Forestar Group - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered 2,333 lots and $250.4M revenue with diluted EPS of $0.32; net income fell 57% y/y to $16.5M as lower deliveries reduced operating leverage and SG&A ran elevated due to platform expansion.
• Gross profit margin was 22.0% vs 23.8% y/y (23.8% included an unusually high-margin closeout last year); pretax margin was 8.7% vs 16.7% y/y, reflecting lower volumes and mix.
• FY2025 guidance maintained: 16,000–16,500 lots and $1.60–$1.65B revenue; management expects Q1 to be the lowest delivery quarter and second-half revenue above first-half.
• Liquidity remained strong ($132.0M cash, $512.5M revolver availability, $644.5M total); facility amended in December 2024 to extend maturity to Dec 2029 and increase commitments to $640M; S&P upgraded corporate rating to BB- in January, reinforcing capital access and flexibility.
• Consensus estimates from S&P Global were unavailable at time of analysis; we cannot assess beats/misses vs Street for Q1 2025.

What Went Well and What Went Wrong

What Went Well

• Strong capital structure and liquidity: $644.5M total liquidity; revolver maturity extended to 2029 with increased commitments and reduced pricing, plus S&P credit upgrade to BB- in January 2025, enhancing funding flexibility and competitiveness.
• Backlog and pipeline expanded: owned and controlled lots rose to 106,000; owned lots under contract increased to 25,200 with ~$2.2B future revenue, supported by $207M hard earnest money deposits — a key share-gain indicator in a fragmented market.
• ASP tailwind from mix: average sales price per lot rose to $105,500 vs $96,400 y/y; management noted one infill project with high lot prices skewed ASP higher, and expects low-to-mid single-digit price escalators.

Quotes

• “We continue to expect that the first quarter will be our lowest delivery quarter… In fiscal 2025, we still expect to deliver between 16,000 and 16,500 lots, generating $1.6 billion to $1.65 billion of revenue.”.
• “Forestar is uniquely positioned to gain market share in the highly fragmented lot development industry… our guidance for fiscal 2025 remains unchanged.”.

What Went Wrong

• Volume-driven operating deleverage: pretax margin fell to 8.7% from 16.7% y/y; SG&A elevated due to ~30% employee count growth and new market setup, though CFO expects SG&A to moderate and be high-single digits as % of revenue for FY2025.
• Deliveries down y/y: lots sold decreased 26% to 2,333 vs 3,150 y/y; revenues declined to $250.4M from $305.9M y/y; net income down 57% to $16.5M.
• Cycle times remain above historical norms due to governmental delays, despite ~30-day improvement this quarter and 120 days off the prior peak; this continues to limit upside on lot deliveries.

Transcript

Operator (participant)

Good morning and welcome to Forestar's First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar. Chris.

Chris Hibbetts (VP of Finance and Investor Relations)

Thank you, Jenny. Good morning and welcome to the call to discuss Forestar's first quarter results. Before we get started, I want to remind everyone that 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 or will be filed with the Securities and Exchange Commission.

Our earnings release is on our website at investor.forestar.com, and we plan to file our 10-Q later this week. 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 (President and CEO)

Thanks, Chris, and welcome to the team. For those who haven't met Chris yet, he joined our team in December as part of a planned transition with Katie Smith joining D.R. Horton on January 1st. I'm also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The Forestar team delivered 2,333 lots, generating revenues of $250.4 million during the quarter and earnings per diluted share of $0.32. Demand for finished lots remains solid, and our owned lots under contract have doubled from a year ago, and the percentage of our owned lots under contract is at the highest level since June of 2020. The Forestar team continues to expand our operating platform, including making significant investments in land acquisition and development, and adding key personnel in our local markets and entering new markets.

Our owned lot position has increased 23% compared to a year ago, and our community count has increased 25% over the same period. We remain focused on investing in compelling land parcels, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Forestar's unique blend of financial strength, operating expertise, and geographic reach is a significant competitive advantage, enabling us to be a leading supplier of finished lots. Jim will now discuss our first quarter results in more detail.

Jim Allen (CFO)

Thank you, Andy. In the first quarter, net income was $16.5 million or $0.32 per diluted share, compared to $38.2 million or $0.76 per diluted share in the prior year quarter. Our pre-tax income was $21.9 million compared to $51.2 million in the first quarter of last year, and our pre-tax profit margin this quarter was 8.7% compared to 16.7% in the prior year quarter as a result of reduced operating leverage. Revenues for the quarter totaled $250.4 million compared to $305.9 million in the prior year quarter. We sold 2,333 lots in the quarter with an average sales price of $105,500. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. We continue to expect that the first quarter will be our lowest delivery quarter of the fiscal year.

Our gross profit margin for the quarter was 22% compared to 23.8% for the same quarter last year. The prior year quarter was positively impacted by an unusually high margin lot sales related to the closeout of a legacy community. Excluding the high margin lot sales from that legacy community, our prior year first quarter gross profit margin was approximately 22.8%. Chris.

Chris Hibbetts (VP of Finance and Investor Relations)

In the first quarter, SG&A expense increased 29% from the prior year quarter to $36 million, primarily due to a 30% increase in employee count to 427 employees compared to 329 employees a year ago. We have increased our employee count to support the expansion of our operating platform, including entering new markets and increasing community count. SG&A expense as a percentage of revenues was 14.4% compared to 9.2% in the prior year quarter, primarily as a result of the year-over-year decrease in lot deliveries. We are pleased with the progress we have made building our team, and we continue to attract high-quality talent. We remain focused on efficiently managing our SG&A while investing in our teams to support continued growth. Mark.

Mark Walker (COO)

Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points generally remains limited, and demographic supporting housing demand remains favorable despite continued affordability challenges. Mortgage rate buy-down incentives offered by builders have helped to address affordability and spur demand. Our ongoing focus remains to develop lots primarily for homes at affordable price points. Availability of contractors and necessary materials has improved, and the cost of developing land has stabilized. While we continue to see modest improvement in cycle times, government 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. Homebuilders are competing to secure land and lot positions, and many are looking to replace current closeout communities to position themselves for future growth.

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.

Jim Allen (CFO)

D.R. Horton is our largest and most important customer. 15% of the homes D.R. Horton started in the past 12 months 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 significant opportunity to grow our market share within D.R. Horton. We also continue to work on expanding our relationships with other homebuilders. 9% of our first quarter deliveries or 221 lots were sold to other homebuilders, including two new customers. Chris.

Chris Hibbetts (VP of Finance and Investor Relations)

Forestar'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. We are positioning to return to strong volume growth in future periods supported by our increased investments in land acquisition and development over the last several quarters. During the first quarter, we invested approximately $685 million in land and land development, which was a 50% increase from the prior year quarter. 57% of our investment was for land acquisition, and 43% was for land development. Our land acquisition pipeline is front-end loaded this fiscal year, and we expect the pace of our investment in land acquisition to moderate for the remainder of the year. We still expect to invest approximately $2 billion in land acquisition and development in fiscal 2025, subject to market conditions. Mark.

Mark Walker (COO)

Our total lot position as of December 31st increased 29% from a year ago to 106,000 lots, of which 68,300 or 64% was owned and 37,700 or 36% were controlled through purchase contracts. 8,100 of our own lots were finished at quarter end. 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. Owned lots under contract to sell increased 51% from a year ago to 25,200 lots, or 37% of our owned lot position. $207 million of hard earnest money deposits secured these contracts, which were expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry.

Another 28% of our owned lots are subject to a right-of-first offer to D.R. Horton based on executed purchase and sale agreements. Jim.

Jim Allen (CFO)

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with $645 million of liquidity, including an unrestricted cash balance of $132 million and $513 million of available capacity on a revolving credit facility. In December, the company amended its credit facility, which, among other things, extended the maturity date from October 2026 to December 2029, reduced pricing, and increased the aggregate lender commitments from $410 million to $640 million. We were also pleased to receive an upgrade to our corporate credit rating from S&P earlier this month, taking us from a B+ to BB-. Total debt at December 31st was $807 million, with no senior note maturities until May 2026, and our net debt to capital ratio was 29.5%.

We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 13% from a year ago to $31.84. Forestar's capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks.

Andy Oxley (President and CEO)

Thanks, Jim. We are pleased with the continued expansion of our operating platform.

We have made significant investments in land and land development, grown our team with best-in-class talent, entered new markets alongside D.R. Horton's footprint, and have a breadth of new opportunities being evaluated by our team. I believe there's tremendous opportunity ahead. Forestar is uniquely positioned to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans, combined with constrained finished lot supply across the majority of our diverse national footprint, positions us for further success. Our guidance for fiscal 2025 remains unchanged. Based on current market conditions, we expect to deliver between 16,000 and 16,500 lots and to generate $1.6 billion-$1.65 billion of revenue. We expect our first quarter will be our lowest delivery quarter of the year, and we still expect our revenues in the second half of fiscal 2025 to be higher than the first half.

The variability we experienced throughout fiscal 2024 illustrates the quarter-to-quarter fluctuations that can occur in delivery of finished lots. We are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. We are the market leader in a highly fragmented and undercapitalized industry and uniquely positioned to take advantage of builder demand for finished lots. Our goal remains the same: to double our market share to 5% over the intermediate term. We expect to aggregate significant market share over the next few years while maintaining our disciplined approach when investing capital to enhance the long-term value of Forestar. With a clear strategic direction, a dedicated team, and a strong operational and financial foundation in place, I'm excited about Forestar's future. Jenny, at this time, we'll open the line for questions.

Operator (participant)

Thank you very much. At this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad now. Confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions. Thank you. Your first question is coming from Carl Reichardt of BTIG. Carl, your line is live.

Carl Reichardt (Managing Director and Partner)

Thanks. Hey, guys. Nice to talk to you. So I wanted a little more detail on the stabilization of costs in land development. Andy, can you expand on that a little bit, the particular aspects of horizontal development where you're starting to see that kind of stabilization? And just as a follow-on, I'm assuming the cycle time issue, as we discussed before, is really related to the entitlement or approval process and not other dynamics.

Mark Walker (COO)

Hey, Carl, it's Mark. In terms of the cost and stabilization, we've seen that really over the past trailing 12 months, our development costs have been stable. Our team's done a great job making sure the budgets are updated throughout the life of the project. We're not really seeing price increases come across our desk like we were maybe 12 months ago. So that's a very positive sign for cost. In terms of cycle times, we decreased our cycle times again 30 days this quarter. So that's about 120 days off the peak. And so those cycle times we continue to see come down. We still are seeing the entitlement hang-ups, particularly at substantial completion with the government jurisdictions.

That's something we're going to continue to work on this fiscal year with the hope that we can get down to a normalized cycle time by the end of the fiscal year.

Carl Reichardt (Managing Director and Partner)

Thank you, Mark. And then on the cost leverage, obviously recognizing the negative leverage this quarter, 30% increase in employee count and new market setup. How are you thinking about the growth in that employee count and new markets as you look the next year or two? Should we expect an improvement in that leverage that's more substantial, especially back half of this year as you build out that pool of lots you have coming? Or is that something we'd expect to see in the next couple of years? And then I have one more after that.

Jim Allen (CFO)

Okay. Carl, yeah, we would expect to see our SG&A expense moderate for the remainder of the year. We're still, based on our revenue guidance, we would still expect it to be kind of high single digits for the year.

Carl Reichardt (Managing Director and Partner)

Thanks, Jim. And then last, just on dollars, but we model revenue per lot versus pricing just because it's a little easier. But this seemed particularly high relative to last year's revenue per lot. Was there something particular this quarter that drove that higher? I think Horton talked about a 3% increase in lot supply, although obviously it's a lag to you. What are you seeing or what can we expect in terms of revenue per lot as we go through the year, recognizing there might be some vol in it depending on the particular land that you sell?

Andy Oxley (President and CEO)

It was really just mix for this quarter. We had one particular infill project with pretty significant lot prices that skewed that ASP up for the quarter. And we're pretty much predicting that low to mid single-digit escalate raise in lot price.

Carl Reichardt (Managing Director and Partner)

All right. I appreciate it, guys. Thanks so much.

Andy Oxley (President and CEO)

Thank you, Carl.

Operator (participant)

Thank you very much. And your next question is coming from Anthony Pettinari of Citigroup. Anthony, your line is live.

Asher Sohnen (Equity Research Senior Associate)

Hi, this is Asher Sohnen on for Anthony. So thanks for taking my question. I just wanted to ask, how has builder demand been kind of trending year to date? And then have you seen Horton or any of your other customers maybe delay or otherwise alter their scheduled lot takedowns?

Mark Walker (COO)

If builder demand remains strong, particularly where we can get new communities open and on board, builders are lining up at the door essentially to get into new communities. In existing communities, we're seeing the same. There are, on occasion, when we deal with this quarter over quarter, some inventory buildup, and it's project by project. If there's ability to bring in a new builder, we will do that. We have been doing that in the past. But builder demand is strong overall. Demand for finished lots remains solid.

Asher Sohnen (Equity Research Senior Associate)

Great. Great. No, that's good. And then just separately, are you able to just help us a little bit more with, and you talked about this a little bit in the prepared remarks, but details on kind of the cadence of deliveries over the balance of the year, just given the softness in the first quarter?

Andy Oxley (President and CEO)

It was really. We had a really strong fourth quarter, so October was a little softer. It improved in November. December got pretty much back to normal, and then as we go through, what we've seen over the last several years is that we have that first quarter seasonally is our lowest, and we have a majority of our deliveries in the second half of the year, so we see that same progression, pretty much similar to what 2024 was.

Asher Sohnen (Equity Research Senior Associate)

Great. Thanks. That's helpful. I'll turn it over.

Operator (participant)

Thank you very much. Just a reminder there, if anyone has any remaining questions, you can do so by pressing star one on your phone keypad now. Okay. I'm not seeing anyone else come into the queue for questions. I will now turn the call back over to Andy for any closing remarks.

Andy Oxley (President and CEO)

Thank you, Jenny. And thank you to everyone on the Forestar team for your focus and hard work. Stay disciplined, flexible, and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today and look forward to speaking with you again in April to share our second quarter fiscal 2025 results.

Operator (participant)

Thank you very much, Andy. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.