Forestar Group Inc.

Good morning and welcome to Four Star's fourth quarter and fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode and we will open for questions following the presentation. If anyone should require operator assistance during this 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.

Thank you, Jenny. Good morning and welcome to the call to discuss Four Star's fourth quarter and fiscal year 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 and performance is contained in Four Star'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 available on our website at investor.fourstar.com, and we plan to file our 10K in the next few 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 Andy Oxley, our president and CEO.

Thanks, Katie. Good morning, everyone. I'm also joined on the call today by Jim Allen, our chief financial officer, and Mark Walker. our Chief Operating Officer. As always, we appreciate your interest in Four Star and taking the time to discuss our fourth quarter and fiscal year results. The Four Star team finished especially strong, delivering over 5,300 lots in the fourth quarter and more than 15,000 lots for the full fiscal year. Fiscal 2024 diluted earnings per share increased 20% to $4, and pre-tax income increased 22% to $270.1 million. Our return on equity improved 60 basis points to 13.8%, and our book value per share increased 15% from a year ago to $31.47. We improved our profitability and returns in fiscal 2024 despite extended cycle times and investing heavily in building our team and our platform for future growth. Over the last five years, Four Star has invested approximately $6.7 billion in land acquisition and development and delivered over 70,000 finished lots to over 60 local, regional, and national home builders. Over the same time period, our returns on equity have nearly tripled, and our book value per share increased 87%. These results reflect the strength of our business model and the market-leading teams we have built across our national footprint. Thank you to all of the four-star team members for your efforts this year. In fiscal 2025, we will continue to execute our strategic plan by investing for future growth turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Four Star is well positioned, both financially and operationally, to capitalize on builder demand for finished lots. Jim will now discuss our fourth quarter and fiscal 2024 results in more detail.

Thank you, Andy. In the fourth quarter, net income increased 13% to $81.6 million, or $1.60 per diluted share. For the year, net income increased 22% to $203.4 million, or $4 per diluted share. Revenues for the fourth quarter totaled $551.4 million, flat with the prior year quarter. The current quarter includes $23.4 million in track sales and other revenues and $4.5 million in revenue from deferred development projects. Revenue totaled $1.5 billion in fiscal 2024, which includes $42 million of track sales and other revenue, and $8.1 million in revenue from deferred development projects. Lots sold during the quarter increased 8% to 5,374 lots, and for the year, lots sold increased 7% to 15,068 lots. Our average lot sales price for the quarter was $97,300 and was $96,600 for the year. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Mark?

Our gross profit margin this quarter was 23.9% of 290 basis points from a year ago. Our gross profit margin was positively impacted by lot sales from an unusually high margin project. Gross profit margin for the year was 23.8% of 260 basis points from the prior year. In fiscal 2024, gross margin was positively impacted by non-recurring revenue items with unusually high margins, including selling excess sewer capacity and land contract assignment fees. During fiscal 2023, we recorded $19.4 million of non-cash real estate impairment charges to cost of sales, excluding the effects Of those items, our full-year gross profit margin would have been approximately 23% compared to 22.5% for fiscal 2023. Jim? Our fourth quarter pre-tax income increased 14% to $108.5 million compared to $95.4 million in the prior year quarter, and our pre-tax profit margin improved 230 basis points to 19.7%.

Our pre-tax profit margin this quarter was positively impacted by a gain on sale of assets of $4.5 million. Pre-tax income for the year totaled $270.1 million compared to $221.6 million in fiscal 2023, and our pre-tax profit margin for the year improved 250 basis points to 17.9%. Our pre-tax profit margin this year was positively impacted by a total gain on sale of assets of $9.5 million. Excluding the effects of the non-recurring revenue items with unusually high margins and the gain on sale of assets, our full year pre-tax profit margin would have been approximately 16.5%. Katie? In the fourth quarter, SG&A expense increased 21% from the prior year quarter to $32 million.

SG&A expense as a percentage of revenues was 5.8% compared to 4.8% in the prior year quarter. For the year, SG&A expense was $118.5 million, or 7.9% as a percentage of revenues, up 110 basis points from 6.8% in the prior year. Our employee count increased 30% from a year ago, which will support the continued expansion of our platform, including entering new markets and increasing community count. Roughly 80% of new hires in fiscal 2024 are in local market operations. We are pleased with the progress we have made building our team and our ability 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?

The supply of new and existing homes at affordable price points remains generally limited, and demographics supporting housing demand remain favorable, despite elevated mortgage interest rates and inflationary pressures. Mortgage rate buy-down incentives offered by builders, combined with low resale supply relative to historical 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 has improved over the past several months, but we have not seen overall reductions in the cost of developing land. While we have Started to see some improvement in cycle times. Governmental delays continue to extend cycle times above historical norms. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible. Homebuilders are competing to secure land and lot positions, and many are looking to replace current closeout communities to position themselves for future growth. As a result, we have not seen any softening in land prices. However, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Jim?

DR Horton is our largest and most important customer. Sixteen percent of the homes DR Horton started this year 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 a significant opportunity to grow our market share within DR Horton. We also continue to work on expanding our relationships with other home builders. We sold 1,801 lots, or 12% of our deliveries, to more than 20 other customers in fiscal 2024. Katie?

Forster'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. During the fourth quarter, we invested approximately $450 million in land and land development, of which $320 million was for land development and $130 million was for land. For the full year, we invested approximately $1.6 billion in land and land development, of which 65% was for land development and 35% was for land. In fiscal 2025, we currently expect to invest approximately $2 billion in land acquisition and development.

Mark? Our lot position at September 30th was 95,100 lots, of which 57,800, or 61%, are owned, and 37,300, or 39%, are controlled through purchase contracts. 6,300 of our own lots are finished. Consistent with our focus on capital efficiency, we target owning a three- to four-year supply of land and lots, and manage our development in phases to deliver lots at a pace that matches market demand. Owned lots in our contract to sell increased 40% compared to a year ago to 21,000 lots, or 36% of our own lot position. $172 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $1.9 billion of future revenue. Another 30% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Jim?

We have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with approximately $860 million of liquidity, including an unrestricted cash balance of $480 million and $380 million of available capacity on our undrawn revolving credit facility. Total debt at September 30th was $706 million, with no senior note maturities until fiscal 2026, and our net debt to capital ratio was 12.4%. We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 15% from a year ago to $31.47. 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 today and have continued to become more expensive, which impacts the majority of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity, particularly in an elevated interest 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 now turn it back to you for closing remarks.

Thanks, Jim. Thank you to the four-star team for delivering a record year of profitability. Fiscal 2024 was also a year of building for the future. We grew the size of our team by 30% and deepened our bench of local market leaders. We were pleased that over 50% of those leaders were internal promotions. We increased our investment in land acquisition and development by 65% year over year. And we further diversified our geographic footprint by entering Virginia and reentering Washington, Oregon, and Utah. These investments in our people and platform have positioned Four Star to grow faster than the market. However, there are still challenges in the entitlement and permitting processes, resulting in lengthening development timelines. As we look forward to fiscal 2025, based on current market conditions, We expect to deliver between 16,000 and 16,500 lots and to generate $1.6 to $1.65 billion of revenue. We currently expect our first quarter will be our lowest delivery quarter of the year, and we expect our revenues in the second half of the year of fiscal 25 to be higher than the first half. The variability we experienced throughout fiscal 24 illustrates the quarter-to-quarter fluctuations that can occur in the delivery of finished lots. We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project. 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. 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 with investing capital to enhance the 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. Jenny, at this time, we'll open the line for questions.

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. 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 any participants using speaker equipment, it may be necessary to pick up your handset before you press the please. Please wait a moment while we poll for questions. Thank you very much. Your first question is coming from Carl Reichart of BTIG. Carl, your line is live.

Thanks. Hey, everybody. Nice to talk to you. Thank you for the time. I have a couple here. One is, as you look at your 25 guide, is your expectation that the percentage of lots you actually deliver to customers other than DR Horton going to grow in 25?

Not really. We really do expect to stay at around 85% to 90% of our lots going to Horton over the near term as we look to increase our market share within DR Horton. Until we get closer to delivering about 30% of their lot needs, I think that we'll stay in that 85% to 90% range.

Okay, great. Thank you, Katie. And then, Mark, if you or anyone wants to put a few numbers around this idea of cycle times, so I sort of understand them for the vertical side of home construction, but for land development, if we break it out into, say, the beginning of lot acquisition to starting grading and then grading to finished lot, and I know it varies a lot, how long is it taking to do both of those elements on average? And then what is the difference today versus, say, what it was, you know, four or five years ago as the market has changed?

Yeah, Carl, I'll give you a couple of those questions. So from grading, basically, that typically takes about 120 days. And that depends, again, on the project and the market. That can change with geography up north, not west. But typically, let's say it's 120 days. A historical cycle time has been about 12 months. I would tell you four or five years ago, it could have even been maybe nine months, but that has grown over the years. The biggest challenge today is really just government approvals, and that timeline has elongated. It would typically take you about 30 days to get a final plot recorded where the lot's basically substantially complete and approved by a jurisdiction. Today, that's ranging anywhere from 30 to 180 days, depending on geography. That's our biggest challenge. I can say our cycle times were reduced over the past 60 days by, I'm sorry, over the past quarter by 60 days. So that's a lot of progress we're making. And they're off or they're down about 90 days off of our peak. So 60 days improvement over the quarter and 90 day improvement over the peak.

Great. That is very helpful, those specifics. And then last if I can ask just one more. When you think about your relative pricing power now today compared to right after COVID, do you think it's changed meaningfully one way or the other? Thanks.

I would say that we have seen improvement, not necessarily on the hard costs, but on vendor availability, trades looking for work.

Carl, did you mean on the development cost side or on the finished cost side?

Well, actually, I meant pricing to customers, really, as you sort of think about it. But, sure, the cost side, too, would be helpful. I guess at the end of the day, it really comes down to that.

Yeah, our relative price in terms of our lot price to home builders ASP has remained pretty constant, I would say, over the past several years. That range is somewhere around what's called 25%. That can fluctuate up or down based off of geography, but typically that lots at home ratio is somewhere in the mid to high 20s. Historically, it used to be in the low to mid 20s.

Yeah. Okay. Great. I really appreciate the help, guys. Thanks a bunch.

Thank you very much. Your next question is coming from Anthony Petanari of Citigroup. Anthony, your line is live.

Hi, this is Asher Stonin on for Anthony. Thanks for taking my questions. Just maybe as you think about your development pipeline for 2025, are there any markets you would call out as maybe a little bit oversupplied right now or any other markets where you may be pulling back from in terms of new land acquisition? I think there's a lot of attention on Florida and Texas right now.

Not really. I mean, in affordable price points, we're not seeing any build up in inventory our customer demand is pretty robust across the whole country so we're not really caught calling out any caution in any parts of in parts of the country right now obviously the hurricanes had a little bit of impact we were fortunate that we didn't have any of our family members but certainly our hearts go out to those communities that were affected.

Thank you. And then switching gears, do you kind of have a sense of an updated timeline for maybe for deconsolidation? I think I noticed you guys had a shelf filing, so I don't know if that kind of accelerates it at all. And, Les, I think you previously talked about the ability to continue growing the business pretty significantly without having to dip into the capital markets. I'm just wondering if that's still the case.

Well, as far as deconsolidation, that's really a question for D.R. Horton. That's not really something that's under our control. As far as our ability to continue to grow, absolutely, and that's our plan. We do have the ability to continue to grow with our existing balance sheet. However, we do plan to continue to add debt to our capital stack as our equity balance allows that and allows us to continue to manage our net debt to total capital at a ratio of 40% or less. So we would continue to... look to finance growth. Fortunately, our liquidity position allows us to be opportunistic when we do access the capital markets. We ended the year with $860 million of total liquidity, so obviously that will go a long way to help finance our growth into fiscal 25 and beyond.

The shelf, too, that was just more of a housekeeping item. Our old shelf expired early October, and so we just renewed the shelf with exactly what we had filed previously.

Got it. Thank you. That's very helpful. I'll turn it over.

Thank you very much. Your next question is coming from Trevor Allenson of Wolf Research. Trevor, your line is live.

Hi, good morning. Thank you for taking my questions. First one's on land prices. You mentioned in your prepared remarks you're not really seeing a softening on pricing. From a new home demand perspective, there's been a few geographies consistently noted as weaker. Colorado comes to mind, also some markets in Texas and Florida. In those markets specifically, the ones that have been softer, have you seen a flattening out of land prices in those markets, or are you seeing any more favorable terms?

No, land prices continue to grow low to mid-single digits year over year, similar to development costs from a land pricing perspective. So specifically across the United States and specifically in those markets, it's consistent.

Okay, gotcha. And then, Katie, I think you mentioned still focusing on being the key supplier to Horton until you guys approach your 30% target you guys have talked about for a while before you start expanding more with other builders. As you think about your long term plans, what's a reasonable amount of time for you guys to get 30% of their lot?

Well, I mean, there's a couple of different puts and takes in that. One of them is the rate of growth that Horton chooses to grow at. They're obviously growing off of a much larger number. And so us growing more than 10% is really just us trying to keep up with their lot needs. So it's hard to say. We would hope that we'd be able to, five years or so, we think that that would be a good target for us to be able to sell 30% of our lots to other customers. And it'll be a stair step approach. It's not going to be something that happens to overnight. But I do think that it's important that the number of lots that we sell to other builders is going to continue to increase year over year. We sold to eight new customers this year that we had not sold to in the past. And so we really are focused on growing and expanding those relationships with other customers.

And we're also focused on expanding and growing our market share in our current markets as well. So there's significant opportunity to aggregate market share, not only within Horton. I think today we're at 16% trying to get to that third or as well as other builders, as Katie said. I think we added a good number of builders this fiscal year as well. We continue to work on those relationships year in and year out. It takes a little bit of time to continue to grow those, which we have.

Yeah, makes sense. That's a very helpful color. And then just maybe a quick housekeeping question. You mentioned the 4Q margin benefited from some unusually high margin projects. Any help on what kind of impact that had to gross margin on the quarter? Thanks.

We're not going to disclose the exact amount. I would say that margin would have been approximately 20, 22.

I think what we can say, though, is we underwrite to return. So margin is going to fluctuate or vary from quarter to quarter. We do see that. But over the long term and now over the last eight to ten quarters or so, We've seen our normalized margin, and we adjust for one-time items or kind of unusually high margin projects, but we've seen that kind of between the 21.5% and 23% range very consistently, and I think that's kind of more where we feel like our normalized margin is.

Yeah, so very stable there. Okay, thank you for all the colors. Very helpful and good luck moving forward.

Thank you.

Thank you, Trevor.

Thank you very much. And our next question is coming from Alex Barron of the Housing Research Center. Alex, your line is live.

Yes, thank you and good morning. I guess my main question was, you know, what's the general constraint to growth because as I I look at the, for example, the number of lots under contract with their hoard, it's gone from 14,400 to 20,500 this year or year over year. Yet, you know, the, I guess the guidance is going up from 15,000 last year to about 16,000 this year. So what's the kind of constraint to growing faster in general terms?

It's just hard to put a lot on the ground. I mean, it takes a long time from the time that you identify the track, get it under contract, get it entitled, and then take it through the approval process and finally get it developed and finished. So our investment was less a couple years ago, and so that caused our overall number of available lots to go down. We reversed that. and have been growing that throughout 24 and will continue in 25. But you really won't see the results of that until late 25 and going into 26. So it's a quarter over quarter building process and you just have to stay very disciplined and focus on what you can affect that quarter in building the business.

what are the range of timeframes in developing lots from the time you guys acquire them in different markets? Like what's the shortest timeframe and what's the longest, you know, market?

Yeah, it varies market to market, but it can range anywhere from six months up to 24 months. It really depends on the actual project's specific site conditions, as well as that government jurisdiction. A lot of it has to do with landscape and geography, soil conditions, but it varies from market to market and geography.

Got it. Okay, thanks, and good luck.

Thank you.

Thank you, Alice.

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now turn the call over to Andy Oxley, the CEO for Four Star, for closing remarks.

Thank you, Jenny, and thank you to everyone on the Four Star team for your focus and hard work. As we enter fiscal 2025, continue to stay disciplined, flexible, and opportunistic, while focusing on consolidating market share. 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.

Thank you very much. This does conclude today's conference. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your