Operator: Good morning, and welcome to Forestar's Q4 and fiscal 2026 earnings conference call. At this time, all participants are placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star one on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.
Chris Hibbetts: Thank you, Matthew. Good morning, and welcome to the call to discuss Forestar's Q4 and fiscal year 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. Although Forestar 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 Forestar 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 Forestar'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.
Chris Hibbetts: Our earnings release is available on our website at investor.forestar.com, and we plan to file our 10-K in the next few weeks. 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, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. Before discussing our Q4 and fiscal year results, I want to recognize Don Tomnitz. As announced in yesterday's press release, Don will retire as Executive Chairman of Forestar effective 31 October. His leadership has played a vital role in shaping the company's strategic direction and driving its significant growth. We are deeply grateful for his dedicated service and many contributions, and we wish him all the best in retirement. Now turning to the results. The Forestar team had a solid finish to the fiscal year, generating over $580 million of revenue in Q4 and $1.6 billion for the full year within our most recent guidance range.
Andy Oxley: Ongoing affordability constraints and cautious consumer sentiment continued to weigh on new home sales, and higher mortgage interest rates added further pressure during the quarter. Despite these challenges, we increased our book value per share by 8% to $37.56 at year-end and further strengthened our balance sheet, ending the year with $1.3 billion of liquidity while continuing to position us to achieve our long-term objectives. Over the last five years, we have invested more than $7 billion in land acquisition and development and delivered approximately 75,000 finished lots to local, regional, and national home builders. During the same period, our book value per share increased 83%. These results reflect the strength of our business model and teams that we have built across our national footprint.
Andy Oxley: For fiscal 2027, we will continue to allocate capital prudently, manage inventories efficiently, and focus on generating solid returns to strengthen our market-leading presence in the highly fragmented lot development industry. With a differentiated combination of financial resilience, deep expertise, and a substantial operating platform, we are well-equipped to supply home builders with the finished lots they need while successfully navigating current market dynamics. Jim will now discuss our Q4 and fiscal 2026 financial returns in more detail.
Jim Allen: Thank you, Andy. In Q4, net income attributable to Forestar was $59.2 million, or $1.15 per diluted share on revenue of $580.8 million. Q4 revenue includes $38.7 million in tract sales and other revenue. For the year, net income attributable to Forestar was $142.6 million, or $2.78 per diluted share on $1.6 billion of revenue, which includes $129.1 million of tract sales and other revenue. We sold 5,004 lots during the quarter, bringing our total lots sold for the full fiscal year to 13,545. Our average sales price was $108,300 for the quarter and $111,200 for the year. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of the lots we sell. Our gross profit margin for Q4 was 17.8%, compared to 22.3% for the same quarter of fiscal 2025.
Jim Allen: This quarter's margin was reduced by higher costs to close out one project due to increased regulatory compliance requirements, as well as $7.6 million of real estate impairment charges related to two projects. Excluding these items, our gross profit margin would have been 20.8%. Our gross profit margin for the year was 19.7%. Excluding those same items, our full-year gross profit margin would have been 20.8%. Our Q4 pre-tax income was $78.6 million, and our pre-tax profit margin was 13.5%. Pre-tax income for the year totaled $192.1 million, and our pre-tax profit margin this year was 11.7%. Pre-tax income and profit margin for the quarter and the year were reduced by the items I just mentioned and partially offset by a $10 million gain on sale of assets in the Q4. Chris?
Chris Hibbetts: SG&A expense for the Q4 decreased 10% to $38.4 million, representing 6.6% of revenue. The decline compared to the same quarter in fiscal 2025 was largely driven by lower head count and variable compensation. For the year, SG&A expense decreased 2% to $151 million, or 9.2% of revenue. We remain focused on managing SG&A efficiently while maintaining strong teams across our national footprint to support future growth. We expect head count to remain relatively flat in fiscal 2027. Mark?
Mark Walker: Ongoing affordability constraints and cautious consumer sentiment continue to weigh on new home demand. Buydown incentives offered by builders are helping to bridge the affordability gap. However, recent increases in mortgage rates are further constraining affordability. Meanwhile, home builders remain focused on shortening cycle times and efficiently managing their inventory of homes and finished lots, which is affecting the timing and volume of finished lot purchases. Our primary focus remains developing lots for new homes at prices for entry-level and first-time buyers, which is the largest segment of the new home market. However, we maintain the flexibility to pursue projects targeting other segments of the new home market, as well as those offering multiple product types. Availability of contractors and necessary materials remain solid.
Mark Walker: Land development costs have been stable, which have been helped by our team actively working with trade partners on project cost and taking advantage of less land development activity occurring across the industry. We have also seen stable cycle times despite continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim?
Jim Allen: D.R. Horton is our largest and most important customer. In fiscal 2026, 14% of the homes D.R. Horton started were on a Forestar-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 Forestar, we have a significant opportunity to grow our share of their business. We also continue to expand our relationships with other home builders. In fiscal 2026, we sold 1,916 lots, or 14% of our total, to customers other than D.R. Horton. This includes 146 lots sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. Excluding those lots, sales to other home builders were the highest percentage of our annual lot sales since 2018. We sold lots to more than 25 different home builders this year, including eight new customers. Chris?
Chris Hibbetts: Our 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. During the Q4, we invested $299 million in land acquisition and development, and for the full year, we invested $1.3 billion. For both the Q4 and full year, approximately 80% of our investment was for development and 20% was for land. In fiscal 2027, we currently expect to invest approximately $1.3 billion in land acquisition and development. For new investments, we are prioritizing projects that are in undersupplied markets, smaller and faster turning, or offer multiple product types. For land development, we are aligning our investment pace with current demand through disciplined project phasing and sub-phasing.
Chris Hibbetts: As industry-wide development activity slows and higher rates pressure home builders and developers, our ongoing commitment to both new and existing projects keeps us well-positioned to deliver finished lots to the market. Mark?
Mark Walker: Our lot position at 30 September was 84,400 lots, which 58,200 or 69% are owned, and 26,200 or 31% are controlled through purchase contracts. Of our owned lots, 8,100 are finished, down 16% from the Q3. Majority of our finished lots are under contract to be sold. Consistent with our focus on capital efficiency, we target owning a three to four-year supply of land and lots and manage our development in phases to deliver finished lots at a pace that matches market demand. At year-end, 21,500 or 37% of our owned lots were under contract to sell. Approximately $200 million of hard earnest money deposits secure these contracts, which are expected to generate $2.2 billion of future revenue. Our contracted backlog supports our ability to continue gaining market share. Another 18,600 lots or 32% of our owned lots are subject to a right of first offer to D.R.
Mark Walker: 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 year with $1.3 billion of liquidity, including $657 million of unrestricted cash and $658 million of available capacity on our undrawn revolving credit facility. Total debt at 30 September was $794 million, with no senior note maturities until fiscal 2028, and our net debt to capital ratio was 6.7%. Stockholders' equity at year-end was $1.9 billion, and our book value per share increased 8% from a year ago to $37.56. Forestar's capital structure is one of our biggest competitive advantages and sets us apart from other land developers. Project-level land acquisition and development loans are less available today and continue to be more expensive, which affects the majority of our competitors. Those loans are generally more restrictive, carry floating rates, and create administrative complexity, particularly in higher interest rate environments.
Jim Allen: Our capital structure provides us with financial and operational flexibility, and our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I will now turn it back to you for closing remarks.
Andy Oxley: Thanks, Jim. Fiscal 2026 was a solid year for Forestar. We generated $1.6 billion of revenue and grew book value per share by 8%. We continue to execute our strategy by investing in land acquisition and development across our broad operating platform. We also strengthened our balance sheet, ending the year with $1.3 billion of liquidity. Thank you to all of the Forestar team members for your continued efforts this year. As we look forward to fiscal 2027, based on current market conditions, we expect to deliver between 12,000 and 13,000 lots and to generate $1.4 to $1.5 billion of revenue. Similar to fiscal 2026, we currently expect our Q1 will be our lowest lot delivery and revenue quarter of the year, and we expect our lot deliveries and revenues in the H2 of fiscal 2027 to be higher than the H1.
Andy Oxley: We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project. Forestar has consistently demonstrated its ability to navigate changing market conditions. While we expect home affordability constraints and cautious home buyers to remain near-term headwinds for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. We are well-positioned for continued success with our portfolio across our diverse national footprint, operating expertise, and strong balance sheet. Matthew, at this time, we will open the line for questions.
Operator: Certainly. Everyone at this time, we will be conducting a question and answer session. If you have any questions or comments, please press *1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you are listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press *1 on your phone. Please hold while we poll for questions. Thank you. Our first question is coming from Ryan Gilbert from BTIG. Your line is live.
Ryan Gilbert: Hi. Thanks. Good morning, guys. I am wondering if you could talk in a little more detail about how you plan to achieve the mutually stated goal of one-third of D.R. Horton's deliveries on Forestar lots, and maybe some specific levers that you can pull in 2027 or 2028 to make progress towards that goal. It just seems like if you are going to do 12,000 to 13,000 lot sales in 2027, that is a deeper year-over-year decline than what Horton is guiding to currently.
Andy Oxley: Thanks, Ryan. We have made significant progress on that one-third in a lot of markets. It is just that they are in so many more markets than we are. We are in 65 markets, and they are in around 130. As overall, we have to grow at a faster pace than they grow, which has been a challenge. But as we have scaled up the organization, particularly with our growth out West, we think we can make meaningful progress in 2027 and into 2028.
Ryan Gilbert: Okay. Got it. On the cash balance, $650 million, can you talk about how you are thinking about deploying that into land versus potentially strategic opportunities or even buying back the stock, given where it is trading?
Jim Allen: Yeah. Hi, Ryan. We are still planning to invest $1.3 billion in land and development. Majority of that will be in development for fiscal 2027. As far as stock buybacks, it is not that the current stock price is not compelling. We just believe that the highest priority for our cash is to reinvest in the business and the long-term growth opportunity that this company has.
Ryan Gilbert: Okay. Understood. Last one for me, just given the weakening in the end market, the housing market, over the last few months, are you seeing any distressed opportunities start to emerge in any of the markets that you are operating in that could be a potential opportunity to deploy that cash? When we had talked, I think, probably coming up on five or six months ago now, it seemed like there was pretty limited opportunities on the distressed front.
Andy Oxley: We are seeing more opportunities pick up, particularly in the back half of the quarter. We are reviewing each of those opportunities as they present themselves, and we think that there will be more opportunities as the year persists.
Ryan Gilbert: Any detail that you could provide there? I am wondering if maybe you are seeing some opportunities come out of the land banking competition.
Andy Oxley: I have not really seen it out of the land banking competition. I think it is more around private builder developers that are looking at what happened in 2026 and what the forecast is for 2027. And they are looking for ways to unlock the value of their organizations that they have built, understanding that the next year or longer may be a rougher environment.
Ryan Gilbert: Okay. Got it. Thanks so much, guys.
Jim Allen: Thank you.
Operator: Thank you. Once again, everyone, if you have any questions or comments, please press star then 1 on your phone. Your next question is coming from Paul Przybylski from Wolfe Research. Your line is live.
Paul Przybylski: Good morning. To start off, I was wondering, could you frame the gross margin degradation, between maybe higher input costs or some better pricing you may have to offer your customers?
Jim Allen: The lower gross margin in the quarter was really caused by a couple of unusual factors. We had two impairments in the quarter for $7.6 million. Then the closeout of another project that had additional costs for legal and regulatory requirements around on-site stormwater remediation and maintenance. Those two things together, really, if you exclude those, our gross profit would be 20.8%.
Jim Allen: Really within kind of our normalized gross margin that we have seen for the last several years, between 20% and 23%.
Paul Przybylski: Okay.
Andy Oxley: We really haven't seen increases in costs. Earlier in the year, we actually had started to see some decreases in certain components. I think those, in the H2 of the year, were largely offset by some other increases, particularly related to fuel. But really, pricing has been pretty stabilized, and contractor availability definitely has improved.
Jim Allen: Couple that with the reduced land development activity, I think that there will be some opportunities if the inflationary pressures can be reduced to decrease our cost structures, direct costs.
Paul Przybylski: Okay.
Jim Allen: I think one other point, too. If you just look at our core lot sales margin, which excludes tract sales and impairments, for the year was at 21% compared to 21.3% last year. So we really haven't seen a significant decrease in that core lot sales margin.
Paul Przybylski: Okay. You mentioned the West being an opportunity to increase your share with Horton to get closer to that one-third goal. But that has kind of been one of the weaker demand regions. Do you go ahead and purchase lots now, or do you kind of sit on the sidelines and then wait till that market stabilizes, so you can get a better understanding on your underwriting?
Andy Oxley: We are focused on our smaller, quicker-turning deals. We are not looking to do really large projects. Particularly where the Horton team has a great pipeline, we are able to open up and very efficiently start to expand in those markets. We have seen that have good success over the last couple years, and we will continue with that program.
Mark Walker: The other thing too is we have a very robust pipeline. So it is allowing us to select investments that really fit our model. That is something that we are seeing as well.
Paul Przybylski: Okay. Just my last one to follow back up on the cost. You really had not seen oil, I guess, pricing flow through much in 2026, but are you getting surcharges or any increases in 2027 that might be a headwind for your margin?
Mark Walker: We are not seeing today any material impact of that. A lot of that is due to, again, reduced land developer activity, and we are seeing more contractor availability. So the more contractors we have that bid our projects, we are really pushing back on that to the extent that we can. Our teams are working with our trade partners day in, day out to find ways to reduce cost. If that was to come through, it takes us 12 months to put a lot on the ground, so it is going to take some time for those higher costs to work their way through.
Paul Przybylski: Okay. Thank you very much.
Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to Andy for closing remarks. Please go ahead.
Andy Oxley: Thank you, Matthew. Thank you to everyone on the Forestar team for your focus and hard work. As we enter fiscal 2027, 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 Q1 results.
Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
