Forestar Group Inc (FOR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Forestar Group Incorporated Earnings Conference Call. My name is Michelle and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

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

Thank you and good morning. This is Chris Nines, Chief Financial Officer of Forestar Group. I would like to welcome each of you who have joined us by conference call or webcast to discuss the results for second quarter 2009. 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, as we will make forward-looking statements during this presentation. In addition, this presentation will include non-GAAP financial measures. The required reconciliations to GAAP financial measures can be found on our website at www.forestargroup.com. This presentation will also include increased transparency and additional disclosures related to our mineral assets, including proved developed producing reserves. As a result, I would encourage each of you to review our reserve disclosures, included in this presentation. This morning, Jim DeCosmo and I will present the results for second quarter 2009 and provide an update on the execution of our strategic initiatives. At the completion of our presentation, we will be happy to take your questions. Thanks for your interest in Forestar. Now, let me turn the call over to Jim.

Thank you, Chris, and welcome to all of those who have joined us on the call this morning. In 2009 to-date, Forestar has made significant progress at executing our strategic initiatives despite difficult economic conditions. In the second quarter of 2009, we sold about 75,000 acres for $120 million, and reduced debt by over $110 million. Producing cash used for development and lower costs was a significant contributor to generating positive cash flow in the second quarter of 2009, with cash flow excluding the gain from the 75,000 acre sale. As you'll soon see, our mineral resources team has made good progress improving transparency and disclosure of our mineral resources segment. Since close of quarter, we've achieved two additional significant accomplishments. The second institutional sale closed yesterday for $39.5 million. And I also wanted to acknowledge the good work of Chris Nines, who successfully led the initiative (inaudible) the credit facility providing us with options to extend the terms of the facility through July of 2012. Since we embarked on our initiative, we've fundamentally strengthened and transformed the balance sheet, significantly improving liquidity and flexibility. Now, let me turn it over to Chris to review the financials.

Thanks, Jim. Net income for second quarter 2009 was $50.9 million or $1.41 per diluted share compared with net income of $9.6 million or $0.27 per diluted share in second quarter 2008 and a net loss of $3.9 million, or $0.11 per share in first quarter 2009. Our second quarter 2009 results include a gain of $1.37 per share after tax from the sale of about 75,000 acres of timberland for approximately $120 million. Now, let me turn to our segment results. We manage our operations through three business segments -- real estate, mineral resources, and fiber resources. Our real estate operation reported segment earnings of $5 million in second quarter 2009, compared with just under $1 million in second quarter 2008 and $0.5 million in first quarter 2009. Second quarter 2009 real estate segment earnings include a $4.1 million loss from equity and unconsolidated ventures, principally related to an impairment expense for a real estate project located near Atlanta, Georgia. In addition, second quarter 2008 real estate segment earnings were negatively impacted by a $3.5 million charge, principally associated with environmentally remediation activities at our San Joaquin River project located near Antioch, California. Jim will provide greater detail of our second quarter 2009 real estate sales activity in a few slides. Mineral resources segment earnings were $6.4 million in second quarter 2009, compared with $23.2 million second quarter 2008 and $4.8 million in first quarter 2009. Second quarter 2008 mineral resources segment results include $18.5 million in lease bonus payments associated with leasing over 47,000 net mineral acres. Fiber resources reported segment earnings of $3.3 million in second quarter 2009, compared with $1.4 million in second quarter 2008 and $2.9 million in first quarter 2009. Second quarter 2009 fiber resources segment earnings benefited from a higher mix of chip and saw from our Georgia land holdings. Now, let me turn the call back over to Jim who will walk you through our real estate pipeline, the key performance indicators for each of our segments, and provide an update on our strategic initiatives.

I'll review our key performance indicators for each segment of our business, followed by an update on our strategic initiatives and a section on minerals focused on increasing transparency and disclosures related to our mineral assets, including proved producing reserves. Real estate -- starting at the bottom and working our way up. Revenue and earnings were up in comparison, principally due to higher retail tract sales. As Chris noted, in the second quarter of this year, earnings were adversely impacted by a $4.1 million impairment charge associated with unconsolidated venture project near Atlanta. Retail land sales -- we sold approximately 7,500 acres at an average price of about $2,300 an acre. One sale in particular included several parcels and totaled approximately 5,500 acres, located in some of our most rural locations. Residential sales -- we sold 165 lots in the second quarter of 2009, an average price of approximately $59,200 per lot. All but three lots were sold in our Texas markets. Our pipeline estimates are for the end of the second quarter 2009 and have not been adjusted for subsequent sales. Working back from the left to the right, we had about 230,000 undeveloped acres of real estate, principally located in and around Atlanta. Just under 34,000 acres is in the entitlement process, 14,088 acres entitled and just over 2,800 acres in the development category, yielding our real estate portfolio just over 280,000 acres at the end of the quarter. Estimated residential lot count -- we have just over 25,000 estimated lots in the entitled category and 4,109 lots in development, down from the first quarter of 2009 and year-end 2008. Lots entitled in the development are principally located in the major markets of Texas. Not reflected in the acreage is our 58% ownership in [Ironstob] Venture, which controls over 16,000 acres in North Georgia, principally located in Paulding, Polk and Haralson counties. Now shifting gears to our minerals KPIs. The minerals resources segment generated $7 million in revenue and $6.4 million in earnings for the quarter, up from the first quarter of this year and down from the second quarter of 2008. Oil volume is relatively flat in comparison to our natural gas volume for the second quarter, is down from the first quarter of 2009, and up compared to the second quarter of 2008. Now keep in mind that volumes reflect what we've been paid for and not what was produced at the wellhead for the various quarters. We leased approximately 8,200 acres for the quarter and continue to be encouraged by the level of interest in the current natural gas prices. Fiber resources -- sales volume for both pulpwood and saw timber was up in the second quarter of this year compared to the first quarter of '09 and second quarter of '08. Pulpwood prices are relatively flat while saw timber prices are down from the first quarter, generally due to higher volume and a smaller chip and saw that we sold in Georgia. Our fiber resources segment generated $5 million of revenue and $3.3 million in earnings in the second quarter of this year, up over comparative quarters. We continue to operate our fiber resources segment in a way that maximizes the value of both, our fiber resources and real estate. As I mentioned in my opening comments, we've made substantial progress executing our near-term strategic initiatives. The next series of slides will provide you with additional insight in our performance. We have three basic strategic initiatives the organization is keenly focused on. First, generating significant cash flow principally from the sale of 175,000 acres of HBU timberland. Second, realizing the value of our natural resources -- mineral, fiber and water with our initiatives focused on minerals; oil and gas. In this case, there's two elements to this realization. First, the realization of the current value of these assets. And second, the realization of the potential value of our assets, business and strategy. And last, generating positive cash flow through significant reductions and development and lowering costs. Our first institutional sale with the Hancock Timber Resources Group; 75,000 acres for $120 million cash, not to include mineral interest. These properties are identified with the purple shading. From the map, you can see that this package was comprised of some of the larger, more contiguous blocks, including the majority of our Alabama property and approximately 52,000 acres located in Georgia. The second sale of 20,000 acres for $39.5 million is shaded in gold or yellow, and principally located south and west of Atlanta. The balance of the properties are identified as either sale-candidate, shaded in green, or red -- held for real estate uses. In 2009, including the retail land sales, we've sold approximately 105,000 acres for $185 million, a significant step in executing our initiatives. The balance of the acreage is in various stages of the sales process and offerings. Our plan remains to target specific packages for specific market segments and the buyers who have the financial ability to perform. Our near-term initiatives are what we do on a daily basis and we're committed to execution. We'll continue to be diligent in our efforts, yet disciplined to ensure that future sales reflect the value of these assets. We are not distressed sellers. After reducing debt by $111 million in the second quarter, total debt to cap is at 32%, down from 44% at the end of the first quarter this year. In addition, we are successfully negotiating a minimis to the credit facility, including an option to extend the term through July of 2012. In a short period of time, we've transformed the balance sheet and credit facility significantly improving liquidity and flexibility. And note that the second quarter and balance sheet metrics do not include the benefit of the second $39.5 million institutional land sale, and also do not reflect any income taxes associated with the first institutional land sale due in the third quarter of this year. 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 development by 75%, excluding our commitment to Marriott Resort at our Cibolo Canyons project in San Antonio. During the first half of the year, investment and development was down $10.6 million, excluding resort contributions, down $26 million or 71% from the first half of 2008 -- continued progress in the right direction. We also continue to make progress lowering costs. In the second quarter, G&A was down approximately 20% over the second quarter of '08, excluding share based compensation expense. In the second quarter, operating expenses were down approximately 15% over the second quarter of '08, excluding share based expense and a charge related to the San Joaquin project in Antioch, California. We've made good progress and we'll continue to examine and reduce costs where possible across the entire business. The last segment of the call this morning will focus on our mineral resources. Our strategy and additional disclosures to include a regional overview, proved developed producing reserve estimates and leasing and well activity related to specific formations and plays by basin. Our strategy is to realize the value of minerals by marketing and promoting available acreage and negotiating the best deals in the market for rates, interest terms and conditions, ultimately increasing production, reserves and value. Historically, the disclosures have been limited. This quarter will provide additional information with the objective being to aid the market in understanding and valuing our assets and business. In addition, we'll provide updates on relative events, impacting Forestar Minerals. The forthcoming slides will address the disclosures been identified under the column labeled Second Quarter 2009. And before moving on, let me also mention that we launched the first edition of our minerals website at ForestarMinerals.com, a basic start but a good beginning. Our strategy is to move acreage from the left to the right, generating lease bonus revenue and creating value by increasing our share of production and reserves. At the end of the second quarter 2009, we had 472,000 acres available for lease, 124,000 acres leased for exploration and production, and 26,000 acres held by 464 producing and selling wells. To-date, the greatest concentration of activity and production is in East Texas, a prolific region for oil and especially natural gas. Forestar Minerals are located in some of the most prolific natural gas basins in the continental US. According to the Energy Information Agency, Texas and Louisiana account for 34% of the natural gas reserves in the nation. With continued advancements in horizontal drilling and completion technology, the natural gas shale or resource plays have contributed the majority of the recent increases in natural gas production and reserves. The Forestar marks indicate the location of our interest in the various basins in Texas, Louisiana, Alabama and Georgia. On the right-hand side is a stratigraphic column we produced providing a view of the formations or plays that are generating oil and gas production and/or generating leasing activity associated with our mineral acreage. And a quite colorful stratigraphic column, I might add. Now let me shift gears to Forestar Reserves. At this time, we are pointing our estimated proved developed producing reserves, only one component of reserves. At year-end 2008, our proved developed producing reserves were estimated at 10.3 Bcfe or billion cubic feet equivalent. This is a metric that's used to represent both oil and natural gas volume. The 10.3 BCFE represents our share of the PDPs associated with the 439 in producing wells at the end of 2008. The PDP reserve volume and value is based on 2008 year-end natural gas and oil prices and production costs. As you would expect, volumes and values will vary based on year-end price and costs spread. Our PDP and value for PDPs is estimated at $31.9 million. This is the present value of the $52.4 million of estimated future cash flow at a 10% discount rate. PDPs are only one component of reserves and limited to the 439 wells generating production from 26,000 net mineral acres, less than 5% of our ownership. Consistent with our strategic initiative, we'll continue to pursue additional disclosures. The next chart will provide additional perspective on reserves. In the center of the slide are five basic categories of reserves plus a resource category. As you can see, the category of reserves we reported, PDPs highlighted in the dark blue, is only one component of reserve estimates and do not include other categories or reserves associated with producing wells, acreage held by production or the balance of our mineral acreage. To the right, our natural gas volume estimates from the US Energy Information Agency and the Potential Gas Committee. Total estimated natural gas volume for the continental US is approximately 1,700 Tcf, or trillion cubic feet. Of that volume, 226 Tcf is proven, which includes the categories Proved Developed Producing, Proved Behind Pipe and Proved Undeveloped and 1,485 Tcf defined as probable, possible and resource. In simple terms, probability or certainty of recovery is highest with PDPs and declines with progression down the chart. Now let's step back and take a broader look at our mineral assets and market drivers, starting with Texas and Louisiana. The majority of the current production activity in Texas and Louisiana is generally associated with three basins. The East Texas and the Gulf Coast basins, which include a number of active formations and plays and the Fort Worth basin, which includes the Barnett Shale. The stratigraphic column on the right side of the slide shows the formations and plays generating the majority of our production and lease activity. The map illustrates our ownership at the county level and status held by production, lease for exploration, and drilling or available for lease. At the bottom of the slide, our significant lessees and/or operators or wells in which we have royalty interest. Recently, the Bossier and Haynesville formations have generated leasing and/or drilling activity by EnCana and EOG, just to name a few. This is a similar chart for Georgia and Alabama. Lease is green, available for leasing is yellow. Of our approximately 257,000 net mineral acres, approximately 9,000 is leased with the potential primarily associated with either the Conasauga or the Floyd plays. To the northeast is the Chattanooga formation. The previous two slides provided a snapshot of the status of our mineral ownership and the formations and the operators in the basins. Now let's take a look at the most recent activities in the first half of 2009. This slide provides an update on Texas well production and leasing activity in the first half of this year. 15 new wells came on line producing and selling and we leased 8,600 acres for exploration and drilling. Let me start with selling and producing wells. In the Fort Worth basin, six wells are located at our Summer Creek joint venture development project in Tarrant County and are producing out of the Barnett Shale. Five are operated by Chesapeake and one by Devon. In the East Texas basin, six wells are operated by Cabot and two by Newfield, all producing out of the James Lime. And to the south is one new well operated by Anadarko and producing out of the Austin Chalk. These 15 wells plus additions in the second half of the year will drive 2009 year-end reserve estimates as well as future production. Due to decline rates, a minority of wells account for the majority of reserves in production. Replacement is important. The 8,600 acres leased principally target the formations we've checked on the right side of the column. This is the same information for Louisiana -- 5,700 acres leased and three additional wells producing and selling in the first half of this year. All three wells are producing oil and gas out of Yegua (inaudible) formation and operated by Union Oil and Gas. All the 2009 leasing activity has been in Beauregard Parish with exploration drilling targeting the Yegua and the Wilcox formations. In closing, we continue to expect the balance of 2009 to challenging. Yet, we remain focused and committed to achieving our strategy and our initiatives. First, continue strengthening the balance sheet principally from the sale of 175,000 acres of HBU timberland with 95,000 acres in 160 million closed to-date. Second, provide meaningful minerals transparency and disclosures while continuing to promote leasing and negotiating agreements, getting the best terms, conditions and value. Third, improving cash flow by reducing cash used for development and lower costs, reducing investment development by 71% and administrative costs by 16% year-over-year, equates to over $26 million improvement in cash flow. 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, the projects and assets for our business, we've enhanced our long-term value creation potential and earnings power. Now, once again, let me thank you for your interest in Forestar and for joining us this morning. Now, I'd like to open up the call for questions.

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

Thank you. Good morning. Jim, on the proven reserves, you indicated 10.3 Bcf equivalent. How much of that would be oil and how much would be gas?

Mark, I tell you that it's approximately 70/30, 60/40 natural gas to oil. For sure, it's more heavily weighted toward natural gas than it is oil.

Okay. And then, also, you had a lot of leasing activity in the middle of last year. Has that led to a number of new wells? Or, would the leasing activity and the hope for well production -- is that something that we would expect to see arise in the months or quarters ahead?

Mark, I would say that, certainly, leasing activity and drilling activity are related. But I'm not sure that we can say that there's a one-to-one relationship, if you leased twice as many acres, you're going to get twice as many wells. I think it's just a function of the formation, the price of oil and gas, you know, the activity. So, I'd just answer the question that way. I think we'd be getting a little ahead of ourselves to say that if we leased 100,000 acres and we'd expect the number of wells to have some multiple associated with that.

Okay. And then, lastly, I appreciate very much the helpful information you provided on the oil and gas on your proven reserves. Do you expect and is it customary to try and provide a little bit more guidance or transparency on realistic expectations on the balance of your business. There's a slide where you show, basically, the five or six different categorizations of where the oil and gas is. And there's proven that that's not necessarily a producing well. Is that the type of information that you would expect to share with us, at least your best assessment of it in the future?

Yes, Mark. I'll go back to the comment that I made on the slide. And we're fully committed to continuing to pursue additional disclosures.

Okay. Terrific. Then, shifting gears and I'll free up the line real soon. Have you seen any increase in traffic regarding potential lot activity, in the Texas markets in particular?

Mark, I'll tell you what we have seen and this is going to be fairly consistent with what you read with regards to the housing market today. There's been more activity in traffic associated with the lower-priced homes or entry level. It's generally believed that the $8,000 tax credit has been a fairly successful incentive. So, we have seen that. I would tell you that the consumer-to-buyer sentiment is better today than it was three to six, nine months ago. But understand that when I say better today, that just means less bad. But we are encouraged about what we've seen. But at the same time, we certainly remain cautious. With regards to lot sales, I'd also tell you that, in addition to a little bit more activity around the lower-priced homes and lots, we continue to sell our tried-and-true master planned communities that we have here in Texas.

How many of the 165 lots you sold were in Cibolo Canyons, in the quarter?

Mark, a fairly decent number. Cibolo continues to -- I believe, don't hold me to this, but I think it's about 16.

Okay. And then, lastly, on Cibolo Canyons, do you have any better visibility on -- two things; one, the timing of when the Marriott will become operational, and two, the potential timing of when there could be a bond issuance that would enable you to recoup some of the money you've spent there?

Okay. With regard to timing, Mark, to our knowledge, the project is still on schedule to open sometime in the first quarter of 2010, or next year. Construction is going strong. There was a comment that I heard the other day that I'll repeat that there's over 1,000 workers showing up every day. So, it's full speed ahead. With regard to the bond capacity and bond issue, Mark, I'd say that's a process that requires assessment of ad valorem taxes and confirmation collectibles and all of that kind of good stuff. But that process is ongoing. It'd be a little presumptuous for me, this morning, to tell you when we think there's going to be a collection. But what I'll commit to you is that, just as soon as we have a collection, I'll share that with you as well as the market.

Okay. Thanks very much.

Thank you, Mark.

(Operator Instructions) Your next question comes from the line of [Ben Rosenflag] of [Private Fund Management]. Please proceed.

Good morning, guys. How are you doing?

Good, Ben. How are you, this morning?

Not too bad. Not too bad. Just a few questions. The Atlanta impairment, can you tell me a little bit more about that?

Ben, what I'll tell you is that it was just a project that was in the CL Venture. And, to my knowledge, Ben, I think CL is actually a partner with another entity in that.

Okay. So that was just a passive investment for you guys?

Pardon me.

I said that was just a passive JV?

Yes.

Okay. And, let's see here. Can you tell me what the current cash balance is? I know you guys are going to release your balance sheet on your Q. But what's the current cash balance and how is the remaining debt structure? I think Chris said previously that you paid down the revolver completely.

Ben, I don't know if I got the second part of the question. If I'm not mistaken, cash balance at the end of the second quarter was $17 million, but it'll be reported in the Q.

Right. And then, also, the 136 remaining outstanding under the facility - is that entirely term loan?

Yes. That's the entire -- ?

Term loan balance. We had no outstandings under revolver at the end of the second quarter.

Okay. Great. That's what I thought. And, then also, during the second quarter, since you guys said that the income tax associated with the Hancock sale will be paid in the third quarter. What were the second quarter cash taxes paid?

Ben, that will be in the Q.

Okay. And then, switching gears real quick, for the fiber segment, can you kind of add some color on the increase in saw timber sales?

Yes. Ben, in our supply agreement, we set up an annual plan. And the buyer, who is Temple Inland, really is the entity who regulates the rate of cut and what they cut. And then they just pay us for it. So, what we set up may have been a little bit heavier to solid wood or saw timber. But what's really reflected is principally a function of how Temple Inland harvest over that period of quarter.

Okay. Great. And then, third, development -- are you guys able to project what your obligations to Cibolo are going to be for the second half of the year and pretty much until completion?

Well, we provided information with regards to commitments related to the resort, Ben. And on the residential side, as far as putting additional lights on the ground, it's just a function of the market in lot inventory. As long as builders are building and selling and get closer on adding lots, then we'll entertain the notion of putting some additional lots on the ground.

Okay. And I guess that pretty much just leaves me back to the cost side of your strategic initiatives. Going back to the corporate G&A reductions, I think you had made a note on the release that the first six months G&A include the $3.2 million paid to the outside advisors. So, it looks like, timing-wise, to get an understanding of the run rate, that was mainly incurred in the first quarter. Is that correct?

Yes.

Okay. So you would say that this low fours number for a quarter is kind of a run rate that you guys are at right now?

Yes, I think that's probably accurate, Ben. Here again, remember that that excluded any stock based comp expense. But, I'll go back to the comment I made, Ben. Regardless of where it's at today, it continues to be a focus for us to look at every opportunity and every part of G&A to reduce expense.

Okay. So, I think, short of straight up cutting employees, I know you guys have done a little bit of, can you point to specific G&A cost-cutting programs that have either been implemented thus far or are in the process of being implemented so we can kind of be able to say, okay, well, they are halfway where they want to be. Or, they are three-quarters where they want to be. Or, we understand some of the things that are going on that are going to lower costs in the future?

Yes, Ben. If you go back to some of the comments that we made at the end of the first quarter call, there was about four or five various bullet points of actions that we had taken and that we continue to take. So, there's four or five different initiatives and we kind of shared those in the first quarter. And as you mentioned in your question/ comment, it was associated to some extent with human resources - full-time employees, as well as contractor, temporary.

Okay, can you just kind of give me a refresher besides the HR component of it, some of the other big milestones on the cost-cutting front?

Yes. Ben, for the sake of the call this morning, I'd refer you back to the Q, as was to the first quarter slides, as well as the comments. It's all in there.

Okay. That's all I got. I appreciate it.

All right. Thank you, Ben.

Your next question comes from the line of Robert Holt of Holt Capital Partners.

Good morning. Your natural gas production, quarter-over-quarter, was down 20% plus. Is that a function of the decline curve and depletion on the wells? Or, did the producing companies shut in some wells, because your oil production was reasonably flat?

Robert, I think that it was certainly a combination of what you mentioned, plus the timing of payments. With the new team in place, there's been new processes to insure that we receive payment for all production. So there was a little bit of catch-up in the first quarter.

And then, do you have a sense of how many wells that are being drilled or maybe have not yet been hooked up to pipe or have not yet generated royalty income?

Yes. Robert, what we're reporting at this time would be wells that have come online that are producing and selling.

All right. Thank you very much.

Thank you, Robert.

Your next question comes from the line of John Olive of Credit Suisse. Please proceed.

Hi, good morning, guys.

Good morning, John.

Hi.

Hi, Chris. Hi, Jim. Wanted to ask you on slide 15, on the HBU timberland sale initiatives -- it seems like you guys have made tremendous progress on the first line institutional. You've got 95 closed and 25 in-process. So, 120 of the 175 to 125 is targeted for sale. It seems like you're nowhere near as close on the special use and conservation and on the retail, small tracts. Can you tell me what is either more difficult or slower about those two HBU sales? And what would likely be the progress there?

John, as I shared in the comments that there's a number of various offerings in the marketplace. And they are at various stages. And there are different kind of buyers. And I think you probably understand that, so I think that drives it as much as anything, John. The other thing that I would say, too, is that when we put that chart, there are three categories that we identify. And we also said that, as we noted in the acreage count, that there's got to be flexibility there. I will tell you that in today's market, flexibility is going to be important, to be able to move acreage around across those categories or buyer groups. So, that would be my response to you, John.

Jim, thanks. The logical follow-up would be, then -- it just seems a lot easier and quicker to sell institutional. And would you move more acres into institutional and kind of hang onto conservation and small tract a little bit longer? Would that be a logical conclusion?

John, we would certainly do that if that's where the strength of the market is or was. I think you know that, today, selling land in the market is radically different than it was 12, 18, 24 months ago. So it takes a whole lot more marketing and selling resources and effort to get it done today than it did back then. So, that'd be my comment.

Thanks, guys. I appreciate it.

Thank you, John.

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

Thanks. Just wanted to follow-up on the senior credit facility amendment. Can you give us any more color on what that entails?

Yes, I let Chris handle that.

Basically, Mark, if you look at the amendment that we put in place here in July -- basically, the primary components of that will, one, reduce the interest coverage requirement to one and a half times through the rest of this year and to leave it at 1.75 times through the maturity. It also provides Forestar with the opportunity to extend the maturity of the facility until June of 2012 at our option, beginning in third quarter of next year. So, if we decide it's prudent, we can pay 35 basis points and extend up to $350 million until June of 2012.

Okay. Great -- so a little insurance policy, effectively. And do you include the proceeds from the strategic initiatives program in the coverage ratios?

Yes. That gain on sale would be in the numerator of the interest coverage, yes.

Okay. And then, as you think about debt targets more generally, and the programs you have underway, what type of total amount of debt do you think you should be carrying? And do you think about it as different businesses, carrying different amounts of debt? You have you natural resources business. Do you think of that as having a certain debt-holding capacity, and then the real estate is something separate? Or, how do you go about thinking about your debt targets?

Mark, I would tell you that it's very much a function of the market conditions in the businesses. Clearly, one of the drivers that determines the level of debt on our balance sheet is the amount of consistent cash flow that we generate. And of course, as you've seen by the historical financials, as well as the performance, the minerals groups and natural resources, provides a pretty strong underpinning there. So, I would be a little reluctant to say that this is an absolute target. It's very much going to be dependent upon the businesses and where we are in the markets.

Well, given where we are in the markets today, what be a reasonable assessment?

Well, I can tell you that we certainly headed in the right direction with the progress that we've made. And as we've said on other calls and comments, Mark, that we still have a little ways to go.

Okay. And then just lastly, I take it that the share repurchase part of the strategic initiatives plan is still very much something that you hope to expect to achieve. And is there any sense on, or any timing that you could give us as to when you would hope to be essentially done with the strategic initiatives program?

Mark, as I said in my comments, we are committed to executing and delivering on our strategic initiatives. And the first priority is the balance sheet and then we'll move forward from there.

That concludes the question and answer session. Now, I'll turn it back to Jim DeCosmo for closing remarks.

Thank you. I appreciate the questions. I appreciate your attendance on the call and to the webcast this morning, and we hope everybody has a great day. Thank you.

Ladies and gentleman, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.