Q4 2024 Forestar Group Inc Earnings Call
Speaker Change: Good morning and welcome to 4th quarter and fiscal 2024 earnings conference call. At this time all participants are in a listen only mode and we will open for questions following the presentation.
Speaker Change: If anyone should require operator assistance during this conference, please press star zero on use telephone keypad. Please note this conference is being recorded. I will now turn the call over to Katie Smith, Vice President of Finance and Investor Relations for Forestar.
Katie Smith: Thank you, Jenny. Good morning and welcome to the call to discuss forced or forced quarter in fiscal year results. Thank you for joining us.
Katie Smith: Before we get started today's call includes forward-looking statements as defined by the private securities litigation reform act of 1995. Although forced or believes in such statements or based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
Katie Smith: 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.
Katie Smith: Additional information about factors that could lead to material changes and performance is contained in Forrester's 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.
Katie Smith: Our earnings release is available on our website at Investor.FourStar.com, and we plan to file our 10K in the next few weeks.
Katie Smith: 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 Andy Oxley, our President and CEO.
Andy Oxley: Thanks, Katie. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer.
Andy Oxley: As always, we appreciate your interest in 4STAR and taking the time to discuss our fourth quarter and fiscal year results.
Andy Oxley: The four-star team finished especially strong, delivering over 5,300 lots in the fourth quarter and more than 15,000 lots for the full fiscal year.
Andy Oxley: Fiscal 2024 diluted earnings per share increased 20% to $4, and pre-tax income increased 22% to $270.1 million.
Andy Oxley: Our return on equity improved 60 basis points to 13.8%, and our book value per share increased 15% from a year ago to $31.47.
Andy Oxley: We improved our profitability and returns in fiscal 2024 despite extended cycle times and investing heavily in building our team and our platform for future growth.
Andy Oxley: Over the last five years, 4STAR has invested approximately $6.7 billion in land acquisition and development, and delivered over 70,000 finished lots to over 60 local, regional, and national homebuilders.
Andy Oxley: Over the same time period, our returns on equity have nearly tripled, and our book value per share increased 87%. These results reflect the strength of our business model and the market-leading teams we have built across our national footprint.
Andy Oxley: Thank you to all of the 4STAR team members for your efforts this year.
Andy Oxley: In fiscal 2025, we will continue to execute our strategic plan by investing for future growth, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry.
Andy Oxley: Four Star is well positioned, both financially and operationally, to capitalize on builder demand for finished lots. Jim will now discuss our fourth quarter and fiscal 2024 results in more detail. Thank you, Andy.
Jim Allen: In the fourth quarter, net income increased 13% to $81.6 million for $1.60 per diluted share. For the year, net income increased 22% to $203.4 million, or $4 per diluted share.
Jim Allen: Revenues for the fourth quarter totaled $551.4 million, flat with the prior year quarter. The current quarter includes $23.4 million in track sales and other revenues and $4.5 million in revenue from deferred development projects.
Jim Allen: Revenue totaled $1.5 billion in fiscal 2024, which includes $42 million of crack sales and other revenue, and $8.1 million in revenue from deferred development projects.
Jim Allen: Lots sold during the quarter increased 8% to 5,374 lots. And for the year, lots sold increased 7% to 15,068 lots.
Jim Allen: Our average lot sales price for the quarter was $97,300 and was $96,600 for the year.
Jim Allen: We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Mark? Our gross profit margin this quarter was 23.9% of 290 basis points from a year ago.
Jim Allen: Our gross profit margin was positively impacted by lot sales from an unusually high margin project.
Jim Allen: Gross profit margin for the year was 23.8% of 260 basis points from the prior year.
Jim Allen: In fiscal 2024, gross margin was positively impacted by non-recurring revenue items with unusually high margins.
Jim Allen: including selling excess sewer capacity and land contract assignment fees.
Jim Allen: During fiscal 2023, we recorded $19.4 million of non-cash real estate impairment charges to cost of sales.
Speaker Change: excluding the effects of those items, our full year gross profit margin would have been approximately 23% compared to 22.5% for fiscal 2023. Jim?
Jim Allen: Our fourth quarter pre-tax income increased 14 percent to $108.5 million compared to $95.4 million in the prior year quarter, and our pre-tax profit margin improved 230 basis points to 19.7 percent.
Jim Allen: Our pre-tax profit margin this quarter was positively impacted by a gain on sale of assets of $4.5 million.
Jim Allen: Pre-tax income for the year totaled $270.1 million, compared to $221.6 million in fiscal 2023, and our pre-tax profit margin for the year improves 250 basis points to 17.9 percent.
Jim Allen: Our pre-tax profit margin this year was positively impacted by a total gain on sale of assets of $9.5 million.
Jim Allen: Excluding the effects of the non-recurring revenue items with unusually high margins and the gain on sale of assets, our full-year pre-tax profit margin would have been approximately 16.5%.
Jim Allen: In the fourth quarter, SG&A expense increased 21% from the prior year quarter to $32 million. SG&A expense as a percentage of revenues was 5.8% compared to 4.8% in the prior year quarter.
Jim Allen: For the year, SG&A expense was $118.5 million, or 7.9% as a percentage of revenues, up 110 basis points from 6.8% in the prior year.
Jim Allen: Our employee count increased 30% from a year ago, which will support the continued expansion of our platform, including entering new markets and increasing community count. Roughly 80% of new hires in fiscal 2024 are in local market operations.
Jim Allen: We are pleased with the progress we have made building our team and our ability to attract high quality talent.
Jim Allen: We remain focused on efficiently managing our SG&A while investing in our teams to support our continued growth. Mark? The supply of new and existing homes at affordable price points remains generally limited.
Jim Allen: and demographic supporting housing demand remain favorable despite elevated mortgage interest rates and inflationary pressures. Mortgage rate buy-down incentives offered by builders combined with low resale supply relative to historical norms continue to be a driver of buyers choosing new construction.
Jim Allen: Our ongoing focus is to develop lots for homes at affordable price points.
Jim Allen: Availability of contractors and necessary materials has improved over the past several months, but we have not seen overall reductions in the cost of developing land.
Jim Allen: While we have started to see some improvement in cycle times, governmental delays continue to extend cycle times above historical norms. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible.
Jim Allen: Homebuilders are competing to secure land and lot positions and many are looking to replace current closeout communities to position themselves for future growth.
Speaker Change: As a result, we have not seen any softening in land prices. However, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Jim?
Speaker Change: D.R. Horton is our largest and most important customer.
Jim Allen: Sixteen percent of the homes D.R. Horton started this year were on a four-star developed lot. With a mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by four-star, we have a significant opportunity to grow our market share within D.R. Horton.
Jim Allen: We also continue to work on expanding our relationships with other home builders.
Jim Allen: We sold 1,801 lots, or 12% of our deliveries, to more than 20 other customers in fiscal 2024.
Jim Allen: 4STAR's underwriting criteria for new development projects remains unchanged at a minimum 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months.
Jim Allen: During the fourth quarter, we invested approximately $450 million in land and land development, of which $320 million was for land development and $130 million was for land.
Jim Allen: For the full year, we invested approximately $1.6 billion in land and land development, of which 65% was for land development and 35% was for land.
Speaker Change: In fiscal 2025, we currently expect to invest approximately $2 billion in land acquisition and development. Mark.
Speaker Change: Our lot position at September 30th was 95,100 lots, of which 57,800, or 61%, are owned, and 37,300, or 39%, are controlled through purchase contracts. 6,300 of our own lots are finished.
Speaker Change: Consistent with our focus on capital efficiency, we target owning a three to four year supply of land and lots.
Speaker Change: and manage our development and phases to deliver lots at a pace that matches market demand. Owned lots under contract to sell increased 40% compared to a year ago to 21,000 lots, or 36% of our owned lot position.
Speaker Change: 172 million dollars of hard-earned money deposits secure these contracts, which are expected to generate approximately 1.9 billion dollars of future revenue. Another 30% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Jim.
Jim Allen: We have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with approximately $860 million of liquidity, including an unrestricted cash balance of $480 million and $380 million of available capacity on our undrawn revolving credit facility.
Jim Allen: Total debt at September 30th was $706 million, with no senior note maturities until fiscal 2026, and our net debt to capital ratio was 12.4%.
Jim Allen: We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 15% from a year ago to $31.47.
Jim Allen: Thank you.
Jim Allen: Four Stars Capital Structure is one of our biggest competitive advantages, and it sets us apart from other land developers.
Jim Allen: Project level land acquisition and development loans are less available today and have continued to become more expensive, which impacts the majority of our competitors.
Jim Allen: Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity.
Jim Allen: particularly in an elevated interest rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities when they arise.
Jim Allen: Andy, I'll now turn it back to you for closing remarks.
Andy Oxley: Thanks, Jim. Thank you to the 4STAR team for delivering a record year of profitability.
Andy Oxley: Fiscal 2024 was also a year of building for the future. We grew the size of our team by 30% and deepened our bench of local market leaders. We were pleased that over 50% of those leaders were internal promotions.
Andy Oxley: We increased our investment in land acquisition and development by 65% year over year. And we further diversified our geographic footprint by entering Virginia and reentering Washington, Oregon, and Utah.
Andy Oxley: These investments in our people and platform have positioned 4STAR to grow faster than the market. However, there are still challenges in the entitlement and permitting processes resulting in lengthening development timelines.
Andy Oxley: As we look forward to fiscal 2025, based on current market conditions, we expect to deliver between 16,000 and 16,500 lots.
Andy Oxley: and to generate 1.6 to 1.65 billion dollars of revenue. We currently expect our first quarter will be our lowest delivery quarter of the year and we expect our revenues in the second half of the year of Fiscal 25 to be higher than the first half.
Andy Oxley: The variability we experienced throughout Fiscal 24 illustrates the quarter-to-quarter fluctuations that can occur in the delivery of finished lots.
Andy Oxley: We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project.
Andy Oxley: We are the market leader in a highly fragmented and undercapitalized industry and are uniquely positioned to take advantage of builder demand for finished lots.
Andy Oxley: Our goal remains the same, to double our market share to 5% over the intermediate term.
Andy Oxley: We expect to aggregate significant market share over the next few years while maintaining our disciplined approach with investing capital to enhance the long-term value of 4STAR.
Andy Oxley: With a clear strategic direction, a dedicated team, and a strong operational and financial foundation in place, I'm excited about 4STAR's future.
Speaker Change: Jenny, at this time we will open the line for questions.
Speaker Change: Thank you very much. We will now be conducting our question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your phone keypad now.
Speaker Change: A confirmation tone will indicate that your line is in the question queue.
Speaker Change: Thank you very much. Your first question is coming from Karl Reichart of BTIG. Karl, your line is live.
Karl Reichart: Thanks, everybody. Nice to talk to you. Thank you for the time. I have a couple here. One is, as you look at your 25 guide, is your expectation that the percentage of lots you actually deliver to customers other than DR Horton going to grow in 25?
Speaker Change: Thank you for joining us. Thank you. Have a good day.
Speaker Change: Not, not really. We really do expect to stay at around 85 to 90% of our lots going to Horton over the, you know, near term, as we look to increase our market share within DR Horton. Until we get closer to delivering about 30% of their lot needs, you know, I think that will stay in that, you know, 85 to 90% range.
Speaker Change: Okay, great. Thank you, Katie. And then, Mark, if you or anyone wants to put a few numbers around this idea of cycle times, so I sort of understand them for the vertical side of home construction, but for land development, if we break it out into, say, the beginning of lot acquisition to starting grading, and then grading to finished lot,
Speaker Change: and I know it varies a lot, how long is it taking to do both of those elements on average? And then what is the difference today versus, say, what it was, you know, four or five years ago as the market has changed?
Speaker Change: Yeah, Carl, I'll give you a couple of those questions. So from grading, basically, that typically takes about 120 days, and that depends, again, on the project and the market. That can change with geography up north and out west.
Speaker Change: But typically, I'd say it's 120 days. A historical cycle time has been about 12 months. I would tell you four or five years ago, it could have even been maybe nine months.
Speaker Change: But that has grown over the years.
Speaker Change: The biggest challenge today is really just government approvals and that timeline has elongated. It would typically take you about 30 days to get a final plate recorded or the lot basically substantially complete and approved by a jurisdiction. Today that's ranging anywhere from
Speaker Change: 30 to 180 days, depending on geography. So that's our biggest challenge. I can say our cycle times were reduced over the past 60 days.
Speaker Change: over the past quarter by 60 days. So that's a lot of progress we're making. And then they're off or they're down about 90 days off of our peak. So 60 days improvement over the quarter and 90 day improvement over the peak.
Speaker Change: Great. That is very helpful, those specifics. And then last up, I can ask just one more. When you think about your relative pricing power now, today, compared to right after COVID, do you think it's changed meaningfully one way or the other? Thanks.
Speaker Change: I would say that we have seen improvement, not necessarily on the hard costs, but on vendor availability, trades looking for work.
Speaker Change: Carl, did you mean on the development cost side or on the finish? Well, actually, I meant pricing to customers, really, as you sort of think about it, but sure, the cost side too would be helpful. Then, I guess, at the end of the day, it really comes down to that.
Speaker Change: Yeah, our relative price in terms of our lot price to homebuilders ASP has remained pretty constant I would say over the past several years. That range is somewhere around what's called 25 percent. That can fluctuate up or down based off of geography, but typically that lot-to-home ratio is somewhere in the mid to high 20s.
Speaker Change: historically used to be in the low to mid 20s.
Speaker Change: Yeah, okay, great. I really appreciate the help, guys. Thanks a bunch.
Speaker Change: Thank you very much. Your next question is coming from Anthony Pettinari of Citigroup. Anthony, your line is live.
Speaker Change: Hi, this is Asher Sonin on for Anthony. Thanks for taking my questions. Just maybe as you think about your development pipeline for 2025, are there any markets you would call out as maybe a little bit oversupplied right now, or any other markets where you may be pulling back from in terms of new land acquisition? I think there's a lot of attention on Florida and Texas right now.
Speaker Change: Not really. I mean, in affordable price points, we're not seeing any buildup in inventory. Our customer demand is pretty robust across the whole country, so we're not really...
Speaker Change: calling out any caution in any parts of the country right now. Obviously, the hurricanes had a little bit of impact. We were fortunate that we didn't have any of our family members.
Speaker Change: affected, but certainly our hearts go out to those communities that were affected.
Speaker Change: Michael Rehaut,
Speaker Change: Thank you. And then, switching gears, do you kind of have a sense of an updated timeline for maybe for deconsolidation? I think I noticed you guys had a shelf filing, so I don't know if that kind of accelerates it at all. And last, I think you previously talked about like the ability to continue growing the business pretty significantly without having to dip into the capital markets. I'm just wondering if that's still the case.
Speaker Change: Thank you.
Speaker Change: Well, as far as deconsolidation, that's really a question for D.R. Horton. That's not really something that's under our control.
Speaker Change: As far as our ability to continue to grow,
Speaker Change: Absolutely, and that's our plan. We do have the ability to continue to grow with our existing...
Speaker Change: or existing balance sheet. However, we do plan to continue to add debt to our capital stack as, you know, our equity balance allows that and allows us to
Speaker Change: continue to manage our net debt to total capital at a ratio of 40% or less.
Speaker Change: So, you know, we would continue to...
Speaker Change: you know, look to finance growth. Fortunately, our liquidity position, you know, allows us to be opportunistic when we do access the capital markets.
Speaker Change: We ended the year with $860 million of total liquidity, so obviously that will go a long way to help finance our growth into fiscal 25 and beyond.
Speaker Change: The shelf too, that was just more of a housekeeping item. Our old shelf expired early October and so we just renewed the shelf with exactly what we had filed previously.
Speaker Change: Got it. Thank you. That's very helpful. I'll turn it over.
Speaker Change: Thank you very much. Your next question is coming from Trevor Allenson of Wolf Research. Trevor, your line is live.
Trevor Allenson: Hi, good morning. Thank you for taking my questions. First one's on land prices. You mentioned in your prepared remarks you're not really seeing a softening on pricing. From a new home demand perspective, there's been a few geographies consistently noted as weaker. Colorado comes to mind, also some markets in Texas and Florida. In those markets specifically, the ones that have been softer, have you seen a flattening out of land prices in those markets, or are you seeing any more favorable terms?
Speaker Change: No, land prices continue to grow low to mid-single digits year over year, similar to the development cost from a land pricing perspective. So, specifically across the United States and specifically in those markets, it's consistent.
Speaker Change: Okay, gotcha. And then Katie, I think you mentioned, you know, still focusing on being the key supplier to Horton until you guys approach your 30% target you guys have talked about for a while before you start expanding more with other builders. As you think about your long-term plans, what's a reasonable amount of time for you guys to get 30% of their lot?
Katie Smith: Um, well, I mean, there's a couple of different puts and takes in that, you know, one of them is the rate of growth that Horton chooses to grow at, you know, they're obviously growing off of a much larger number. And so us growing more than 10% is really just us trying to keep up with their lot needs. So it's hard to say we would hope that we'd be able to, you know, 5 years or so. We think that that would be a good target for us to be able to sell 30% of our lot to other customers. And it'll be, you know, a stair step approach. It's not going to be something that happens to overnight. But I do think that it's important that.
Katie Smith: The number of lots that we sell to other builders is going to continue to increase year over year. We sold to eight.
Katie Smith: new customers this year that we had not sold to in the past and so we really are focused on growing and expanding those relationships with other customers.
Speaker Change: And we're also focused on expanding and growing our market share in our current markets as well. So there's significant opportunity to aggregate market share not only within Ordon. I think today we're at 16% trying to get to that third as well as other builders as Katie said. I think we added a good number of builders this fiscal year as well. We continue to work on those relationships.
Speaker Change: year in and year out. It takes a little bit of time to continue to grow those which we have.
Speaker Change: Yeah, makes sense. That's a very helpful color. And then just maybe a quick housekeeping question. You mentioned the 4Q margin benefited from some unusually high margin projects. Any help on what kind of impact that had to gross margin on the quarter? Thanks.
Speaker Change: We're not going to disclose, you know, the exact amount. I would say that margin would have been approximately
Speaker Change: I think what we can say though is...
Speaker Change: You know, we underwrite to a return, so margin is going to fluctuate or vary from quarter to quarter. You know, we do see that, but over the long term and now over the last eight to ten quarters or so, we've seen our normalized margin, and we, you know, we adjust for one-time items or kind of unusually high margin.
Speaker Change: projects, but we've seen that kind of between the 21 and a half and 23 percent range very consistently and I think that's that's kind of more where we we feel like our normalized margin is.
Speaker Change: Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com
Speaker Change: Yeah, so very stable there. Okay, thank you for all the colors. Very helpful and good luck moving forward.
Speaker Change: Thank you. Thank you, Trevor.
Speaker Change: Thank you for watching. We'll see you next time. Bye. Bye. Bye.
Speaker Change: Thank you very much. And our next question is coming from Alex Barron of the Housing Research Centre. Alex, your line is live.
Alex Barron: Yes, thank you and good morning. I guess my main question was, you know, what's the general constraint to growth? Because as I look at the, for example, the number of lots
Alex Barron: under contract with Gerald Horton. It's gone from $14,400 to $20,500 this year, or year-over-year.
Alex Barron: Yet, I guess the guidance is going up from 15,000 last year to about 16,000 this year. So what's the kind of constraint to growing faster in general terms?
Speaker Change: It's just hard to put a lot on the ground. I mean, it takes a long time from the time that you
Speaker Change: identified the track, get it under contract, get it entitled, and then take it through the approval process and finally get it developed and finished. So our investment was...
Speaker Change: less a couple years ago, and so that caused our overall number of available lots to go down.
Speaker Change: We reversed that and have been growing that throughout 24 and will continue in 25, but you really won't see the results of that until late 25 and going into 26.
Speaker Change: So, it's a quarter over quarter building process, and you just have to stay very disciplined and focus on what you can affect that quarter in building the business.
Speaker Change: What are the range of time frames in developing lots from the time you guys acquire them in different markets? Like, what's the shortest time frame and what's the longest, you know, in which market?
Speaker Change: It varies market to market but it can range anywhere from six months up to 24 months. It really depends on the actual project's specific site conditions as well as that government jurisdiction. A lot of it has to do with landscape and geography, soil conditions, but it varies from market to market and geography.
Speaker Change: Thank you for watching. Have a great day.
Speaker Change: Got it. Okay, thanks, I'm good luck.
Speaker Change: Thank you.
al: Thank you. Thank you, Al.
Speaker Change: Thank you very much. Well we appear to have reached the end of our question and answer session. I will now turn the call over to Andy Oxley, the CEO for Forstar, for closing remarks.
Andy Oxley: Thank you, Jenny, and thank you to everyone on the 4STAR team for your focus and hard work.
Andy Oxley: As we enter fiscal 2025, continue to stay disciplined, flexible, and opportunistic while focusing on consolidating market share. 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.
Speaker Change: Thank you very much. This does conclude today's conference. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.