Forestar Group Inc. (NYSE:FOR) Q3 2023 Earnings Convention Name July 20, 2023 5:00 PM ET
Firm Individuals
Katie Smith – Director of Finance & IR
Dan Bartok – CEO
Jim Allen – CFO
Mark Walker – COO
Convention Name Individuals
Truman Patterson – Wolfe Analysis
Carl Reichardt – BTIG
Operator
Good afternoon, and welcome to Forestar’s Third Quarter 2023 Earnings Convention Name. At the moment, all contributors are in a listen-only mode. An issue-and-answer session will comply with the formal presentation. [Operator Instructions] Please notice this convention is being recorded.
I’ll now flip the decision over to Katie Smith, Director of Finance and Investor Relations for Forestar.
Katie Smith
Thanks, Paul. Good afternoon, and welcome to the decision to debate Forestar’s third quarter outcomes. Thanks for becoming a member of us.
Earlier than we get began, right now’s name consists of forward-looking statements as outlined by the Non-public Securities Litigation Reform Act of 1995. Though Forestar believes any such statements are primarily based on affordable assumptions, there isn’t any assurance that precise outcomes won’t be materially completely different.
All forward-looking statements are primarily based upon data accessible to Forestar on the date of this convention name and we don’t undertake any obligation to replace or revise any forward-looking statements publicly. Further details about elements that might result in materials modifications in efficiency is contained and Forestar’s annual report on Kind 10-Ok and its most up-to-date quarterly report on Kind 10-Q, each of that are filed with the Securities and Alternate Fee.
Our earnings launch is on our web site at investor.forestar.com, and we plan to file our 10-Q tomorrow. After this name, we are going to submit an up to date investor presentation to our Investor Relations website beneath Occasions and Shows to your reference.
Now I’ll flip the decision over to Dan Bartok, our CEO.
Dan Bartok
Thanks, Katie. Good afternoon, everybody. As all the time, we respect your curiosity in Forestar and taking the time to debate our third quarter outcomes. Along with Katie, I am joined on the decision right now by Jim Allen, our Chief Monetary Officer; and Mark Walker, our Chief Working Officer.
Our strong third quarter outcomes have been pushed by stronger market circumstances. Our technique of continuous to develop heaps through the market transition positions us properly to capitalize on the elevated demand for completed heaps from builders.
Our third quarter internet earnings elevated 18% and the prior yr quarter to $46.8 million or $0.93 per diluted share. Pretax earnings elevated 18% to $62.4 million and our pretax revenue on was 16.9%. Consolidated revenues elevated 20% to $368.9 million, whereas lot deliveries elevated 10% to three,812 heaps.
We consider every challenge in native market circumstances to find out the suitable pricing and gross sales tempo to maximise returns. We have now demonstrated that our distinctive and versatile enterprise mannequin can shortly pivot primarily based on altering homebuilder demand and market circumstances.
None of that may occur with out an unimaginable staff. Their dedication, ardour and experience permit us to proceed placing our long-term worth creation targets on the middle of each resolution we make. Thanks to all of our worth staff members to your efforts.
Jim will now focus on our third quarter monetary ends in extra element.
Jim Allen
Thanks, Dan. Within the third quarter, internet earnings elevated 18% to $46.8 million or $0.93 per diluted share in comparison with $39.7 million or $0.80 per diluted share within the prior yr quarter. Consolidated revenues for the quarter elevated 20% and to $368.9 million in comparison with $308.5 million within the prior yr quarter. The present quarter included $10.2 million in income from deferred improvement initiatives and $23.8 million in monitor gross sales and different income.
Heaps offered in our third fiscal quarter elevated 10% to three,812 heaps with a median gross sales worth of $87,000 and $70. We anticipate continued quarterly fluctuations in our common gross sales worth primarily based on the geographic location and lot seismic of our deliveries. Our pretax earnings elevated 18% to $62.4 million in comparison with $52.7 million within the third quarter of final yr, and our pretax revenue margin this quarter was 16.9% and in comparison with 17.1% within the prior yr quarter. Our gross revenue margin this quarter was 23%, up 450 foundation factors sequentially and down 100 foundation factors from a yr in the past.
Within the third quarter, SG&A expense was $26.4 million. As a proportion of income, SG&A expense improved 60 foundation factors to 7.2% from 7.8% within the prior yr quarter. We are going to proceed to give attention to controlling our SG&A prices whereas guaranteeing that our infrastructure helps our enterprise. Mark?
Mark Walker
As for present market circumstances, the availability of latest and current properties at reasonably priced worth factors stays restricted. Demographic supporting housing demand remained favorable regardless of increased mortgage charges and inflationary pressures. Builder incentives have helped race the affordability hole for a lot of homebuyers. And low resale provide is a driver of patrons selecting new building. Consumers are rising housing begins and lots of are centered on shopping for completed heaps.
Forestar is a key provider to many homebuilders, and is uniquely positioned to benefit from the scarcity of completed heaps for the homebuilding {industry}.
Through the third quarter, we offered a number of 16 clients, which was a brand new quarterly excessive. The availability of vacant developed heaps, significantly at reasonably priced worth factors continues to be constrained throughout our footprint. Forestar is targeted on growing heaps for properties at reasonably priced worth factors, demonstrated by our common gross sales worth of roughly $88,000.
Whereas contract availability and supplies are nonetheless difficult to acquire in sure markets, the provision continues to enhance. The price to develop a residential lot has not declined, and we presently don’t anticipate improvement prices to lower given the strengthening demand from builders within the total inflationary setting. We are going to proceed to be proactive and work with our commerce companions to regulate improvement prices.
Homebuilders are returning to the land market to safe heaps for future progress and residential costs have usually stabilized. Because of this, land costs haven’t fallen as many anticipated originally of this yr. Nonetheless, land sellers have been adjusting again to regular contract phrases, leading to extra customary due diligence time strains and take down constructions. Jim?
Jim Allen
D.R. Horton is our largest and most necessary buyer. Nonetheless, we glance to proceed increasing {our relationships} with different homebuilders and nonetheless have an intermediate-term purpose of promoting 30% of our heaps to clients apart from D.R. Horton. 16% of our third quarter deliveries or 625 heaps have been offered to different clients, which incorporates 105 heaps that have been offered to loads banker who expects to promote heaps to D.R. Horton at a future date.
13% of our deliveries within the prior quarter have been 435 heaps have been offered to third-party clients. Along with rising by increasing our buyer base, now we have vital runway to develop our market share inside D.R. Horton. Our mutually acknowledged purpose is for 1 out of each three properties that D.R. Horton sells to be constructed on loads developed by Forestar. Katie?
Katie Smith
Forestar’s underwriting standards for brand new improvement initiatives features a minimal 15% pretax return on common stock and a return of the preliminary money funding inside 36 months.
Through the third quarter, we invested $215 million in land and land improvement, of which $190 million for land improvement and $25 million was for land. Whereas our investments this quarter have been down in comparison with the prior yr quarter, they have been up 17% sequentially. We anticipate our investments in land acquisition and improvement to extend within the coming quarters.
Our lot place at June 30 was 73,000 heaps, of which 53,700 heaps are owned and 19,300 heaps are managed by buy contracts. The vast majority of our personal loss have been positioned beneath contract to buy from land sellers earlier than 2021, leading to a horny value foundation. At quarter finish, now we have 7,800 completed heaps readily available. We usually anticipate to keep up a better stock of completed heaps to satisfy builder demand. After we agreed to lot take-down schedule, there’s usually a worth escalator in-built to compensate us for carrying the asset.
We stay intensely centered on managing our improvement in phases as we try to ship completed heaps at a tempo that matches market demand in step with our emphasis on capital effectivity. We’re persevering with to focus on a 3 to four-year owned stock of land and cargo. 28% of our owned heaps are beneath contracted gross sales, representing roughly $1.4 billion of future income. These contracts have $124 million of onerous earnest cash deposits affiliated with. One other 31% of our owned heaps are topic to a proper of first supply to D.R. Horton primarily based on executed buy and sale agreements. Jim?
Jim Allen
We’re retaining vital liquidity and utilizing modest leverage to maintain our stability sheet robust, whereas sustaining our disciplined method when investing capital. We ended the quarter with roughly $780 million of liquidity and together with an understated money stability of $400 million and $380 million of obtainable capability on our undrawn revolving credit score facility.
Whole debt at June 30 was $707 million, with no senior notice maturities till fiscal 2026, and our internet debt-to-capital ratio was 19.1%, down from 32.8% within the prior yr interval. We ended the quarter with $1.3 billion of stockholders’ fairness and our guide worth per share elevated to $25.96, up 13% from a yr in the past.
Based on the Nationwide Affiliation of Homebuilders, challenge degree land acquisition and improvement loans proceed to develop into costlier, which straight impacts nearly all of our opponents. Forestar’s capital construction is one in every of our greatest aggressive benefits, and it units us other than different land builders. Different builders usually use project-level improvement loans, that are usually extra restrictive have floating charges and create administrative complexity, significantly in a rising charge setting. Our bonds present us with operational flexibility and glued value debt whereas our robust liquidity permits us to benefit from engaging alternatives after they come up.
Dan, I’ll head again to you for closing remarks.
Dan Bartok
Thanks, Jim. I am happy with the Forestar staff’s execution throughout our third fiscal quarter. They delivered progress and powerful profitability, permitting Forestar to keep up double-digit returns. I am much more happy with how properly we’re positioned and the power of our stability sheet. Our robust stability sheet and ample liquidity give us the flexibleness to put money into land alternatives that may drive our future progress, and keep an applicable degree of completed heaps and stock to satisfy builder demand.
We’re the market chief in a extremely fragmented and undercapitalized {industry}. And we’re uniquely positioned to benefit from the robust demand for completed heaps by homebuilders. We are going to proceed to combination vital market share over the following few years. Whereas sustaining our disciplined method on investing capital to reinforce the long-term worth of Forestar.
Builder incentives have been impactful in bridging the affordability hole for patrons. Forecasts now anticipate 2023 U.S. single-family housing begins to say no roughly 10% to twenty% in comparison with 2022. We an enchancment from a decline between 15% and 30% forecasted simply three months in the past.
Whereas new residence begins and gross sales have been stronger than anticipated in 2023, a mortgage charges are again to peak ranges reached in late 2022, which may affect demand as patrons modify. We can’t management the macroeconomic backdrop or straight affect the demand for housing. Nonetheless, we are able to and can keep centered on strengthening our platform and rising operational efficiencies to drive future progress. We’re carefully monitoring every market, submarket and challenge as we try to stability tempo and worth to vacate returns.
Our targets haven’t modified. We nonetheless intend to double our market share to five% over the intermediate time period. Wanting ahead, we consider that D.R. Horton and lots of different homebuilders will proceed to shift their focus in direction of shopping for completed heaps from third-party builders, as an alternative of self-developing. We consider our market share good points will speed up as financing stays costly and thus accessible for almost all of our opponents.
We have now a monitor file of strong execution and are centered on a long-term alternative earlier than us. As applicable, we are going to make the most of our platform and powerful stability sheet to capitalize on alternatives that construct shareholder worth.
With our skilled staff that has efficiently managed by prior market cycles, we’re properly outfitted to navigate this dynamic setting whereas investing properly for our future progress and additional strengthening our industry-leading place.
Paul, at the moment, I’ll open up the road for questions.
Query-and-Reply Session
Operator
Thanks. At the moment, we will likely be conducting a question-and-answer session. [Operator Instruction] And the primary query right now is coming from Truman Patterson from Wolfe Analysis. Truman, your line is dwell.
Truman Patterson
Hey, good afternoon, everybody. Thanks for taking my questions. First, your largest buyer simply steered that they are positioning for rising doubtlessly type of 10% in 2024. Your internet debt to whole capital ratio is actually wholesome at 19%. I am simply making an attempt to know the place that metric may have to go in the event you all are focusing on to doubtlessly help that kind of progress as properly.
Dan Bartok
Properly, I feel our capital construction because it sits right now, we’re properly positioned to satisfy that progress with out further capital. I feel as we stated earlier than, we consider we are able to truly develop our quantity at a few 20% annual charge with out elevating further capital, though it could require doubtlessly leveraging some further debt when applicable.
Truman Patterson
Truthful sufficient. So type of perhaps the web debt to whole cap to hit a 20% progress charge, may creep as much as the 30%, perhaps 40% vary. In your lot ASP, it was up about 3.5%, each year-over-year and quarter-over-quarter. And I understand that there is a lot that may affect that metric geographically, lot dimension, et cetera. I am simply making an attempt to know how type of core completed lot pricing has been trending lately, given the robust rebound in demand. However builders bumping up incentives to maneuver a number of the properties?
Jim Allen
Properly, clearly, you may’t draw too many conclusions on costs from our ASP. There’s a lot affect from combine, proper, in there? So as a consequence of lot sizes and geography. In order that’s all the time going to be altering.
However I feel so far as pricing goes, we per entrance foot foundation. I imply we actually have not seen reductions in pricing. So we have seen pricing maintain constant, most likely mirrored extra in our margins than our ASP.
Truman Patterson
Bought you. Truthful sufficient. Thanks to your time.
Dan Bartok
Thanks, Truman.
Operator
Thanks. And the following query is coming from Carl Reichardt from BTIG. Carl, your line is dwell.
Carl Reichardt
Thanks, all people. I did wish to comply with up, I feel, on a part of what Truman was asking actually on margin variability within the $1.4 billion you’ve got acquired in backlog as you look out the following few quarters or perhaps even simply the complete yr of ’24, are you anticipating the gross margin to be considerably much less variable than it has been both as a consequence of combine or simply strengthen circumstances? And do you suppose you’ve got reached prior to now kind of a peak gross margin that you would be able to obtain sooner or later? Or do you anticipate it to go above your final prior peak?
Dan Bartok
That is a troublesome one. We all the time speak about returns greater than margins, I suppose actually about sustaining the suitable tempo and assembly the builders’ demand. What’s actually been fascinating over the past a number of quarters is actually — as we dialed in on a project-by-project foundation, the identical because the builders do. After which there’s been some instances the place we have needed to make worth changes and scale back margins.
There’s additionally been events the place we have been in a position to improve worth and improve margins. So I feel it may be lumpy. Hopefully, we’ve not peaked. Hopefully, there’s some higher margins forward. However improvement prices aren’t — does not look to be coming down. Land prices do not look to be coming down. I feel there’s going to be pricing strain. We’re simply going to should see how that performs out on a project-by-project foundation.
Carl Reichardt
Thanks, Dan. After which are you able to speak a bit bit about any regional tendencies actually over the past two quarters, I feel. Clearly, in ’22, we had relative power within the Southeast, Florida, huge for you, Carolina is huge for you, Texas. With quite a lot of weak spot in elements of the West, does that start to reverse in any respect when it comes to builder demand for heaps in ’23? Thanks.
Dan Bartok
I might say that Phoenix and Denver, two of our markets the place we have been seeing type of late to return again to the market have each rebounded properly, and we’re positively seeing demand for heaps in these markets return as we had hoped for. We did not promote loads over the last a number of quarters in these markets due to actually lack of demand and lack of the way it begins. And it actually goes again to the builders’ inventories, the place have been they lengthy, the place do they should type of rightsize their inventories. And it looks as if their begin paces have leveled off, and that is type of at a degree, an rising foundation once more. So hopefully, that offers us the chance to proceed to be strategic in every of the markets.
Carl Reichardt
Thanks very a lot, Dan. I respect it.
Dan Bartok
Thanks, Dan.
Operator
Thanks. The subsequent query is coming from Anthony Pettinari from Citigroup. Anthony, your line is dwell.
Unidentified Analyst
Hello. That is [indiscernible] for Anthony. Thanks for taking my query. Simply considering again to 2022, you noticed a builder demand type of pull again on the surge in rates of interest and clearly, housing demand fell. However I used to be questioning simply kind of over the course of this quarter and perhaps quarter-to-date, how responsive has like constructed our curiosity in what’s been type of relative to mortgage charges. As mortgage charges have risen over the previous couple of months? Have you ever seen a corresponding cooling of inbound builder demand? After which much more lastly chopping it extra submitting, when mortgage charges begin to degree off for a few weeks, do you see builder curiosity type of decide up?
Jim Allen
Yeah. We’re seeing the builders’ urge for food improve, particularly for completed heaps. I imply they’re all in search of the choice heaps. They’re all in search of completed heaps. And so right now, we’re seeing the urge for food improve throughout the board for the builders. We’re not simply our primary buyer with D.R. Horton, but additionally with the opposite biller purchasers that now we have. So we’re receiving extra calls. So now we have not seen a falloff truly, we have seen the other. We have seen a rise in demand.
Unidentified Analyst
All proper. No, that is useful. After which I suppose, I feel in your ready remarks, you talked about that your heaps are a form of a beautiful value foundation. So I used to be questioning in the event you’re in a position to type of dimension that roughly in any respect. I feel perhaps when it comes to timing, like how lengthy earlier than you progress by that land? And in that case, as soon as that occurs, is there type of a significant step down in margin type of baked in?
Jim Allen
Yeah. Usually, we underwrite to a 12-month improvement time-frame. Once more, it goes to market-to-market, project-by-project. It has been fascinating when it comes to if we elongate that point line, we have in a position to maintain some pricing energy simply because the demand for completed heaps has been there. We’re type of writing these tailwinds for the time being. However once more, we take a look at the market each time we worth heaps, we do not worth our heaps up entrance.
In order that’s been useful for us. If we see one thing within the first, let say, 4 months or so of improvement {that a} concern, we are able to think about that we’re pricing our heaps. We won’t all the time get again to pricing energy to offset the fee will increase. However as Dan stated, we’re not centered totally on margin however defending or return, maximizing our returns.
Unidentified Analyst
Okay, tremendous useful. I am going to flip it over.
Operator
Thanks. [Operator Instructions] The subsequent query is coming from Mike Rehaut from JPMorgan. Mike, your line is dwell.
Unidentified Analyst
Hello, guys. Doug [indiscernible] on for Mike. On a step again on the finish of final quarter along with your feedback on the financial institution volatility. I simply wish to know in the event you had any additional coloration on this been any change since that final dialog on the banking volatility affect on different land builders, in that case, in direction of the start of the earlier quarter, did you see any kind of fabric profit.
Katie Smith
Had been you asking about banking volatility? Sorry, you type of breaking apart.
Unidentified Analyst
Sorry. Yeah. Simply if there’s any replace on banking volatilities in truth in your opponents and if it was did you guys see any kind of profit?
Dan Bartok
It is extra anecdotes that we hear than something that now we have skilled as a result of we do not use challenge degree financing, however now we have positively heard that different builders, the phrases at which they’re being quoted to do offers have gotten extra stringent. Rates of interest have clearly risen to do acquisitions, improvement loans for builders. And — so once more, the anecdote, they’re having a harder time in some instances, not with the ability to get the loans that they’d have needing extra fairness to stability out and paying increased rates of interest.
Unidentified Analyst
Bought it. So nothing materials or not outdoors of [indiscernible].
Dan Bartok
Yeah, I might say nothing along with that.
Unidentified Analyst
Bought it. Thanks.
Operator
Thanks. And there have been no different questions at the moment. I might now like handy the decision again to Dan Bartok for closing remarks.
Dan Bartok
Thanks, Paul. And thanks to everybody on the Forestar staff to your focus and onerous work I am pleased with the outcomes the staff achieved this quarter, we are going to keep disciplined, versatile and opportunistic as we proceed to consolidate market share. We respect everybody’s time on the decision right now and look ahead to talking with you once more in November to share our fourth quarter and monetary 2023 outcomes. Thanks.
Operator
Thanks. This does conclude right now’s convention. Chances are you’ll disconnect your strains at the moment. Have a beautiful day.
