Forestar Group Inc.

Good morning, and welcome to 4STAR's third quarter 2025 earnings conference call. At this time, all participants are in 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 Chris Hibetz, Vice President of Finance and Investor Relations for 4STAR.

Thank you, John. Good morning, and welcome to our call to discuss Four Star's third quarter 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 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.

Thanks, Chris. 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. The four-star team delivered a solid third quarter generating $32.9 million of net income or $0.65 per diluted share on $390.5 million of revenue. Lots sold increased 11% year-over-year and 6% sequentially to 3,605 lots. Additionally, lots under contract to sell increased 26% from a year ago to 25,700 lots, representing 38% of our owned lot position and $2.3 billion of future revenue. which is the highest contracted backlog we have had during the last five years. While affordability constraints and weaker consumer confidence continue to impact the pace of new home sales, we maintain strong liquidity through disciplined investment in inventory. Our experienced operators are adjusting the pace of development where appropriate, and we are moderating our land acquisition investments. Over 80% of our investments this quarter were for land development. We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise, and a diverse national footprint enables us to consistently provide essential finished lots to home builders and navigate current market conditions effectively. We will now discuss our third quarter financial results in more detail. Jim?

Thank you, Andy. In the third quarter, net income was $32.9 million, or $0.65 per diluted share, compared to $38.7 million, or $0.76 per diluted share in the prior year quarter. Revenues for the third quarter increased 23% to $390.5 million, compared to $318.4 million in the prior year quarter. Our gross profit margin for the quarter was 20.4% compared to 22.5% for the same quarter last year. The current year quarter was negatively impacted by the closeout of one community with an unusually low margin. Excluding the effect of this item, our current year quarter gross margin would have been approximately 21.1%. Our pre-tax income was $43.6 million compared to $51.6 million in the third quarter of last year. And our pre-tax profit margin this quarter was 11.2% compared to 16.2% in the prior year quarter. The prior year quarter was positively impacted by a $5 million gain on sale of assets. Pre-tax profit margin in the prior year quarter, excluding the gain on sale, would have been 14.6%. Lots sold in our third quarter increased 11% to 3,605 lots. with an average sales price of $106,600. Our average sales price this quarter was impacted by an outsized mix of lot deliveries from communities with higher price point lots. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries.

Chris?

In the third quarter, SG&A expense was $37.4 million, or 9.6% as a percentage of revenues, compared to 9.2% in the prior year quarter. Our increase in SG&A is primarily driven by the expansion of our operating platform, including entering seven new markets alongside DR Horton's footprint and increasing community count by 16% in the last year. 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 future growth. Mark?

New home sales have been slower than last year as continued affordability constraints and weaker consumer confidence continue to weigh on demand. However, mortgage rate buy-down incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes, particularly at more affordable price points. Our primary focus remains developing lots for new homes at prices that target entry-level and first-time buyers, which is the largest segment of the new home market. The availability of contractors and necessary materials remains solid. The land development cost is stabilized. We have also seen improvement in cycle times despite continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency.

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. and 23% of their finished lot purchases this quarter were lots developed by Four Star. 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 continue to work on expanding our relationships with other home builders and intermediaries. 15% of our third quarter deliveries, or 530 lots, were sold to other customers, which includes 331 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to eight other home builders, one of which was a new customer. Mark?

Our total lot position at June 30th was essentially flat from a year ago at 102,300 lots, of which 68,300, or 67%, was owned, and 34,000, or 33%, were controlled through purchase contracts. 10,000 of our own lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three to four year supply of land and lots in managed development phases to deliver finished lots at a pace that matches market demand. Owned lots under contract to sell increased 26% from a year ago to 25,700 lots, or 38% of our own lot position. $230 million of hard-earned money deposits secure these contracts, which are expected to generate approximately $2.3 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in a highly fragmented lot development industry. Another 27% of our own lots are subject to a writer-first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

WorkStar'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 third quarter, we invested approximately $372 million in land and land development, which was relatively flat with the prior year quarter. Roughly 20% of our investment was for land acquisition and 80% was for land development. Although we have moderated our land acquisition investment, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will allow us to return to strong volume growth in future periods, and we still expect to invest approximately $1.9 billion in land acquisition and development in fiscal 2025 subject to market conditions. Jim?

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 $792 million of liquidity, including an unrestricted cash balance of $189 million and $603 million of available capacity on our undrawn revolving credit facility. Total debt at June 30th was $873 million, with $70.4 million of senior note maturities in the next 12 months and our net debt to capital ratio was 28.9%. We ended the quarter with $1.7 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $33.04. 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.

Thanks, Jim. As outlined in our press release, we are maintaining our fiscal 2025 revenue guidance of $1.5 billion to $1.5 billion while lowering our lot delivery guidance to 14,500 to 15,000 lots in response to current market conditions. Our team has a proven track record of adjusting to changes in market conditions quickly. and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. While we expect home affordability constraints and cautious home buyers to continue to be a near-term headwind for new home demand, we are confident in the long-term demand for finished lots and our ability 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 the majority of our diverse national footprint, positions us for further success. With a clear direction, a dedicated team, and a strong operational and financial foundation in place, I am excited about Four Star's future. John, at this time, we'll open the line for questions.

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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment, please, while we poll for questions. Once again, please press star one if you have a question or a comment. The first question comes from Trevor Allenson with Wolf Research. Please proceed.

Hi, good morning. Thank you for taking my questions. First one's on gross margins. You called out the single community had, I think you said roughly a 70 basis point impact on margins. Excluding that, it still seems like gross margins took a step down, both sequentially and year over year in the quarter. Should we think about this 21% gross margin rate being a good run rate going forward, or were there other kind of one-time impacts in the quarter that impacted your margins?

Just one moment.

the range of 21% to 23%, so at the lower end of the range for this quarter. But we haven't, you know, we really haven't seen anything that would indicate, you know, significantly lower margins going forward.

Okay. You guys, you cut out for quite a long time. I really only caught the end of that. That question. Could you kind of repeat the beginning or the answer? Could you repeat the beginning of it? I'm not sure if other people had the same technical difficulty, but I think I only caught probably the last five or six words of your answer.

Okay. Sorry about that. Yeah, it's really mostly mixed. I mean, again, if you exclude that one closeout community and our margins, our normalized margin for the quarter would have been 21.1%. We try to do that every quarter, adjust for unusually high or low lot sales, margin lot sales, or kind of one-time items. Over the last three years, that range has kind of been in the 21% to 23% range. So this quarter was a little bit lower. And we're continuously managing price and pace at each community to maximize returns. We underwrite to returns, not to margin. So, you know, we're always going to have a mix of higher or lower margins, depending on which communities are delivering in the period. So, you know, this quarter was kind of at the lower end, but at this point, you know, we see no, you know, no indication of, you know, reduced margins.

Okay. All right. That's very helpful, and apologies if others could hear you clearly and I had to repeat the answer there. Second question is around development costs. You mentioned, again, that they've stabilized. I think you used similar language the last quarter. Have you started to see the development costs actually decline sequentially, or is it just more of a stabilization, as you say, and those are kind of flattish quarter over quarter?

It's flattish, and they've been stabilized for quite some time now. Sometimes we see some upticks in some categories and some downward mobility in others as well, but for the most part, we're just classifying it as stable.

Okay. Makes sense. Thank you for all the color, and good luck moving forward.

Thanks. The next question comes from Anthony Petinari with Citigroup. Please proceed.

Hi, this is Asher Sonnen on for Anthony. Thanks for taking my question. I wanted to clarify about the guide. I mean, you trimmed your volume guidance, but reiterated revenue, you know, which I guess implies better pricing. Is that just a function of maybe the mix of which communities are delivering or other puts and takes on pricing that we should think about?

Yeah, I mean, if you just kind of look back to our original guidance and the ASP implied in that, you know, to date we've realized a higher ASP which is partly due to lot price increase, but largely due to mix as well. So if you just look at the average selling price to date and what that implies for the fourth quarter, it leads to us leading our revenue guidance at the same level.

Great. Thanks. And then just to clarify on that last point, what would you point to as driving those lot price increases? Yeah.

Go ahead. Yeah, in our original guidance, we had implied a low single-digit ASP increase, you know, just based on the kind of national shortage of finished lots. And so it really is community by community where the lots are located for the price. But then, like I said, a large part of our ASP increase is just due to mix of where those are located.

Okay, understood. Thanks. I'll turn it over.

The next question comes from Michael Rehat with JP Morgan. Please proceed.

Hi, good morning. This is Alex Isaac on for Mike. Appreciate you taking my question. I want to ask about the new markets you entered and see if there's any regional focus, as well as also what you're seeing on the ground between the regions that you operate in.

Yeah. So as we've talked about, we are opening up in the Pacific Northwest, Northern California, Salt Lake, Reno. So those are all new markets for us. And we have team members now, boots on the ground, and are in the process of building out support around those as market conditions allow.

Those are all new markets in the last year, but we didn't have any new markets necessarily in this quarter.

Okay, that sounds great. Appreciate that. And then one other question, you mentioned all the capital structure. There's been some questions that we received related to some of the other competitors in the land development space and their REIT structure. Is there any interest, or would there be any consideration of conversion to a REIT for a four-star, or has that been something that you've considered?

No, not really. I mean, we're a developer company, as opposed to a land banker just providing financing. So I think that's really our business model and our focus.

That sounds great. Appreciate all the color.

Once again, if you have a question or a comment, please indicate so by pressing star 1 on your touchtone phone. The next question comes from Barry Hames with Sage Asset Management. Please proceed.

Thanks so much for taking my question. D.R. Horton on their call talked about a slower growth in their community count as they go through the next few quarters into next fiscal year. I think they talked about having been in double digits and getting down to more of a mid-single digit. It sounded like maybe over a couple quarters, but could you talk about how that might affect your thoughts going forward as you start thinking about the next fiscal year? Thanks so much.

Well, we still have, you know, a lot of growth opportunity within Horton because at the moment we're about 15% of their lot. And our mutually stated goal is to basically double that in the intermediate term. So I think that we will continue to see growth and market share consolidation within Horton. But also, you know, we are – increasing our customer base with other builders as well, and continuing to add new customers to the mix. So we think we have significant opportunity to grow both within the Horton footprint and outside.

Great. Thanks so much. Appreciate it. Thank you.

If there are any remaining questions, please indicate so now by pressing star 1.

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 to share our fourth quarter results on Tuesday, October 28th.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.