Forestar Group Inc. (FOR) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Forestar Group’s Fourth Quarter and Full Year 2014 Earnings Conference Call. My name is Denise, and I'll be the operator for today. At this time all participants are in listen-only mode, later we will conduct a question-and-answer session. [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 fourth quarter and full year 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 Web site 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 Web site. Now let me turn the call over to Jim for some opening comments.

Thank you, Anna, and I would like welcome everybody who has joined us on the call today. This morning I want to simply say the Forestar is committed maximizing long-term shareholder value. In 2014, we delivered record real-estate segment EBITDA of over 100 million. Further execution of our strategy. On the other hand the oil and gas segment financial performance was not up to our standard. Segment earnings were adversely impacted by oil price driven impairments, yes we were successful growing production and proved reserves by 20%. Given unacceptable results and low oil prices, we restructured our oil and gas business and we’re intently focused on generating cash flow and earnings, it’s a positive step in the right direction towards maximizing long-term shareholder value. Also since last call, we have implemented several initiatives specifically focused on enhancing shareholder value. First we repurchased approximately 1.5 million shares in the fourth quarter and 2014 for 25 million. Second our Board of Directors voted recommend declassifying the Board so that all directors would be elected annually. Third Forestar added two new shareholders proposed directors to the Board in February that should expand the board’s perspectives. And fourth last and most important we’ve listened our shareholders regarding complexity, capital requirements in the mix of our businesses, as a result our Board, management team and advisors are engaged in evaluating strategic alternatives to enhance shareholder value and that includes a comprehensive review of our oil and gas business. Now let me turn the call over to Chris for a review of our financial results.

Thank you, Jim. Let me begin by highlighting our fourth quarter and full year 2014 financial results. Forestar reported a net loss of approximately 11.8 million or $0.34 per share in the fourth quarter of 2014 compared with net income of 13 million or $0.33 per share in the fourth quarter of 2013. Our fourth quarter 2014 financial results include special items of 23.2 million after tax principally associated with non-cash asset impairment charges related to our oil and gas segment driven primarily by lower oil prices. These fourth quarter 2014 charges include $10.1 million after-tax associated with proved property impairments 9.8 million after-tax associated with unproved leasehold interest impairments and 3.3 million after-tax principally associated with severance and other non-recurring costs. Excluding these special items fourth quarter 2014 net income was 11.4 million compared with 13 million in fourth quarter 2013. For full year 2014 Forestar reported net income of 16.6 million or $0.38 per share compared with net income of 29.3 million or $0.80 per share in 2013. Our full year 2014 financial results include special items of 24.5 million after-tax principally associated with non-cash asset impairments related to our oil and gas segment driven primarily by lower oil prices. A breakdown of these full year 2014 charges include 10.1 million after-tax associated with proved property impairments 11.1 million after-tax associated with unproved leasehold interest impairments and 3.3 million after-tax associated with severance and other non-recurring costs. In addition our full year 2013 results including one-time tax benefit of 6.3 million associated with timberland sales from 2009. As a result excluding special items full year 2014 net income was 41.1 million compared with 23 million in 2013. This improvement in our full year 2000 financial results excluding special items was driven primarily by record real-estate segment earnings. Now let’s turn to full year and fourth quarter segment results. Fourth quarter 2014 real-estate segment earnings were 30 million compared with 27.7 million in the fourth quarter of 2013. This improvement is due to 7.6 million in earnings from the sale of our 8,400 acres of undeveloped land and a $6.6 million gain associated with the receipt of 46.5 million in bond proceeds from the Cibolo Canyons Special Improvement District. In addition our real-estate segment reported record annual earnings of 96.9 million in 2014 compared with 68.4 million in 2013. This improvement in annual results is driven by $26 million in gains associated with the Ironstob exchange, the acquisition of our partners’ interest in the 11 multifamily venture and a gain related to the proceeds received from Cibolo Canyons as well as higher land sales and increased lot sales activity. Oil and gas reported a segment loss of 39 million in the fourth quarter of 2014 compared with approximately 1 million in segment earnings in the fourth quarter of 2013. This decline is principally due to non-cash charges of approximately 35.7 million which includes 15.5 million of proved oil and gas property impairments, 15.1 million of unproved leasehold interest impairments and 5.1 million of severance and other non-recurring costs. For full year 2014 oil and gas reported a segment loss of 22.7 million compared with segment earnings of 18.9 million in 2013, this decline is principally due to non-cash charges of approximately 37.7 million which includes 17.1 million associated with unproved leasehold interest impairments, 15.5 million of proved property impairments and 5.1 million of severance and other non-recurring costs. Other natural resources segment earnings were 3.3 million in the fourth quarter of 2014 compared with 3.7 million in fourth quarter 2013. Our fourth quarter 2014 other natural resources segment results included $2.7 million gain associated with determination of timber lease in connection with the sale of the remaining 2,000 acres of land from our Ironstob venture near Atlanta. Fourth quarter 2013 other natural resources results included $3.8 million gain related to the partial termination of a timber lease in connection with the Ironstob venture. Full year 2014 other natural resources segment earnings were 5.5 million compared with 6.5 million in 2013. This decline in annual segment results is primarily due to lower fiber sales activity. Forestar reported a total segment loss of 5.7 million in the fourth quarter of 2014 compared with segment earnings of 32.4 million in fourth quarter 2013. And total segment earnings of 79.7 million in full year 2014 compared with 93.8 million in 2013. The decline in segment results in fourth quarter and full year 2014 compared with the prior year is principally associated with non-cash asset impairment charges related to our oil and gas segment. Now let me turn the call back over to Jim to walk through the operating performance and market conditions for each of our segments.

Thank you, Chris. And I’ll begin with the review and update of our real-estate business. Relative to housing in our view going forward we believe that underlying supply and demand fundamentals for both single and multifamily housing are intact and favorable to further expansion. Housing starts and inventories remain below long-term historic averages while at the same time household formation continues to increase. As a result and given the temper phase of housing recovery, we believe housing starts will continue to increase for some time. In particular I believe these conditions are also true for Forestar given the location and the quality of our communities. Demand for finished lots has continued to strengthen in our projects evidenced by lot sales and margins. Rather than pressing lot sales volume, we focused on increasing margins that’s our strategy; it’s the greatest value from every acre. As the charts illustrate both the lot margin and total profit is the highest we’ve generated since 2006. The 2014 total growth lot profit is up almost five times compare to our trough in 2009. Our communities continue to be sought after by homebuyers, that’s a solid indicator preference and demand. We expect 2015 lot sales to be about 1,900 lots which would be relatively flat with 2014 levels excluding the bulk sales. Given our investments in Texas I’ll make a few comments relative to our view on lower oil prices and housing. Housing supply and demand fundamentals in our Texas markets are stable, most important absolute new home and lot inventories remain well below the equilibrium levels. If we were drastically oversupplied that'd be a real problem. Despite the drop in the oil prices, Texas continues to be one of the stronger state economies in the nation which is evidenced by job and population growth that remains well above the U.S. average. However, it would be hard to argue that the decline in oil prices won’t have an impact on Texas job in in-turn housing. We’ve seen headlines reporting layoffs in energy sector. Fortunately energy sector jobs account for only 2.9% of the overall Texas economy and 4.2% in Houston where we’ll likely see the greatest impact on jobs. Nonetheless Houston is expected to experience positive but decelerating job growth -- we had fortunately remained one of the most affordable housing markets in the nation. As you can see our exposure in Houston represents only 10% of our real-estate investment. In addition our communities are located in healthy submarkets and are well established high quality development that provides confidence to perspective homeowners and buyers. For the year real-estate segment earnings were 96.9 million that’s up over 40% compared with last year a record for our real-estate business. Our team is credited for driving an increase in segment results. In particular, 10.5 million in earnings related to exchange in 10,000 acres of timber leases or 54 acres of owned underdeveloped land solving the bifurcation of Ironstob venture property, 7.6 million in earnings associated with acquisition of our partners 75% interest in Eleven and Austin Multifamily development project and 6.6 million in earnings from the receipt of 60 million in cash from the Cibolo Canyons Publics Improvement District. During 2014 we also sold over 22,000 acres of undeveloped lands for about $2,200 an acre with the remaining acreage in Georgia locating closet to metro Atlanta. We will continue to evaluate our undeveloped land and opportunistically sell non-core parcels for growth and reinvestment. Relative to lot sales we sold over 2,300 lots in 2014, and that includes about 370 lots sold in two bulk sales. Total lot sales in 2014 were up 24% over the previous year with an average gross profit per lot of 30,000 except 17% year-over-year excluding the bulk sales. In addition we sold 944 acres of residential tracks at over $8,500 an acre and 32 acres of commercial tracks for over $258,000 an acre. Now let’s look at the fourth quarter real-estate results. Fourth quarter 2014 real-estate segment earnings were 30 million that’s up 2.3 million from the previous year. Including in gain on asset sales is the 6.6 million associated with the Cibolo bond offering and $1.3 million gain from the sale of a land contract near Charlotte. Other notable fourth quarter sales over 8,900 acres of undeveloped land were sold for $2,100 an acre. We had over 500 lots with average gross profits per lot of 35,700 that’s up 29% quarter-over-quarter excluding box sales. And last 26 acres of residential track for 54,800 per acre and 25 acres of commercial tracks for over $227,000 an acre. Next I’ll highlight an example of strategy execution, one that we’re certainly proud of. As we share with you last quarter we reached another milestone at Cibolo Canyons our 2,800 acre mixed use community located in San Antonio. As of year-end 2014 cumulative cash flow is now positive, but more important future net cash flows to Forestar from lot and track sales plus the District disbursements are expected to exceed 150 million by 2034. Instrumental in becoming cash flow positive where received from the Cibolo Canyons Special Improvement District in the fourth quarter. Recall that the District has two financial responsibilities to Forestar; first, distributing the HOT and Sales and Use Tax. After receiving 46.5 million in the fourth quarter Forestar have received 66 million as of year-end 2014 with a potential for an additional 35 million of payments through 2034, that’s assuming no growth in tax collection. And second, reimbursement for major track infrastructure cost, we received 8 million in the fourth quarter and have now received 34 million as of year-end 2014 and expect to receive an additional 32 million by 2034. These reimbursements are dependent upon property tax collections which is simply a function of CIF value. Relative to sales we sold just over 50% of the 1,769 planned lots. We have about 56 commercial acres remaining to be sold or developed. The success of Cibolo Canyons is a testament to the execution of our strategy, the greatest value from every acre and with the use of District cash disbursement to repurchase stock is value return to shareholders. Moving on to multifamily. Rental continues to be a main stay in housing. Given the current demographics the desire for mobility the tight mortgage underwriting standards and the increased propensity ran among millennial we believe multifamily will continue to be a significant component of housing going forward. Nearly all our multifamily sub-markets where we currently have projects planned are under construction continue realize above average job growth that is the cornerstone of demand. At the end of 2014 we had one stabilized multifamily community in our portfolio with five projects under construction accounting for over 1,700 units. Developing our multifamily portfolio is progressing well we expect these investments to average about 2 to 2.5 tax multiple and 36 to 48 months following the start of construction. We currently anticipate Midtown in Dallas and 360 Denver to be sold in the latter half of this year. We ended the quarter with four multifamily sites in the pipeline, one in Nashville, Charlotte and two in Austin. We’ll continue to evaluate additional acquisition opportunities in our core submarkets that are anchored by solid job growth and balanced supply fundamentals. Summing up real-estate. At year-end 2014 we had over 50 active selling residential communities and 13 markets. Throughout the year we leverage the strength of our team and portfolio to create realized asset value by capitalizing on housing and lot demand from builders. Going forward we’ll continue leverage our team’s strengths, capitalize on our real-estate portfolio and deliver value through high margin sales across the board, lots, residential and commercial tracks. Strategy market conditions and return productivity guide our real-estate investments. In 2014 discipline continue to trump growth, in particular only five single family tracks were acquired that met our return and our underwriting criteria. These projects are expected to deliver nearly 850 lots, that's equivalent about 40% of the 2014 lot sales. We also acquired our partners’ interest in Lantana, that’s an award winning master plan community located near Dallas with about 650 lots remained to be sold. And last we purchased three multifamily development sites that we expect to yield about 700 units. Given our portfolio and a prudent team our real-estate business remains positioned to create to deliver value going forward. Now shifting to other natural resources. 2014 other natural resources segment earnings were approximately 5.5 million and it’s down 1 million compared with 2013 principally due to lower fiber sales. We saw nearly 330,000 tons of fiber that's down about 46% compared with the previous year. Offsetting this decline were lower operating expenses and 1.1 million revenue and 200,000 earnings from our water interest. During the fourth quarter of 2014, other natural resources segment earnings were 3.3 million versus 3.7 million in the fourth quarter of 2013, a $2.7 million gain on timber in the fourth quarter of 2014 was associated with the sale of the last 2,000 acres from the Ironstob venture. For 2015 we expect fiber sale to be in the 275,000 to 300,000 ton range. In addition we continue to work toward being a part of economic water solutions for Texas. We currently have an export permit for 12,000 acre feet and we’re pursuing the balance of the 45,000 acre feet requested here in central Texas. Moving to oil and gas, full year 2014 oil and gas segment results were loss of 22.7 million compared with segment earnings of 18.9 million previous year. 2014 results were negatively impacted by non-cash impairments and other charges of approximately 37.7 million reflective of year-end lower oil prices. Forestar has been focused on growing production, reserves and value from oil and gas assets and investments primarily in the quarter of Bakken/Three Forks in the central uplift in Kansas and Nebraska. As a result our 2014 oil and gas production reached nearly 1.3 million BOEs up over 20% compared with 2013. The growth in productions principally attributed investments in the Bakken/Three Forks. Liquids production from working interest grew by 53% but was offset by 20% decline in royalty interest production which contributed to about a 6.1 million reduction in segment earnings from mineral. Full year results also benefited from $8.5 million gain primarily from the sale of Oklahoma water flow production and 650 net acres of leasehold interest in North Dakota. Below segment earnings is the EBITDAX reconciliation as you know that’s a non-GAAP measure with reconciliation in segment earnings included in the appendix of presentation. Year-over-year 2014 EBITDAX was up almost 7 million as mostly due to higher DD&A from increased production. Fourth quarter oil and gas segment results were loss of 39 million, a 40 million decline from the fourth quarter 2013. As a bottom right table indicates the decrease is primarily due to 35.7 million in non-cash impairments and other costs driven principally by lower oil pricing. For the quarter working interest oil production was up 48% compared to last year with only six new Bakken wells coming on-line in the fourth quarter. We ended the quarter with 20 wells waiting on completion averaging about 10% working interest based on operators plan we expect about half of these wells or half the 20 wells to come online in the first quarter. Low segment earnings once again is the EBITDAX reconciliation, the fourth quarter of 2014 EBITDAX of 5 million is down 7.6 million from the fourth quarter of the previous year with higher DD&A and working interest volumes largely offset by non-cash impairments and lower pricing. Let’s take a look at our year-end 2014 reserves. Proven reserve volume increased 20% in 2014, proven reserves from working interest investments were up 26% while reserves from owned minerals were 15% year-over-year. Also note that probable and possible reserves are up from 4.7 in 2013 to 8.1 million barrels of oil equivalents or BOEs in 2014 mostly all Bakken acreage. As reviewed and prepared by a third party oil and gas and engineering firm as Netherland, Sewell, discounting cash flow for our proved reserves using a 10% rate or PV-10 was 229 million at year-end 2014 and that’s up from 183 million year-end 2013. Working interest investments added 53 million and PV-10 while minerals declined 7 million. For perspective applying to December 31, 2014 NYMEX strip price of 61.07 to our proved reserve would yield approximately at a 10% discount rate. Let’s take a look at the key drivers of the proved reserves growth, total proved reserves increased 2.9 million BOEs during 2014 and was offset by 1.3 million in production which equates to a net 1.6 million BOE increase in reserves which is over 125% reserve replacement. Furthermore consistent with the strategic imitative to increase production of oil and liquids, our 2014 year-end reserves increased to 26% on liquids and that’s up from 36% just three years earlier. Our working interest investments and mineral lease acquisitions have been the main driver of continued growth and improved reserves. Kansas and Nebraska proved reserves are up 30% year-over-year while the Bakken/Three Forks the main driver of reserve growth is up 50% and now represents over half of our total proved reserves. As the chart of the left illustrates the investment weighted average proved developed producing estimate of ultimate recoveries by Netherland, Sewell for 2014 is up to 680,000 BOEs almost 40% above 2013. This further illustrates the substantial improvement operators have made in their drilling completion techniques and operations. We ended 2014 with about 9,300 net mineral acres the recorded the Bakken/Three Forks that's up about 3,300 acres since acquiring CREDO. At the year-end we were participating in approximately 120 wells and we’ll have the option to participate in an estimated additional 330 wells. Clearly the question is does it make sense to invest given today’s strip prices. As you’d expect the answer is largely dependent on drilling and completion cost estimated ultimate recoveries in oil prices obviously $50 oil significantly reduces number of wells they will meet our 20% hurdle rate of return. It’s worth noting that we’ve already seeing substantially lower drilling inflation cost estimates from operators, based on their feedback we expect cost to continue go down across all phases of drilling completions and production. During the first two months of this year we’ve declined to participate in four or seven proposed wells. Given operators guidance we expect to receive 30 to 35 well proposals most of which have been in the permitting and the development pipeline. Based on current oil price forecast 2015 oil and gas capital expenditures are expected to be down significantly. A majority of the capital is to complete existing wells and participate in a select number of Bakken/Three Forks proposals to meet or exceed the 20% rate or return. We’ll evaluate each well on a standalone basis given operators cost estimates EURs and NYMEX strip prices. In response to the fresh oil prices and unacceptable financial performance significant steps have been taken to lower all cost with the focus on generating cash flow and earnings in 2015. With the changes in January and after one-time restructuring costs 2015 oil and gas operating expenses are expected to be approximately 50% lower in 2014 primarily due to staff reductions associated with closure of our Fort Worth, Texas office. Going forward we’ll continue to diligent in identifying and delivering additional cost reduction in our oil and gas segment. And the last section of the call let me update you on our strategic review and our shareholder initiatives. Our Board of Directors the management team and financial advisors are engaged in exploring strategic alternatives to enhance shareholder value including a thorough review of the oil and gas business. Given the current oil and gas pricing environment and with almost 1 million acres of oil and gas interest it's important that all options are thoroughly reviewed to ensure we maximize shareholder value. And the interim we’ve taken meaningful actions to reduce oil and gas operating costs and capital expenditures with an intensified emphasis on generating cash flow and earnings. In real-estate we’ll continue developing a best class business by leveraging our core competencies, investing with utmost discipline and generating the greatest value from every acre in our portfolio today and in the future. And I'll close by saying that given my involvement in the process, I’m confident that this body work is clearly focused on adopting strategies that will maximize long-term value that’s our commitment to shareholders. Once again I want to thank you for joining us on the call this morning as well as your interest in Forestar. Now I’d like to open up the call for questions.

Perhaps this one is for Chris, but free to chime in anyone. I wanted to talk about the repo and first of all was it frontend loaded and should we infer that despite the shares are now lower but you think that [16.67] you're buying well below net asset value?

Steve, I’ll comment and certainly Chris can chime in. I wouldn't say that it was frontend loaded. We were consistently purchasing for the length of the time that the widow as open in the fourth quarter and then the widow was closed. So I think the most important question is going forward what’s the plan and Steve I will tell you since we have engaged in the review of these strategic initiatives and I think it’s going to be important for this interim period of time to make sure that we maintain financial flexibility, but I will tell you in my opinion I thought those were good investments in the fourth quarter and certainly added shareholder value. Chris do you want comment? And Chris says he’s good.

So how long was the window open, because presumably it closed not faster than it normally would because of your engagement with your shareholders?

I think that given the announcement on December 8th that was probably the close of window.

And should we infer from your comments there that you might not be buying presently until you address the strategic review because you want to maintain that flexibility?

So what I’ll say that I think it’s prudent from the financial management perspective given the work it's ongoing relative to the strategic initiatives just to maintain financial flexibility and just since we’ve finish up that bodywork relative to capital investments as always. The stock repurchase will continue to be one of alternatives in our options.

And then switching gears a bit, you anticipated a question on the sale of some of your multifamily developments. Since 360 is 80% done, would it reasonable to assume that gets monetized in 2016 and maybe another property or two?

Steve, with what we see today relative to the progress in construction and lease up as well as move-ins, we would forecast that both 360 and Midtown and Dallas would both be sale candidates for the latter half of this year 2015.

But Eleven and Midtown are the ones that you identified as being probable for the second half?

No, it was 360 in Midtown.

Again two more questions and I’ll turn it over, if oil was $90 a barrel would be these adding all of the 8.1 million probable and possible to your proven reserves is that a way to think of it?

There would be some transition of probables and possibles into the proved category but Steve I wouldn’t 100% of that. It just the pipeline from probables and possibles to put up to PDPs, so it will migrate in there.

And then final question, can the tax losses on these oil and gas business be used to offset taxes on the real-estate business?

Steve, I am going to let Chris answer that question, but here again our taxes are calculated at the corporate level and so I think it may be difficult to make that connection. I think that’s fair Steve.

That’s what guys I was hoping, if it’s all in the family at the corporate level then -- I was just thinking they’re two completely different subsidiaries you might not be able to comingle the loss with gains elsewhere but sounds like you probably could?

With the accelerated depreciation deduction our investments our working interest as well so that pulls down our cash tax rate as well.

Our next question comes from Mark Weintraub with Buckingham Research. Please proceed.

Question for you on the oil and gas business. So you gave us the year-end proved reserves. Now, the same hand, though, you're choosing not to participate in some of the drilling activity. Does that -- as you don't participate in that drilling activity, would that have implications to what the reserves will be? Essentially, does your reserves total go down each time you don't participate in drilling activity?

Mark you’re correct in your comment, reserves are calculated based on your intent to participate in our future drilling, so if conditions would warrant not electing in or not participating then that would also be reflected in your reserve calculation. So if you have not intent you’re not -- company would not get credit for its reserves.

And so when you provided that note underneath where you say applying the $61 strip average oil price, does that factor in that you would potentially be choosing not to participate in several projects et cetera and so that the actual amount of probable reserves is lower as well as the price.

That’s true for proved, I wouldn’t say for probable, it is true for proved, Mark you are right.

And then how fast is the decline or what type of sensitivity, if the prices at 50 instead of the 61, can you give us sensitivity on where that number would go to for the PV-10.

From 61 to 50 Mark, is that what you are asking me?

Exactly.

Mark, if you look at the slide that Jim walked through on the oil and gas, based on SEC average prices for the year our PV-10 was 229 million. Using the strip price at year end which was $61 that PV-10 value will be 128 million so down about a $100 million versus the SEC average price.

So if you were to use and you may not have this handy or one that provided but if you were to use $50 instead of $61 closer to where the current strip price, can you give a sense as to where that PV-10 would be?

Mark, this is Jim. We can’t at this point, we didn’t calculate 50, we can calculate a lot of different numbers as you know is moving everyday it could be lower by mid-year, could be higher by end of the year. So we're just reluctant to calculate a lot of reserve estimates based on various pricing assumptions. As you know nobody has ever been right.

Just hoping to get a sense of sensitivity, clearly you can do 70 above just was hoping maybe to get a little sense just on that. Next chart I believe you show where couple of charts later you show where breakeven is under different scenarios. I was curious if we can get a few more scenarios. Shifting gears for a moment just to the real-estate side, first off, so the undeveloped land you are averaging 2,100, 2,200 per acre on those lands. Do you think that those sales were representative of your undeveloped acreage or were perhaps either better or not quite as good as average acreage, I know in the past you've tended to sell stuff that was further out, was that continuing to be the case or how would you characterize the land you’re selling.

Mark, the 2,200 is the combination of a couple of larger sales as well as some retail sales. So given the mix I would say the $2,200 is representative of common average range if you will of undeveloped land. With what’s left Mark, there is clearly some properties that are I think lend themselves to larger bulk sales and others to retail. So I’d say the mix in the sales in 2014 would be kind of representative of what’s left.

And then one last one I’m assuming in the 2015 lot sales guidance you’re assuming no bulk sales as a part of that is that there?

That’s correct. It’s very difficult to forecast bulk sales. If you look at that chart you can see that there have been some bulk sales over the past several years, very difficult to forecast that though.

So just to the -- it is possible there would be but you’re just not forecasting it given the lack of visibility on something like that?

That’s correct.

Our next question comes from Stephen O'Hara with Sidoti & Company. Please proceed.

I just had a question I guess first on Eleven, and where does that show up now and maybe what was the NOI or maybe what’s kind of fourth quarter NOI with Eleven, I assume Eleven is in that portfolio now if you can just talk about that a little bit.

We would expect an annual NOI out of Eleven in the range of about $3 million.

And is that, it’s just in the real-estate segment now?

Yes, that will be in the real estate segment and the commercial and income properties revenue and cost of sales line.

And it’s been obviously fully on balance sheet now.

And then just with the increase in EURs for the Bakken land, could you just talk about what that does to the maybe OpEx or the other costs in the oil and gas business and it sounded like most of the OpEx was going to down due to the headcount reduction and closing the office. So I’m just wondering what the impact of the increase in EURs is on expenses going forward, if anything?

Steve, I don’t think that there is any connection between increase EURs in operating expenses, obviously if there is greater production there is going to production calls in total would be up, but what I will say that I think it’s important relative to what we’re seeing already in 2015 with a few AFEs or proposals that have come in, its dramatic how fast the drilling and completion costs are coming down and we’re seeing this across the board relative to at lease operating expenses, drilling completion calls it’s moving down rapidly and that’s a good thing.

And just to go back to the EURs, does that impact depletion at all or anything like that? Because I guess a lot of these wells are beyond on the books at lower EURs, so your depletion rate, I guess would be higher than what it should be going forward per barrel. Does that make sense, or no?

Yes, you’re heading in the right direction. I’ll let Chris answer that for you.

Yes, Steve you’re absolutely right, with higher EURs we’re going to amortize the drilling and completion costs over a much larger reserve base which is going to reduce the DD&A cost on a per barrel basis, so in 2014, the depreciation and depletion in our oil and gas segment was just under $30 million as Jim said with EURs up over 30% year-over-year we'd expect that DD&A number to come down on a per barrel basis, so assuming the same level of production in 2015, our DD&A would be down to 20% to 30% next year.

And then just maybe lastly on the lot margin, if you could -- I assume the lot margin is up, that's great. I guess in terms of maybe a constant mix, I assume it's up as well. Is that fair kind of on a same-store sale basis? It's not a -- most of it is not an increase a change in mix or an improvement in mix. Correct?

That’s correct. Steve there will a bit of mix in it but its primarily same-store sales as I said in the comments. One of the things that we’ve really focused on given the difficultly and replacing these blocks, we want to make sure that we’re selling in a pace in a rate that we realized as much margin as we possibly can which has been a real focus and then it’s spot on with our strategy.

And then I apologize, one last one. In terms of the headcount reduction and the closing of the office, how long can you operate the oil and gas business in the state it's in with a reduced headcount?

Steve, I think that we are adequately staffed to manage this portfolio given our view of what the future looks like, I think its player based on the ramp up over the last couple of years that we’re growing that business and then we made a significant change from that direction. At the end of 2014, the strategy if you will, will be much more passive is a word that I would use and I think if we can do a much better job at doing more with less.

Our next question comes from Robert Howell with Prospective Partners. Please proceed sir.

Quickly on the last question, you talked about the DD&A going down 30% or so next year. Is that just on a GAAP basis, or does that kind of impact taxes as well so you won't have as big a deduction for taxes?

Can you repeat your question again?

You were talking about the reduction and the depreciation depletion, that that was going down. I just was wondering is that just a GAAP reduction, or is that also impact your tax books as well?

No that’s a GAAP reduction, amortizing those upfront costs associated with our working interest investments over a larger resource base, will reduce DD&A and obviously improve earnings, but from a working interest perspective we accelerate about 80% of that investment for DD&A purposes for taxes?

And then with the slowdown in drilling, how does that impact -- or how much time do you have for getting land to be held by production? Do you have a pretty wide window still, or does the slowdown in drilling mean that there's risk of not being able to hold onto some of your land or acreage?

Yes, Rob, clearly you've got to manage that and we take that in consideration with the various proposals that we get. I think we ended 2014 with about 60% of the Bakken acreage held by production, so the other 40% of that acreage that is not held by production; there are not any immediate dates that are coming up in 2015 that we would lose out. What we’ve done in the past is that when we see a parcel that may be at risk from lease termination of region in lease we put packages together and so to monetize those. So there is a mitigation plan if you will for any leases that potentially may expire.

And last, I know you guys do minimal hedging with your production, but do you have any forward sales at all going into this year from -- at higher prices?

No, we don’t.

Our next question comes from David Spier with Nitor Capital. Please proceed.

Could you talk about what’s driving your strategies here in terms of multifamily? What’s the rationale, I guess behind your strategy?

Yes. David, I guess back in 2010 it was obvious to us when we were evaluating the housing recovery that multifamily flash rental was going to be a significant part of the housing recovery then and particularly now. So we were by the fact because we’re in land development we’ve been involved in multifamily and have believed that, it’s a great opportunity and just a natural extension, from our single-family business. So we capitalized on that. It didn’t take much of ramp up relative to staff to be able to establish to position the platform that we have today. The pipeline that's been developed today I think it is good start and it’s healthy but we’ve managed it in such way that it works within a C Corp, and also given the capital constraints that we have.

I guess to take the question or more, I guess, the issue, the strategy seems to be continuing down the path of more or less developing and then flipping these properties upon completion, but then, after all, you’re forced to then do it all over again, going to develop a new property and then flip it. I think it was mentioned in your presentation you are looking to sell Midtown this year, the property that you own 100% of. And to us at least, it couldn’t be more clear that if you really want to maximize and increase long-term shareholder value, you’d be far better off holding onto these properties, building up a substantial portfolio of income-generating properties. This way, you would be able to grow annual and operating income. You would also have, like you mentioned, minimal much lower capital requirements overall, where you would be able to have a little bit more flexibility in terms of the overall company. But we seem to be continuing with the strategy where we constantly have to recycle capital, which I would say only adds more risk in inconsistency earnings. So it’s kind of hard. So I understand the move into multifamily, but it’s kind of hard -- in our opinion the strategy of developing and flipping rather than building a real pipeline of solid portfolio where we see, on an annual basis, real NOI growth and asset growth.

David, your point is well taken and as it relates to the strategic review for Forestar that is certainly one of the alternatives that we’re exploring. But keep in mind when you said throw off the income typically these new multifamily developments due to GAAP accounting date you don’t throw off much GAAP income. So keep that in mind.

Yes, I forget about accountants -- cash flow and earnings. I’m not -- as investors in the company, wherever the accounting may be, okay, that’s understandable. But in terms of building value and generating cash flow, you get whether it’s GAAP or whatever it may be, it doesn’t really make a difference at the end of the day.

Yes, David, I wouldn’t argue with you. If you build up enough of a portfolio and have that direction then you’ve got to make some -- you’ve got to be willing to make some structural decisions. But I’ll this relative to the reinvestment risk I wouldn't argue that -- but keep in mind you said why'd you get in the business and the strategy where we are today. If you look at the presentation today and the previous presentations that we’ve made just prove the development. We create quite a bit of both earnings as well as gains and profits very impressive. We have been successful to date of being able to reinvest and find new parcels and new locations and sites.

I understand. I commend you for that, and you definitely had a -- it’s been impressive the results you have had in terms of building it. But I would say this. If you look at the stock price and where the stock is, I would say our clear rationale is any investor analyzing, looking at this company sees you are paying close to 30 million in annual interest expense. And the question then comes, what happens to our lot sales and our ability to monetize these developments in the event of a cyclical slowdown or an economic slowdown of growth. What’s going to happen then? On the other hand, if we -- this wouldn’t be a major concern to an investor if we had a portfolio of operating assets with recurring cash flow that could fall back on and handle this -- handle that interest. At the same time, you’ll be able to, because of the minimal capital requirements you have the financial flexibility to pursue activities here and there and opportunities that come on horizon. So I would just leave it at that, if you are a company, in our opinion you are supposed to be increasing shareholder value and building something for the future. And it doesn't -- building and flipping, you're not really building anything at the end of the day, but adding to inconsistent earnings. Yes, over time, it might grow, but they are inconsistent and require a lot of capital. And I can really only imagine what this company would be if income generating assets were maintained. And I think you look at a company like Consolidated-Tomoka -- if you take a look at that company and take a page out of their playbook, they're trading at a substantial premium to book value. And I could only imagine if we took a page out of their playbook and went down that direction that we would be hopefully one day trading at the same type of level and getting the value that we deserve more or less. So I appreciate and thank you very much.

That was out last question for the morning. Once again I want to thank everybody for joining us today on our earnings conference call and I hope that you have a great day.