1/21/2025

speaker
Jenny
Host

Good morning and welcome to Four Star's first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. 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 corner over to Chris Hibbert, Vice President of Finance and Investor Relations for Four Star. Chris.

speaker
Chris Hibbert
Vice President of Finance and Investor Relations

Thank you, Jenny. Good morning, and welcome to the call to discuss Four Star's first public results. Before we get started, I want to remind everyone that 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 Four Star's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are or will be filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.fourstar.com, and we plan to file our 10-Q later this 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.

speaker
Andy Oxley
President and Chief Executive Officer

Thanks, Chris, and welcome to the team. For those who haven't met Chris yet, he joined our team in December as part of a planned transition with Katie Smith joining D.R. Horton on January 1st. I'm also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The four-star team delivered 2,333 lots, generating revenues of $250.4 million during the quarter and earnings per diluted share of 32 cents. Demand for finished lots remained solid, and our owned lots under contract have doubled from a year ago. And the percentage of our owned lots under contract is at the highest level since June of 2020. The four-star team continues to expand our operating platform, including making significant investments in land acquisition and development and adding key personnel in our local markets and entering new markets. Our owned lot position has increased 23% compared to a year ago, and our community count has increased 25% over the same period. 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. 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. Jim will now discuss our first quarter results in more detail.

speaker
Jim Allen
Chief Financial Officer

Thank you, Andy. In the first quarter, net income was $16.5 million, 32 cents per diluted share compared to 38.2 million dollars or 76 cents per diluted share in the prior year quarter. Our pre-tax income was 21.9 million dollars compared to 51.2 million dollars in the first quarter of last year and our pre-tax profit margin this quarter was 8.7 percent compared to 16.7 percent in the prior year quarter as a result of reduced operating leverage. Revenues for the quarter totaled $250.4 million compared to $305.9 million in the prior year quarter. We sold 2,333 lots in the quarter with an average sales price of $105,500. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. We continue to expect that the first quarter will be our lowest delivery quarter of the fiscal year. Our gross profit margin for the quarter was 22% compared to 23.8% for the same quarter last year. The prior year quarter was positively impacted by an unusually high margin lot sales related to the closeout of a legacy community. Excluding the high margin lot sales from that legacy community, our prior year first quarter gross profit margin was approximately 22.8%.

speaker
Chris Hibbert
Vice President of Finance and Investor Relations

Chris? In the first quarter, SG&A expense increased 29% from the prior year quarter to $36 million primarily due to a 30% increase in employee count to 427 employees compared to 329 employees a year ago. We have increased our employee count to support the expansion of our operating platform, including entering new markets and increasing community count. SG&A expense as a percentage of revenues was 14.4% compared to 9.2% in the prior quarter, primarily as a result of the year-over-year decrease in lot deliveries. 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 continued growth. Mark?

speaker
Mark Walker
Chief Operating Officer

Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points generally remains limited, and demographics supporting housing demand remain favorable, despite continued affordability challenges. Mortgage rate buy-down incentives offered by builders have helped to address affordability and spur demand. Our ongoing focus remains to develop lots, primarily for homes at affordable price points. Availability of contractors and necessary materials has improved, and the cost of developing land has stabilized. While we continue to see modest improvement in cycle times, government 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. Home builders 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?

speaker
Jim Allen
Chief Financial Officer

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 D.R. Horton. We also continue to work on expanding our relationships with other home builders. 9% of our first quarter deliveries, or 221 lots, were sold to other home builders, including two new customers.

speaker
Chris Hibbert
Vice President of Finance and Investor Relations

Chris? 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 positioning to return to strong volume growth in future periods supported by our increased investments in land acquisition and development over the last several quarters. During the first quarter, we invested approximately $685 million in land and land development, which was a 50% increase from the prior year quarter. 57% of our investment was for land acquisition and 43% was for land development. Our land acquisition pipeline is front-end loaded this fiscal year, and we expect the pace of our investment in land acquisition to moderate for the remainder of the year. We still expect to invest approximately $2 billion in land acquisition and development in fiscal 2025, subject to market conditions.

speaker
Mark Walker
Chief Operating Officer

Mark? Our total lot position at December 31st increased 29% from a year ago to 106,000 lots, of which 68,300, or 64%, was owned, and 37,700, or 36%, were controlled through purchase contracts. 8,100 of our own lots were finished at quarter end. Consistent with our focus on capital efficiency, we target owning a three to four year supply of land and lots and manage our development phases to deliver finished lots at a pace that matches market demand. Owned lots under contract to sell increased 51% from a year ago to 25,200 lots, or 37% of our owned lot position. $207 million of hard earnest money deposits secured these contracts, which were expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 28% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Jim?

speaker
Jim Allen
Chief Financial Officer

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with $645 million of liquidity, including an unrestricted cash balance of $132 million and $513 million of available capacity on a revolving credit facility. In December, the company amended its credit facility, which, among other things, extends the maturity date from October 2026 to December 2029 reduced pricing, and increased the aggregate lender commitments from $410 million to $640 million. We were also pleased to receive an upgrade to our corporate credit rating from S&P earlier this month, taking us from a B plus to double B minus. Total debt at December 31st was $807 million, with no senior note maturities until May 2026, and our net debt-to-capital ratio was 29.5%. We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 13% from a year ago to $31.84. 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 as they arise. Andy, I will hand it back to you for closing remarks.

speaker
Andy Oxley
President and Chief Executive Officer

Thanks, Jim. We are pleased with the continued expansion of our operating platform. We have made significant investments in land and land development, grown our team with best-in-class talent, entered new markets alongside D.R. Horton's footprint, and have a breadth of new opportunities being evaluated by our team. I believe there's tremendous opportunity ahead. Four Star is uniquely positioned to gain market share in the highly fragmented lot development industry. finished lot supply across the majority of our diverse national footprint positions us for further success. Our guidance for fiscal 2025 remains unchanged. 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 expect our first quarter will be our lowest delivery quarter of the year and we still expect our revenues in the second half of fiscal 2025 to be higher than the first half. The variability we experienced throughout fiscal 2024 illustrates the quarter-to-quarter fluctuations that can occur in delivery of finished lots. We are closely monitoring each of our markets 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 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 when 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.

speaker
Jenny
Host

Thank you very much. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad now. Confirmation tone will indicate that your line is in the 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 keys. Please wait a moment whilst we poll for questions.

speaker
Carl Reichardt
BTIG

Thank you. Your first question is coming from Carl Reichardt of BTIG.

speaker
Jenny
Host

Carl, your line is live.

speaker
Carl Reichardt
BTIG

Thanks. Hey, guys. Nice to talk to you. I wanted a little more detail on the stabilization of costs in land development. Andy, can you expand on that a little bit, the particular aspects of horizontal development where you're starting to see that kind of stabilization? And just as a follow-up, I'm assuming the cycle time issue, as we discussed before, is really related to the entitlement or approval process and not other dynamics.

speaker
Mark Walker
Chief Operating Officer

Hey, Carl, it's Mark. In terms of the cost and stabilization, we've seen that really over the past trailing 12 months, our development costs have been stable. Our team's done a great job making sure the budgets are updated throughout the life of the project. We're not really seeing price increases come across our desk like we were maybe 12 months ago. So that's a very positive sign for cost. In terms of cycle times, we decreased our cycle times again 30 days this quarter. So that's about 120 days off the peak. And so the cycle times we continue to see come down. We still are seeing the entitlement hangups, particularly at substantial completion with the government jurisdictions. That's something we're going to continue to work on this fiscal year with the hope that we can get down to a normalized cycle time by the end of the fiscal year.

speaker
Carl Reichardt
BTIG

Thank you, Mark. And then on the cost leverage, obviously recognizing the negative leverage this quarter, 30% increase in employee count and new market set up. how are you thinking about the growth in that employee count in new markets as you look the next year or two? Should we expect an improvement in that leverage that's more substantial, especially back half of this year as you build out that pool of lots you have coming? Or is that something we'd expect to see in the next couple of years? And then I have one more after that.

speaker
Jim Allen
Chief Financial Officer

Carl, yeah, we would expect to see our SG&A expense moderate for the you know, based on our revenue guidance, we would still expect it to be kind of high single digits for the year.

speaker
Carl Reichardt
BTIG

Thanks, Jim. Last, just on dollars, but we model revenue per lot versus pricing, just because it's a little easier. But this seemed like particularly high relative to last year's revenue per lot. Was there something particular this quarter that drove that higher? I think Horton talked about 3% increase in lot supply, although obviously it's a lag to you. What are you seeing or what can we expect in terms of revenue per lot as we go through the year, recognizing there might be some ball in it dependent on on the particular land that you sell?

speaker
Jim Allen
Chief Financial Officer

It was really just mixed for this quarter. You know, we had one particular infill project with pretty significant lot prices that skewed that ASP up for the quarter.

speaker
Andy Oxley
President and Chief Executive Officer

And we're pretty much predicting that, you know, low to mid single digit escalate of raising lot price.

speaker
Carl Reichardt
BTIG

All right, I appreciate it, guys. Thanks so much.

speaker
Andy Oxley
President and Chief Executive Officer

Thank you, Carl. Thank you, Carl.

speaker
Jenny
Host

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

speaker
Asherson
Representative for Anthony Petanari, Citigroup

Hi, this is Asherson and on for Anthony. So thanks for taking my question. I just wanted to ask, how has builder demand been kind of trending here to date? And then have you seen Horton or any of your other customers maybe delay or otherwise alter their scheduled lock takedowns?

speaker
Mark Walker
Chief Operating Officer

If builder demand remains strong, particularly where we can get new communities open and on board, builders are lining up at the door, essentially, to get into new communities. In existing communities, we're seeing the same. There are, on occasion, when we deal with this quarter-over-quarter, some inventory buildup, and it's project-by-project. If there's the ability to bring in a new builder, we will do that. We have been doing that in the past, but builder demand is strong overall. the financial odds remain solid.

speaker
Asherson
Representative for Anthony Petanari, Citigroup

Great. That's good. And then just separately, are you able to just help us a little bit more with, and you talked about this a little bit in the prepared marks, but details on kind of the cadence of deliveries over the balance of the year, just given the softness in the first quarter?

speaker
Andy Oxley
President and Chief Executive Officer

Well, it was really, you know, we had a really strong fourth quarter. And so October 1st, was a little softer. It improved in November. December got pretty much back to normal. And then as we go through, what we've seen over the last several years is that we have that first quarter seasonally is our lowest. And we have a majority of our deliveries in the second half of the year. So we see that same progression pretty much similar to what 2024 was.

speaker
Asherson
Representative for Anthony Petanari, Citigroup

Great, thanks. That's helpful. I'll turn it over.

speaker
Jenny
Host

Thank you very much. Just a reminder there, if anyone has any remaining questions, you can do so by pressing star 1 on your phone keypad now.

speaker
Carl Reichardt
BTIG

Okay, I'm not seeing anyone else come into the queue for questions.

speaker
Jenny
Host

I will now turn the call back over to Andy for any closing remarks.

speaker
Andy Oxley
President and Chief Executive Officer

Thank you, Jenny, 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 April to share our second quarter fiscal 2025 results.

speaker
Jenny
Host

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

Disclaimer

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.

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