4-STAR 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 4-STAR on the date of this conference call, and we do not undertake any obligation to update or revise any forward-looking statements publicly. Thank you for your attention.
Speaker 2: Additional information about issues that could lead to material changes in performance is contained in four stars annual report on Form 10K and its most recent quarterly report on Form 10Q, both of which are filed with the Securities and Exchange Commission.
Speaker 2: This afternoon's earnings release is on our website at investor.forcer.com, and we plan to file the 10Q later this week. After this call, we will post an updated investor presentation to our investor relations site under a Vetson presentations for your reference. Now I will turn the call over to Dan Bortock, our CEO .
Speaker 3: Thank you, Katie, and good afternoon, everyone.
Speaker 3: In addition to Katie, I am pleased to be joined on the call today by Jim Allen, our chief financial officer.
Speaker 3: The 4-Start team delivered a strong third quarter highlighted by net income increasing 151% from the prior year to $39.7 million or $0.80 per diluted share.
Speaker 3: Pre-tax income increased 150% to $52.7 million, and our pre-tax profit margin expanded by over 1000 basis points.
Speaker 3: year over year to 17.1 percent.
Speaker 3: Revenues decreased 1% to $308.5 million, while lot deliveries decreased by 10% to 3,473.
Speaker 3: Our lot deliveries for the quarter fell below our expectations.
Speaker 3: to increase headwinds in the development process.
Speaker 3: This was primarily related to municipality delays.
Speaker 3: And to a lesser extent, shortages of certain materials.
Speaker 3: However, demand for finished lots remain strong during the quarter, supported by our seventh consecutive quarter of finished lots on hand accounting for less than 10% of four stars on the portfolio.
Speaker 3: Customers continue to purchase lots soon after completion.
Speaker 3: Force stars lots, so the DR Horton continue to grow with a percentage of DR Horton's closings year over year.
Speaker 3: Additionally, our Lats sold the customers other than DR Horton Increased 213%
Speaker 3: compared to the prior year quarter.
Speaker 3: As a result of continued demand in our focused teams, we achieve significant improvement in our pre-tax profit margin, both year over year and sequentially.
Speaker 3: Our increasing profitability and focus on capital efficiency is translating into higher returns for our shareholders.
Speaker 3: 4-Star achieved a 16.2%.
Speaker 3: Return on equity for the trailing 12 months and the June 30th, 2022.
Speaker 3: This was a 620 basis point improvement.
Speaker 3: From the same period a year ago, our 9th consecutive quarter of our OE improvements.
Speaker 3: interest rates rose very quickly in June and the housing market is adjusting accordingly.
Speaker 3: Although we did not see demand deteriorate for finish lots during the third quarter, we expect new home starts will continue to moderate.'ll continue to moderate.
Speaker 3: We will now discuss our third quarter results in more detail, and I will end the call with closing remarks and updated guidance. Jim.
Speaker 4: Thank you, Dan.
Speaker 4: In the third quarter, four stars net income increased 151% to $39.7 million or 80 cents per diluted share.
Speaker 4: compared to $15.8 million or $32 cents or diluted chair in the prior year quarter.
Speaker 4: Consolidated third quarter revenues decreased 1% to $308.5 million.
Speaker 4: Lots sold decreased 10% year over year to 3,473 lots with an average sales price of $86,500.
Speaker 4: Our average sales price this quarter was higher than the second quarter due to the geographic and lot size mix of lot deliveries. The price was higher than the second quarter due to the geographic and lot size mix of lot deliveries.
Speaker 4: We expect our average sales price will continue to fluctuate in the quarter to quarter due to those factors. We expect our average sales price will continue to fluctuate in the quarter to quarter due to those factors.
Speaker 4: We are pleased that we continue to make progress delivering more lots from Project Source by 4*.
Speaker 4: 43% of lots sold in the quarter were 4 star sourced compared to 16% in the third quarter of 2021
Speaker 4: Additionally, this is the first quarter since the airport and acquired their controlling interest. That 100% of the lot sold during the quarter were from development projects.
Speaker 4: 13% of Four Star's third quarter lot deliveries were sold to customers other than D.R. Horton, up from 4% in the third quarter of fiscal 2021.
Speaker 4: We sold 435 lots to 12 customers other than DR Horton, which was a 213% increase in lots sold to other customers compared to the prior year quarter. We sold 435 lots to 12 customers in lots sold to other customers compared to the prior year quarter.
Speaker 4: We are excited about the significant progress we have achieved in expanding our customer base and continue to target selling approximately 30% of our lots to other customers over the intermediate term.
Speaker 5: dan
Speaker 3: Our pre-tax income for the third quarter increased 150% to $52.7 million with a pre-tax profit margin of 17.1%.
Speaker 3: As I said in my opening remarks, this was an improvement of over 1,000 basis points compared to the prior year quarter.
Speaker 3: The prior year quarter included an $18.1 million pre-tax loss on extinguishment of debt related to the redemption of the company's 8% senior notes.
Speaker 3: Excluding that $18.1 million charge, our pre-tax income for third quarter increased 34%, and our pre-tax profit margin improved 460 basis points.
Speaker 3: Our gross profit margin expanded 620 basis points to 24%
Speaker 3: Compared to 17.8% a year ago.
Speaker 3: The improvement was primarily due to increased margins on lot sales from development projects sourced by Forestar.
Speaker 3: SGNA expense as a percentage of revenues in the third quarter was 7.8% compared to 5.4% in the prior year quarter.
Speaker 3: While this was higher than expected due to fewer lot deliveries this quarter, we believe we will continue to manage our business at a mid-single digit SG&A percentage for the full fiscal year.
Speaker 3: We remain focused on efficiently managing our SGNA while besting in our teams.
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Speaker 2: Forstor's underwriting criteria for new development projects includes a minimum 15% annual pre-tax return on inventory and a return of the initial cash investment within 36 months.
Speaker 2: During the third quarter, investments in land and land development totaled $368 million, of which $79 million was for land and $289 million was for land development. Fiscal year to date, our investments in land and land development totaled approximately $1.1 billion.
Speaker 2: We continue to be very selective when investing in new projects and remain focused on developing projects within our own land portfolio at a disciplined pace.
Speaker 2: We now plan to invest approximately $1.425 billion in land and land development during fiscal 2022 subject to market conditions. And we are continuing to target a three to four-year-owned inventory of land and land.
Speaker 2: Forester's Lot position at June 30th was 97,000 lots of which 65,300 lots were owned and 31,700 lots were controlled through purchase contracts.
Speaker 2: The majority of our owned lots were put under contract prior to 2021.
Speaker 2: At quarter end we had 5,300 finish locks on hand.
Speaker 2: Finished plots have accounted for less than 10% of Forester's own portfolio for seven consecutive quarters. We are intensely focused on managing our development and phases to ensure we are delivering finished plots at a pace that matches market demand, consistent with our focus on capital efficiency and returns. How do you feel now? Canada's development creation is purposefully developed for international success in putting market demand at risk finding effective?raatar system like emergency service service service system service service assist service services service service services service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service service you
Speaker 2: At June 30th, 53% of our own locks were sourced by 4-star, up from 51% a year ago. As Jim said, 43% of locks sold in the quarter were from projects sourced by 4-star, up from 16% a year ago. That percentage will continue to trend higher as more 4-star sourced projects start to deliver lots. As more 4-star sourced projects start to deliver lots.
Speaker 2: We also have good visibility into future revenues. Of our 65,300 owned lobs, 30% are under contract to sell to deer hoarding, representing approximately $1.5 billion of future revenue. Additionally, 29% of our owned lobs are subject to a right of first offer to deer hoarding based on executed purchase and sale agreements. Again.
Speaker 4: Force TAR remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage. At quarter end we had approximately $500 million of liquidity, including $150 million of unrestricted cash and $350 million of available capacity on our revolving credit facility.
Speaker 4: Total debt at June 30th was $706 million with no senior note maturities until 2026.
Speaker 4: And our net debt to capital ratio at quarter end was 32.8%.
Speaker 4: Forstars capital structure is one of our key competitive advantages.
Speaker 4: Most traditional land developers are encumbered by project level financing, which makes it more difficult to react to changing market conditions while adding complexity and administrative costs.
Speaker 4: Our strong liquidity and corporate level financing enable us to effectively operate through changing economic conditions and positions us to be opportunistic when attractive opportunities present themselves. When attractive opportunities present themselves.
Speaker 4: At quarter end stockholders equity was $1.15 billion and our book value per share increased to $23.5 up 18% from a year ago.
Speaker 4: one point one five billion dollars and our book value per share increased to twenty three dollars and five cents up 18 percent from a year ago. Dan.
Speaker 3: We expect the environment will remain challenging due to rising interest rates, persistent inflation,
Speaker 3: continued municipality delays and shortages of certain materials.
Speaker 3: However, our teams are relentless problem solvers and they continue to navigate this environment exceptionally well. We are going to be able to access this environment exceptionally well. We are going to be able to access this environment
Speaker 3: We'll continue to be proactive in the areas we can control.
Speaker 3: As I said in my opening remarks, we expect new home starts will continue to moderate. We also expect to experience a brief period of reduced lot deliveries.
Speaker 3: As outlined in our press release, we are updating our guidance for fiscal 2022. We now expect our pre-tax profit margin to be approximately 14.25% for the year.
Speaker 3: consistent with the midpoint of our prior range of 14% to 14.5%.
Speaker 3: We expect to deliver approximately 17,000 lots this year, generating roughly 1.425 billion of revenue. terrace views of reconstruction are according to the St. John's Conditions Commission. The of the main Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington St. George Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington Washington you
Speaker 3: compared to our prior guidance of between 19,500 and 20,000 watt deliveries, generating 1.7 billion of revenue.
Speaker 3: Finally, we still expect our effective tax rate in fiscal 2022 to be approximately 24.5%. In fiscal 2022 to be approximately 24.5%.
Speaker 3: Although the uncertainty of this market transition may persist for some time, we remain positive on the long-term demand outlook for finished lots and our ability to gain market share in the fragmented lot development industry.
Speaker 3: We believe that home builders will continue to shift their focus towards buying finished lots from third party developers instead of self developing.
Speaker 3: with our National Footprint, Strong Balance Sheet, and Season Management Team that has experienced and navigating to market cycles. on track.
Speaker 3: 4 Star is extremely well positioned to deliver further value to our shareholders.
Speaker 3: John , at this time we will now open the line for questions.
Speaker 1: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one. Next turn phone.
Speaker 1: We ask that while closing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while a poll for questions.
Speaker 1: And the first question is coming from Deepa Raghavan with Wells Fargo. Your line is live.
Speaker 7: Hi, good evening everyone, thanks for taking a question.
Speaker 7: Then, you think it will be talked about some of the markets where you expect to see...
Speaker 7: housing flow down, in fact the most. Also are you looking to change your future land mix?
Speaker 7: Uh uh thank you.
Speaker 7: As we have to go down to Hopkins, bring it to us some of those changes.
Speaker 3: Well, I think at this point, I don't know that we've really seen the fall off in demand. Much of it is somewhat anticipated. Obviously, from the release this morning on housing starts, you know, housing starts, or your people's single family permits, or starts are down about 16% year over year. And so at this point, I can't pinpoint any one market. We're just being cautious and...
Speaker 3: attempting to adapt as market conditions continue to change. As far as our land strategy, there's nothing at this point that is changing our strategy. Almost two-thirds of the lots that we own today were...
Speaker 3: We're put under contract before 2021, so we feel very good about the basis in our land and our positions. And I think that we're diversified appropriately as it relates to current permits market by markets. I actually feel really good about our current land in a lot of position. And I think that we're going to have a lot of position. I'm going to have a lot of position. A lot of position.
Speaker 7: Okay, the broad of this housing chart, this is serious. If you have a forecast for housing stocks next year, I'd be appreciate you. You do have the opportunity to share in the down cycle, but at a high level of housing stocks, you can be planning your business course in the next day.
Speaker 3: Well actually I was looking at the Wells Fargo report earlier today so I think I got some of our information from your group. Right now I think you know at least from your data your estimate for next year is down about two and a half to three percent in single family starts.
Speaker 3: But again, I don't know how old that report was and I think the market is changing pretty rapidly over the last several weeks we've seen builders start to moderate, start kind of across the board.
Speaker 7: Sorry, that's there. My last question is I can choose what M.
Speaker 7: Sorry, that's, that's my last question. If I can please one more. And um.
Speaker 7: Any way to think, you're really, and hopefully your perfect comments we mentioned, what moderating housing demand, you also mentioned municipal delays. This view is out of fact, you know, closer to the co-vac in volume died, how much would be attributes to municipal delays and how much would you attribute to co-vac in the housing market? And that's the last thing. We organized ??????.
Speaker 3: Well, for this prior quarter
Speaker 3: Basically, as we were finishing lots, they were still being purchased. We did not really see the impact of what maybe the future is gonna bring in demand for those lots. So as we finished lots, they were still sold. Our finished lot on our inventory really didn't change much quarter over quarter or year over year. We were staying pretty steady at that number. It's funny, and all the prior calls, the last several calls and discussions I've had.
Speaker 3: You know, a lot of the other builders have been talking about municipality delays. And, you know, we really had not experienced it until this past quarter. So it was, came as somewhat of a surprise to us, but just really the delays in getting the paperwork finished, plots recorded, getting those final certifications from the municipality. The lots were on the ground that we just didn't have that, you know, the right ability to transact and sell that platted lot.
Speaker 7: Thanks very much. Good luck.
Speaker 8: Thank you very much. Good luck. Thank you.
Speaker 1: Okay, the next question is coming from Truman Patterson with Wolf Research. He's lying alive.
Speaker 4: Hey, good afternoon everyone. Thanks for taking my questions. And I do apologize. I was having a hard time hearing Deepa. So if I, you know, double up on questions, I apologize. But so it looks like you all pulled back a bit on land activity during the quarter based on your lot count. I'm just hoping you can give us kind of a lay of the land from a competition standpoint, whether builders have generally paused bidding on certain parcels in the market.
Speaker 4: Are you hearing many are attempting to renegotiate option land terms and whether there are any metros that you're actually starting to see land prices soften a bit sequentially?
Speaker 3: Okay, first actually if you really look back at our lot inventory over the past year, we really kind of started slowing our land acquisition about a year ago, then we stayed pretty steady year over year in our own and controlled lots.
Speaker 3: As far as...
Speaker 3: Markets and what other builders do, we're clearly hearing about builders dropping contracts. We're seeing that firsthand in some instances where the land that was tied up by builders, they're just letting those contracts go and are coming back into the market. I don't know that that has translated into reduced land prices yet. I think it'll probably take a little longer for the landowners to realize that, you know, the value they had contracted at before was overstated.
Speaker 3: Although we do anticipate seeing that, you know, sometime later this year, that we expect, you know, land owners to maybe get a little more realistic about some of the pricing and the terms. I mean, some of it wasn't prices as much as it was terms. That really tightened up and, you know, as far as short due diligence periods and closing on unentitled land was, you know, kind of became the norm there for a while for other land buyers. So I expect that that will soften, but again, I don't know that we have seen that in the marketplace yet.
Speaker 4: Okay, thanks for that. And then, you know, with rates moving higher and home buyer demand is clearly cool a bit here. You all have mentioned the financial or financing competitive advantage over your peers, but I'm just trying to understand what the strategy is over the coming, we'll call it, you know, 12 months. I think you were talking about, you know, single family starts being down a little bit earlier, they somehow will fall into receiving a employed Google user, they will run despair and sooner or later, will run into feedback andMLX, or will happen, or?crosstalk'' or'' messaging''." you
Speaker 4: Do you take advantage of the slowdown, really go out and capture incremental market share, perhaps even grow the land bank, or do you shore up a bit of cash and maybe even just develop and liquidate a portion of your current own land bank?
Speaker 3: Well, we're going to be constantly looking for those opportunities. If we see attractive opportunities to buy land in good locations at good prices, that's one of the reasons we want to keep a strong balance sheet with a lot of liquidity is to be able to take advantage of those opportunities.
Speaker 3: But we don't feel the same need that maybe we did a couple years ago to go out and build up our land portfolio. So again, we expect that pricing will become more reasonable in terms of the year progresses.
Speaker 3: So from a day to day, you know, we are looking at starts, starts.
Speaker 3: in each of the subdivisions that we have, we're looking at the underlying sales and trying to make sure we're monitoring and adjusting our lot deliveries as best as we can. Maybe potentially staging lots in a partially completed fashion so that we can quickly react when the man changes and turns around, I think everybody's out there experimenting a little bit with some reduced starts. It's not necessarily every subdivision, but in many places.
Speaker 3: where maybe spec inventory had grown or the builders loaded up on some finished lots, we expect some moderation for time being, but um...
Speaker 3: Again, it's really just kind of watching it as closely as we can and adapting as quickly as we can.
Speaker 4: Okay and then one final for me you know clearly a third of your land bank is optioned or controlled deals which you know have a pretty attractive basis given the land appreciation the past couple years but I'm just hoping you know hoping you can help us think through like what would market conditions really need to look like before you might you know just step aside from from some of that option land.
Speaker 3: You know, again, I think it's really on a project by project basis. And we'll be looking at, you know, one what other land do we own in that area? What are, a lot of positions are, what the sales activity looks like.
Speaker 3: and trying to make sure that we aren't too long on land in those markets.
Speaker 3: Again, if you think about how we're focused on our returns, it's making sure that the cash that we're deploying, we can return relatively quickly.
Speaker 3: So I don't know that there's any widespread answer for your question, but it's because it really is going to be done on a deal by deal basis and, you know, a sub-market by sub-market basis.
Speaker 4: Okay gotcha so when you're thinking through it it's a bit more about you know the amount of land that you have in a market rather than you know any level you know price declines or anything like that in the land market.
Speaker 3: Yeah, again, we hope to be able to take advantage of opportunities as they come up. But right now it's pretty darn granular. I mean, we literally spend...
Speaker 3: you know, lots of our parts of every day, you know, going through project by project and understanding the local inventory and the project inventory as we make decisions on putting lots into development or slowing development and or looking at future land purchases.
Speaker 4: Okay, perfect. Thanks for taking my questions and good luck in the upcoming quarter. Great. Thanks Truman. Thanks for coming. Great. Thanks Truman. Great. Thanks Truman.
Speaker 1: Okay, up next we have Max Donnie with BTIG, Max Your Lines Live.
Speaker 9: Hey guys, thanks for taking my questions.
Speaker 9: So on the material side, are there any particular materials that are causing delays right now?
Speaker 3: There's two that are probably the most prominent. One of them is getting transformers from the power companies to get subdivisions hot with electricity. It seems to be kind of widespread. It's not just one location versus another, but I'd say that's probably the most common problem we're having is actually, lots can be done, we just can't get electricity to them. Waiting on that utility company.
Speaker 3: The second is actually reinforced concrete pipe. There's a lot of that pipe is made in locations close to our projects. It isn't shipped at long distance. And it isn't necessarily the pipe itself, but it's the reinforcing wire that goes in that pipe. And there seems to be a shortage of that. And again, but best we can determine is there's a shortage at pretty good.
Speaker 3: National and scope is, as I think most of us made in China and sent over here and then the pipe is made locally. That's probably the two biggest areas that we're experiencing material delays.
Speaker 9: Got it. Thank you. That's really helpful. And then my second question is, last quarter you guys discussed an interest from the build to rent operators for some of your assets. Have you seen a change demand or interest either up or down this quarter? And do you have any updated thoughts on the space in general?
Speaker 3: At this point, we're still seeing the demand to be strong. We expect maybe pricing might be, as we look to sell additional parcels, we think pricing might be a little softer because I think interest rates have gone up and at least the appearance of cap rates has gone up a little bit. And as they back into what they can pay for, for develop land. We are continually looking at the space. We have sold some parcels to that space. That was happening to be a unique transaction in the way that it was structured. And the way that it was structured.
Speaker 3: which probably brought a little more.
Speaker 3: visibility to that particular transaction. But yeah, we will continue to look at the build for rent market as a viable.
Speaker 3: demand for lots in our subdivisions.
Speaker 9: Awesome, thanks so much guys.
Speaker 10: Thanks.
Speaker 1: Once again, if there are any remaining questions or comments, please indicate so by pressing star one on your touch tone phone. Up next we have Anthony Petinari with Citigroup. Anthony, your line is live.
Speaker 9: Hi, this is Asha Sonan on For Ants. And thanks for taking my questions. I just want to know, what kind of home price or home sales volumes, you know, the client scenario? Would you have to see materialized before you could start thinking about potential impairments to your book, if any.
Speaker 3: You know, that's always a hard question. When I think about home prices, there's a couple of factors that I think have driven home prices up. One is I think builders have been able to increase their margins over what may have been an historical run rate, and a lot of their material costs have run up. So I think that there's gonna be a, there's gonna be some price adjusting downward. I think there's room before it gets to the, to lot prices themselves. So far we haven't seen any pushback on our lot pricing.