Forestar Group Inc (FOR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2008 Fourth Quarter Forestar Group Earnings Conference Call. My name is Channel and I will be the coordinator for this call. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Chris Nines, Chief Financial Officer. Please, proceed sir.

Thank you and good morning. This is Chris Nines, Chief Financial Officer of Forestar and I'd like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for fourth quarter and full year 2008. Joining me this morning is Jim Decosmo, President and CEO of Forestar.

Let me remind you to please review the warning statements in our press release and our slides concerning forward looking statements as we will make forward looking statements during this presentation.

This morning Jim and I will provide an update on our value creation activities and our financial results for fourth quarter and full year, 2008. At the completion of our presentation, we will be happy to take your questions. Thanks again for your interest in Forestar. I'd now like to turn the call over to Jim.

Thank you, Chris, and good morning, welcome and thank you for joining us on the call and the webcast. Before Chris reviews the financials, I want to make a few comments relative to the markets 2008 as well as our near term focus.

The housing markets continue to battle through a rough storm as a result, we will continue to reduce costs and investments in development. Our natural resources continue to perform well, at least bonus acreage and oil and gas production was significantly helping to offset lower oil and gas prices and difficult real estate market conditions.

For the quarter and the year, we did not acquire any new real estate projects. Unlike many, Forestar has a strong mix of low basis assets, active real estate projects principally located in the major markets of Texas, productive natural resources and a lean organization led by a proven and experienced management team navigating our business through this phase of the cycle.

The team is very focused on creating shareholder value, generating positive cash flow and continuing to strengthen our balance sheet. On the next few slides I want to briefly comment on our 2008 performance.

In 2008 we sold over 6000 undeveloped acres at an average price from $4800 per acre, generating about $29 million in sales. We continue creating value through entitlement. Entitlement activities were initiated on additional 7300 acres and now total 25 projects and 33,700 acres in the entitlement process.

Five projects received entitlement, totaling 2,500 acres, yielding approximately, 1,050 lots, 580 commercial acres. We focused our entitlement activities on acreage, having the greatest commercial potential and locations expected to benefit form economic investment and experience.

Real estate sale, 1,060 lots at an average price of $48,500 per lot, including in sales -- and these sales are 117 lots sold in a bulk transaction at a price $11,000 per lot. These were the last remaining lots at an entry level project called Parks of Deer Creek. Without the bulk sales, lot sales for the year would have averaged $53,200 per lot

In addition, we sold 120 commercial acres at an average price of $232,400 per acre. Our single largest investment in 2008 was in our Cibolo Canyons project in San Antonio. For the year, we invested $34.9 million in Cibolo Canyon. We believe Cibolo is one of our business defining projects that'll create and deliver value for years to come.

In 2008, we sold 71 lots at Cibolo at an average price of $91,400 per lot. That's up considerably from the first sales in 2005 that average approximately $52,000 per lot. As you would expect, sales velocity is down. Nonetheless, 71 lots equate to 1.4 sales per week. The average 2008 home sales per community for national builders is less than 0.5, and that's according to Zelman and Associates.

With regards to the resorts, I recently attended an onsite talking out event where Marriott Miller Global announced targeted completion by year end and an operating early in the first quarter of next year. You can see the design specifics on the chart, Marriott claims this to be their largest JW resort in the world.

Our economics are as follows, to date we've contributed 700 acres and approximately $26.5 million. From the time the resort opened and for each year thereafter through 2034, we'll receive the equivalent of 9% of the hotel room revenues and 0.5% sales and use tax generated from the sales of all food, beverage, conference, golf and spa. At year end 2008, we billed the municipal utility district $49.5 million to be reimbursed to Forestar for major infrastructure costs. Payment will be made at the time adequate (inaudible) support the issuance to bond by the district.

We believe Cibolo Canyon demonstrates the value we can create at other projects in market. At year end, we had 476,000 net mineral acres available for lease. 2008 we leased about 61,000 net mineral acres for approximately $25 million in revenue. We optioned 17,000 acres for $1.6 million and billed and received $2 million in delay rentals.

Our share of natural gas production for the year is 1,363 MMCF which generated revenue of $11.9 million. Our share of oil produced was 88,000 barrels and revenue of $9.4 million.

We had a strong year in mineral resources and I'll tell you our most significant accomplishment was establishing our minerals oil and gas team. Our team was recruited from an expiration and production sector, establishing the foundation capabilities, skill sets and experience required to further develop the business and create significant value. Their first initiative is to develop and provide the disclosures necessary for the market to fully understand and assess the value of our strategy and our mineral oil and gas asset.

We have approximately 34,000 timbered acres owned and 18,000 acres leased all being managed for optimum timber yield and enhanced real estate value. In addition, almost 300,000 acres are leased for recreation, generating approximately $2 million in revenue and cash.

Our fiber resources segment sold 917,000 tons of pulp wood, an average price of $852 a ton at almost 164,000 tons of fall timber at an average price of $1,951 per ton. Our resource revenue for 2008 was approximately $13 million. Now, let me turn it back over to Chris who will review financials for the quarter and year.

Thanks, Jim. Net income for fourth quarter 2008 was $1.7 million or $0.05 per diluted share outstanding, compare with essentially break even results for fourth quarter 2007. For the year 2008, Forestar reported net income of $12 million or $0.33 per diluted share, compared with net income of $24.8 million or $0.70 per diluted share.

Despite challenging market conditions, fourth quarter and full year 2008 financial results reflect the benefit of our leasing and royalty income related to our oil and gas minerals, a low cost operation and our value creation strategy for our real estate and natural resources assets. Full year 2008 weighted average diluted shares outstanding was 35.9 million shares.

Now, let me turn to our segment results. Manager operations for three business segments; real estate, mineral resources, and fiber resources. Our real estate operation reported segment earnings of $3 million in fourth quarter 2008, compared with the segment loss of $0.2 million in fourth quarter 2007. The year over year improvement in segment earnings was principally due to increased sales of undeveloped lands.

Our real estate segment results were negatively impacted by impairment expense of $3.3 million in fourth quarter 2008 and $3.9 million in fourth quarter 2007. Full year 2008 real estate segment earnings were $9.1 million compared with $39.5 million in 2007. This decline was primarily due to residential lot sales and commercial track sales due to the continued slow down in new home construction activity.

Jim will walk you through our real estate sales and entitlement activities for fourth quarter and full year 2008 in a few slides. Mineral resources reported segment earnings of $6.1 million fourth quarter 2008, compared with $3.7 million in fourth quarter 2007. Full year 2008 mineral resources segment earnings were $44.1 million, compared with $18.6 million in 2007. These improvements were driven by increased leasing activity and higher royalties from increased natural gas production and higher average oil and natural gas prices.

Including ventures, during 2008, we leased over 61,500 mineral acres, generating $24.9 million in bonus payments. In addition, during 2008, we retained a new minerals team, led by Flavious Smith located in Fort Worth Texas. This team brings extensive experience and a proven track record of maximizing value of minerals through increased leasing, royalties and additional participation in production revenues.

Fiber resources reported segment earnings of $2.7 million in fourth quarter 2008 compared with $3.8 million in fourth quarter 2007. Fourth quarter 2007 segment earnings benefited from a $2.2 million gain on the termination of a timber lease with the Jones Company in connection with the formation of the Ironstob Venture. Full year 2008 fiber resources earnings were $8.9 million, compared with $7.9 million in 2007.

In summary, total segment earnings for fourth quarter 2008 were $11.8 million, compared with $7.3 million in fourth quarter 2007. For the year 2007 total segment earnings were $66 million and despite challenging marketing conditions for our business in 2008, total segment earnings were $62.1 million. Now, let me turn the call back over to Jim, who will walk you through our real estate pipeline and the key performance indicators for our business.

Our real estate pipeline is comprised of four distinct value categories with the strategies being to create value by moving acreage through the value chain from left to right. At the end of 2008 we had approximately 315,000 low basis undeveloped acres of real estate principally located in and around Atlanta. The majority of this segment is comprised of acreage we selected from the 2 million acre timberland portfolio once owned by Temple-Inland.

We had just under 34,000 acres in entitlement process, just over 14,000 acres entitled, and just under 2,800 acres in the development category, giving our real estate portfolio of just over 365,000 acres.

In addition, we have about 25,000 lots in an entitled category, many originating from our low basis land with minimal investment. We have 4,421 lots in some phase of development, defined as engineered with no physical site work to finish lots ready for sale.

Not reflected in the acreage is our 58% ownership interest in Ironstob Venture, which controls over 16,000 acres in north Georgia. This acreage is principally located in Paulding, Polk and Haralson County.

This next series of slides are our real estate key performance indicators, a reconciliation of our progress in creating value by moving acreage through the pipeline. Revenue and earnings were down year over year, principally due to reduced residential and commercial sales. Land sales, we sold over 6,000 acres for the year and 36 transactions at an average price of $4,800 an acre.

We have an upcoming slide providing additional details of transparency. In 2008 we sold 120 acres of commercial property at an average price of $232,400 per acre. We sold 259 lots in the fourth quarter of 2008, including 117 lots at $11,000 per lot in the bulk sale at Parks of Deer Creek.

Once again, an entry level project in south Fort Worth, experiencing some school district issues, a deterrent to demand. Net of the bulk sales, we sold 142 lots at an average price of approximately $59,000 per lot. For the year, we sold 1,060 lots an average price of $48,500 per lot. Net Parks of Deer Creek, our average lot price was $53,500 per lot.

The next slide provides additional insight on historical pricing trend. As I've mentioned previously, our real estate portfolio is heavily influenced by the major markets in Texas. You can see from the chart on the left, our sales velocity has declined in all markets with the Texas markets continuing to outperform on a relative basis.

From a pricing standpoint, you can see by the chart on the right, the sales prices have not only held up but have steadily increased. 2008 average lot price is net of the price of the Parks of Deer Creek bulk sale.

A legitimate question, why are the Texas markets different from other markets today? First, home prices did not over heat to the first half of the decade, there was very little speculative activity. The markets have continued to maintain fairly balanced housing and lot inventory and to date, Texas has continued to lead the nation in job growth.

However, I must say the Texas markets are not exempt from the recession and the poor sentiment that exists throughout the housing sector. Nonetheless, Texas has held up well. These are the basic underpinnings of our portfolio of real estate projects. Next I'll provide additional color on our retail or small tract land sales.

As part of Temple-Inland, or as a standalone public company, since 2001 we've sold approximately $173 million in undeveloped small tract retail land sales. We've executed over 220 transactions representing approximately 40,000 acres at an average price in excess of $4,400 per acre. These sales include properties that were classified as timberlands or higher and better use.

In 2008 36 transactions generated approximately $29 million undeveloped land sales, a little over 6,000 acres at an average price of $4,800 per acre. With a price per acre ranging from a low of just over $2000 per acre to a high or $14,000 per acre.

This chart provides additional detail relevant to state and ownership structure, the bars represent price per acre on the left access and acreage is denoted by the triangles and scales on the right. For example, sale number 27 is an east Texas sale of approximately 450 acres at a price roughly $4,800 an acre.

Sale number three is a Georgia special use/conservation sale of approximately 470 acres at a little over $10,600 per acre. Even though this is an orderly looking chart, keep in mind that land sales are lumpy.

In the latter half of the year we allocated additional human resources to our retail small track land sales initiative, expanded the network of retail brokers and enhanced the marketing activity with the objective of generating additional retail for small track land sales. Of note, the historic sales I previously mentioned were accomplished with essentially one person and minimal marketing.

In addition to adding resources to our land sales initiative, this week we're launching our improved retail small track land sales website with many of the notable upgrades and attributes on the right. It can be viewed at landforsale.forestargroup.com and I encourage you to visit the site.

Move on to entitlements for 2008. Georgia entitlement progress, in 2008 we initiated entitlement process on five additional projects for 7,300 acres. At year end we had a total of 19 projects and just over 28,000 acres in the entitlement process.

We also secured entitlements on five projects with an estimated yield of 1,050 lots and 500 commercial acres for various uses and in locations expected to benefit from development and job creation. As we discussed before, we're equally focused on economic development and commercial uses.

The next two slides are examples of two of our commercial use projects here in entitlement in 2008. The [Talreed] industrial park is located at the intersection of highway 29 and I-85 with the [Texex] rail adjoining the southern border. The site's located approximately 35 miles from Atlanta airport or the Kia plant West Point, Georgia, scheduled to open this quarter and begin production later this year. The 195 acre industrial park is zoned for 2 million square feet for industrial and or distribution uses.

South Talreed is a good example of creating multiples of value through multiple use entitlement of low basis land with minimal investment. Our project currently entitled Pickens School, Pickens County Georgia received entitlement in 2008. This project is located northeast of Atlanta, intersected by highway 515, a four land divided highway potentially the extension of I-575 which originates just above Marietta, off of I-75.

In addition to zoning for residential community, the 414 acre is zoned as highway business allows us the flexibility to mix retail, office and multifamily in a way that optimized use and value. Given the location, the existing infrastructure and zoning, this project is one of our sites earmarked for economical development at the regional and state level.

The mineral resources segment generated almost $48 million in revenue for the year. We leased approximately 61,500 net mineral acres for the year and ended the year with approximately 121,000 acres under lease. That's up 44,000 from year end '07.

Even though oil and natural gas prices have come down form the peak in 2008, we continue to experience leasing activity evident by the 5,687 acres leased in the fourth quarter. Gas production is up year over year with oil down marginally. At year end 2008 there were an additional 31 wells producing royalty revenues compared to year end 2007.

We ended 2008 with our minerals, oil and gas team in place with a top priority of providing transparency and disclosures required for net asset value assessment. Disclosures will include reserve estimates and are targeted for release in our second quarter filing.

[Officer] sales volumes for 2008 was less than 2007 and skewed toward pulpwood given depressed fall summer prices. Nonetheless, our fiber resources segment earnings of $8.9 million was up year over year and is principally due to a reduction in cost. We will continue to operation our resources segment in a way that maximized the value of both our real estate and our fiber resources.

Business generated $12 million in earnings for $0.33 per diluted share in a very challenging year. Our 2008 segment earnings of $62.5 million were down less than $4 million from 2007. That's a tribute to the hard and diligent work of our employees and our solid foundation of real estate natural resource asset. We currently have a very lean organization of approximately 92 people who are very focused on creating and delivering value from a strong mix of both real estate and natural resource assets.

In closing, we expect 2009 to be a challenging year. Our near term initiatives are to generate sales across all lines of business with the previous slide providing overview of assets and segments from which we sell.

Number two, continue to reduce investments in development. By far, our largest use of cash. The run rate over the last three years has been approximately $80 million a year. We expect our ongoing efforts to significantly reduce development spend in 2009.

Number three, continue to reduce both G&A and operating expense. If free cash is generated, we will continue to strengthen our balance sheet and use cash in a way that best benefits our shareholders. Once again, let me thank you for your interest in Forestar and joining us this morning.

Before I open up the call for questions, let me state that we are not prepared to answer any questions concerning Mr. Ware's proposal and we will not speak on behalf of the Board. We have very experienced Board of Directors who will consider Mr. Ware's proposal in accordance with his fiduciary responsibility and respond as appropriate in due course. Now, I'd like to open up the call for questions.

(Operator Instructions). Your first question comes from the line of Robert Howard of Prospector Partners. Please proceed.

Good morning.

Good morning, Robert.

Just a couple things, the Q4 mineral results, did that -- I guess, are those results all sort of based on current commodity prices, or would there have been any additional uplifted that you could have benefited from old $100 oil prices that had some how some contractor had kind of come along and maybe had those revenues bit a little bit higher than you would have expected from just sort of a straight current commodity price level?

Right. Robert, our prices that we report are generally anywhere from a 60 to a 90 day lag. We get paid at the well head and there's a bit of accounting and time lag between when the oil or gas is produced and when we get paid. So we're generally about, as I said, 60 to 90 days in arrears or a lag in price.

Okay, and so the earnings or revenue that you get, its all based on when the cash comes in as opposed to some type of based on okay the oil came up in October and I guess the revenue gets credited when you get the cash as opposed to when the oil is taken out of the ground.

That's correct.

Yes, okay. And where are you guys in terms of kind of completing your inventory of your mineral resources, and I know one of your big tasks is trying to get your hands completely around everything you've got, how is that process going?

Robert -- Robert, as I stated in my comments that the new minerals oil and gas team is in place, their number one priority is to generate the transparency and the disclosures required for you and the balance to market to be able to fully understand and value these mineral oil and gas resources. As I also stated, our target is to provide a significant amount of additional information in our second quarter filing.

Okay, Q2. All right.

So there -- so I will tell you there is a full court press.

All right. And have you guys -- I guess sort of with the current economic environment, thought anything about what your debt levels are? I mean are you sort of happy with the way your debt liquidity -- or situation is? Do you want to pay down some of that at all, or what are your kind of thinkings in how to deal with the economic environment on that end of things?

Yes, Robert, we ended 2008 with debt to cap somewhere around 42%, 43%, something like that. You know, I can tell you, kind of based once again on the comments that I made, we expect 2009 to be another really challenging year. So addressing in the balance sheet and in some prudent manner would probably be in the best interest of the business.

Okay, great. Thanks guys.

Bye, Robert.

Thank you.

Your next question comes from the line of Mark Weintraub of Buckingham Research.

Thank you. Jim, I wanted to get a little bit more detail on slide 22 and go over the three elements of the near term strategic initiative to drive higher free cash flow, maybe get a little bit more specificity if possible. And maybe first of all to kind of the middle one, which is reduce investment and development. Can you tell us how much in terms of obligations or capital that you need to spend in '09 that there is still on the table as starting point?

Yes, Mark, as I said in my comments, we expect that our initiatives and ongoing efforts to make a significant reduction in spend for development in '09. The biggest obligation that we have and commitment is clearly Cibolo Canyons related to the resort, Palisades West which was a significant investment in 2008, for the most part, has been satisfied, there will be a little bit that rolls over into the -- into the first quarter of this year.

Those two projects alone, Cibolo Resort, the development plus Palisades in 2008 represented about $44 million of our investment in development, so you can see just in those two projects alone represented a significant share of development.

So, I would also tell you in 2009, looking back at our investments, a lot of the major track is in in Cibolo. A couple of the most significant expenses were the two parkways, there's a TPC parkway that goes through the resort, and also another Cibolo Canyons parkway that goes through the resort and both those are divided highways with medians and significant investment. Both those are in and almost fully landscaped.

So order of magnitude, Cibolo Canyons and Palisades West in 2009, what's the commitment that you have still outstanding/

Palisades -- yes, Palisades is just about done. I can't tell you exactly what the number is for Cibolo development for the residential piece, it will certainly be down given the investments in the major track that we had last year and in the resort, I think we're roughly $26.5 million in on an existing $38 million commitment.

Okay, so I guess there's $12 million remaining, some of which could be in '09, some could be in 2010?

Yes, I -- it's just a function of the pace of construction development on the resort. As I said in my comment, there's an expectation by Marriott and Miller that the resort will be completed by the end of the year and opening just a little over a year from now in the first quarter of '10.

And so then beyond Cibolo Canyons and Palisades, it seems you probably spent about $35 million. If I take the $80 million and I subtract the $44 million, order of magnitude $35 million for other projects. What type of number do you think is realistic for '09?

Less. You know, we reduced the investment development in all projects and I think Cibolo and Palisades are kind of an example. There's a -- there's a handful of projects that continue to do well even in today's environment, and as I said on a number of occasions, that's where we'll consider any investment in development.

Okay, and so order of magnitude when we put it all together for '09, should we be thinking $30 million or so of development? $40 million of development spending? Or can it be even less than that?

Mark, I won't give you a specific number, I'll just go back to my prepared comments and say that in comparison to 09 it will be a significant reduction.

Okay, and on the operating expense reduction, you indicated you were already very lean, where can you get further leverage to reduce operating expenses and what type of magnitude opportunity is that?

In OpEx and G&A in 2008, Mark, being the first year of a standalone public company there was certainly some start up and ramp up costs that we have continued to move out of the operations and the system latter half of the year, we'll continue to do that in the fist quarter.

I'll tell you that we are -- as far as employees that we have onboard, it's down from its peak, the number of consultants and contractors that were providing support for start up is almost nonexistent today. So those are a couple of the two primary and biggest areas.

Okay, and then, when you talked about generating sales across all lines of business, I'm sure that's -- I'd imagine you do that all the time, the delta being -- you made a reference I guess to the retail land sales program and that you certainly laid out an enhanced strategy there, is there -- are there other areas where you -- we should be thinking that there could be a renewed or more aggressive effort to realize revenues sooner rather than later, across the business lines?

Yes, across all lines of business. I think it -- I think my comments were appropriate for the morning, Mark.

Okay. And then lastly, when you put all this together, and you come to increased free cash flow is -- do you think it's very -- is it well within your capabilities to be free cash flow positive in 2009, i.e. to be in a debt reduction mode in 2009, is that something you can --

That's clearly our target and focus.

Okay. And then, lastly, I recognize that it's the Board's role to respond to that Holland Ware proposal and I understand you cant comment to that, but is there a particular timeline in which you would expect to be able to give us feedback on that or how should we --

Mark, as we said in our press release, the Board will address it in due course.

Okay, thank you.

Thank you, Mark.

Your next question comes from the line of Eric Anderson of Hartford Financial.

Yes, good morning. Wanted to congratulate you on a good quarter and good year and a very challenging environment. I wonder if you could just give us a little bit of history as to the -- if you look at the timberland that you remained that was not sold in the 2 million share transaction that you referenced earlier, how is it decided sort of what you kept, was it just things that didn't get the appropriate bid or was there some strategic thought as to what you wanted to keep in order to put into the company.

The second part of my question relates to the mineral rights. I believe you've got mineral rights on about 600,000 acres and does that imply that some of the 2 million acres that were sold either didn't have them or you were not able to retain those mineral rights?

Okay.

Thank you.

First question, criteria for the property that we've selected, Eric, beginning in early 2000 we put a team in place in Georgia and started examining all of the properties in that region to determine which ones had the potential to create multiples of value through entitlement and in subsequent development.

So there's a fairly exhaustive analysis that started years and years ago, looking at these properties, it's a function of estimates of infrastructure development, infrastructure plans, infrastructure that's in place, population growth, demographics, principally related to Atlanta, but also in consideration with Birmingham and Chattanooga.

So we started that in the early 2000s prior to spinning out and as part of Temple-Inland's transformation plan there was one more evaluation of all the properties and selections were made. So our selections were based on our believe that these properties had the potential to create multiples of value and or had multiples of value above and beyond timberland just based on other special uses.

So then if they're presently still primarily just timberland holdings, that doesn't imply that they always will be.

That's true. You know these -- when you look through these properties it would look like timberland, but so did some of the master developments that are in Georgia today.

Okay.

You know the feedstock for development is either agriculture or timberland. And when you look at our value creation strategy, if there's that undeveloped land at the -- in the bottom and we move it up into entitlement when its ready for products that have been in development and subsequent development will make those investments when we can meet our return expectation.

All right. So then basically, whatever you have today is stuff that you wanted to keep, not that you had to keep.

Correct. Yes, that -- absolutely. Absolutely. Those were our selection. Second part of your question, 622,000 net mineral acres, the simple answer to that is that over the decades as Temple and Temple-Inland bought and sold property, they would generally reserve mineral right. So if you look at Texas and Louisiana, we own something just north of 50,000 surface acres and I think mineral acreage is north of 350,000. So in most cases we don't own the surface but we do own the mineral.

Okay, well that's very helpful.

Which is the dominant estate.

Right. Thanks for your help.

Your final question comes from the line of [Gerard Goet] of [Maria].

Hello, I was wondering if you could just help us with the date of the next Board meeting regularly scheduled or otherwise.

Our Board meets -- Gerard, our Board meets quarterly and as I've said, the Board will entertain and review proposals in due course.

So there's no date set at the moment, but the Board does meet quarterly.

Yes.

Okay, thank you.

That was our last question. Once again I want to thank you for joining us on the call this morning as well as your interest in investment in Forestar.

Ladies and gentlemen, that concludes our presentation. Thank you for your participation. You may now disconnect. Have a great day.