Forestar Group Inc. (FOR) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2014 Forestar Group Earnings Conference Call. My name is Aliston, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Ms. Anna Torma, Senior Vice President, 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 first quarter 2014 results. I'm Anna Torma, Senior Vice President, Corporate Affairs. 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 in the Investor Relations section of our website at forestargroup.com. Before we get started, let me remind you to please 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 first quarter 2014 financial results. For the first quarter of 2014, Forestar reported net income of approximately $8.3 million or $0.19 per diluted share compared with net income of $4 million or $0.11 per share in the first quarter of 2013. The primary driver of the change in earnings was lower share-based compensation expense. Real estate segment earnings were $23.6 million in first quarter 2014, up compared with $19.4 million in the first quarter of 2013. The primary driver of the improvement in real estate is an increase in undeveloped land sales and higher residential lot sales, which Jim will share with you in greater detail in just a few slides. Our first quarter 2014 real estate segment results also include $2.3 million in charges, associated with additional cost of 2 multi-family ventures in Austin and Denver, where Forestar is the general contractor for these developments. In addition, our first quarter 2013 results include pre-tax earnings of approximately $10.9 million associated with the sale of Promesa, a multi-family community we developed in Austin. Oil and gas segment earnings were $0.8 million in the first quarter of 2014 compared with $5.1 million in the first quarter of 2013. This decline is principally due to higher exploration, production and operating expenses and lower production volumes related to our own mineral interest and the impact of severe weather conditions, principally in North Dakota. Other natural resources segment loss was $0.5 million in the first quarter of 2014 compared with segment earnings of $1.3 million in the first quarter of 2013. This decline was principally due to lower fiber sales volumes. Total segment earnings were $23.9 million in the first quarter of 2014 compared with $25.8 million in the first quarter of 2013. Before I turn the call back over to Jim, let me quickly review our balance sheet, liquidity profile and a proposed debt transaction we currently have in the market. As we've shared with you in the past, we are very committed to maintaining our financial strength and flexibility while executing our growth strategy. At the end of the first quarter, we had almost $300 million in available liquidity. In addition, on April 29, we announced that our subsidiary, Forestar (USA) Real Estate Group, Inc. intends to offer up to $250 million of senior secured notes due in 2022. If the offering is completed, we intend to use the net proceeds to repay all of the $200 million of outstanding term loans currently outstanding under our senior credit facility with any remainder for general corporate purposes. This financing would be expected to provide a better match between our debt maturities and the duration of the assets in our portfolio and increase financial flexibility. The offering is subject to market and other conditions. We expect our cash flows and available liquidity should adequately fund our Growing FORward strategic initiatives. Now let me turn the call back over to Jim for some additional operating highlights from the first quarter of 2014.

Thank you, Chris. And I'd also like to welcome everybody who's joining us on the call this morning. While we continue to see solid momentum in real estate in the first quarter, oil and gas production continue to be impacted by adverse weather, as well as declining royalty income. However, with housing starts 500,000 below the long-term annual average of 1.5 million, we believe there's still several innings of recovery in front of us. Relative to oil and gas, drilling completion operations has picked up with more moderate weather conditions. And as a result, we expect to see an increase in working interest production throughout the year. This morning, we'll review the first quarter 2014 results and provide an update on our Growing FORward initiatives and, in particular, our updated 2014 capital plan. I'll begin with our real estate segment results. In the first quarter, real estate segment earnings were $23.6 million, that's up over [ph] 21% compared with the first quarter of last year. As the chart illustrates, the main driver was higher undeveloped land and lot sales. We sold over 9,300 acres of undeveloped land for over $2,100 an acre, with those lands primarily located in East Texas. These sales represent a meaningful step toward monetizing $100 million of non-core assets in connection with our Growing FORward strategic initiatives. We sold 974 lots in the first quarter of this year, and that's up 118% compared with the first quarter of last year. In addition, we sold 831 acres of residential tracts. Of these sales, 360 lots and 831 acres of residential tract were sold in bulk which closed out 2 non-core communities near Atlanta. Excluding these bulk sales, average lot prices and gross profit per lot was 7% higher compared with the first quarter of last year. We continue to capitalize on the housing recovery by delivering lots from our solid pipeline of projects in growing markets with tight lot inventories. Now let's take a little bit closer look at sales trends. Barring any major shocks to housing, we anticipate lot sales in 2014 to exceed 2,200 lots, that's up about 17% over 2013 and that's also up from the 2,100 we referenced on the February earnings call. Including the bulk sales in Q1, we expect lot margins to be comparable to 2013. Given the current level of housing demand, we continue to operate with the majority of all lots in development under contract. Relative to the location of sales, Texas accounts for the majority of our sales, and as you'd expect, given the most of our investment projects are in Texas, one of the strongest state economies in the nation. Even though Texas is doing well, we're seeing other markets and investments gaining momentum. Aside from the bulk sales, 33 lots were sold in Atlanta, plus another 57 lots in Denver and Nashville. And last, gross profit from lot sales is up year-over-year and is holding up well across all age classes of acquisitions. One of the major competitive advantages we have today is that we came out of the housing recession with a strong portfolio of assets, balance sheet liquidity and experienced team that's certainly capable of developing lots to meet demand in these inventory constrained markets. Over the trailing 24 months, we've also been successful and I would add yet disciplined in acquiring tracts, replacing lots or units sold in some cases, even extending our position in certain submarkets. Since the second quarter of 2012, we've acquired 9 projects in 5 markets, which we anticipate will produce about 2,000 lots, generating north of a 20% return, while maintaining close to a 40% profit margin. Relative to capitalized development expense, the majority of all investments within our selling communities, with the major -- with the majority in Texas or by [ph] Colorado, which is primarily development expense associated with previous sales at our Pinery West project located in submarket at Denver. The following slides are intended to provide you with additional visibility in the recent capital that we invested in real estate acquisitions and extensions. Lantana is one of our most successful communities held in a partnership, with lot sales among our top 5 selling communities. Lantana is certainly -- is centrally located between Dallas and Fort Worth, it's just 15 miles north of the DFW National Airport. It's also less than 2 miles away from over 1 million square feet of retail, entertainment and restaurants. The master-plan community has been awarded community of the year in Dallas, Fort Worth on a number of occasions and has been 1 of the top selling communities in DFW over the last 5 years. In the first quarter, we had an opportunity to purchase the remaining venture interest from our partner for approximately $8.2 million. We'll now have a 100% interest in 285 lots under development and about 517 lots to be developed, plus all the reimbursements from 2 water supply districts. The investment has a projected IRR in excess of 20% and doesn't materially change the gross profit per lot. Let's look at the progress of another recent acquisition, which is Morgan Farms in Nashville. Late in 2012, we acquired a 208-acre site in Brentwood, which is a prime submarket, south of Nashville, for $7 million, expected to yield about 173 lots. This site is 10 miles from the Brentwood Cool Springs business center, which has 13 million square feet of office and it's 1 of the best school districts in the state. This is an example of an acquisition brought to us by a local builder, who have had taken the property through entitlement and was looking for the right developer to take over the project. Forestar's competitive advantage of being a developer with a balance sheet, available liquidity and the reputation for best-of-class planning and execution of development projects was the deciding factor. Morgan Farms will include 3 price points. And the group of local and regional builders include Drees Homes, Turnberry Homes and 3 custom builders. As of today, 75% of all the lots are under contract with multi-year takedown schedules. Our pro forma cash flows indicate breakeven at about 45% of the project life, with gross lot margins expected to be similar to our 2013 average of 40%. Now let's turn to multifamily. In addition to our single-family communities, we got 4 multi-family projects currently under construction, with 1 project in Littleton, a submarket in Denver, about to break ground. In total, about 1,620 units. Eleven, which is our 257-unit community here in Downtown Austin, is over 98% complete and about 65% leased. Eleven is currently being marketed for sale, and we expect it to close late in the second quarter or early in the third. The balance of our multi-family development projects are progressing well. And as the chart illustrates, we expect these investments to yield a 2- to 3-cash multiple in 36 to 48 months following the start of construction. We acquired 2 new sites in Austin for projects which are expected to be in ventures and start construction in 2015. In the next 2 slides, our review of multi-family development project in Nashville and the 2 recent site acquisitions. We broke ground at the end of 2013 at our multi-family project located in Nashville, which we call Acklen, which is 30% owned by Forestar in a venture with MassMutual. We sourced and purchased this 3-point acre site during the third quarter of 2012 for $11 million. It's an excellent location, adjacent to the Vanderbilt University campus and several hospital campuses. The surrounding employment base is in excess of 46,000 employees. Acklen is just 3 miles from downtown Nashville and 10 minutes from the airport. The project will be a 300-unit Class A multi-family project with a best-of-class amenity package. Forestar's equity in the project is $6 million, with pro forma cash to Forestar of $14 million, a 2.5 cash multiple. This should be another successful project. It's in a great location. And with the balance of supply coming online over the next few years, it should keep the submarket fully occupied around 94% through the time of completion. Next, looking at 2 sites we've acquired. We recently purchased and closed 2 sites for future multi-family projects both located here in Austin. Pressler Park is located in Austin central business district, a short walk from the capital and the University of Texas. As you can see, the site also fronts Austin Central Parking System elevation that provides premier views of Lady Bird Lake, plus easy access to running, trails, parks and boating, just a few of the amenities. The second site is currently called Westlake, and it's a first-ring [ph] suburban 20-acre project located in West Austin with direct access to Highway 360, a major transportation quarter here in Austin. For comparison purposes, this site is much closer to Downtown Austin than our successful Promesa project that's sold in the first quarter of last year. Other key factors include being a part of the AIMS school district, where all 9 schools are rated exemplary. That's the highest possible designation. When this project is completed, it'll be 1 of 3 multi-family locations in the submarket. We'll keep you posted on the status of these projects as we make progress. Going forward, consistent with our initiatives, we'll continue to capitalize on the housing recovery by growing sales across the board, lots, residential and commercial tract. And we'll remain disciplined as we evaluate future investments in real estate, both development, as well as acquisition and extensions. Let's shift gears to other natural resources. First quarter 2014 of the natural resources segment losses were approximately $0.5 million compared with segment earnings of $1.3 million in the first quarter of last year. During the first quarter, we sold over 57,000 tons of fiber, that's down from 191,000 tons in the first quarter of last year. For the year, we anticipate fiber sales to be approximately 350,000 tons. Now let's turn to oil and gas. As I've mentioned, the first quarter 2014 results continued to be adversely impacted by unseasonable weather conditions. As expected, first quarter Oil and Gas segment earnings were $0.8 million, down over $4 million compared with the first quarter of last year. Q1 production and revenues from working interest was up 27% and $3.4 million, respectively, yet offset by exploration, production and DD&A expenses, that were up $4.7 million. And last, royalty income was down $1.3 million, primarily due to volume. The table at the bottom right shows the core end status of our working interest wells. During the first quarter, our average daily production was over 1,900 barrels a day, up about 27% over the first quarter of last year. Due to cold conditions, only 3 Bakken/Three Forks producers were added during the first quarter. However, 3 wells for drilling and approximately 18 wells were waiting on completion at the end of March. As conditions improve, we're seeing a pickup in funding request and completion wells. With the sale of a smaller non-core operating area associated with Credo acquisition and a step-up in production, we expect the second quarter segment earnings to be in the $5 million to $7 million range. Below segment earnings is the EBITDAX reconciliation. That's a non-GAAP measure, but we provide a reconciliation of segment earnings in the Appendix of the presentation. First quarter 2014 EBITDAX of $9.8 million was down only $0.4 million over the first quarter of last year. Now I'd like to turn the call over to Flavious Smith, who'll provide you with an update and some additional insights into our oil and gas operations.

Thanks, Jim. As we have discussed in prior calls, we have about 7,600 net acres, at least, in the Bakken/Three Forks play of North Dakota. These wells of interest are located in what is considered to be the Bakken core. The map on the left, illustrates the locations, the most productive wells -- and the most productive wells in the Bakken shown in orange and yellow. The location of these leases are highlighted -- and you can see in the wells in and around our leasehold have EURs generally on the higher end of the range. We have added about 1,600 acres since the acquisition of Credo for an average of about 6,000 per acre, all located in the core and expected to generate returns that will exceed our hurdle rates. Under current spacing, we have about 450 Bakken/Three Forks locations, with nearly 370 undrilled and ahead of us. We ended the quarter with over half of these locations held by production. As Jim said earlier, due to the cold winter weather, only 3 Bakken/Three Forks wells came online in the first quarter of 2014. Including these 3 wells, we now have an interest in 83 gross wells. In addition to the weather delay, our average working interest was only about 3% in the quarter. However, at the end of the first quarter, we had 21 wells either drilling or waiting on completion crews, with an average working interest of 8%. Some of these wells will have working interest as high as 18%. We anticipate adding about 57 additional producing wells in 2014 in the Bakken. These will be down from our previous expectations of about 85 wells, again, due primarily from delays in drilling starts due to weather. However, we expect our average working interest to be up 10% from the 7% in 2013. The table in the upper right shows our expected IRR in the Bakken/Three Forks at 500 to 600 EURs. The average type curve of our producing wells continue to show EURs above 500 MBOE, with many approaching 600,000 barrels of oil equivalent and greater. Assuming our additional 370 wells noted earlier and using a PBT and have only about 500,000 per well, the potential discounted cash flow of our Bakken/Three Forks position approaches $185 million. The chart on the left provides an illustrative cumulative cash flow earnings example of the Bakken/Three Forks well. On average, these wells go cash flow positive 3 years after completion and surpassed our investment return hurdle rate of 20%. Let's move south to another important region, which is Kansas and Nebraska. Our operations in Kansas and Nebraska continue to focus on Lansing-Kansas City. At the end of the first quarter of 2014, we have leased 195,000 net acres. In April, we acquired an additional 61,000 net acres of leasehold in Nebraska. This additional acreage should enable us to build a pipeline of drilling locations for, at least, the next 18 months. As you know, from previous presentations, the Kansas/Nebraska project area consists of stock pay intervals, and we have been successfully delineating structure with 3D Seismic. However, there are times when these stock pays are high and tight, it won't produce. This accounts for about our 4 and 10 success rate. Let's take a closer look at our first quarter Kansas/Nebraska activity. In the first quarter of 2014, we had a 40% drilling success rate, in line with our historical program average. We added 12 new gross producing wells. However, as the Bakken -- however, as with the Bakken/Three Forks, the cold weather impacted our drilling and production activities. As a result, we have reduced our 2014 plan. We now expect to drill 90 gross wells, which should add about 36 new gross producers, risking about 40% success. As you know, we operate the majority of the wells in our Kansas/Nebraska project area. Economics on a risk-adjusted basis have continued to support returns above our 20% target. As we have discussed in prior calls, we fully burdened our economics with dry haul, land seismic drilling and completion cost, lease operating and production severance tax cost when we review all of these project areas quarterly so as to evaluate our results and future prospects. At present, based on acceptable project metrics, we will continue to further develop our inventory of drillable locations. Again, the chart on the left provides an illustrative cumulative cash flow and earnings example of a Kansas/Nebraska well. Positive cash flows begin 2 years after completion and generate approximately $500,000 in discounted cash flow per well. Let's now take a look at some activities in our -- in the Texas Panhandle. We are currently operating 2 horizontal development wells in the Texas Panhandle on acreage that was part of the Credo acquisition. These wells are targeting the Cleveland formation. Our estimated total cost for these 2 wells is approximately $1.3 million. Based upon our expected EURs, as noted on the slide, we expect an IRR above our hurdle rates. In addition to the Cleveland, we have other targets in the area, including the Tonkawa and Mora. Over the next few months, we will evaluate our current well results and other activity in the area to determine next steps. Bottom line is to invest with discipline. Now I'll hand it back over to Jim.

Thank you, Flav. Just a couple of closing comments on our oil and gas business. Even though the drilling operations were impacted through the long winter, we still expect production to pick up as operations return to a more normal level. Based on our current estimate, we'd expect 2014 working interest production to be up about 400,000 BOEs, royalty down approximately 150,000, netting an increase of about 250,000 BOEs over the 2013 production of 1.1 million BOEs. Consistent with our initiatives, our focus is to, first, invest in existing locations expected to drive earnings and returns; second, evaluate non-core assets and sell those deemed to be non-core; and, third, manage capital accordingly. In the last section of the review this morning, I'll give you an update on our Growing FORward initiatives, in particular, an update on our capital plan. We remain focused on executing our strategic initiatives. Growing FORward is specifically designed to create and deliver shareholder value. As a reminder, there's 3 primary components. Number one, growing through strategic and disciplined investment. With our 2016 operating EBITDA target of $200 million, EBITDA per share would be about 4.5x higher than the annual average from 2008 through 2011. Number two, proving up the value of our portfolio by increasing return on assets. That's a key metric that has proven to be highly correlated with shareholder value. And number three, monetizing $100 million of non-core assets by 2016. To further incent the execution of our initiatives, our compensation plan is primarily based on ROA and earnings performance. Let's take a closer look at our updated 2014 capital plan. Given that the first quarter investments were less than expected, we're providing an updated estimate of our 2014 capital plan. As you can see in the table, Real Estate is relatively flat with a downward bias, and Oil and Gas is estimated to be down materially from the original plan, yet up about 20% to 25% from the 2013 actuals. The primary driver in oil and gas reductions and seismic, lease extensions and exploration drilling in the Bakken/Three Folks are principally weather-related. It's important to note that a majority of the capital plan is investment and development of existing locations and communities. In real estate, development expense is capitalized with the majority of investment used to develop infrastructure and lots and existing communities that are generating solid margins and returns. Similar to real estate, oil and gas development capital is primarily used to drill and produce existing locations, heavily weighted toward the Bakken/Three Forks, followed by the Central Uplift in Kansas and Nebraska, both locations generating above target returns. And relative to investments and acquisitions and extensions, they are contingent upon identifying locations in both real estate and oil and gas that meet or exceed our hurdle return rates. In the case that source locations don't meet our underwriting criteria and hurdles, that capital won't be invested. In Oil and Gas, the capital is primarily for extensions and bolt-ons in the Bakken/Three Forks and the Central Uplift, as Flav reviewed. He also noted in an oil and gas review that we've secured additional 1,600 net mineral acres in the Bakken/Three Forks core since year-end 2012, and we recently acquired 61,000 acres in a bulk transaction. And last, we'll look to identify and secure positions in emerging resource plays. In closing, I'll tell you that we remain focused on delivering our Growing FORward initiatives. First, as illustrated on a previous slide, capital investment of $75 million in the first quarter was less than the original plan due to weather, but more important, discipline. Second, we divested about $20 million in non-core properties. That's a combination of undeveloped land and real estate projects, and this is a significant step toward our goal of $100 million by 2016. Furthermore, in Q2, we've sold our interest in a small oil and gas field that was a part of the Credo acquisition. So in the first half, we will generate non-core sales from across the business. Third, relative to operating with discipline, we expect our cash flows and available liquidity to adequately fund our Growing FORward initiatives. Given outlook for housing, energy and our positions in real estate and oil and gas, I remain optimistic and I'm looking forward to Forestar's future. Once again, I want to thank you for joining us on the call this morning. And now, I'd like to open up this session for questions.

[Operator Instructions] And your first question comes from Steve Chercover of D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: I have a couple. Starting with Eleven, it's a little bit smaller than Promesa was, Promesa was 289 units. And given the prices are up, should we anticipate effectively similar sales and earnings?

Steve, Eleven is likely going to outperform Promesa from a financial perspective. If you go back to Slide 11, you'll see that on Eleven, we expect the cash to come out of Eleven at the time of close to be about $12 million, which is about a 3 multiple from the equity we have invested. Steven Chercover - D.A. Davidson & Co., Research Division: There are so many slides. And then in the real estate pipeline, would you say that it's where you want it to be? It looks like your acreage is down about 12,000 acres, presuming we do that bulk sale and lots are down about 4,500. So I know you're investing in it, but is it -- would you view the pipeline is getting smaller or is where you want to be?

Steve, there's been some changes, but I would say it's minor. If we look at the inventory of developed lots and lots to be developed, and also take into consideration the acquisitions over the last 24 months, the pipeline is pretty stable. We've been maybe just a little bit short of replacing sales, but that's okay. Given the size of the pipeline and the number of projects, we've got the ability to be -- to exercise discretion and discipline. To the extent, as I said in my comment, that we can find new opportunities that meet our underwriting criteria and meet our return hurdles, then we'll certainly make those investments. Steven Chercover - D.A. Davidson & Co., Research Division: Certainly. And those 8,400 acres that you sold at $1,850, I mean, that seems to me about Timberland values in the South, although it was classified as real estate. I mean, from a tax perspective, were those operating Timberlands?

Yes. Steve, I think I'd mentioned that a majority of those tracts were in East Texas. They -- those were not properties that were in and around Atlanta. So you're correct, they were much more Timberland-like than HBU. Steven Chercover - D.A. Davidson & Co., Research Division: But it's still appropriate to call it real estate from a...

It's just -- yes, it's just how we reported in the segment, Steve. Steven Chercover - D.A. Davidson & Co., Research Division: Okay. And so switching to, I guess, resource, why was the pulp and sawlog volume down so significantly from 191,000 to 57,000 tons?

Yes, it's just the comparison between a really strong quarter and a weak quarter. In the first quarter of 2013, the inventories were relatively low in that basin and there was a lot of harvest. And it's just the opposite in the first quarter 2014, inventories were low and harvest was down. So that was the principal reason for the significant variance in volume. Steven Chercover - D.A. Davidson & Co., Research Division: What would be a good run rate there?

Well, as we said, we expect the harvest this year to be, call it, 350,000 tons, something like that. So that's roughly 80,000, 89,000 tons a quarter. There's going to be a little bit of variability. Steve, I think you know that it varies a little bit throughout the year, dependent upon whether it's inventory build or inventory depletion, it's converting facilities. Steven Chercover - D.A. Davidson & Co., Research Division: Okay. And I'm sure you -- I'm sure I just missed this one. Of the $100 million asset sales, that $20 million that you sold in Q1, does that mean there's $80 million left or there's $100 million over and above this? I apologize if...

Yes, there were -- the $20 million goes toward the $100 million, Steve. So there would be $80 million left.

And your next question comes from Mark Weintraub of BRG.

A couple of clarifications, if I could. First off, the original guidance you gave on real estate lots, had that included the 367 bulk lot sales or was that opportunistic?

It included it, Mark. It was a little bit earlier in the year than what we had -- than what we've estimated. So the 2,100 included that bulk. And then, as I said, we expect, based on what we can see today, that lot sales be 2,200 possibly bit north.

Or 2,300, I believe, is what you are forecasting now. Is that right?

Yes. Mark, I said that 2,200 with a little bias to the north of that.

Okay. And what -- so that is a pickup. I believe you had 2,100 originally. Where is the added strength and most feasible?

Yes. Mark, it's really across the board. Texas is doing well. And then as I said while I was discussing lot sales, we're beginning to see a pickup in Atlanta. We've made a couple of investments in Nashville that are gaining a lot of traction and momentum, and we generated some recent sales in Denver. So it's -- I think it's appropriate to say that it's across the board.

Okay. And then on that 100 million or 80 million to go in reposition assets, is that all focused on Timberland/real estate non-core sales?

No. Mark, as I commented, the first $20 million was a combination of undeveloped land or Timberland and then a couple of non-core projects where we sold out of both finished lots and residential tract. And then I also commented that in the second quarter of this year, Flav and his team have consummated a sale of a non-core location that was part of the Credo acquisition. And so what I would tell you is that if we look at Forestar portfolio, our business or businesses, we're evaluating everything.

Okay. And of the $200 million in 2016 EBITDA target, can you give us a sense as to roughly how much of that would be coming from the Oil and Gas business? And is that from the existing footprint?

Yes. It's principally from the existing footprint, and it's pretty evenly split, Mark, between real estate and oil and gas.

Okay. And obviously, it's been a little bit slower in ramping up the oil and gas earnings than you were hoping, and then you pointed to weather as being the reason. And is that -- are there any other insights that you could share as to -- was there anything else going on? I mean, cost seem -- again, it could all fall under the umbrella of weather, but it's hard to -- from the outside, it's hard to have a really good look. Any other learning experiences that you've been having as you've been ramping the business up?

Yes, good question, Mark. There's really 2 things. Obviously, the fourth quarter and the first quarter were impacted by weather, just from an operating perspective. But as I also said, the volume from our -- from royalty from owned minerals has been in decline. And we expect that to be down roughly 150,000 barrels or BOE equivalent in 2014 as compared to 2013. So that's a little bit of a headwind as it relates to both production and earnings. But fortunately, today, with natural gas prices in the mid-4s, there's a little bit more of an appetite for activity investment than there was at the 250 for sure. But those are the 2 key reasons, Mark. It's weather, but also the decline in royalty volume.

And so is the -- is what happens to royalty volume pretty much a function of the nat gas price? Or is there a built-in decline separate from nat gas pricing?

It's just -- it's a built-in decline, Mark. There's -- as we look back, Flav will -- there's been hardly any drilling over the last, what, 12 to 18 months. There's maybe a few wells that have been drilled. So you got to continue to have some wells coming online in order to maintain your volume.

Yes, hi, Mark. What I would tell you is that East Texas, where most of our land is, most of our mineral interest is, is a really high-cost basin, and it's a gas basin, primarily. And with gas prices at $2.50, and $3 over the last 2, 3 years, it really has just come to a screeching halt for exploration. And so we don't see any opportunity there to see much growth until we get about $5 or $6. And so -- and that's coming. We think that's coming. And we'll see some more activity, and we'll start to quell the decline, hopefully, in the legacy minerals.

And your next question comes from Robert Howard of Prospector Partners.

Just a couple of things. That Kansas/Nebraska acreage that you bought, can you tell us how much it cost?

Yes, it was -- yes, go ahead, Flav.

Yes, Robert, it was an Apache deal and it was $95 an acre. And really contiguous acreage, and to a lot of our -- it was contiguous to itself and it's also contiguous to a lot of our existing prospects. So it really fit in to the puzzle up there to help us generate more locations.

That's, sorry, 9,500?

No, $95 an acre.

$95. Okay. All right, yes. Okay. Just wanted to -- okay. And then the oil and gas CapEx, does that sort of decline in '14? Does that get shifted forward into '15? Or did it -- it's kind of other things good in the play and you can't immediately make that assumption.

Yes, Rob. I would say that a majority of the reduction is -- it was just a slowdown in the first quarter and just reevaluating the plan. We continue to look at all of the investment, all -- alternatives and options that we have. But I'd tell you, it's principally a push forward. Typically, in the locations we're in, highlighting the Bakken/Three Forks and Central Uplift, those are good investments. And as I said in my comments, it's principally development. But as much as anything, it's just -- it's a push out.

Yes, Rob, we had 85 wells in the plan in the Bakken, and that's down to 57. And that's simply because the wells weren't getting drilled in the first quarter as expected because it was just too cold.

Yes, okay. And is there -- just, I guess, for the next couple of years, that CapEx level, I mean, does this, say, 125 to 200 range, is that sort of what you see as being a reasonable assumption going forward or could there be an even bigger number? Or how do you kind of see this a little longer term?

Yes, Rob, what I would tell you is that given the footprint and locations of the portfolio today, I think we'd look at 2013, 2014 capital as kind of being in the ballpark of what we see today for an investment level. The biggest delta is, obviously, the drilling plans, more importantly, the execution of those plans in the Bakken/Three Forks. We look at the mix of capital in oil and gas. It's pretty heavily weighted towards the Bakken/Three Forks. In discussions that Flav and I have had, and with the team they've had with operators, there's a certain amount of services and drilling rigs in the basin, and that kind of limits the rate. So assuming that level of services and rigs stays in the basin, then we'd expect it to be fairly consistent going forward.

okay. And just sort of, I guess, the cash flows or the cash to cover this CapEx, you kind of, at least were somewhat implying, at least for this year, that you weren't really going to need too much more. And, I mean, are these wells that you're drilling now, is the sort of the cash flow that's coming from these new wells going to be able to, kind of, sustain this drilling level that we're talking about or is there -- how much need might there be for outside financing to, kind of, keep up with the drilling CapEx?

Yes. Rob, what I commented on, and I think Chris made the same comment in his remarks, was that given where we are today, with our available liquidity and the cash flows that we see going forward, that we firmly believe that we are adequately funded to cover our Growing FORward initiatives.

Okay. And then just lastly, on the -- some of these lot sales, you talked about Atlanta recovering and you had 400 lot sales there. So I guess 33 soon, but the -- Texas, well, the 400 lot sales that you had, that's obviously a very large number of the total for the quarter, and yet, Texas was 80% of the profit, and just off the top of my head, thinking that this Atlanta land would be sort of legacy, low-cost basis land, and which would mean that -- I don't know. It just sounds like you might not have been selling much so [ph] -- I just kind of wondered sort of how the profits work. And, I mean, is it sort of similar to some of the landfills you've had before? Were you just sort of saying these are lots that we're not going to be able to monetize in the near future and its -- the present value is better to take the money now and put it somewhere else, or kind of what was going on there?

Yes, Rob, if I understood your comment and question correctly, it would be the latter. We look at the projects, real estate development projects that we have. We look at the returns that we would generate from development, and if it doesn't meet our criteria, then those are deemed non-core. Particularly, if we don't think there's a recovery in sight, that was the case for the 2 projects that we sold out of in Atlanta. And another comment that I would make is that 1 of the 2 were a part of the old TEMCO joint venture that LIC had with Cousins back in the early '90s. So it was an old project that there's some interest in and we're able to monetize that. Relative to the contribution profits, obviously, the -- since the predominance of the finished lots sales are coming out of Texas, it's going to drive the gross profit margin. But I'd also tell you that of the lot sales that were not bulked in Atlanta, as well as Nashville and Denver, they're also generating some pretty attractive profit margins.

And your next question comes the line of Craig Gilbert of Linden Advisors.

I appreciate the color on some of the royalty income. I wanted to expand upon that a little bit. It sounded like the bulk of it was coming from East Texas. If natural gas kind of hovers around where it is currently, will that income continue to decline? And can you give us a sense of the magnitude? It sounds like it's doing about $9 million of cash flow last 12 months.

Yes, that -- I think that's in the ballpark. I would tell you, and I'll ask Flavi to comment on this as well, is that gas is trading roughly at $4.50 or something like that. There's -- that improves the appetite. And as Flav said, the East Texas and the Gulf Coast Basins are gassier. But most of the activity that we're seeing today is not just dry gas, it's a combination of dry gas and condensate NGLs and oil. So there are some things happening out there. There's some nice trends of other plays. It's a little -- I think it's probably a little too early to comment on exactly where those might end up, but we're encouraged by what we're seeing. But -- and, Flav, you can comment on this. I'd say we'll probably get more phone calls and interest today than we were 2 years ago.

Yes, especially East Texas, again. Louisiana is a little more oily, a little more liquids-rich. So there's -- there are a few wells being drilled there. But everybody's kind of bent their pick on the Wilcox, so that was a big majority of the work in our acreage in Louisiana. The Austin Chalk as well, 2, 3 years ago, we were at $6, $7. The Austin Chalk was really busy with Anadarko and Swift. And that has come to a screeching halt. So really, we have large blocks of acreage in the Bossier shale, but you need $6 or $7. And we have large blocks of acreage in the Austin Chalk, but again, you need $5 to $6. So as it eases up, we're going to see some more activity. And we evaluate our acreage all the time, and we have people call about our acreage all the time to determine whether we want to drill some wells on it or whether we will lease it to somebody else. And those phone calls are starting to pick up a little, but it's not like it was in the past. And we do have our own projects there. The problem is we need a little help, too, with prices. So it'll come, too. As you see us, we're in the down cycle right now on those basins.

Right. No, that makes sense. If it kind of continues the steady state where it is, I mean, will that income continue to decline as, I guess, some of those leases expire and they don't renew them? Am I thinking about that, right?

Well, these aren't leases -- their leases will expire, not our minerals. But -- and they -- if they're not producing, that's -- we'll get it back. But the natural decline will continue. Until we see wells drilled down there, you'll see a normal decline of the minerals resource base over time.

It's just part of the cycle that you see, and is part of the oil [indiscernible] basin price. It's -- if we look back over last 10 to 15, 20 years, there've been periods of a lot of activity and a lot of leasing and drilling, and other times, it's been slower. And the other thing that we didn't speak to, that happens concurrently, is just continue advancement in technology. So something that may not have been economic 5 or 10 years ago, with some changes in technology, it reduces cost or increases EURs, and helps in addition to just straight commodity price.

And my second question is just on the water assets. Are those part of the non-core bucket of the $80 million remaining? And are there any metrics you can give us in terms of those -- the value? I believe book value is not representative, it's recorded at a very low basis.

Yes, that's correct. I would not classify the water assets as non-core today. There's -- we think that there's a lot of option value there. We are focused with a small team that's dedicated everyday to work on securing groundwater withdrawal permits and negotiating purchase and sale agreements. We believe that is the greatest value to be created and ultimately realized in that business.

Your next question comes from Ben [indiscernible] with Monaco Street Capital.

I'm not an oil and gas expert, so I have to apologize. But I'm going to ask a question about the Texas Panhandle slide that you have in the deck. I'm not sure if this is exactly what Flavius said, but apparently the wells cost about $4.5 million in the Cleveland and the Tonkawa?

Yes, right. Yes, each.

Our share. We don't have a 100% of those wells. Our share was what, 1.3, 1.4.

We have working interest.

So who's going to be drilling those primarily? I'm just wondering because I don't know if Credo has a whole lot of experience in horizontal drilling being non-op in the Bakken and being kind of vertical drilling in Kansas/Nebraska. So maybe you can talk about your partners there, and who's going to be drilling. Because these are definitely more complicated wells than, I think, than are being drilled, especially Kansas/Nebraska.

Well, The Texas Panhandle, yes, these are horizontal wells. And we built our team with expertise to do this from companies like EOG and Quicksilver, and several other companies. So internally, we had the engineering, the drilling engineering completion expertise, the geological expertise to drill these wells. And we are the operator. And actually one of those wells is drilled and waiting on frac and the other well is drilling and almost to TD and the horizontal. And we will frac those wells together. So we feel really good about our operational experience there. Obviously, our Kansas/Nebraska vertical well, that's conventional, there's no fracs. Those are very simple, old-school. I mean, that technology you could drill those with cable tool the rigs. I mean, that's old technology. The -- and then our operators in North Dakota, primarily is Halcón, and you know those guys are all Petrohawk guys. So they have the technology to drill deeper horizontal wells. We feel pretty good about them. A matter of fact, about 7 or 8 wells, they're currently waiting on frac, and IP are Halcón wells that were drilled on a pad, so -- on 1 pad. So we have really good operators in North Dakota. We have the expertise to drill wells like that in-house, but our working interest is very small, and so we're going to put ourselves in that position for a 10% working interest. But we have a pretty broad skill set in both divisions, in the South and in the North to drill the type of wells that we're looking at.

Ben, I would also say too that the wells that Flav referred to in the Panhandle, they're essentially offsets. I mean, this is -- these are development wells that were adjacent to or offset existing Cleveland and/or Tonkawa wells.

Actually these are PUDs and probables in a section. We have wells on both sides of this, of the section so we're pretty comfortable where we are there.

And maybe just a quick follow-up on that. I mean, as you continue to think about the opportunity in Texas Panhandle, I mean do you see -- I guess you're indicating that these are kind of low hanging fruit and you know the geology there. What about the opportunity to expand there, maybe talk a little bit about well cost and kind of the opportunity you see.

Hey, Ben. The path forward there is that is to continue to focus on the positions and locations that we have. I think we've commented on a number of calls that there are certain occasions where it makes most sense Forestar to stay in a no-cost royalty position. Sometimes a working interest position and then there's going to be occasions where it makes good sense for us to operate. And it's really just based on risk and calls. So that's the principal driver of those decisions.

Okay. And then one final question. I guess, what I'm here from you is that the capital spend is going to be, at least in oil and gas, is going somewhere near where it's been based on your requirements in the Bakken and other things that you're doing. And I guess, what I'm -- well, a lot of people I think are having trouble understanding is how shareholders eventually benefit as you continue to outspend your cash flow, I mean, we focus a lot on free cash flow which would be cash flow after CapEx and being positive. And so maybe just talk a little bit about how you envision the shareholder base benefiting from the level of spending that's occurring today?

Yes. Ben, I had mentioned, once again that when we look at where we are today and the opportunities that we have going forward, we think given the liquidity that we have today and the cash flows going forward that they we're in good shape and we'll certainly have the ability to adequately fund our Growing FORward initiatives. So we believe that based on our estimates, that cash flow is going to continue to ramp up and we'll be in good shape. Chris, you want to comment?

Yes. I mean, as we said earlier, I think, Ben, as Jim mentioned, we see cash flow as increasing from the improvements in the business. And based on that, and the financial transactions that have taken place over the last 12 to 18 months, our balance sheet is in good shape to finance those investments over the next few years. And we'll successfully fund our Growing FORward initiatives, which includes driving [indiscernible] and EBITDA and earnings to the bottom line. And when you drive return on assets, as we're all aware, that's closely in line with how shareholders do. So if we can drive segment EBITDA and Return on Assets, we think we'll drive shareholder value. And we think we're fully funded to do that over the next few years.

And your next question comes from Richard Dantley [ph] of Longport Partners.

The comment about the stacked pays in Kansas and Nebraska being high and tight and won't produce. Can you -- are you getting better at being able to see those on 3D?

Yes. This is Flavious Smith. We shoot 3D on almost all of our acreage that we acquire. And for the sole purpose of finding the highs. And we don't -- now, really, we don't miss the highs anymore. Very, very seldom that we have a bust on seeing the highs. But the problem is, and is always been the case in the Lansing-Kansas City, some times it's high and the rocks are tight. And if the rocks are tight and high, the oil just can't get through them, There may be oil there, but you just can't produce it. So that accounts for our dry holes. We don't drill low wells, we don't drill off structure wells, we drill the highs, it just sometimes it won't produce. But 4 out of 10x it does produce, and those 4 wells carry those 10 and still make our rate of return.

Right. I see. And the folks at Synergy, on a call, referenced pools that were 0.5 million to over 1 million barrels. Have you -- that is a whole lot different than 30,000, 40,000 EURs that you're talking about.

Keep in mind that those are fields and we have the Tracy Field, which has got 6, 8 or 10 wells in it. And those wells are -- together, cumulatively, if you got 10 wells, they all make 40,000 barrels, that's 400,000 barrels. So what they're referencing is what we see and what we're looking for. I mean, when we drill wells, we're looking for million barrels fields. The problem is you've got to continue to drill wells on a methodical basis to make sure you're hitting your rate of returns as you do this exploration. Because a lot of this is exploration as you move out in some of these areas. And when it is, will we find it, we hit the highs, and we'll find those wells. And the Tracy Field, 1 of the fields that we have, we have discovered is one of those type deals.

It's just a function of how many wells that you're able to drill in that structure. If it's 10, it's 40,000 -- 400,000. If it's 20, then it's 800,000. It's really just the size of the structure.

So you can't see the fields on 3D?

You can see the highs, and then you drill the highs, and if it's not tight, like the Tracy is, we've got 10 wells in there now. And we're continuing to develop that. We just have to continue to find the edges of those fields. And at some point, that structure, that field you'll reach that limits of where the wells are produced. We just haven't reached the limit there yet. And again, we make other discoveries and when we make those discoveries, we start to develop those fields as well. Some of the fields are 2 wells, some of the fields are 100 wells, south of us. So we hope to find the 100-well field. But that's just part of the game and the model.

I understand. And then on Slide 21, the graphic about the acreage you added in Kansas and Nebraska. Maybe that -- those are small counties, but the Forestar 2Q leases in sort of bluish, light blue, looks a lot -- more like, more than 1,700 acres. Was the 1,700 really talking about up in the Bakken?

Yes, that was 1,600 since the Credo acquisition that we added.

Your next question comes from Anthony Hammill of Broadview Capital management.

Firstly on the non-core assets, you mentioned $100 million, of which $20 million have been sold. Is this from a pool of more than $100 million that you're looking to sell? You might have 10 assets or plays that if you sold all of them, could be well in excess of $100 million? Or is there a specific $100 million worth of assets that those are the only things you would consider to be non-core?

It's more of the latter. We have targeted and identified roughly $100 million in non -- what we believe to be non-core assets today, it's not a $100 million out a pool of $200 million.

Okay. So to get to that target, you have to sell that entire portfolio, like all those deals have close in -- by 2016?

That would be true. It's not exactly $100 million. But based on all of the evaluations now since we feel, particularly given the progress we made so early, that we'll be successful in delivering that initiative.

Okay. And it might be a little early. But when the queue comes out, will there be anything from that, that portfolio that will show up as an asset held for sale? Or we'll be specifically donated on the balance sheet that we can see what the book value is there?

Correct. It will not be identified as assets held for sale. But as you know, as I commented a few times, it's a combination of what we deem to be non-core across the business, whether it's real estate or undeveloped land or even oil and gas.

Right. And I'm not sure if you answered this, but it is, and maybe slightly within the context of that question, are there any long-term thoughts or change in your thinking on the Radisson and Austin and that as -- a sitting on such a spectacular piece of real estate or what that could be for as a long-term asset, other for redevelopment that you're involved in or in the hands of someone else.

The thoughts really hadn't changed there. The Radisson is in a very good location. But commensurate to that, it generates a very attractive cash flow return that's, I think, it makes a very nice contribution in the business. We are in the process of investing some capital in the Radisson and some refurbishments. And based on the results that we're seeing today, it is generating returns in cash back that exceed our expectations. It's a great piece of real estate.

Yes, no doubt. And how much capital have you put in to that refurbishment?

I think there's going to be a total of about 15 that's going in, and that includes all the rooms, the restaurant and the ballroom. The restaurant and the ballroom have just been transformed, and it's probably something or it's probably capital we should have invested in that location a couple of years ago.

Right. Okay. And that has already been spent? Or that will would that be the total spend?

Probably a little over half that has already been an invested.

Right, okay. And in Austin, with the 2 multifamily ventures there, do you -- at this point, are you able to say what Forestar's total cost will be? And is it going to be -- it looks like likely to be higher than anything that you've done already, particularly at Pressler. And because you're putting in more capital, is there a potential that the multiple you receive on that might be lower because you're coming in with buying land at market as opposed to coming in with, perhaps, some legacy cost land?

Yes. 2 comments. One, majority of all our sales have been on properties or sites that have been at market, has not been legacy, if you will. The legacy is really Timberland, in around Atlanta, which is on the books for maybe $500 an acre. The rest of our real estate has been acquired in open market. Relative to...

I'm sorry, I mean in the context of the current market as opposed to something you may have acquired 5, 10 years ago at a lower that would be below.

Yes. But even what you see on -- when you go back and look at the pipeline on Slide 11, those are all relatively recent acquisitions. But relative to the capital that would go in these 2 projects in Austin, my expectations today and we're not there yet, is that they would also be part of a venture. In most cases, when we take down the sites and we put all the plans together and do the entitlement underwriting, when we close the venture, typically cash comes back to us.

Right, okay. So that will be the same with the Austin properties that you'll be bringing in, either bank financing or other equity partners?

Yes. That's the majority of the projects we have. We're bringing an equity partner and also secure project low financing.

Okay. So there's not going to be significant amount of capital in addition to the cost of land coming from Forestar?

No. In fact, net, net, we probable -- from where we are today, you got cash coming back.

Right. Okay. And now the sort of bigger picture question. Again, you reported very strong numbers on the real estate side, stock price goes down again. The capital plan, the amount of money you're spending on oil and gas, the results still aren't there for -- other than perhaps geologist to be able to see where the value is going to be from there. Now you mentioned that a reduction in capital plan is primarily due to weather and the inferences that you're just going to spend it, regardless. Is there any set of circumstances or if we look at couple of quarters out, and you're still not seeing tangible financial results from the Oil and Gas business, that perhaps we'll see a tightening and more success based, or more disciplined spending on the Oil and Gas business? Because we can see it with real estate -- when you put money into real estate, we have tangible presence of you making solid return oil and gas you've got to see that.

Anthony, what I would say is that the adjustments that we've made into the oil and gas capital plan has been a combination, both weather-related as well as -- is a tightening, if you will. So it's a combination of both. Yes, some of it is timing and weather-related, but I will tell you we're equally as focused on ensuring that the capital that we would allocate in investment in oil and gas will generate returns. So I can assure you that it is a major focus for Forestar. But I said now on a couple occasions, the fourth and first quarter were more challenged just due to the inclement whether. But we fully expect that as things normalize, we'll see -- we're going to see a pickup in production and that's ultimately going to be reflected in the bottom line.

Okay. And just one last comment. The analyst from Davidson mentioned kind of sort of exasperatedly that there's just so many slides. And that's not a comment that, we appreciate the disclosure, but just as a final comment until we can get to a point where there's less than 40 slides, I really don't believe that the market will be able to see the value in this company until it does get simplified and it becomes something that is either a real estate company or an oil and gas company. So we -- and I'm sure other shareholders would ask that at some point in the distant -- not too distant future, you work towards that.

Your next question comes from Albert Sebastian of Prospect Advisors.

Just a few questions on the proxy. Jim, just a few questions on the proxy. It listed events that constitute a change of control and it lists 6 events. And in the proxy, the first one for example is 20% ownership by any entity could trigger a change in control. But the last one is that any other event that the board determines to be a change in control, and I've never seen anything this broad where the board can basically just determine that any event is a change in control. Can you explain that?

Al, I think it's fairly standard language and it's not -- it's just not unique to Forestar.

Okay. So you feel that this is just standard language, and therefore, it's appropriate?

Yes. When those who developed the proxy language, what not, I will tell you that our language is going to be in the fairway of most all C Corps, Corporations.

Okay, okay. And let me ask you one other thing and we'll move on to some other questions. In terms of the payments to the management group on a change in control -- there's 5 individuals, 1 of them, of course, is yourself. And when I add up all these payments that management would get on a change of control, it's over $30 million. From what I've seen, I could be wrong, but from what I've seen, that seems quite large relative to the size of the company. I mean, Forestar only earned last year, I think, about $29 million. So how does the board look at this and determine that this is appropriate for the management group to receive these payments on a change of control.

Yes, it includes both a change of controls as well as the termination of employment. But, Al, I'll tell you that the board is going to include in commitments and contracts and agreements, with management terms and conditions, that are kind of commensurate with where the market is and what the norm is. I don't -- Al, as you probably know, I don't spend a whole lot of time focused on those types of issues. My primary concern and focus is on creating and delivering value through Forestar and its operations.

Okay. And Tim, just a question on water. It's been quite a while since we've seen a transaction in water. I think the last transaction was in 2011. I think you sold some mitigation rights. And I mean, you have devoted a fair number of resources to water. I know Phil Weber is working very hard on that, and he's in the executive management group. But, I guess, why haven't we seen more value creation in water and more transactions, given the resources you've devoted to that?

Al, I think that since 2011, there have been some others sales from mitigation and mitigation banks. But, Al, I would also tell you that the water business that we're developing here, focusing on Texas, continues to make progress. But what I would point to, is if you look at the marketplace, there's very few, if any, transactions that have taken place. I would tell you that Forestar, in my opinion, has probably made as much if not more progress than anybody. It's early in developing a water market. But as I said on a number of occasions, I really like our position that the timing is much more of a challenge to predict.

And just one last question, Jim, and if anyone else has a comment on this, please chime in. But when you take a look at the share price, it's at around $17. And the book value, at least on using the basic shares outstanding is over $20, and clearly, there are assets on the books which are below market. I mean, the Timberland, they are historically on the books for $600 an acre, et cetera. The book value for the Radisson is well below what it's worth. So here we are, we sit with the share price. Selling meaningfully below book and the book value is clearly understated, why do you think that's the case? Why do you think the market doesn't recognize the value of the company, and to what extent is that a reflection of management action?

Al, I would say that from all the conversations that I've had and interactions in my perception, is that the market is more comfortable and confident in the real estate assets of the business. If it is much more mature, and it's had a much longer run, we're able to provide a different level of history and transparency there. We, in essence, have been in the Oil and Gas business in a more formal way over the last, I guess 1 to 1.5 years. In that 1 year, 1.5 year, we've had almost 6 months of that being impacted by some unseasonable weather conditions. My belief is, at the end of the day, Al, is that the investments that you make, whether it's in real estate or it's in oil and gas, you got to generate returns and show the performance. That's why we've got some issues we have and the plans we have and taken all the steps that we made, particularly in growing forward to drive our performance, whether it's an EBITDA, return on assets and then kind of to your point, is also being diligent in bringing the market any properties or assets within this portfolio, that we don't believe we're going to generate -- expect returns over time. So, Al, thank you for your questions. I think we've got 1 more.

This final question comes from Edward [indiscernible] of Basset Capital.

The question I have just in line with the prior question, and then basically just a question on valuation. Is this like -- I mean, if we look at -- just looking at the acid value the non oil and gas assets, it should we be able to support the current total enterprise value of the company. And my question is, I mean, would you, I mean, tell or maybe just give guidance on what -- I mean, what the company's strategy is in terms of how to [indiscernible] maybe eventually -- once the oil and gas entity is able to stand on its feet, to be separated from the real estate business. As long as these companies are combined, it seems like you're going to have many conglomerate discounts because they are 2 completely asset, different asset measured on different metrics and the market doesn't like that.

I'll comment. The business that we have today within Forestar and the segments is principally a reflection of the portfolio of assets that we were blessed with at the time of spend from [indiscernible]. Our focus has been on investing -- excuse me, in these business to approve up and realize value. We believe that the greatest value to be realized is to invest and grow this business where they generate very high quality earnings and returns and ultimately you're able to operate within our cash flow at some point in time to your point. We think it will have created a lot of value and we'll certainly evaluate our alternatives and options at that point in time. Everyone -- good. Edward, thank you for your questions. And that was our last question for the morning. We, once again, appreciate your interest in Forestar and your participation in the call. And wish everybody a great day. Thank you.

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