Participants

Chris Hibbetts; Vice President of Finance & Investor Relations; Forestar Group Inc

Anthony Oxley; President, Chief Executive Officer; Forestar Group Inc

James Allen; Chief Financial Officer, Executive Vice President; Forestar Group Inc

Mark Walker; Chief Operating Officer, Executive Vice President; Forestar Group Inc

Carl Reichardt; Analyst; BTIG

Anthony Pettinari; Analyst; Citi

Trevor Allinson; Analyst; Wolfe Research

Alex Isaac; Analyst; JPMorgan

Presentation

Operator

Good morning and welcome to Forestar's second-quarter 2025 earnings conference call. (Operator Instructions) 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.

Chris Hibbetts

Thank you, Jenny. Good morning and welcome to our call to discuss Forestar's second-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 Form 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.forsetar.com, and we plan to file our 10-Q early next week. After this call, we will post an updated investor presentation to our Investor Relations site under Events & Presentations for your reference.
Now, I will turn the call over to Anthony Oxley, our President and CEO.

Anthony Oxley

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 second quarter, generating $31.6 million of net income, or $0.62 per diluted share on revenues of $351 million. Lots sold increased 4% from a year ago and 46% sequentially to 3,411 lots. Additionally, lots under contract to sell increased 41% from a year ago to 25,400 lots, which is 37% of our own lot position, the highest contracted backlog we've had during the last four years.
Our current backlog represents $2.3 billion of future revenue. We further strengthened our balance sheet during the quarter by increasing our liquidity position to approximately $800 million while extending our debt maturity profile through refinancing transaction completed in March. We also continue to expand and diversify our operations alongside D.R. Horton's footprint, entering 10 new markets in the last year and increasing our community count by 21%.
The home-building industry continues to face headwinds from home affordability constraints and declining consumer confidence, resulting in a slower than expected start to the spring selling season. We are well positioned to navigate current market conditions, and our experienced operators are responding by adjusting the pace of development where appropriate, and we are moderating our pace of land acquisition. 79% of our investments this quarter were on land development.
We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. We are able to consistently provide the essential finished lots to home builders with our unique blend of financial strengths, operating expertise, and a diverse national footprint. We will now discuss our second-quarter financial results in more detail.
Jim?

James Allen

Thank you, Andy. In the second quarter, net income was $31.6 million or $0.62 per diluted share compared to $45 million or $0.89 per diluted share in the prior-year quarter. Revenues for the second quarter increased 5% to $351 million compared to $333.8 million in the prior-year quarter. Our gross profit margin for the quarter was 22.6% compared to 24.9% for the same quarter last year.
The prior-year quarter was positively impacted by non-recurring revenue items with unusually high margins, including selling excess sewer capacity and a land contract assignment fee. Excluding the effect of these items, our prior-year second-quarter gross margin would have been approximately 22.5%.
Our pre-tax income was $40.7 million compared to $58.9 million in the second quarter of last year, and our pre-tax profit margin this quarter was 11.6% compared to 17.6% in the prior-year quarter. The decrease in pre-tax profit margin this quarter was primarily due to the non-recurring high-margin items impacting the prior-year quarter and less SG&A leverage in the current quarter.
Lots sold in our second quarter increased 4% to 3,411 lots with an average sales price of $101,700. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries.
Chris?

Chris Hibbetts

In the second quarter, SG&A expense increased 32% from the prior-year quarter to $38.4 million, primarily due to a 29% increase in employee count to 440 employees. Our increased employee count is supporting the expansion of our operating platform, including entering 10 new markets alongside D.R. Horton's footprint and increasing our community count by 21%.
SG&A expense as a percentage of revenues was 10.9% compared to 8.7% in the prior-year quarter. 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?

Mark Walker

The 2025 spring selling season started slower than expected as potential homebuyers have been more cautious due to continued affordability constraints, declining consumer confidence. Mortgage rate buy down incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes. Our primary focus remains developing lots for new homes at affordable price points.
The availability of contractors and necessary materials remains positive. The cost of developing land is stabilized. We have seen improvement in cycle times despite continued governmental delays. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible.
Jim?

James Allen

D.R. Horton is our largest and most important customer. 15% of the homes D.R. Horton started in the past 12 months were on a Forestar-developed lot, and 22% 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 home builders and intermediaries. 27% of our second-quarter deliveries, or 910 lots, were sold to other customers, which includes 352 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 10 other home builders, two of which are new customers.
Mark?

Mark Walker

Our total opposition at March 31 increased 10% from a year ago to 105,900 lots, of which 68,400 or 65% was owned and 37,500 or 35% were controlled through purchase contracts. 9,500 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 three- to four-year supply of land and lots and manage development in phases that deliver lots at a pace that matches market demand.
Owned lots under contract to sell increased 41% from a year ago to 25,400 lots, or 37% of our own lot position. $212 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.3 billion of future revenue. Our contract to backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry.
Another 28% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

Chris Hibbetts

Forestar's underwriting criteria for new development projects remains unchanged at a minimum of 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. During the second quarter, we invested approximately $340 million in land and land development, which was relatively flat with the prior-year quarter.
21% of our investment was for land acquisition and 79% was for land development. Our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. We have moderated land acquisition investment as our current land and lot position will allow us to return to strong volume growth in future periods. We now expect to invest approximately $1.9 billion in land acquisition and development in fiscal 2025, subject to market conditions.
Jim?

James Allen

We have significant liquidity and are using modest leverage to keep our balance sheets strong and support our growth objectives. We ended the quarter with $792 million of liquidity, including an unrestricted cash balance of $174 million and $618 million of available capacity on our undrawn revolving credit facility.
In March, we issued $500 million or 6.5% senior unsecured notes due 2033. A portion of the net proceeds were used to fund a tender offer to purchase $329 million of our existing 3.85% senior unsecured notes due 2026, leaving $71 million of the 3.85% notes outstanding.
The successful transaction extended our debt maturity profile while enhancing our liquidity position. Total debt at March 31 was $873 million with no senior note maturities until May 2026, and our net debt to capital ratio was 29.8%. We ended the quarter with $1.6 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $32.36.
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, 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.

Anthony Oxley

Thanks, Jim. I'm pleased with the results that our team delivered this quarter, particularly considering the slower start to the spring selling season for the industry. We expect homeowner affordability constraints and cautious home buyers continue to be headwinds for the homebuilding industry.
Home buyers have responded favorably to recent increases in incentives offered by builders. However, the slower pace of new home sales during the spring selling season is affecting our lot deliveries. As outlined with our press release, we are updating our guidance for fiscal 2025. We now expect to deliver between 15,000 and 15,500 lots this year, generating between $1.5 billion and $1.55 billion of revenue.
Our team has a track record of adjusting to changing end 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. 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 a constrained finished slot 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'm excited about Forestar's future.
Jenny, at this time, we'll open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Carl Reichardt, BTIG.

Carl Reichardt

Good morning. Nice to talk to you. Thanks for taking my questions. Just on the guidance to start with this year and the change, is that based on transactions that you know have been pushed out, or is it more of an estimate? And I'm thinking in the context of your largest customer who said today we still need the land, we just don't need it now.
And regardless of why those 1,000 or so units won't close this year, would your internal expectations for margins for the year change based on those deals? I know you don't guide there, but I'm just curious if you expect your margins to be similar to what you would have, whether those 1,000 units closed or not?

Anthony Oxley

It's mostly prospective looking, Carl. I mean, it's sort of on a community by community where we've seen a buildup in inventory. We have conversations at the community level and reflect how that's going to look through the balance of the year.
With respect to margin, as you mentioned, we don't guide to margin, we're more focused on a return. But we're not seeing -- we have not seen and we're not anticipating seeing much of a margin change as we move forward.

Carl Reichardt

Okay, great, helpful. And then a follow-up, which is also two questions. I'm curious whether or not we started at all to see the raw land sellers begin to think about business for housing demand changing and whether or not they're beginning to become more flexible on asking prices?
And then I just also wanted to ask about the lot banker deal in particular. Can you walk me through sort of how those sales to land bankers work? Do you make the kind of margin you expect there? Is it a bulk sale? Because it's a little bit different than the core business. So thanks a lot, guys.

Mark Walker

Hey, Carl, it's Mark. I'll talk to the raw land sellers and I'll let Jim take your question on the lot banking. But in terms of flexibility, we're seeing more flexibility on terms. We're still not really seeing any flexibility or that much flexibility in price. So sellers are still holding firm on price, but what we are seeing is more conventional lot or land take down terms, which really helps our ROI-based business.

James Allen

And as far as lot bankers, Carl, we don't contract directly with lot bankers, but we do allow our home building customers to assign their contracts to lot bankers. So from our standpoint, it is a sale to a third party, but again, we don't sell directly, we don't contract directly with lot bankers.

Carl Reichardt

Do you make the same kind of expect to make the same kind of returns, margins that you would on a more traditional deal in a deal like this?

Anthony Oxley

It is exactly -- it's basically just a [lot take] that a home builder would have so it's all the same pricing that we've contracted with a home builder. They've just assigned to that.

Carl Reichardt

Assigned the contract, okay. Great, I appreciate it.

Operator

Anthony Pettinari, Citi.

Anthony Pettinari

Good morning. You saw an increase in SG&A and I think other company investments as you move into new markets and grow community count. I'm just wondering, big picture, how you balance kind of this increase in costs as your largest customer expects deliveries to be down year over year?
And I know you've trimmed the land and acquisition and development spend target, but I'm just wondering if there's any other actions that you would take or contemplate taking if the market remains weak?

James Allen

Sure, SG&A is up, really tied to the increase in headcount from last year, so that headcount increased by 29% compared to a year ago. Only 4% of that increase occurred in the second quarter, so we've slowed down. The vast majority of that increase in headcount is boots on the ground really to support the 21% increase in in active projects and the 10 new markets that we've gone into.
We would expect our headcounts to remain basically flat for the remainder of the year and as a result, I think the percentage of SG&A revenues, we would expect to come down to the high-single digits for the year we gain more leverage, revenue leverage with a bigger second half of the year.

Anthony Pettinari

Got it. And then you talked about the cost of developing land stabilizing, just wondering if you are seeing or anticipate any direct or indirect impact from tariffs on land development costs?

Mark Walker

Yeah, I think right now, it's a lot of noise. I think it's too early to tell. Again, I think, as we scale our business and we continue to build relationships with our trade partners, I think it's going to give us the ability to either hold pricing or see limited impacts of tariffs. But as of right now, we're seeing really not a lot from our trade partners in terms of cost increases, really nothing at all.

Anthony Pettinari

And maybe just one last one, if I could. I think Texas and Florida represents maybe roughly half of your total lot position, and I'm wondering how you characterize demand for lots in Texas and Florida versus the national average? Is it a little weaker or significantly weaker or is it -- just wondering how you kind of characterize it regionally and within the states?

Anthony Oxley

I would say, we are seeing some weakness in Florida and less in Texas. We're seeing some strength in some other markets, Las Vegas, the Carolinas, but it's been more of a pace issue, really returning to more of a pre-COVID take down on a quarterly basis more so than large bulk takes.
So particularly in affordable price points, yes, the customers are challenged, but there's strong activity in the sales centers, so we feel good about the long-term market.

Chris Hibbetts

Okay, that's very helpful. I'll turn it over.

Operator

Trevor Allinson, Wolfe Research.

Trevor Allinson

Hi, good morning. Thank you for taking my questions. You modestly lowered your land and development spend versus your prior expectation. How sensitive is that spend to a potential further weakening demand?
And then historically, you guys were closer to 70% development as a fraction of that total spend. Do you think that continues to move higher? It looks like it has moved higher here recently. You think that continues going forward?

Chris Hibbetts

Yeah, I mean, so when we look at our total spend, we did lower it mostly partly because of the market, but we also feel very good about our total lot position to support kind of the growth trajectory that we're on.
We were higher in land acquisition in the first quarter when you look at the level of spend and we mentioned in that call that we were going to moderate spend, which we're doing. So we do expect the kind of percentage of total spend to turn down a little bit. But we are still in the growth mode, so acquisition may be a little bit higher percentage than what it was when you mentioned the one-thirds, two-thirds from that standpoint.
But we do have the ability to moderate our spend if demand changes one way or the other. We have a very robust pipeline of projects that we can look to. So if the market turns up, we can ratchet back up as well as continue to ratchet down if we need to.

Trevor Allinson

A quick follow-up on that before getting into my second question. Are you seeing your competitors pull back more significantly to where this becomes perhaps a further acceleration of market share gains for you guys, given you didn't adjust your spend all that much?

Mark Walker

Yes, I think it's definitely there's opportunity in this market cycle to consolidate market share. That's not only with improving the relationship with our number one customer, D.R. Horton, but also with other builders as evidence with the 10 additional builders that we added this quarter, and also it helps us to strengthen our relationship with our trade base. So we really see this as an opportunity for us to continue to consolidate market share.

Trevor Allinson

Yeah, I think that's really helpful and actually a great segue into the next question I have. Your biggest customer is talking about slowing deliveries here in 2025. In that environment, do you look at increasing your penetration with other builders, or is this the type of environment where everybody's probably looking to slow some bit and that's a slowing a bit and that's a bit more challenging? Thanks.

Anthony Oxley

Well, I mean, as from the commentary this morning, they're looking to increase starts at Horton. Obviously, that'll depend on market conditions, so obviously the first input to that is the lot. And as they noted, there's not an abundance, there's not a surplus of finished lots out there. So I think we see our ability to grow that Horton market share in the current environment.
But as we talked about in our prepared remarks, we have expanded our relationship with other customers and with repeat customers as well as several new customers. So I think it supports the long-term view that we can continue to grow in the Horton footprint as well as expand our relationship in the larger community.

Mark Walker

And the other point is our capital structure is a huge advantage for us and when it sets us apart from other developers in terms of just being their availability to develop lots and then having what Andy said the Horton -- but the market share and Horton and other builders.

Trevor Allinson

Thank you for all the color and good luck moving forward.

Operator

Michael Rehaut, JPMorgan.

Alex Isaac

Hi, good morning. This is Alex Isaac on for Mike. Thanks for taking my question. I want to dive in, ask about the federal deregulation around land and the messaging coming from Horton. I was curious how you feel like that could impact lo supply going forward, particularly in some of the more constrained markets?

Anthony Oxley

Really too early to tell yet. Not sure what has been finalized with the new administration, really just don't have a whole lot of color to offer at this point.

Alex Isaac

But yeah, that makes a lot of sense. Thanks for the answer. Then also, I want to ask about on gross margins. How should we be thinking about them on a longer-term basis? You mentioned more in a growth mode now. How do we see those like on a longer term and where do you think those could reach at a steady state?

Anthony Oxley

We've really seen a lot of stability in the margin over the last really three or four years being in that 21% to 23%. If you kind of normalize our margins this year over last year, we're real close. We don't see the pressure on the trade and labor side that we saw coming out of that post-COVID. So we think we're in a relatively stable margin environment. Obviously, it's going to be subject to market conditions. So it'll play out over the next several quarters.

Alex Isaac

Sure, that sounds great. Appreciate the color.

Operator

Thank you very much. Well, that appears to be the end of our question-and-answer session. I will now turn the call back over to Andy for closing remarks.

Anthony Oxley

Thank you, Jenny, 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 third-quarter results on Tuesday, July 22.

Operator

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