Forestar Group - Earnings Call - Q4 2025

Executive Summary

• Strong top- and bottom-line beat: Q4 revenue of $670.5M and diluted EPS of $1.70 versus S&P Global consensus of ~$556.6M and ~$1.26, respectively; pre-tax margin 16.9% despite a year-ago tough compare on gross margin; beat aided by $103.4M in “tract sales and other,” including the first multifamily site sale. Consensus values from S&P Global Market Intelligence.*
• FY25 revenue came in at $1.662B, exceeding the high end of maintained guidance ($1.50–$1.55B), even as FY25 lots delivered (14,240) finished slightly below the Q3-updated guidance range (14,500–15,000), reflecting mix and non-lot revenues in Q4.
• Initial FY26 outlook: 14,000–15,000 lots and $1.6–$1.7B of revenue; management expects 1Q26 to be the lowest delivery quarter and a back-half-weighted year, consistent with FY25 cadence.
• Balance sheet/LIQ the differentiator: liquidity $968.1M, net debt-to-capital 19.3%, redemption of remaining $70.6M 2026 notes; no senior note maturities until FY28—positioning FOR to take share as project-level financing remains tight for peers.

What Went Well and What Went Wrong

What Went Well

• Revenue/EPS beat with expanded ASP: Q4 revenue up 22% YoY to $670.5M; EPS $1.70; ASP per lot rose to $115.7K (vs $97.3K a year ago). CFO: “gross profit margin this quarter was 22.3%, down 160 bps YoY… prior year benefited from an unusually high margin project,” yet pre-tax margin still 16.9%.
• Strategic/financial positioning: Liquidity $968.1M; net debt-to-capital 19.3%; redeemed 3.85% 2026 notes; “Our capital structure provides… operational flexibility… positions us to take advantage of attractive opportunities”.
• Market-share and platform build-out: CEO highlighted entry into 6–7 new markets, >10% community count increase, and a 92% five-year increase in book value per share; platform and DHI relationship underpin a goal of 1 in 3 DHI homes on FOR lots.

What Went Wrong

• Lots delivered missed updated guidance: FY25 lots delivered were 14,240, finishing below the Q3-updated 14,500–15,000 range, even as revenue exceeded guidance, reflecting mix/tract sales contribution.
• Gross margin pressure: Q4 gross margin 22.3%, down 160 bps YoY due to a tough comparison from a high-margin project in the year-ago period.
• Macro/market pockets remain choppy: Management flagged “pressure in some markets in Texas” and “a little bit more pressure in parts of Florida,” though affordable price points still see good absorptions.

Transcript

Operator (participant)

Good morning, and welcome to Forestar's Fourth Quarter and Fiscal 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode, and the question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note, this conference is being recorded. I will now turn the call over to Mr. Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar. Sir, the floor is yours.

Chris Hibbetts (VP of Finance and Investor Relations)

Thank you, Ali. Good morning, and welcome to the call to discuss Forestar's Fourth Quarter 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.

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 (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. As always, we appreciate your interest in Forestar and taking the time to discuss our Fourth Quarter and Fiscal Year results. The Forestar team finished the year strong, generating over $670 million of revenue in the fourth quarter and $1.7 billion of revenue for the full year, which was above a high end of our most recent guidance range. Despite the challenges for new home demand due to ongoing affordability constraints and cautious consumer sentiment this year, we grew annual revenues by 10% and increased our book value per share to $34.78, up 11% from a year ago. We achieved these results all while maintaining a strong balance sheet and ending the year with $968 million of liquidity.

Over the last five years, Forestar invested more than $7.3 billion in land acquisition and development and delivered more than 75,000 finished lots to approximately 60 local, regional, and national home builders. During the same period, our book value per share has increased 92%. These results reflect the strength of our business model and our market-leading teams we have built out across our national footprint. Thank you to all the Forestar team members for your efforts this year. In Fiscal 2026, we will continue to execute our strategic plan by investing for future growth, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise, and diverse national footprint enables us to provide essential finished lots to home builders and effectively navigate current market conditions.

Jim will now discuss our Fourth Quarter and Fiscal Year 2025 financial results in more detail.

Jim Allen (CFO)

Thank you, Andy. In the fourth quarter, net income increased 7% to $87 million or $1.70 per diluted share. For the year, net income totaled $167.9 million or $3.29 per diluted share. Revenues for the fourth quarter increased 22% to $670.5 million. The current quarter includes $103.4 million in tract sales and other revenue, which was primarily for sales of residential tracts and, to a lesser extent, our first sale of a multifamily site. Revenue increased 10% to $1.7 billion in Fiscal 2025, which includes $118.1 million of tract sales and other revenue. In the fourth quarter, we sold 4,891 lots with an average lot sales price of $115,700, and for the year, we sold 14,240 lots with an average lot sales price of $108,400. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries.

Our gross profit margin this quarter was 22.3%, down 160 basis points from a year ago. Our gross profit margin in the prior year fourth quarter was positively impacted by lot sales from an unusually high margin project. Our fourth quarter pre-tax income increased 4% to $113.1 million, and our pre-tax profit margin was 16.9%. Pre-tax income for the year totaled $219.3 million, and our pre-tax profit margin this year was 13.2%. Our pre-tax income and profit margin for the quarter and the year were positively impacted by a gain on sale of assets of $4.5 million. Chris.

SG&A expense for the fourth quarter was $42.7 million or 6.4% as a percentage of revenues. For the year, SG&A expense was $154.4 million or 9.3%. Our average employee count for Fiscal Year 2025 increased 24% compared to the prior year, which has supported the continued expansion of our platform, including entering new markets and increasing community count. Roughly 90% of new hires in Fiscal 2025 were in our local market operations. We are pleased with the progress we have made building our team and our ability to attract high-quality talent. We remain focused on efficiently managing our SG&A while investing in our teams to support our continued growth. Mark?

New home sales have been slower than last year as continued affordability constraints and cautious consumer sentiment continue to weigh on demand. However, mortgage rate buy-down incentives offered by builders are helping to bridge the affordability gap. Transfer demand for new homes, mainly at more affordable price points. 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. The availability of contractors and necessary materials remains solid, and land development costs have been stable. We have also seen improvement in 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?

D.R. Horton is our largest and most important customer. 15% of the homes D.R. Horton started this year 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 market share within D.R. Horton. We also continue to work on expanding our relationships with other home builders. 17% of our Fiscal 2025 deliveries for 2,489 lots were sold to other customers, which includes 927 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 more than 20 different home builders this year, including six 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. During the fourth quarter, we invested $347 million in land and land development, of which approximately 80% was for land development and 20% was for land. For the full year, we invested approximately $1.7 billion in land and land development, of which two-thirds was for land development and one-third was for land. In Fiscal 2026, we currently expect to invest approximately $1.4 billion in land acquisition and development. Mark?

Andy Oxley (President and CEO)

The lot position on September 30th was 99,800 lots, of which 65,100 were 65% our own and 34,700 were 35% our control through purchase contracts. 8,900 of our owned lots are finished, which is down 11% from the third quarter. The 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. Owned lots under contract to sell increased 13% compared to a year ago. 23,800 lots were 37% of our owned lot supply. $193 million of our earnest money deposits secure these contracts, which are expected to generate approximately $2.1 billion of future revenue.

Another 27% 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. We ended the quarter with $968 million of liquidity, including an unrestricted cash balance of $379 million and $589 million of available capacity on our undrawn revolving credit facility. During September, we redeemed the remaining $70.6 million of 3.85% senior unsecured notes that were due in 2026. Total debt at September 30th was $803 million, with no senior note maturities until Fiscal 2028, and our net debt to capital ratio was 19.3%. We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $34.78. 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 today and have continued to be more expensive, which impacts the majority of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity, particularly in an elevated interest rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I'll now turn it back over to you for closing remarks.

Andy Oxley (President and CEO)

Thanks, Jim. Fiscal 2025 was another successful year for Forestar. We delivered revenue growth of 10% and increased our book value per share by 11%. We continue to execute our strategy to expand the business through significant investments in land and land development and growth of our team. These investments helped us enter seven new markets and increased our community count by over 10%. We further strengthened our balance sheet through extending near-term debt maturities and increasing our liquidity. As we look forward to Fiscal 2026, based on current market conditions, we expect to deliver between 14,000 and 15,000 lots and to generate $1.6-$1.7 billion of revenue. We currently expect our first quarter will be our lowest delivery quarter of the year, and we expect our revenues in the second half of Fiscal 2026 to be higher than the first half.

We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project. While we expect home affordability constraints and cautious home buyers to continue to be 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 to continue success with our lot portfolio across our diverse national footprint, operating expertise, and strong balance sheet. Ali, at this time, we'll open the line for questions.

Operator (participant)

Thank you, sir. Ladies and gentlemen, at this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. One moment, please, while we poll for questions. Thank you. Our first question today is coming from Trevor Allinson with Wolfe Research. Your line is live.

Trevor Allenson (Director, Equity Research)

Hi, good morning. Thank you for taking my question. Looking at your 2026 guidance, it looks like you're expecting deliveries to be up low single digits. That's roughly the same growth as your largest customer. As we think about you deepening your penetration with Horton, why would you not grow faster as we look into next year? Is it an expectation that sales to other builders come down, or is it just some conservatism? What's driving kind of the inline growth with Horton?

Andy Oxley (President and CEO)

Thanks, Trevor. You know, it's just their size. If they grow at low single digits, we need to grow at mid-single digits just to maintain pace with them. So they've entered some new markets. We've entered six or seven new markets for the year. We are growing market share in the markets where we are in, but it's just a matter of us catching up with them in those additional markets. We have the land. We have the team in place. So we are positioned if the market is there. We could increase those units, but it's really going to depend on the spring selling season to see what the year gives us.

Trevor Allenson (Director, Equity Research)

Okay. Makes sense. That's helpful. And then you talked about employee count being up 24% in Fiscal 2025. You built out your team ahead of some anticipated growth here over the next couple of years. With that in mind, how should we think about your headcount moving forward and then your leverage on SG&A in Fiscal 2026? Thanks.

Jim Allen (CFO)

Our headcount has remained basically flat since the first quarter of Fiscal 2025. Most of that increase in headcount actually occurred in Fiscal 2024, but only partially recognized in Fiscal 2024. I would expect our headcount to continue to remain flat or maybe even drift down slightly as we move into Fiscal 2026.

Trevor Allenson (Director, Equity Research)

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

Andy Oxley (President and CEO)

Thank you, Trevor.

Operator (participant)

Thank you. Just as a reminder, ladies and gentlemen, that's 1 if you have any questions or comments. Our next question is coming from Anthony Pettinari with Citigroup. Your line is live.

Anthony Pettinari (Analyst)

Hi, this is Asher Sohnen, and I'm for Anthony. Thanks for taking my question. I just wanted to ask, I think last week we saw a builder talking about how they were getting some cost concessions and extended takedown schedules on their lots. I was just wondering with Horton or your third-party customers, are you seeing any pushback on lot prices or maybe extended takedown schedules or anything like that?

Andy Oxley (President and CEO)

Yeah. From a land acquisition perspective, we've been successful renegotiating time and terms, but not so much land value. Throughout the years, our teams and we have developed proven underwriting due diligence and market research strategy that helps us ensure that we're purchasing land at current market rates. In terms of lot pricing, we haven't seen a whole lot of pushback on our lot pricing today. Again, we manage that project by project to maximize returns.

Trevor Allenson (Director, Equity Research)

Okay. Thanks. That's helpful. And I just wanted to drill down a little bit. I think you guys have a big presence in Texas and Florida. I was just wondering if you could talk geographically around those regions, specifically what kind of trends you're seeing there?

Andy Oxley (President and CEO)

Yeah. We are seeing some pressure in some markets in Texas. It's choppy. Probably see a little bit more pressure in Florida, parts of Florida. But those are really large markets, and particularly at the affordable price point where we tend to concentrate our business, we're still seeing good absorptions.

Trevor Allenson (Director, Equity Research)

Great. That's helpful, and if you won't mind me sneaking in one more, just on modeling question? In terms of the cadence of deliveries in 2026 in your guide, I think 2025 was pretty back half-weighted. I'm just wondering if there's any thinking around 2026.

Andy Oxley (President and CEO)

Yeah. I mean, I think we're projecting 2026 to be similar cadence to 2025. Certainly, our deliveries will be larger in the second half of the year, similar to this year.

Trevor Allenson (Director, Equity Research)

Okay. Thank you very much. I'll turn it over.

Operator (participant)

Thank you. Once again, ladies and gentlemen, if there will be any final questions or comments, please indicate so now by pressing *1 on your telephone keypad. Okay. As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Andy Oxley for any closing remarks.

Andy Oxley (President and CEO)

Thank you, Ali. And thank you to everyone on the Forestar team for your focus and hard work. As we enter Fiscal 2026, continue to stay disciplined, flexible, and opportunistic while focusing on consolidating market share. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results.

Operator (participant)

Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.