Forestar Group Inc.

Good morning and welcome to Four Star's first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode and the floor will be open for questions following the presentation. If anyone should require operator assistance during this conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the call over to Chris Hibbets, Vice President of Finance and Investor Relations for Four Star.

Thank you, Jenny. Good morning, and welcome to our call to discuss Four Star's first 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 4STAR 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, which is 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 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 am 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 first quarter generating revenues of $273 million in a 9% increase from the prior year quarter on 1,944 lots sold. Our book value per share has increased 10% from a year ago to $35.10, and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue. While affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales, We are managing with discipline to balance inventory investments with liquidity and flexibility. We ended the quarter with $820 million of liquidity and approximately 75% of our investments this quarter were for land development and 25% were for land acquisition. 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 diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively. We will now discuss our first quarter financial results in more detail. Jim?

Thank you, Andy. In the first quarter, net income was $15.4 million, or 30 cents per diluted share, compared to $16.5 million or 32 cents per diluted share in the prior year quarter. Our pre-tax income was $20.8 million compared to $21.9 million in the first quarter of last year. And our pre-tax profit margin this quarter was 7.6% compared to 8.7% in the prior year quarter. Revenues for the first quarter increased 9% to $273 million compared to $250.4 million in the prior year quarter. We sold 1,944 lots in the quarter with an average sales price of $121,000. 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. Our gross profit margin for the quarter was 20.1% compared to 22% for the same quarter last year. The current year quarter was negatively impacted by a track sale with an unusually low margin. Excluding the effect of this item, our current year quarter gross margin would have been approximately 21.5%. Chris?

In the first quarter, SG&A expense was $36.5 million, or 13.4% as a percentage of revenues. compared to $36 million, or 14.4%, as a percentage of revenues in the prior year quarter. Our headcount decreased 3% from a year ago as we remain focused on efficiently managing our SG&A while maintaining our strong operational teams across our national footprint to support future growth. We expect our headcount to remain relatively flat for the remainder of the year.

Mark? Demand for new homes continues to be impacted by affordability constraints and cautious consumer sentiments. 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. Land development costs and cycle times have stabilized. 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. Sixteen percent of the homes DR Horton started in the past 12 months were on a four-star developed lot, and 23 percent of their finished lot purchases over the same timeframe 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 D.R. Horton. We continue to work on expanding our relationships with other home builders. Sixteen percent of our first quarter deliveries, the 317 lots were sold to other customers, which includes 146 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 six other home builders. Mark?

Our total loss position at December 31st was 101,000 lots, of which 65,600, or 65%, was owned, and 35,400, or 35%, were controlled through purchase contracts. 10,400 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 deliver finished lots at a pace that matches market demand. At quarter end, 24,100, or 37% of our own lots, were under contract to sell. $210 million of hard-earned money deposits secure these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contractive 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 our right of first offer to D.R. Horton based on executed purchase and sale agreements.

Chris? Four stars underwriting criteria for new development projects remains unchanged at a minimum 15% free tax return on average inventory and a return of our initial cash investment within 36 months. During the first quarter, we invested $415 million in land and land development. Roughly 25% of our investment was for land acquisition and and 75% was for land development. Although we have moderated our land acquisition investment over the last 12 months, 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 $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim?

We have significant liquidity and are using modest leverage to keep our balance sheets strong and support our growth objectives. We ended the quarter with approximately $820 million of liquidity, including an unrestricted cash balance of $212 million and $608 million of available capacity on our undrawn revolving credit facility. Total debt at December 31st was $793 million, with no senior note maturities in the next 12 months. and our net debt to capital ratio was 24.6%. We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 10% from a year ago to $35.10. 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. The four-star team delivered increased revenues this quarter while maintaining strong liquidity, and executing our disciplined investment strategy. As outlined in our press release, we are maintaining our fiscal 2026 revenue guidance of $1.6 billion to $1.7 billion and our lot delivery guidance of 14,000 to 15,000 lots. Our teams have a proven track record of adjusting quickly to changes in market conditions, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. Our national footprint and more than 200 active projects are a strategic advantage and provide flexibility to allocate capital based on local market conditions. While we expect home affordability constraints and cautious consumers to continue to be 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 a constrained finished lot supply and a 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, we are excited about Four Star's future. Then, at this time, we'll open the line for questions.

Thank you very much. We'll be now 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 queue. You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Our first question is coming from Anthony Pettinari of Citigroup. Anthony, your line is live.

Hi, this is Asher Sonnen on for Anthony. Thanks for taking my questions. Just starting on gross margins, I think maybe even excluding the track sale, the 21 and a half percent gross margin might've been down one Q and one Q on year over year, maybe versus four Q. Can you just talk about the puts and takes there and kind of what gross margins might look like over the next few quarters?

Yeah, the biggest impact on margin in the quarter was really due to mix. And there's always gonna be an impact based on the mix of projects that are delivering lots in the quarter. And that was the case this quarter. The lots that delivered really just had a lower gross margin. Looking forward, you know, at this point, we don't see any reason why our gross margins wouldn't be in kind of in the historical range that we've seen, kind of 21% to 23%. probably at the lower end of that range, you know, just given our, given, I guess, trying to match price and pace or balance price and pace in a slower demand environment.

Got it. Okay. No, that's really helpful. I mean, following up on that, I mean, when it comes to like JR Horton and third-party customers, it sounds like you're getting some maybe pushback on price? I think, you know, last time we saw prices like pushback on softer demand, there was more pushback on maybe takedown schedules and slowing those down. But I'm just curious if you could talk about what you're seeing from your customers.

So market to market, you know, we're continuing to meet with all of our customers. And, you know, there has been a movement away from large bulk takedowns that had been sort of the norm in the post-COVID environment to more of a structured quarterly takedown. We've gone through most of that through fiscal 25. There's probably a few pockets where that's still going on. But we really haven't seen a lot of change on price. Sometimes in a community where the pace is slower, we'll meet with our customers and and work through some things. But it's largely gone back to what we would consider a normal market environment in terms of quarterly lot takedowns.

Okay. That's helpful. If you don't mind me sneaking one more in there, I think SG&A spend was pretty flat year-over-year on a dollar basis. Is that just kind of something we should expect for the next few quarters, or is there any puts and takes to think about there?

Yeah, our headcount is actually down a little bit from a year ago and from last quarter. And we expect our headcount to remain pretty stable for the remainder of the year. Headcount and labor costs are, you know, the majority of our SG&A. So we would expect, you know, we would expect it to be pretty stable.

Thank you. I'll turn it over.

Thank you very much. Just a reminder there, if anyone has any questions, you can still join the queue by pressing star one on your phone keypad now. Okay, I'm not seeing any further questions in the queue. So I will now hand it, oh, apologies, we do have a question. We have a question in from Paul Peschilski of Wolf Research. Paul, your line is live.

Thank you. Good morning. I guess to start off, you mentioned that your ASP was, you know, due to mix to higher-priced homes. Is that planned or is that more a function of market conditions and weak entry level? And then how would your – you know, inventory of developed lots, you know, or anything you could bring to the market over the next 12 months? How does that break out between entry level and move up?

So it was planned. As we've grown our development platform in the West, they tend to have higher ASPs. And so you're starting to see some of that flow through. And so we think over time that will continue. We don't think it will be as much in the remaining quarters of this fiscal year as it was in Q1. And also it was kind of amplified due to just the lower volume of lot closings overall. We're really not changing our strategy in terms of development plans for, you know, primarily the first-time homebuyer and homebuyers. entry level. That's the largest section of the market, and it's where our biggest customer focuses a lot of their attention. So we're very focused on maintaining affordability, and I think that that's the position to be in the marketplace.

Okay, thank you. And then I guess, you know, Texas and Florida, you really have outsized exposure to those two states. Are you looking to maybe rebalance a little bit given, you know, higher resale inventory in those two markets or two states?

Yeah. I mean, we look at that every – on a month-to-month and quarter-to-quarter basis and reallocate because, you know, our national platform allows us to do that. And, you know, right now Texas and Florida are – a couple of the more challenged markets with inventory. So we're being very selective in what we're looking at and what we're doing there and moderating our development activities there where appropriate to make sure that we don't have excess inventory. But those are still huge markets. They still have great in-migration. And so we think the fundamentals for those markets long-term are real solid. But we will continue to evaluate on a quarter-by-quarter basis and make investments based on current local market conditions.

And then just the last one, I would assume that you're probably pulling back on the size of your phase developments. How does that impact your cost structure? Does that have any meaningful headwinds to margins?

There's no real impact on our cost structure. We do pull it back just based off the meet demand, so we can meet sales absorptions. Really, we're seeing supply of materials and contractor availability is in really good shape, so we continue to work with those trade partners and governing jurisdictions to reduce cost and cycle times. It helps us reduce cycle times a bit when we pull back and reduce those phases. Obviously, we're trying to deliver lots to meet the market demand and just that continued increase in contractor availability alongside cooperating with the government jurisdictions is really the key to driving those lower development costs and cycle times.

I appreciate it. Thank you.

Thank you. Thank you, Jenny.

I was just posing up and you beat me to it. Thank you very much. I'll hand it over to you.

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 to share our second quarter results on Tuesday, April 21st.

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