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spk07: Good afternoon and welcome to Four Star's first quarter 2021 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Hansen, Vice President of Investor Relations for D.R. Horton, the majority shareholder of Four Star.
spk01: Thank you, Paul. We welcome each of you to the call to discuss Four Star's financial results. And our apologies for the brief delay as our provider experienced some technical difficulties. 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 2020 annual report on Form 10-K, which is filed with the Securities and Exchange Commission. This afternoon's earnings release is on Four Star's website at investor.fourstar.com. and the 10Q is planned to be filed mid-next week. After this call, we will post an updated investor presentation to Forrester's investor relations site under Events and Presentations for your reference. Now, I will turn the call over to Stan Bartok, CEO of Forrester.
spk03: 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. I'd like to first give a shout-out to the Forrester team, the size of our team has doubled in the last year during a time of social distancing and remote work. The team is working together well through the obstacles and is focused on achieving our lofty goals. Their strong belief in Four Star and our unique business plan has only been surpassed by their hard work and dedication to implement and execute our plan. We are off to a strong start for fiscal 2021. we continue to deliver on key milestones which will create additional value for our shareholders. Our business is expanding rapidly and we are capitalizing on the strength of the residential finished lot market. We delivered more than 10,000 lots to home builders in fiscal 2020 and we are now on track to deliver over 13,500 lots in fiscal 2021. Executing on our plan is translating into increased profitability. Our gross profit margin increased by 200 basis points year-over-year to 14.4% as a result of our intentional shift towards more four-star source projects, less lot banking, and the overall strength of the market. We are consolidating market share in the undercapitalized and fragmented lot development industry. Four-star lots sold to D.R. Horton continue to grow as a percentage of D.R. Horton's closings year-over-year. and our lot deliveries to third-party builders are at their highest level since the quarter of DR Horton's acquisition of its interest in Four Star. We are executing on our returns-focused business model and building upon the foundation which has been set. Our high turnover, lower risk manufacturing strategy led to a 140 basis point year-over-year improvement in Four Star's return on equity. We expect to generate further growth and profits and increases in returns in fiscal 2021 as our platform continues to gain scale and our team matures. We'll now discuss our first quarter financial results in more detail. Jim?
spk02: Thank you, Dan. In the first quarter, Four Star's net income increased 30% to $22 million, or 46 cents per diluted share. compared to $16.9 million, or 35 cents per diluted share, in the prior year quarter. Four Star's first quarter revenues increased 24% from the prior year quarter to $307.1 million. The prior year quarter included $30 million of revenues from residential tract sales. Residential lots sold during the quarter totaled 3,567 lots, an increase of 47% from the prior year quarter. The average sales price for the quarter was $86,000. 87% of lots sold in the quarter were from development projects, up from 58% in the same quarter in the prior year. Lots sold to DR Horton during the quarter represented 95% of Four Star's total lots sold, down from 99% in the first quarter of fiscal 2020. Dan?
spk03: Our pre-tax income for the quarter was $29.2 million, with a pre-tax profit margin of 9.5%. Our gross profit margin was 14.4% in the first quarter, up 200 basis points from 12.4% in the prior year quarter. As I mentioned earlier, the improvement in our gross margin was primarily due to an improvement in development lot sale margin, and to a lesser extent, a smaller percentage of lot banking deliveries during the quarter. We continue to expect fluctuations in our gross and pre-tax margins due to the quarterly mix of our lot deliveries and the timing of track sales. SG&A expense as a percentage of revenues in the first quarter was 5%, compared to 4.2% in the prior year quarter. The increase in our SG&A expense ratio was primarily due to our increased number of employees and the associated compensation costs. We are extremely pleased with our progress building our team and now have 179 employees, double our number of employees from a year ago. We remain focused on managing our SG&A efficiently while building out our infrastructure to support our significant growth. And we believe we will continue to manage our business at an SG&A percentage significantly lower than most public home builders. We still expect our pre-tax profit margin to improve to approximately 10% for the full year of fiscal 2021. Jessica?
spk01: Forrester'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 first quarter, investments in lots, land and development totaled $480 million, of which $300 million was for land and $180 million was for land development. Forrester now expects to invest at least $1.5 billion in lots, land and development in fiscal 2021 subject to market conditions. Forrester's lot position at December 31st increased 74% from a year ago to 77,500 lots of which 52,300 lots are owned and 25,200 lots are controlled through purchase contracts. Of Four Star's owned land position, 18,300 lots, or 35%, are under contract to sell to D.L. Horton, representing at least $1.3 billion of future revenue. Another 16,600, or 32%, of Four Star's owned lots are subject to a right of first offer to D.L. Horton under the Master Supply Agreement. 46% of Four Star's owned lot position at December 31st was sourced by Four Star, up from 29% a year ago, supporting future gross margin expansion. Lots controlled through purchase contracts more than doubled from a year ago to 25,200 lots. Lot sales prices are not contracted for until Four Star owns the lots. So Four Star has the potential to take advantage of the rising home price environment on the portion of its land position that is controlled through purchase contracts, further supporting future gross margin expansion. Four Star continues to target a three to four year owned inventory of land and lots. Jim?
spk02: Four Star remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage. At December 31st, we had $580 million of liquidity. including $240 million of unrestricted cash and $340 million of available capacity on a revolving credit facility. Total debt at December 31st was $654 million, with no senior note maturities until fiscal 2024, and our net debt-to-capital ratio at quarter end was 31.8%. At December 31st, stockholders' equity was $893 million, and our book value per share increased to $18.58, up 8% from a year ago.
spk03: Dan? Four Star is uniquely positioned to consolidate market share through housing market and economic cycles in the highly fragmented lot development industry. Based on our first quarter results and today's market conditions, we now expect to deliver between $13,500 and 14,000 lots and to generate approximately $1.1 to $1.2 billion of revenue in fiscal 2021. Due to timing of lot development schedules, we expect our lot deliveries in the second half of the year to be higher than the first half. As I mentioned earlier, we are still expecting 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 home builders. 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 consistently profitable and are managing 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 summarize, we are continuing to execute on our plan and our position for continued success. Paul, at this time, we now open up the line for questions.
spk07: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star-watt on your telephone keypad. The 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 speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question and one follow-up. One moment, please, while we poll for questions. Thank you. Our first question comes from John Lavala with Bank of America. Please proceed with your question.
spk06: Hi, guys, and thank you for taking my questions. First one, and Dan, I think you partially answered this one already, but maybe just a little bit more color would be helpful. The $13,500 to $14,000 delivery range, even at the high end, would seem to imply sort of flat to sequentially down deliveries potentially through the remainder of the year. It seems like there might be a little bit of a timing issue in the second quarter. Is that the extent of it, or is there anything else that we should be considering?
spk03: Yeah, I think that's pretty much the extent of it. I think the second quarter is really about the timing of a lot of deliveries. But as you can see, our trend for the end of the year would still be up.
spk01: Yeah, so really just lot development schedules. The lots are in the pipeline being developed, but they're not ready to all get pushed into the second quarter. Clearly the demand's there, and so the back half of the year is expected to be stronger than the first half.
spk06: Gotcha. Okay, that's helpful. And then maybe just in terms of the competitive landscape for land, I mean, we're hearing more and more commentary from builders that getting finished lots is becoming more and more challenging. And I think in the past you've talked about sort of the 150 to 200 lot communities being where most of the competition is, and you guys being sort of north of that has limited the competition. Is that still the case, or are you seeing incremental competition even for sort of the lots that you're looking for?
spk03: Yeah, I think you're starting to see the builders go up that scale a little bit as land prices have been increasing. We've been pretty fortunate that we had a pretty big pipeline of transactions that we've been working on for a long time. which you can see in our growth in lots here in this last quarter. Most of that is stuff that we've been working on for quite a long time. So, yes, I am seeing the price of land go up, and I am seeing builders starting to chase a little bit bigger deals in the marketplace.
spk08: Got it. Thank you very much, guys. Thank you.
spk07: Our next question comes from Anthony from Citi. Please proceed with your question.
spk05: Good afternoon. I was wondering if you could talk a little bit about how lot pricing discussions have been kind of trending in the current environment given, you know, rising home prices and if you can talk about what level of pricing traction, you know, for lots not under contract, if there's any sort of color you can give on current trends.
spk03: Yeah, clearly the demand for lots is at a high level right now. A good portion of the lots that we have are under contract already with the R. Horton and also with some other builders. But as we're bringing new projects online without lot contracts, we are definitely seeing some appreciation in lot prices. I think the market is very strong right now.
spk01: And I don't think we ended up mentioning in our scripted remarks, but Four Star recently closed on their second transaction with a third-party builder. So not only are they having success in controlling more land through purchase contracts and increasing the amount of their own land position through what Four Star sourced, they've actually now closed on two third-party transactions.
spk05: Okay, that's very helpful. And then you saw a strong gross margin improvement on the mix-up from, I guess, law banking to development projects. Is it possible to talk about how gross margins in each of those businesses kind of trend on a like-for-like basis? And has kind of the ASP mix-down that we've seen from builders, should we think about that as a margin headwind? Is it margin neutral? Is it an opportunity? Just any thoughts there?
spk03: Well, first of all, I think with all the rest of the builders moving down market probably just has helped us because we've been focused on that affordably priced product. So I think there's just more people trying to play in the space where we have product to sell. So I think that's been a good thing for us. As far as gross margins, I think our focus has really been on trying to do more four-star source transactions where we control the land from day one rather than getting an assignment from a builder for that first phase. So it's, I think, continuing to show, I think, some future growth in gross margins.
spk01: Yeah, and we haven't specifically disclosed the breakdown between lot development margin and lot banking margin, but we have seen a lift in both, particularly as some of the lot banking deals, four stars held longer. And so inherently, since those are underwritten to a return, the gross margin is rising on that at the same time. but it is to a greater extent coming from the improvement in the lot development margin.
spk05: Okay. That's very helpful. I'll turn it over.
spk07: Thank you. Our next question comes from Ryan Gilbert with BTIG. Please proceed with your question.
spk04: Hi. Thanks for the time, everyone. Dan, I was hoping to just get a little color or maybe just, you know, if you could just dig in a little bit on You know, the strength of the demand that you're seeing from your home builder customers and maybe how the level of activity that you're seeing so far in 2021 compares to this time last year pre-COVID. And, you know, maybe any markets in particular that you want to highlight as particularly strong.
spk03: Well, I think in general, it is clear that there's a lot shortage out there. I mean, the phone is ringing constantly of people trying to get into lot positions that we control. And I've heard other builders' comments on their calls. I haven't really seen anything quite like it, to be honest with you. It's been pretty phenomenal. It's really across the board. There's very few markets that we're not seeing increased demand for lots. And whether it be Locker, whether it be our original business plan, but we were always focused on that affordably priced market, and everybody has kind of jumped over there. So it's really kind of played well into our hand.
spk01: Yeah, Ryan, and I think we put it in the press release for the first time, and we mentioned it in the script, but although the majority of four-star deliveries are still going to deal with Horton, it did come down as a percentage this quarter year over year, and they sold 178 lots to builders other than Horton. which may not sound like a whole lot, but it's up from 32 lots a year ago. So are making progress on that front.
spk04: Okay, that's great. And maybe just to quickly follow up there, that's great to hear that you signed your second deal with a third-party builder. How does the pipeline look generally as we go into the rest of 2021?
spk03: As far as third-party builders, is that your question? Yep, yes. You know, again, we've put a lot more four-star source deals into the development phase. So I think you will continue to see a growth in sales of third-party builders. And we are in probably more negotiations with builders as far as doing deals that they've sourced and brought to us. So I think you'll continue to see that number trend upwards. But I think, as I said last quarter, it's not going to go from 5% to 20% overnight. I think you'll continue to see a gradual growth because so much of our volume is going to go to Horton just based on the things that they have under contract right now.
spk04: Okay, got it. And just a quick one on SG&A, if you don't mind. I think the sequential step-up was a bit bigger than I had expected, and I'm wondering if that 2.6 million sequential increase in SG&A is a good run rate going forward or if there's something one time in the quarter or just kind of a one-time step up and you might go back to more normal or the run rate that we saw in prior quarters?
spk03: Yeah, I think it'll probably go up from the prior quarter run rate, but I also don't think it'll be at the rate of this last step up. Again, although we're adding to our team, it's also at the kind of middle management and support levels So I don't think that as we add headcount you'll see the same overall rate. And we also opened several new offices. So you're now starting to see rent and things kick in for that. That will be fixed over a period of time.
spk01: And Ryan, to John's earlier comment and conversation about volume and what that looks like for the year, SG&A always follows volume right and the ability to leverage it or not. So when you think about modeling the remainder of the year, would expect more significant SG&A leverage in the back half of the year and not as much in Q2 with potentially decreased volumes in Q2.
spk04: Got it. Okay, great. Thanks very much.
spk07: Thank you. Our next question comes from Michael Rehaut of J.P. Morgan. Please proceed with your question.
spk00: Hi. This is Elad on for Mike. First, I just was curious, and sorry if I missed this, but The mix of lot banking versus lot development projects this quarter was 87% being development projects. And I think for the remainder of the year, you had mentioned prior being sub 20% for lot banking projects. I was wondering if this is more of a new run rate to think about for the rest of the year.
spk03: Well, again, it's hard to predict from quarter to quarter how that's going to look. But I think that we're definitely going to be sub 20%. and probably maybe even a little lower than that, but it'll fluctuate from quarter to quarter.
spk00: Great. And then also I was curious on the gross margin expansion of 200 basis points, and you mentioned that the majority of that was due to the lot development margin improvement. But within that, if you could just kind of break out maybe what were some of the drivers there, if it was just mostly it's just the stronger market, if it also was more for source lots, or any color you could provide?
spk03: I think predominantly it is really based on the four-star source lots. That's really where we have better pricing power overall because generally when we do that builder source, that first phase is locked in pricing. So we really don't have any pricing power to hit the current market. So I think it's predominantly four-star source transactions driving that expansion.
spk00: Great. Thanks. There's one more if I could squeeze it in. As I think about the growth in the business and still being strong in, you know, fiscal year 21, the closings growth being up, you know, 30 to 35% according to your guidance, any benchmarks or things to think about, you know, going forward in terms of what growth could look like in fiscal year 22 or beyond that or how you're thinking about growth beyond this year?
spk03: Well, I think we haven't really given any guidance to that, but I think that with our current capital base, we can substantiate probably a 20% growth rate without any increase to our capital structure. So I feel good about that as long as the market holds good. And again, any expansion beyond that, as we said before, we do look to tap the capital markets, both in equity and debt, at opportune times.
spk08: That's very helpful. Thank you.
spk07: There are no further questions at this time. I would like to turn the floor back over to Dan Bartok for any closing comments.
spk03: Thank you, Paul. And thank you to everyone on the four-star team for your focus and hard work. We look forward to working together to continuing growing and improving our operations over the coming years. We appreciate everyone's time on the call today and look forward to speaking with you again in April to share our second quarter results. Thank you.
spk07: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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