Forestar Group Inc. Q4 FY2024 earnings call

• Fiscal 2024: Finished especially strong, delivering over 5,300 lots in Q4 and over 15,000 for the full year. Fiscal 2024 diluted earnings per share increased 20% to $4 and pretax income increased 22% to $270.1 million. Return on equity improved 60 basis points to 13.8%, book value per share up 15% to $31.47.
• 5-year investment: Over $6.7 billion invested in land acquisition and development, delivered over 70,000 finished lots to homebuilders. Returns on equity nearly tripled, book value per share up 87%.
• Fiscal 2025 plans: Execute strategic plan by investing for growth, turning inventory, maximizing returns, consolidating market share in lot development industry.
• SG&A: Q4 SG&A expense increased 21% to $32 million (5.8% of revenues vs. 4.8% prior year). Yearly SG&A $118.5 million (7.9% of revenues, up 110bps). Employee count up 30%, 80% new hires in local market operations.
• Market conditions: Limited supply of affordable homes, favorable demographics despite mortgage rates/inflation. Contractors/materials availability improved but costs not reduced. Cycle times extended due to governmental delays. Land prices not softened.
• Major customer: D.R. Horton is largest customer (16% of their starts on Forestar lots). Goal to have 1/3 of their sales on Forestar lots.
• Underwriting: Minimum 15% pretax return on average inventory, initial cash return in 36 months.
• Liquidity: $860 million liquidity at quarter end, net debt-to-capital 12.4%, book value per share $31.47.

In the fourth quarter, net income increased 13% to $81.6 million or $1.60 per diluted share. For the year, net income increased 22% to $203.4 million or $4 per diluted share. Revenues for the fourth quarter totaled $551.4 million, flat with the prior year quarter. Revenue totaled $1.5 billion in fiscal 2024. Lots sold during the quarter increased 8% to 5,374 lots and for the year, lots sold increased 7% to 15,068 lots. Our average lot sales price for the quarter was $97,300 and was $96,600 for the year. Gross profit margin this quarter was 23.9%, up 290 basis points from a year ago. Gross profit margin for the year was 23.8%, up 260 basis points from the prior year. Fourth quarter pretax income increased 14% to $108.5 million compared to $95.4 million in the prior year quarter and our pretax profit margin improved 230 basis points to 19.7%. Pretax income for the year totaled $270.1 million compared to $221.6 million in fiscal 2023, and our pretax profit margin for the year improved 250 basis points to 17.9%.

• Fiscal 2025: Expect to deliver between 16,000 and 16,500 lots and generate $1.6 billion to $1.65 billion of revenue. First quarter expected to be lowest delivery quarter, second half revenues higher. Goal to double market share to 5% over intermediate term.
• Plan: Continue to invest for future growth, turn inventory, maximize returns, and consolidate market share in the fragmented lot development industry.

• Governmental delays extending cycle times above historical norms.
• Elevated mortgage interest rates and inflationary pressures impacting housing demand.
• While contractors/materials availability improved, overall development costs not reduced.
• Cycle times still affected by governmental delays, though some improvement seen.

Q: As you look at your '25 guide, is your expectation that the percentage of lots you actually deliver to customers other than D.R. Horton going to grow in '25?

A: Not really. We really do expect to stay at around 85% to 90% of our lots going to Horton over the near term as we look to increase our market share within D.R. Horton.

Q: On land prices. You mentioned in your prepared remarks, you're not really seeing a softening on pricing. From a new home demand perspective, there's been a few geographies consistently noted as weaker. In those markets specifically, the ones that have been softer, have you seen a flattening out of land prices in those markets? Or are you seeing any more favorable terms?

A: Land prices continue to grow low to mid-single digits year-over-year, similar to the development cost from a land pricing perspective. So specifically across the United States and specifically in those markets is consistent.

Q: As you think about your long-term plans, what's a reasonable amount of time for you guys to get to 30% of their lot needs?

A: Well, there's a couple of different puts and takes in that. One of them is the rate of growth that Horton chooses to grow at. They're obviously growing off of a much larger number. And so us growing more than 10% is really just us trying to keep up with their lot needs. So it's hard to say. We would hope that we'd be able to five years or so, we think that, that would be a good target for us to be able to sell 30% of our lots other customers. And it will be a stair-step approach. It's not going to be something that happens overnight. But I do think that it's important that the number of lots that we sell to other builders is going to continue to increase year-over-year. We sold to eight new customers this year that we had not sold to in the past. And so we really are focused on growing and expanding those relationships with other customers.

Q: What's the general constraint to growth?

A: It's just hard to put a lot on the ground. I mean it takes a long time from the time that you identify the track, get it under contract, get it entitled and then take it through the approval process and finally get it developed and finished. So our investment was less a couple of years ago. And so that caused our overall number of available lots to go down. We reversed that and have been growing that throughout '24, and we'll continue in '25 but you really won't see the results of that until late '25 and going into '26. So it's a quarter-over-quarter building process and you just have to stay very disciplined and focus on what you can affect that quarter in building the business.