Forestar Group Inc. Q4 FY2026 earnings call

• Leadership Transition: Don Tomnitz retired as Executive Chairman effective October 31st, following five years of significant growth and strategic direction setting.
• Financial Resilience: The company ended the year with $1.3 billion in liquidity ($657 million unrestricted cash and $658 million available on revolving credit) and increased book value per share by 8% to $37.56.
• Market Headwinds: Ongoing affordability constraints, cautious consumer sentiment, and higher mortgage interest rates are weighing on new home sales and lot purchase timing.
• Operational Efficiency: Land development costs remain stable due to active management with trade partners and reduced industry-wide competition for contractors. Cycle times have remained stable despite governmental delays.
• Customer Diversification: While D.R. Horton remains the largest customer (14% of their starts were on Four Star lots), sales to other home builders reached the highest percentage since 2018, with sales to more than 25 different builders including eight new customers.
• Capital Discipline: The company maintains strict underwriting criteria (minimum 15% pre-tax return on average inventory, return of initial cash within 36 months) and prioritizes projects in undersupplied markets that are smaller, faster-turning, or offer multiple product types.

Four Star operates as a single integrated segment focused on land acquisition and development for home builders. For the fourth quarter of fiscal 2026, the company generated $580.8 million in revenue, with net income attributable to Four Star of $59.2 million ($1.15 diluted EPS). For the full fiscal year 2026, total revenue was $1.6 billion, with net income attributable to Four Star of $142.6 million ($2.78 diluted EPS). Revenue includes track sales and other revenue ($38.7 million in Q4; $129.1 million for the year). The gross profit margin was 17.8% in Q4 (adjusted to 20.8% excluding impairments and closeout costs) and 19.7% for the full year (adjusted to 20.8%). Pre-tax income was $78.6 million in Q4 (13.5% margin) and $192.1 million for the year (11.7% margin), both reduced by non-recurring items.

• Fiscal 2027 Lot Deliveries: Management expects to deliver between 12,000 and 13,000 lots.
• Fiscal 2027 Revenue Guidance: Expected revenue is between $1.4 billion and $1.5 billion.
• Seasonality: First quarter is expected to be the lowest lot delivery and revenue quarter of the year, with the second half outperforming the first half.
• Capital Investment: Expected investment in land acquisition and development is approximately $1.3 billion for fiscal 2027, aligning pace with current demand.
• Margin Outlook: Core lot sales margin is expected to remain normalized around 20-23%, excluding unusual impairments or regulatory closeout costs.

• Affordability and Demand Risks: Higher mortgage rates and affordability constraints continue to suppress new home demand and affect the timing/volume of lot purchases by builders.
• Regulatory Costs: Increased regulatory compliance requirements, such as stormwater remediation, can lead to unexpected costs at project closeouts.
• Asset Impairment: The company recorded $7.6 million in real estate impairment charges related to two projects during the quarter.
• Supply Chain Inflation: Potential future increases in fuel and material costs could impact margins, though currently offset by reduced developer activity and contractor availability.
• Market Volatility: The highly fragmented lot development industry faces uncertainty, requiring careful balance of pace and price to maximize returns.

Q: Ryan Gilbert asked how Four Star plans to achieve its mutual goal with D.R. Horton to have one-third of Horton’s deliveries on Four Star lots, noting that Four Star’s projected lot sales for FY27 represent a larger YoY decline than Horton’s guidance. He also asked about deploying the $650M cash balance into land, buybacks, or distressed opportunities.

A: Andy Oxley explained that while progress has been made in existing markets, Four Star operates in only 65 of Horton’s ~130 markets, requiring faster growth to close the gap. He believes scaling up the West Coast organization will allow meaningful progress in FY27/28. Jim Allen stated that cash priority is reinvestment in land/development rather than buybacks, as the long-term growth opportunity outweighs current stock pricing. Mark Walker noted emerging distressed opportunities from private builder-developers unlocking value amid a rougher forecast, rather than from land bankers.