Q1 2023 Forestar Group Inc Earnings Call

Okay.

Good afternoon, and welcome to <unk> first quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad I will now turn the call over to Katie Smith director of Finance and Investor Relations for four star.

Thank you John and good afternoon, everyone and welcome to the call to discuss <unk> first 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.

Air Force or 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 <unk>.

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.

Our earnings release is on our website at investor that forced our dot com and we plan.

To file our 10-Q tomorrow.

During this call we will post an updated investor presentation to our Investor Relations site under events and presentations for your reference now.

Now I will turn the call over to Dan Bartok CEO .

Thank you Katie.

Good afternoon, everyone.

As always we appreciate your interest in four star and taking the time to discuss our first quarter results.

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

Mark Walker, our Chief operating officer.

Mortgage rates rose rose at a record pace during 2022 as a result housing affordability has been severely impacted.

New home sales fell 15% in November from a year ago in December housing starts were down 25% from a year ago.

Despite those headwinds, resulting in a revenue decline of nearly 50%.

Our gross profit margin increased 390 basis points to 21, 9%.

And our pre tax profit margin was 12, 9%.

The real story here is the transformation that torstar has undergone over the past five years.

We have become the largest pure play residential lot manufacturing company in the United States.

Build a platform of assembled a team that is flexible and focus we.

We have further strengthened our balance sheet and look to be opportunistic in ways that will continue to build shareholder value.

We have a strategic relationship with D. R. Horton.

America's largest builder.

And we have positioned ourselves to expand our customer base as we consolidate market share.

The housing market is going through a period of transition where.

We are disciplined and have been proactively reducing land acquisition over the past 18 months.

We have been stating development activity at our projects to be prepared for when the demand for residential lots increases.

Our flexibility enables us to quickly adjust to meet the needs of our customers.

We continue to strive to maximize returns, while we plan and prepare to return to periods of rapid growth.

Having a growth plan is one thing.

We have the capital structure, the operational flexibility and strong customer relationships and most importantly, the team to execute that plan.

<unk> is better positioned than ever to.

Serve current and new customers and consolidate market share.

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

Thank you Dan and.

In the first quarter net income attributable to four star was $20 8 million or <unk> 42 per diluted share compared to $40 5 million or <unk> 81 per diluted share in the prior year quarter.

Consolidated revenues for the quarter totaled $216 7 million compared to $407 $6 million during the first quarter of 2022.

We sold 2263 lots during the quarter with an average sales price of $90100.

We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries.

We expect demand for residential lots will continue to be impacted in the coming months as homebuilders aligns starts to a new sales pace.

Our pretax income for the quarter totaled $27 9 million compared to $53 $5 million in the first quarter of last year.

Our pre tax profit margin of 12, 9% was 20 basis points lower than last year.

Driven by reduced operating leverage.

Our gross profit margin was 21, 9%, representing an improvement of 390 basis points over the prior year period.

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In the first quarter SG&A expense was $22 $9 million were 10, 6% as a percentage of revenues compared to $21 $5 million in the prior year quarter.

While our SG&A expense as a percentage of revenue was higher than we would like to.

Absolute dollars were down 3% sequentially and has decreased for the last three quarters.

We will continue to focus on controlling our SG&A costs, while ensuring that our infrastructure supports our business Mark.

As for current market conditions, we are starting to see greater contractor availability with front end trades and continue to stage development on a project by project basis. Despite single family home starts falling roughly 25% in December from a year ago, our cost to develop a residential lot continued decline.

Materials like concrete.

And transformers are still challenging to procure.

However, our teams are relentless problem solvers and they continue to navigate this environment exceptionally well.

We will continue to be proactive and work with our trade partners to develop.

Cost control development costs.

We evaluate each project and the surrounding market conditions, as we determine the appropriate pricing and sales space to maximize returns.

We remain focused on developing lots for homes at affordable price points demonstrated by our average sale price of roughly $90000 over the past 12 months, our inventory balance has grown only 5% disc.

Despite elongated development timelines and inflationary pressures further demonstrating disciplined and strategic inventory management Jim.

7% of our first quarter deliveries were sold to customers other than D. R Horton compared to 11% in the prior year quarter.

And the trailing 12 months, 16% of our deliveries were sold to other customers and we continue to target selling 30% of our lots to customers other than D. R. Horton over the intermediate term.

Additionally, four stars 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 that D. R. Horton starts is on a lot developed by four star.

Our mutually stated goal is for one out of every three homes that D. R. Horton sells to be built on a lot developed by us Katie.

<unk> underwriting criteria for new development projects includes a minimum 15% pre tax return on average inventory and a return of the initial caution Baxter from 30.

During the first quarter, we invested $237 million in land and land development.

Reduction of 38% compared to the prior year quarter $205 million, which were land development and $32 million range.

As land prices continue to increase across most of our footprint. During the last 18 months, we proactively starting to reduce store Landon background quicker concern at the slower housing market and primarily focused on the phased development.

We are working with land sellers to extend.

And uncertainties quickly after determining attracts our unique operating model allows us to adjust the pace of development based on market conditions, and we remain intensely focused on managing our development and safer.

Strive to deliver finished lots at a pace that matches market demand consistent with our emphasis on capital efficiency Mark.

<unk> lot position.

<unk> <unk> 31 was 82300 lots of which 61500 lots are owned and 2800 are controlled through purchase contracts.

Our lot position decreased by 7800 lots or 9% sequentially and by 21000 lots or 20% year over year.

We incurred $2 $4 million of option deposits and due diligence write offs in the quarter.

At quarter end, we had 7600 finished lots on hand, the majority of our owned lots were placed under contract to purchase from land sellers prior to 2021.

Resulting in an attractive cost basis, and we had no inventory impairments during the quarter.

We are continuing to target a three to four year owned inventory of land and lots.

30% of our own lots are under contract to sell representing approximately $1 5 billion of future revenue. These.

These contracts of $148 million of hard earnest money deposits associated with them.

Another 29% of our own laws are subject to a right of first offer to D. R. Horton based off executed purchase and sale agreements Jim.

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 the long term value of horsepower.

We ended the quarter with over $580 million of liquidity.

Including approximately $215 million of unrestricted cash and $365 million of available capacity on our revolving credit facility. After the reduction for outstanding letters of credit.

Total debt at December 31 was $706 million with no senior note maturities until fiscal 2026.

Our net debt to capital ratio at December 31 was 28, 7% down from 33, 9% in the prior year period.

We ended the year with $1 $2 billion of stockholders' equity and our book value per share increased to $24 50.

Up 15% from a year ago.

<unk> capital structure is one of our biggest competitive advantages most traditional land developers are encumbered by project level financing, which makes it more difficult to react to the market, while also adding complexity and administrative costs.

Our strong liquidity and corporate level financing enable us to operate effectively through changing economic conditions and positions us to be strategic when attractive opportunities present themselves.

We have significant flexibility to navigate the upcoming year.

Katie.

Consistent with our last earnings call and as a result of the current market uncertainties. We are now.

Not providing guidance for fiscal 2023 assets.

We will reevaluate providing annual guidance.

Visibility into market conditions.

We have been very strategic and disciplined and we are well positioned to recap quickly to the short term challenges that are before us and the house.

Industry.

And looking back to you for closing remarks.

Thank you Katie.

Horsecar will continue facing difficult comparisons to our fiscal 2022 results as the housing industry adjusts throughout 2023.

We have made remarkable progress building four stars platform, which enabled us to maintain strong returns and margins during a challenging quarter.

While we cannot control the macroeconomic backdrop or directly influence the demand for housing.

Can and will stay focused on strengthening our platform and increasing operational efficiencies to drive future growth.

We're closely monitoring each market sub market and projects as.

As we strive to balance pace and price to maximize returns.

We are the market leader in a highly fragmented and under capitalized industry.

And are optimistic about <unk> ability to continue to execute well consolidate market share in any operating environment.

I would like to add on to Jim's earlier comment about our capital structure being a big competitive advantage.

Because it is our team that is our biggest advantage I could not be more proud to be a part of this team.

Their knowledge and experience in the way that they have dealt with the challenges of this past year are truly remarkable.

Yes.

Looking forward, we continue to believe that D. R. Horton and many other homebuilders will shift their focus towards buying finished lots from third party developers instead of self developing.

With our broad geographic footprint attractive land positions strong balance sheet and most importantly, our experienced team.

<unk> is well positioned to be the lot supplier of choice to homebuilders.

We are planning for the long term and have a track record of solid execution.

We proactively and methodically starting to implement our downturn playbook over 18 months ago by adjusting our pace of new land acquisition in preparation for today's current environment.

When appropriate.

We will leverage our platform and balance sheet to take advantage of opportunities to build shareholder value.

Our flexibility enables us to quickly adjust to meet the needs of our customers.

Our team has managed through market cycles before and we are well positioned to navigate these challenging market conditions.

At this time, we'll now open up the line for questions.

Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question.

As from Truman Patterson with Wolfe Research. Please proceed.

Hey, good afternoon, everyone and thanks for taking my questions.

First you all been trending close to 20% of important starts orders over the past year.

You mentioned your stated goal of supplying about a third of their lot needs do you you all continue.

Can you to increase that percentage throughout 2023 or.

Given the current housing backdrop do you kind of run at a steady state digest, the current environment see where.

Home and lot prices ultimately subtle.

Yes. Thanks, Truman thanks for the question.

It'll be an interesting year I think everybody is looking forward to seeing how it how it plays out I don't expect that our market share within Horton will decrease by.

I expect that it will increase but the.

Is that going to be going from your one out of one out of five homes. The one out of four during this year that that would probably be pretty aggressive.

But I do expect to continue to see some increase in our market share within Horton.

Okay. Okay got you and then.

Are you all actually seeing any opportunities to buy discounted land or distressed deals.

Or is it still just a bit too early I got the impression on the call that.

Perhaps youre not ready to deploy capital yet and maybe there is some some further downside.

Yes, we are starting to see opportunities may be.

More particularly though in deals that we may have.

Either passed on before or where somebody outbid us and now those deals are coming back around weather may have been dropped.

But as far as seeing anything that I would call distressed or severely discounted.

Haven't really seen that yet, but we're we're looking hard for.

Got you understood and then one final for me.

Which markets do you think have the greatest slot constraints.

And we'll just say our lease susceptible to potential impairments in the industry.

Which markets are maybe more oversupplied more at risk.

Asking because right now.

New home pricing.

Just made is kind of down about 10% from the peak nationwide.

I don't I don't really see that any market is oversupplied.

Again, nothing at all compared to what we saw back in <unk> timeframe.

So I think it's still really hard to get lots entitled then they get lost is all upside.

Again, I don't see anything being oversupplied.

I think as far as.

Riskiest markets I think as the ones that ran up the most and are probably going to be a little slower to bounce back and that the ones that would point to would be I think it was you're here on everybody talked about right, which is Arizona.

Inver.

We kind of got out of the out of the northwest. So we kind of missed some of the stuff that happened up in.

In Salt Lake in Washington, and Boise, but I'd say for us probably the two that.

That we look at most carefully our Arizona and Colorado.

Perfect. Thank you I appreciate the time.

Great. Thanks, Jeremy.

Okay.

The next question is coming from Carl Reichardt with BP I G. Please proceed.

Thanks, Good afternoon, everybody. Thanks for taking my question I just wanted to follow up on <unk>.

You had $90000 on a sort of average revenue per lot great. This quarter. Obviously the market has changed to some degree the southeast has remained reasonably decent Texas has been good the west has slowed a lot.

As Youre thinking about your mix of deliveries in 'twenty, three recognizing you're not giving guidance do you think it's going to adjust appreciably from what it was in 'twenty two geographically speaking.

It's always it's always challenging outlook product mix is going to sell on what dates.

90000, I think it was probably the highest we've hit in a quarter, but we also.

<unk> had some sales in the west.

We sold our last lots up in the Seattle market.

Again, we might reenter that market when it's more attractively priced again.

And then we had some other western type sales that may be skewed that number a little higher than usual.

So I would expect overall, our ESP will probably not increase from 90, but will probably trend down a little bit this year.

Alright, Thanks, Dan and then regarding your comments on on the potential for opportunities you talked about some builders may be looking more at finished lot transactions as opposed to doing self development.

Besides deals that you passed on before that are now coming back to the market is there any sense that youre seeing now some of those vertically integrated builders want to move towards not developing their own given the sort of need it for margin.

And are you seeing other developers out there not looking at new deals so not only dropping deals, but just effectively disappearing from the market at all that kind of firm level distress yet.

Yes, I think clearly I've seen that the smaller developers are having a hard time getting new financing new projects.

Probably the.

Negotiating with our banks on their existing deals that's my sense.

We are seeing some developers that have put a couple of packages together, but again I don't I don't think they are feeling.

Overly stressed yet.

That may happen I think I guess, we'll see what happens here with the spring selling season about the begin but we are definitely seeing a slow up in transactions by developers.

As far as builders.

The conversations over the last couple of months have been interesting people are looking for positions in areas that they are not in yet, but I think everybody's getting ready to pull the trigger again.

Again, I think you were going to really see over the next eight to 12 weeks, what happens with sales and therefore builders desire to ramp up starts again.

Okay, Great I appreciate it Dan Thanks, very much thanks, Paul.

Carl.

Okay. The next question is coming from Anthony Pettinari with Citigroup. Please proceed with your question.

Hi, This is asher conant on for Anthony Thanks for taking my question. So your ASP per lot Roes.

2% quarter over quarter, which seems somewhat out of line with what we're seeing in terms of home prices. What they are doing so is that largely due to delivery of lots.

Pricing kind of Arctic put under contract and the timing of those deliveries and then if so was there any renegotiation of prices between homebuilders baked into that.

Number and if not should we start to expect like renegotiation to be a price headwind over the balance of the year.

Well this is Jim Allen with respect to the.

The 90100 ASP for the quarter I think the increase there probably had more to do with mix than anything as Dan mentioned.

I guess with respect to.

Renegotiate out with that are you ahead.

Renegotiating were seeing builders come to us looking for.

Some flexibility with terms not so much pricing, but maybe their takedown. So price right now it's held pretty steady the ethane that will mentioned is 90100 for an ASP.

That's us in a sweet spot, we think for affordable pricing, where builders want to be with highest demand is in the marketplace. So.

We have not seen that yet on the pricing side, but.

We have had builders come back to us and want to talk about terms.

Okay.

Add on to that tier one builder comes to us and wants to renegotiate it.

We're typically getting something in return for that so whether it be a larger earnest money deposit or.

A higher escalator on the glass. So there is a little bit it doesn't.

As far as Christ whenever renewables.

Hi, Joe.

Great. That's really helpful and then just sort of.

Following up on that then so as you as you sort of.

Right up new contracts for lots that are sort of coming through the pipeline that they haven't been contracted yet.

Has pricing looked like trending there that's sort of.

Billy how stable kind of following underlying land prices have not yet.

Come down or are you starting to have to give up a little bit price there.

I think we look at that project by project market by market. They all have unique characteristics. So when we set pricing for finished lots. We're looking at all of the intangibles for each market but.

Right now our pricing has held steady.

Okay.

Great.

Yes.

Good to hear and very helpful. Thank you I'll turn it over.

Our next question is from Mike Rehaut with Jpmorgan. Please proceed with your question.

Hi, guys, Doug we're low on for Mike.

Last quarter, you guys mentioned that we're any closer to any potential impairments after the quarter and I was just curious after this most recent quarter of that mindset has changed and if not how do.

Do you envision the rest of the year going in terms of May.

Maybe getting to kind of the warning zone.

Central impairment.

Well.

We regularly review and monitor.

Projects for.

Indicators of impairment.

We had no impairments for the quarter.

We did write off some some due diligence costs in earnest money.

Related to deals that we decided not to close on.

At this point as Mark said, our margins and our pricing has held up pretty well.

We've seen a little bit of compression in margin, which we expected.

Probably a little bit early to say what to expect for the rest of the year that'll be more.

Contingent on general market conditions, and what happens with rates.

But at this point, we don't see widespread impairments, we may have isolated impairments as we go through the year, but.

We don't see it at this point on a widespread basis.

Great Thanks, and with that I'm just following up on what you said in terms of margins so relative to your expectations at the end of <unk>.

You haven't seen more or less of the margin compression you expected.

Sequentially grew.

Gross margins came down a little bit this quarter.

<unk> has held up pretty well our pricing has held up well.

We have lost operating leverage due to reduced volume.

We certainly.

Have a higher SG&A as a percentage of revenue.

And then we'd like.

But as I said earlier, our SG&A expense was down 3% sequentially and is.

Decreased for the last three quarters.

Gross margin great quarter pretty much in line with what we expected.

Yes.

Great. Thank you.

We have reached the end of the question and answer session and I will now turn the call over to Dan Bartok for closing remarks.

Thank you John .

Thank you to everyone on the four star team for your focus and hard work I am proud of the results the team achieved this quarter.

We will stay disciplined flexible and opportunistic as we continue to consolidate market share in fiscal 2023.

We appreciate everyone's time on the call today and look forward to speaking with you again in April to share our second quarter results. Thank you.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.