Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Forestar Group Inc (FOR, Financial) delivered 3,255 lots, generating revenues of $318.4 million, in line with expectations.
- Pre-tax profit margins remained strong at 16.2%, with earnings per diluted share of $0.76.
- Book value per share increased 15% to $29.87, and return on equity expanded 190 basis points to 13.8%.
- Forestar's total lot position increased 40% from a year ago to 102,100 lots, indicating strong future revenue potential.
- The company has significant liquidity with approximately $745 million, including $360 million in unrestricted cash and $385 million available on an undrawn revolving credit facility.
Negative Points
- Net income decreased 17% to $38.7 million compared to the prior year quarter.
- Revenues for the quarter decreased 14% to $318.4 million from $368.9 million in the prior year quarter.
- SG&A expenses increased 11% to $29.3 million, with SG&A as a percentage of revenues rising to 9.2% from 7.2% in the prior year quarter.
- Development cycle times have increased due to governmental delays, impacting lot deliveries.
- The company faces elevated mortgage interest rates and inflationary pressures, which continue to impact affordability.
Q & A Highlights
Q: Can you provide more details on the government delays affecting lot development? How many lots were delayed, and what specific issues are causing these delays?
A: Mark Walker, Chief Operating Officer: The primary delays are related to getting finished lots certified and approved by the government, which affects both the beginning of development and subsequent phases. Over a 15-month period, we experienced an eight to nine-week increase in cycle times due to supply chain issues, contractor availability, and government approvals. However, cycle times have stabilized over the past six months, and we have seen some recent reductions in cycle times for a small sample of projects.
Q: Is there a change in the mix of the number of lots per community that you are letting out the door? And can you provide a sense of the expected growth in lot deliveries for 2025?
A: Anthony Oxley, President and CEO: There is no significant change in the size of the communities. We expect mid-single-digit growth in lot deliveries for 2024 and see the potential for double-digit growth in 2025, depending on market conditions. We have increased our land acquisition and development activity, which should result in more lot deliveries over the next 90 to 180 days.
Q: On the guidance, if the volume guidance is down but revenue guidance is unchanged, is pricing better, or is it a mix impact?
A: Katie Smith, Vice President - Finance, IR: The revenue guidance remains unchanged because the low end of our range, combined with the year-to-date average price, rounds down to $1.4 billion. We expect the average sales price (ASP) to be roughly in line with what it has been this year and in the next quarter.
Q: Are there any markets that you might call out as oversupplied or where you're pulling back in terms of new land acquisition? Conversely, are there any markets that are particularly attractive?
A: Anthony Oxley, President and CEO: We are not seeing inventory buildup in affordable price point or first-time homebuyer products. Markets like Florida, Texas, and the Carolinas are very strong. We do see some softness in areas with rapid price appreciation and higher interest rates, such as Colorado. However, affordable price point products continue to see strong demand.
Q: Can you elaborate on the impact of government delays on your lot deliveries and development cycle times?
A: Mark Walker, Chief Operating Officer: Government delays primarily affect the certification and approval of finished lots, as well as the beginning of development and subsequent phases. Over a 15-month period, we saw an eight to nine-week increase in cycle times due to these delays. However, cycle times have stabilized over the past six months, and we have seen some recent reductions in cycle times for a small sample of projects.
Q: What is the outlook for lot deliveries and revenue growth in 2025?
A: Anthony Oxley, President and CEO: While we are not providing specific guidance for 2025, we expect mid-single-digit growth in lot deliveries for 2024 and see the potential for double-digit growth in 2025, depending on market conditions. We have increased our land acquisition and development activity, which should result in more lot deliveries over the next 90 to 180 days.
Q: How are you managing the impact of elevated mortgage interest rates on affordability and demand for new homes?
A: Mark Walker, Chief Operating Officer: Despite elevated mortgage interest rates and inflationary pressures, the supply of new and existing homes at affordable price points remains limited, and demographics supporting housing demand are favorable. Mortgage rate buy-down incentives offered by builders, combined with low resale supply, continue to drive buyers to new construction. Our focus remains on developing lots for homes at affordable price points.
Q: Can you provide more details on your capital structure and liquidity position?
A: James Allen, Chief Financial Officer: At quarter end, we had approximately $745 million of liquidity, including an unrestricted cash balance of $360 million and $385 million of available capacity on our undrawn revolving credit facility. Total debt at June 30 was $706 million with no senior note maturities until fiscal 2026, and our net debt-to-capital ratio was 18.7%. Our capital structure provides operational flexibility and positions us to take advantage of attractive opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
