Forestar Group - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue rose 5% year over year to $351.0M while diluted EPS fell to $0.62; gross and pretax margins compressed versus last year due to nonrecurring high-margin items in the prior-year quarter and less SG&A leverage.
• Results were below Wall Street consensus: revenue $351.0M vs $363.2M* and EPS $0.62 vs $0.73*; Q1 also missed, marking two consecutive estimate misses (see Estimates Context).
• Management lowered FY25 guidance to 15,000–15,500 lots and $1.50–$1.55B revenue from 16,000–16,500 lots and $1.60–$1.65B, citing a slower-than-expected spring selling season and affordability headwinds; land investment trimmed to ~$1.9B from ~$2.0B.
• Balance sheet strengthened: issued $500M 6.50% notes due 2033 and tendered ~$329.4M of 3.85% notes due 2026; liquidity ended the quarter at $792.0M, with net debt-to-capital at 29.8%.

What Went Well and What Went Wrong

What Went Well

• Lots sold increased 4% YoY to 3,411 and 46% sequentially; owned lots under contract climbed 41% YoY to 25,400 (37% of owned lots), representing ~$2.3B of future revenue—“the highest contracted backlog we've had during the last 4 years”.
• Diversification of customer base: 27% of Q2 deliveries (910 lots) sold to customers other than D.R. Horton, including a lot banker assignment; added relationships with 10 other builders (2 new).
• Capital structure optimized: $500M 6.50% senior notes due 2033 issued and ~$329.4M tendered on 2026 notes, extending maturities and enhancing liquidity; liquidity $792.0M at quarter-end.

What Went Wrong

• Margin compression: gross margin 22.6% vs 24.9% last year; pretax margin 11.6% vs 17.6% YoY, driven by prior-year nonrecurring high-margin items and less SG&A leverage.
• SG&A increased 32% YoY to $38.4M, with SG&A as % of revenue elevating to 10.9% (vs 8.7% last year) due to a 29% increase in headcount to support new markets and community growth.
• FY25 guidance cut: lots and revenue lowered due to affordability constraints and cautious consumers slowing spring demand; land investment moderated to ~$1.9B.

Transcript

Operator (participant)

Good morning, and welcome to Forestar's second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode, and the floor will be open for questions following the presentation. If anyone should require operator assistance during the conference, please press star zero on your phone 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 Hibbetts (VP of Finance and Investor Relations)

Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar's second 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 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 early next 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.

Anthony Oxley (President and CEO)

Thanks, Chris. 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. The Forestar team delivered a solid second quarter, generating $31.6 million of net income or $0.62 per diluted share on revenues of $351 million. Lots sold increased 4% from a year ago and 46% sequentially to 3,411 lots. Additionally, lots under contract to sell increased 41% from a year ago to 25,400 lots, which is 37% of our owned lot position, the highest contracted backlog we've had during the last four years. Our current backlog represents $2.3 billion of future revenue. We further strengthened our balance sheet during the quarter by increasing our liquidity position to approximately $800 million while extending our debt maturity profile through refinancing transactions completed in March.

We also continue to expand and diversify our operations alongside D.R. Horton's footprint, entering 10 new markets in the last year and increasing our community count by 21%. The home building industry continues to face headwinds from home affordability constraints and declining consumer confidence, resulting in a slower-than-expected start to the spring selling season. We are well-positioned to navigate current market conditions, and our experienced operators are responding by adjusting the pace of development where appropriate, and we are moderating our pace of land acquisition. 79% of our investments this quarter were on land development. We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. We are able to consistently provide essential finished lots to home builders with our unique blend of financial strength, operating expertise, and a diverse national footprint.

We will now discuss our second quarter financial results in more detail. Jim?

James Allen (CFO)

Thank you, Andy. In the second quarter, net income was $31.6 million or $0.62 per diluted share, compared to $45 million or $0.89 per diluted share in the prior year quarter. Revenues for the second quarter increased 5% to $351 million compared to $333.8 million in the prior year quarter. Our gross profit margin for the quarter was 22.6% compared to 24.9% for the same quarter last year. The prior year quarter was positively impacted by non-recurring revenue items with unusually high margins, including selling excess sewer capacity and a land contract assignment fee. Excluding the effect of these items, our prior year second quarter gross margin would have been approximately 22.5%. Our pre-tax income was $40.7 million compared to $58.9 million in the second quarter of last year, and our pre-tax profit margin this quarter was 11.6% compared to 17.6% in the prior year quarter.

The decrease in pre-tax profit margin this quarter was primarily due to the non-recurring high margin items impacting the prior year quarter and less SG&A leverage in the current quarter. Lots sold in our second quarter increased 4% to 3,411 lots, with an average sales price of $101,700. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Chris?

Chris Hibbetts (VP of Finance and Investor Relations)

In the second quarter, SG&A expense increased 32% from the prior year quarter to $38.4 million, primarily due to a 29% increase in employee count to 440 employees. Our increased employee count is supporting the expansion of our operating platform, including entering 10 new markets alongside D.R. Horton's footprint and increasing our community count by 21%. SG&A expense as a percentage of revenues was 10.9% compared to 8.7% in the prior year quarter. 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 future growth. Mark? The 2025 spring selling season started slower than expected as potential home buyers have been more cautious due to continued affordability constraints and declining consumer confidence.

Mortgage rate buy-down incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes. Our primary focus remains developing lots for new homes at affordable price points. The availability of contractors and necessary materials remains positive. The cost of developing land has stabilized. We have seen improvement in cycle times despite continued governmental delays. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible. Jim?

James 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, and 22% of their finished lot purchases this quarter were lots developed by Forestar. 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 market share within D.R. Horton. We continue to work on expanding our relationships with other home builders and intermediaries. 27% of our second quarter deliveries, or 910 lots, were sold to other customers, which includes 362 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to 10 other home builders, two of which are new customers. Mark?

Mark Walker (COO)

Our total lot position at March 31 increased 10% from a year ago to 105,900 lots, of which 68,400, or 65%, was owned, and 37,500, or 35%, were controlled through purchase contracts. 9,500 of our owned lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three- to four-year supply of land and lots and manage development in phases to deliver lots at a pace that matches market demand. Owned lots under contract to sell increased 41% from a year ago to 25,400 lots, or 37% of our owned lot position. $212 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.3 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. Chris?

Chris Hibbetts (VP of Finance and Investor Relations)

Forestar's underwriting criteria for new development projects remains unchanged at a minimum of 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. During the second quarter, we invested approximately $340 million in land and land development, which was relatively flat with the prior year quarter. 21% of our investment was for land acquisition, and 79% was for land development. Our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. We have moderated land acquisition investment as our current land and lot position will allow us to return to strong volume growth in future periods. We now expect to invest approximately $1.9 billion in land acquisition and development in fiscal 2025, subject to market conditions. Jim?

James 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 $792 million of liquidity, including an unrestricted cash balance of $174 million and $618 million of available capacity on our revolving credit facility. In March, we issued $500 million of 6.5% senior unsecured notes due 2033. A portion of the net proceeds were used to fund a tender offer to purchase $329 million of our existing 3.85% senior unsecured notes due 2026, leaving $71 million of the 3.85% notes outstanding. The successful transaction extended our debt maturity profile while enhancing our liquidity position. Total debt at March 31 was $873 million, with no senior note maturities until May 2026, and our net debt-to-capital ratio was 29.8%.

We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $32.36. 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.

Anthony Oxley (President and CEO)

Thanks, Jim. I'm pleased with the results that our team delivered this quarter, particularly considering the slower start to the spring selling season for the industry.

We expect homeowner affordability constraints and cautious home buyers continue to be headwinds for the home building industry. Home buyers have responded favorably to recent increases in incentives offered by builders, however, the slower pace of new home sales during the spring selling season is affecting our lot deliveries. As outlined with our press release, we are updating our guidance for fiscal 2025. We now expect to deliver between 15,000 and 15,500 lots this year, generating between $1.5 billion and $1.55 billion of revenue. Our team has a track record of adjusting to changing in market conditions quickly, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. 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.

Continued execution of our strategic and operational plans, combined with a constrained finished lot supply across the majority of our diverse national footprint, positions us for further success. With a clear 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, you may do so by pressing Star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press Star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the Star keys. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Carl Reichard of BTIG. Carl, your line is live.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Thanks. Morning, everybody. Nice to talk to you. Thanks for taking my questions. Just on the guidance to start with this year and the change, is that based on transactions that you know have been pushed out, or is it more of an estimate? I am thinking in the context of your largest customer who said today, "We still need the land. We just do not need it now." Regardless of why those thousand or so units will not close this year, would your internal expectations for margins for the year change based on those deals? I know you do not guide there, but I am just curious if you expect your margins to be similar to what you would have whether those thousand units closed or not.

James Allen (CFO)

It's mostly prospective looking, Carl. I mean, it's sort of on a community-by-community where we've seen a buildup in inventory. We have conversations at the community level and reflect how that's going to look through the balance of the year. With respect to margin, we really, as you mentioned, we don't guide to margin. We're more focused on a return, but we're not seeing—we have not seen, and we're not anticipating seeing much of a margin change as we move forward.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Okay. Great. Helpful. Then follow-up, which is also two questions. I'm curious whether or not we started at all to see the raw land sellers begin to think about business for housing demand changing and whether or not they're beginning to become more flexible on asking prices. I just also wanted to ask about the lot banker deal in particular. Can you walk me through sort of how those sales to land bankers work? Do you make the kind of margin you expect there? Is it a bulk sale? Because it's a little bit different than the core business. Thanks a lot, guys.

Mark Walker (COO)

Hey, Carl. It's Mark. I'll talk to the raw land sellers, and I'll let Jim take your question on the lot banking. In terms of flexibility, we're seeing more flexibility on terms. We're still not really seeing any flexibility or that much flexibility on price. Sellers are still holding firm on price, but what we are seeing is more conventional land takedown terms, which really helps our ROI-based business.

James Allen (CFO)

Yeah. As far as lot bankers, Carl, we do not contract directly with lot bankers, but we do allow our home building customers to assign their contracts to lot bankers. From our standpoint, it is a sale to a third party. Again, we do not sell directly. We do not contract directly with lot bankers.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Jim, do you expect to make the same kind of returns, margins that you would on a more traditional deal in a deal like this?

James Allen (CFO)

It is exactly—it's basically just a lot take that a home builder would have. So it's all the same pricing that we've contracted with a home builder. They've just assigned that.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Assigned the contract. Okay.

James Allen (CFO)

Yes.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Okay. Great. I appreciate it. All right. Thanks, all. Appreciate it.

Operator (participant)

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

Anthony Pettinari (Research Analyst)

Good morning. You saw an increase in SG&A and I think other company investments as you move into new markets and grow community count. I'm just wondering, big picture, how you balance kind of this increase in costs as your largest customer expects deliveries to be down year over year. I know you've trimmed the land acquisition and development spend target, but I'm just wondering if there's any other actions that you would take or contemplate taking if the market remains weak.

James Allen (CFO)

Sure. Yeah. SG&A is up, really tied to the increase in headcount from last year. That headcount increased by 29% compared to a year ago. Only 4% of that increase occurred in the second quarter. We have slowed down. The vast majority of that increase in headcount is boots on the ground, really, to support the 21% increase in active projects and the 10 new markets that we have gone into. We would expect our headcount to remain basically flat for the remainder of the year. As a result, I think the percentage of SG&A revenues we would expect to come down to the high single digits for the year as we gain more revenue leverage with a bigger second half of the year.

Anthony Pettinari (Research Analyst)

Got it. Got it. You talked about the cost of developing land stabilizing. Just wondering if you are seeing or anticipate any direct or indirect impact from tariffs on land development costs.

Mark Walker (COO)

Yeah. I think right now it's a lot of noise. I think it's too early to tell. Again, I think as we scale our business and we continue to build relationships with our trade partners, I think it's going to give us the ability to either hold pricing or see limited impacts to tariffs. As of right now, we're seeing really not a lot from our trade partners in terms of cost increases. Really nothing at all.

Anthony Pettinari (Research Analyst)

Okay. Okay. Maybe just one last one, if I could. I think Texas and Florida represents maybe roughly half of your total lot position. I'm wondering how you'd characterize demand for lots in Texas and Florida versus the national average. Is it a little weaker or significantly weaker, or is it—I'm just wondering how you kind of characterize it regionally and within the states.

James Allen (CFO)

I would say we are seeing some weakness in Florida and less in Texas. We are seeing some strength in some other markets, Las Vegas, the Carolinas. It has been more of a pace issue, really returning to more of a pre-COVID takedown on a quarterly basis, more so than large bulk takes. Particularly at affordable price points, yes, the customers are challenged, but there is strong activity in the sales centers. We feel good about the long-term market.

Anthony Pettinari (Research Analyst)

Okay. That's very helpful. I'll turn it over.

Operator (participant)

Thank you very much. Your next question is coming from Trevor Allinson of Wolfe Research. Trevor, your line is live.

Trevor Allinson (Director of Equity Research)

Hi. Good morning. Thank you for taking my questions. You modestly lowered your land and development spend versus your prior expectation. How sensitive is that spend to a potential further weakening in demand? Historically, you guys were closer to 70% development as a fraction of that total spend. Do you think that continues to move higher? It looks like it has moved higher here recently. Do you think that continues going forward?

Mark Walker (COO)

Yeah. I mean, when we look at our total spend, we did lower it partly because of the market. We also feel very good about our total lot position to support kind of the growth trajectory that we're on. We were higher in land acquisition in the first quarter when you look at the level of spend. We mentioned in that call that we were going to moderate spend, which we're doing. We do expect the percentage of total spend to trend down a little bit. We are still in the growth middle, so acquisition may be a little bit higher percentage than what it was when you mentioned the one-third, two-thirds from that standpoint. We do have the ability to moderate our spend if demand changes one way or the other.

We have a very robust pipeline of projects that we can look to. If the market turns up, we can ratchet back up as well as continue to ratchet down if we need to.

Trevor Allinson (Director of Equity Research)

A quick follow-up on that before getting into my second question. Are you seeing your competitors pull back more significantly to where this becomes perhaps a further acceleration of market share gains for you guys, given you did not adjust your spend all that much?

Mark Walker (COO)

Yeah. I think definitely there's opportunity in this market cycle to consolidate market share. That's not only with improving the relationship with our number one customer, D.R. Horton, but also with other builders, as evidenced with the 10 additional builders that we added this quarter. It also helps us to strengthen our relationship with our trade base. We really see this as an opportunity for us to continue to consolidate market share.

Trevor Allinson (Director of Equity Research)

Yeah. Thanks. That's really helpful. Actually, a great segue into the next question I had. Your biggest customer is talking about slowing deliveries here in 2025. In that environment, do you look at increasing your penetration with other builders, or is this the type of environment where everybody's probably looking to slow a bit, and that's a bit more challenging? Thanks.

James Allen (CFO)

I mean, from the commentary this morning, they're looking to increase starts at Horton. Obviously, that'll depend on market conditions. The first input to that is the lot. As they noted, there's not an abundance. There's not a surplus of finished lots out there. I think we see our ability to grow that Horton market share in the current environment. As we talked about in our prepared remarks, we have expanded our relationship with other customers and with repeat customers as well as several new customers. I think it supports the long-term view that we can continue to grow in the Horton footprint as well as expand our relationship in the larger community.

Mark Walker (COO)

The other point is our capital structure is a huge advantage for us and what sets us apart from other developers in terms of just being there, availability to develop lots, and then having, what Andy said, the growing both of market share in Horton and other builders.

Trevor Allinson (Director of Equity Research)

Thank you for all the color and good luck moving forward.

Mark Walker (COO)

Thanks.

Operator (participant)

Thank you very much. Your next question is coming from Michael Rehaut of JP Morgan. Michael, your line is live.

Alex Isaac (Software Equity Research)

Hi. Good morning. This is Alex Isaac on for Mike. Thanks for taking my question. I want to dive in and ask about the federal deregulation around land and the messaging coming from Horton. I was curious how you feel like that could impact lot supply going forward, particularly in some of the more constrained markets.

James Allen (CFO)

Really too early to tell yet. Not sure what has been finalized with the new administration. Really just do not have a whole lot of color to offer at this point.

Alex Isaac (Software Equity Research)

Yeah. That makes a lot of sense. Thanks for the answer. I wanted to ask about gross margins. How should we be thinking about them on a longer-term basis? You mentioned you're more in a growth mode now. How do we see those on a longer term, and where do you think those could reach at a steady state?

James Allen (CFO)

We've really seen a lot of stability in the margin over the last really three or four years being in that 21-23%. If you kind of normalize our margins this year over last year, we're real close. We don't see the pressure on the trade and labor side that we saw coming out of that post-COVID. We think we're in a relatively stable margin environment. Obviously, it's going to be subject to market conditions. It'll play out over the next several quarters.

Alex Isaac (Software Equity Research)

Sure. That sounds great. Appreciate the color.

Operator (participant)

Thank you very much. That appears to be the end of our question and answer session. I will now turn the call back over to Andy for closing remarks.

Anthony Oxley (President and CEO)

Thank you, Jenny. 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 to share our third-quarter results on Tuesday, July 22.

Operator (participant)

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