Forestar Group Inc. Q2 FY2025 earnings call

• The team delivered a solid second quarter with net income and revenue growth.
• Land acquisition was moderated, with 79% of investments this quarter in land development.
• Focused on turning inventory, maximizing returns, and consolidating market share in the lot development industry.
• Homebuilding industry faces headwinds from affordability constraints and declining consumer confidence.
• D.R. Horton is the largest customer, with 15% of their starts in the past twelve months on Forestar lots and 22% of finished lot purchases this quarter.
• Expanded into 10 new markets and increased community count by 21% in the last year.
• Strengthened balance sheet via refinancing, extending debt maturity and increasing liquidity.

In the second quarter, Forestar Group Inc. generated $31.6 million of net income or $0.62 per diluted share, with revenues of $351 million. Lots sold increased 4% from a year ago and 46% sequentially to 3,411 lots. Lots under contract to sell increased 41% from a year ago to 25,400 lots (37% of own lot position), representing $2.3 billion of future revenue. Liquidity was increased to approximately $800 million, and total debt at March 31st was $873 million with a net debt to capital ratio of 29.8%. Stockholders' equity was $1.6 billion, and book value per share increased 11% to $32.36.

• Expect to deliver between 15,000 and 15,500 lots in fiscal 2025, generating between $1.5 billion and $1.55 billion of revenue.
• Plan to invest approximately $1.9 billion in land acquisition and development in fiscal 2025, subject to market conditions.

• Homebuilding industry headwinds from affordability constraints and declining consumer confidence.
• Project-level land acquisition and development loans are less available and more expensive, impacting competitors.
• Regional market variations, including weakness in Florida and strength in some other markets like Las Vegas and the Carolinas.

Q: 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? And I'm thinking in the context of your largest customer who said today, we still need the land. We just don't need it now. And regardless of why those thousand or so units won't close this year, would your internal expectations for margins for the year change based on those deals? I know you don't guide there, but I'm just curious if you expect your margins to be similar to what you would have whether those thousand units closed or not.

A: It's mostly prospective looking, Carl. I mean, it's sort of on a community-by-community basis where we've seen a build-up in inventory. You know, 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, you know, as you mentioned, we don't guide to margin. You know, 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.

Q: 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. And then 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. So thanks a lot, guys.

A: Carl, it's Mark. I'll talk to the raw land sellers, and I'll let Jim take your question on the lot banking. But in terms of flexibility, we're seeing more flexibility on terms. We're still not really seeing any flexibility or that much flexibility in price. So sellers are still firm on price, but we are seeing more conventional lot take or land take down terms, which truly helps our ROI-based business. Jim Allen: Yeah. And as far as Lot Bankers, Carl, we don't contract directly with Lot Bankers, but we do allow our home building customers to assign their contracts to lot bankers. So, you know, from our standpoint, it is a sale to a third party. You know, we but, again, we don't sell directly. We don't contract directly with Lot Bankers.

Q: You modestly lowered your land and development spend versus your prior expectation. How sensitive is that spend to potential further weakening in demand? And then 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?

A: Yeah. I mean, so when we look at our total spend, we did lower it, basically partly because of the market, but we also feel very, 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. And we mentioned in that call that we were going to moderate spend, which we're doing. So we do expect the kind of percentage of total spend to trend down a little bit. But we are still in the growth mode. So acquisition may be a little bit higher percentage than what it was when you mentioned the one-third, two-thirds from that standpoint. But 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. So, you know, if the market turns up, we can rush it back up, as well as continue to ratchet down if we need to.

Q: I want to dive and ask about the federal deregulation around land and the messaging coming from Hutton. I was curious how you feel like that could impact lot supply going forward, particularly in some of the more constrained markets?

A: Really too early to tell yet. Not sure what has been finalized, you know, with the new administration. Really just don't have a whole lot of color to offer at this point.

Q: You mentioned on gross margins. How should we be thinking about them, you know, on a longer-term basis? You mentioned more in a growth mode now. How do we see those, like, on a longer term? And where do you think those could reach at a steady state?

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