Forestar Group Inc (FOR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forestar Group First Quarter 2009 Financial Results Conference Call.

(Operator instructions)

As a reminder, this conference 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.

Good morning, this is Chris Nines, Chief Financial Officer of Forestar Group 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 first quarter 2009. Joining me this morning is Jim Decosmo, President and CEO of Forestar.

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

This morning Jim Decosmo and I will present the results for first quarter 2009 and provide an update on the execution of our near term strategic initiatives. At the completion of our presentation, we will be happy to take your questions. Thanks for your interest in Forestar.

First quarter 2009 results were a net loss of $3.9 million, or $0.11 per share, compared with a net loss of $0.2 million, or $0.01 per share, in first quarter 2008 and net income of $1.7 million, or $0.05 per share, in fourth quarter 2008.

First quarter 2009 results include approximately $3.2 million in pretax expenses for outside advisors regarding an evaluation by our board of directors of an unsolicited shareholder proposal.

Now, let me turn to our segment results. We manage our operations through three business segments -- real estate, mineral resources and fiber resources. Real estate secures entitlements and develops infrastructure on our lands, primarily for single family residential and mixed use communities and manages our undeveloped land and commercial properties. Our real estate segment includes over 363,000 acres of land owned directly or through ventures located in nine states and 12 markets.

Mineral resources include approximately 622,000 net acres of oil and gas mineral interests located in Texas, Louisiana, Alabama, and Georgia. And fiber resources includes the sale of wood fiber, primarily in Georgia, and manages our recreational leases.

Our real estate operation reported segment earnings of $0.5 million in first quarter 2009 compared with $3.5 million in first quarter 2008 and $3 million in fourth quarter 2008. Real estate segment earnings were negatively impacted $1.2 million in first quarter 2009, principally related to an impairment charge and increased legal reserves.

Fourth quarter 2008 real estate segment earnings include impairment charges of $3.3 million. Jim will provide greater detail of first quarter 2009 real estate sales activity and value creation in a few slides.

Mineral resources segment earnings were $4.8 million in first quarter 2009 compared with $6.5 million in first quarter 2008 and $6.1 million in fourth quarter 2008. Let me remind you that our first quarter 2008 mineral resources segment results include the benefit of a 241-acre mineral lease at $6,500 per acre and a real estate venture in Dallas-Fort Worth which is located in the Barnett Shale.

Fiber resources reported segment earnings of $2.9 million in first quarter 2009, compared with $2.8 million in first quarter 2008 and $2.7 million in fourth quarter 2008. First quarter 2009 fiber resources segment earnings benefited from a higher mix of saw timber harvested primarily from our east Texas undeveloped land holdings.

Now, let me turn the call back over to Jim who will walk you though our real estate pipeline, the key performance indicators for each of our segments, and provide an update on our near-term strategic initiatives.

Thank you, Chris. I want to welcome everybody to the call this morning. As I review the results and provide comments on the quarter and the recent developments, it's important to understand that our strategy, and specifically our near-term initiatives, determine what we do on a daily basis. Specifically, generating significant cash principally from the sale of 175,000 acres of HBU timberland and using the proceeds to pay down $150 million in debt and buy back up to 20% of the outstanding stock.

Realizing the value of our natural resources -- minerals, fiber, and water -- with our initiatives focused on minerals, oil and gas. In this case there's two elements of realization -- first, the realization of the current value of our assets; and, second, the realization of the potential value of these assets, business and strategy. And last, generating positive cash flow through significant reductions in development and lowering cost.

At the end of the first quarter, we had approximately 313,000 undeveloped acres of real estate principally located in and around Atlanta. The 175,000 acres that we've selected for disposition is acreage that will not meet our return expectations given the time required to move through the pipeline.

We have just under 34,000 acres in entitlement process, just over 14,000 acres entitled, and just under 2,800 acres in a development category yielding our real estate portfolio of just over 363,000 acres. And in addition, we have about 25,000 lots in entitled category, mostly originating from our land in and around Atlanta with minimal investment.

At the end of Q1 '09 we had 4,315 lots in development, which is down from year end 2008. Not reflected in the acreage is our 58% ownership interest in Ironstob venture, which controls over 16,000 acres in north Georgia, principally located in Paulding, Polk and Haralson counties. That's just to the west of Atlanta.

Now the next series of slides are our real estate key performance indicators. I want to start at the bottom and work our way up. Revenue and earnings were down in comparison principally due to reduced residential and commercial sales. As Chris mentioned, earnings were adversely impacted by $1.2 million for an impairment charge and legal reserve.

Land sale -- we sold approximately 2,200 acres at an average price of approximately $3,800 per acre. For the quarter, we sold four acres of commercial property at an average price of $215,600 per acre. We sold 107 lots in the first quarter of 2009 at an average price of approximately $72,000 a lot. Many of these sales were in Cibolo Canyons in San Antonio and Lantana in Dallas-Fort Worth.

Let me shift to entitlement activity. Ridgeview, once called Lithia Springs, is a 117 acre site with 105 net developable acres and is located about 45 miles west of Atlanta, near the intersection of Highway 100 and Interstate 20 and is adjacent to the Honda transmission plant. It's a 250,000 square foot facility with about a $150 million investment and employs approximately 440 employees.

As you can see from the aerial and the site plan, plant access is through Ridgeview and is adjacent to our property. The zoning allows for 80 acres for commercial uses and 25 acres for residential to include townhomes or multifamily. Product type and yield include up to 443,000 square feet of retail, a 400-room hotel, 346,000 square feet of office, and a little over 1.2 million square feet for light industrial and 218 residential units -- pretty good density.

With this entitlement and zoning we have the flexibly to mix and to optimize the uses to include providing support to the plant and establishing a reasonable commercial presence given its proximity to the interchange.

Shifting gears to minerals, the mineral resources segment generated $5.9 million in revenue and $4.8 million in earnings for the quarter, down from comparative quarters. Both oil and natural gas volumes are up compared to Q4 and Q1 of '08. Well count at the end of the first quarter of '09 is up compared to Q1 '08, as well. As expected, prices are down for both natural gas and oil.

We leased approximately 6,100 acres for the quarter and we continue to see interest. An enhancement to the first quarter lease is that in addition to our royalty interest we negotiated a working interest option in all wells drilled in a 22,000-acre prospect area, even though our leased acreage represents a minor part of the prospect. If we elect not to participate, then our royalty interest will increase an additional 2.5% after payout, simply defined as the operator recovering its costs.

Let me give you a scenario. Assume a productive well is drilled that we elected not to participate in. Because of the success, the operator informs us he plans to drill offset wells. Our choices are then to exercise our working interest option and participate, sell or promote our working interest, or decline and receive the additional 2.5% royalty [upon] payout.

The benefit of the agreement is the terms, the optionality, the potential upside and ability to manage risk. Once again, progress and the realization of value of our natural resources.

Fiber -- Harvester sales volume for the first quarter of '09 was in line with Q4 '08 and up, year over year. Prices were mixed but generally down. We had a pretty high volume of saw timber for the quarter, principally form the timber sales in east Texas.

Our fiber resources segment earnings of $2.9 million is generally in line with comparative quarters; however, keep in mind that the first quarter of '08 earnings benefited from a $1.4 million gain on timber associated with the termination of a timber lease. We'll continue to operate our fiber resources segment in a way that maximizes the value of both our real estate and fiber resources. As I mentioned earlier, all of our actions, resources and attention have been focused on delivering our near-term strategic initiatives.

As we announced Monday, we executed a definitive agreement to sell Hancock Timber Resources (sic) Group 75,000 acres for $120 million in cash, not to include mineral interests. From the map, you can see this package was comprised of some of the larger more contiguous blocks and included the majority of our Alabama property and approximately 52,000 acres located in Georgia.

Given the current market conditions, our sales strategy was to target entities who were in the market, had committed capital and the ability to close. We announced our near term initiative on February the 11th and just over two and a half months we signed the first sales agreement -- a significant initial step in executing our initiatives.

The entire 175,000 acres is in the sales process from advertising in the market under contract. Specifically, there are two 25,000 acre institutional packages out and I'd estimate that we have another 14 to 16 packages of various sizes and uses in the market.

In addition, we have a significant number of retail or small tracts advertised on our website and through local brokers. Once again, the plan targets specific packages or specific market segments and buyers who have financing and the ability to close.

As I mentioned earlier, our near-term initiatives are what we do on a daily basis and we are firmly committed to fully executing our initiatives.

Not surprising, the majority of the properties we sold are those furthest from Atlanta and generally to the west. As previously mentioned, the undeveloped land parcels we will retain are of higher quality and superior locations and best fit our business and value creation strategy.

Considering historical uses of cash, development at approximately $90 million a year is by far the greatest use of cash and is therefore a significant initiative for us. Our 2009 target is to reduce investment in development by 75%, not to include our commitment to the Marriott Resort at our Cibolo Canyons project in San Antonio. Our first quarter investment in development was $7.6 million, which was down $13 million from the first quarter of '08 -- another positive step in the right direction.

We've also made progress lowering costs. In the first quartet this year, we reduced full-time head count by approximately 10% and virtually eliminated all part-time contractors who were primarily working on year one start up acquirement. Out head count today is 93 -- a pretty lean organization, especially considering that just in our real estate segment we're responsible for 104 projects in nine states and 12 markets.

For the quarter, G&A was down approximately 12%, excluding the one-time costs associated with the board's evaluation of an unsolicited shareholder proposal. We'll continue to examine and reduce costs wherever possible across the entire business.

Our strategy is to realize the value of natural resources, specifically our minerals, oil and gas. There are two primary components of this realization. First, developing and providing the disclosures and transparency required to appropriately determine the current value of our assets, business, and strategy. And, second, the minerals team promoting leasing and drilling activity resulting in increased acreage under lease, lease rates, volume produced and volume reserved. Once again, we've made progress on both fronts and are targeting additional disclosures with our second quarter 2009 communications and filing.

In closing, we continue to expect the balance of 2009 to be challenging, yet we remain focused and committed to achieving our strategy and initiatives. First, paying down $150 million in debt and buying back up to 20% of the outstanding stock, principally through the sale of 175,000 acres of HBU timberland.

Second, provide the transparency and disclosures necessary to appropriately value the minerals business and increase acreage in play and in production. Third, generate positive cash flow by reducing cash used for development and lowering costs.

We fundamentally believe the execution of these initiatives and our strategy will maximize long-term shareholder value. In addition, we believe that by retaining the best properties, projects and assets for our business we've enhanced our long term value creation potential and earnings power.

Once again, let me thank you for your interest in Forestar and for joining us this morning. I'd like to open up the call for questions.

(Operator instructions). Your first question comes from the line of Mark Weintraub with Buckingham Research. Please, proceed.

Thank you. Jim, is it possible for you to give us a little more sense on timing of the other potential land transactions? Perhaps if you could share with us whether or not you've already received bids on any of the other larger packages, or any sense as to when you'd hope to have the different deals done by?

Sure. Mark, I'd say that sooner is better than later. You know, obviously, we've been very aggressive and proactive at marketing, getting the packages out there. I won't comment with regards to the status of bids and whatnot in that I don't want to adversely impact the sales and the process. You know, as we've said on a number of occasions, from the time that we went public with initiatives, that it's a full-court press to deliver and get them done. Obviously, we're working in a market that's not quite as robust as it was a couple of years ago, but that's okay. We've altered our plan, our format and our structure to address that. So that'd be my comment with regards to the timing question.

Okay, maybe just following up on that answer, would you say that your expectations of what you can achieve through this process are the same now as they were when you began the process a couple months ago?

Mark, I would have to say, yes. If you look at -- I'll refer you back to one of the maps or the charts that we provided and look at the initial sale and what's left in front of us. If you look at just the proximity, I'll tell you that these properties have been well managed from a timber perspective. And we think that they're good assets. We think Hancock has made a good buy and we wish them the very best and we think that there will be continued interest.

Okay, shifting gears, could you give us an update on the status of the J&W (sic) Marriott at Cibolo?

Sure. There's -- but it is on plan and you can go to the JW Marriott resort website for that project. And they have announced that they're targeting turning keys over to Marriott late in the third quarter, early in the fourth, and have a soft opening early in 2010. If you're ever down that way, I'd encourage you to go by and see it. It's a whale of a project and John Pierret, who's responsible for the project, reports on it to us a couple times a month and shows us pictures and it's a very impressive project.

Terrific. And can you give us any sense of when you might recoup the conveyance costs, the $50 million or so of conveyance costs that you have at the project?

Mark, I'd assume that you're referring to the -- the utility district component of the special public improvement district that's on the bottom of the slide, that $50 million?

Yes.

Mark, there is -- there's somewhere in the neighborhood of 450 homes, two apartment complexes that have been finished and mostly leased up as a part of the project that will provide ad valorem tax support for the bonds. So we feel like we're in pretty good shape and we're moving forward in that process. It's difficult to say exactly the timing on it, but it's a whole lot closer than it was a year ago -- I can tell you that.

Would it be fair to say that, certainly, assuming the hotel starts on time, you'd expect to have it by the end of next year?

I think based on your assumption, I think that would be a valid assumption.

And understand, too, Mark, that as we continue to make investments in what I call major track, that will also be included in the reimbursements through that district.

Okay, and then lastly, you've had a couple of relatively small impairment charges. When one looks at the dates that you had acquired some of the properties, '06, '07, from the outside, it's almost surprising that there haven't been more in the way of impairment charges. Can you provide a little more color as to why there haven't been more impairment charges and how worried one should be about future impairment charges?

Mark, I think your comment is appropriate. There hasn't been a whole lot of impairment and I think you almost answered your own question. If you look at that schedule three, in the back of the K, you can see what our investment is in these various projects -- when they are -- were acquired and how much is left in front of us. And you'll see that Forestar is not a company that was caught up in the housing craze in Phoenix and Vegas and California which -- and south Florida, which is where I assure you the lion's share of impairments have been taken for other entities, whether it's in -- for home builders or for housing.

I'd close that comment -- statement out saying, in addition to that, a majority of the vestment -- and there's a slide that shows this -- is in the major markets of Texas, which relatively speaking are the healthiest in the nation. Now, obviously, they've slowed down but they were not caught up in the price run ups and had the speculative activity in the subprime concentration. And for the last two or three years, these markets led the nation in job growth. So that's really what frames up our portfolio as well as the risk of future impairment.

Okay, thank you, Jim.

You're welcome. Thank you, Mark.

Your next question comes from the line of [Ben Rosenwie] with Private Fund Management. Please proceed.

Hey, Jim. Hey, Chris. How are you doing?

Doing, Ben.

Quick question on the cost cutting initiatives. You're talking about the G&A, the reduced head count, reduced contract workers. Do you see that as something that's going to be kind of an ongoing thing? Or do you think that what you've done so far, if you kind of annualize that, it's going to get you to where you want to be?

Ben, I would tell you that that's a first step, but regardless of where you are in a cycle, it's part of who Forestar is. I think you got to look at your entire business, whether it's G&A or OpEx or any use of cash. It's got to always be at the forefront and examined for its best uses. So I would close that comment by saying that, that's a first step but we're not finished and nothing gets a pass.

Okay, okay. That makes sense. And then on the sales to Hancock, I think you showed on the map attached to your 8-K that it looks like those are the kind -- the outer ring of land in the Atlanta MSA? And so it looks like, I guess, if you just did the valuation map, roughly $1,600 an acre there. What kind of valuations are you seeing in the stuff that you have in process? Obviously, I guess, it's going to be dependent on the specific land, but as a majority of that is kind of closer into Atlanta, what kind of stuff are you expecting?

Well, it's a little difficult to answer that question. Ben, I think the best response to that is, let's see what the properties produce. I think you -- you're looking at it from the right perspective. What we've sold so far is from a location perspective -- is that it's furthest out from Atlanta. But I'll also say that even those properties that we sold to Hancock, those were well managed lands. It was well managed timber.

And what's a little bit unique about these sales, versus most southern timberland sales, if you look at just the location, they're all sandwiched so to speak between Atlanta and Birmingham and Chattanooga with Atlanta being a population of 5 million people expected to double in the next 15 to 20 years. So these are good properties. They don't -- they no longer fit our real business model, as I said earlier, but there's a lot of optionality there for a buyer.

Got you. Okay, and then lastly I guess, just the nat gas and mineral segment. It looks like you guys are making good progress in terms of leasing and getting some royalty revenue. But obviously it's pretty highly dependent on the market rates there for nat gas and oil. With your new team in place, what kind of -- what are they seeing in the industry in terms of pricing going forward and what are they expecting from that segment?

Well, Ben, if you look at the leasing activity and the rates and production -- all that stuff in the fourth quarter of '08 versus the first quarter of '09, and I made the comment earlier when I was talking about minerals that we're continuing to see activity. You know, fortunately, even with depressed prices, really compared to '08, activity is still encouraging. Obviously, the team that's in place now has a different set of networks and relationships, and in our opinion they're really doing a good job of promoting our ownership and the opportunities and doing what we hired them to do. So I would say that even though prices are down, we remain encouraged and optimistic. We think that they're great assets and they got a lot of potential.

All right, guys. Thanks, I appreciate it.

Thank you, Ben.

Your next question comes from the line of Robert Holt with Holt Capital Partners. Please, proceed.

To some extent a follow up on the previous questions. You've continued to describe your properties that you're planning to sell as higher and better use timberland, and yet if you look at the price basis of this announced transaction at $1,600 an acre, that would be a little bit more generic in terms of pricing. And I wondered how you would rationalize the pricing that I would view as more generic with your description of higher and better use that I would think would imply higher prices per acre?

Robert, I think that there's -- if there's two components of land prices, there's the base component of a timber, or timberland, value and then there's some increment of value realization for HBU. I would suppose that there is probably some reflection of HBU value and more than likely, looking at historically the base value of the timberland is probably down.

If you were to run comparables, for example, versus the Plum Creek sale in the southeast last year, can you help me in terms of quality of timber or different valuation metrics relative to the fact -- I think they sold for roughly $1,800 or $1,850 an acre? Or would you attribute all of the difference simply to softer markets?

I think most of it's attributed to softer markets. Robert, I'm not intimately familiar with the timber attributes of the sales that you mentioned. I will say that the timber component of what we sold to Hancock has been well managed. It may be a little bit on the younger side, but I think you've probably addressed your question appropriately and it's just a softer market today.

In a different -- shifting gears to minerals -- in a different natural gas pricing environment and with a new team in place, would you consider hedging any of your royalty income?

Robert, it's -- obviously, in the oil and gas business, hedging is a tool that's used quite a bit. It's out there in front of it. I wouldn't want to say today whether we would or whether we wouldn't. Generally, our philosophy has been that we haven't hedged. At the end of the day, it's somewhat of a bet, but it's part of the business. So I'd just leave it at that.

Your Ridgeview development -- about how much in additional capital expenditures should we expect as that gets developed out? And how much capital do you have in the project at this point?

Robert, I'd tell you that there's minimal investment in that project. Really, the entitlement expense has been absorbed in the operating expense for the real estate segment. So relatively speaking it is very little.

Expected capital going forward -- the way that we look at that project or any other project is it may be developed out. It may be partially developed. It may be ventured. Or depending upon market conditions, if there was another entity that approached us and wanted to buy it entitled, and we run the numbers and it says it's best to sell it as entitled prosperity, then conceivably there would be no investment.

So we try to manage our business and look at development and the capital investment from a very disciplined approach. And we've said on a number of cases, whether we look at an acquisition or investing in development, we've got a pretty stringent and disciplined methodology for looking at that. So it's not that we've got a budget for development for this project. I think it's too early to call that.

One last question on residential lot sales -- we're coming into the spring selling season that in a normal year would be an important seasonal period for you. You've described the year as challenging still. Do you have -- can you give us any guidance in terms of expected lot sales versus the second quarter of last year? Or kind of any sense of how momentum is going, especially since you're primarily exposed to various Texas markets, especially San Antonio?

Yes, Robert, my comment would -- that I made earlier I think is probably appropriate. The markets continue to be challenged. There's clearly some headwinds in the market. The good news is that the markets we're in, if you look at inventory ratios of homes, lots -- the whole schmear, we're in pretty good shape.

In my opinion, what's really going to get a market moving again is going to come from the demand side. And these markets are going to have to begin to generate some jobs. And so I don't -- we're not looking for significant increases in numbers until we see some job growth return and some jobs created.

All right. Thank you very much and congratulations on making progress on your strategic plan.

Thank you, Robert.

Your next question comes from the line of Peter Ruschmeier with Barclays Capital. Please proceed.

Thanks. Good morning.

Good morning. How are you, Pete?

Very well. Hi, Chris. Hey, Jim. Couple questions -- maybe, Chris, can you review the liquidity of the company that you have access to? And to the extent that you've shared this -- what you've commented on in terms of the 20% buyback, whether you plan to do that open market purchases? Or can you -- can you act on that preemptively in anticipation of timber sales with some of your liquidity?

Pete, this is Chris. Relative to the liquidity situation, we ended the first quarter with about $175 million in availability under our credit facility. And that facility will mature in December 1st of 2010. So as we ended the quarter, we still have about $175 million in availability,

Okay, and have you shared at all as to whether you plan to do a Dutch tender, open market purchases? Have you elaborated at all on how you plan to buy back stock?

Relative to the buyback, Peter, what we've said is that those repurchases will come following the asset sales. In this first sale to Hancock, when it closes in June, we would use all 100% of those proceeds to reduce debt. Following that debt reduction going forward, we'll just have to evaluate on a transaction-by-transaction basis, and determine with our board what makes sense for debt reduction as well as what makes sense for share repurchases.

Okay, that's helpful. And remind us, Chris, if you would, the tax implications of the sale to Hancock?

It would be a fully taxable transaction at this point.

And have you shared the basis of those lands?

It's book basis. It'd be about $500 an acre and the tax basis would be less than that.

Okay, and maybe a question for Jim. I'm curious if you could elaborate on the timing and the steps when you talk about improving minerals transparency? What are the signposts that we should be looking for? Can you elaborate on what you plan to do there?

Yes, Pete, if you look at the -- that slide and that chart, next to last one called improved minerals transparency, held by production are wells that are producing and selling and generating royalty interest for us. Commonly, with oil and gas there's a series of different reserve calculations; probably about half a dozen of the most common being prove and developed.

So the team has been diligently working on that information to begin to provide some insights, some transparency on reserves and reserve calculation. Obviously, the next tranche is, so what's coming behind the reserve, which is drilling and well activity, leasing activity, and also providing greater insights into the 622,000 net mineral acres. Where is it? What formation? What play? What's going on? Or what's not going on? So that's the approach that we're taking, Pete.

Okay.

And --

And not to pin you down on timing, but is this something you think over the next one to two quarters you'll get to where you want to be on transparency?

Yes, there's a -- we'll take a significant step with the release and the filings and communications at the end of this quarter, but it will be an ongoing effort. We'll continue work through the third and the fourth and then ongoing.

But, Pete, to be quite honest, what we've provided to the market is, to-date, is unacceptable. Basically, we've provided a couple of very high level and general maps and some historical financials. So that's the base that we're working from but we've got the right team in place that can generate the right type of information data and transparency for us.

Very good. And just lastly, if I could -- given that most of your acres are HBU looking to put these acres into different pipelines for development down the road, can you remind us of how you're thinking about your harvest strategy, since some of these acres, presumably, you would not want to be harvesting? And so maybe from a high level, what percent of your acres might be in a rotation for harvest versus set-aside to not be touched for that purpose?

Pete, the real difference in how the timber is managed is there's essentially no clear cutting. So there's not a final harvest because you certainly don't want to destroy real estate value or adversely impact aesthetics and things of that nature. But I will say that there's different ways to be able to capture 100% of the growth, which is what our objective is. So for example, if 350,000 acres is growing a million tons a year, which is generally the objective of land managers, or timber owners, is to cut growth. And well, our target is to remove and harvest that million tons. It's principally through thinning and not final harvest to capture all the value that we possibly can up to the point that we don't impact any real estate value. So we're pretty -- we're pretty assertive and pretty aggressive even on the timber harvest and sale side of the business.

Okay, thanks very much. Good luck with your plan.

All right. Thank you, Pete. I want to thank everybody for joining us this morning and I hope that everybody has a great day.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.