Forestar Group Inc. Q2 2023 Earnings Call
Okay.
Good afternoon, and welcome to four stores second 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.
Please note this conference is being recorded.
I will now turn the call over to Ashley Dagley corporate Securities Counsel for four stars.
Thank you John Good afternoon, everyone and welcome to the call to discuss sports stars second quarter results. Thank you for joining us.
Before we get started today's call includes forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
Of that four 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 <unk> 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 enforced stars annual report on Form 10-K, and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
Our earnings release is on our website at Investor Dot four-star dot com and we plan to file our 10-Q early next week. After this call. We will post an updated investor presentation to our Investor relations site and a bit under events and presentations for your reference.
Now I will turn the call over to Dan Bartok CEO .
Thanks, Ashley and we appreciate you filling in for Kt This quarter.
Good afternoon, everyone as always we appreciate your interest in four star and taking the time to discuss our second quarter results.
I am pleased to be joined on the call today by Jim Allen, Our Chief Financial Officer, and Mark Walker, Our Chief operating officer.
Our second quarter results continued to demonstrate the strength and resiliency of <unk> unique business model.
<unk> generated $301 $5 million of consolidated revenues.
The gross profit margin of 18, 5%.
The pre tax profit margin of 11, 9%.
And a return on equity for the trailing 12 months of 11, 7%.
Despite a transitioning housing market sticky inflation and challenging comparisons to our exceptional quarter achieved a year ago.
Our operational discipline manufacturing mentality and cost management initiatives helped us maintain double digit pre tax profit margins and return on equity.
Thank you to all of our valued team members for your efforts.
Over the past five years <unk> has undergone a remarkable transformation, becoming the largest pure play residential lot manufacturing company in the United States.
We have built a platform and assembled a team that is flexible and focused.
We have further strengthened our balance sheet and look to be opportunistic in ways that will continue to build shareholder value.
Our strategic relationship with D R Horton America's largest builder.
Helped us capture market share quickly and we are well positioned to expand our customer base.
While builders have started to increase new home starts from our perspective, there is still uncertainty about how the rest of the year unfolds.
We are continuously monitoring the market and remain flexible so quickly adjust to build their demand.
What sets forth our apart from peers is our strong capital structure, our operational flexibility and a strong customer relationships and most importantly, an exceptional team to execute our plans.
We will continue to navigate the short term volatility, while investing wisely for our future growth and striving to maximize returns.
We're start is better positioned than ever to serve current and new customers and to continue to consolidate market share.
Jim will now discuss our second quarter financial results in more detail.
Thank you Dan.
In the second quarter net income attributable to four star was $26 9 million or <unk> 54 per diluted share compared to $47 8 million or <unk> 96 per diluted share in the prior year quarter.
Consolidated revenues for the quarter totaled $301 5 million, which included $7 $5 million in revenue from deferred development projects and $41 $1 million million and track sales and other revenue compared to $421 $6 million of consolidated revenues during the second quarter of 2022.
<unk> two.
We sold 2979 lots during the quarter with an average sales price of $84700.
We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries.
Our pretax income for the quarter totaled $35 9 million compared to $63 $2 million in the second quarter of last year and our pre tax profit margin was 11, 9%.
Our gross profit was $55 9 million compared to $87 $5 million in the prior year quarter.
And our gross profit margin declined 230 basis points to 18, 5% we.
We incurred $900000 of option deposits and due diligence write offs in the quarter. Additionally, we recorded noncash real estate impairment charges totaling $19 $4 million, which reduced our gross profit margin by 650 basis points.
The impairment charges were related to cost overruns in two projects then encountered adverse development conditions, one in Florida and one in Texas.
Excluding those impairments our gross profit margin would have been 25%.
Gross margin was positively impacted by our legacy commercial track sale and to a lesser extent increased margins on lot sales from development projects sourced by four star.
In the second quarter, SG&A expense was $22 million or seven 3% as a percentage of revenues compared to $24 $3 million in the prior year quarter.
This was our fourth consecutive quarter, reducing absolute dollars of SG&A expense.
Cereals, like concrete and transformers are still challenging to procure and certain markets.
However, our teams are relentless problem solvers and they continue to navigate this environment exceptionally well we.
We will continue to be proactive and work with our trade partners to control development costs.
Our unique operating model and capital structure allows us to adjust the pace of development based on market conditions.
We remain intensely focused on managing our development phases as we strive to deliver finished lots at a pace that matches market demand.
With our emphasis on capital efficiency.
We evaluate each project and the surrounding market conditions to determine the appropriate pricing and sales pace to maximize returns.
Main focus on developing lots for homes at affordable price points demonstrated by our average sales price of roughly $85000.
D. R. Horton is our most important and largest customers. However, we look to continue expanding our relationships with other homebuilders and heavy goal of selling 30% of our loss of customers other than D. R. Horton.
Over the intermediate term.
11% of our second quarter deliveries were 313 lots were sold to other customers, which includes 147 lots that were sold with a lot banker, who expects to sell those lots of D. R. Horton at a future date.
18% of our deliveries in the prior year quarter.
1017 lots were sold to third party customers, including the sale of 787 deferred development lots.
In addition to growing by expanding our customer base, we have significant runway to grow our market share within D. R. Horton.
Our mutually stated goal is for one of every three homes that D. R. Horton sells to be filled by new lots developed by four stars.
Jim.
Four stars underwriting criteria for new development projects includes a minimum 15% pre tax return on average inventory.
And a return of the initial cash investment within 36 months.
During the second quarter, we invested approximately $185 million in land and land development of which $170 million was for land development and $15 million was for land.
Our investment this quarter was down 45% compared to the prior year quarter.
As land prices increased across most of our footprint, we proactively started to reduce our land investment in 2021 and anticipation of a slower housing market.
We shifted our focus to the phased development of land that we already own.
Despite the elongated development timelines inflationary pressures and slowing demand our inventory balance has grown only 1% compared to a year ago further demonstrating disciplined and strategic inventory management.
<unk>.
We continue to work with land sellers to extend closing dates and in certain cases, we've opted to terminate contracts four stars lot position at March 31 was 76400 lots of which 57800 lots are owned and 18600 lots are controlled through purchase contracts.
Majority of our own lots were placed under contract to purchase from land sellers before 2021, resulting in an attractive cost basis.
Our lot position decreased by 5900 lots or 7% sequentially and by 20100 lots or 21% year over year at.
At quarter end, we had 9100 finished lots on hand, we are continuing to target a three to four year owned inventory of land and lots.
26% of our own lots are under contract to sell representing approximately $1 3 billion.
A future revenue these contracts of $130 million of hard earnest money deposits associated with them.
Another 30% of our own lots are subject to a right of first offer to Dr. Horton based on executed purchase and sale agreements Jim.
We are retaining significant liquidity and using modest leverage to keep our balance sheet strong while maintaining our disciplined approach when investing capital we ended the quarter with over $650 million of liquidity, including approximately $285 million of unrestricted cash and $365 million of available capacity.
On our Undrawn revolving credit facility.
Total debt at March 31 was $707 million with no senior note maturities until fiscal 2026.
Our net debt to capital ratio at March 31 was 25, 2% down from 29, 9% in the prior year period.
We ended the quarter with $1 5 billion of stockholders' equity and our book value per share increased to $25 <unk>.
Up 12% from a year ago.
<unk> capital structure is one of our biggest competitive competitive advantages and it sets us apart from other land developers.
Other developers generally use project level development loans, which are typically more restrictive.
Floating rates and create administrative complexity, particularly in a rising rate environment.
Our bonds provide us with operational flexibility and fixed cost debt, while our strong liquidity allows us to take advantage of attractive opportunities when they arise.
Consistent with our last earnings call and as a result of the current market uncertainties, we are not providing guidance for fiscal 2023 at this time.
We have been very strategic and disciplined and we are well positioned to react quickly to changes in market conditions.
Dan I will hand, it back to you for closing remarks, thanks, Jim.
Overall I am pleased with the four star teams execution during a transitioning housing market.
We have made remarkable progress building four stars platform and our commitment to operational excellence enabled us to deliver strong margins and maintain competitive returns.
I'm, even more pleased with how well we're positioned and the strength of our balance sheet.
We are the market leader in a highly fragmented and under capitalized industry and remain confident about <unk> ability to continue to execute well and consolidate market share.
<unk> is well positioned to be the last supplier of choice to homebuilders due to our broad geographic footprint attractive land positions strong balance sheet.
And most importantly, our ability to execute.
Looking forward, we continue to believe that D. R. Horton and many other homebuilders will shift their focus towards buy.
Finished lots of third party developers instead of itself developing <unk>.
In conversations with third party builders have increased in recent months.
While mortgage rates are down from peak levels seen in late 2022 and home price increases have moderated.
Home affordability remains a challenge for consumers.
<unk> expect 2023 U S single family housing starts to decline between the range of approximately 15% to 30% compared to 2022.
While we cannot control the macroeconomic backdrop or directly influence the demand for housing we.
Canon will stay focused on strengthening our platform and increasing operational efficiencies to drive future growth.
We are closely monitoring each market sub market and projects as we strive to balance pace and price to maximize returns.
Our goals have not changed we still intend to double our market share to 5% over the intermediate term.
We believe our market share gains will accelerate.
Land development financing remains expenses and less available for the majority of our competitors.
We have a track record of solid execution of our focused on the long term opportunity before us.
When appropriate we will leverage our platform and strong balance sheet to capitalize on opportunities that build shareholder value.
With our experienced team that has successfully managed through prior market cycles, we are well equipped to navigate the current environment and further strengthen our industry leading position.
John at this time, we'll 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, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
All 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 comes from Carl Reichardt with <unk>. Please proceed.
Thanks afternoon, everybody. Thank you for the time.
So Dan.
The commercial banking world has been royal quite a bit since we last chatted.
And.
While the builders the large publics.
Capitalized not dissimilar Lee to you I'm guessing a lot of small local land development peers of yours are fairly reliant on regional banks for secured financing and I'm wondering whether or not youre, noting to this point any disruption in additional disruption in their ability to get financing and whether or not that's an op.
<unk> for you and if so what kind of opportunity could it be.
We are hearing about problems in getting financing the basic clearly tightening up some of their lending standards.
In China, a little bit away from A&D financing. So I think that does present some opportunities for us.
We continue to look for those opportunities.
That said in the remarks is thats really how we positioned ourselves to be have a really strong balance sheet and the liquidity to take advantage of those opportunities when they arise. So we look we look forward to this year.
Okay.
And then you have said before the goal is trying to get.
With the return of cash on your on your deals 36 months. After initial investment I am curious if you look back on the transactions you have completed over the course you are like running the company what percentage of your of your deals have you actually achieved that goal of getting your cash out 30% to 36 months from initial investment.
Well I don't know that I have that number in my head Carl.
But I would say on average we are probably doing better than 36 months is based on our returns that we've been achieving in our our.
Our inventory turns.
Other than the last couple of quarters, when we'll obviously velocity has slowed up.
We were exceeding projections and in our.
Our inventory turns so I.
Overall, I feel really good about us hitting that 36 months.
Okay.
And then just if I can squeeze one more in.
We've talked about difficulty with with concrete with Transformers, which we know about that.
I think this is really more for mark but.
If we look at availability of change just the folks.
How would you think is now compare to what you saw pre COVID-19 are we back to pre COVID-19 levels of availability or are we still have a ways to go before we get there in terms of subcontractors that you are now cloud the capacity to work with you.
Yes, Carl I think contract availability is definitely freeing up I don't think were back to pre COVID-19 availability, yet I think some of those contractors in the past, let's call it two quarters, where essentially finishing work.
On development. So I think we're starting to see some pricing consideration on front end part of our business as well as contractor availability freeing up so we feel good about the opportunity of the contractors coming back to the market as well as being able to see some type of pricing incentives, we have seen cost stabilize.
Great that's perfect I appreciate it all thanks, so much.
Carl.
The next question comes from Truman Patterson with Wolfe Research. Please proceed.
Hey, good afternoon, everyone.
Thanks for taking my questions.
Historically whenever I look at you all you've been able to ramp kind of the back half of the year lot deliveries versus the first half and perhaps a part of that was you all were in growth mode, but.
Given the current better than I expected.
Demand environment with with the Homebuilders do you think thats still a likely scenario to play out this year or are there other items to consider builders, having a larger land bank or even your own internal development pipeline.
Yes, I don't know if I can answer the likely part of that but what I can tell you is that we've positioned our inventory in a way to sort of ramp up.
But we've got over 9000 finished lots on the ground today and with the lives that we have under development. We have been working clearly over the last six months and probably even the last year of staging lots at various stages phases of development. So we've got lots that had been graded.
So kind of got that piece behind us, we've got loss, where we put pipe in the ground and halted.
So so it's kind of easier to deliver lot much quicker than the normal per space cycle.
I think we are positioned to step on the gas well.
Because of the strength we are seeing we are we're no longer covering the break we're kind of stepping on the gas pedal gently and starting to ramp up development again.
So again.
And it really is on a project by project basis, what's the lot inventory out there how's the build theyre doing with sales pace how are they doing with starts pace and trying to make sure that we got lots in front of the builder at every one of our projects.
Perfect. Thank you and then you mentioned previously that from.
Some smaller private developers you've been hearing about financing tightening if you will but are you actually seeing any land price relief, yet or distressed deals come into the market.
I understand that it likely varies across geographies, just any color on specific markets to call out.
I can't say that we're really seeing big discounts on land prices, yet, we're definitely seeing availability of the builders have dropped a lot of contracts over the last year.
So deals that maybe we looked at and got outbid on before we are we are seeing back again and kind of re engaging with sellers.
As far as as far as them.
Getting pricing at Big discounts I think we're able to get them at maybe what we may have offered a year ago versus what we got outbid on them, but we're not really seeing the big discounts yet.
And we on what we May not I mean, if the market really does continue to recover the way it has been as I see those huge discounts that were hoping for.
Perfect all right well. Thank you for your time and good luck in the coming quarters.
Great. Thanks Truman.
The next question comes from Anthony Pettinari with Citigroup. Please proceed.
Hi, This is Ashley <unk> on for Anthony Thanks for taking my question.
ASP per watt now mid single digits quarter over quarter I'm. Just wondering is that a function of just sort of the inherent lumpiness of your business or is that a result of lot prices starting to fall home prices downwards.
No. It's really just due to mix the geographic and lot size mix from quarter to quarter.
Right perfect. Thank you that's helpful. It's sort of in line with what I was thinking, but that's sort of on the gross margin side.
What is the sequential decline in gross margins also really a result of mix and then if so how do how should we think about the gross margin mix such cadence or trajectory.
Second half of the fiscal year.
We will be.
Our gross margin was obviously impacted by by the two impairment.
That we took this quarter so while we reported 18, 5%.
650 basis point impact from from the impairment So you add those back.
Closer to 25%.
We did have.
Also we had on.
On the positive side.
Our legacy commercial tract with very high margin during the quarter. So.
Kind of exclude both of those things are in our kind of normalized margin for the quarter was really between 22% and 23%.
Thanks, that's very helpful I'll turn it over.
Again, if there are any remaining questions. Please indicate so by pressing star one on your Touchtone phone. The next question is from Michael Rehaut with JP Morgan. Please proceed.
Hi, guys, Doug will go on for Mike.
You guys mentioned you know.
You've gone through the banking crisis in July the private developers have been seeing financing.
Moving forward Emerald scenario on which.
We've launched in a mild recession, you guys see yourself still and kind of.
Finally, being able to take over some of those projects. Despite the environment worsening all it would be something where you'd have to kind of maintain.
Stay on the sidelines in the valuation.
Well as we see those opportunities, we are underwriting and engaging and trying to see if theres a deal there that that that hits our metrics.
So we're not standing on the sidelines, we are actively looking for an engaging on opportunities as they arise.
Got it great and then in terms of touched on a little bit earlier in terms of pricing.
Kind of on <unk>.
Regional basins has there been any different.
The difference in trends from last quarter to this quarter and where do you envision that.
Moving forward as the year progresses.
Pricing in terms of ASP or in development in terms of ASP.
Yes, I think our ASP is pretty stable I mean again as Jim said, it's going to move quarter to quarter based off the size.
Different types, but we think at the moment, we feel like the ASP is going to be pretty stable for the rest of the year.
Got it thank you.
If there are any remaining questions. Please indicate so now by pressing star one on your Touchtone phone.
Okay. It looks like we have no further questions in queue I would now like to turn the floor back to Dan Bartok for any closing remarks.
Thank you John and.
And thank you to everyone on the portion of our team for your focus and hard work I'm 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 July to share our third quarter results. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.