Participants

Katie Smith; Vice President - Finance, IR; 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, LLC

Anthony Pettinari; Analyst; Citigroup Inc.

Presentation

Operator

Good afternoon and welcome to Forestar’s third quarter 2024 earnings conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the call over to Katie Smith, Vice President of Finance and Investor Relations for Forestar.

Katie Smith

Thank you, John. Good afternoon and welcome to the call to discuss Forestar's third-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 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 early next 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.

Anthony Oxley

Thanks, Katie. Good afternoon everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. Before I go over our results, I want to acknowledge the passing of Don Horton and the legacy he leaves behind.
Homebuilding and land development are not easy, but Don was tremendously successful because he always put people first. His leadership and commitment to D.R. Horton and its people was unmatched. Don's vision and support for Forestar gave us aspirational but achievable goals and enabled us to become the country's largest pure-play residential lot developer. All of us at Forestar are incredibly proud to be a part of the D.R. Horton family and strive every day to grow and improve, which Don pushed us all to do.
Now I will discuss our results. There continues to be solid demand for residential developed lots and supply is still constrained in most markets. The Forestar team delivered 3,255 lots, generating revenues of $318.4 million during the quarter, which was in-line with our expectations. Our profitability remains strong with pre-tax profit margins of 16.2% and earnings per diluted share of $0.76. The team's performance in the third quarter resulted in book value per share increasing 15% to $29.87, and our return on equity for the trailing 12-months ending June 30, 2024, expanded 190 basis points to 13.8%.
Forestar's unique blend of financial strength, operating expertise, and geographic reach is a significant competitive advantage, enabling us to be a leading supplier of finished lots. We remain focused on investing in compelling land parcels, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry.
Jim will now discuss our third quarter results in more detail.

James Allen

Thank you, Andy. In the third quarter, net income decreased 17% to $38.7 million, or $0.76 per diluted share, compared to $46.8 million, or $0.93 per diluted share in the prior year quarter. Revenues for the quarter decreased 14% to $318.4 million, compared to $368.9 million in the prior year quarter. We sold 3,255 lots in our third fiscal quarter with an average sales price of $94,000.
We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Our pre-tax income decreased 17% to $51.6 million compared to $62.4 million in the third quarter of last year. And our pre-tax profit margin this quarter was 16.2% compared to 16.9% in the prior year quarter.
Our pre-tax profit margin this quarter was positively impacted by a gain on sale of assets of $5 million. Our gross profit margin for the quarter was 22.5% compared to 23% for the same quarter last year. In the third quarter, SG&A expense increased to 11% from the prior year quarter to $29.3 million. Our employee count increased 33% from a year ago to support the expansion of our platform, including entering new markets and increasing community count.
SG&A expense as a percentage of revenues was 9.2% compared to 7.2% 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 our continued growth. Mark?

Mark Walker

The supply of new and existing homes at affordable price points remains limited and demographics supporting housing demand are favorable, despite elevated mortgage interest rates and inflationary pressures. Mortgage rate buy-down incentives offered by builders, combined with low resale supply, relative to historic norms, continue to be a driver of buyers choosing new construction. Our ongoing focus is to develop lots for homes at affordable price points.
Availability of contractors and necessary materials have improved over the past several months, but we have not seen overall reductions in the cost of developing land and our cycle times have increased. We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible.
However, our development cycle times are still being impacted by governmental delays, which limited upside to our lot deliveries during the quarter. Home builders are competing to secure land and lot positions, and many are looking to replace closed-out communities to position themselves for future growth. As a result, we are not seeing any softening of land prices. However, our team remains disciplined, flexible, and opportunistic on pursuing new land acquisition opportunities. Jim?

James Allen

D.R. Horton is our largest and most important customer. 15% 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 one out of every three homes D.R. Horton sells to be 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 home builders. 11% of our third-quarter deliveries or 352 lots were sold to other home builders. Katie?

Katie Smith

Forestar’s underwriting criteria for new development projects remain unchanged at a minimum 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. We are positioning to return to strong volume growth by accelerating our investments in land acquisition and development.
During the third quarter, we invested approximately $370 million in land and land development, which was a 72% increase from the prior-year quarter. 75% of our investment was for land development and 25% was for land acquisition. Fiscal year-to-date, our investments in land and land development totaled approximately $1.2 billion and we now expect to invest approximately $1.6 billion in land acquisition and development in fiscal 2024 subject to market conditions. Mark?

Mark Walker

Our total lot position at June 30 increased 40% from a year ago to 102,100 lots in quarter end, of which 57,900 or 57% was owned and 44,200 or 43% was controlled. Consistent with our focus on capital efficiency, we continue to target owning a three- to four-year supply of land and lots and remain focused on managing our development in phases to deliver lots at a pace that matches market demand.
Lots owned at June 30 includes 5,900 finished lots. This is the lowest number of finished lots we've had on hand at quarter end since September 2022, demonstrating that our customers continue to purchase lots soon after completion. 35% of our owned lots are under contract to sell, representing approximately $1.8 billion of future revenue.
Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 29% of our owned lots are subject to a right of first offer to D.R. Horton, based on executed purchase and sale agreements. Jim?

James Allen

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. At quarter end, we had approximately $745 million of liquidity, including an unrestricted cash balance of $360 million and $385 million of available capacity on our undrawn revolving credit facility.
Total debt at June 30 was $706 million with no senior note maturities until fiscal 2026 and our net debt-to-capital ratio was 18.7%. We ended the quarter with $1.5 billion of stockholders' equity and our book value per share increased 15% from a year ago to $29.87.
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 when they arise.
Andy, I'll hand it back to you for closing remarks.

Anthony Oxley

Thanks, Jim. In closing, I believe there is tremendous opportunity ahead of us. Forestar is uniquely positioned 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 most of our diverse national footprint positions us for further success. We are expanding our team and accelerating our investments in land and development to position Forestar for consistent long-term growth.
Elevated mortgage interest rates continue to impact affordability, but the underlying fundamentals of a housing shortage remain. We believe the low supply of existing homes at affordable price points, combined with builder incentives, including rate buydowns will continue to drive buyers to new construction, and our strong relationship with D.R. Horton provides a clear path for growth.
As outlined in our press release, we are revising our fiscal 2024 guidance. Based on our fiscal year-to-date results and expectations for the fourth quarter, we now expect to deliver between 14,600 and 15,100 lots compared with prior guidance of delivering between 14,500 and 15,500 lots. We still expect to generate $1.4 billion to $1.5 billion of revenue.
We are the market leader in a highly fragmented and undercapitalized industry and are uniquely positioned to make advantage of builder demand for finished lots. There is a significant opportunity to expand our presence in the markets we operate in.
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 our disciplined approach to capital allocation to enhance long-term value of Forestar. With a clear strategic direction, a dedicated team and a strong operational and financial foundation in place, I'm excited about Forestar's future.
John, at this time, we'll open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Carl Reichardt, BTIG.

Carl Reichardt

Thanks. Hi, everybody. Nice to talk to you. So I think you talked about government delays limiting upside, I think was the for AG used in the quarter. And I wanted to ask for some more detail on that. Two things really. One were there delays, how many lots were delayed. And then there is a lot of places government can create issues in getting lots developed. So I'm curious just on some details as to what specifically is hurting the most when it comes to getting a lot sort of out the door into customers.

Mark Walker

Yeah. Hey, Carl, it is Mark. There is a couple of things. The primary delays related to government approvals is really related to getting finished lots certified on the ground and get those transacted. It also affects beginning development, as well as getting those approvals for subsequent phases to begin development. I'll talk a little bit about cycle times too, just to give you a little bit of context.
Over a 15-month period, let's call it, September ‘22 through December ‘23, we experienced an eight to nine week increase in the cycle times. And that was primarily related to supply chain, contractor availability, but really these government approvals, it was just taking much longer to receive those approvals. There is a little bit of good news behind that.
From January '24, let's call it till today, we've seen our cycle time stabilize really over the past six months. There's a little bit additional given news. We've had a small sample size of the projects that just delivered lots that have recently closed where we’ve seen some reduced cycle times. So although we are seeing those impacts from governmental delays, we are seeing a little bit of opportunity in our cycle times.

Katie Smith

Yeah. And Carl, this is Katie. As far as loss moved out of the quarter, we really didn't have any of that moved out of the quarter due to the delays. It was just lumpier lot sales this quarter, but it was in-line with our expectations, which we alluded to in our remarks.

Carl Reichardt

Okay. Thanks Katie and Mark. Okay. And then just a couple, I'll squeeze into one here, if I can. Is there a change in sort of the mix of number of lots per community that you are letting out the door right now? I'm curious about that. And then sort of along those lines too, so we've got a big growth in lots under control of contract deposits indicate some acceleration.
You talked a little bit about expecting some stronger volume growth. So as we look out in '25, your midpoint you are going to grow about 6% this year in lot count. Is next year kind of a year where you think double-digit growth could be achievable for you? Or can you give us sort of a sense as to what kind of acceleration we might see? Thanks a bunch all.

Anthony Oxley

So there is really not a change in the size of the communities. I mean we have a blend and it's geographically different as we go across the country. So I would say that's pretty consistent. With respect to lot deliveries, I think you are close. While we are not giving guidance for 2025 at this point, the mid-single digits is correct for '24. And we do see the potential based on market conditions being for double-digit growth into '25. (multiple speakers)

Carl Reichardt

Yeah, go ahead, sorry.

Anthony Oxley

Yeah, I was going to address a little bit of the delays, too. If you look back from, let's call it, 4Q of '22 fiscal year and 3Q '23, we pulled back our land acquisition development activity, just basically due to the sharp interest rates, balancing price, and pace. We've experienced a reduced months or quarters of closing in the 1Q and 2Q.
If you think about the vast majority of what we purchased and acquisition to shovel ready. So you kind of are seeing that impact of those lots not being able to deliver, as well as the delayed cycle times. And right now, we have a lot of lots that are under development. It's a 30%-increase from our low point, which was the beginning of 3Q of '23. And those lots are in the cycle in production and right to hit over the next 90 to 180 days.

Carl Reichardt

Okay. That’s great to hear. Thanks so much, I appreciate it.

Operator

(Operator Instructions) Anthony Pettinari, Citi.

Anthony Pettinari

Hey, good afternoon. On the guidance, if the volume guidance is down a bit, but revenue guidance is unchanged. Is that -- is pricing better? Or is that just purely a mix impact? Or any color there?

Katie Smith

Yeah. So when we were looking at guidance, when the low end of our range and if you take the year-to-date average price that it rounds down to $1.4 billion. And so, that's why we just kept it the same.

Anthony Pettinari

Okay.

Katie Smith

We would expect for ASP to be roughly in line with what it has been this year and in next quarter.

Anthony Pettinari

Got it. And then are there any markets that you might call out as oversupplied or where you're pulling back in terms of new land acquisition? Or alternately, are there any markets that you're seeing accelerate or particularly attractive? Just curious from a regional perspective. And then, obviously, a lot of focus on Florida and you have a presence there, anything you can say specifically about that state?

Anthony Oxley

So generally, on affordable price point or a first-time homebuyer product, we are really not seeing inventory buildup anywhere. Affordable in Florida, in Texas, very strong, Carolinas also very strong. Probably where we do see some softness is where there's been a pretty rapid price appreciation over the last couple of years then impacted by the higher interest rates. Colorado would be an example of that. But again where there is affordable price point product, we are seeing strong demand. Florida I can't really say that we are seeing softness there.

Anthony Pettinari

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

Operator

(Operator Instructions) We have no further questions in queue. We have reached the end of the question-and-answer session. And I will now turn the call over to Andy Oxley for closing remarks.

Anthony Oxley

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 in October to share our fourth quarter and fiscal 2024 results.

Operator

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