Forestar Group Inc (FOR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 Forestar Group Earnings Conference Call. My name is Jasmine, and I'll be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Chris Nines, CFO. You may proceed.

Thank you, and good morning, this is Chris Nines, Chief Financial Officer of Forestar Group. I'd like to welcome each of you who have joined us by conference call or webcast this morning, to discuss the results for third quarter 2009. Joining me this morning is Jim Decosmo, President and CEO of Forestar.

Let me first remind each of you to view our warning statements in our press release and our slides, as we will make forward-looking statements in this presentation. This morning, Jim Decosmo and I will present the results for third quarter 2009, and provide an update on the execution of our strategy, and 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. Now, let me turn the call over to Jim.

Thank you, Chris, and welcome all those who have joined us on the call this morning. In the third quarter of 2009 and year-to-date, Forestar has made significant progress of executing our strategy and our strategic initiative, despite challenging economic conditions. In the third quarter of 2009, and as part of our strategic initiatives, we sold about 20,000 acres for $39.5 million.

We also received approximately $20 million in reimbursements from the Cibolo Canyons Public Improvement District; a positive reflection of the value that is being created, and its ability to generate the ad valorem tax-revenue stream required to support the district's bonding capacity.

For the quarter, we leased about 10,800 acres in East Texas, for approximately $15.8 million, which equates to an average of almost $1,500 per acre. In addition, we'll receive 27% royalty interest on oil and natural gas production, plus other agreement terms I'll review in the mineral section. This is a significant step change in our agreement terms in East Texas, and a reflection of the capability and the competence of our team.

In our continued efforts to increase cash flow, cash used for operations and development is now almost $59 million year-over-year, excluding investments in the Cibolo Canyons Resort. As a result of our progress, we have reduced debt by $13 million for the quarter, and approximately $124 million, or 35%, since the first quarter of this year. We ended the quarter with approximately $43 million on the balance sheet, primarily to be used for the payment of estimated taxes.

Since announcing our initiatives earlier this year, we have made considerable progress transforming the balance sheet, significantly improving liquidity, flexibility, and positioning Forestar for the future.

Now, let me turn it back over to Chris to review the financials.

Thanks, Jim. Net income for third quarter 2009 was $19.5 million, or $0.54 per diluted share, compared with net income of $0.9 million, or $0.02 per diluted share in third quarter 2008, a net income of $50.9 million, or $1.41 per share in second quarter 2009.

Our third quarter 2009 financial results included an after-tax gain of $0.45 per share from the sale of about 20,000 acres of timberland for approximately $39.5 million. In addition, our second quarter 2009 results include an after-tax gain of $1.37 per share from the sale of about 75,000 acres of timberland for approximately $120 million.

Now, let me turn to our segment results. Our real estate operation reported segment earnings of $0.1 million in third quarter 2009, compared with $1.7 million in third quarter 2008, and $5 million in second quarter 2009. Our third quarter 2009 real estate segment earnings include a $4.7 million impairment expense primarily associated with a condominium project located in Austin, Texas, and two joint-venture projects located in Tampa, Florida.

In addition, second quarter 2009 real estate segment earnings include a $4.1 million loss from equity in unconsolidated ventures, principally related to an impairment charge from an investment in a real estate project located near Atlanta, Georgia.

Mineral-resources segment earnings were $17.8 million in third quarter 2009, compared with $8.2 million in third quarter 2008, and $6.4 million in second quarter 2009. Third quarter 2009 mineral-resources segment results include $15.8 million in lease bonus payments, associated with leasing almost 10,800 net mineral acres for $1,465 per acre.

Fiber resources reported segment earnings of $2.1 million in third quarter 2009, compared with $1.9 million in third quarter 2008, and $3.3 million in second quarter 2009.

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

Thank you, Chris. I'll start with real estate. If we start at the bottom of the slide and work our way up, revenue of about $23 million, and essentially breakeven earnings are down from the second quarter of 2009, and essentially in line with the third quarter of 2008. As Chris noted, the third quarter of 2009 earnings were adversely impacted by a $4.7 million impairment.

Retail land sales. We sold approximately 5,300 acres at an average price of about $2,100 an acre. One sale in particular included several parcels, and totaled approximately 3,100 acres, and was located in some of our more rural locations.

Residential sales. We sold 168 lots in the third quarter of 2009 at an average price of approximately $52,700 per lot. We did see some more activity in our lower-priced communities, which is likely a reflection of the first-time homebuyer tax credit.

With regards to the market, inventories have declined, affordability has much improved, and a number of other elements of the housing market have stabilized. These improvements are encouraging, yet we remain cautious as long as jobs continue to decline, a very important fundamental of near-term housing demand.

Our pipelines at the end of the third quarter of 2009. Working from the left to the right of the totals, we have about 207,000 undeveloped acres of real estate, mostly located in and around Atlanta; just under 32,000 acres in an entitlement process; 14,087 acres entitled; and just over 2,800 acres in the development category, yielding our real estate portfolio of approximately 255,000 acres.

Estimated residential lot count. We have just over 25,500 lots in the entitled category, and less than 4,000 lots in development, down from the second quarter of 2009, and year-end 2008. Lots entitled and in development are principally located in the major markets of Texas. Not reflected in the acreage is our 58% ownership interest in the Ironstob venture, which controls over 16,000 acres in North Georgia, principally located in Paulding, Polk, and Haralson Counties.

Now, shifting gears to an update on our Cibolo Canyons project in San Antonio. As I mentioned in my opening remarks, the Cibolo Canyons Special Public Improvement District was successful in the issuance of limited ad valorem tax utility-system bonds, enabling their reimbursement of approximately $20 million to Forestar for a previous investment in infrastructure development. The balance on reimbursement is just under $30 million.

The Bexar County Appraisal District assessed value for Cibolo Canyons is approximately $412 million, with the resort accounting for $154 million of this total. Keep in mind, these are January 2009 assessments, a time when the resort was fairly early in construction. The reimbursement is a good first step in the right direction, and has been accounted for as a reduction in basis. As additional value is developed in homes, apartments and the resort, incremental ad valorem tax capacity should enable the district to issue additional bonds.

Now, in addition to the cash flow generated by the reimbursement, we've sold approximately 43 lots through the third quarter of this year, at an average price of just under $81,000 per lot, and our initial cash commitments to the resort have been essentially fulfilled.

Also, as depicted on the slide, the resort is scheduled to open in January, just a little over two months away. Then, just five months later, the TPC Valero Open is scheduled to move to the JW Marriott Hill Country Resort. We have come a long way.

The mineral-resources segment generated $18.8 million in revenue and $17.8 million in earnings for the quarter, up considerably in comparison to the previous quarter and the third quarter of 2008. At the top, you can see that both the net acres leased and the average bonus per acre were up considerably.

One agreement accounted for the majority of activity in the quarter. The terms include a lease bonus of $1,500 per acre for a five-year term, 27% royalty interest, minimum drilling commitments to hold the lease, sharing of all geoscience information, and a pew clause provision, which limits both the vertical and horizontal holding rights beyond producing strata. With regards to exact locations, target zones and lessee information, we're limited by a confidentiality clause. Our team did a nice job of promoting and negotiating this agreement.

Natural-gas volume is marginally down from the previous quarter, and down considerably from the same quarter 2008, which is principally due to the timing of payments in 2008. Natural-gas prices remained low due to lower demand and elevated storage-inventory levels. Oil volumes up slightly in comparison, while the price is up over the previous quarter, and down compared to 2008.

Regarding the markets -- now, our minerals business has performed well, and we remain encouraged, yet we can't overlook the current reduction in domestic energy demand, elevated natural-gas inventories and the subsequent impact on oil-and-gas companies. We might not be able to control the macro fundamentals of energy markets, but we can certainly control how we operate within them.

Our strategy is to realize the value of our natural resources specifically, minerals, oil and gas. In this case, there's two elements of this realization; first, the realization of the current value of our assets; and second, is the realization of the potential value of our assets, business and strategy. Our current strategic initiative is focused on providing the transparency and disclosures needed to better understand and value our assets and business.

In the second quarter, we provided 2008 year-end proved-and-developed producing reserves, well information and lessee information and producing strata, just to name a few. Continuing with our minerals-disclosure initiative, this slide and the next provide an overview of mineral assets owned by county, with the maps illustrating mineral-acreage status at the end of the third quarter, either available for lease, under lease, or held by a production.

I also want to update you on a recent development that was announced by Devon Energy on Monday, November the 2nd. Devon issued a news release announcing the results of a successful Haynesville shale well in St. Augustine County, Texas, achieving an average continuous 24-hour flow rate of 30.7 million cubic feet of natural gas equivalent per day.

The Devon well is not on our mineral acreage, but it is a positive factor relating to the trend and the development of the Haynesville Shale in East Texas. This is the same information for Louisiana; it's acres by county in the table on the right, with a map illustrating the status of the mineral acreage. As we go forward, we're committed to providing additional disclosures to include relevant developments in the basin that may potentially impact our business and assets.

Moving to fiber -- fiber resources. Total sales volume for pulp wood and saw timber was down in the third quarter 2009, compared to the third quarter of 2008, and the previous quarter this year. Both pulp wood and saw timber prices were slightly up in comparison to the previous quarter, and the same quarter in 2008.

Our fiber-resources segment generated $3.6 million in revenue, and $2.1 million in earnings, in the third quarter of 2009. Given the reduction in acreage, we'd expect to see revenues and earnings change accordingly. Regardless of the acreage owned, we'll maximize the value realized from every layer of resource and value.

Shifting gears to an update on our near-term strategic initiatives -- as I mentioned in my opening comments, we've made substantial progress executing our near-term strategic initiative. The next few slides provide you with additional insight into our performance.

We've got three basic strategic initiatives that our 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 these natural resources with initial focus on minerals, oil-and-gas transparency and disclosure; and, last, conserving cash through significant reductions in development and lowering costs.

Land sales. Our first intuitional sale was to the Hancock Timber Resources Group -- 75,000 acres for $120 million cash, not to include mineral interests. Those properties are identified with a purple shading. From the map, you can see this packet was comprised of some of the larger, more contiguous blocks, and include a 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 orange and principally located south and west of Atlanta. The balance of the properties are identified as either sale candidates, which are shaded in green, or held for real estate uses, shaded in red.

As I've said previously, the balance of the acres to be sold is in the market, and can generally be classified as advertised, under negotiation, or under contract. Given the current market conditions, it's very difficult to speculate what will close and when.

Our original plan was to tailor sales and packages to the market, targeting buyers with an understanding of value, and the financial ability to close. We remain committed to the plan, and continue to work diligently on this initiative. Forestar is fortunate. Our balance sheet enables us to negotiate from a position of strength, and we are not a distressed seller.

Through the third quarter, including the retail land sales reported in the segment, we've sold approximately 110,000 acres for about $196 million -- significant progress in the execution of our strategy and strategic initiatives.

Considering the historical uses of cash, development at approximately $90 million a year is, by far, the greatest use of cash and, as you would expect, a significant initiative for us. Our 2009 target is a reduced investment and development by 75%, and that's excluding our commitment to the Marriott Resort at our Cibolo Canyons project in San Antonio.

Through the third quarter, investment in development was $14.5 million, down approximately $52 million, or 78% year-to-date, in comparison to 2008 -- continued progress in the right direction. Year-to-date, G&A and operating expenses are both down about 15%; that's excluding share-based compensation expense.

Year-to-date, in 2009, we've reduced cash used for development, operations, and G&A by almost $59 million, year-over-year. We've made good progress, and will continue to examine and reduce costs where possible, across the entire business.

The progress we've made in executing our strategy and strategic initiatives has enabled us to reduce debt by $12 million through the third quarter. That's a 35% reduction since the end of the fourth quarter of this year. In addition, early in the third quarter, we were successful in negotiating amendments to the credit facility, including an option to extend the term through July of 2012.

In closing, I want to say that the markets have improved somewhat, yet we still expect the balance of 2009, and into 2010, to be challenging. We'll remain focused and committed to executing our strategy and strategic initiatives, resulting in a balance sheet that is well positioned for the future. Our near-term strategic initiatives and performance; first, continue strengthening the balance sheet principally from the sale of 175,000 acres of HBU timberland, with 95,000 acres and $160 million closed, to-date.

Second, provide meaningful minerals transparency and disclosures, while continuing to promote leasing, and negotiating agreements yielding the best terms, conditions and value. On both counts, we've made considerable progress, evidenced by the most recent agreement and disclosed PDP reserves, acreage by county, active strata, well information and active lessees, just to name a few.

Third, improving cash flow by reducing cash used for development, and lowering costs. Reducing investment in development, operating and administrative costs has totaled, through the third quarter, almost $59 million year-over-year; this is significant. This is also, not to mention, a successful $20 million Cibolo Canyons bond issuance sale.

We remain confident that execution of these initiatives and our strategy will maximize long-term shareholder value. In addition, we believe that following the execution of our initiatives, our portfolio of assets will still be comprised of our best properties, projects, and assets for our business, enhancing our long-term value-creation potential, and our earnings power.

And, 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 to questions.

(Operator Instructions)

Your first question comes from the line of Mark Weintraub, with Buckingham Research. You may proceed, sir.

Thank you. Good morning. I guess I'm trying to really figure out how significant the increase in the mineral-rights activity is. You noted that Devon had the well in St. Augustine and then you've got 13,000 acres there --. First of all, how close are you from where Devon was drilling the well? It looks like you've got -- it looks like you leased out a lot of acres there in the quarter. And how far away is that from where the activity is taking place?

Mark, if you look at our ownership in St. Augustine County, and the current intelligence on that well would say that it's in the northern half of the county. So, we have property that's in the general vicinity. As I said in my comments, we're encouraged by that. It's a significant step change to the west, from where the core of the Haynesville has been reported to-date.

So we're encouraged by the activity, by the performance of that well and its location. As I said, it is not on us, but it's a good step in the right direction, and it's an indication of the trend of the Haynesville.

And with the big step-up in the leasing activity which you've had over the last year in general, not just in this quarter, is it expected that you will see higher volumes coming off of your land, which will feed through to higher royalty payments? Obviously, the price of nat-gas and oil is going to be a factor there. But, directionally, would -- if the oil-and-gas markets were to hold up reasonably well, would you expect meaningful pickup in royalty streams right now, in the year ahead?

Mark, the royalty is just a function of the current wells that are in place, and the wells that are coming on line and the wells that would be drilled. So kind of back to your comment, with regards to the market, your assumption was if it stays relatively flat, then we would guess that the rate of activity would respond accordingly.

What I can say, Mark, is that, given the strategy and the initiatives that we have, Forestar has got a full-court press on promoting the acreage that we have for lease, making sure that we've got a very good understanding of what's going on in the marketplace to negotiate the very best terms and conditions for Forestar and, obviously, for the shareholders. It's a little bit difficult to forecast the activity part of it. But I can assure that what we're doing today is considerably different then what we were doing two years ago.

I'll give you just a little example, Mark. In the leasing in the third quarter, there had been some ongoing negotiations with regards to the location of interest. And our team was at one of the oil-and-gas conferences, and we had a booth. And we were sharing prospect and lease information and opportunities. And it was evident to the market that we were promoting some acreage that had interest in it. And we believe that it helped push that deal across the line. So that's just an example of some things that we're doing today, that we were not doing a couple years ago.

So, back to my comment, Mark -- it's a full-court press and a little bit of a new day, as it relates to our promoting and getting the best deal terms and conditions in place.

Okay. That's very helpful. Maybe I can come at it one last way, and see if this is helpful. For instance, I think it was maybe a couple years ago, there were some sales in DeSoto County, where, rather than having -- rather than getting a percentage of royalties, you basically got everything up front.

I assume that you looked at that as an alternative; selling the mineral rights outright, as opposed to getting an up-front payment and royalties. Can you give us a sense as to what the types of values it might have been, had you chosen to go that route instead of the $1,500 up front, and then the royalty proportions?

Mark, with regards to the DeSoto County transaction, I don't know that I can get connected with that transaction in particular, but what I can tell you is that the $1,500 an acre lease bonus and 27% royalty, in our opinion, was, by far, the best alternative and the greatest value, looking at all other options or alternatives, whether it was an outright sale, whether it was negotiating more lease bonus or higher royalty interest.

The way that we put this deal together, we firmly believe, and fundamentally believe, it was of the greatest value to Forestar and, obviously, to the business.

Okay, thank you.

So, Mark, one other comment related to that is -- these decisions are made -- when we structure these deals, our agreement is based on a lot of intelligence with regard to what the strata is, what the play is, what the potential economics are. So when these agreements are fashioned and structured, we're doing it in such a way that clearly creates the most value for us.

Right. And I guess what I'm trying to do is -- recognizing that there are a lot of moving variables, et cetera -- but to try and get a better assessment of what type of value some of this discovery process might be unveiling, from your perspective and, again, realizing there are a lot of moving variables, so it's very difficult for you to pin an exact number -- but, just in order of magnitude. Any -- to the extent that you can continue to be helpful in helping us gauge that, that would be appreciated.

Okay -- and, Mark, we will. I understand your question. And, as I've said, what we want to do is make sure that we provide all of the disclosures and the transparency that we possibly can to help you and to help anybody in the market to better understand the value today, as well as the potential value going forward.

Thanks, Jim.

Thank you, Mark.

(Operator Instructions)

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

Congratulations on the progress you've made on your strategic initiatives, as well as additional disclosure in these quarterly packets. I think you're definitely on the right track. Question regarding sort of your next step -- you've done a great job of sort of laying the foundation, and making the assets that you have more productive -- and put the balance sheet in much better shape than you were 18 months ago.

What should we expect over the next 12 to 18 months in terms of capitalizing on the better balance sheet, and sort of growing the business through acquisition potential of -- potentially -- of existing developments or other capital outliers?

Robert, thank you for your compliment. And I'll address your question this way -- we've made a lot of progress in addressing the balance sheet. As we said in our initiatives -- that the first order of business, or the first phase was to pay down $150 million of debt, and we've made a lot of progress there. We still have a ways to go.

We're going to continue to operate the business from a conservative, as well as from a cautious, perspective. We've come a long way. And there's more stability in the economy, but we just don't believe we're out of the woods yet.

I think this is evidenced by Congress' -- the Congress continuing to contemplate and, potentially, extending the tax credit for first-time homebuyers and, potentially, even expanding that. In my opinion, that says -- well, the government says, we don't need to pull the oxygen off the patient yet. And at the end of the day, we want to see the fundamentals returned. So, that's kind of an example of why we remain cautious.

As we think about the business going forward and -- over the next 12 to 18 months -- we had a -- we sent out a press release some time back, announcing the addition and the hire of Phil Weber, who comes to us with a lot of experience and insights and capabilities related to a multi-family. And when we look at where housing is today in this economy, as well as the demographics, we think the story and the fundamentals are compelling.

Just another brief example -- if you look at the record housing starts in the US, it was back in 1972. And it's like 2.5 million, when there were 90 million less people. And you say, well, what's that all about?

Well, the first piece of that is that's the baby boomers forming households, graduating from college, and that's pretty powerful. The other part of that that's sometimes overlooked is that almost 40% to 45% of those starts were in multi-family. So you kind of transition that forward -- today, we're at that point in time where the echo boomers, which is even a larger component of the population is graduating from college and forming households.

Now, unfortunately, they're probably graduating with a heck of a lot more debt and fewer options than the baby boomers had. So we think multi-family, on a go-forward basis, is ripe for opportunity, and that's one of the primary reasons that we brought Phil aboard. So when we think about Forestar going forward first, is with caution, and to make sure we maintain a very healthy balance sheet, but also look at these opportunities that we have in front of us -- for example, like the multi-family.

Thank you very much. And, specifically, as it relates to lots sold during the quarter -- you were up slightly sequentially from the second quarter. Given the somewhat stronger Texas economy than the rest of the country, is it your hope that you've seen the bottom in terms of lot-sale numbers?

Robert, it's clearly my hope that we've seen the bottom. Robert, there appears to be more stability in the market today. Inventories are much improved. Affordability is much improved. There's a lot of indicators that improved, and they're all pointing in the right direction. The piece that we have yet to see, which is critical, is jobs returning. So, hopefully, in the not-too-distant future, we'll see some jobs returning to these markets.

Thank you very much. And, again, congratulations on better disclosure and the progress you've made.

Good. Thank you, Robert.

Your next question comes from the line of Anna Torma, with Soleil Securities. You may proceed.

Good morning. Congratulations on a great quarter. Just to expand on Robert's question, I was wondering if you could just give some additional color. Are you still seeing the builders steadily back in the market, reloading their lot pipeline, as you move into the fourth quarter, here? Or, as we've seen the first-time homebuyer tax credit sort of come closer to a potential expiration, or at least a pause, have you seen that pull back?

Anna, thank you for your comment. And, with regards to the activity and the builders -- there's clearly more activity by the builders, even today. And, from a lot perspective -- builders taking out lots today -- if the tax credit expires this month, there's no way they're going to build something and have a buyer to qualify for it. So, from that perspective, we're encouraged.

I would say that, from an inventory perspective, if you look at A-lots and A-locations, that inventory is getting pretty thin. And that's principally because, for any material amount or of any magnitude, there really haven't been any lots that have been put on the ground within the last couple years. So, we are encouraged by the builder activity. There does seem to be more appetite today. The sentiment is better. Confidence is, I'd say, still waning a little bit. So, we're very -- we're cautiously optimistic.

Great. Thanks. That's very helpful. And also, on Cibolo, are you starting to see more traffic or interest in residential lots there, now that you're getting closer to the opening -- and with the Valero Open coming? So, should we be looking at a pace of lots potentially increasing in the coming quarters?

Anna, it's a little bit difficult to forecast the impact of the resort opening. Intuitively, you would think that when the resort opens and the advertising and the marketing ramp up to a much higher level, and you've got the Valero coming -- there's going to be a lot more attention as -- with regards to prospective homeowners, new homeowners, as well as builders. So, that would be my response there.

I think something like that is hard to forecast. But, just intuitively, you would think that, with the resort opening up and moving forward, it should have a positive impact.

Okay, great. Thanks. And, then, just the last question -- could you possibly give us just the number of active wells you had at the end of the quarter? And, if you can, break it up by natural gas versus oil, but if not, just the number of wells would be great.

Anna, I don't know the exact number at the end of the quarter, but it's somewhere around 450 -- 460, something like that.

Okay, great. Great, thank you.

Thank you, Anna.

There are no further questions at this time. I'd like to turn the call back to Mr. Jim Decosmo for closing remarks. You may proceed.

Good. Thank you. As I said in my opening comments, we want to thank you for your participation this morning, as well as your interest in Forestar, and we hope everybody has a great day.

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. Have a great day.