Forestar Group Inc. (FOR) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Forestar Group Incorporated Earnings Conference Call. My name is Denise, and I'll be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Anna Torma. Please proceed.

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 third quarter 2014 results. I'm Anna Torma, Senior Vice President, Corporate Affairs. Joining me on the call today is Jim DeCosmo, President and CEO; and Chris Nines, Chief Financial Officer. This call is being webcast and copies of the earnings release and the presentation slides are now available on 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 third quarter financial results.

Thank you, Anna, and let me also welcome everybody joining us on the call this morning. In third quarter 2014, Forestar reported income before taxes of approximately $8 million, compared with $8.9 million in third quarter 2013. Net income was approximately $5.2 million in third quarter 2014 or $0.12 per share, as compared with net income of $11.8 million or $0.33 per share in the third quarter of 2013. The primary driver of the variance in net income and earnings per share is principally related to our previously reported onetime tax benefit in third quarter 2013 of approximately $6.3 million or $0.17 per share related to qualified timber gains from sales in 2009. Real estate segment earnings were approximately $16 million in third quarter 2014, up compared with $13.2 million in third quarter 2013. Our third quarter 2014 real estate segment results include a $7.6 million gain pretax, associated with the purchase of our partner's 75% ownership interest in the Eleven multifamily venture, reflecting the fair market value of the project on the date of purchase. As a result of this acquisition, we remeasured the value of our equity investment from $2.2 million to $9.8 million, resulting in a $7.6 million gain. Oil & Gas segment earnings were approximately $6 million in third quarter 2014, compared with $8.5 million in the third quarter 2013. This decline in earnings is principally due to higher exploration costs, lower oil prices and reduced royalty interest production related to our legacy minerals, which was partially offset by a $3.3 million gain pretax principally associated with the sale of approximately 348 net mineral acres of leasehold interest in the Bakken/Three Forks, as well as higher working interest oil production, which was up 55% year-over-year. Other natural resources segment earnings were approximately $700,000 in third quarter 2014, compared with earnings of $500,000 in third quarter 2013. This improvement was primarily due to lower operating expenses, approximately $200,000 in earnings associated with the ground water reservation agreement we highlighted last quarter, and almost $200,000 gain on the sale of water rights related to a real estate project near Denver. As a result, total segment earnings were $22.7 million in third quarter of 2014, up about $0.5 million compared with $22.2 million in the third quarter of 2013. Before I turn the call over to Jim, let me quickly review the recent Cibolo Canyons Special Improvement District bond issuance. One of our premier real estate community is the Cibolo Canyons, a master plan mixed use community located in San Antonio. In 2007, we entered into economic development agreement to facilitate third-party construction and ownership of the JW Marriott San Antonio Hill Country Resort and Spa. In exchange for a $43 million capital commitment from Forestar, a legislatively created Cibolo Canyons Special Improvement District agreed to provide Forestar with the right to receive the 9% hotel occupancy tax and 1.5% sales in use tax from the resort collected by the district through 2034, along with other infrastructure reimbursements in the community. The award-winning JW Marriott resort located within our Cibolo Canyons community is a tremendous success, and on October 24 the district successfully issued $48.9 million of Hotel Occupancy and Sales and Use Tax Revenue bonds and distributed $46.5 million to Forestar. As you can see the bottom right hand of the slide, Hotel Occupancy and Sales and Use tax collections from the district have improved since the resort opened in early 2010, and are currently over about $6 million per year. In addition, Forestar is entitled to receive additional Hotel Occupancy and Sales and Use taxes above the district's debt service requirements through 2034. To date, we've contributed our $43 million and received $66 million from the district, associated with Hotel Occupancy and Sales and Use taxes. Going forward, assuming no growth in taxes collected from the resort, we would anticipate an additional $35 million in payment to Forestar. In addition, we're expecting reimbursements of over $40 million, excluding interest for infrastructure investments, which we've already made in the residential components of our Cibolo Canyons community. The accounting for the $46.5 million in proceeds from the district is expected to result in a gain of approximately $6 million in the fourth quarter of 2014, with all future proceeds associated with the Hotel Occupancy and Sales and Use taxes representing earning as well. Given the strong liquidity position of over $450 million at quarter end, a flexible balance sheet and improved cash flows, today we also announced that the proceeds received from the Cibolo Canyons district, along with our available liquidity, are expected to be used to repurchase up to $55 million in common stock, which today represents almost 10% of Forestar's current market capitalization. Repurchases will be made under the company's existing share repurchase program, and will be accomplished from time-to-time through open market or privately negotiated transactions, subject to market conditions, legal requirements and other factors. Following these share repurchases, we expect to maintain sufficient available liquidity to fund our Growing FORward initiatives. Now let me turn the call over to Jim.

Thank you, Chris. And I'd also like to welcome everybody, who's joining us on the call this morning. I especially want to congratulate Chris and John Pierret for a great job on resourcing the bonds over the goal line. That's a fantastic accomplishment. Chris and John and the team, they start their day, every day, the same way. And that is we wake up every morning, focused on creating and realizing value. And that's our strategy, delivering the greatest value from every acre and growing through strategic, and let me emphasize, disciplined investments. The success of Cibolo Canyons is a testament to the execution of our strategy and our vision. And equally important, to create and realize exceptional value and that's value that's returned to shareholders. Today, we've effectively delivered our 2009 and 2012 Triple in FOR initiative, and we're well on the way toward delivering our Growing FORward initiatives and increasing segment earnings, driving return and repositioning non-core assets. On a fully diluted basis, we expect our 2014 total segment EBITDA per share to triple over that of 2010. I believe we have the right vision, the right team and we're on the right strategic path to maximize shareholder value. Now let's take a look at some of the operating highlights from the third quarter of this year, and I'll start with real estate. Even though there is some mixed signals in housing, we're just as confident today as we were this time last year, particularly, given the location and the quality of our community, coupled with low inventories. And I'll touch more on our markets in just a moment. For the quarter, real estate segment earnings were $16 million and that's up over 21% compared with the third quarter of last year. As the chart illustrates, the key driver of the increase in the segment results was the $7.6 million gain associated with the purchase of our partner's 75% interest in Eleven, a 257-unit multifamily venture that's here in Austin. I'll provide additional comments relative to Eleven and the multifamily update. Regarding lot sales. We continue to see a stable demand for lot and tract sales. 323 lots were sold in the third quarter, with average lot prices 30% higher and average lot margins 35% higher in the same quarter of 2013. Both prices and margins are the highest we've seen since becoming a public company. This quarter, we sold 4 commercial tract acres for nearly $590,000 an acre from a joint venture project that we have in Houston. And last, we sold 637 acres undeveloped land for about $3,200 an acre. Now looking more closely at lot sales trends. Residential real estate supply demand fundamentals in our Texas markets remain stable. Texas continues to be one of the strongest economies in the nation. On the trailing 12 months ending in September, the major markets of Texas had 280,000 net new jobs on a year-over-year basis. That's the largest in the history of the state and that pushes unemployment rate down to 5.2%. Likewise, lot supply in Texas' 4 major markets remain well below equilibrium levels. For 2014, we continue to anticipate residential lot sales to be in the range of 2,200 to 2,300, that's up about 20% in sales and profit compared with 2013. We've yet to see any evidence of significant inventory build of new homes or undeveloped lots in our submarkets. The bargaining [indiscernible] we expect 2015 market conditions to be fairly consistent with 2014, even leaving the multifamily. Did you know that 36% of 18- to 31-year olds still live with their parents? That's a record, and 1 example of the pent-up demand for housing, in particular, rental. We consider the current demographics' desire for mobility, mortgage underwriting standards and economy, we believe multifamily is a housing segment with legs. Relative to Eleven, Forestar developed its 257-unit Class A community at a competitive cost and on a location that delivered solid rent growth and is currently 96% leased. As I previously mentioned, during the quarter, we purchased our partner's 75% interest in the venture. This is a property that Forestar looks forward to owning given our basis and the fact that Eleven is premier real estate with a number of attractive options going forward, yet to come. The New University of Texas medical school is being developed adjacent to Eleven and scheduled to open in 2016. Medical school and the teaching hospital are expected to generate 15,000 new jobs and a $2 billion economic impact. We like the future prospects of Eleven. In core area, we have 4 multifamily projects under construction accounting for over 1,300 units. Our projects are progressing well as the chart illustrates. We expect these investments to average about a 2 to 3 cash multiple and 36 to 48 months following the start of construction. We currently anticipate the Midtown in Dallas and 360° Denver to be sold in the latter half of next year. We ended the quarter with 5 multifamily sites in the pipeline, 1 in Houston, Charlotte and Nashville and 2 here in Austin. We'll continue to evaluate additional acquisition opportunities in submarkets that are anchored by solid job growth and balanced supply fundamentals. To sum it up. Real estate. We have a strong portfolio of both single and multifamily communities in good locations and most important, healthy economies. These attributes, coupled with the low housing inventories and stable demand, there's a real estate business well-positioned. Going forward, consistent with our strategic initiatives, we'll continue to capitalize on our real estate portfolio and drive sales across the board. lodge, residential and commercial properties. Relative to growth, a majority of our investments this year have been weighted towards multifamily. During the first 3 quarters of this year, we purchased 2 multifamily sites in Austin and 1 in Nashville. Relative to single family acquisitions, the landscape's been challenging. There are a number of larger homebuilders acquiring traction, virtually no margin on land and development. This year, through September, we purchased 3 smaller single-family projects totaling just over 320 future lots. Adding single and multifamily together, we purchased an estimated 1,000 units to be developed. As always, our strategy is to grow our real estate portfolio through disciplined investments, which meet our return criteria. Shifting to other natural resources. Third quarter, other natural resources segment earnings were approximately $0.7 million, that's up $200,000 compared with the same quarter last year. The main driver of improvement and earnings was lower operating expenses. In addition, during the quarter, we generated approximately $200,000 earnings from the 5-year groundwater reservation agreement with Page County that I discussed with you last quarter. Subsequent payments will be based on an annual reservation of just over $22 for each permitted acre foot. We currently have permits for 12,000 acre feet and we're pursuing the balance of the 40,000 acre feet that we requested. In addition, we sold about 120 acre feet of water rights for just over $3 million, generating gain of almost $200,000. These non-core water rights were associated with real estate property we own north of Denver, and we sold to a municipal/industrial buyer in the region. During the third quarter, we sold about 93,000 tons of fiber, down from nearly 141,000 tons in the third quarter of last year. For the year, we continue to anticipate fiber sales to be between 325,000 and 350,000 tons. Moving to oil and gas. Included in oil and gas review will be our normal update plus a return sensitivity analysis given that the recent reduction in oil prices. Oil and gas segment earnings were $6 million in the third quarter, down $2.5 million compared with the same quarter last year. During the quarter, we sold leasehold interest in 348 acres in North Dakota, accounting for majority of the $3.3 million gain. Also in the quarter, we benefited from lower operating expenses and higher working interest margins, but we were adversely impacted by higher exploration cost, declining royalty volume from our own mineral acres, acreage. Third quarter earnings and working interest were up about $200,000 from year ago levels, that's a 43% increase in working interest production. It was largely offset by 15% decline in oil prices. Exploration costs were up $3.8 million principally due to the $2.3 million charge associated with a mechanical issue in exploratory well in Oklahoma. During the quarter, we acquired additional leasehold interest in the Bakken/Three Forks, including 560 net acres in the quarter play for $3 million. In addition, we leased about 20,000 acres of land in Kansas City play for $0.8 million and this acreage is primarily infill to block up existing prospects, the 3D seismic and subsequent drilling. Below the segment earnings is the EBITDAX reconciliation as the non-GAAP measure with reconciliation to segment earnings that we included in the appendix of the presentation. Third quarter 2014 EBITDAX of $19.1 million is up $3.5 million from the third quarter of last year, mostly due to higher DD&A from increased production and a gain on sale of leasehold interest in the Bakken. Take a look at the recent drilling results in the Bakken. Drilling completion have been relatively steady on an annual basis, which is encouraging especially considering the unseasonally slow first quarter. In particular, we're encouraged by clear trend of the increasing well production and performance this year. Potential exists for EURs north of 600,000 barrels of oil equivalents or BOEs. In the third quarter, 9 Bakken and 1 Three Forks wells came online with an average working interest of over 10% and IP rates averaging over 2,300 BOEs a day. To the Halcon Wells in which we have almost a 19% working interest IP of over 36 and 4,100 BOEs per day and are expected to generate EURs well above our underwriting case of 500,000 BOEs. Operators in the Bakken/Three Forks continue to drive improved well performance in returns evidenced by higher initial production rates. Operators continue to unlock incremental value in returns by dialing on completion techniques and prescription, in particular, slick water frac with increasing volumes and tailored mixes of sand and ceramic profits. We continue to be bullish on the Bakken/Three Forks, given our approximately 8,000 net minerals of leasehold interest heavily weighted in the Fort Berthold Reservation primarily in Dunn and McKenzie County. The next slide illustrates the Bakken activity and the return sensitivity analysis. Oil prices have declined principally due to increased supplies and anemic global GDP growth. Although it's difficult to forecast how long we'll be facing this current stretch of these lower prices, it's unlikely they'll stay below the $80 level long term. As a matter of reference, the global replacement cost for barrel of oil is estimated to be approximately $80. So as long as prices remain below that level it's likely new supplies will be constrained. With that in mind, the chart on the left provides our sensitivity analysis of returns at various oil prices, which also account for the takeaway deduct from Bakken crude. This analysis indicates that a $70 West Texas intermediate WTI pricing and 600,000 EURs returns remain above our cost of capital. The table on the bottom right shows our estimated PV-10 for the Bakken/Three Forks at the same EURs range of the WTI pricing. Given the current condition, we anticipate drilling activity in the Bakken/Three Forks remain relatively steady over the near term and into 2015. Obviously, that assumes normal weather conditions. We finished the third quarter with 23 wells drilling or waiting on completion, and expect 10 to 15 wells to come online in the fourth quarter or total of 35 to 40 gross wells going to sales this year. Shifting to Kansas and Nebraska. Even though we've experienced some volatility in success rates on a quarterly basis, we continue to maintain about a 40% success rate in Kansas and Nebraska. We ended the third quarter with a total of 274,000 net mineral acres targeting the lands in Kansas City formation. Our current position should provide a pipeline of about 12 to 24 months of future drilling locations. Once again, we provided an all sensitivity analysis based on a 40% success rate and 2 levels of EURs, 35,000 and 40,000 BOEs. Now to the [ph] Bakken, assuming EURs of 35,000 BOEs per wells at $7 oil, we should generate a return above our cost of capital. As the upper right chart illustrates, we anticipate 36 wells to come online in 2014, about the same as in 2013. Our investments in oil and gas are making a contribution to our financials, particularly, in light of declining royalty volume and revenue from our own minerals. In that vein, I'm encouraged to report we're beginning to see a little drilling and exploration activity on our legacy minerals. It's a step in the right direction. But I'll tell you it's still too early to provide comments as to potential. As the chart on the right illustrates, barring unusual events, the second half 2014 working interest production should be roughly 30% higher than the first half. We're continuing to expect 2014 total production to come in at about 1.2 million BOEs, and that's up about 15% year-over-year, as I mentioned, principally driven by working interest investments. However, with lower oil prices and the absence of onetime gains, we expect the fourth quarter segment earnings to be around breakeven. Relative to a Best-of-Class oil and gas company, our strategy is to secure operating position in emerging resource play with a meaningful pipeline of drilling locations and deliver solid returns. Given that initiative, we secured a leasehold position in approximately 24,000 net minerals acres and perspective oil resource play in the Anadarko Basin in Southwest Oklahoma. Our geologist experience in the basin and our analysis indicate an opportunity to achieve these Best-of-Class attributes that I just noted. We've recently commenced exploring the prospect and certainly recognize there's uncertainties in the early stages developing resource prospects. We'll be providing updates on future calls. Additional element of the plan is to work through Kansas and Nebraska, while transitioning capital and talent into Oklahoma, and as always, maintain a solid balance sheet and adequate liquidity to fund growth plans is a top priority. I'll close with an update on our strategic initiatives, which are designed to drive business results and maximize long-term shareholder value. Number one, generating $200 million in segment EBITDA by 2016. On a fully diluted basis, EBITDA per share would be about 4.5x higher than the annual average from 2008 through 2011. Through the first 3 quarters of this year, we generated segment EBITDA of $108 million, up nearly 39% over the first 3 quarters of 2013. And I expect 2014 segment EBITDA to be up in the 20% to 25% range over last year. Number two, monetizing $100 million of non-core assets by 2016. Once again, we've divested about $31 million in non-core assets that's over 30% of the way to the target. Number three, growing through strategic, and let me emphasize once again, disciplined investments. In the first 9 months, we've invested about $178 million in capital in our 2 core businesses and that's predominantly developing existing locations. Subsequent to the end of third quarter, we're now in our plans to repurchase up to $55 million in stock under our existing share repurchase program. The receipt of $46.5 million from Cibolo Canyons special improvement district followed by an additional $78 million bond issue supported by ad valorem tax receipts funds the planned share purchase. As I look at where Forestar is today in Growing FORward, we've got a strong portfolio of assets in the right locations, and most importantly, experienced teams committed to deliver results. Equally as important, Forestar is underpinned with the balance sheet, liquidity and cash flows adequately fund our Growing FORward initiatives and delivering 2 Best-of-Class businesses, real estate and oil and gas. Once again, I want to thank you, for joining us on the call this morning, as well as your interest in Forestar. And now I'd like to open up the call for questions.

[Operator Instructions] Our first question comes from Steve Chercover with Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: First question, as we think of the $46 million inflection at Cibolo Canyons, should we think of that as a recurring principal with more to come.

Steve, I think that the book balance or the book basis for -- that was about $24 million. So certainly got the bases back and then anything on top that from a cash perspective would be above our basis. And then, also, in Chris' comments, if you consider everything flat going forward through 24, there should be receipt at the district level of an incremental $35 million. And just let me emphasize that's -- the assumption is, is that everything is flat going forward. Steven Chercover - D.A. Davidson & Co., Research Division: I guess, I just want to make sure at maturity there's no recourse to Forestar.

Only recourse, Steve, that we have is we provided a $6.8 million Letter of Credit to support the bond issuance, which is effectively 150% of maximum annual debt service. So that is our recourse to the bond issuance. Steven Chercover - D.A. Davidson & Co., Research Division: The recent declines in oil and gas prices are obviously bad from a royalty stand point. But is there a silver lining because as drilling activity slows the capital fall on you diminishes?

Steve, our expectation today is that the rate of drilling in the Bakken/Three Forks, which is where we have a nonoperated working interest would be fairly flat year-over-year. So a lot of the discussion relative to capital for oil and gas has been a reduction in growth rates, which means flat year-to-year. There can be a lot of variability in capital spending. There's a big difference. I'll just the Bakken/Three Forks for example. In the core, you still generate a return at $60 on the periphery and in the flanks. The breakeven cost is above $80. So the level of capital spending is very much dependent upon the production cost. Steven Chercover - D.A. Davidson & Co., Research Division: But if oil were back at $100 for instance, would you be able to say unequivocally that you've got sufficient capital to fund all of your strategic initiatives?

Yes. Steve, we've said on a number of occasions here that given the balance sheet, the liquidity and the cash flow that we see going forward that we're adequately funded to deliver our Growing FORward initiative.

Our next question comes from Steve O'Hara with Sidoti. Stephen O'Hara - Sidoti & Company, Inc.: I had to jump on a little late but I just wanted to ask you a question about the Growing FORward initiatives and I apologize if it's been discussed already. But do you still believe you can get to where you are or where you want to be in those initiatives given the current oil price? And maybe what your thoughts are there.

Yes. Steve, I think, it goes without saying that oil price are down $20 it makes it a little bit more difficult, but we still believe that we can deliver the Growing FORward initiatives. I said in my comments that it's unlikely that oil will stay down below $80 -- below that $80 level long term. If you just look at the global replacement cost for oil is north of $80. So nonetheless, we always will look at our plans and our initiatives and make adjustments, based on what's happening in the markets. But when you put together initiatives and plans and targets, there's going to be some adaptive moves and measures along the way. And we're certainly prepared to do that. Stephen O'Hara - Sidoti & Company, Inc.: And can you just talk about, I know Halcon was at a conference, I want to say, back in August or September and they were talking about you EURs in the Bakken and it sounded like they've thought that a lot of these EURs are going to be in the million range, definitely in the high several hundred thousand range. And I'm just wondering what that would help -- how that would help you guys. And is that -- are those areas where you guys are situated.

Yes, Steve, obviously, if EURs came in, at 1 million barrel per well that would be very significant to Forestar. If you recall the -- with the Credo acquisition, even subsequent investments, we took pre-underwriting $500,000 so that's a double. So that's very meaningful as it relates to returns as well as PV-10. Also relative to Halcon, about 40% of the units in which we have investments in, Halcon will be the operator. So to the extent that Halcon continues to improve in well performance and in calls and returns, that's certainly a good thing for Forestar. I'm pulling for them. Stephen O'Hara - Sidoti & Company, Inc.: I'm sure. And then just finally, in terms of -- is it a matter of Halcon being maybe better in the region? Or is it a matter of just technology improving the way they operate the wells improving? And I mean, do you see that improving generally in the Bakken? Or is it more of just the Halcon wells only?

Steve, I think there's 2 key points here. One is all the operators are making progress in driving return either through lowering costs or increasing EURs and production rates through technology. I don't think it would be a good idea for me to try to handicap is Halcon better or worse. I think that they're a very confident cable operator and they continue to make improvements and progress. Number two, and I think probably even most important, is location. If you look at results, you'll see that there's a pretty significant difference in consistency, as well as level of improvement in the core versus non-core, and I just used 2 broad categories there. But even though the Bakken is a resource play there is some variability and there also is some variability in their performance across the basin but the real focus is, for us, whether it's a sale or acquisition or an investment, it's all about both the geology and the quality of the rocks, the location, as well as the operator.

Our next question comes from Rob Longnecker with Jovetree.

Can you guys provide a little more color on this new Bakken you're talking about, kind of, what you're potentially budgeting for it and what are your return hurdles are from there?

Yes, Rob, the returns to hurdles for oil and gas are a 20% rate of return and that's the standard that we have. Relative to the new position, it -- as I said, in my comments, it's to a very small position and perspective resource play. As I said, it's approximately 24,000 acres not 100. The position that we took is consistent with us managing our balance sheet and our capital. And it's important to us that we don’t over-extend ourselves and other comment I'd make, Rob, too, is that, as we think about the locations we have in various basins and play going forward, as I said, we see ourselves working through the Kansas and Nebraska. And I see a transition into the Oklahoma position that we established.

And I mean shouldn't return hurdle be higher for a more speculative [indiscernible] stage basin?

Yes, depending upon risk, when you underwrite it from an exploratory perspective, it's a much higher return, but ultimately, Rob, you've got to believe that, once proven, once stabilized that you're going to generate a longer-term at least 20% rate of return at the project level.

And oil what prices are you using? Are you using spreads for that?

We'll look at a couple of different scenarios, Rob, we'll use a spread and then we're pretty consistent using the standard of $80 and $3. $80 oil flat and $3 gas. The thought is if you like the returns and like the economics at $80 and $3, then it's a good investment. So that's a -- instead of using NYMEX all the time, which changes, we always use 1 consistent pricing. So we've got some -- a relative view, relative to investments.

So is this something that you think you'll get it big your Kansas Nebraska asset?

I'm sorry, Rob. What are you saying?

Is this -- are you guys envisioning that this is something that will get as big as the Kansas Nebraska asset in terms of acreage?

Unlike -- they're 2 different types of plays, Rob. I think what you asked me is do we see this becoming same size from an acreage perspective as Kansas and Nebraska.

Yes.

No. The Kansas Nebraska is more of a statistical play. And what we see in the location in Oklahoma is a resource.

Got you. And just changing gears for a second. Have you guys changed strategy at Eleven? It's my understanding that you guys were marketing that.

Yes, it was being marketed and the more that we look at the property, Rob, the more that we like this prospect going forward. If you look at some of the projects that we had, we developed Promesa, a large saleable [ph] balance sheet. We believe in that site, we're doing the same thing with Cedar Hill. And I would tell you, if I had to do it over again, I would -- we would have developed Eleven on the balance sheet and have held it for some time. So we had an opportunity to acquire our partner's interest and to end up with a still very attractive cost basis. So we took advantage of that. And as I said in my comments, if we look at what's going on in the surrounding area around Eleven, it's only getting better, particularly, given the development of UT med school.

And how does the price that you guys [indiscernible] that you had as well?

Rob, can you repeat that one more time?

Yes. Sorry. I guess, I think, all the callers are having an echo. You guys were running a process that sounds like you had some preliminary offers on the table. How does the price that you paid your partners compare to those [indiscernible] on the table?

It was relative to pricing we see in the market, Rob. What we paid the partner was, you'd say at the time of acquisition, was at market. And also, consistent with terms that we had in the agreement.

Our next question comes from Jeff Bronchick with Cove Street Capital.

Jim, just again, maybe just to clarify the Oklahoma play, what was the land cost for the acreage?

Jeff, it was in the neighborhood of $500 to $600 an acre, something like that. We were relatively early there. This is -- as you're probably well aware the established position you start -- you start early and have a lot of analysis relative to the geology in the rocks and everything else. So we were able to get in, at what I believe to be, a pretty attractive price per acre.

And the second, the press release mentioned the $2.3 million as a dry hole and you referenced it here on the call as a mechanical issue with the rig. Maybe, would you just clarify that?

Yes. One of the exploratory wells was having mechanical issues, principally, reflective of the crew in the rig and we made a decision to discontinue those operations and bring in a new crew and rig.

So this remains -- this play remains wildcatting, for lack of a better word, versus the Bakken, which is sort of a mechanical punch and play.

Jeff, I wouldn't call it wildcatting, but I also wouldn't say that it's a proven resource play just in this development stage. There certainly other operators, public operators, who are in the basin who have had a number of successful wells. So I think you may be a little bit stretched to call it wildcatting.

And so looking at 2006 -- in 2015 what would you estimate the dollar amount that you're going to put in for any variety of exploratory wells or land acquisition in Oklahoma.

Jeff, the capital that we see for 2015 today, and I'll provide additional clarity on the call in February, I think capital being pretty consistent in 2015, as well as 2014 and also, the type of mix. One of the things that we have focused on is maintaining the mix between capital that's used for development versus acquisitions or extensions. And we'll continue that mix going forward. I think I said on previous calls that one of the reasons that capital is down from our initial forecast this year is slower drilling in the Bakken/Three Forks, which is a lot of our development program. So for a period of time, that's kind of the throttle for our capital plans. But I also mentioned, Jeff, that we'll continue to -- and we have a plan to work through Kansas and Nebraska and begin to redirect some of those resources in Oklahoma.

And maybe -- okay so what you just said was CapEx, you think all else being equal, roughly the same in 2015 and '14, roughly the same mix between real estate and oil and gas, is a reasonable estimate.

Yes. And Jeff, we're still in the process of ticking and tying. So I'll use your words. Given what we see today that would be our estimate.

Got it. And so when you say transition from Kansas City and Nebraska, what exactly are you saying? Are you saying this is not for us and we're an exiter, we're going to leave that fallow? What does that mean?

No, it's not to say we'll leave it fallow, Jeff. Working through Kansas and Nebraska one scenario is that we've got a nice acreage position. I don't see us trying to extend the play if there's any additionally leasing, it'll be just to block up an infill and existing locations to complete seismic blocks in the drilling, so. What I would say is that another way of saying working through is wind down. And I'm just sharing with you kind of one of those scenarios. But the level of capital there, I think, going forward will decline.

Got it. So it is a wind down i.e., no additional capital other than makes insane economic sense and you basically you're not -- you're going to be drilling -- putting less money into the drilling in this statistical play. Is that -- I just want to make sure I understand what you're saying.

What I'm saying, Jeff, is we'll -- given the acreage that we have, we still like the returns. We think that it generates a nice return, so we'll drill up what we have. What I'm saying is we don't have any plans to extend the play any further than what we are. And I'll go back to the comment that I made, too, Jeff, that I think is important, is that as we think about our oil and gas business or 1 of the real objectives that we have is to have a very attractive cost basis in an emerging resource play that has got long life, it's got really good margins, and one that one day looks like a Bakken/Three Forks. So it's kind of back to the point that you're making earlier, to the extent that you can establish that position it's great to a heck of a lot of value.

I mean, Jim, I appreciate all your words on oil and gas and your oil and gas pricing outlook. I will -- we've written it down. But again, I'll repeat, something I've talked about before, I mean look at the first half of the call, and the real estate success you have and you're having as a result of, frankly, what you're really good at, a local knowledge, the ability to put sweat equity in, excellent footprint and that enables you to do things like Cibolo Canyon and do things like payout essentially, that's almost like -- and it's effectively a special dividend of the Cibolo proceeds with the share repurchase, all of which are terrific, fabulous things. And I shudder to think how high your stock would be if that's what you did for a living. And I look at oil and gas and by definition, and let's just assume you're an average oil and gas, that's a terrible idea for this company. And I think -- I just don't understand and I have to ask you again, the stock is $17, it's still $17, because being an oil and gas guy is really difficult even if you're good and lucky. And I just think, I can't say it out loud, you guys wake up every day thinking of how to add value. The simplest and easiest way to do it is stop and focus on your real estate and doing things like share repurchase and cleaning up your balance sheet. That's how you're going to wake up every day and make money. That's what we think about every single day when we wake up and look at Forestar. And I think a lot of shareholders feel the same way.

Jeff, thank you for your opinion.

Our next question comes from David Spier with Nitor Capital.

First off, I just want to say I, I mean, obviously, no surprise, share the sentiments expressed by the last caller. But on another note, is there a book value per share number at the end of Q3?

Yes, it's roughly about 17, David.

So that's where we are now. And just a thought on land, almost every company I speak with, my company speaks with, in the land development business, I mean there are talks about the inherent value of developing and holding on to the commercial and retail land that surrounds their communities and their properties. It's always mentioned that there is tremendous margin in that business and more importantly, it's a -- provides an ability to generate a long-term cash flow stream that's consistent as well. So initially, with the purchase of the remaining stake in Eleven, looks like it was a sign that Forestar was realizing that this was a great play in a great way to maintain this consistent cash flow stream. But then it was mentioned that you're also planning on selling some properties at the end of the year. So I would just -- if possible, is there a way to clearly state the company strategy in regards to development of multifamily properties?

Sure, Dave. I think, we have been pretty consistent in articulating a strategy and a plan relative to multifamily and development and creating value given the sites that we have, as well as the sites that we've acquired. In the case that some of these properties, Eleven being a good example, is in a location and with future cash flow characteristics and in returns, and there is a case where some of them make good sense to hold for longer period of time. And it depends on how the economies develop around it, it could mean longer term. That's the position that -- and the strategy we've taken with Radisson downtown. I mean the value there just continues to increase. And it's got very nice cash flow return characteristics. And we think that Eleven very well could be in that same category.

Understood. But the other point that I would, more or less, make is by holding on to these assets, you're continuing to build an asset base that has long-term consistent stabilized cash flow that whether the economy, the surrounding economy, the profile is great or not, it's -- it might be considered better than the risk of having to replenish these assets consistently by flipping them. So that would be the other side to make. But I'm glad to see that the investment you made in Eleven because it's a sign of that strategy. The other question is regarding the 4 acres of commercial land that was sold. Is there an idea of what the intention is for the development of that land? What is that land going to be put towards?

Dave, I believe the uses are retail. And keep in mind, when -- it's 4 acres, there's a big difference in value between a hard corner and an internal head slide [ph] when you're worried you've got commercial zoning but if I'm not mistaken it's for retail use.

So then -- so let me ask you, is there not the possibility to instead of selling that land to use that land and contribute towards that project where you would hold on to a share in the development? And again, have the opportunity to generate consistent cash flow and building up an asset base, more or less, is that an option that should be considered that is possible?

Yes, that's 1 of the options that we look at, Dave, as we -- depending upon what the product is and its location, we'll consider contributing the land and the capital accounting to a venture. We've done that on a number of occasions. In some cases, you're a whole lot better off taking the value off the table and reinvesting it. So it just is -- it's very much dependent upon the financials and the circumstances. But relative to an option, that's sort of what we wanted with it, yes.

The only thing I point out is then there's that, again, the reinvestment risk. And I just, I leave it at the fact that especially now with the initiatives the last few years. And then also in the earnings release, one of the -- the thing that was mentioned regarding Eleven, was that it will result in a $7.6 million balance sheet gain. And nothing was really mentioned about the actual earnings of the property, which would seem to be rather important. So it kind of gives the appearance that some of these decisions are more driven primarily by headline illustrative figures rather than actual re-returns on investment, because if you think about the last 2 initiatives, the Grow FORward initiative, the investments in oil and gas, it's almost, I could say, offhand about close to $500 million in capital that was invested. Yet this past quarter was $5.2 million in earnings. I understand it was $22 million in segment earnings but after $8.6 million in interest expense and then $5.2 million in SG&A, we're left with the current income figure. So I just think it should be considered rather than consistently having to take the reinvestment risk of building up substantial assets like companies such as the Howard Hughes, which has been very successful, look at their stock price. And it's because they maintain and hold on to their assets and they're developing a cash flow stream. And I'd just strongly mention and consider that, rather than taking the assets and having to reinvest it into things, such as oil and gas, whereas we see the cash flow is not consistent than anything but that. I appreciate it, guys.

Our next question comes from Richard Dearnley from Longport Partners.

So in Kansas and Nebraska, you mentioned that the success rate is down to -- down closer to 40%. Wasn't it running around 50%?

No. Richard, the long-term average has been right around 40%. There's been some variability from quarter-to-quarter. We've had highs as high as 60% on a quarterly basis, and down below 30%. But quarter in, quarter out long-term, it continues to be about 40%.

Be about 40%. And does it vary between Kansas and Nebraska?

Most of it is driven by Nebraska. A majority of Kansas today is just production. But the lion's share of the drilling is in Nebraska.

I see. And my recollection is the average effective price of a well was $650,000-or-so, and it's now up to $900,000. Is that because of Nebraska?

No, there's a little bit of confusion there. The cost to drill a well is around the $200,000 range, $300,000 to complete it. If you add 1.5 dry holes, which is reflective of a 40% success rate, and you totally burden a producer with calls, then it's the $800,000 to $900,000 that you see, which is the way we look at it.

Yes. Did that used to be in the $600,000, $700,000 range?

Richard, I don't think so.

Then, I guess, I'm remembering wrong.

We have no further time for questions. I would now turn the call over to Mr. Jim DeCosmo for any closing remarks. Please proceed.

Good. Thank you, once again, I want to thank everybody for joining us on the call this morning, and for your interest in Forestar, as well as your questions. I hope that you have a great day. Thank you.