Good afternoon, and welcome to Forestar’s Fourth Quarter 2021 Earnings Conference Call. I will now turn the call over to Katie Smith, Director of Finance and Investor Relations for Forestar..

Thank you, John. Good afternoon, everyone, and welcome to the call to discuss Forestar’s fourth quarter and fiscal 2021 results. Thank you for joining us. Before we get started, 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 and its most recent quarterly report on Form 10-Q, both of which are filed with the SEC.

This afternoon’s earnings release is on our website at investor.forestar.com, and we plan to file our 10-K in about two weeks. 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 Dan Bartok, our CEO..

Thank you, Katie, and good afternoon, everyone. In addition to Katie, I am pleased to be joined on the call today by Jim Allen, our Chief Financial Officer. We are extremely proud of the Forestar team’s accomplishments in the fourth quarter and in full fiscal year. We sustained our momentum in the fourth quarter.

And as a result, we continue to gain market share in the fragmented lot development industry. Forestar delivered more than 15,900 lots to customers in fiscal 2021, representing a 53% increase in lot deliveries year-over-year. This resulted in significant revenue growth and margin expansion, creating meaningful value for our shareholders.

We achieved outstanding operating leverage while improving profitability, even as we invested heavily in growing our team and platform. We are efficiently scaling our business with fiscal 2021 SG&A expenses at 5.2% of revenue, while increasing our gross profit margin 460 basis points from fiscal 2020.

The demand for developed lots remains incredibly strong. This, combined with our strategy of pricing lots closer to the time of delivery enabled Forestar to take advantage of favorable market conditions when setting finished lot prices in select markets.

We also made further progress in delivering more lots from Forestar-sourced projects, and we continue to reduce our lot banking position. We continue to execute our returns-focused business model. Our high turnover, lower risk manufacturing strategy led us to achieve an 11.7% return on equity for fiscal 2021.

This was a 440-basis point improvement from last year and our sixth consecutive quarter of ROE improvement. We expect to continue to increase our returns on equity and inventory as our platform gains additional maturity and scale, and our team captures additional share in their respective markets.

Jim will now discuss our fourth quarter and fiscal 2021 results in more detail..

Thank you, Dan. In the fourth quarter, net income attributable to Forestar increased 82% to $44 million or $0.89 per diluted share compared to $24.2 million or $0.50 per diluted share in the prior year quarter.

Consolidated revenues for the quarter increased 20% from the prior year quarter to $418.7 million, which included $20.1 million of track sales and other revenue. Lots sold during the quarter increased 23% year-over-year to 4,902 lots with an average lot sales price of $81,600.

We expect our ASP will continue to fluctuate quarter-to-quarter based on the geographic location and lot size mix of our deliveries. 94% of lots sold in the quarter were from development projects, up from 77% in the same quarter in 2020.

For the fiscal year, net income attributable to Forestar increased 81% to $110.2 million or $2.25 per diluted share compared to $60.8 million or $1.26 per diluted share in fiscal 2020. Consolidated revenues for the year totaled $1.3 billion, which included $32.7 million of track sales and other revenue.

During fiscal 2021, lots sold increased 53% to 15,915 lots with an average sales price of $81,600. 89% of lots sold in fiscal 2021 were from development projects. During the quarter, lots sold to D.R. Horton represented 89% of Forestar’s total lots sold, down from 97% in the fourth quarter of fiscal 2020. Lots sold to D.R.

Horton during the fiscal year represented 93% of Forestar’s total lots sold. We sold lots to 14 customers other than D.R. Horton during fiscal 2021, up from 11 customers in fiscal 2020.

Dan?.

Our pretax income for the quarter increased 84% to $58.8 million with a pretax profit margin of 14%. This was an improvement of 480 basis points over the prior year quarter. Our pretax income for fiscal 2021 increased 88% to $146.6 million, while our pretax profit margin improved 270 basis points to 11.1%.

Excluding the $18.1 million loss on extinguishment of debt, the pretax income for fiscal 2021 increased 111% to $164.7 million, and our pretax profit margin improved 400 basis points to 12.4%.

Our gross profit margin was 18.1% in the fourth quarter and was 17.3% for the fiscal year, representing an improvement of 540 basis points and 460 basis points over the prior year periods, respectively.

This improvement was primarily due to increased margins on lot sales from development projects, which was largely driven by capitalizing on strong demand for finished lots.

Based on today’s market conditions, we expect our pretax profit margin in fiscal 2022 to be approximately 13%, driven mostly by improvement in lot sales gross margin as we expect a higher proportion of Forestar-sourced development lot sales in fiscal 2022 when compared to fiscal 2021.

We continue to expect quarterly fluctuations in our gross and pretax profit margins due to the quarterly mix of our lot deliveries and the timing of track sales.

As a result of expected quarterly fluctuations, combined with seasonal volumes and operating leverage, we currently expect to have lower pretax profit margins in the first half of fiscal 2022 compared to the second half of the year. SG&A expense as a percentage of revenue was 4.7% in the quarter and 5.2% for the year.

We remain focused on efficiently managing our SG&A expenses as we build out our platform to support our significant growth. We believe we will continue to manage our business at a mid-single-digit SG&A percentage.

Katie?.

Forestar’s underwriting criteria for new development projects includes a minimum 15% annual pretax return on inventory and a return of the initial cash investment within 36 months.

During the fourth quarter, investments in land and land development totaled approximately $370 million of which $125 million was for land and $245 million was for land development. During fiscal 2021, investments in land and land development totaled approximately $1.6 billion, of which roughly half was for land and half was for land development.

In fiscal 2022 we expect to invest at least $1.75 billion in land and land development, subject to market conditions. Forestar’s lot position on September 30 was 97,000 lots, of which 64,400 lots are owned and 32,600 are controlled through purchase contracts. Of our 64,400 owned lots, 33% are under contract to sell to D.R.

Horton, representing approximately $1.6 billion of future revenue. 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. Lots sourced by Forestar continue to grow as a percentage of the company’s owned lot portfolio, supporting further improvement in our gross margins.

Of the company’s owned lot position at September 30, 52% were sourced by Forestar, up from 39% a year ago. We are continuing to target a three to four-year owned inventory of land and lots.

Jim?.

Forestar remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage. At September 30, we had approximately $500 million of liquidity, including $150 million of unrestricted cash and $350 million of available capacity on our revolving credit facility.

Total debt at September 30 was $705 million with no senior note maturities until fiscal 2026, and our net debt-to-capital ratio at year-end was 35.2%. During fiscal 2021, we issued 1.4 million shares of common stock under our at-the-market equity offering program, raising net proceeds of $33.4 million.

At September 30, stockholders’ equity was $1 billion, and our book value per share increased to $20.47, up 13% from a year ago.

Dan?.

While there have been disruptions in the supply chain, including shortages and delivery delays, the core drivers of our business remain healthy. Although we have not seen any improvement in the supply chain yet, we believe, we are well positioned to continue navigating successfully through changing market conditions.

Our accomplishments in fiscal 2021, combined with our growth plan and proven business model, give us confidence in the Forestar’s teams ability to execute throughout fiscal 2022. We believe Forestar remains uniquely positioned to gain market share through a housing market and economic cycles in the highly fragmented lot development industry.

We were pleased with our sales pace in October. Based on current market conditions, we expect to deliver between 19,000 and 19,500 lots and to generate approximately $1.65 billion of revenue in fiscal 2022. Due to seasonal volumes, we expect revenue to be higher in the second half of fiscal 2022 than the first half.

And as I mentioned earlier, we currently expect our pretax profit margin for the full year of fiscal 2022 to be approximately 13%. We expect lower pretax profit margins in the first half of fiscal 2022 compared to the second half due to the quarterly mix of expected lot deliveries, and to a lesser extent, operating leverage.

Finally, we expect our tax rate in fiscal 2022 to be approximately 24.5%. Before we turn to questions, I’d like to remind everyone of Forestar’s investment highlights. We have a unique lot manufacturing business model that is very different than a typical land developer. We have no unentitled land.

We are focused on developing lots for the affordably priced housing market. We have a management team that is experienced in consolidating market share and navigating through market cycles. We have a strong balance sheet and liquidity position with low net leverage.

We have been increasingly profitable and are managing our business at a mid-single-digit SG&A percentage. And most importantly, we have a unique competitive advantage due to our relationship with D.R. Horton, the nation’s largest builder. This highly strategic relationship allows us to expand our platform nationally, while minimizing risk.

To summarize, we are executing on our plan and are positioned for continued success. John, at this time, we’ll open up the line for questions..

Thank you. [Operator Instructions] And the first question is coming from Truman Patterson from Wolfe Research. Your line is live..

Thanks. Actually, this is Paul Przybylski.

Dan, I was wondering if you could provide any more color on the mix of revenue and pretax in 2022 and maybe the magnitude of how it might be higher and lower?.

Well, it’s – again, we have a little bit of supply chain questions going on and how things are going to be delivered, and to our best guess, we clearly believe that revenues are going to be higher in the second half of the year. Some of that’s based on when new land deals were put into production.

But we definitely expect higher revenues in the second half compared to the first half. We think our margins themselves will also be higher in the second half as compared to the first half. Some of that’s driven by the higher volume and the rest is a little bit just from more Forestar-sourced projects..

Okay.

I guess, what – how long do you think your development timeline has extended over the past quarter, past six months? And what are the major roadblocks and the outlook for getting those resolved?.

Yes. No, there’s no really one answer, to be honest with you. Because it’s amazing to me how different it is from division to division. I have some divisions that haven’t really seen any delays at this point. Others that we’re seeing 30, 60, 90-day delays. I think the biggest issue right now is PVC pipe, particularly in the larger size diameter pipe.

There seems to be a shortage of that. We’re seeing shortages in valves for that pipe and fittings. But again, it’s spotty. Some markets have plenty of things where the local suppliers had bigger inventories. Others are waiting for things to be produced.

The other thing that we’re seeing a little shortage on, again, market-specific, is the concrete structures, that being fabricated for the exact use. It isn’t that there’s a shortage of the concrete, it’s that there’s a little bit of labor shortage and the people to be able to produce them. So again, very spotty market-to-market.

And then another thing that seems a little bit humorous, but in some cases we’ve had difficulty getting manhole covers..

Got it. Thank you. Appreciate it..

The next question is coming from Anthony Pettinari from Citigroup. Your line is now live..

This is Asher Sohnen on for Anthony, and congrats on the quarter.

I was just wondering, on the flipside, are there any markets that you are kind of seeing maybe builders getting a little bit more heated, maybe those pulling back on the other sales of lots? Obviously, supply chain has kind of constricted sales across the board, but I’m just wondering if there’s any markets where things are starting to maybe top out or maybe worry you a little bit?.

From a demand standpoint, I’m not really seeing any slowdown anywhere, to be honest with you. As fast as we’re getting lots on the ground, people want those lots. The overall market, I think that if there’s a market that I watched closely, it’s probably Austin, Texas. I think prices have escalated faster than most places.

Land prices have escalated a little bit faster than other places. There’s just been a flood of people and jobs going to that market, which sets kind of a demand generated frothiness, so to speak. But again, we’re pretty fortunate to have some really strong land positions that we tied up a while back and are executing pretty well..

Okay, that’s helpful. Just switching gears to price, I think in the quarter pricing was down a little bit year-over-year. And you talked about that over the past quarters, kind of mostly a timing issue.

But I was just wondering if you can talk about looking what’s already been contracted for 2022, can you give us a sense of what level of price growth might be baked in there?.

Yes. I think if you take the guidance that we provided in revenue and in lots, we’re probably looking overall at about a 7% or 8% increase in lot prices. But again, that’s – I don’t know how indicative that is to specific markets or specific projects because we have shifted to some extent.

A higher percentage of our lot sales are in Florida and Texas than they may have been in the past, which are basically less expensive lots. And we’ve also seen kind of an overall average smaller lot.

So even though the prices have held pretty consistent, I think on a real basis, we’re definitely seeing some price increases in all markets and heavier in others..

Okay, thanks. That’s helpful. I’ll turn it over..

Next question is coming from Deepa Raghavan from Wells Fargo Securities. Your line is now live..

Hi, good evening everyone. Thanks for taking my questions.

What are some of the newer markets you’re entering into at this time? And also, where are you seeing the most expansion within Forestar sourced lots at this time?.

Well, I’ll answer the second question first. The markets, that’s really the major markets where we have had teams and we continue to build on the size of those teams and now have people in those markets. That had been outsourcing land deals which are more coming to fruition.

So I think if you just kind of name off the top markets in the country, you’ve got Dallas, Houston, Austin, Orlando, Tampa, Phoenix. That’s probably where we’ve grown the most within those markets.

Pretty much throughout Florida, I say Orlando and Tampa, but it’s really pretty much throughout Florida where our teams and our ability to execute have grown the most. New markets, I think the only new market this past quarter was Albuquerque. Albuquerque/Santa Fe, which actually we were in before. We sold out of that project.

It’s a little bit of a land constrained market, so it took us some time to find an appropriate new project. So even though it’s a new market for the quarter, it is one that we’ve been in before. Other than that, I don’t know of any other new market entries that I would say are recent.

We’ve entered, over the last year, I think we had several new markets. I’d have to look at the list over here. You got that handy, Katie? Okay, so Wilmington, North Carolina was a new market for us in Q3. In Q2, we went into Gainesville, Florida, Asheville, North Carolina and Columbus, Ohio. And in Q1, actually several. We had Savannah.

Savannah, Georgia, Ocala, Florida, Des Moines, Iowa, Spokane, Portland/Salem, Portland Salem market. And that was it. So again, a little bit smaller markets where our new markets are at, but we’re finding an attractive market. There’s not a lot of competition with land developers.

Land prices aren’t out of reach, so able to put affordable lots on the ground. Obviously, we have much smaller teams in those markets, but I think they’re going to be really strong profitable markets for us..

That’s great color. I appreciate it. My follow-up is on capital raises.

As we stand here now, are you expecting to raise any fresh capital next year?.

Well, we did update our shelf offering. We had an ATM program in place last year. We intend to have one in place for the next few years coming up. I think we’re going to continue to be opportunistic and look at the capital markets on a regular basis. And when we feel that we can add value to the shareholders, we will continue to raise equity.

But I think some of that’s just based on the capital markets and how things go. And obviously, we feel good about our ability to place that equity into the market and get pretty quick returns. We have still a pretty robust pipeline.

But again, I think we’re going to be opportunistic, but we would expect to continue raising equity through our ATM program..

Got it. Thanks very much. Good luck..

Thank you..

The next question is coming from Mike Rehaut from JPMorgan. Your line is now live..

Thanks. Good afternoon, everyone. First, just wanted to dive in, and I apologize if this is one that you hit on earlier, probing on the 2022, fiscal 2022 pretax margin guidance of 13%. So I guess roughly up 100 – I’m sorry, 200 basis points year-over-year.

Safe to say that at this point, you’re thinking it’s primarily going to be driven by gross margin expansion, I presume, since you’re expecting mid-single-digit SG&A to persist.

And if that’s the case, if you could just kind of again – and again, I’m sorry if you hit on this before, but just outline the drivers of what’s pushing that gross margin forward..

I think the primary driver is, one is just a strong market and demand – high demand for the lots. I think the other is the continued development of the Forestar sourced transactions that we’ve been buying. And I think we’ll always have better pricing power on transactions that we’ve sourced versus one that a builder has sourced.

But also, I think, if I’m not mistaken, I think our profit increase, I think you may be excluding the onetime charge we had in there, which drove some of that. I think we were what, 11 –.

11.1% for the year..

11.1% for the year going to 13%, but without the onetime charge, what was it for?.

12.4%..

12.4%. So it’s actually only about a 60-basis point expansion if you exclude the onetime charge..

I appreciate that. That’s something I guess I didn’t flow through the annual tab.

So just going back though, to the Forestar sourced, can you just give us a reminder of where you are currently or maybe 2020, 2021, 2022 and where you could be over a longer period?.

Well, our Forestar sourced owned lots at the end of the year were about 52% of our owned lots. I think last year was about 39%. We’d expect that to continue to increase..

I guess I meant, though, as a percent of lot deliveries..

It was about 23% this past year of our lot deliveries, and I think it was about 10% last year. Okay..

But as those inventories continue to grow, you’ll see that there’ll be a trailing effect of lot sales. So based on what Jim’s – throughout there, I would expect it might be another 10% increase in the number of – in the percentage of sales that came from Forestar sourced deals..

Right. And I guess just lastly, could you just remind us of the gross margin differential between the Forestar sourced and the D.R.

Horton sourced?.

Yes. I don’t think that’s anything that we’ve provided..

Okay. One last question, if I could. Just on the gross margin – I’m sorry, the SG&A. You’re expecting mid-single digits, which more or less sounds similar to what you did this past year and you did 4.9 in 2020.

Is this kind of how we should think of a steady state, particularly as you continue to build out your network? Or is this something that over time, we could still see a little bit of leverage as the business continues to grow?.

Yes. I mean, that’s a great question. I think running at a give or take 5% SG&A number is extremely efficient myself. We have been building out the teams and we’re getting deeper into the teams. I would hope that as our scale continues to grow, we will see some leverage off of that number.

But it’s also hard for me to just think that I can really run sub-5 on a continued basis. But I hope to prove that works. But I don’t know that I would give you that guidance here today..

Okay, very good. Thanks so much..

Yes, thanks..

[Operator Instructions] The next question is coming from Max Downey from BTIG. Your line is live..

Hi guys. Thanks for taking my questions. Just kind of wondering, so this quarter you sold about 400 more lots to third-party builders than this time last year.

Is there anything that’s kind of driving that? Is the deal environment better than last year? Or is there anything else kind of helping that out?.

It’s obviously, we’re still growing off of a very low base 400 lots in the scheme of things doesn’t sound like a lot of lots, but it just happened to be a project or two that delivered that were Forestar sourced that had contracts with other builders. But it doesn’t – to say 400 lots doesn’t feel like a big mover.

I think it’s just going to be lumpy for a while. Obviously, we’re trending in the direction of more third-party builder sales, but I wouldn’t look at this quarter’s number as a new run rate or anything. I think it’s just going to be lumpy for a while..

That makes sense. That’s really helpful. And then my second one is, in the past, I think we’ve kind of talked about the potential for M&A to accelerate growth.

Is there any change in developer interest to sell to you or any interest on your guys’ end in doing that?.

We definitely have an interest in finding and transacting on opportunities as they fit. We continue to look at some opportunities, but have not found anything that really fit our model yet at a price that seems attractive. But we will continue to look and it is part of our strategy..

That’s helpful. Alright, thanks guys..

Okay. We have a follow-up question coming from Truman Patterson’s line from Wolfe Research. Your line is now live..

This is Paul again.

I guess looking at the number of lots that you have contracted for sale, can you remind us how many of those or what mix of those make more like a fixed price basis versus those that have cost inflators? And then how does the rising price of oil/fuel impact your development costs?.

I’m going to take the second one, because that’s probably easier. We don’t, we haven’t really seen a huge increase in our development costs as a result of rising fuel yet. But normally, you would anticipate that the contractors, because their fuel costs are going up, are going to pass some of that through.

And then also in plastic resin pipe, which it’s gone up quite a bit, plastic resin pipe, but we think that’s more due to supply chain issues than directly the cost of oil. I’m hoping that, that plastic resin actually settles down a little bit, but that’s just a hard one to predict.

So I don’t really know that I’ve seen, that I could pinpoint a number for you that how much is directly related to the cost of oil. As it relates to contracts, it’s a little bit over the board. Some of our contracts to sell are what I would call bulk closes, where the price is fixed when we deliver the lots. They buy all the lots and we’re done.

Others have takedown provisions where they take so many a quarter or so many a month or every 6 months. In all of those cases, there is a cost inflator built into that contract price. So it’s the base price plus an escalator that will increase over time, so that we’re being somewhat compensated for holding those lots.

So all of them that have takedown features have escalators..

Okay, thank you. Appreciated..

I’d now like to turn it back to Dan Bartok for closing comments..

Thank you, John. Thanks to everyone on the call today. And specifically, thanks to the Forestar team. Your focus and hard work this year has really made these results achievable. So thank you, guys. And I’m really proud of the results the team achieved this year, and we look forward to working together to continue growing and improving our operations.

And for everyone on the call, we appreciate your time today and look forward to speaking with you again in January to share our first quarter results. Thanks..

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation..