Forestar Group Inc. (FOR) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Forestar Group Earnings Conference Call. My name is Tony, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Anna Torma, Senior Vice President of Corporate Affairs. Please proceed, ma'am.

Thanks and good morning. I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss Forestar's fourth quarter and full year 2012 results. I'm Anna Torma, Senior Vice President, Corporate Affairs. And joining me on the call today is Jim DeCosmo, President and CEO; Chris Nines, Chief Financial Officer; and Flavious Smith, Chief Oil and Gas Officer. This call is being webcast and copies of the earnings release and presentation slides are now available on the Investor Relations section of our website at forestargroup.com. Before we get started, let me remind you please to review the warning statements in our press release and our slides as we will make forward-looking statements during the presentation. In addition, this presentation includes non-GAAP financial measures. The required reconciliation to GAAP financial measures can be found at the back of our earnings release and slides or on our website. Now let me turn the call over to Chris for a review of our financial results.

Thanks, Anna, and welcome to everybody joining us on the call this morning. Let me begin by highlighting our full year 2012 financial results and how the execution of our Triple in FOR strategic initiatives is beginning to benefit the bottom line. In 2012, Forestar reported net income of approximately $12.9 million or $0.36 per share compared with net income of $7.2 million or $0.20 per share in 2011. Our 2012 financial results includes special items of approximately $0.20 per share and include after-tax expenses of $0.12 per share associated with the acquisition of Credo Petroleum and an after-tax loss of $0.08 per share related to the extinguishment of debt associated with the amendment and extension of our term loan. In addition, our 2011 financial results includes special items at $0.24 per share, which consists of an after-tax loss of $0.06 per share associated with withdrawal of private debt offering and after-tax loss of $0.82 per share principally related to impairments associated with entering into agreements to acquire certain asset from the CL Realty and TEMCO ventures and an after-tax gain of $12 per share from the sale of 57,000 acres at Timberland. As a result, net income, excluding special items, was $0.56 per share in 2012 compared with a loss of $0.04 per share in 2011. This improvement reflects stronger segment operating results which are highlighted on the following slides. Real Estate reported segment earnings of $53.6 million for full year 2012 compared with a loss of $25.7 million in 2011. Let me remind you that our full year 2011 Real Estate segment earnings include approximately $45.2 million in noncash asset impairment charges, principally associated with the acquisition of certain assets from the CL Realty and TEMCO ventures. Improvement in our 2012 Real Estate segment results primarily reflect the sale of 2 stabilized multifamily properties and our interest in a commercial office project, increased residential lot sales activity and the reduction in noncash asset impairment charges. Jim will share this with you in more detail in just a few minutes. Mineral Resources reported total segment earnings of $21.6 million for full year 2012 compared with $16 million in 2011. This year-over-year increase was primarily driven by higher oil production, the acquisition of Credo Petroleum and increased mineral leasing activity. Fiber Resources reported total segment earnings of $5 million in 2012 compared with $1.9 million in 2011 due to increased fiber sales activity and higher average pricing. As a result, we reported total segment earnings of $80.2 million for 2012 compared with a loss of $7.8 million in 2011, illustrating the early benefits of executing our Triple in FOR strategic initiatives. Now let me turn to our fourth quarter results. In the fourth quarter of 2012, Forestar reported net income of approximately $10 million or $0.28 per share compared with a loss of $22.9 million or $0.65 per share in the fourth quarter 2011. Our fourth quarter 2012 results include special items of approximately $0.01 per share associated with the acquisition of Credo Petroleum. In addition, our fourth quarter 2011 results include approximately $0.82 per share after-tax related to the noncash asset impairments associated with the CL Realty and TEMCO transactions, which I described earlier. As a result, our net income excluding special items was $0.29 per share in fourth quarter 2012 compared with $0.17 per share in fourth quarter 2011. These results once again reflect a significant improvement in our segment operating results, which are highlighted on the following slides. Real Estate reported segment earnings of $21.6 million in fourth quarter 2012 compared with a loss of $25 million in fourth quarter 2011. Again, our fourth quarter 2011 Real Estate segment earnings include $44.5 million in noncash asset impairment charges related to the CL Realty and TEMCO transactions. In addition to the reduction in noncash asset impairment charges, our year-over-year improvement was driven by an $8.2 million gain on our venture sale of the Las Brisas multifamily community located near Austin and higher sales of residential lots and commercial tracks. Mineral Resources reported total segment earnings of $5.7 million in fourth quarter 2012 compared with $3.7 million in fourth quarter 2011, driven by higher oil production and leasing activity. The acquisition of Credo Petroleum added approximately $2 million in additional segment earnings in fourth quarter 2012. Fiber Resources reported total segment earnings of $2.3 million in fourth quarter 2012 compared with $100,000 in fourth quarter 2011, primarily due to higher fiber sales. Total segment earnings were $29.6 million in fourth quarter 2012 compared with a loss of $21.2 million in fourth quarter 2011. Now let me turn to our balance sheet and our focus on maintaining financial strength while executing our growth strategy. In 2012, we generated $108 million in pretax cash flow and reduced debt by $86 million though our Triple in FOR strategic initiatives to accelerate value realization. These sales include our 25% interest in Palisades West, the sale of approximately 800 acres from our Light Farms venture, reimbursements of investment in land in the formation of 2 multifamily ventures and the sale of 2 of our stabilized multifamily properties, Broadstone and Las Brisas. The sale of these assets allowed us to make several strategic investments during the year, including the acquisition of Credo Petroleum for $146 million equity purchase price and over $50 million in real estate acquisitions for both community development and multifamily. The table on the left highlights our financial leverage at year end 2012. We had approximately $294 million in total debt outstanding with $50 million of that being consolidated debt, most of which is nonrecourse to Forestar. Our total debt to total capital ratio was about 36% at year end 2012 and our available liquidity stood at $159 million, slightly above year end 2011. We remain very focused and committed to maintaining balance sheet strength. As we continue to execute our growth strategy, we're committed to preserving financial flexibility and maintaining ample liquidity to generate the greatest value from every acre. As a result, we will continue to reposition non-core assets and monetize stabilized multifamily assets to support reinvestment and debt reduction. In addition, we expect to generate additional liquidity over time through acquisitions, as well as additions to our proven reserves to further grow our borrowing base. We are targeting to maintain at least $100 million in available liquidity throughout the cycle, which we remain well above today. As you can see on the debt maturity chart on this slide, we have no significant near-term debt maturities for the next several years. In addition to our senior credit facility, we also actively monitor and assess public debt markets for additional liquidity for growth and investment. The combination of our strong portfolio, well-located assets, the right strategy, a great team and our commitment to maintaining balance sheet strength and financial flexibility has Forestar well-positioned to maximize and grow shareholder value. Now let the turn the call over to Jim for some additional highlights.

Thanks, Chris, and I'd also like to welcome everybody who's joined us this morning on the call as well as the webcast. As Chris pointed out, our financial results improved considerably compared to 2011, despite prolonged economic weakness. In the early stages of the housing recovery, and what I believe will prove to be a North American energy renaissance, I'm encouraged by our prospects. Acquisition at Credo transformed our minerals management operations into an established oil and gas business with a prime pipeline of oil and liquids prospects. In Real Estate, we've capitalized on improving housing markets by accelerating lot sales and margins, and furthermore, we generated cash in earnings from the sale of several stabilized commercial properties. As the chart illustrates, these results are the primary drivers, over $90 million in 2012 EBITDA, and it's the source of our momentum going into 2013. We've got our sights set on delivering Triple in FOR, that's the path to delivering the greatest value for our business and particularly our shareholders. If I were to headline the call this morning, it would be Momentum In Forestar. Take a look at few of the highlights for 2012. As you can see, almost every dimension of Forestar contributed to our 2012 results. Compared to 2011, oil and gas production is up significantly. Multifamily property sales contributed for the first time. Lot sales profit is up handily, and Fiber revenue is up almost 90%. We'll cover the highlights in more details within the segment sections of the presentation. Much like 2012, every part of the business contributed to the fourth quarter results. The one point that I'll cover before reviewing the segment is the repurchase of 100,000 shares in the fourth quarter at an average price of $14.90 a share. That's one of just many sound investments in 2012. I believe our results for the quarter and year are a step in the right direction, so let's begin by taking a look at our Mineral Resources segment. Our fourth quarter Mineral Resources earnings of $5.7 million, were up $2 million year-over-year. That's principally due to higher oil and gas production and leasing activity. Oil production was up over 245% compared with the fourth quarter of 2011 as 16 additional wells came online. Full year 2012 Mineral Resource earnings at $21.6 million were $5.7 million above 2011, once again, driven by an increase in oil production and leasing activity. And last, we have invested in oil and gas talent that we believe will create long-term value for the business. Let's take a look at our increase in oil production. Both charts illustrate an increase in drilling and oil production over the last 2 years, and as you can see, a significant step change with the acquisition of Credo. Our production increased almost 2.5x as compared to the fourth quarter last year with Credo accounting for 68% of the oil production. We'll continue our production growth through promoting exploration and drilling on our legacy P [ph] minerals, investing in the Bakken Three Forks and the Central Uplift in Kansas and Nebraska. We expect the step up in drilling to drive oil production, cash flow and reserves. Estimated year end 2012 proven reserves of 5.6 million barrel of oil equivalent is up 2.6 million from year end 2011, and that's primarily due to the acquisition of Credo. In addition to Bakken wells, I'm encouraged that 2012 year end reserves now include a number of wells in the Three Forks formation. As anticipated, operators are now testing, producing and proving out various benches at Three Forks. That's a significant development. Our legacy reserves are down 1.1 million BOE principally due to record production in 2012, lower SEC pricing and less drilling due to depressed natural gas and natural gas liquids pricing. SEC pricing for natural gas is down $1.21 per mcf or about 30% year-over-year as we look at 2011 versus 2012 year end reserves. Production and pricing account for the majority of the reduction in proven reserves on our own legacy minerals. I'd just remind you, the benefit of owning minerals and the associate oil and gas is still in place and owned, is not leased. As pricing and technology advance, production reserves will follow. In addition, and it is noted, there's an estimate of 0.7 MBoe of unproven probable and possible reserves. As the chart illustrates on the right, we've been successful shifting our proven reserve base to oil. We ended 2012 with 57% of our reserves in oil, that's twice the level of 2010. Let me turn the call over to Flav to provide you with a number of the key updates and our focus on 2013 investments, as well as expectations.

Thanks, Jim. Activity in the Bakken Three Forks continues to accelerate as many operators are moving from drilling to whole leases to scalable pad drilling. As with all resource plays, the operators' objective is to reduce cost through operational efficiencies and economies of scale, particularly in drilling and completion-related expenses. As of year end 2012, we are participating in 35 producing wells. That's up over 20 wells compared to last year. 15 wells are currently drilling with about 10 waiting on frac and final completion. Estimated ultimate reserves for producing Bakken in Three Forks wells is also trending in the right direction. The chart highlights our production type curves to date from 35 producing wells in comparison to 400,000, 500,000 and 600,000 EUR-type curves. Note the solid orange type curve. That is our estimate of the average EURs, given the production to date, from the 35 wells. We expect continued upward revision to EURs as operators optimize completion prescriptions in this part of the basin. Two other points. First, as we have shared before, our underwriting for our investment in Credo was based on 500,000 barrels of oil per well in the Bakken. And second, at this early stage on the Fort Berthold Indian Reservation, year end 2012 EUR estimates are about 400,000 barrels per well. Additional time and production data will provide greater certainty in estimated EURs. We're continuing to acquire our leasehold interest in mineral acreage in Kansas and Nebraska, and at year end 2012, we had nearly 122,000 net mineral acres leased. We acquired leases of approximately 25,000 net acres in Nebraska for an average price of $25 per acre in the fourth quarter. Our target is the Lansing-Kansas City formation. These are shallow 4,000 to 5,000-foot conventional vertical wells with costs generally around $500,000 to drill and complete. We're expecting to participate in about 82 gross wells in 2013, 57 of them we will be operating. Historically, we have realized about 40% success rate in this play. At $90 oil, we estimate risk-adjusted returns far surpass our 20% target rate of return. On the real benefits -- one of the real benefits of our Kansas Nebraska project is at this point in time, it's both scalable and repeatable, and it fits well within our low-risk investment profile. Due to lower retail gas prices, drilling activity in East Texas and Louisiana slowed down slightly in 2012. 13 wells were completed on our legacy P [ph] minerals with the majority targeting oil and natural gas liquids in the Austin Chalk and Upper Wilcox in Louisiana. In 2012, revenues for legacy minerals were $34 million, providing a cash flow underpinning for our oil and gas business. We have about 7 wells planned in 2013 over several horizons, primarily targeting the lower Cleveland, Rodessa, James Lime, Pettit, Glen Rose and Wilcox formations. We are currently drilling our first well in Henderson County, Texas, and this well should reach total depth within the next 10 days. Our 2013 capital investment for drilling and completion program for 2013 is estimated to be about $70 million to $75 million. We will participate in 178 gross wells, amounting to a little over 58 net wells. The Bakken accounts for the majority of the capital program with 54 wells planned at a cost of about $43.7 million. That's up about 35 wells from operators' estimates in November. Using the same assumptions shared earlier, this investment should yield about 1.9 million barrels of oil equivalent in future production and over 120 million barrels in net cash flow. We'll continue to drill in Kansas Nebraska, a lower cost, low-risk play expected to generate attractive returns. We have identified 82 well locations, which together account for about 20% of our capital plan or about $14.5 million. On average, we'll have about 54% working interest in those wells. About 13% of the capital plan or about $9 million will be invested in drilling in Texas and Louisiana, where we retain a working interest of about 20% to 25%. Many of these wells will be drilled on our legacy minerals where we also retain a low-cost royalty interest. Now I'll turn the call back over to Jim.

Thank you, Flav. In the fourth quarter, Fiber was up $2.2 million and up over $3.1 million for the year. During the quarter, we sold over 162,000 tons of fiber and nearly 494,000 tons for the year. Our average stumpage price in the fourth quarter was up over 42% from a year ago due to greater mix and larger sawlogs. Even though housing starts and lumber prices have picked up, we've yet to see the stumpage markets follow. It will more than likely take low inventories coupled with wet conditions. I also want to add that the team's done a great job in keeping almost 99% of our available land leased for recreational uses. And that's the greatest value from both an economic and community stewardship perspective. Switching gears to Real Estate. Our Real Estate segment results are reflective of 2 key elements of our business and our strategy: Number one, our position and ability to deliver single-family lots and multifamily rental units; and number 2, the early innings of the U.S. housing market recovery. In 2012, we accelerated value realized from Real Estate across a number of dimensions. The 22% increase in lot sales increased our share of gross lot margin by 60%, and that's a combination of price and recent acquisitions and investments. Harvesting value, we created in the multifamily business is the sale of 2 properties, an increase in residential and commercial track sale and no asset impairment in 2012. Prior to -- or before 2011 impairments, 2012 segment earnings were up $34.1 million or 175%. That's another solid step in the right direction, one of the fundamental drivers that's been our investment in development and acquisition. Recognizing the housing recovery early on, we invested about $77 million in acquisitions, targeting locations that were supported by long-term job growth and in close proximity to employment centers, and most importantly, exemplary education; in addition, investments that generate near-term cash flow and earnings; and equally important, communities where our prospective homebuyers would enjoy a superior lifestyle and have confidence in the investment in their homes. As the slide indicates, these acquisitions contribute almost $30 million in cash and $11.7 million in earnings in 2012. I believe we'll continue to see and experience additional cash and earnings in 2013. In addition to acquisitions, we invested about $32 million in community development. We would expect if housing continues to recover, our investment and development to increase accordingly. Let's take a step back and take a look at the entire Real Estate portfolio. We've shared this map with you on a number of occasions. And as the chart illustrates, we ended 2012 with about 70% of our real estate investment in the major markets of Texas, which is certainly where we want to be. That's consistent with the last slide where a majority of the acquisitions and investment have been in Texas. As I mentioned earlier, we're encouraged by the improvement in housing. In fact, we're beginning to see some signs of recovery in Atlanta. And keep in mind, Atlanta is coming out of a very deep trough. The bottom line, Forestar has invested in many of the best housing markets in the U.S. and, we believe, in the right product type. Let's take a look at our lot sales trend. Residential lot sales increased in 2012 to 1,365, that's about 22% above 2011 and a little over 2x the 642 lots we sold in 2009, which was our trough, yet is still well below our previous peak of 3,600. Average lot margins have also continued to improve, with our 2012 average margin a little over $19,500. That's up 11% over 2011. In addition, our backlog of lots under contract remains in good shape at 1,340 lots at year end. Having communities in A locations with ability to deliver lots remains a distinctive Forestar advantage. Let's shift gears to multifamily. During 2012, we sold 2 of our multifamily communities, Broadstone in the third quarter and Las Brisas in the fourth. Total sales consideration was $97 million, with Forestar receiving about $40 million in cash, $18.4 million in earnings and generated returns well above our cost of capital. Given multifamily fundamentals and market conditions, we continue to look for additional sites to fit our criteria, underwriting and model. A good example is a site that we acquired in the fourth quarter. This site is located in Charlotte, North Carolina and was acquired for $6 million. The 1.5-acre site is located just outside of the central business district and close proximity to one of Charlotte's best entertainment and dining destinations. Residents also have easy access to the new Little Sugar Creek Greenway, which includes a 6-mile hike and bike trail for recreation and enjoyment. There are several major employers nearby, including the largest hospital in Charlotte located directly across the street. The submarket has the highest rental rates in Charlotte, 6% annual rent growth and over 97% occupancy. We're currently in discussions with perspective equity partners and anticipate starting construction in the second half of this year and start leasing in the second half of 2014. Consistent with our model, I'd expect to have about $3 million to $5 million of equity in the project at time of completion. Our team continues to build a pipeline of A class development projects. We completed construction of Promesa at the end of the year, and the property's now approximately 80% leased, and we're currently marketing it today and anticipate closing in the first half of this year. We're also on track developing 2 communities, Eleven located in Austin and 360 located in Denver. Eleven should begin pre-leasing in April, with planned stabilization and sale as early as 2014. 360 should begin pre-leasing in June with stabilization and sale in 2015. Pro forma Forestar cash flows from these 3 properties are estimated at approximately $46 million. In addition, we currently have 3 development sites in the pipeline, one each in Nashville, Charlotte and Dallas, with several other locations under review. In the last section of the call, I want to update you on execution of our Triple in FOR initiatives. As you've heard several times now, we are very focused on proving up and growing our net asset value, and we made good progress on our Triple in FOR strategic initiatives. First, accelerating value realization. We listed many of the drivers of our 2012 performance, yet the bottom line is, segment earnings are up over $80 million, or almost 65% from our 2008 through 2011 average. Second, optimize transparency and disclosure. Our acquisition of Credo expands our ability to report reserve categories, and we'll be reporting PUDs for the first time this year. We've provided additional information and insights at our December investor conference in New York, and today, we're launching the first phase of our Forestar data utility. And third, raising our net asset value. Credo is clearly a big step toward this goal, however, I'm just as encouraged with our investments in community development and multifamily. All investments I'd do again tomorrow if given the opportunity. Now let's recap where we're headed next for Triple in FOR. Optimizing transparency and disclosure. We've been focused on increasing transparency and disclosure. Today, we're launching the first phase of an easy-access excel-based utility that includes historical financials and key performance metrics. The first phase provides Real Estate financial data, and phase 2 will provide oil and gas state and release as reserves are finalized. The tools can be accessed from the About Us section in the Investor Relations section of the Forestar website. We hope you'll find this tool helpful. In that vein, we're also launching additional segment data in excel that's intended to facilitate analysis and prospects for additional value creation. Given the metrics we're providing on calls such as this, SEC filings and various presentations, we believe that consolidating information for easier analysis and providing a platform to expand oil and gas and water reporting should be a benefit to the market. Shifting gears to oil production. In the first 4-year period, we averaged about 115,000 barrels of oil a year. 2012, we produced 371,000 barrels and expect to produce about 700,000 barrels in 2013, a step in the right direction. As we invest in exploration and drilling, we expect to grow oil production, but more importantly, generate solid returns. We're committed to remaining disciplined and vigilant as we invest to deliver our oil and gas Triple in FOR initiatives. Turning to Real Estate. On the Real Estate side, our trough in lot sales, as I mentioned earlier, was in 2009 is about 640 lots. In comparison, we doubled lot sales in 2012, and we expect to see lot sales in the 1,900 range with continued margin growth in 2013. If housing continues to recover, we expect to see a pickup in demand for residential and commercial track sales. Historically, and particularly at the market level, housing leads commercial development and investment. As the chart on the bottom left illustrates, we should be in good position to deliver our real estate initiatives. With the combination of driving sales margin, disciplined investment, disciplined investing and repositioning, these underperforming real estate assets are key to our future success. In total, if you look at our segment level EBITDA over the last 4 years, delivering Triple in FOR boils down to just one critical item, [indiscernible] Real Estate sales and oil and gas production at margins that meet or exceed our return requirements. That's typically a mid-to low-20s RoR. And meeting our return expectation calls for strategic and disciplined investing in Real Estate and in oil and gas, and that's simply our strategy. Given that we're in the early innings of a housing recovery in North American energy renaissance, I'm encouraged. But what gives me even more confidence is knowing we have a committed and capable team, a portfolio of assets in good locations and the right strategic initiatives. We're making good progress, and I believe we're just beginning to realize our true potential. In closing, once again, I want to thank you for joining us on the call this morning, as well as your interest in Forestar. And now, I'd like to open up the call for questions.

[Operator Instructions] Your first question comes from the line of Mike (sic) [Mark] Weintraub.

Jim, I'm looking at the slide on Page 39, where you have the Triple in FOR. And it looks like you have a very sizable goal on the EBITDA increase for 2014 versus 2013. Can you talk a little bit about what the key drivers -- I think in 2013, you talk about higher lot sales and oil production. Is it more of the same? Or are there other things that go into the 2014 versus 2013 expectation?

Mark, I would tell you that it's a combination of every part of the business. One of the expectations we have as if housing market recovers, is we'll continue to see a pickup in commercial track sales. Historically, that's made a pretty significant contribution when the markets were in pretty good shape. And as the 2012 results begin to indicate, we're seeing a step-up in that. But Mark, I think you address the -- your own question pretty well. It's an expectation of continued growth in the production of oil and gas and in lot sales, multifamily contribution, as well as commercial and residential track sales.

Your next question comes from the line of Albert Sebastian of Prospect Advisors.

A couple questions. On the realized price for oil, I saw that it was -- I think it was $80 in the fourth quarter. Flavius, can you give us just an idea of what's going on there in terms of is there a particular reason why you're selling at -- it seems like a meaningful discount to WTI pricing. Is that due to a quality difference in terms of it being heavier crude? Or is it something to do with the cost of transportation from the wellhead to market?

Al, part of the issue is in North Dakota, with some of the oil we produce there, that oil was trading at a differential down from West Texas for a while as transportation out of the basin has been limited. That has actually started to shift now to equal to or actually better than West Texas Intermediate as we're moving 700,000 or 800,000 barrels a day by train. I mean, the industry is out of the marketplace. The other thing driving the oil prices down is simply the world market. We just don't see the prices we had last year as the economies have faltered.

Al, I think that you and Flav have kind of answered the question. It's a combination of both quality, but more importantly, it's just the takeaway cost from wherever the oil is being produced. As Flav said, the transportation infrastructure has stepped up considerably in the last year in North Dakota. And then, of course, there's going to be somewhat of a deduct in Nebraska and Kansas given the location of those wells, but that's the primary driver in that delta.

The only thing is, though, Jim, can you give us a little bit of a feel and an understanding of given that differentials have basically closed to 0, what does that mean in terms of earnings? I mean, what were the differentials in the fourth quarter and what -- it sounds like going forward, they're going to be 0. So what does that mean in terms of the impact on earnings?

Well, let's think about it this way, Al, and I'll use a number that I mentioned in the -- in my comments. If we produce 700,000 barrels of oil in 2013, then $10 is $7 million.

Okay. And that obviously, that pretty much goes to the bottom line, although there might be some royalties in that as well. But -- okay, just let me -- I'm going to ask you a couple other questions and then I'll get back in the queue. Just quickly, any update on the water initiative? Or -- and then also, I saw that the residential lots under option contracts look like they were down a little bit. Can you just comment on that? And then I'll get back in queue.

Sure. Al, with regards to water, as Phil shared with the market in December in New York, we're working on a number of initiatives with prospective buyers, as well as permitting agencies and entities. Our position today is consistent with what we talked about in December, we're encouraged. We think we've got good assets in good locations, and we can deliver a economically viable solution to a number of entities. I will say, since we met in December, the legislature here in Texas has convened. There's a lot of attention and -- on these water issues for the state. And in fact, it's -- I will tell you, it's in the top 2 with regards to the bills that have been introduced by both the Senate as well as the House. So we're encouraged by that from a funding perspective. And then we're also looking for the state to consider a different structure relative to water so that there's some state leadership, which we believe is also important. So net-net, Al, I'd tell you that we remain encouraged, we like our position. We think we've got some good solutions, and as Phil said in New York, we think it's just -- it's not a matter of if, it's a matter of when. Relative to lots that are under option contract, Al, that's going to bounce around a little bit from quarter-to-quarter and time-to-time. I will tell you that when you look at the chart and the comments, it's been relatively flat. But keep in mind, the faster that you're selling out of there, the -- it puts pressure on maintaining that in a good position, but I don't think that there's any real news in that, Al. We're encouraged with where we are today, and as I've said in previous calls, too, majority of those option contracts for lots are lots that we haven't even developed yet. So we're okay with where we are.

Your next question comes from the line of Steve Chercover from D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: First question is for Jim, and then a couple for Flav, please. So you said that you're marketing Promesa. Right now, it's about 80% occupied and you've got high confidence it will be monetized in the first half. Is that kind of par for the course, that you can sell a multifamily unit while it's still in the process of being marketed?

Steve, I think it's reflective of the quality of the project, the product and its location, the market that it's in. If it's in a different location in a different market, probably wouldn't be the same story. I will tell you that given the amount of interest and traffic and tours that we've already provided, we're very encouraged. There's a chance, Steve, that from the time that we broke ground till we close the sale, this is going to be within the realm or within the timeframe of 2 years, which is really great. I've shared this before. When we looked at Promesa and developed the pro forma and the underwriting, at that time, the plan was based on a sale in year 7. So this is quite a bit ahead of our expectations from the time that we were involved in the underwriting. Steven Chercover - D.A. Davidson & Co., Research Division: Terrific. Okay. And then switching to resource. The acceleration of your drilling expenditures versus the plan you articulated a few months ago, is that because you're being pulled by your partners? Or the recurrence are just that compelling? Or maybe you could expand.

Did you say deceleration? Steven Chercover - D.A. Davidson & Co., Research Division: No, I said acceleration. You went to about $40 million to -- the low-40s to the low-70s, if I'm...

Yes, Steve, the majority of that delta is all driven by the operators' drilling plans in the Bakken and the Three Forks. In November of 2011, the estimates that we had in that time were in the 20 range. And since then, as operators have firmed up their plans, that's up, what, almost 34 wells? And -- in the principle driver in the delta in the capital plan for drilling and completion. The other -- one of the other things that's driving that capital budget, and Flav mentioned it in his comments, is that -- and this is a good thing. The operators initially, and this is the way the play's developed, initially, we'll begin to drill the whole leases. And now, the operators have got a couple different locations where they're going to start pad drilling. And that's drilling multiple wells from the same location. So that's going to drive a big pickup in the number of wells, but more importantly, and we're encouraged by this, is it provides some efficiencies and economies of scale with both -- with mobilization cost, drilling cost, completion cost. So getting cost down while maintaining, proving the ultimate recoveries is a good thing. Steven Chercover - D.A. Davidson & Co., Research Division: Okay. And then finally, the dip in your proven reserves, I guess that's a function of both timing and, for lack of better words, mark-to-market regulations?

Yes. There's a little bit of that involved. As I said in the comment, a majority of the delta from '11 to '12 is production and price. 2012 production was a multiple, again, from what we saw in 2011, and price of both natural gas and natural gas liquids is down considerably year-over-year, and that drives some of these wells as being uneconomic and will not show up in reserves. But most importantly, if there's one comment that I make that I think is very important for all of us to understand is that these legacy and these owned minerals, the oil and gas associated with this ownership is still in place. We hadn't lost anything, it's not leased. There's no lease expense, there's virtually no carry cost. So as -- over time, as we see some price improvements, as well as improvements in technology, I think that we'll get that oil and gas. So obviously, we always like to see reserves fueling up, but in this case, given that we own minerals, we're obviously not quite as concerned. Steven Chercover - D.A. Davidson & Co., Research Division: And we should hear the, I guess, additional disclosure on what's behind the pipe and undeveloped within the Forestar legacy assets shortly?

Yes, yes. Now, Steve, as we've shared with you and the rest of the market, when we bought Credo, that enabled us to begin to report additional proven reserves. It's well done proven reserve categories, but it's not a light switch that's going to happen over time. But I said in my comments, we will begin to report those beginning at -- for this 2012 year end report.

Your next question comes from the line of David Woodyatt of Keeley Asset Management.

Yes, I went into your website and I clicked on something called Reserve Estimates, and instead of getting reserve estimates, I get a write-up about non-GAAP financial measures. I was wondering if -- my question, I guess, is once you get the right, I guess, the right material in there, is that going to be additional information? Or is that same information that's in your slide deck?

It will be mostly the same information that's in the slide deck. There will be additional information. We just recently, I think yesterday, finalized the reserves with Netherland and Sewell, so the website will be updated and additional information will be provided, Dave.

What exactly would be the timing on that additional information?

Dave, we are still in the process of receiving the final report from Netherland and Sewell, but just as soon as we can get the report and get the information out, we'll -- we're going to put it out there.

Okay. So you're talking about within days? Or is this something long...

Well, I'll say, it's either days or weeks. But I will say is that I don't expect it to see any material differences from what we've reported this morning.

Your next question comes from Mark Weintraub with a follow-up of Buckingham Research.

If I go to -- on Slide 23, where you talked about the capital investment in oil and gas, just one clarification. It says the drilling and completion CapEx is about $72.5 million. If I look at the chart on the right where it says capital investment versus cash flow, it looks like more on the order of $90 million. Are there other expenditures going on in the oil and& gas business beyond the drilling and completion CapEx numbers?

Yes. The majority of the CapEx and the most important investment we make, Mark, is in the drilling and completion. But there's a little bit of capital in there for G & G [ph] and leasing capital activity. But it's also important to understand that, as Flav said in his comments in that bottom right-hand chart, that's cash flow at the wellhead.

And so -- but the capital investment -- so this business -- am I right to understand there'll be roughly $90 million being invested in this business in 2013?

That's correct. It's in the $90 million ballpark.

Okay. And obviously, 2014 looks like a similar capital investment. Is this the type of number you'd expect to be investing on an ongoing basis? Or is there a big ramp these first couple of years and then it goes back down? Again, this is assuming no other acquisitions or anything like that.

Mark, without getting too far ahead of myself, the big step-up is principally driven by the Bakken Three Forks. And assuming that the operators are on a schedule of roughly 50 wells a year, then we would see this as being relatively stable. Relative to the chart that you're referring to on the bottom right, we just made the assumption that in 2014, the capital plan would be similar. And it's just to show that what's happening is that a big step-up in 2013 will generate production and cash flow, that by 2014, we'll cover the capital expense.

Got it. And if I understand correctly, to a certain extent -- well, to a large extent, your capital plans are going to be driven by what the other operators want to do, and then you have to decide whether you're going along or not, is that fair?

That's true, that's true. We have -- we participate in a working interest in the Bakken Three Forks, it's at our election. So the operators will obviously share their plans with us, but the decision point's when they send you an AFE. And Flav and his team determine are we in or we out.

And if you decide that you don't want to be in, do you get -- how does that play out?

Let me turn that over to Flav and he can give you a sense of what it means when you don't elect to participate in a unit.

Well, Jim's right. The -- when we get an AFE for each one of these operators, we make an election. And typically in these resource plays, I'll tell you that the tendency is to participate in wells because you typically are not going to drill any dry holes unless you have a mechanical failure or something along that line. So we're more inclined to feel pretty good about our spend level this year. But I will say, we evaluate every AFE that comes in. Our geologists and geophysicists look at where we're going to drill, and then we make a decision based on do we believe it's -- well, do we believe the oil that -- we'll recover the oil we need to make the well economic. I will say that the -- as a part of the process, we are evaluating our acreage all the time to determine whether we like where we are or reposition or do what we need to do. But when we make these decisions, we have the right people in the room to make them. So we feel pretty good about them.

Flav, if you don't -- if you elect not to participate, are you out for the balance of that unit or...

In North Dakota, it's a well-by-well election under the state rules. But we have elected to enter into operating agreements with a lot of our operators. And so if you're out, typically, you'll be out of offsets as well. So there's a little bit of a penalty there if you don't participate. But again, we take all that into consideration when we make decisions, and we feel good about that. So we'll -- but again, the capital spending plan is based on what we believe we will elect into this year.

Okay. And now, Jim, you mentioned lot sales potentially going up to 1,900, which would be terrific in 2013. But I also imagine that means there's going to be more lot development spending to get the lots in position. Can you give us a sense what that might tally?

That's right. Yes. Mark, as I mentioned, in 2012 that number was about $30 million to $33 million, somewhere in that range. And assuming that we've got a good forecast, we expect the capital required to put lots on the ground would be close to the $50 million range in 2013.

Okay. And then...

Mark, the only thing I would add to that, that's encouraging for me. That just means that we've got markets and communities that are responding to improve conditions. And a majority of that development will be for lots that are already under contract, so it's not as though we're putting speculative -- many speculative lots on the ground.

Right. And obviously, you're doing this with the expectation of getting nice margins on the investment, that's totally understood.

Yes, yes. It looks that -- yes, looks like margins continue to improve. Obviously, they'll level off somewhere, but right now, we're certainly encouraged.

And real quick, any update on Cibolo Canyons of note?

The update for Cibolo Canyons would be the project is continuing to perform well. I'll tell you that Chris and his team and those responsible for Cibolo are obviously, continue to examine various alternatives at how to best manage the cash flow stream associated with the improvement district. And given where market conditions are and especially bond markets and everything else, we're going to work hard to be opportunistic and make some things happen there.

And do you think we could see something happen in 2013 on the bonding side?

Mark, what I would tell you, if we get something done next week, we would do it. But we are absolutely focused on making something happen sooner rather than later.

Okay. And if I could, one last one. You mentioned you're beginning to see signs of recovery in Atlanta. Could you expand a little bit on that? And perhaps even more important, as you see signs of recovery in Atlanta, what actions is that going to prompt you to consider taking?

Yes, let me -- I tried to temper the comment with the condition that Atlanta was in at the bottom and it is getting better. The context of that comment, Mark, is that we're starting to sell some lots again in Atlanta. There's more interest, as you know. And a couple of the acquisitions that we made in the last year or so, they were distressed communities. They're good communities in distressed situations. And those projects are doing extremely well. So activity's picked up, selling some lots again. May have to put a few lots on the ground on Seven Hills and then we'll look at some of the legacy assets further down the road. But once again, I don't want to get too far out in front of the market. We're going to be very, very disciplined as it relates to starting development in the projects in Atlanta.

Your next question comes from the line of Albert Sebastian of Prospect Advisors with a follow-up.

Yes. Gentlemen, it looks like the performance in Fiber Resources was quite good in the fourth quarter. For modeling purposes, what should we assume in terms of kind of an ongoing normalized rate for segment earnings?

Yes. Al, I would be reluctant to use a quarter and annualize it because there's some variability just based on the harvesting plans of the mills that we have agreements with. So if there's a lot of harvesting activity in a quarter or not, it can certainly impact that flow. I would say that 2012 was a good year. Obviously in our harvest plans, we always try to put together plans that would enable us to maintain that level of volume sustainably over time. And the only caveat being is, keep in mind, Al, is that the acreage in that part of the world is always changing. You just need to take that into consideration as well.

Okay. So it sounds like -- for the year, $5 million is not a bad number to use on -- for an annual basis.

Yes. I think that, Al, what I would say is that 2012 should be in the zip code of 2013.

Okay. Just one last question. Can you just give us a little bit of how management and maybe the board thinks about the Triple in FOR initiative? Because it looks like things are moving in the right direction, and I like the initiatives you're taking. But it seems as though the capital spend is higher. So how does the board and the management think about the fact that you're going to be spending more capital? And should there also be other considerations in terms of evaluating performance such as maybe return on invested capital or free cash flow?

Yes. The -- your last comment, Al, I think is central to the question. When we think about investing capital, number one, is the return to that capital is going to generate for the business and obviously for our shareholders. So the -- I can tell you, I'm involved in all acquisitions and investment in -- the number one metric that we look at is return, whether it's oil and gas or it's Real Estate or any part of our business. So that is the -- that's the real focus for management, and I would tell you, it's the same focus for our board. When we have meetings and we provide updates and insights in the capital plans, the number one metric that we share and have discussions with our board is all about return. Once again, we want to thank everybody for joining us on the call this morning, as well as your interest in Forestar, and hope that you have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.