Forestar Group Inc. (FOR) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Forestar Group Q1 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Anna Torma. Please go ahead.

Thanks and good morning. I would like to welcome each of you who have joined us by conference call or web cast this morning to discuss an update on Forestar's previously announced key initiatives and first quarter 2016 results. I'm Anna Torma, Senior Vice President of Corporate Affairs. Joining me on the call today is Phil Weber, Chief Executive Officer; and Chuck Jehl, Chief Financial Officer. This call is being web cast, and copies of the earnings release and presentation slides are now available on the Investor Relations section of our website at forestargroup.com. Before we get started, let me remind you to please review the warning statements in our press release and our slides as we will make forward-looking statements during the presentation. Now, let me turn the call over to Phil to provide an update on our key initiatives.

Good morning and thank you for joining us this morning. As reported, Forestar has made significant additional progress on our key initiatives to reduce costs, exit non-core assets and simplify the company. Let me point out a few highlights this morning; so starting on slide 3 in the deck; in oil and gas during the first quarter of 2016, we sold our remaining Kansas and Nebraska oil and gas properties for $21 million and a portion of our Bakken/Three Forks assets for $9.5 million. Additionally, on May 6th, we closed the sale of the remaining Bakken/Three Forks assets for $50 million. These combined sales generated over $75 million in net proceeds to Forestar and will reduce annual operating expenses and corporate G&A by an estimated $2.5 million. Shifting over to the Radisson Hotel, we closed that sale on May 4, which generated pre-tax net proceeds after debt repayment to Forestar of $112 million. In multifamily, we closed on the sale of our venture interest in Denver 360° at the end of the first quarter. The buyer was our existing venture partner. Also during the quarter, we closed on sale of our Music Row multifamily site Nashville for $15 million. These two multifamily transactions generated combined net proceeds to Forestar of $29.1 million. During the second quarter, we also sold Eleven, our multifamily community in downtown Austin for just over $60 million; $60.2 million. We repaid the debt of $23.9 million and generated pre-tax proceeds of approximately $35 million. We also executed an agreement for the sale of our Dillon site in Charlotte. We are expecting the closing on that this month. Downtown Edge or Pressler, we have also referred to it as Pressler before, is the site we own in Austin is presently being marketed. Last on multifamily, we are developing marketing plans with our partners on the remaining three venture assets, Acklen in Nashville; Elan 99 in Houston; and HiLine in Littleton. Let me shift now to undeveloped land; Forestar has commenced to process to opportunistically exit its remaining 87,000 acres of timberland and undeveloped land. We sold nearly 2,000 acres in the first quarter of 2016. We have retained LandVest to advise us on the sale process on approximately 72,000 acres located primarily in Georgia. The initial bids for this are due in July. We will provide more color, as we make progress on exiting this timberland portfolio. Separately, we are opportunistically selling the remaining roughly 15,000 acres of timberland in Texas. So the easy way to think about it is, there is roughly 72,000 acres in Georgia and 15,000 acres in Texas, and the Texas assets were selling separately from the Georgia property, using intermediaries in Texas, versus LandVest. So to conclude on asset sales, we have made lots of solid progress on exiting the non-core assets, which is helping to reduce costs and simplify the company. Let me shift now to cost reductions, which is slide 4 on your deck; as we outlined on our last call, we have taken actions to eliminate over $30 million in SG&A costs in 2016 as compared to 2015 actual spending. With the exit of the non-core assets scheduled for this year, we estimate full year 2016 SG&A to be approximately $56 million. In the first quarter, we reduced SG&A by 24% compared with Q1 last year. We continue to target an annualized run-rate of $39 million or less, once all of the previously announced initiatives are fully implemented. We remain focused on our cost reduction initiatives, and will continue to work to further cut costs. As a good example, as we put in the release, in furtherance of the company's initiatives to reduce costs, the board took action yesterday to reduce its size from nine to 7 members, and that will be effective September 1 of this year. So lots of progress in asset sales, lots of progress in reducing costs. With that, let me turn it over to Chuck, who will review the first quarter 2016 results.

Thank you, Phil. I would also like to welcome everyone joining us this morning. I will provide a review of our first quarter 2016 financial results, beginning on slide 5. Forestar reported a net loss of $4.4 million or $0.13 per share in first quarter 2016, compared with a net loss of approximately $8.2 million or $0.24 per share in the first quarter of 2015. Now let's look at an overview of the segment results for the first quarter of 2016; our real estate segment earnings were $20.2 million in the first quarter of 2016, compared with $9.1 million in the first quarter of 2015. I will provide additional details on our real estate segment results in a moment on the next slide. Let me turn to our oil and gas segment; oil and gas results in first quarter 2016 were a loss of $12.4 million compared with a loss of $2.9 million in first quarter 2015. First quarter 2016 includes a net loss of approximately $11 million related to the sale of nearly $191,000 net leasehold acres and 185 gross, 65 net to our interest, oil and gas wells, primarily located in Nebraska, Kansas, Oklahoma and in North Dakota, as a result of our initiative to exit non-core oil and gas working interest assets. First quarter 2015 segment results include $2.8 million in restructuring costs. As Phil mentioned earlier, the combined Bakken/Three Forks and Kansas-Nebraska transactions generated meaningful cash proceeds to us and eliminate future capital allocation to non-core oil and gas assets. These transactions substantially complete our exit of non-core oil and gas assets and eliminate working interest exposure to fluctuations in oil and gas prices. Now let me turn to our natural resource segment; our results were a loss of $600,000 in first quarter 2016 compared with a loss of about $400,000 in first quarter 2015. We have limited harvest activity in the first quarter 2016 as a result of our initiatives to explore the opportunistic exit of our timberland and undeveloped land as Phil mentioned. Now let's take a closer look at real estate activity in greater detail for the quarter. First quarter 2016, this is through slide 6; first quarter 2016 real estate segment earnings were $20.2 million compared with $9.1 million first quarter 2015. We sold our 360 multifamily venture interest and also received a development fee for the project for a total of $15.1 million, which generated $10.8 million in earnings and we sold our Music Row multifamily site in Nashville for $15 million, generating a gain of about $4 million. In addition, we sold 1,972 acres of undeveloped land for about 2,890 per acre in the quarter. We sold 284 residential lots, relatively flat with year ago levels. Average lot gross profit was approximately $25,300 per lot in first quarter 2016, down from prior year levels, principally due to mix sold in the quarter. In addition, we sold eight commercial track acres for over 331,000 per acre. Touching on OpEx results, one of our initiatives to reduce cost across the organization; first quarter 2016 OpEx was higher than first quarter 2015 in our real estate segment, principally due to $1.4 million in onetime severance costs in the quarter, as a result of this initiative. Now finally, I will make a few comments about market conditions, and open the call up for some questions. On slide 7; we continue to see stable market conditions throughout Texas and our other key markets. Job growth continues to outpace the national average in most Texas markets, as well as Atlanta, Charlotte, and Nashville. Houston continues to see slower job growth than that of the national average. A combination of low housing inventories and solid job growth should continue to drive steady demand in our communities. We ended first quarter 2016 with nearly 1,400 lots in backlog. We are at or above target in all of our markets, to meet our full year planned lot sales, between 1,600 and 1,800 lots for full year 2016. So we remain optimistic about demand for home ownership in all of our markets. Thank you for joining us this morning for your [indiscernible] our call and your interest in Forestar, and I would like to open it up for questions.

[Operator Instructions]. And our first question comes from Mark Weintraub of Buckingham Research. Your line is now open.

Thank you. Congrats on all the progress you are making. I am just trying to think through how/when all the assets have been sold, etcetera, and we look at the underlying business remaining, and we match that up against the $39 million in targeted annual SG&A costs. How that all plays out? And just -- here is some simple math, and maybe if you could just fill in maybe stuff that I am missing; if we were just to assume 2,000 in lot sales just as a starting and 30,000 or 35,000 in gross profit per lot. And then we have got the SG&A going against that and maybe some interest expense; are there any other kind of big variables that play into what the much more simplified company is going to look like that you'd really highlight?

Hey Mark, this is Chuck. I'd point you to slide 4 on our chart that we show the progress from 2015 SG&A actual spend and then our run rate for 2016 and then the target. I will tell you, the $39 million again is a target, and we are working very hard in the company to further reduce costs to the size of the company that we will be, once we sell all of the non-core asset. So I wouldn't stop at that number. As Phil said in his comments, it'd be $39 million or less, and is really dependent on executing these asset sales and the timing of those, because we are not done. So we continue to stay very focused on that and we will continue to reduce that, where we can, as we exit assets.

Okay. And maybe just a little clarity too; on that project level expenses that are embedded in there, looks like $10 million or so; what exactly is that?

Mark, that's project and property taxes for the projects, if there is homeowner association dues; anything to support and carry the real estate asset on the balance sheet as we own it. So community maintenance, just a lot of different things.

And that $0.30, $0.35 gross profit per lot, which kind of hits -- I think a number that historically have been thrown out there as representative of potential, obviously higher than what was booked in this quarter. Is that in your judgment still, a reasonable normalized level of profitability on your lot sale?

This is Phil. I am going to ask Michael Quinley, President of our Community Development Group, to answer that.

Hey Mark. Good morning. The decrease in the margins are really, primarily due to mix. I got to remind you the two points; first, in 2015, we saw a higher margin than we did in previous years, because we had a maturing lot mix and we had higher lot prices. For example in Houston alone, we had 20 plus more lot sales, Q1 2016 over Q1 2015. However, many of those sales in 2015 were at a much higher price. They were kind of our second and third kind of move-up product. That division is yielding sales prices over $100,000 per lot. Now we sold out of that product and now we are replacing that product, and the product we are replacing it with, is more of your moderate priced homes and is the first and second move-up, which for Houston is exactly where you'd want to be, in today's market. So we expect to see overall margins, in line with our historical rates.

Great. Thank you.

And that rate -- and Mark, you're right. That rate will be somewhere around 30% to 35% of your lot sales.

Thank you.

Thank you. And our next question comes from Steve Chercover of Davidson. Your line is now open.

Thank you and good morning. First quick question, now that you have exited the Bakken and most of the kind of operating environments in oil and gas, will you still be collecting royalties from your original Texas land?

Yeah hey Steve, its Chuck. Good morning. Yes, we will -- we basically, substantially exited, as I said, the working interest assets. But our legacy mineral assets in both Texas and Louisiana, where we have over 530 producing wells or active wells, we will continue to have that revenue stream. With no -- excuse me, I am sorry.

Sorry, I didn't mean to interrupt, go ahead please.

What I was going to say, in recall, there is no cost participation there in drilling, obviously, in future wells.

Which is great, you get checks. But so will it remain a segment -- I know it will vary depending on price of oil, can you tell us what the price will be or what the revenue will be?

You know Mark, the answer to -- whether it will be a segment or not. We evaluate that on a quarterly and annual basis -- I am sorry Steve. But on the revenue, it's in the $5 million to $6 million range of cash flow streams and are historically, as of last year, on the minerals platform.

Great. Thanks. And then switching gears to water; is there any update you can provide on your efforts to monetize the water?

Yeah, this is Phil. First of all, we have significantly reduced all of the costs that we are spending on developing the water assets. We have pretty much suspended, pretty much what we have been doing there. We continue to have some discussions with potential buyers of produced water. We also have had some interest in potentially partnering with us in the Lake County project that we have, the permits on; and then we have some interest in our Houston Liberty County project that we have talked about before. But I wouldn't want to be definitive on anything there. There are just kind of ongoing discussions, and with the rain that we have had, we have had record rainfall here. Most of the surface water reservoirs in the state are 100% full. So it has really taken some of the pressure off of looking at groundwater as a conjunctive supplement to surface water.

Yeah. I was going to be flippant, but I decided not to make any noise or comments.

You can.

And then, can you just talk about strategy of retiring your debt? When all of the sales that are already completed thus far in Q2 or pending, could we think of you guys being net debt free?

I would say, in terms of cash management, liability management, we are working with the board on that. And as we have more to say about that, we will talk about it.

Okay, thanks. That's all I had.

Thank you. And our next question comes from Anthony Hammill of Broadview Capital. Your line is now open.

Good morning and congratulations on the divestitures and all the work you have done as a board or management team. Couple of quick housekeeping questions, and then more bigger picture question. What's the approximate -- and I know [indiscernible], but the approximate book value of the oil and gas business now, on the asset side?

Yeah Anthony. We filed our 10-Q yesterday. So basically, on our working interest assets, remaining about $42 million at Q1 end.

Okay. And the 360, what was that on the books for, the interest there?

Our interest -- $3 million to $3.5 million; so we had about a $9.6 million gain there, Anthony, plus we received a development fee for completion of construction growth, [indiscernible] $10.8 million in earnings.

Okay, yeah. No I was -- I thought it was $3.5 million, so I was shocked at the --

Yeah, that's right.

I guess it was -- so, obviously nice work on that one. And then Dillon is now under contract; would that also be obviously not a -- you may not be able to give us some order of magnitude, but will that also be a profitable sale, based on what it's on the books for?

Yes. We believe so. Yes it will be.

And then is there anything on, in terms of identifying further non-core assets that may potentially be for sale. Is there anything you can do on Cibolo, whether it's the SPID or the interest in the JW Marriott to monetize there, or is that something that's out of your hands?

Anthony, I want to first clear up. We don't have an interest in the JW Marriott. We have got economic development agreements that we have interest in from the Cibolo master plan in the hotel from years ago. What was your original question on Cibolo, on the --

There is a cash flow stream that comes off of the -- off the resort to you. I know it's not an interest, but there is a cash flow stream based on the resort, and is there any way to monetize that, separate from --

We were always looking at opportunities to potentially bond -- they have a warrant tax stream on the district. But keep in mind, 2014, we did bond the hotel sale stream and it had significant cash flows in, in 2014 of about $46 million to the company. So those bonds are in place and they are servicing their debt, and we get residual cash flows from that going forward.

Right. Okay. With all the sales that have closed and are soon to close; this is a bit follow-on to the last question about, whether you could be -- have essentially no net debt. And you mentioned that you are going to get back in due course, about uses of cash. What can you tell us about the process there to determine when will be the right time to return cash to shareholders, and in what amount and whether it’s a buyback or special dividend, and if it’s a buyback, how that buyback will be? Is there a committee setup specifically to do that, is there a set board meeting, is there anything you can give us in terms of shedding light on the process and potential timing?

Anthony, thank you. This is Phil; I'd give you the same answer. We are working with the board on that, and we will just leave it at that.

Okay. But the board is engaged and also the departure of two board members is not going to delay that process in any way?

No. Our board is very engaged. The management team and the board are working very closely, together. We have seven outstanding board members. The two board members that are retiring also, are not retiring till September, so they will be involved in the August board meeting, and we are working very closely with the board on that.

Very good. Okay, well I appreciate the work and look forward to an announcement on the return of cash to shareholders. Thank you.

Thanks Anthony.

Thank you. And our next question comes from David Spier of Nitor Capital. Your line is now open.

Hey guys, good morning.

Good morning David.

Good morning.

I know you had mentioned that you will be accepting bids, I believe in July, for the [indiscernible]. Any idea of when you would expect that to close, or would you expect the deal to get done before the end of the year?

Yeah. There is a chance it could get done by the end of the year. So I would say you know, late fourth quarter, it might spillover into first quarter. And one of the keys there is, as we have said, we are opportunistically exiting and so we are going to be very-very prudent of how we go through the process and make sure that we are getting a very attractive price for those very valuable assets.

Got it. And how much of the acreage is HBU, higher and better use acreage and how much is really more standard timber?

Hey David, its Chuck. I will point you to our 10-Q. We actually have a good disclosure in there, that's got a table on the timberland and undeveloped land. So in the HBU category of a little under 20,000 acres in Georgia, we also have a category entitled undeveloped land, it's about 5,000 acres and then the balance is Timberland in Alabama, Georgia and Texas.

Got it. Understood. And then I'd assume that that sale amount will come in at substantial increase over the book. So have you guys thought about, and is the sale process around, more or less, the most tax efficient way to monetize the asset?

You bet. I mean, we are constantly thinking about the most efficient ways on the asset sales to be most tax efficient as possible.

Okay. That's all from me guys. Keep it up and looking forward to more to come. All the best.

Thank you, David.

David, thank you.

Thank you. And our next question comes from Mark Weintraub of Buckingham Research. Your line is now open.

Thank you. And maybe a bit of a follow-up to the last question in some regards. Given the sales that have been completed, including the ones in the second quarter already; can you give us any sense as what cash tax implications there would be, when you net it out all together?

You know, Mark, as kind of a follow-on to David, we are trying to be as tax efficient as possible on the asset proceeds. We have got $37 million in NOLs that carried forward from 2015 and about $3.5 million in AMT tax credit. So we will utilize that and then any other opportunities and strategies that we may have, as we exit other assets.

And did you get any tax benefits from the sale of the oil and gas business this year?

No Mark. I think remember on the last call, we had a discussion about. The $80 million roughly in Kansas/Nebraska and the Bakken that we have sold, year-to-date, those assets approximate -- tax and book approximate each other. So very little cash/tax leakage or benefit there at all on the oil and gas. We have taken those deductions, as you recall, the intangible drilling costs in the year drilled, and we have not drilled any wells, are anticipated in some time. So the benefit of those deductions have been taken.

Okay. Thank you.

Thank you.

Thank you. And I am showing no further questions at this time. I'd like to turn the conference back over for any closing remarks.

Okay. This is Phil. Thank you very much for joining us this morning. As we noted in the release and our earnings statement, we are making lot of progress. We continue to work hard, we are very pleased with the sales prices on the Radisson, Kansas/Nebraska, the Bakken, and them multifamily communities that we have sold. Several exceeded our NAV range and all were within our NAV range, and we are going to continue to use our NAV to guide us both on our asset sales and our future capital allocations, as we go forward. So thanks for your time today, and we look forward to making progress and continuing to work hard. Thanks a lot.

Have a great day. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day everyone.