Forestar Q4 FY2025 Earnings Call - Strong liquidity and disciplined land investments amid affordability headwinds

Ali, Conference Call Operator: Good morning, and welcome to Forestar’s Fourth Quarter and Fiscal twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. And please note, this conference is being recorded. I will now turn the call over to Mr. Chris Hibbett, Vice President of Finance and Investor Relations for Forestar.

Sir, the floor is yours.

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: 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 ks 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 ks 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.

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 $670,000,000 of revenue in the fourth quarter and January 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 $968,000,000 of liquidity. Over the last five years, Forestar invested more than 7,300,000,000 in land acquisition and development and delivered more than 75,000 finished lots to approximately 60 local, regional and national homebuilders. 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 twenty twenty six, 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 homebuilders and effectively navigate current market conditions. Jim will now discuss our fourth quarter and fiscal year ’twenty five financial results in more detail. Thank you, Andy.

In the fourth quarter, net income increased 7% to $87,000,000 or $1.7 per diluted share.

Jim Allen, Chief Financial Officer, Forestar: For the year, net income totaled $167,900,000 or $3.29 per diluted share. Revenues for the fourth quarter increased 22% to $670,500,000 The current quarter includes $103,400,000 in track sales and other revenue, which was primarily for sales of residential tracks and to a lesser extent, our first sale of a multifamily site. Revenue increased 10% to $1,700,000,000 in fiscal twenty twenty five, which includes $118,100,000 of frac 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 pretax income increased 4% to $113,100,000 and our pretax profit margin was 16.9%. Pretax income for the year totaled $219,300,000 and our pretax profit margin this year was 13.2%. Our pretax income and profit margin for the quarter and the year were positively impacted by a gain on sale of assets of $4,500,000 Chris? SG and

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: A expense for the fourth quarter was $42,700,000 or 6.4% as a percentage of revenues. For the year, SG and A expense was $154,400,000 or 9.3%. Our average employee count for fiscal year twenty twenty five 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 twenty twenty five were in our 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 and 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, rate buy down incentives offered by builders are helping to bridge the affordability gap spur 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 remain solid and land development costs have been stable. We have also seen improvement in cycle times by continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim?

Jim Allen, Chief Financial Officer, Forestar: D. R. Horton is our largest and most important customer. 15% of the homes D. R.

Horton started this year were on a four star 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 homebuilders. 17% of our fiscal twenty twenty five deliveries for 2489 lots were sold to other customers, which includes nine twenty seven lots that were

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: sold expects to sell those lots to D. R. Horton at a future date. We also sold lots to more than 20 different homebuilders this year, including six new customers. Chris?

Forestar’s underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within thirty six months. During the fourth quarter, we invested $347,000,000 in land and development, of which approximately 80% was for land development and 20% was for land. For the full year, we invested approximately $1,700,000,000 in land and land development, of which two thirds was for land development and one third was for land. In fiscal twenty twenty six, we currently expect to invest approximately $1,400,000,000 in land acquisition and development. Mark?

Our lot position at September 30 was 99,800 lots, of which 65,100 or 65% are owned and 34,700 or 35% are controlled through purchase contracts. 8,900 of our owned and lots are finished, which is down 11% from the third quarter. 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 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 or 37% of our own lot supply.

Dollars 193,000,000 of hard earnest money deposits secure these contracts, which are expected to generate approximately $2,100,000,000 of future revenue. Another 27% of our own lots are subject to a right of first offer to D. R. Horton based on executed purchase and sale agreements. Tim?

Jim Allen, Chief Financial Officer, Forestar: We have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with $968,000,000 of liquidity, including an unrestricted cash balance of $379,000,000 and $589,000,000 of available capacity on our undrawn revolving credit facility. During September, we redeemed the remaining $70,600,000 of 3.85% senior unsecured notes that were due in 2026. Total debt at September 30 was $8.00 $3,000,000 with no senior note maturities until fiscal twenty twenty eight and our net debt to capital ratio was 19.3%. We ended the quarter with $1,800,000,000 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

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: over to you for closing remarks. Thanks, Jim. Fiscal twenty twenty five was another successful year for Forestar. We delivered revenue growth of 10% and increased our book value per share by 11%. We continued 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 increase 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 twenty twenty six, based on current market conditions, we expect to deliver between 14,015 lots and to generate $1,600,000,000 to $1,700,000,000 of revenue. We currently expect our first quarter will be our lowest delivery quarter of the year, and we expect our revenues in the 2026 to be higher than the first half. We are closely monitoring each market as we strive to balance pace and price project.

While we expect home affordability constraints and cautious homebuyers 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.

Ali, Conference Call Operator: Thank you, sir. Our first question today is coming from Trevor Allinson with Wolfe Research. Your line is live.

Trevor Allinson, Analyst, Wolfe Research: Hi, good morning. Thank you for taking my question. Looking at

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: your 26 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

Trevor Allinson, Analyst, Wolfe Research: about you deepening your penetration with Horton, why would

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: you not grow faster as we look into next year?

Trevor Allinson, Analyst, Wolfe Research: Is it an expectation that sales to other builders come down? Or is it just some conservatism? What’s driving kind of the in line growth with Horton?

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: Thanks, Trevor. It’s just their size. They 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 Allinson, Analyst, Wolfe Research: Okay. Makes sense. That’s helpful. And then you talked about employee count being up 24% in fiscal twenty twenty five. You built out your teams 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 your leverage on SG and A in fiscal ’twenty six? Well,

Jim Allen, Chief Financial Officer, Forestar: our headcount has remained basically flat since the 2025. Most of that increase in headcount actually occurred in fiscal twenty twenty four, but only partially recognized in fiscal twenty twenty four. I would expect our headcount to continue to remain flat or maybe even drift down slightly as we move into fiscal twenty twenty six.

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: Thank you for all the color and good luck moving forward. Thank you, Trevor.

Ali, Conference Call Operator: Thank you. Our next question is coming from Anthony Pettinari with Citigroup. Your line is live.

Ashra Stone, Analyst, Citigroup: Hi, this is Ashra Stone in on 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 lot. So 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?

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: Yes. 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 a 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, lot pricing has we haven’t seen a whole lot of pushback on our lot pricing today. Again, we manage that project by project to maximize returns.

Ashra Stone, Analyst, Citigroup: Okay. Thanks. That’s helpful. And then I just wanted to drill down a little bit. I think you guys have a big presence in Texas and Florida.

I was wondering if you could talk geographically around those regions, specifically what kind of trends you’re seeing there?

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: Yes. 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 affordable price points, where we tend to concentrate our business, we’re still seeing good absorptions.

Ashra Stone, Analyst, Citigroup: Great. That’s helpful. And then if you won’t mind me sneaking in one more, just a 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?

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: Yes. I mean, I think we’re projecting ’26 to be similar cadence of ’25. Certainly, deliveries will be larger in the second half of the year, similar to this year.

Ashra Stone, Analyst, Citigroup: Okay, thank you very much. I’ll turn it over.

Ali, Conference Call Operator: Thank you. 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.

Chris Hibbett, Vice President of Finance and Investor Relations, Forestar: Thank you, Ollie, and thank you to everyone on the Forestar team for your focus and hard work. As we enter fiscal twenty twenty six, 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.

Ali, Conference Call Operator: 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.