Forestar Group Inc. (FOR) Earnings Call Transcript & Summary

Good morning, and welcome to Forestar's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar's third quarter results. Before we get started, I want to remind everyone that 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-K, in its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.forestar.com, and plan to file our 10-Q later this week. After this call, we will post an updated investor presentation to our Investor Relations site under Events & 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. The Forestar team achieved solid third quarter results with revenues of $407 million, up 4% from the prior year quarter on 3,659 lots sold. Earnings per diluted share increased 8% to $0.70 and pretax income increased 12% to $48.7 million. Book value per share increased 10% from a year ago to $36.40 and our contracted backlog remains strong with visibility towards $2.3 billion of future revenue. Ongoing affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flexibility and we ended the quarter with approximately $1.1 billion of liquidity. We also reached a significant milestone this quarter, delivering our 100,000 lot since D.R. Horton made its transformative investment in Forestar in 2017. Forestar has grown to a proven scalable platform, and we couldn't be prouder of what our teams have built to get us here. Looking ahead, we remain focused on turning our land and lot inventory efficiently, maximizing returns and consolidating market share with a strong balance sheet, operating expertise and a diverse national platform, Forestar is well positioned to navigate market conditions and extend its leadership position in the highly fragmented lot development industry. We will now discuss our third quarter financial results in more detail. Jim?

Thank you, Andy. In the third quarter, net income attributable to Forestar increased 9% to $35.9 million or $0.70 per diluted share compared to $32.9 million or $0.65 per diluted share in the prior year quarter. Our pretax income increased 12% to $48.7 million compared to $43.6 million in the third quarter of last year, and our pretax profit margin increased 80 basis points to 12%, from 11.2% in the prior year quarter. Revenues for the third quarter increased 4% to $407 million compared to $390.5 million in the prior year quarter. Mark? .

We sold 3,659 lots in the quarter with an average sales price of $108,800. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our delivery. Our gross profit margin for the quarter was 20.7% compared to 20.4% for the same quarter last year. Chris?

In the third quarter, SG&A expense increased 2% to $38.3 million compared to $37.4 million in the prior year quarter. As a percentage of revenues, SG&A was 9.4%, down from 9.6% in the prior year quarter. Our head count declined 9% from a year ago as we remain focused on efficiently managing SG&A while maintaining strong teams across our national footprint to support future growth. We expect our headcount to remain relatively flat for the remainder of the year. Jim? .

D.R. Horton is our largest and most important customer. 14% of the homes DR Horton started in the past 12 months were on Forestar developed lot. A mutually stated goal of 1 out of every 3 homes D.R. Horton cells to be on a lot developed by Forestar, we have significant opportunity to grow our business with D.R. Horton. We also continue to expand our relationships with other homebuilders, selling 289 lots or 8% of our third quarter deliveries to 12 other customers this quarter. Mark? .

Our total opposition at June 30 was 91,700 lots of what 62,200 or 68% were owned and 29,500 or 32% were controlled through purchase contracts. 9,600 of our own lots are finished at quarter end and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a 3- to 4-year supply of land and lots to manage development phases to deliver finished lots at a pace that matches demand. At quarter end, 23,500 or 38% of our owned lots are under contract to sell, $202 million of par earnest money deposits to secure these contracts, which are expected to generate approximately $2.3 billion of future revenue. For contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 31% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

Forestar's underwriting criteria for new development projects remains unchanged at a minimum of 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the third quarter, we invested $312 million in land and land development. Roughly 80% of our investments was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year to more efficiently manage our inventory, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will enable us to return to strong volume growth in future periods. We still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim.

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with approximately $1.1 billion of liquidity and including an unrestricted cash balance of $395 million and $670 million of available capacity on our undrawn revolving credit facility. Total debt at June 30 was $793.8 million with no senior note maturities in the next 12 months, and our net debt-to-capital ratio was 17.7%. We ended the quarter with $1.9 billion of stockholders' equity and our book value per share increased 10% from a year ago to $36.40. Forestar's capital structure is 1 of our biggest competitive advantages, and it sets us apart from other land developers. Project level land acquisition and development loans have become less available and more expensive in recent years impacting most of our competitors who generally rely on this type of financing. These loans are typically more restrictive, have floating rates and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks.

Thanks, Jim. Forestar team delivered solid results in the third quarter, including increased revenues and profits while further strengthening our balance sheet. As outlined in our press release, we are maintaining our fiscal 2026 lot delivery guidance of 14,000 to 14,500 lots and our revenue guidance of $1.6 billion to $1.7 billion. Our teams have a proven track record of adjusting quickly to changes in market conditions. We closely monitor each of our markets and balance the pace and price of lot sales to maximize returns across our projects. With more than 200 active projects across our broad national footprint -- we have operational flexibility to allocate capital strategically based on local demand and market dynamics. Although home affordability constraints and cautious consumer sentiment are expected to remain near-term headwinds for home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in highly fragmented lot development industry. Consistent execution of our strategic and operational plans, combined with constrained supply of finished lots across many of our markets, positions us well for further success. With a clear strategy, the experienced team and strong operational and financial foundation, we are optimistic about Forestar's future. Jenny, at this time, we will open the line for questions.

[Operator Instructions] Our first question is coming from Ryan Gilbert of BTIG.

I was hoping you could give us an update on the competition that you're seeing in the land market from other land developers and land bankers as well. Horton talked to maybe a slower-than-expected homebuyer market in the quarter. And I'm wondering if that translated into the land market as well. .

Landmark has been relatively stable. I haven't seen much change in land price. We have seen a little bit of improvement on being able to negotiate terms, for example, getting land on takedowns, getting through full entitlement and permitting -- so we're able to focus on shovel-ready deals. Overall, I would say we'd see a somewhat less development activity across the board in quite a few markets. But most markets are still slightly undersupplied. So we think that gives us opportunity for future growth.

Got it. Sorry, slightly undersupplied from a finished lot perspective?

That's correct.

Okay. Got it. I'd appreciate any directional thoughts on 2027, just given the decline in your controlled block count. Do you think that the land position puts you in a position to grow market share in 2027? .