Forestar Group Inc. (FOR) Q3 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to Forestar's Third Quarter 26 Earnings Conference Call. At this time, participants have been after the presentation. It is now my pleasure to turn the floor over to your host, Chris Hibbetts, vice president of finance and investor relations for Forestar.

Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar's third quarter results. Before we get started, I want to remind everyone that today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 2000. Although Forestar believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Forestar. On the date of this conference call, and do not undertake any obligation to update or revise any forward-looking statements publicly. Additional information about factors that could lead to material changes in performance is contained in Forestar's annual report on Form 10-K And its most recent quarterly report on Form 10-Q. Both of which are filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.forestar.com. We plan to file our 10 Q later this week. After this call, we will post an updated investor presentation on our Investor Relations site under Events and Presentations for your reference. Now I will turn the call over to Andy Oxley, our President and CEO.

Thanks, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our chief Financial Officer; and Mark Stephen Walker, our Chief Operating Officer. The Forestar team achieved solid third quarter results with revenues of $407 million up 4% from the prior year quarter, on 3.66 thousand lots sold. Earnings per diluted share increased 8% to $0.70 and pretax income increased 12% to $48.7 million. Book value per share increased 10% from a year ago to $36.40 and our contracted backlog remains strong with visibility towards $2.3 billion of future revenue. Ongoing affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flex flexibility, and we ended the quarter with approximately $1.1 billion of liquidity. We also reached a significant milestone this quarter, delivering our 100 thousandth lot since D.R. Horton made its transformative investment in Forestar in 2017. Forestar has grown to a proven scalable platform and we could not be prouder of what our teams have built to get us here. Looking ahead, we remain focused on turning our land and lot inventory efficiently, maximizing returns, and consolidating market share. With a strong balance sheet operating expertise, and a diverse national platform, Forestar is well positioned to navigate market conditions and extend its leadership position in the highly fragmented lot development industry. Now, we will now discuss our third quarter financial results in more detail. Jim?

Thank you, Andy. In the third quarter, net income attributable to Forestar increased 9% to $35.9 million or $0.70 per diluted share. Compared to $32.9 million or $0.65 per diluted share in the prior year quarter. Our pretax income increased 12% to 48.7 million compared to $43.6 million in the third quarter of last year, And our pretax profit margin increased 80 basis points to 12.1% from 11.2% in the prior year quarter. Revenues for the third quarter increased 4% to $407 million compared to $391 million in prior year quarter. Mark?

We sold 3.66 thousand lots in the quarter. With an average sales price of $109 thousand. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our delivery. Our gross profit margin for the quarter was 20.7% compared to 20.4% for the same quarter last year. Chris?

In the third quarter, SG&A expense increased 2% to $38.3 million compared to $37.4 million in the prior year quarter. As a percentage of revenues, SG&A was 9.4%, down from 9.6% in the prior year quarter. Our headcount declined 9% from a year ago. We remain focused on efficiently managing SG&A while maintaining strong teams across our national footprint to support future growth. We expect our headcount to remain relatively flat for the remainder of the year. Jim?

D.R. Horton is our largest and most important customer. 14 percent of the homes D.R. Horton started in the past 12 months were on a Forestar developed lot. With a mutually stated goal of 1 out of every 3 homes D.R. Horton sells to be on a lot developed by Forestar. We have significant opportunity to grow our business with D.R. Horton. We also continue to expand our relationships with other homebuilders. Selling 289 lots or 8% of our third quarter deliveries to 12 other customers this quarter. Mark?

Our total lot position at June 30 was 91.7 thousand lots. Of which 62.2000 or 68% were owned and 29.5 thousand or 32% were controlled through purchase contracts. 9.6 thousand of our own lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a 3 to 4 year supply of land and lots and manage development phases, deliver finished lots at a pace that matches demand. At quarter end, 23.5 thousand or 38% of our own lots were under contract to sell. $202 million of hard earnest money deposits secured these contracts. Which are expected to generate approximately $2.3 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in a highly fragmented lot development industry. Another 31% of our own lots are subject to the right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

Forestar's underwriting criteria for new development remains unchanged at a minimum 15% pre tax return on average inventory and a return of our initial cash investment within 36 months. During the third quarter, we invested $312 million in land and land development. Roughly 80% of our investment was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year, to more efficiently manage our inventory, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will enable us to return to strong volume growth in future periods. We still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 26 subject to market conditions. Jim?

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with approximately $1.1 billion of liquidity, including an unrestricted cash balance of $395 million and $670 million of available capacity on our undrawn revolving credit facility. Total debt at June 30 was $794 million with no senior note maturities in the next 12 months. And our net debt to capital ratio was 17.7%. We ended the quarter with $1.9 billion of stockholders' equity, and our book value per share increased 10% from a year ago to $36.40. Forestar's capital structure is 1 of our biggest competitive advantages. And it sets us apart from other land developers. Project level land acquisition and development loans have become less available and more expensive in recent years. Impacting most of our competitors who generally rely on this type of financing. These loans are typically more restrictive, have floating rates, and create administrative complexity. Especially in a volatile rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks.

Thanks, Jim. The Forestar team delivered solid results in the third quarter including increased revenues and profits while further strengthening our balance sheet. As outlined in our press release, we are maintaining our fiscal 26 lot delivery guidance of 14 thousand to 14.5 thousand lots and our revenue guidance of 1.6 billion to $1.7 billion. Our teams have a proven track record of adjusting quickly to changes in market conditions. We closely monitor each of our markets and balance the pace and price of lot sales to maximize returns across our projects. With more than 200 active projects across our broad national footprint, we have flexibility to allocate capital strategically based on local demand and market dynamics. Although home affordability constraints and cautious consumer sentiment are expected to remain near term headwinds for home demand, we are confident in the long term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. Consistent execution of our strategic and operational plans combined with constrained supply of finished lots across many of our markets positions us well for further success. With a clear strategy, an experienced team and strong operational and financial foundation we are optimistic about Forestar's future. Jenny, at this time, we will open the line for questions.

Thank you. The floor is now open for questions. If you have any questions, please press 1 on your phone keypad now. We ask that while you are posing your question, you please pick up your handset if you are listening on a speaker phone to provide optimum sound quality. Press star 1, if you would like to ask a question. Please wait a moment whilst we poll for the questions. Our first question is coming from Ryan Gilbert of BTIG. Ryan, your line is live.

Hi. Thanks. Good morning, everyone. Was hoping you could give us an update on the competition that you are seeing in the land market from other land developers and land bankers as well. Horton talked to maybe a slower than expected home buyer market. In the quarter, and I am wondering if that translated into the land market as well.

Land market's been relatively stable. Have not seen much change in land price. We have seen a little bit of improvement on being able to negotiate terms. For example, getting land on takedowns, getting through full entitlement and permitting. So we are able to focus on shovel ready deals. Overall, I would say we would see a somewhat less development activity across the board in quite a few markets. But most markets are still slightly undersupplied. So we think that gives us opportunity for future growth.

Got it. Very slightly undersupplied from a finished lot perspective. that is correct. Okay. Got it. I appreciate any directional thoughts on 2027. Given the decline in your controlled lot count. Do you think that the land position you in a position to grow market share in 2027?

Yes. Our own lot supply, we want to target that to be around 3 to 4 months of supply. Today-- Sure. Barry. Year supply. 3 to 4 year supply. Today, it is a little bit over just north of 4, so we feel good about our own lot supply. We have the finished lots on the ground. This year to execute. Moving into next year. In terms of consolidating market share, we feel really good about our opportunity to grow our market share, just within D.R. Horton but with other builders. And we have a very robust pipeline of future projects, so we think we can expand in the Horton footprint as well as with some third parties.

Great. Then any change in the guess, the M&A pipeline or opportunities for growth via M&A? I am just kind of looking at the cash balance building over the course of the year.

I think there are opportunities. We continue to see opportunities. So that is part of the reason we, we want to have strong liquidity is to be able to take advantage of opportunities when they arise.

Okay. Great. Thank you.

Thank you very much. Just a reminder there, you can still join the queue by pressing star 1 on your phone keypad. Our next question is coming from Trevor Allinson of Wolfe Research. Trevor, your line is live.

Good morning. Thank you for taking my questions. At times in the past, when the market's been weaker, you guys have used that as an opportunity to pick up headcount to try to help grow your share. I think here recently, including in the prepared remarks, you continue to talk about keeping your headcount flat. So I guess what I would ask what is different this time with weaker conditions? Why are you not being more aggressive to pick up headcount like you have in past periods?

So we had pretty significant head count growth in 2024 in the first half of 25. We intentionally moderated that in the second half of 25 and have been relatively flat slightly down this year. We will see an increase in headcount as we go into 2027. As we develop out more land capabilities, particularly out West.

Okay. Okay. Got you. Makes sense. Second, then on cycle times, can you just update us on how those are trending, maybe where those stand versus a year ago? Or what would you consider a normalized cycle time for you guys? And then historically, the municipalities have been frequently cited as the biggest bottleneck. Are you seeing any relief there?

Okay. I will talk about cycle times first. It really comes back to a couple of things. Contractor availability continues to free up. Not just free up but also we are seeing what we would say are A rated contractors that we would be able to utilize We do manage our developments and phases. Cycle times over the past trailing, let's say, 36 months have come down close to 6 months. Settled in around 12 months. We are currently operating in the 12-month cycle time. We do think there is further opportunities for efficiencies to reduce our cycle times and our cost. You hit the nail on the head. I think basically, are complete to close in terms of governing jurisdictions. that is been our bottleneck to reduce our cycle times further. But I do believe there is opportunities to reduce our cycle times as we go into the future.

Okay. Great. Definitely encouraging. And maybe 1 more if I can. Gross margins in the quarter, were at the lower end of your 21% to 23% historical range? I know there is always mix impacts. We have also seen diesel costs come up here. That said, were there any impacts in the quarter from diesel as well? Or is that primarily a mix impact?

Not really. it is primarily it is primarily mix and just the environment, just a slower absorption environment. As we manage price and pace on a project by project basis, our margins have been at the lower end of our historic range over the last 3 or 4 years.

Okay. Makes sense. Thank you for all the color, and good luck moving forward.

Thank you very much. And our next question is coming from Ryan Gilbert of BTIG. Ryan, your line is live.

Thanks. Just a quick follow-up. For me. I think Horton mentioned some relief on horizontal construction costs on the call, and I am wondering if that is something that you are seeing as well. And to the extent you are seeing some cost relief when you would expect that to flow through the income statement.

Our costs have stabilized, I would tell you, over the past 12 months. I mean, we are seeing some reductions in some categories and we are seeing some increases in others, but I would say relative to direct costs, they are pretty stable. We have not seen a big decrease in cost.

Okay. Got it. Thanks, guys.

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to Andy for any closing comments.

Thank you, Jenny, and thank you to everyone on the Forestar team for your dedication and commitment. Let's stay focused, flexible, and opportunistic as we continue to strengthen our market position. We appreciate everyone's time on the call today. We look forward to speaking with you again to share our fourth quarter and full year results on Thursday, October 29.

Thank you very much. This does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.