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Good morning, and welcome to Forestar Group Inc.'s Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. The floor will be open for questions following the presentation. Please note this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar Group Inc.

Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar Group Inc.'s second 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 Group Inc. 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 Group Inc. on the date of this conference call. 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 Group Inc.'s annual report on Form 10-K and 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. We plan to file our 10-Q early next week. After this call, we will post an updated investor presentation to our Investor Relations site under Events and Presentations for your reference. Now, I will turn the call over to Andy Oxley, our President and CEO.

Thanks, Chris. 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 Group Inc. team delivered a solid second quarter generating $31.6 million of net income or $0.62 per diluted share. Revenues of $351 million. Lots sold increased 4% from a year ago and 46% sequentially to 3,411 lots. Additionally, lots under contract to sell increased 41% from a year ago to 25,400 lots, which is 37% of our own lot position. The highest contracted backlog we've had during the last four years. Our current backlog represents $2.3 billion of future revenue. We further strengthened our balance sheet during the quarter by increasing our liquidity position to approximately $800 million, extending our debt maturity profile through a refinancing transaction completed in March. We also continue to expand and diversify our operation, entering ten new markets in the last year and increasing our community count by 21%. The homebuilding industry continues to face headwinds from home affordability constraints and declining consumer confidence, resulting in a slower than expected start to the spring selling season. We are well positioned to navigate current market conditions, and our experienced operators are responding by adjusting the pace of development where appropriate. We are moderating our pace of land acquisition. 79% of our investments this quarter were on land development. We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. We are able to consistently provide essential finished lots to home builders with our unique blend of financial strength, operating expertise, and a diverse national footprint. We will now discuss our second quarter financial results in more detail. Jim?

Thank you, Andy. In the second quarter, net income was $31.6 million or $0.62 per diluted share, compared to $45 million or $0.89 per diluted share in the prior year quarter. Revenues for the second quarter increased 5% to $351 million compared to $333.8 million in the prior year quarter. Our gross profit margin for the quarter was 22.6% compared to 24.9% for the same quarter last year. The prior year quarter was positively impacted by non-recurring revenue with unusually high margins, including selling excess sewer capacity and a land contract assignment fee. Excluding the effect of these items, our prior year second quarter gross margin would have been approximately 22.5%. Our pre-tax income was $40.7 million compared to $58.9 million in the second quarter of last year. And our pre-tax profit margin this quarter was 11.6% compared to 17.6% in the prior year quarter. The decrease in pre-tax profit margin this quarter was primarily due to the non-recurring high margin items impacting the prior year quarter and less SG&A leverage in the current quarter. Lots sold in our second quarter increased 4% with an average sales price of $101,700. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Chris?

In the second quarter, SG&A expense increased 32% from the prior year quarter to $38.4 million, primarily due to a 29% increase in employee count to 440 employees. Our increased employee count is supporting the expansion of our operating platform, including entering ten new markets alongside D.R. Horton's footprint and increasing our community count by 21%. SG&A expense as a percentage of revenues was 10.9% compared to 8.7% in the prior year quarter. We are pleased with the progress we have made building our team, and we continue to attract high-quality talent. We remain focused on efficiently managing our SG&A while investing in our teams for future growth. Mark?

The 2025 spring selling season started slower than expected. As potential homebuyers have been more cautious due to continued affordability constraints and declining consumer confidence, mortgage rate buy-down incentives offered by builders are helping to bridge the affordability gap to spur demand for new homes. Our primary focus remains developing lots for new homes at affordable price points. The availability of contractors and necessary materials remains positive. The cost of developing land has stabilized. We have seen improvement in cycle times despite continued governmental delays. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible. Jim?

D.R. Horton is our largest and most important customer. Fifteen percent of the homes D.R. Horton started in the past twelve months were on a Forestar Group Inc. developed lot. And 22% of their finished lot purchases this quarter were lots developed by Forestar Group Inc. With a mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by Forestar Group Inc., we have a significant opportunity to grow our market share within D.R. Horton. We continue to work on expanding our relationships with other home builders and intermediaries. Twenty-seven percent of our second quarter deliveries were non-D.R. Horton lots sold to other customers, which includes 362 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to ten other home builders, two of which are new customers. Mark?

Our total lot position at March 31st increased 10% from a year ago to 105,900 lots, of which 68,400 or 65% were owned and 37,500 or 35% were controlled through purchase contracts. Nine thousand five hundred of our owned lots were finished at quarter-end. The majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three to four-year supply of land and lots managed in development phases to deliver lots at a pace that matches market demand. Owned lots under contract to sell increased 41% from a year ago to 25,400 lots or 37% of our owned lot position. Two hundred twelve million dollars of hard earnest money deposits secured these contracts, which are expected to generate approximately $2.3 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 28% 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 Group Inc.'s underwriting criteria for new development projects remains unchanged at a minimum of 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. During the second quarter, we invested approximately $340 million in land and land development, which was relatively flat with the prior year quarter. Twenty-one percent of our investment was for land acquisition, and 79% was for land development. Our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. We have moderated land acquisition investment as our current land and lot position allows us to return to strong volume growth in future periods. We now expect to invest approximately $1.9 billion in land acquisition and development in fiscal 2025, 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 $792 million of liquidity, including an unrestricted cash balance of $174 million and $618 million available to pass on our undrawn revolving credit facility. In March, we issued $500 million of 6.5% senior unsecured notes due 2033. A portion of the net proceeds was used to fund a tender offer to purchase $329 million of our existing 3.85% senior unsecured notes due 2026, leaving $71 million of the 3.85% notes outstanding. The successful transaction extended our debt maturity profile while enhancing our liquidity position. Total debt at March 31st was $873 million with no senior note maturities until May 2026. And our net debt to capital ratio was 29.8%. We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $32.36. Forestar Group Inc.'s capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors. Other developers generally use project-level development loans, which 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. 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. I'm pleased with the results that our team delivered this quarter, particularly considering the slower start to the spring selling season for the industry. We expect homeowner affordability constraints and cautious homebuyers to continue to be headwinds for the homebuilding industry. Homebuyers have responded favorably to recent increases in incentives offered by builders; however, the slower pace of new home sales during the spring selling season is affecting our lot deliveries. As outlined with our press release, we are updating our guidance for fiscal 2025. We now expect to deliver between 15,000 and 15,500 lots this year, generating between $1.5 billion and $1.55 billion of revenue. Our team has a track record of adjusting to changes in market conditions quickly, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. We are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans, combined with a constrained finished lot supply across the majority of our diverse positions, positions us for further success. With a clear direction, a dedicated team, and a strong operational and financial foundation in place, I'm excited about Forestar Group Inc.'s future. Jenny, at this time, we'll open the line for questions.

Thank you very much. At this time, we will be conducting our question and answer session. Your first question is coming from Carl Reichardt of BTIG. Carl? Your line is live.

Thanks. Good morning, everybody. Nice to talk to you. Thanks for taking my questions. 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.

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.

Okay. Great. Helpful. And then a follow-up, which is also two questions. 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.

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.

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.

Do you make the same kind of returns or margins that you would on a more traditional deal in a deal like this?

It is exactly, it's basically just a lot take that a home builder would have. So it's all the same pricing that we've contracted with a home builder. They've just assigned the contract.

Okay. Great. I appreciate it. Alright. Thanks all. Appreciate it.

Thank you very much. Your next question is coming from Anthony Pettinari of Citi. Anthony, your line is live.

Good morning. You saw an increase in SG&A and I think other company investments as you move into new markets and grow community count. And I'm just wondering big picture how you balance kind of this increase in costs as, you know, your largest customer still expects deliveries to be down year over year? And I know you've trimmed the land acquisition and development spend target, but I'm just wondering if there's any other actions that you would take or, you know, contemplate taking if the market remains weak?

Sure. You know, SG&A is up, you know, really tied to the increase in headcount from last year. So that headcount increased by 29% compared to a year ago. Only 4% of that increase occurred in the second quarter. So, you know, we've slowed down, you know, the vast majority of that increase in headcount is boots on the ground really to support the 21% increase in active projects and the ten new markets that we've gone into. We would expect our headcount to remain basically flat for the remainder of the year, and as a result, I think the percentage of SG&A to revenues, we would expect to come down to the high single digits for the year as we gain more leverage, you know, revenue leverage with a bigger second half of the year.

Got it. Got it. And then you talked about the cost of developing land stabilizing. Just wondering if you are seeing or anticipate any, you know, direct or indirect impact from tariffs on land development costs?

Yeah. I think right now, it's a lot of noise. I think it's too early to tell. Again, I think, you know, as we scale our business and we continue to build relationships, I think it's going to give us the ability to either hold pricing or see limited impacts to tariffs. But as of right now, we're seeing really not a lot from our trade partners in terms of cost increases, really nothing at all.

Okay. Okay. And maybe just one last one if I could. I think Texas and Florida represent maybe roughly half of your total lot position. And I'm wondering how you'd characterize demand for lots in Texas and Florida versus the national average? Is it a little weaker or significantly weaker or is it just wondering how you kind of characterize it regionally and within the states?

I would say, you know, we are seeing some weakness in Florida. And less in Texas. We're seeing some strength in some other markets, Las Vegas, the Carolinas. So but it's been more of a pace issue, really returning to more of a pre-COVID take down on a quarterly basis more so than large bulk takes. So particularly at affordable price points, yes, the customers are challenged, but there's strong activity in the sales centers. So we feel good about the long-term market.

Okay. That's very helpful. I'll turn it over. Thank you very much.

Your next question is coming from Trevor Allinson of Wolfe Research. Trevor, your line is live.

Hi. Good morning. Thank you for taking my questions. 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?

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.

A quick follow-up on that before getting into my second question. Are you seeing your competitors pull back more significantly to where this becomes a perhaps a further acceleration of market share gains for you guys given you didn't adjust your spend all that much?

Yeah. So I think it's definitely just there's opportunity in this market cycle to consolidate market share. That's not only within our relationship with our number one customer D.R. Horton, but also with other builders as evidenced with the ten additional builders that we added this quarter. And also it helps us to strengthen our relationship with our trade base. And we really see this as an opportunity for us to continue to consolidate market share.

Yeah. Thanks. That's really helpful. And actually a great segue into the next question I had. Your biggest customer is talking about slowing deliveries here in 2025. In that environment, do you look at increasing your penetration with other builders, or is this a type of environment where everybody's probably looking to slow some bit and that's a bit more challenging? Thanks.

Well, I mean, as from the commentary this morning, you know, they're looking to increase starts at Horton. Obviously, that'll depend on market conditions. So, obviously, the first input to that is the lot. And as they noted, lots are there, there's not an abundance, there's not a surplus of finished lots out there. So I think we see our ability to grow that Horton market share in the current environment. But as we talked about in our prepared remarks, we have expanded our relationship with other customers and with repeat customers as well as several new customers. So I think it supports the long-term view that we can continue to grow in the Horton footprint as well as expand our relationship in the larger community. And the other point is our capital structure is a huge advantage for us. What it sets us apart from other developers in terms of just being their availability to develop lots and then having what Andy said, growing both of market share in Horton and other builders.

Thank you for all the color, and good luck moving forward.

Thanks.

Thank you very much. And your next question is coming from Michael Rehaut of JPMorgan. Michael, your line is live.

Hi. Good morning. This is Alex Isaac calling for Mike. Thanks for taking my question. 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?

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.

Yeah. That makes a lot of sense. Thanks for the answer. Then also, you know, I wanted to ask about 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?

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.

Sure. That sounds great. Appreciate the color.

Thank you very much. Well, that appears to be the end of our question and answer session. I will now turn the call back over to Andy for closing remarks.

Thank you, Jenny, and thank you to everyone on the Forestar Group Inc. team for your focus and hard work. Stay disciplined, flexible, and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today. We look forward to speaking with you again to share our third quarter results on Tuesday, July 22nd.