Forestar Group Inc. Q3 FY2025 earnings call

• The Forestar team delivered a solid third quarter with $32.9 million net income and $390.5 million revenue. - Lots sold increased 11% YOY and 6% sequentially. - Lots under contract to sale were up 26% YOY, highest contracted backlog in 5 years. - Maintained strong liquidity through disciplined inventory investment. - Adjusting development pace and moderating land acquisition. - Over 80% of investments this quarter were for land development. - D.R. Horton is the largest customer, with 15% of their started homes on Forestar developed lots. - Total lot position at June 30 was essentially flat, with owned lots under contract to sell up 26% YOY. - Underwriting criteria for new development projects require at least 15% pretax return on average inventory and initial cash investment return within 36 months. - Significant liquidity with $792 million liquidity, $189 million unrestricted cash, and $603 million available on revolving credit facility. - Capital structure provides operational flexibility and strong liquidity to take advantage of opportunities.

In the third quarter, Forestar generated $32.9 million of net income or $0.65 per diluted share on $390.5 million of revenue. Lots sold increased 11% year-over-year and 6% sequentially to 3,605 lots. Lots under contract to sale increased 26% from a year ago to 25,700 lots, representing 38% of the owned lot position and $2.3 billion of future revenue.

• Maintaining fiscal 2025 revenue guidance of $1.5 billion to $1.55 billion. - Lowering lot delivery guidance to 14,500 to 15,000 lots in response to current market conditions.

• Affordability constraints impacting new home sales pace. - Weaker consumer confidence affecting new home sales.

Q: On gross margins, you called out a single community impacted margins, should 21% gross margin rate be a good run rate going forward?

A: In the range of 21% to 23%, lower end for this quarter, but no indication of significantly lower margins going forward.

Q: On development costs, have they started to decline sequentially?

A: They're flattish and stabilized, with some upticks and downward mobility in categories but mostly stable.

Q: On new markets entered and regional focus, any regional differences?

A: Entered Pacific Northwest, Northern California, Salt Lake, Reno as new markets, with team members on the ground building support as market conditions allow.

Q: On consideration of conversion to REIT, any interest?

A: No, as Forestar is a developer, not a land banker providing financing, so focus is on development business model.

Q: On D.R. Horton's slower community count growth, how does it affect Forestar?

A: Still significant growth opportunity within Horton as they aim for 1 out of 3 homes to be on Forestar developed lots, and also increasing customer base with other builders.