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spk10: Good afternoon and welcome to Four Star's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton, the majority shareholder of Four Star.
spk01: Thank you, Paul, and good afternoon. We welcome each of you to the call to discuss Four Star's fourth quarter and fiscal 2020 financial results. Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Four Star 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 Four Star on the date of this conference call, and Four Star does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in Four Star's 2019 annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q, all of which are filed with the Securities and Exchange Commission. This afternoon's earnings release is on Four Star's website at investor.fourstar.com, and the 10-K is planned to be filed in about two weeks. After this call, we will post an updated investor presentation to Four Star's investor relations site under Events and Presentations for your reference. Now I will turn the call over to Dan Bartok, the CEO of Four Star.
spk08: Thank you, Jessica, and good afternoon, everyone. In addition to Jessica, I am pleased to be joined on the call today by Jim Allen, our Chief Financial Officer, and by Colin Dawson, DR Horton's Vice President of Corporate Finance and Treasurer. We're extremely proud of the four-star team's accomplishments in fiscal 2020. We continue to deliver on key milestones, which we believe will create additional value for our shareholders. We are rapidly scaling our business and have capitalized on the strength of the residential finished lot market. We delivered more than 10,000 lots to home builders in fiscal 2020. more than double our deliveries in fiscal 2019. We continue to implement drivers which will translate to increased pre-tax profitability. We are efficiently scaling our business with SG&A leverage improving 180 basis points from fiscal 2019. And we expect improved gross margins in fiscal 2021 as a result of the overall market strength and our intentional shift towards more four-star source transactions and less lot banking. We are consolidating market share in the undercapitalized and fragmented lot development industry. As four-star lots sold to D.R. Horton doubled as a percentage of D.R. Horton's closings on a year-over-year basis. In addition, we are pleased to report we recently closed our first project, which was sourced by a third-party builder. We continue to execute on our returns-focused business model build upon the foundation which has been set. Our high turnover, lower risk manufacturing strategy led to a 260 basis point year-over-year improvement and four stars return on equity. We expect to generate further growth in profits and increases in returns in fiscal 2021 as our platform continues to gain scale and our team matures. We'll now discuss our fourth quarter and fiscal 2020 results in more detail. Jim?
spk05: Thank you, Dan. In the fourth quarter, net income attributable to Four Star increased 91% to $24.2 million or 50 cents per diluted share compared to $12.7 million or 30 cents per diluted share in the prior year quarter. Consolidated revenues for the fourth quarter totaled $347.6 million which included $5.2 million of revenue from residential tracks sold. Four Star's fourth quarter lot sales revenues increased 90% from the prior year quarter to $342.4 million. Residential lots sold during the quarter totaled 3,977 lots, an increase of 108% from the prior year quarter. The average lot sales price for the quarter was $86,000. Seventy-seven percent of lots sold in the quarter were from development projects, with the remainder from lot banking. For the fiscal year ended September 30, 2020, net income attributable to Four Star was $60.8 million, or $1.26 per diluted share, compared to $33 million, or 79 cents per diluted share, in fiscal 2019. Consolidated revenues for fiscal 2020 totaled $931.8 million, which included $51.1 million of revenue from residential and commercial tracks sold. Four Star's fiscal 2020 lot sales revenues increased 150% from the prior year to $880.3 million. Residential lots sold during fiscal 2020 totaled 10,373 lots, an increase of 151% from fiscal 2019. The average lot sales price for the year was $84,600, and 71% of lots sold in fiscal 2020 were from development projects. During the fourth quarter, we sold 3,900 lots to DR Horton and 10,200 lots during the fiscal year.
spk08: Dan? Our pre-tax income for the quarter was $32 million, with a pre-tax profit margin of 9.2%. Our pre-tax income for all of fiscal 2020 was $78.1 million, with a pre-tax profit margin of 8.4%. Our gross profit margin was 12.7% in the fourth quarter and for the year. SG&A expense as a percentage of revenue was 3.7% in the quarter and 4.9% for the year. We currently expect our pre-tax profit margin to improve to approximately 10% in fiscal 2021, driven mostly from improvement in lot sales gross margin as we expect a lower mix of lot banking and higher proportion of four-star source development lot sales in fiscal 2021 compared to fiscal 2020. However, we still expect quarterly fluctuations in our gross and pre-tax margins due to the mix of our lot deliveries and the timing of potential track sales. We remain focused on managing our SG&A efficiently while building out our infrastructure to support our significant growth. We believe we will continue to manage our business at an SG&A percentage significantly lower than most public home builders. Jessica?
spk01: Forster's underwriting criteria for new development projects includes a minimum 15% annual pre-tax return on inventory and a return of the initial cash investment within 36 months. During the fourth quarter, investments in lots, land, and development totaled $320 million, of which $170 million was for land and $150 million was for land development. During fiscal 2020, investments in lots, land, and development totaled approximately $1 billion. In fiscal 2021, Four Star expects to invest at least $1.25 billion in lots, land, and development subject to market conditions. Four Star's lot position at September 30th was 60,500 lots, of which 42,400 lots are owned and 18,100 are controlled through purchase contracts. 14,000 or 33% of Four Star's owned lots are under contract to sell to D.R. Horton, representing approximately $1 billion of future revenue. Another 16,400 or 39% of Four Star's owned lots are subject to a right of first offer to D.R. Horton under the Master Supply Agreement. Of Four Star's owned lot position at September 30th, 39% was sourced by Four Star, up from 28% a year ago. Four Star continues to target a three to four year owned inventory of land and lots. Jim?
spk05: Four Star remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage. At September 30th, we had approximately $740 million of liquidity, including $400 million of unrestricted cash and $340 million of available capacity on our revolving credit facility. Total debt at September 30th was $641 million, with no senior note maturities until fiscal 2024, and our net debt-to-capital ratio at year-end was 22.1%. During the quarter, we entered into an equity distribution agreement to issue and sell, from time to time, up to $100 million of our common stock through an at-the-market equity offering program. As of September 30th, no shares had been issued under the program. At September 30th, stockholders' equity was $871 million, and our book value per share increased to $18.12, up 8% from a year ago.
spk08: Dan? Four Star is uniquely positioned to consolidate market share in a highly fragmented lot development industry through housing market and economic cycles. Based on today's market conditions, we now expect to deliver between $13,000 13,500 lots and to generate approximately $1.1 billion of revenue in fiscal 2021. And as I mentioned earlier, we currently expect our pre-tax profit margin for the full year of fiscal 2021 to be approximately 10%. At scale, we continue to expect our operating model to produce financial results and returns that are similar to or better than most mid-cap homebuilders. Before we turn to questions, I'd like to remind everyone of Four Star's investment highlights. We have a unique lot manufacturing business model, very different than a typical land developer. We have no unentitled land. We are focused on developing lots for affordably priced housing. We have an experienced management team that knows how to navigate through market cycles. We have a strong balance sheet and liquidity position with low net leverage. We are profitable and expect to continue to manage our business at an SG&A percentage significantly lower than most public home builders. And most importantly, we have a unique competitive advantage due to our relationship with D.R. Horton, which de-risks the expansion of our operating platform and allows us to have a national geographic footprint. To put it simply, we are executing on our plans and our positions for success.
spk07: Paul, at this time, we'll now open up the line for questions.
spk10: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using the speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
spk02: Thank you.
spk10: Our first question comes from Ryan Gilbert with BTIG. Please proceed with your question.
spk04: Ryan Gilbert Hi, thanks. Good afternoon. Thanks for taking my questions. First one, just on the 2021 guidance, pretty significant step up, you know, even from what we were thinking in November of 2019 and January of 2020. And I'm wondering if you can talk a little bit about the initiatives that You may have put in a place to flex up your production capacity or production cadence to get to that 13 to 13.5. It seems like whatever you've done, you've also been able to put it in place for the fourth quarter as well, given the expectations there. Just any color would be very helpful. Thank you.
spk08: During the year, we obviously continued our land acquisition program, even though it slowed up for a little while during the COVID crisis main period there. We never really lost any of those deals and continued that land acquisition. As soon as we saw that the market came out strong, we really ramped up production and put more lots under development than we may have originally anticipated. making sure that we're prepared to hit the demand today and potentially increase demand for next year. So we feel pretty comfortable where we sit today in the guidance that we've provided.
spk04: Okay, that's great. And second question, just on the land bank, I mean, getting it up 10,000 lots sequentially, it doesn't seem like there's, you know, or I should say it seems like you're able to adequately source lots in the market, but I'm wondering if you can talk about the competitive landscape in your regions. Are you finding that competition for lots is heating up, or does it feel about the same as it did last quarter?
spk08: It definitely feels like the builders are out actively trying to refill their pipelines with lots, but they're more focused on what I would call the smaller lot positions, land positions, where maybe that 150 to 200 lots. From a four-star source opportunity, we've been working on building this pipeline for a while now. I think we have targeted that slightly larger transaction that maybe doesn't have the same competition as the smaller transactions. So although I think there's a lot more people out trying to buy land today, we still feel like our pipeline is very strong for what we're doing.
spk04: Okay, great. I'll jump back in the queue. Thanks very much.
spk07: Thanks, Ryan.
spk10: Thank you. Our next question comes from John Lovallo with Bank of America. Please proceed with your question.
spk09: Hey, guys. Thank you for taking my questions as well. Maybe starting off with the revenue growth outlook, it seems like around 20% to 25% is what you're contemplating. What makes that sort of the right growth rate and what's preventing you from growing faster? Is it a focus on just being more profitable growth or any help on that would be appreciated?
spk08: Well, you know, it's obviously been a crazy year. You know, we're taking our best guess today and what we feel very comfortable with as looking forward into this year. We feel really comfortable with the guidance of 13,000 to 13,500 lots. There could potentially be some upside if from a year end, we ended the year with about 5,000 finished lots and about 12,000 lots under development. I think we're trying to be prepared to meet any additional demand that may come beyond our current comfort level.
spk01: Then, John, for the delta between the lots sold and the revenue guidance, that's really being driven by an ASP decline. that's expected really just as a result of mixed shift. So the lot guidance is actually up for 25% to 30% versus the revenue guidance that's up slightly lower than that.
spk09: Right. Okay. That's helpful. And then if we think about gross margin heading into next year, you expect it to improve. And one of the things that you called out was just less third-party source deals. Can you just remind us what the margin differential is between a four-star program source deal and a third-party source deal?
spk08: It's really hard to pinpoint that exactly. The good thing about four-star source deals is we control the transaction. Whenever a builder, whether it be Horton or a third-party builder, when they're bringing that deal to us, they control the transaction, so they always have choices. They could self-develop it. They could hand it off to a different developer or do the transaction with us, so it's It's more competitive in that margin. It really varies on the length of the deal, the size of the transaction, as to what that margin is going to be. We just feel really good about kind of the mix of where we stand right now.
spk09: Okay, maybe if I could just dovetail off of that for a second. The gross margin in the quarter of 12.7, it looks like track sales were relatively low in the quarter, I think 5.2 million. Can you just help us understand some of the puts and takes on the margin in the quarter then?
spk07: I'm not quite sure 100% how to answer that.
spk08: Within the quarter itself, again, it's always based on product mix. Are we selling shorter duration deals, lot banking deals, or four-star source deals? The four-star source transactions are really just starting to kick in from the standpoint of sales. So I think from where we were this quarter, I continue to see expansion in that margin. And again, lot banking is starting to roll off. I think we did 29% total lot banking this year as compared to 39% last year. And there's probably going to be sub-20 the year coming up.
spk01: And then, John, on the different lot sales, really not a whole lot of change other than if you recall in Q3, we did call out the track sale margin was pretty low. The track sale margin this quarter was not abnormally low, so that is driving part of the benefit from Q3 to Q4, but we also saw banking stay relatively flat and not a whole lot of movement in development margin.
spk02: Got it. Thank you, guys. Thank you.
spk10: Our next question comes from Anthony Tetanari with Citigroup. Please proceed with your questions.
spk03: Hi, this is actually Asher Sonnen on for Anthony. Thanks for taking my question. I guess just first off, can you just talk about maybe the cadence of lot sales in the quarter and then maybe the cadence contemplated in your 2021 guidance? Should we be thinking about growth in 21 as more front-loaded with demand maybe normalizing the back half or maybe even throughout the year or even accelerating as the year goes on? And then is that kind of reflective of maybe how you think about the overall sustainability of housing demand?
spk08: Yeah, you know, again, from a cadence, you know, we're really not giving any monthly guidance. We did that a little bit earlier this year during the, I think, during the height of the crisis when everybody was wondering what was going to happen in the market, just to kind of show the variability. You know, I think we don't really see a lot of seasonality in our numbers, so I think that I look forward to the guidance that we've given. There's probably going to be some volatility quarter to quarter, but it's really hard to pinpoint that. Again, we really look at it more with the comfort of the guides that we've given on an annual basis.
spk01: So a significant growth ramp annually in 21 and, of course, going forward even further into 22 and beyond. But as Dan mentioned, some quarter to quarter variability to that.
spk03: All right. Thank you. That's helpful. And then just sort of maybe on switching gears to pricing. You know, we've seen a lot of, you know, rising home prices, and I'm just wondering, has that kind of driven, you know, in terms of your negotiation with builders, has that driven your pricing strength on your end? And then if we think about, you know, the builders facing some rising costs, particularly in lumber, is that, you know, is there a possibility that builders might come back to you and, you know, look for maybe concessions to help them preserve margins if maybe the ASB growth starts to slow? Or does that really only happen when ASBs actually kind of decline?
spk08: I think you really see that when ASPs decline, more than slowing. They usually turn to incentives first to try to regain that sales pace. From our standpoint, most of what we're selling has been under contract for a few months or up to a year. So we don't see a lot of price movement immediately when we see strength in the market. But as we As we set prices for the next phases, we're definitely taking advantage of pricing where we can.
spk02: Thank you. I'll turn it over.
spk10: Thank you. Our next question comes from Michael Rahat of J.P. Morgan. Please proceed with your question.
spk00: Hi, this is Elad Hildman on for Mike. Congrats on the corridor and thanks for taking my questions. First, I think you mentioned that you're expecting less lot banking next year. And in the past, you talked about the mix between lot development and lot banking as roughly two-thirds and one-third. I'm just curious if, you know, what you're kind of thinking for 2021 at this point. Yeah, for 2021, I see it being sub-20%.
spk08: Again, a lot of us, we tend to use the lot banking to put our cash to work while we built our pipeline. So at this point, we're using it less to put that money to work. So I see it being some 20% this year.
spk00: Okay, great. So just following up on that, I think pre-COVID-19, you were guided to pre-tax margins of roughly 10%. And if now you're having a higher mix of lot development, which generally is at a much higher margin, I'm just wondering kind of what could be impacting the pre-tax margin there, any color you could give on how to think about those puts and takes. Thanks.
spk08: Well, again, I think we're guiding back to that approximate 10% number. I think that what we saw before COVID, we feel strong about being able to regain that kind of performance level. I think that's On a go-forward basis, that's the model that we expect to be able to see, which is between margins and our SGA percentage, we'll be able to deliver that 10% pre-tax margin.
spk01: And compared to this year, that'll be approximately 160 basis point improvement, so a pretty substantial driver on a year-over-year basis.
spk02: Okay, thank you.
spk10: Thank you. Our next question comes from Truman Patterson with Wells Fargo. Please proceed with your question.
spk06: Hey, good afternoon everyone. Congrats on a really nice quarter. First, a few questions around horizontal development. I mean, you all were essentially able to deliver, I think, 60% more lots than you originally expected. Could you just discuss your strategy, you know, the past six to seven months on the horizontal development side of the business? I know you all secured some crews while everyone was pausing. Are you still finding plenty of availability? Are you starting to see development times lengthen now that demand has returned? And are you seeing any sort of inflationary pressure after some of the price concessions earlier in the year?
spk08: I think from an availability, I think our strategy earlier this year of keeping guys at work and and putting some new guys to work has really paid off for us. We're making sure that we're keeping those crews busy, whether it's on the next job in town or putting more of us on the ground on that phase. I think part of our strategy is making sure that we're paying quickly and that we're keeping people at work. So far we have not seen any fall off in the availability of work. From a pricing standpoint, we're seeing a little bit of increase, primarily in PVC pipe that's going in the ground. We've taken some actions to try to save that off. Hopefully it won't last long because generally it's kind of tied to petroleum prices, which have stayed pretty consistent. I think it's a little bit of over-demand and maybe some of the plants that are producing the pipe shut down for a while, which created a shortage. So I don't see it being a long-term problem at this point. So right now we feel really good about the ability to continue to put lots on the ground.
spk06: Okay, so your third-party developer costs aren't necessarily increasing. Are you actually seeing the development timeline lengthen?
spk08: No. Again, we're seeing costs stay relatively the same. Often we're asking people to move to the next phase and they're holding pricing from the prior phase. And again, if they're not putting lots on the ground quick enough, we start looking for alternates because we try to keep it right on pace.
spk06: Okay, that's really helpful. And then a couple follow-ups. One on the builders have just had very robust pricing recently. How well are you all positioned to participate in the upside. I'm really thinking, could you walk us through what portion of your portfolio has phase price escalators and are those escalators tied to market pricing?
spk08: There's no automatic escalators tied to market pricing. What we do is we price phase by phase, so we're not locked in too long. And then we evaluate on a project by project basis where we stand in With our inventory, we look at what the builder's inventory is, their need, and their velocity for sales. And we just look for those opportunities to push pricing where we can. But again, always cognizant that we're more returns-focused than we are margin-focused. We want to make sure that the velocity that they're selling at continues to improve our returns as well as theirs.
spk01: And there is about a third... There's a third of Four Stars Pipeline, though, that is not under contract or ROFO today. So that entire third, it hasn't even been negotiated yet, so that's where they can definitely take advantage of the robust housing market conditions. And then on some portion of the ROFO as well, but definitely the full third that's not contracted.
spk06: Okay, okay. And then finally, you know, just with the land markets, you know, becoming a bit more competitive, I realize you guys focus on a bit larger deals. But are there any areas that you would say are getting overheated or frothy? And then I know every land deal's different, but what sort of inflation are you seeing?
spk08: You know, again, it goes market by market. I was out in California a few weeks ago, and it feels like I think the landowners out there are trying to push pricing a little more than anywhere else. You know, that At least from some of the things I've seen, the word on the street is we're looking at about 10% land inflation in the markets that we were looking at. But I haven't seen it hit those kind of numbers anywhere else yet. And again, as you know, we're not very deep in California to begin with.
spk06: All right. That's extremely helpful, and good luck on the upcoming year.
spk02: Thanks. Appreciate it.
spk10: Thank you. Our next question comes from Ryan Gilbert with BTIG. Please proceed with your question.
spk04: Hi. Thanks for taking the follow-up. It was a little surprising to see your cash balance increase in the fourth quarter from the third, and it looked like there was a nice pickup in inventory turnover. Is that just a function of doing more lot options as a percentage of your lots controlled, or is there anything else that you can point to that's gotten the turns up?
spk08: I think it was the fact that we sold almost 4,000 lots last quarter. I think it almost attributed entirely to that. It was a very strong quarter for us. Sales were strong. We are continuing to use lot option contracts for our purchases as a higher percentage of our control lots. But really it was just a function of sales was just really strong last quarter.
spk01: And Ryan, thanks for pointing out the increase in terms. That really is the main driver to the 260 basis point year-over-year improvement in return on equity that Dan called out in his prepared remarks.
spk04: Okay, great. And then last one for me was interested to hear that you've signed your first project with a third-party builder, or your first sourced lot deal with a third-party builder. Just wondering if there's any color that you can add there, and then maybe how you're thinking about market sizing or market potential for third-party builders versus DR Horton.
spk08: Yeah, it's always been part of our goal to build third-party business as well as the Horton business. I think as you've heard me say many times, we had to have the teams in place first to be able to deliver. We now have, I think we have 16 division offices now that are not fully staffed you know they're they're staffed well enough to kind of be able to deal with third parties um you know the demand is out there you know as the the builders continue to call us looking for transactions it's nice to have the first one under our belt and i think on a long-term basis i think we've always kind of steered towards maybe at least 30 percent of our business being with uh with builders other than horton at this point i would I would stick with that. I think we doubled last year. We went from 1% of our sales to 2%. So we've got a ways to get there, but it's clearly nice to have that first one under our belt.
spk04: Okay, great.
spk02: Thanks very much. Thanks, Ryan.
spk10: Thank you. There are no further questions at this time. I would like to turn the floor back over to Dan Bartok for closing comments.
spk08: Thank you, Paul, and thank you to everyone on the four-star team for your focus and hard work. I'm very proud of the results the team achieved this year, and we look forward to working together to continue growing and improving our operations during fiscal 2021. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results.
spk02: Thank you. This concludes today's program.
spk10: You may disconnect your lines at this time. Thank you for your participation
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