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…

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…

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…

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…

[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.