Forestar Group Inc (FOR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2009 Financial Results Call for Forestar Group. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference call.

(Operator Instructions)

I would now like to turn the call over to Chris Nines, Chief Financial Officer. Please proceed.

Thank you and good morning, everyone. 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 this morning to discuss the results for fourth quarter and full year 2009. Joining me this morning is Jim DeCosmo, President and CEO of Forestar.

Please review our warning statements in our press release and our slides, as we will make forward-looking statements during this presentation. In addition, this presentation also includes non-GAAP financial measures, the required reconciliation to GAAP financial measures can be found on our website at www.forestargroup.com. We will also provide disclosures related to our mineral assets, including year-end 2009 proved developed 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 fourth quarter and full year 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, and now let me turn the call over to Jim.

Thank you, Chris. Good morning, and welcome to all those who have joined us on the call and webcast. I want to start the call this morning with a brief review of 2009. In spite of an ailing economy and market conditions, we made significant progress advancing our strategy, delivering on our strategic initiatives and creating shareholder value. Highlights for 2009 boil down to about a $200 million cash flow swing from 2008 to 2009.

This is attributable to over $205 million in total land sales, a $68 million reduction in development operating costs, and collecting almost $25 million in district reimbursement, $20 million of which came from Cibolo Canyons. Even though natural gas prices were depressed for the majority of the year, we were able to generate lease bonus revenues of over $21 million, including an agreement in the third quarter accounting for 10,000 acres at $1,500 per acre and 27% royalty interest.

From an investment perspective, Cibolo Canyons in San Antonio was clearly our most significant use of cash, as of this morning, I can proudly report to you that we have met our financial commitments for the development of the resort and as of January 22 of this year, the resort is officially open and receiving gas.

Last but certainly not least, we reduced debt by approximately $121 million or 35% year-over-year. Our position today is much improved over this time last year, which is a real tribute to our team and our organization.

Let me turn it back over to Chris to review some of the key financials.

Thanks, Jim. Forestar reported a net loss of $7.4 million or $0.20 per share in fourth quarter 2009, compared with net income of $1.7 million or $0.05 per share in fourth quarter 2008. For the year 2009, Forestar reported net income of $59.1 million or $1.64 per share, compared with net income of $12 million or $0.33 per share in 2008. Our full year 2009 financial results include a pretax gain of approximately $104 million from the sale of about 95,000 acres of timberland associated with our near term strategic initiatives.

Now, let me turn to our segment results. Our Real Estate operation reported a segment loss of $2.5 million in fourth quarter 2009, compared with segment earnings of $3 million in fourth quarter 2008. Our fourth quarter 2009 Real Estate segment earnings were negatively impacted by impairment charges of $2.7 million, primarily associated with the condominium project located in Austin, Texas, and a $3.6 million pretax charge for environmental remediation activities at our San Joaquin River project located near Antioch, California.

Full year 2009 Real Estate segment earnings were $3.2 million, compared with $9.1 million in 2008. Full year 2009 Real Estate segment earnings were negatively impacted by impairment charges of approximately $10.6 million, and a $3.6 million charge for environmental remediation activities.

Mineral Resources segment earnings were 3.3 million in fourth quarter 2009, compared with $6.1 million in fourth quarter 2008. Full year 2009 Mineral Resources segment earnings were $32.4 million, compared with $44.1 million in 2008. Mineral Resources segment earnings in 2009 include $21.3 million in bonus payments associated with leasing over 25,800 net mineral acres.

Fiber Resources reported segment earnings of $1.4 million in fourth quarter 2009, compared with $2.7 million in fourth quarter 2008. Full year 2009 Fiber Resources segment earnings increased to $9.6 million, compared with $8.9 million in 2008, principally due to increased harvest levels and a higher mix of more valuable saw timber.

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.

I will start with real estate. Starting at the bottom and working our way up, revenue and earnings for the fourth quarters and full years are pretty similar. I will limit my comments to the most significant comparisons. In 2009, we generated $3.2 million in segment earnings after taking approximately $14.2 million in impairments and in environmental reserves, versus about $6.2 million in impairments in 2008.

Retail land sales; in 57 transactions, we've sold approximately $47 million worth of small tracts in 2009, versus about $29 million in 2008. Of note, in the fourth quarter, we sold a 181-acre entitled tract in Jackson County, Georgia, for $8,500 an acre. Given the market conditions and minimal entitlement expense, the team did a nice job creating value through entitlements and realizing value through the sale.

Throughout the year, we have expanded our marketing efforts for all sales, in particular, our retail land sales website at landforsale.forestargroup.com continues to generate interest. Commercial land sale -- off by about $26 million year-over-year probably one of the slowest years we have seen in quite some time. Residential lot sales, we sold 202 lots in fourth quarter, up somewhat compared to 168 lots in the previous quarter of 2009, yet down year-over-year. On an annual basis, lot sales were off by about 40%, while lot price continues to hold up reasonably well.

With regards to the markets, inventories continue to decline, affordability is much improved and a number of other elements in the housing market appear to have stabilized. However, the most important fundamental that is missing is job growth; until then, we remain cautious. I don't think it is a matter of if, but when.

As I mentioned on a number of occasions, our real estate portfolio is heavily influenced by the major markets of Texas, where we have a majority of our real estate investments. You can see from the chart on the left, our sales velocity has declined considerably, where the Texas market is generating the majority of our sales over the last several years.

Many sales throughout the year were master-planned communities like Lantana in Dallas and Cibolo Canyons in the San Antonio market; projects that offer homebuyers community, lifestyle and value. You can see by the chart on the right that sales prices have held up relatively well considering the loss of value in housing nationwide. This is a reflection of historic investments, both strategic and disciplined.

Even though sales have been slow, many markets in a number of our projects are getting thin on finished lot inventories. That is good news from the sales perspective, but will require investment and development in 2010 to support future sales.

Shifting gears to our real estate pipeline -- this is our pipeline at the end of the fourth quarter of 2009, working from the left to the right. We have about 204,000 undeveloped acres of real estate, mostly located in and around Atlanta; just under 32,000 acres in entitlement process, 13,660 acres in title, and just over 2,400 acres in development category given our real estate portfolio of approximately 251,000 acres.

Estimated residential lot count, we had just under 25,500 lots in the title category and less than 3,750 lots in development, down for the eighth consecutive quarter. 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 Harrison counties.

Shifting gears to an update on our Cibolo Canyons project in San Antonio. As I mentioned earlier, the resort officially opened on January the 22nd of this year. According to a number of people who were there for the opening weekend, it was a great experience and a very impressive facility. The doors are open, and you are cordially invited. For the year, we sold 53 lots in Cibolo at an average price of just over $79,000 a lot.

In addition, we received $20 million from the district in the third quarter for prior development costs to qualify for reimbursement. Following the payment, there remains a balance of about $38 million to be reimbursed to Forestar, $9 million of which we submitted in the fourth quarter of 2009. In addition to bond proceeds supported by ad valorem taxes, the district now will be collecting fees from the resort that fulfill their contractual commitments to all parties.

Moving on to minerals -- our comment principally on 2009 versus 2008. Net acres leased are down from 2008, due to significant leasing activity in the first half of 2008 associated with the Bossier or the Haynesville formation. However, due to improved per acre lease bonus rates in 2009, we were down only marginally in lease bonus revenue year-over-year.

Our share of natural gas and oil production volume is up 16% and 22% respectively, the result of 30 well additions and workover activity throughout the year. Prices are down substantially for both oil and natural gas, accounting for the majority of the reduction in revenue and earnings year-over-year. Dealing with a significant reduction of prices in drilling activity in 2009, we were still able to have a good year in minerals.

This map provides a quick view of our 2009 year-end lease status and well activity in Texas. We've highlighted in blue the 19,400 acres leased in 2009, plus the 26 completed wells denoted by the gas well symbol. Call-outs identify the operators of the wells. A majority of the production from well additions is expected to [produce] from the Austin Chalk, James Line and Travis Peak in east Texas and from the Barnett Shale in the Fort Worth basin.

Let me take just a minute to share with you a couple of updates on activities in the East Texas Basin related to the Bossier and the Haynesville shales. In particular and of interest, there have been about six wells completed and nine wells permitted at St. Augustine and Nacogdoches counties. Even though these wells are not on Forestar Minerals, we view them as being positive indicators.

These few wells completed and producing out of the Bossier/Haynesville have estimated total reserves somewhat better than the Barnett Shale average, with a few wells posting pretty impressive reserve estimates. Given these developments, we are encouraged, yet remain cautiously optimistic. Keep in mind, these developments are early in the life of the Haynesville/Bossier in east Texas. Future drilling and market conditions will ultimately determine the extent and the potential value of the Bossier/Haynesville in east Texas.

This is the same illustration for 2009 minerals oil and gas activity in Louisiana; 6,400 acres leased and four wells completed. A majority of the production in Louisiana comes from the Yegua/Cockfield and Wilcox formations. Recall from the KPIs that oil production was up year-over-year, and this is primarily due to the number of wells that have recently come on line in Louisiana.

Wrapping up Minerals -- bottom line, positive growth year-over-year in both production and reserves. On a natural gas equivalent basis, production was up 17% and reserves were up 22% on a year-over-year basis. Our PV-10 estimated of 34.7 million per proved developed reserves is up about 8% and this is constructive, given that the benchmark natural gas price is down 32% in 2009 versus '08. Ending the year with additional production and reserves is encouraging, given the significant reduction in E&P spending and drilling activity in 2009.

Our strategy is to realize potential value of Minerals by marketing and promoting available acreage, and negotiating agreements structured in a way that provide Forestar the greatest opportunity to increase production, reserves and value. We believe we have the solid underpinnings of a good business and we intend to leverage our ownership position.

Moving onto Fiber -- once again, I will focus on the year and start at the bottom. Our team did a nice job in a tough market increasing both revenue and earnings year-over-year, especially in the midst of reducing acreage by 113,000 acres. Volume and the percentage of solid timber sales were up in 2009 versus the previous year, while prices remained relatively flat. As you can see at the bottom of the slide, recreational leases held up fairly well.

Going forward, given the reduction in acreage, we'd expect to see revenues and earnings change accordingly. Regardless of the acreage owned, we'll continue to exercise our ability to realize the value from every layer of resource from every acre.

The way a company performed in 2009 says a lot about its character. Our focus was on proving up what we believe is a great company through the execution of our strategy and strategic initiatives, designed to not only navigate us through this difficult period, but to further develop a competitive advantage and position going forward.

Let me talk to you first about the execution of our initiatives in 2009. First, we sold about 95 of 175,000 acres for approximately $160 million, and that is just under an average of $1,700 an acre. Throughout the year, I think it is safe to say timber land markets experienced increased headwind. Nonetheless, we believe in the value of these properties and our ability to execute going forward. There continues to be interest however, and may take more transactions rather than fewer to complete the plan.

Second, there have been multiple maps and metrics generated and released in 2009, not only for our shareholder community, but for the exploration and production industry. This is evidenced by not only what we have been able to share with you this morning, but also in the team's ability to promote and negotiate terms that add incremental value. 10,000 acres for $1,500 per acre with 27% royalty interest in the third quarter is a solid example.

Third, reducing cash used for development and operating the business at lower cost. For the year, we reduced cash used in these initiatives by almost $68 million year-over-year. Combined, that is almost a 50% reduction. In addition, we work diligently, in support of the districts, enabled a reimbursement of about $25 million in cash, $20 million which came from Cibolo Canyons. That is cash plus the validation of the value we've created in that project.

A good measure of progress is the comparison of our balance sheet at year-end 2009 versus '08. We reduced debt by $121 million or 35%, reduced debt to cap from 43% to 29% and we increased availability from $188 million to $203 million. Today, Forestar has a much stronger balance sheet than at this time last year.

Two primary competitive benefits to our position today; number one, our balance sheet, which I just reviewed with you; and number two, our portfolio of assets, which remains strong, comprised of our best properties, projects and assets for our business, enhancing our long-term value creation potential and our earnings power. Our projects are weighted towards today's healthiest markets and much of our mineral acreage is located in productive oil and natural gas basins.

In spite of the tough economic and market conditions in 2009, Forestar did well, advancing our strategy and delivering on our strategic initiatives, positioning for the future and creating shareholder value. Even though the markets have improved somewhat, we still expect 2010 to be challenging. The improvement in GDP in the latter half of 2009 is encouraging, but until job growth returns, real estate sales are expected to remain sluggish.

As we go forward, we will remain focused on our near term strategic initiatives and the best options for maximizing long-term shareholder value. We continue to believe that's important to position Forestar for the future, by continuing to reduce debt, increase liquidity and improving our financial flexibility.

That's it for the review, other than one last announcement before we take questions. Now that the J.W. Marriott resort in San Antonio is open, we will be hosting an investor conference in April. Not only will there be an opportunity to see the value that Forestar has created in San Antonio, you have the opportunity to meet our team. We are looking forward to the event and hope that you will be able to join us. We will provide more information and details soon.

Now, I would like to open up the call for questions.

(Operator Instructions)

And your first question comes from the line of Anna Torma with Soleil Securities. Please proceed.

Good morning, Jim, and Chris. I was wondering if you could give us a little bit more color on the developed lot interest you are seeing going into January here and February? Are you still continuing to see interest from the builders in purchases or options at the same pace for developed lots? I mean, we are hearing from the builders that they have built up their land pipeline for the near term until they get some sense of the impact here from the home buyer tax credit in April this year.

Sure. What I would tell you is that in our projects in our markets, we are continuing to see increased activity and interest. As I said in one of the comments, that in some of the markets and especially some of the projects, the inventories are getting pretty thin. So we are encouraged, but continue to remain cautious. When you think about the housing market is probably what we hear more than anything or national level statistics, but it makes a significant difference at the market level and certainly at the submarket level.

Okay, great, thanks. And then secondly, on the number of wells you saw this quarter, you didn't seem to have much momentum. Is that just a timing thing? Are you still optimistic that you re going to see increased drilling activity in the coming year?

Anna, obviously there is some timing issues involved with regards to well activity. All indications are -- and this is public information that has been released by some of the major operators in Louisiana as well as in east Texas is they have committed capital to their drilling plans, and it appears as though that given the lease term conditions and the allocation of capital, that we would continue to see some activity.

So even with the lower natural gas prices and the reduction in drilling activity, it appears as though the Bossier/Haynesville has continued to warrant investment.

Okay, great. Thanks. And just one last question. Can you just give us a sense of CapEx and interest expense projections for the year?

Well, because of the reduction in debt, I will let Chris respond to expected interest expense. I would tell you at a higher level, you would expect it to be down given the reduction in debt. CapEx -- I think that the most significant difference between 2010 and 2009 would probably be in development.

As I said, we've got projects that are selling that are getting pretty thin on inventory in our lots and we think it is a prudent business decision to put some more lots on the ground. The thing that you don't want to do is to have projects that are selling -- let the lights go out.

Okay, great. Thanks. I will step back in the queue.

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

Thank you. Just first pulling up on the question on the wells to be drilled, do you have any sense as to whether or not there will be wells drilled on your Haynesville properties during 2010.

Mark, according to the lease terms and conditions that we have, there is some likelihood that there would be. Clearly, according to the agreements that we have, they don't have to drill. They could drop the lease and walk away. You would think that the intention is there to begin to prove those leases up. However, it's a little bit difficult for me to speak on behalf of the operators.

But based on what we've seen in 2009 and some of the results so far, we would hope that the operators associated with our mineral leases would move forward.

And I believe there was a Cardel well drilled by Devon not that long ago in San Augustine County. How far is that from your properties? And, are there any other wells that have been drilled that are reasonably indicative that you should get some success in your San Augustine and/or Angelina properties?

Yes, Mark, the location of that Devon well is public. It is kind of in the north end of the county; we are more central and south, but it is certainly in the vicinity. Since that time, I've mentioned that there has been about half a dozen completions, and I would tell you that they are roughly all in the same vicinity as that Devon well. And of course, we are clearly in that region.

What I would tell you is in addition to those wells, if we just look at the way that the play is trending, it is heading in the right direction. And I think it is just a matter of time before whether wells are drilled on our minerals or next to our minerals or to the south or whatever direction it may be that ultimately would prove up the value of the Bossier/Haynesville in east Texas.

And when would the majority of these leases go back to you, if they aren't drilled on?

Mark, the majority of our leasing in these two counties was in the first half of '08 and those were generally three year terms with certain drilling commitments. So, it is a function of both time and drilling activity that would determine whether those leases come back or not.

And I realize that things are always changing. But do you have a sense if you were to be re-leasing those properties today, what types of terms, order of magnitude -- let's compare it, for instance, to the leases that you booked in Trinity County in the third quarter. Would you expect them to be similar, more beneficial to you, or any way to give us a sense?

Mark, I feel pretty confident in telling you, if those acres were available for lease in St. Augustine and Nacogdoches counties, that they would be more than what we leased them at a couple of years ago, which was very early and ahead of the trend. Trinity is, I think is a good example of improved terms and conditions.

And I would also say that in the heyday in the Barnett Shale as well as the Haynesville and Louisiana around Shreveport, there were lease rates as high as $15,000 to $20,000 an acre. I don't know that these properties would be able to command that today however, I think that is some indication of the potential. I think it is important just to keep in mind that the market conditions and the drilling activity in front of us will really determine that value and potential value.

Great. I have got a few more, but if you want, I will circle back or ask you some more now, whatever your preference is.

Mark, keep going. You are on a roll.

Okay. On the strategic initiatives program, can you remind us what timeframe you had laid out to complete the program?

Mark, I never laid out a timeframe. What is said was is sooner is better than later. However, couching those comments are market conditions that we've got to work and operate within. We worked extremely hard to try to get as much acreage as we possibly could in to the market as fast as we could, given the condition of the buyers and their capital. And I would tell you that I think that we've pushed the envelope pretty hard to get that acreage in play and get it closed.

As I said in my comments too, Mark, I think there has been probably some additional or incremental headwinds in the timber land market throughout 2009. Hopefully in 2010, with a little bit better confidence, a little bit more stability, we would hope that there is a little bit more capital that is returning to that sector.

And I think that we had comments from Rainier and Plum Creek suggesting that there was some signs that things might be stabilizing in timberland markets. Are you seeing that at all, or is that still something that you are hoping for rather than actually seeing?

Mark, I would say that there are signs of stability, not that the timberland market really got terribly unstable, it doesn't even compare to what's happened into the housing market. But as I said earlier, there is still a lot of interest. There are a lot of discussions. We have had a number of negotiations, but we have remained disciplined in the way that we've approached this process and want to make sure that we as well as the shareholders receive the value that's inherent in these properties.

Okay, great. Thank you. And then lastly on Cibolo Canyons, presumably you are now going to start benefiting from revenues generated from the resort. I assume that is going to flow through in 2010. Is that correct?

Mark, this is Chris. Rather than flow through as a revenue, for a while, we will actually take that against the basis that we have invested in the resort. So, what it will really amount to for Forestar is a cash flow stream over the near term.

I think that is a good comment, Chris. Let me make one more too, Mark. Keep in mind, that this is actually a political district; it is independent and it operates on its own. As we've told the story several times, this is referred to as a special politic improvement district; it's pretty extensive and it is pretty complicated.

So the first part of the responsibility the district had was dealing with ad valorem taxes, which I referred to earlier. So, it has just now begun to receive the fees from the resort and look at its responsibilities on a go forward basis.

Okay. And just to clarify, so I believe you still have another almost $30 million that would be coming to you to reimburse you for various expenditures you made for infrastructure. First of all, is that correct?

Not quite. It is now $38 million. We submitted another $9 million in the fourth quarter. I think you were probably thinking of the previous number at $29 million. And we submitted another $9 million in the fourth quarter to the district. So our submissions are now at $38 million. Don't hold me to this, Mark, but I believe that there will probably be even additional submissions going forward.

Okay. And that, I understand, would come against the basis. But, are you also saying that monies which are related to the sales tax, et cetera, would also come against the basis? And if so, when does -- just for accounting purposes, I understand the cash, which is what matters. But how should we be modeling that?

The accounting practice that we follow with the first reimbursement all was cost recovery and went against the basis. As you do that, it will impact the profit margins of lot sales on a go forward basis. Now with regards to the receipts associated with the resort, they will initially come in and be a reduction of basis. I think that we've got approximately $43 million or something like that that's on our basis for the resort. So initially, those receipts will go to or relieve that basis.

Okay. Thank you.

Thank you, Mark.

This concludes the question-and-answer session of today's conference call. I would now like to turn the call back over to management for any closing remarks.

We want to thank everybody once again for joining us this morning. We appreciate your attendance as well as the questions, and I hope that everybody has a great day.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.