This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good afternoon and welcome to Four Star's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A 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. Please note, this conference is being recorded. I will now turn the call over to Katie Smith, Vice President of Finance and Investor Relations for Four Star.
spk00: Thank you, John. Good afternoon and welcome to the call to discuss Four Star's third quarter 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 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 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 4STAR'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.4star.com, and 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.
spk05: Thanks, Katie. Good afternoon, everyone. I'm also joined on the call today by Jim Allen, our chief financial officer, and Mark Walker, our chief operating officer. Before I go over our results, I want to acknowledge the passing of Don Horton, and the legacy he leaves behind. Homebuilding and land development are not easy, but Don was tremendously successful because he always put people first. His leadership and commitment to DR Horton and its people was unmatched. Don's vision and support for Four Star gave us aspirational but achievable goals and enabled us to become the country's largest pure play residential lot developer. All of us at Four Star are incredibly proud to be a part of the D.R. Horton family and strive every day to grow and improve, which Don pushed us all to do. Now I will discuss our results. There continues to be solid demand for residential developed lots, and supply is still constrained in most markets. The Four Star team delivered 3,255 lots, generating revenues of $318.4 million during the quarter, which was in line with our expectations. Our profitability remained strong with pre-tax profit margins of 16.2% and earnings per diluted share of 76 cents. The team's performance in the third quarter resulted in book value per share increasing 15% to $29.87, and our return on equity for the trailing 12 months ending June 30, 2024, expanded 190 basis points to 13.8%. Four Star's unique blend of financial strength, operating expertise, and geographic reach is a significant competitive advantage, enabling us to be a leading supplier of finished lots. We remain focused on investing in compelling land parcels, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Jim will now discuss our third quarter results in more detail.
spk04: Thank you, Andy. In the third quarter, net income decreased 17% to $38.7 million, or $0.76 per diluted share, compared to $46.8 million, or $0.93 per diluted share in the prior year quarter. Revenues for the quarter decreased 14% to $318.4 million compared to $368.9 million in the prior year quarter. We sold 3,255 lots in our third fiscal quarter with an average sales price of $94,000. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Our pre-tax income decreased 17% to $51.6 million compared to $62.4 million in the third quarter of last year. And our pre-tax profit margin this quarter was 16.2% compared to 16.9% in the prior year quarter. Our pre-tax profit margin this quarter was positively impacted by a gain on sale of assets of $5 million. Our gross profit margin for the quarter was 22.5% compared to 23% for the same quarter last year. In the third quarter, SG&A expense increased 11% from the prior year quarter to $29.3 million. Our employee count increased 33% from a year ago to support the expansion of our platform, including entering new markets and increasing community count. SG&A expense as a percentage of revenues was 9.2%, compared to 7.2% 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 to support our continued growth. Mark?
spk06: The supply of new and existing homes at affordable price points remains limited, and demographics supporting housing demand are favorable, despite elevated mortgage interest rates and inflationary pressures. Mortgage rate buy-down incentives offered by builders combined with low resale supply relative to historic norms continue to be a driver of buyers choosing new construction. Our ongoing focus is to develop lots for homes at affordable price points. Availability of contractors and necessary materials have improved over the past several months, but we have not seen overall reductions in the cost of developing land and our cycle times have increased. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible. However, our development cycle times are still being impacted by governmental delays, which limited upside to our lot deliveries during the quarter. Homebuilders are competing to secure land and lot positions, and many are looking to replace closed out communities to position themselves for future growth. As a result, we are not seeing any softening of land prices. However, our team remains disciplined, flexible, and opportunistic on pursuing new land acquisition opportunities.
spk04: Jim? DR Horton is our largest and most important customer. Fifteen percent of the homes DR Horton started in the past 12 months were on a four-star developed lot. With a mutually stated goal of one out of every three homes DR Horton sells to be on a lot developed by four-star, we have significant opportunity to grow our market share within DR Horton. We also continue to work on expanding our relationships with other home builders. 11% of our third quarter deliveries or 352 lots were sold to other home builders. Katie?
spk00: Four Star's underwriting criteria for new development projects remains unchanged at a minimum 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. We are positioned We are positioning to return to strong volume growth by accelerating our investments in land acquisition and development. During the third quarter, we invested approximately $370 million in land and land development, which was a 72% increase from the prior year quarter. 75% of our investment was for land development and 25% was for land acquisition. Fiscal year to date, our investments in land and land development totaled approximately $1.2 billion and we now expect to invest approximately $1.6 billion in land acquisition and development in fiscal 2024 subject to market conditions.
spk06: Mark? Our total lot position at June 30th increased 40% from a year ago to 1,000 to 100 lots at quarter end, of which 57,900, or 57%, was owned and 44,200, or 43%, was controlled. Consistent with our focus on capital efficiency, We continue to target owning a three- to four-year supply of land and lots and remain focused on managing our development in phases to deliver lots at a pace that matches market demand. Lots owned at June 30th includes 5,900 finished lots. This is the lowest number of finished lots we've had on hand at quarter end since September 2022, demonstrating that our customers continue to purchase lots soon after completion. 35% of our own lots are under contract to sell, representing approximately $1.8 billion of future revenue. Our contract to backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 29% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements.
spk04: Jim? We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. 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 30th was $706 million, with no senior note maturities until fiscal 2026. and our net debt to capital ratio is 18.7%. We ended the quarter with $1.5 billion of stockholders' equity, and our book value per share increased 15% from a year ago to $29.87. Four Star'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, while our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I'll hand it back to you for closing remarks.
spk05: Thanks, Jim. In closing, I believe there's tremendous opportunity ahead of us. Four Star is uniquely positioned to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans combined with constrained finished lot supply across most of our diverse national footprint positions us for further success. We are expanding our team and accelerating our investments in land and development position four-star for consistent long-term growth. Elevated mortgage interest rates continue to impact affordability, but the underlying fundamentals of a housing shortage remain. We believe the low supply of existing homes at affordable price points, combined with builder incentives, including rate buy-downs, will continue to drive buyers to new construction, and our strong relationship with D.R. Horton provides a clear path for growth. As outlined in our press release, we are revising our fiscal 2024 guidance. Based on our fiscal year-to-date results and expectations for the fourth quarter, we now expect to deliver between 14,600 and 15,100 lots, compared with prior guidance of delivering between 14,500 and 15,500 lots. We still expect to generate $1.4 to $1.5 billion of revenue. We are the market leader in a highly fragmented and undercapitalized industry and are uniquely positioned to take advantage of builder demand for finished lots. There is a significant opportunity to expand our presence in the markets we operate in. Our goal remains the same, to double our market share to 5% over the intermediate term. We expect to aggregate significant market share over the next few years while maintaining our disciplined approach to capital allocation to enhance long-term value of Four Star. With a clear strategic direction, a dedicated team, and a strong operational and financial foundation in place, I'm excited about Four Star's future. John, at this time, we'll open the line for questions.
spk01: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or a comment. The first question comes from Carl Reichert with BTIG. Please proceed.
spk03: Thanks. Hi, everybody. Nice to talk to you. So I think you talked about government delays limiting upside, I think was the phrase you used in the quarter, and I wanted to ask for some more detail on that. Two things, really. One, were there delays? How many lots were delayed? And then there's a lot of places government can create issues in getting lots developed. So I'm curious just on some details as to what specifically is hurting the most when it comes to getting lots sort of out the door into customers.
spk06: Yeah. Hey, Carl, it's Mark. There's a couple things. The primary delays related to government approvals is really related to getting finished lots certified on the ground. and getting those transacted. It also affects beginning development, as well as getting those approvals for subsequent phases to begin development. I'll talk a little bit about cycle times, too, just to give you a little bit of context. Over a 15-month period, let's call it September 22 through December 23, we experienced an eight- to nine-week increase in the cycle times, and that was primarily related to supply chain, contractor availability, but really these government approvals, it was just taking much longer to receive those approvals. There's a little bit of good news behind that. From January of 24, let's call it until today, we've seen our cycle time stabilize, so really over the past six months. There's a little bit of additional good news. We've had a small sample size of projects that have just delivered lots that have recently closed where we've seen some reduced cycle times. So although we're seeing those impacts from governmental delays, we are seeing a little bit of opportunity in our cycle times.
spk00: Yeah, and Carl, this is Katie. As far as lots moved out of the quarter, we really didn't have any that moved out of the quarter due to the delays. It was just lumpier lot sales this quarter, but it was in line with our expectations, which we alluded to in our remarks.
spk03: Okay, thanks, Katie and Mark. Okay, and then just a couple, I'll squeeze into one here if I can. Is there a change in sort of the mix of number of lots per community that you're letting out the door right now? I'm curious about that. And then sort of along those lines, too. So we've got a big growth in lots under control, contract deposits indicate some acceleration. You talked a little bit about expecting some stronger volume growth. So as we look out on 25, you know, midpoint, you're going to grow about 6% this year in lot count. Is next year a kind of a year where you think double digit growth could be achievable for you? Or can you give us sort of a sense as to what kind of acceleration we might see? Thanks a bunch all.
spk05: So there's really not a change in the size of the communities. I mean, we have a blend, and it's geographically different as we go across the country. So I would say that's pretty consistent. With respect to lot deliveries, I think you're close. While we're not giving guidance for 2025 at this point, You know, the mid-single digits is correct for 24, and we do see the potential, based on market conditions, being for double-digit growth into 25. Great. I appreciate that.
spk03: Yeah, go ahead. Sorry.
spk06: Yeah, I was going to address a little bit of the delays, too. If you look back from, let's call it 4Q to 22 fiscal year, In 3Q23, we've pulled back on land acquisition development activity, just basically due to the sharp interest rates, balancing price and pace. We've experienced a reduced months or quarters of closings of 1Q and 2Q. And if you think about, you know, the vast majority of what we purchased in acquisition is shovel-ready. So you kind of are seeing that impact of those lots not being able to deliver as well as the delayed cycle times. And right now, we have a lot of lots that are under development. It's a 30% increase from our We'll call it our low point, which was the beginning of 3Q at 23. And those lots are in the cycle, in production, and ready to hit over the next 90 to 180 days.
spk03: Okay, that's great to hear. Thanks so much, all. Appreciate it.
spk01: Once again, if you have a question or a comment, please indicate so by pressing star 1. The next question comes from Anthony Petinari with Citi. Please proceed.
spk02: Hey, good afternoon. For the – on the guidance, you know, if the volume guidance is down a bit but revenue guidance is unchanged, is that – is pricing better, or is that just purely a mix impact, or any color there?
spk00: Yeah, so when we were looking at guidance, when the low end of our range, and if you take the year-to-date average price – that it rounds down to 1.4 billion. And so that's why we just kept it the same.
spk05: Okay.
spk00: We would expect for ASP to be roughly in line with what it has been this year and in the next quarter. Got it. Got it.
spk02: And then are there any markets that you might call out as oversupplied or where you're pulling back in terms of new land acquisition? Or, you know, alternately, are there any markets that you're seeing accelerate or look particularly attractive? Just curious from a regional perspective. And then, you know, obviously a lot of focus on Florida, and you have a presence there. Anything you can say specifically about that state?
spk05: So generally, on affordable price point or first-time homebuyer product, we're really not seeing inventory buildup anywhere yet. Affordable in Florida, in Texas, very strong. Carolinas, also very strong. Probably where we do see some softness is where there's been pretty rapid price appreciation over the last couple years, then impacted by the higher interest rates. Colorado would be an example of that. But again, where there's affordable price point product, we are seeing strong demand. Florida, you know, I can't really say that we're seeing softness there.
spk02: Okay. Okay. That's very helpful. I'll turn it over.
spk01: If there are any remaining questions, please indicate so by pressing star one on your touchtone phone. Okay, we have no further questions in queue. We've reached the end of the question and answer session, and I will now turn the call over to Andy Oxley for closing remarks.
spk05: Thank you, John, and thank you to everyone on the four-star 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 and look forward to speaking with you again in October for to share our fourth quarter and fiscal 2024 results.
spk01: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
Disclaimer