Good afternoon. And welcome to Forestar's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal participation instructions. Please note, this conference is being recorded. I will now turn the conference over to Katie Smith, Director of Finance and Investor Relations for Forestar.

Thank you, John. Good afternoon. And welcome to the call to discuss Forestar's first quarter results. Thank you for joining us. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. 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 the conference call and we 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 or will be filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.forestar.com, and we plan to file our 10-Q tomorrow. After this call, we will post an updated investor presentation to 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, Katie. Good afternoon, everyone. I’m joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. Before we discuss this quarter's results, I would like to take a moment to introduce myself since this is my first quarterly public conference call. I joined Forestar at the beginning of the calendar year, transitioning from my prior tenure at D.R. Horton. While there, I served in numerous roles, the most recent being Senior Vice President of Business Development. In addition to being actively involved in D.R. Horton's relationships in Strategic Land Banking and Development, I oversaw opening new markets and M&A activity, including being involved in the D.R. Horton investment in Forestar. I’m excited to have joined the Forestar team and the opportunity to serve in my new role as CEO. I have the utmost respect and appreciation for what Dan Bartok, the company's previous CEO, and the Forestar team accomplished with Dan at the helm. We thank him for his many contributions to Forestar during his six years of service. Forestar's strong balance sheet, healthy pretax margins, and robust land portfolio positions us well for future growth. With over 25 years of experience in land acquisition, development, and homebuilding, I'm confident we will continue to expand Forestar's platform and operations to further strengthen our position as a leading lot developer. We remain focused on investing for future growth, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Now on to our results. We are pleased with our first quarter results highlighted by net income increasing 84% to $38.2 million or $0.76 per diluted share. Our pretax income increased 84% to $51.2 million, and our pretax profit margin improved 380 basis points to 16.7%. Our consolidated revenues increased 41% to $305.9 million, while lots sold increased 39% to 3,150 lots. These results reflected significant improvement in demand for finished lots compared to the first fiscal quarter of 2023 when builders were reducing starts in anticipation of lower demand for new homes after mortgage interest rates rose rapidly. Jim will now discuss our first quarter's financial results in more detail.

Thank you, Andy. In the first quarter, net income increased 84% to $38.2 million or $0.76 per diluted share compared to $20.8 million or $0.42 per diluted share in the prior year quarter. Consolidated revenues for the quarter increased 41% to $305.9 million compared to $216.7 million in the prior year quarter. Lots sold in our first fiscal quarter increased 39% to 3,150 lots with an average sales price of $96,400. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Our pretax income increased 84% to $51.2 million compared to $27.9 million in the first quarter of last year. And our pretax profit margin this quarter was 16.7% compared to 12.9% in the prior year quarter. Our gross profit margin was 23.8%, up 280 basis points sequentially and up 190 basis points from a year ago. Gross margin was positively impacted by the closeout of a legacy community during the quarter. Excluding the legacy community lot sales, our first quarter gross profit margin would have been 22.8%. In the first quarter, SG&A expense was $28 million. As a percentage of revenue, SG&A expense improved 140 basis points to 9.2% from 10.6% in the prior year quarter. We will continue to focus on controlling our SG&A costs while ensuring that our infrastructure supports our business.

As for current market conditions, the supply of new and existing homes at affordable price points is still limited, and demographics supporting housing demand remain favorable despite elevated mortgage interest rates and inflationary pressures. Builder incentives have helped close the affordability gap for many homebuyers, and low resale supply continues to be a driver of buyers choosing new construction. Supply of vacant developed lots, especially at affordable price points, continues to be constrained across our footprint, and Forestar is uniquely positioned to take advantage of the shortage of finished lots. Our ongoing focus is to develop lots for homes at affordable price points, which is demonstrated by our average sales price this quarter of roughly $96,000. Availability of contractors and necessary materials has improved over the past several months; however, we have not seen overall reductions in the cost of developing land. We will continue to value engineer our projects and work with our trade partners to develop lots in the most efficient way possible. Our development cycle times have continued to be impacted by governmental delays. Homebuilders continue to compete to secure land and lot positions, and many are looking to replace current closeout communities to position for future growth. As a result, we are not seeing any softening in land prices. However, in most markets, we have seen an adjustment back to normal contract terms.

D.R. Horton is our largest and most important customer. 16% of the homes D.R. Horton started in the past 12 months were on a Forestar developed lot. With a mutually stated goal of one out of every three homes D.R. Horton sells being on a lot developed by Forestar, we have significant opportunity to grow our market share within D.R. Horton. We also continue to work on expanding our relationships with other homebuilders. 10% of our first quarter deliveries, or 316 lots, were sold to other homebuilders, which includes 124 lots sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. 7% of our deliveries in the prior year quarter were to third-party customers.

Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the first quarter, we invested approximately $450 million in land and land development, split equally between land development and land acquisition. Given the strong demand for finished lots, this quarter's investment was almost double the prior year quarter. We still expect our investments in land acquisition and development to total $1.5 billion to $1.6 billion in fiscal 2024, subject to market conditions. Our lot position at December 31st was 82,400 lots, of which 55,400 lots are owned and 27,000 lots are controlled through purchase contracts. At quarter end, we had 7,300 finished lots on hand. We continue to target a three to four-year owned inventory of land and lots and remain focused on managing our development in phases to deliver finished lots at a pace that matches market demand, consistent with our emphasis on capital efficiency. 30% of our owned lots are under contract to sell, representing approximately $1.6 billion of future revenue. These contracts have $141 million of hard earnest money deposits associated with them. Another 32% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements.

We have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with approximately $840 million of liquidity, including an unrestricted cash balance of $460 million and $380 million of available capacity on our undrawn revolving credit facility. Total debt at December 31st was $705 million with no senior note maturities until fiscal 2026, and our net debt-to-capital ratio was 14.9%. We ended the quarter with $1.4 billion of stockholders' equity, and our book value per share increased to $28.21, up 15% from a year ago. Forestar's capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available today and have continued to become more expensive, impacting most of our competitors. Other developers generally use project-level development loans, which 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 when they arise. Andy, I'll hand it back to you for closing remarks.

Thanks, Jim. We are pleased with Forestar's start to fiscal 2024. Our team maintained double-digit revenues while continuing to deliver growth with strong profitability. Elevated mortgage interest rates continue to impact affordability, but the underlying fundamentals of housing shortage remain in place. We believe the low supply of existing homes will continue to drive buyers to new construction, and our strong relationship with D.R. Horton provides a clear path for growth. Our guidance for fiscal 2024 remains unchanged. Based on current market conditions, we expect to deliver between 14,500 and 15,500 lots and generate $1.4 billion to $1.5 billion of revenue. We are closely monitoring each market as we strive to balance pace and price to maximize returns in each project. We are the market leader in a highly fragmented and undercapitalized industry and uniquely positioned to take advantage of builder demand for finished lots. There is a significant opportunity to expand our presence in markets that we operate in, and our goal remains the same: to double our market share to 5% over the intermediate term. We expect to aggregate significant market share over the next few years while maintaining a disciplined approach with investing capital to enhance the long-term value of Forestar. John, at this time, we'll open the line for questions.

Our first question comes from Truman Patterson with Wolfe Research.

Andy, congrats on the role. I look forward to working with you in the future. I realize you've only officially been in the role for a short time here. But now that you're officially in the seat, are there any kind of big picture initiatives or shifts in how you're thinking about the business coming from the largest builder to now the largest land company? I'd love to hear just any thoughts there. It seems like the healthy growth initiatives that Forestar had laid out previously doubling market share seem like those are largely unchanged. So any commentary there would be helpful.

I appreciate the opportunity to be here. Our goal does not change, as you said, which exactly it's, our goal is to achieve a 5% market share as quickly and efficiently as we can. So we're looking to grow the business.

And then with your gross margins, I realize they can be lumpy kind of quarter-to-quarter. I believe you all said the current quarter was about 22.8%, excluding a closeout community, which is relatively elevated higher end of history. Could you all help us understand whether there were any other kind of items or one-time items during the quarter where this might not be repeatable at this level? Or is it a little bit more sustainable given your cost advantages versus the smaller peers where there's tighter lending conditions, higher cost of capital, etc.?

As you know, we don't provide guidance with respect to margins. And we underwrite returns, not margins. So it does create some variability in margins from quarter-to-quarter depending on which projects deliver lots within the quarter, because we have a mix of projects with higher or lower margins. However, we can provide some historical context, and if you look at maybe the last nine quarters, adjusted for impairments and unusually high legacy lot or land sales, our margins have fluctuated between 18% to 23% for the last nine quarters. In the last five quarters, it’s been between 21% to 23%. If you look at last year's fiscal year we reported 21.2%. But if you exclude the impairments that we recognized in last fiscal year, that would have been 22.5% compared to the 22.8% for this quarter. So you can see that our margins have actually been fairly consistent for the last couple of years in that low 20s% range.

There wasn't anything else in the quarter that was significant enough to call out.

And if I could sneak another one in on the other sides of returns at an enterprise level, if you will, but your lot delivery guidance over the next few quarters kind of implies flattish year-over-year, if I'm doing the math right. It seems like perhaps given some of the growth in the industry, is that a reality or on the flip side, if you all perhaps pulled forward some sales into the first quarter and now you might have a little bit of a developed lot shortage, if you will, just hoping to understand the puts and takes of the guidance?

Well, the first quarter was a good quarter, but it's still early in the year. Based on the current market conditions, our current lot positions, and our development timelines, we still believe that 14,500 to 15,500 is a realistic range.

We also expect new home starts to align with new home sales. So if homebuilder sales accelerated, we could be at the higher end of our range. But we're going to monitor the spring selling season and remain flexible to capitalize on any market upside. I was saying that there could be a bottleneck in achieving that upside that could be related to finished lot deliveries, particularly related to government approval delays.

We alluded to it in our scripted remarks, but we've continued to see delays from municipalities and community development. So that could definitely be the bottleneck.

The next question is from Carl Reichardt with BTIG.

Can I go back to something Mark mentioned about normal contract terms and sort of a movement back that direction? Can you expand on that a little bit by what you mean by normal contract terms, and what was really abnormal prior?

So we're seeing more takedown schedules than we were seeing before, less bulk closings, things of that nature. So although that was increasingly difficult today, there's normal contract terms that have gone back to what was historically the case for, I would tell you, a decade. And so we're getting land sellers that are becoming a little bit more realistic. I'll give you an example. If you had a big project and you were going to bulk purchase a large project, they're now giving you time between your takedowns to take that land down over time versus having to bulk purchase that project, that's probably one of the big normalizations in contract terms.

We've also seen more normalized due diligence time frames, so instead of 30 days, you're getting 60 or 90 days.

So more efficient? It takes longer but easier to manage and more efficient for you all in terms of capital deployment and receipted capital. Is that the way to think about it as opposed to lumpier? And then if I can get to Truman’s question a different way on the guide for the year. So do you have lots that you think right now you'd anticipate finishing in the next two quarters that would be available for sale that don't have a buyer or a contract yet? And if so, what's that number?

I don't have the specific number of lots that are going to be finished that aren't under contract right now; I can probably get that for you, I have to check. But we definitely do have stuff that's under development that's not been put under contract yet. In a Forestar sourced project, we aim to have those under contract anywhere from three to six months before delivery. And so there's definitely still opportunity to put stuff under contract that's going to close in the back half of the year.

And then last question. You did another deal with a lot banker who's working with your largest customer. And I'm curious about whether or not that's a potential growth area for you, whether a lot banker would be working with Horton or not? We certainly talked to plenty who are trying to deploy more capital and looking for opportunities. Can you talk about what that opportunity might be? And then I should follow up on to that also because I always ask about single-family rental and how that business looks if it looks interesting at all, or is that still sort of a one-off?

I'll start and I'll let somebody else chime in if they need to. But I mean, as far as the opportunity with land bankers, it's not really our decision. We're not marketing our lots to land bankers. But if one of our customers wants to use a land banker to step in as an intermediary, we're completely fine with that. It just enhances our capital efficiency and gets that inventory off of our balance sheet. So we're pretty indifferent if there's a land banker that's stepping in on behalf of a builder as long as we have all of the checks and balances in place.

And as it relates to the part of your question on built-for-rent, yes, we do think that, that is a sustainable part of our business. If we can have portions of a larger community, which we could improve our pace through selling to a customer that has built-for-rent components or multifamily components, that's something that we would absolutely entertain.

The next question comes from Anthony Pettinari with Citigroup.

This is Asher Sohnen on for Anthony. I think you talked in the past about the capital structure offering competitive advantage. But I'm just wondering, have you seen any concrete opportunities in the land market come about or any sort of concrete evidence does it come to fruition, or maybe that will take a little bit longer?

We're not seeing any really concrete evidence. What we do see is it does give us a little bit more of a competitive advantage, having the liquidity at hand, competing against another developer. And at times, other builders are using that developer in a much smaller fashion than they're using us. They know that we have the liquidity, and they'd rather look to us to develop the lots versus the other, let's call it, local or regional developer. There have been times when that developer gets into a capital constraint on the following phase, and so some builders will look to us to see if we can step in and purchase that additional phase to help them avoid gaps in their home sales.

And then just separately, obviously, you're not guiding to gross margins for the year. But I'm just wondering, I think previously we talked about increased Forestar-sourced lots driving kind of a gross margin headwind. Are you sort of seeing that tailwind materialize in 2024, or is that maybe more of a 2025 story?

Well, we could see in '24 definitely, we're the Forestar sourced lots do give us more optionality, I guess, with the project. I don't know that we'll see. I mean, we have seen significant increases in development costs as well. So I don't know that we're going to continue to see increased margins as a result of that, because we're always trying to match price and pace or balance price and pace to improve our returns. So it's really not just about the sales price or margin; it's really more about our returns.

Next question comes from Mike Rehaut with JPMorgan.

Doug Wardlaw on for Mike. I was wondering if you could kind of speak to any potential regional trends you've seen over the recent months, especially with the kind of rate volatility that we've experienced, or is there any particular region where you've seen strength or particular weakness?

Not that we've seen any particular weakness. Texas and Florida remain strong for us; they have been a stronghold for a long time.

And then in terms of, you guys touched on difficulty with municipalities and getting approval there. Is there any vision moving forward where you see that easing up a tad, or is that something that you expect to be a problem for the business moving forward, I guess, for the foreseeable future in 2024?

Historically, it's always been a challenge. It's been delayed even further in the past 12 to 24 months, a lot of it's turnover within those departments themselves. You get some subs that are less experienced that are now in that role versus more seasoned experience. It's a daily battle, but I don't know that that's going to ease up anytime in the foreseeable future. But again, I think it's market-to-market in terms of where we're seeing those governmental delays; some areas we see it, some we don't. So really it fluctuates across the United States.

And we've been accounting for those delays in our underwriting. So we've been looking at extended timelines in the underwriting to ensure that we're still going to be able to achieve our returns.

We have reached the end of the question-and-answer session. I will now turn the call over to Andy Oxley for closing remarks.

Thank you, John. And thank you to everyone on the Forestar team for your focus and hard work. We will stay disciplined and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today and look forward to speaking with you again in April to share our second quarter results.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.