Q4 2022 Forestar Group Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to <unk> fourth quarter 2022 earnings Conference call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
I will now turn the call over to Katy Smith director of Finance and Investor Relations for four store.
Thank you, Matt Good afternoon, everyone and welcome to the call to discuss <unk> fourth quarter and fiscal 2022 results. Thank you for joining us.
Before we get started today's call includes forward looking statements as defined.
And by the private Securities Litigation Reform Act of 1995.
Although <unk> 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 factors that could lead to material changes in performance is contained in <unk> annual report on Form 10-K, and its most recent quarterly report on Form 10-Q, both of which are filed with the SEC.
Our earnings releases on our website at Investor Dot forced our dot com and we plan to file our 10-K late next week. 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 <unk> our CEO .
Thank you Katie and good afternoon, everyone.
In addition, the caveat I am pleased to be joined on the call today by Joe Melo, Our Chief Financial Officer, and Mark Walker, Our recently promoted Chief operating officer.
Mark joined <unk> in 2019, as our East region, President and over time also became responsible for our operations in the mid Atlantic North, Texas regions I would like to take a brief moment to have mark to introduce himself before we get started mark Thanks, Dan and Hello, everyone. I'm excited to further my career for store I'm eager to help.
The company continued to build out our platform even further.
We have a high performing team with great regional and divisional leadership I'm also looking forward to getting to know our analysts and investors in my new role.
Thanks Mark.
That mark is new to his role he will not be a active participant today, but we are happy that he will help lead the <unk> team as we continue to scale, our business and consolidate market share.
I want to thank our team for another quarter of strong execution and a great fiscal year.
Our operational and financial results exceeded expectations and our strong performance is a testament to our differentiated business model and our team's ability to react quickly and appropriately to market conditions.
Our pre tax income for the fourth quarter increased 13% to $66 4 million.
$381 $4 million of revenue.
And our pre tax profit margin improved 340 basis points to 17, 4% when compared to our fourth quarter last year.
For the full fiscal year pretax income increased 61%.
$235 $8 million and our pre tax profit margin improved 440 basis points.
15, 5%.
Consolidated revenues for the year increased 15% to $1 $5 billion of $17 691 lot sold which was an 11% increase in lot deliveries over last year.
Since fiscal 2019, <unk> consolidated revenues have more than tripled as we've continued to gain market share in the fragmented.
<unk> lot development industry.
Over the same period, our pre tax margin expanded 480 basis points.
Earnings per share increased 354% book.
Book value per share <unk>.
Increased 43%.
And return on equity expanded over 1000 basis points to 16, 2%.
I'm extremely proud of our team as a platform that we have built together.
Before turning the call over to Jim to review, our financial results I want to reiterate our optimism for the future for Star, We're starting fiscal 2023 from a position of strength.
<unk> has over $620 million of liquidity in order to best capital structures in the residential lot development industry, which provides us with tremendous flexibility to navigate changing market conditions.
Our high turnover manufacturing strategy is fundamentally stronger for the traditional land developer and we are focused on strong execution, which will lead to further value creation for our shareholders.
Jim will now discuss our fourth quarter and fiscal 2022 results in more detail.
Thank you Dan in the fourth quarter net income attributable to <unk> increased 15% to $58 million or $1 <unk> per diluted share compared to $44 million or <unk> 89 per diluted share in the prior year quarter.
Consolidated revenues for the quarter totaled $381 4 million, which included $27 $7 million of track sales and other revenue.
We sold 3914 lots during the quarter with an average sales price of $88800 we expect.
Continued quarterly fluctuations in our Asps based on the geographic location and lot size mix of our deliveries.
For the fiscal year net income attributable to <unk> increased 62% to $178 8 million or $3 59 per diluted share.
Compared to a $110 $2 million or $2 25 per diluted share in fiscal 2021.
Consolidated revenues for the year totaled $1 5 billion, which included $36 $8 million of track sales and other revenue.
During fiscal 2022 lots sold increased 11% to 17691 lots with an average sales price of $86300 Katy.
Our pre tax income for the quarter increased 13% to $66 $4 million pre tax profit margin of 17, 4%.
This was an improvement of 340 basis points over the prior year quarter.
Our pre tax income for the year increased 61% to $235 $8 million and our pre tax profit margin improved 440 basis points to 15, 5%.
The prior year period included an $18 1 million pre tax loss on extinguishment of debt related to the redemption of the company's 8% senior notes.
Excluding that charge pretax income for fiscal 2022 increased 43% and our pre tax profit margin.
310 basis points.
Sure.
Our gross profit margin was 23, 4% in the fourth quarter and was 21, 3% for the year, representing an improvement of 530 basis points and 400 basis points over the prior year periods respectively.
The improvement in gross margin in both periods was primarily due to increased margins on lot sales from development projects sourced by foresaw.
And to a lesser extent high margin track sales during the fourth quarter.
Additionally, interest charged to cost of sales decreased by approximately 70 basis points for the quarter and 50 basis points for the year compared to the respective prior year periods, partially attributed to the refinancing of our senior notes last year.
SG&A expense as a percentage of revenues was six 2% for the quarter and for the year.
We will continue to focus on controlling our SG&A costs, while ensuring that our infrastructure supports our business.
Jim.
We are pleased that we continue to make progress delivering more lots from projects sourced by four star 35% of lots sold in the quarter were four star sourced compared to 24% in the prior year quarter.
In fiscal 2020% to 35% of lots sold were sourced by four star up from 19% in fiscal 2021.
Those percentages should continue to trend higher as more four-star source projects deliver lots.
842 lots are 22% of our fourth quarter deliveries in 2796 lots or 16% of our fiscal year deliveries were sold to customers other than D. R Horton up from 11% and 7% respectively.
Included in our lot sold to other customers are 585 lots in the fourth quarter and 943 lots in fiscal 2022 that were sold to a lot banker, who expects to sell those lots to D. R. Horton at a future date.
We continue to target selling 30% of our lots to customers other than D. R. Horton over the intermediate term. Additionally.
Additionally, <unk> lots sold to D. R. Horton continue to grow as a percentage of D. R. Horton starts year over year and sequentially.
Approximately one out of every five homes with D. R. Horton starts is on a lot developed by four-star are mutually stated goal is for one out of every three homes at D. R. Horton sells to be built by on a lot developed by us Katy.
<unk> underwriting criteria for new development projects, including a minimum 15% annual pre tax return on inventory and a return of the initial cash investment within 36 months.
During the fourth quarter, we invested approximately $290 million in land and land development of which $270 million, that's related development and $20 million for land.
In fiscal 2022 investments in land and land development totaled approximately $1 4 billion.
Of which roughly 75% was for land development and 25% with land.
As land prices continue to increase across most of our footprint during the year, we reduced our land investment by 59% and primarily focused on phase development of Rad, we already.
Demonstrating our management to discipline experience navigating through market cycles.
<unk> lot position at September 30th with 90100 lots.
Which 61800 laughter and.
And 28300 lock are controlled through purchase contracts.
Our lot position decreased by 6900 blocks or 7% both sequentially and year over year.
55% of our annualized resources by four start up from 52% a year ago and the majority of our owned lots were put under contract prior to 2021.
At quarter end, we had 5500 finished off on hard.
We are continuing to target three to four years of owned inventory of land and lot Dan.
We expect demand for residential lots will continue to moderate in the coming months as homebuilders the lines start to a new sales pace.
31% of our old lots are under contract to sell representing approximately $1 $5 billion of future revenue.
These contracts have $136 million of hard earnest money deposits associated with them.
Another 31% of our owned lots are subject to a writer first offer to D. R. Horton based on executed purchase and sale agreement.
We remain intensely focused on managing our development in phases to ensure finished lots are delivered at a pace that matches market demand.
Insistent with our emphasis on capital efficiency.
We evaluate each project and the surrounding market conditions, as we determine the appropriate pricing and sales pace to maximize returns.
Over the past year, our inventory balance.
Phone only 6% despite elongated development timeline and inflationary pressures further demonstrating disciplined and strategic inventory management.
As a result, we generated $108 $7 million in cash flow from operating activities during fiscal 2022.
Tim.
We are maintaining a strong balance sheet with significant liquidity and modest leverage and we plan to maintain our disciplined approach when investing capital to enhance long term value of four star we.
We ended the year with approximately $620 million of liquidity, including $260 million of unrestricted cash and $360 million of available capacity on our revolving credit facility. After the reduction for outstanding letters of credit.
We recently amended our revolving credit facility extending the maturity by 1%.
And a half years to October 2026.
Total debt at September 30 was $706 million with no senior note maturities until fiscal 2026.
Our net debt to capital ratio at year end was 26, 9% compared to 35, 2% in the prior year period, demonstrating our continued focus on disciplined capital management.
We ended the year with $1 $2 billion of stockholders' equity and our book value per share increased to $24 eight.
Up 18% from a year ago.
<unk> capital structure is one of our biggest competitive advantages most regional 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.
Our strong liquidity and corporate level financing enable us to operate effectively to changing economic conditions and positions us to be strategic when attractive opportunities present themselves.
We know these are times to leverage our financial strength at a time when our competitors may be struggling we are incredibly well positioned to emerge from a slowdown in housing even stronger than before.
Having a growth plan is one thing, but having the capital operational flexibility strong customer base and experienced team is another.
We have those key pieces in place to execute our plan.
Dan I'll hand, it back to you for closing remarks.
Okay.
With our last earnings call, we expect the environment will remain challenging due to rising mortgage interest rates persistent inflation continued municipality delays and shortages of certain materials. However, our teams are relentless problem solvers and they continue to navigate this environment exceptionally well.
We will continue to be proactive in the areas that we can control.
As a result of the current market uncertainties, we are not providing guidance for fiscal 2023 at this time.
We will reevaluate providing annual guidance when we have sufficient visibility in the market conditions.
We have been very strategic and disciplined.
And we are well positioned to adapt quickly to the short term challenges that are before us.
We remain very optimistic about <unk> ability to continue to make progress towards our goal of gaining market share and increasing returns.
We continue to believe that D. R. Horton and many other homebuilders will continue to shift their focus towards buying finished lots from third party developers instead of self developing.
With our broad geographic footprint.
<unk> of land positions strong balance sheet.
Most importantly, our experienced team.
<unk> is well positioned to be the last supplier of choice to homebuilders.
I will conclude by saying our leadership team has managed through market cycles before.
Been disciplined inventory management, and our focus on maintaining strong liquidity.
We are working with our customers to adapt to current market conditions in a way that is beneficial to all.
We will be strategic in our approach and will leverage our platform to take advantage of opportunities that will build shareholder value.
I'm incredibly proud of the high performing <unk> repaired for the challenges ahead.
Matt at this time, we'll open the line for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that while posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Carl Reichardt from PBT.
Your line is live.
Hi, everybody.
You talked about opportunities, Dan and Jim too.
I'm curious if you're starting to see some of your peers on the development side begin to drop deals are they turning to you to potentially take them.
And or where are the geographic markets, where you think.
Peers might be struggling the most at the moment.
Yes.
We are starting to see some opportunities I can't I can't say that they have been.
Extremely attractive yet, but we think that they will get better as time continues to move on here, but yes, we're definitely seeing deals being dropped.
Seeing opportunities where other developers are having.
With their loans that are kind of look at the need to get out of their positions, but again I think that we still have a little time to go before they get extremely attractive.
Okay. Thanks, Tim and then you talked about the continuation of delays in getting.
Lots actually through the development process itself, obviously, the builders are starting to tell us that the front end trades for them for the vertical construction side or are getting easier to find are you seeing that that same thing being two now where at least folks like excavators papers whoever that you used to actually get the communities.
Up and running or starting to loosen up and is that is that likely to help you at all from a price or our development pace ability in 'twenty three.
Yes, I think that's exactly what we are seeing that the front end contractors are loosening up with primarily in the dirt moving side of things with Python and Transformers.
Electric companies getting out there to get last minute is still has that loosened up I don't think its getting any worse, but I don't think we're really starting to see it improve much right now.
And yes, I think as the year goes on and more of these crews or don't have somewhere to send their people to the next job that we'll start to see some.
Some cost efficiencies.
Great. Thank you, Dan I will get back in queue. Thanks.
Okay.
Thank you. Your next question is coming from Mike Rehaut from Jpmorgan. Your line is live.
Hi, guys. Good afternoon Billboard law for Mike.
You guys touched on this a little bit earlier.
Ophthalmology give further color on how you are progressing regarding your non <unk>.
Could look like in maybe two to three years Russell.
While we are making progress.
We never expected it to be a sharp increase but we are definitely making progress with other builders.
Yes.
Our goal for maybe the next two to three years is to get up to that 30% of our business going to builders other than Horton.
And frankly, I think some of these tougher times that we're having right now will only help help builders want to buy finished lots rather than developing lots, while I think we're on the trends.
I like what we're seeing in.
So I think these next two years will be very beneficial for us.
Great. Thanks, and then I know you guys.
Guidance for 2023, but is there any way you gave a little bit of insight.
As for how you're thinking about gross margins over the next few quarters and sort of adventure for.
Slide 23 progression.
Yes.
We know it's going to be a challenging year.
There's going to be.
The buildings are definitely trying to reset their start pesos.
Probably be renegotiating some start paces on lot Takedowns, then we will probably see a little bit of margin compression, but it's too early to really tell.
What extent that will be so far we've been able to do.
Deal with slowing pace and not really giving up margin at some point that may come back to it.
Alright, Thank you Paul.
Thank you. Your next question is coming from Anthony Pettinari from Citi. Your line is live.
Good afternoon.
Can you continue to trade well below book and I'm. Just wondering is there a threshold on margins on home prices or volumes or whatever metric you choose when you would have to start thinking about potential impairments. I was just wondering if you can directionally talk about risk of <unk>.
Impairments.
And maybe how far you are away from that as we think about 2003 and potentially softer markets.
While our margins are still strong I mean, I think we're still a long long way from any kind of widespread impairments.
If we see.
If we see some margin compression during the year there may be isolated.
Isolated projects maybe that.
Might have impairments, but at this point, we just we're not seeing it.
The only impairments.
We have or we have had in the year. We had one during the year that was just kind of an isolated incident, but it was really more around.
Earnest money and maybe <unk>.
Getting off due diligence costs for deals that we decided not to pursue.
Is it really more likely.
Daniel overhead over half of those.
Last we owned today, we contracted to purchase before 2021, so we really have pretty low land basis relative to the current more.
More recent market expectation.
You can really see it.
Purchasing of new land really fell.
<unk> this past year, so I feel like we are.
Pretty good shape.
That's the kind of weather the storm.
Okay, that's very helpful.
And then just given the rising rates and affordability is obviously top of mind for homebuyers and builders are there levers you can pull for projects in development.
Have you started to shrink lot sizes are.
Any other changes to projects to drive greater affordability for the final home price.
Well you know we've always focused on the affordable segment. So I think that we've already been in that position.
Relatively small lot prices in the affordable market. So I think from a from a project positioning I feel really good about it.
For us, it's more about controlling that inventory flow.
Right sizing phases, we started evenly over a year ago working on smaller phases that expectation.
Kind of slower demand.
So I think it's really about controlling our capital flow.
As Jim likes to call it our capital efficiency and making sure we're cutting our inventory quickly.
Okay. That's very helpful I'll turn it over.
Thank you. Your next question is coming from Carl Reichardt from <unk>. Your line is live.
And back thanks for the additional time guys.
So.
Danny.
If we do see a really significant slowdown in business does this accelerate the pace at which you can actually self source deals do you think and then the thinking is that if things do slow down it does accelerate your pace that your margin come out when things do get better auto auto ramp pretty nicely or is it is a cigna.
Difficult slowdown more likely to slow your ability to self source deals and make you more reliant on Horton.
I think the former that's what we've kind of been playing for that's why we built are kept our strong liquidity position slowed up land buys we believe theres going to be some significant opportunities that come our way.
And again to me, it's a lot of it is about that positioning.
Part of our strategy all along Carl.
Okay that makes sense just wanted to be sure and then could you expand a little bit on the on the 585.
Lots that you sold too.
A lot banker, maybe talk a little bit about what what if there's a big difference in margins or price or or take down terms with a customer like that then there would be with the traditional builder.
There was really no change it was really an assignment of a contract that we had in place to sell lots.
And it was a bulk transaction.
<unk>.
Rather than buying those lots in bulk.
Turn it over I think or into the middle of Biomarin Balkan the environment and more of a take down. So it was really a matter of the builder living up to the terms of the original contract with us.
We found that to be a positive.
Okay, and then just sorry for the follow up was this was this transaction contemplated in your original guidance of 17000 lot deliveries for the full year.
Well, we we definitely took the original contract into accounts.
And how we set that guidance and again, rather than the builder to closing them directly they just inserted a lot banker in between.
So again they performed on the contract as it was originally contemplated them alright, alright.
Thanks, very much I appreciate it.
Okay.
Thank you showing no further questions that concludes our Q&A session.
I'll now hand, the conference back to Dan Bartok for closing remarks. Please go ahead.
Thank you, Matt and thank you to everyone on the portion of our team for your focus and hard work I'm very proud of the results. The team achieved this year, we will stay disciplined flexible and opportunistic as we consolidate market share in fiscal 2023.
We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results. Thank you.
Okay.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.