Good morning, and welcome to Forestar's Third Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, John. 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 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 this 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 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 later this week. 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, Chris. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. The Forestar team delivered a solid third quarter, generating $32.9 million of net income or $0.65 per diluted share on $390.5 million of revenue. Lots sold increased 11% year-over-year and 6% sequentially to 3,605 lots. Additionally, lots under contract to sale increased 26% from a year ago to 25,700 lots, representing 38% of our owned lot position and $2.3 billion of future revenue, which is the highest contracted backlog we have had during the last 5 years. While affordability constraints and weaker consumer confidence continue to impact the pace of new home sales, we maintained strong liquidity through disciplined investment in inventory. Our experienced operators are adjusting the pace of development where appropriate, and we are moderating our land acquisition investment. Over 80% of our investments this quarter were for land development. We remain focused on turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise and a diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively. We will now discuss our third quarter financial results in more detail. Jim?

Thank you, Andy. In the third quarter, net income was $32.9 million or $0.65 per diluted share compared to $38.7 million or $0.76 per diluted share in the prior year quarter. Revenues for the third quarter increased 23% to $390.5 million compared to $318.4 million in the prior year quarter. Our gross profit margin for the quarter was 20.4% compared to 22.5% for the same quarter last year. The current year quarter was negatively impacted by the closeout of one community with an unusually low margin. Excluding the effect of this item, our current year quarter gross margin would have been approximately 21.1%. Our pretax income was $43.6 million compared to $51.6 million in the third quarter of last year and our pretax profit margin this quarter was 11.2% compared to 16.2% in the prior year quarter. The prior year quarter was positively impacted by a $5 million gain on sale of assets. Pretax profit margin in the prior year quarter, excluding the gain on sale, would have been 14.6%. Lots sold in our third quarter increased 11% to 3,605 lots, with an average sales price of $106,600. Our average sales price this quarter was impacted by an outsized mix of lot deliveries from communities with higher price point lots. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Chris?

In the third quarter, SG&A expense was $37.4 million or 9.6% as a percentage of revenues compared to 9.2% in the prior year quarter. Our increase in SG&A is primarily driven by the expansion of our operating platform, including entering seven new markets alongside D.R. Horton's footprint and increasing community count by 16% in the last year. We are pleased with the progress we have made building our team, and we continue to attract high-quality talent. We remain focused on efficiently managing our SG&A while investing in our teams to support future growth. Mark?

New home sales have been slower than last year as continued affordability constraints and weaker consumer confidence continue to weigh on demand. However, mortgage rate buydown incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes, particularly in more affordable price points. Our primary focus remains developing lots for new homes at prices that target entry-level and first-time buyers, which is the largest segment of the new home market. The availability of contractors and necessary materials remain solid and land development costs have stabilized. We have also seen improvement in cycle times despite continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim?

D.R. Horton is our largest and most important customer. Fifteen percent of the homes D.R. Horton started in the past 12 months were on a Forestar developed lot and 23% of their finished lot purchases this quarter were lots developed by Forestar. With the mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by Forestar, we have a significant opportunity to grow our market share within D.R. Horton. We continue to work on expanding our relationships with other homebuilders and intermediaries. Fifteen percent of our third quarter deliveries or 530 lots were sold to other customers, which includes 331 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to eight other homebuilders, one of which was a new customer. Mark?

Our total lot position at June 30 was essentially flat from a year ago at 102,300 lots, of which 68,300 or 67% was owned and 34,000 or 33% were controlled through purchase contracts. 10,000 of our owned 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 to deliver finished lots at a pace that matches market demand. Owned lots under contract to sell increased 26% from a year ago to 25,700 lots or 38% of our owned lot position. $230 million of hard-earned 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 27% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

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 third quarter, we invested approximately $372 million in land and land development, which was relatively flat with the prior year quarter. Roughly 20% of our investment was for land acquisition and 80% was for land development. Although we have moderated our land acquisition investment, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will allow us to return to strong volume growth in future periods, and we still expect to invest approximately $1.9 billion in land acquisition and development in fiscal 2025, 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 $792 million of liquidity, including an unrestricted cash balance of $189 million and $603 million of available capacity on our undrawn revolving credit facility. Total debt at June 30 was $873 million, with $70.4 million of senior note maturities in the next 12 months, and our net debt-to-capital ratio was 28.9%. We ended the quarter with $1.7 billion of stockholders' equity and our book value per share increased 11% from a year ago to $33.04. 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 and have become more expensive in recent years, impacting most of our competitors. Other developers generally use project-level development loans, which are typically more restrictive at 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. As outlined in our press release, we are maintaining our fiscal 2025 revenue guidance of $1.5 billion to $1.55 billion while lowering our lot delivery guidance to 14,500 to 15,000 lots in response to current market conditions. Our team has a proven track record of adjusting to changes in market conditions quickly, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. While we expect home affordability constraints and cautious homebuyers to continue to be a near-term headwind for new 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. Continued execution of our strategic and operational plans, combined with constrained finished lot supply across the majority of our diverse national footprint positions us for further success. With a clear direction, a dedicated team and a strong operational and financial foundation in place, I am excited about Forestar's future. John, at this time, we'll open the line for questions.

The first question comes from Trevor Allinson with Wolfe Research.

First one is on gross margins. You called out the single community had, I think you said roughly a 70 basis point impact on margins. Excluding that, it still seems like gross margins took a step down both sequentially and year-over-year in the quarter. Should we think about this 21% gross margin rate being a good run rate going forward? Or were there other kind of one-time impacts in the quarter that impacted your margins?

In the range of 21% to 23%. So at the lower end of the range for this quarter. But we really haven't seen anything that would indicate significantly lower margins going forward.

Okay. I couldn't hear you for quite a while and only caught the end of your question. Could you repeat the beginning or your answer? I'm not sure if others had the same issue, but I think I only heard the last 5 or 6 words of your response.

It's primarily a mix of factors. If we exclude that one closeout community, our normalized margin for the quarter would have been 21.1%. We aim to adjust each quarter for unusually high or low lot sales, margin lot sales, or one-time items. Over the past three years, that margin range has fluctuated between 21% to 23%. This quarter was on the lower side, but we are actively managing price and pace at each community to optimize returns. We focus on underwriting returns rather than margin, which means there will always be variations in margins depending on which communities are performing during the period. While this quarter's margin was lower, we do not see any signals of reduced margins moving forward.

Okay, that's very helpful. I apologize if others could hear you clearly while I needed to repeat the answer. My second question is about development costs. You mentioned that they've stabilized, and I believe you used similar language last quarter. Have you begun to see the development costs actually decline sequentially, or is it more of a stabilization, meaning they are fairly flat quarter-over-quarter?

It's flattish, and they've been stabilized for quite some time now. Sometimes we see some upticks in some categories and some downward mobility in others as well. But for the most part, we're just classifying it as stable.

The next question comes from Anthony Pettinari with Citigroup.

This is Asher Sohnen on for Anthony. I wanted to clarify about the guide. I mean you trimmed your volume guidance, but reiterated revenue, which I guess implies better pricing. Is that just a function of maybe the mix of which communities are delivering? Or are there other puts and takes on pricing that we should think about?

Yes. I mean if you just kind of look back to our original guidance and the ASP implied in that, to date, we've realized a higher ASP, which is partly due to a lot price increase, but largely due to mix as well. So if you just look at the average selling price to date, what that implies for the fourth quarter, it leads to us leading our revenue guidance at the same level.

Great. And just to clarify on that last point, what would you identify as the factors driving those lot price increases?

Yes, in our original guidance, we indicated a low single-digit increase in average selling prices based on the national shortage of finished lots. The pricing really varies from community to community depending on where the lots are located. Additionally, a significant portion of our increase in average selling price is attributed to the mix of those locations.

The next question comes from Michael Rehaut with JPMorgan.

This is Alex Isaac on for Mike. I want to ask about the new markets you entered and just curious if any like regional focus as well as looks like what you're seeing on the round between the regions that you operate in?

Yes. So as we've talked about, we are opening up in the Pacific Northwest, Northern California, Salt Lake, Reno. So those are all new markets for us. And we have team members now boots on the ground and are in the process of building out support around those as market conditions allow.

Those are all new markets in the last year, but we didn't have any new markets necessarily in this quarter, so...

I appreciate your comments. I have one more question regarding the capital structure. We've received inquiries about competitors in the land development sector and their REIT structures. Is there any interest or consideration for Forestar to convert to a REIT, or has that been discussed?

No, not really. I mean we're a developer as opposed to a land banker just providing financing. So I think that's really our business model and our focus.

The next question comes from Barry Haimes with Sage Asset Management. Is there interest or would there be any consideration of conversion to a REIT for Forestar? Or is that something that you've considered? No, not really. I mean we're a developer as opposed to a land banker just providing financing. So I think that's really our business model and our focus.

D.R. Horton on their call talked about a slower growth in their community count as they go through the next few quarters into next fiscal year. I think they talked about having been in double digits and getting down to more of a mid-single digit. It sounded like maybe over a couple of quarters. But could you talk about how that might affect your thoughts going forward as you start thinking about the next fiscal year?

Well, we still have a lot of growth opportunity within Horton because at the moment, we're about 15% of their lots. And our mutually stated goal is to basically double that in the intermediate term. So I think that we will continue to see growth and market share consolidation within Horton. But also, we are increasing our customer base with other builders as well and continuing to add new customers to the mix. So we think we have significant opportunity to grow both within the Horton footprint and outside.

We have a lot of growth opportunities within Horton since we currently represent about 15% of their lots, and our shared goal is to double that in the near future. I believe we will continue to experience growth and consolidate our market share within Horton. Additionally, we are expanding our customer base with other builders and bringing in new customers. Therefore, we see significant potential for growth both within and outside of the Horton footprint.

Thank you, John, and thank you to everyone on the Forestar team for your focus and hard work. Stay disciplined, flexible 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 to share our fourth quarter results on Tuesday, October 28.

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