Forestar Group Inc (FOR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forestar First Quarter 2010 Earnings Conference Call. My name is Noelia and I will be your coordinator for today. At this time, all participants are in a 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.

I would now like to turn the presentation over to your host for today's call, Mr. Chris Nines, Chief Financial Officer. Please, proceed.

Good morning. This is Chris Nines, Chief Financial Officer of Forestar Group. I'd like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for first quarter 2010. Joining me this morning is Jim DeCosmo, President and CEO of Forestar. Let me quickly 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.

This morning I will highlight our first quarter 2010 financial results. And following this review, Jim DeCosmo will address our key performance metrics for each of our segments, and the current market conditions for our business. At the completion of our presentation, we will be happy to take your questions. Thanks again for your interest in Forestar.

First quarter 2010 results were a net loss of approximately $3 million, or $0.08 per basic share, compared with a net loss of $3.9 million, or $0.11 per basic in the first quarter 2009; and a net loss of $7.4 million or $0.21 per share in the fourth quarter 2009.

Our first quarter 2010 financial results were negatively impacted by $1.8 million increase in non-cash share-based compensation expense, compared with the first quarter of 2009. This was principally due to an increase in the stock price and its impact on our cash settled equity awards. In addition first quarter 2009 results include approximately $3.2 million in expenses for outside advisers regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal.

Now, let me turn to our segment results. Our real estate operation reported segment earnings of $0.3 million in the first quarter of 2010, compared with $0.5 million in the first quarter 2009 and a segment loss of $2.5 million in the fourth quarter 2009.

I will remind you that fourth-quarter 2009 real estate segment earnings were negatively impacted by non-cash impairment charges of 2.7 million, primarily associated with a condominium project located in Austin, Texas, and $3.6 million charge for environmental remediation activities at our San Joaquin River project located near Antioch, California.

Jim will provide greater insight into our first quarter 2010 real estate sales activity and value creation strategy in a few slides.

Mineral resources segment earnings were $6.2 million in the first quarter of 2010 compared with $4.8 million in the first quarter of 2009, and $3.3 million in fourth quarter 2009. Our first quarter 2010 mineral resources segment results include $3.2 million in lease bonus payments associated with leasing over 2,100 net mineral acres for $1,495 per acre.

Fiber resources reported segment earnings of $1.4 million in the first quarter 2010 compared with $2.9 million in first quarter 2009, and $1.4 million in the fourth quarter of 2009. First-quarter 2010 fiber resources segment earnings were negatively impacted by the sale of over 110,000 acres of timberland during 2009, principally associated with our near-term strategic initiatives.

Now, let me turn the call back over to Jim, who will provide a market update and review the key performance indicators for each of our segments.

Thank you, Chris. I want to welcome all of those who have joined us this morning for our first quarter 2010 conference call. Throughout the downturn our strategy and initiatives had been focused on ensuring that Forestar is well positioned to take advantage of an economic recovery, at whatever time and rate that occurs.

The economic and housing components have improved and are stabilized, yet cloud of uncertainty lingers, especially relating to a number of European market debt issues, and particularly job growth here in the US. Jobs reported this morning is encouraging and a step in the right direction for recovery. In any case, our balance sheet, strategy, team, and portfolio of assets and projects at Forestar are well positioned.

I will start my review and comment this morning with our real estate segment. Real estate market conditions have stabilized and are improved across many of our key real estate markets. To illustrate about a historical housing starts chart on the left, we recently experienced the most dramatic downturn in housing since the depression. It's difficult to envision a case where housing starts can stay at the current levels for any extended period of time. We believe the recovery in housing is not a matter of if, but a matter of when.

Household formation and population growth have continued despite the recession. Many of the market drivers in key Forestar markets are in reasonably good shape, either good to balanced or improving. Foreclosures in particular have been and will likely continue to be a significant issue on a national level, but will be much less of a problem in the major Texas markets, which are our key markets.

The number one fundamental demand issue is job. Until we begin to experience sustained positive job growth, I'm afraid we run the risk of experiencing a fairly flat housing market.

Real estate key performance indicators -- I'll work my way up from the bottom of the chart. Revenue and earnings for first quarter of 2010 are down in comparison with the exception of fourth-quarter 2009 earnings, which as Chris said were impacted by impairments. The majority of the variation is attributable to retail land sales.

Both acres sold and price per acre in land sales were down from comparative quarters. In the first quarter of this year we closed 15 transactions, that is an average of 140 acres per closing. The team has done a nice job generating sales through multiple marketing and advertising channels.

Sales for commercial traffic continue to be constrained as overall slowdown in commercial real estate. Lots sold were down marginally from the fourth quarter 2009 and up considerably year-over-year. On a quarterly basis there is some variability in average sales price and margin per lot, with a majority of the variation being driven by the mix of projects, generating sales and the lot sizes.

For example, in the first quarter this year we sold 24 lots at an average price of about $30,000 a lot in one of our Florida projects. These are the first lots sold in Florida in almost three years. In Texas lot prices averaged $52,000 for the quarter.

The next chart provides an historical overview of lot sales activity on a quarterly as well as an annual basis. During 2006, builders were ending the era of taking out large land and lot position. Over the last several years, builders have reduced inventory through divestitures, and building through their existing inventory. This phase of the cycle is pretty well illustrated by the chart, showing our lot sales over the last several years.

In early 2006, builders continued to ramp up inventory. Late 2006 and early 2007, housing starts began a long and steep descent. Late 2007 through 2009 builders adopt a land light strategy to divest land in lots, and build through their remaining inventory, all of which has led to a reduction in our lot sales velocity.

Fortunately, because the majority of our projects and investments are located in markets that didn't get overheated, prices have held up well. Currently, even with housing demand soft, we are seeing builders back in the market looking for lot positions, and willing to discuss terms. In fact, lot inventories are becoming lean in a number of sub markets.

The next chart is an illustration of our lot inventory over this same period of time. For all practical purposes, we put very few lots on the ground in the last few years, and almost half of the vacant developed lots in Texas are under a takedown agreement. Bottom line, there are a number of projects that will need additional lots soon. Assuming a typical development cost is $20,000 to $30,000 per lot that equates to a capital requirement of about $20 million to $30 million for every 1,000 lots developed.

With the significant shift in housing in certain markets, it is even conceivable that there could be a short-term building constraint caused by an inadequate lot supply. Where that is the case, we are well positioned with land, entitlement and the capability to get lots on the ground.

We ended the first quarter of this year with a little over 200,000 undeveloped acres compared to 1,210 acres in entitlement, and almost 14,000 acres entitled, and a little over 2300 acres in some stage of development getting to our total portfolio of about 250,000 acres.

We received one entitlement for the quarter. It is named or entitled Entrada -- 156 acre track zone for 821 single family lots and three acres for commercial use. We expect housing price points to be in the $125,000 to $200,000, a strong segment in the Austin market. The project has good access, an attractive marketing window plus access to water and sewer.

Entrada is located in the north-east Austin Metropolitan area, which is one of the healthiest MSAs nationally. More specifically, Entrada is located within 10 miles of downtown Austin, in a good school district, and close proximity to amenities and many of the major employers and job centers in Austin.

Shifting gears to mineral. Long-term and global fundamentals are compelling, emerging countries and economies are expected to generate incremental demand for energy. Oil and natural gas will remain essential with expectation that other sustainable and plain supplier sources will grow in their contribution.

Most recently, companies have been focusing on North American oil and natural gas, due to the lower risk investments coupled with expanding resource plays that provide attractive reserve replacement opportunity. In addition, US energy policy dialog continues to emphasize clean, self-sufficient and sustainable sources of energy; natural gas should be a significant part of that solution.

Short-term, oil is underpinned by a globally managed supply and an expectation of global economic growth. Natural gas, principally a domestic fuel source, is faced with elevated inventory supply and soft demand. As a result, lower natural gas prices have generally motivated operators to focus investment towards drilling the [hold] leases, the building reserves.

In light of the recent natural gas prices, minerals had a solid first-quarter this year delivering $6.2 million in earnings. Oil prices were up in comparison with volume pretty much in line with the first and the fourth quarter of 2009. Natural gas volume is down compared to the first and the fourth quarters of last year, but keep in mind the fourth quarter of 2009 is up principally due to the timing of collections.

Price is up over the fourth quarter of 2009 and down compared to the first quarter of last year. Acreage lease which has a tendency to be very lumpy is down quite a bit in comparison to the first quarter of last year, and up somewhat compared to the fourth quarter of 2009. The most significant change is an average lease bonus rate from an average of $342 an acre a year ago, $662 in the fourth quarter of 2009, $1495 per acre in the first quarter of 2010. All in a solid quarter, yet we expect the leasing environment to be challenged in the future.

The first quarter of 20 minerals activity is comprised of 2,130 acres leased principally in Trinity County; two wells were drilled and completed in the quarter; one shallow well in Sabine County with results pending, and of note this is not a Haynesville Bossier well. The second, in Cherokee County is the Travis Peak well, also with results pending. Nine wells initiated sales all producing out of the Barnett and Tarrant County.

In addition, we have included Haynesville Bossier wells of interest both permitted and being drilled. As the map illustrates, we continue to see a positive trend as it relates to Forestar minerals. We made significant progress enhancing our mineral transparency and disclosures. We will remain focused concerning additional reserve measures.

Shifting gears to fiber. Fiber revenues and earnings are in line with the fourth quarter of 2009 and down from the first quarter of last year, principally a function of lower volume, which is to be expected given the reduction of over 100,000 acres last year.

On a price side pulpwood and sawtimber prices are both up over the fourth quarter of 2009. That is primarily driven by wet weather, which constrains timber production, in turn inventory shortfall. The price improvements are encouraging, but have yet to reflect significant changes in fundamental demand.

In closing, we have recently seen a number of the economic indicators improve, although so many housing growth factors in Forestar markets have improved and/or stabilized. In addition, we are seeing positive trends relating to the Haynesville Bossier, certainly heading in the right direction.

All encouraging signs, yet at the same time we remain cautious in that the economy is yet to experience sustained fundamental job growth nationally, and most importantly in Forestar markets. Regardless of the economic direction, we believe our balance sheet, strategy, team and portfolio of projects and assets have Forestar well positioned to benefit going forward.

Those are our remarks for the quarter; I like to open up the call for questions.

(Operator Instructions)

Your first quarter comes the line of Anna Torma with Soleil Securities.

Good morning. I was wondering if you could give us a little bit more color on the mineral resources side in terms of the average lease pricing that you saw per acre. Is that really reflective of one large lease, or is there a mix in there of some lower priced leases and higher priced leases? And related to that, could you just talk about whether that is a small area within a county, or you sort of starting to see that increase over a larger area?

Good morning, Anna. With regards to the leasing activity in the quarter, it is principally one large area. I will say that it is associated with some of the previous leasing in Trinity County in blocking up the leasehold interest from the entity who has interest that. I would say that for whatever the target in the play is, it is consistent with leases in the -- I think it is back in the third quarter of 2009.

So -- encouraging from a lease bonus rate, and as I said in previous comments we are also encouraged by the trending and the direction of the Haynesville Bossier.

Great. And can you just remind us again of whether your leases -- when your leases are generally coming up for renewal, are they relatively sort of steady or do you have a wave coming at any particular time?

Anna, if you recall, we had probably the biggest or most significant quarter in history in the second quarter of 2008. I can't remember exactly what that number is, but somewhere in the neighborhood of 45,000 acres leased in that one quarter. And those were three-year leases, so they would run off sometime in 2011. And I would say that is probably the most significant timing issue as it relates to leases.

Okay, great. Thanks. And just last question on the real estate side, in terms of the undeveloped acreage sales, they were strong, but we certainly saw lower price, is there a larger acreage sale there that skewed the average down or could you break that out for growth?

Anna, they were a mix of sizes in those sales are closing. I will tell you that there wasn't one large deal that really drove the price. Just keep in mind that a majority of these sales that we are initiating are very rural, and some of the properties that we have that are furthest out from Atlanta MSA.

Okay, great. Thanks very much.

Thank you, Anna.

Your next question comes from the line of Robert Howard with Prospect Partners.

Good morning, guys.

Robert, how are you this morning?

Pretty good. Wondering with the minerals segment, is there any more info? I know you have been working on trying to understand the assets that you have, is there anything that you can be disclosing in terms of new knowledge or timetable for when there might be another chunk of new information you are going to be able to share with us?

Robert. If you recall over the last three, four, five quarters, we have gotten a lot of information out with regards our minerals assets, as well as activity within those basins in those plays of interest. What I would commit to you is that we are very focused on additional disclosures. At this point, I think what is key to Forestar minerals is the advancement and the progress that the Haynesville and the Bossier make.

Obviously there are some other plays of interest, but relatively speaking that is the most significant play that is in our basin. So what we will do as we go forward is make sure that you, as well as the rest of the market is kept appraised of what is happening from a drilling perspective, because that is really what is going to determine what acreage that we have to get approved of just related to the Haynesville Bossier or any other play for that matter.

Okay. And then you mentioned that you sold some lots in Florida for the first time in almost three years. Where exactly where those lots?

Yes. It is principally around Tampa/St. Pete. There are two projects down there. One of them is -- I will tell you is exactly three. One of them has had very little if any development, one of them is close to being built out, and another one is somewhere north of half life. But, we thought that it was pretty encouraging that even that part of the world -- and Florida has been beat up pretty bad, is beginning to show some signs of recovery.

And how much do you have a remaining in that area?

Robert, I don't know off the top of my head. What I would say is that, we have got one project that has had very little activity with regards to any development -- there is one that is close to end then, the other is about half life. But I will say that all in it is not a huge volume of lots -- maybe somewhere around the 350 range, something like that.

Okay, great. That is it from me. Thanks.

Thank you, Robert.

Your next question comes from the line of [Charlie Trizza with Tivron].

Hey, guys, just one question. And it might be a little too early to verify it, but have you seen any new inquiries with respect to drilling in sort of the area where your mineral rights are, in light of what has been happening in the gulf, sort of the shift in more onshore drillers or just activity with respect to maybe term sheets that you are getting or negotiating?

Charlie. Not yet. It is hard to tell exactly what the response is going to be from the E&P sector due to some of the issues that we are seeing in the Gulf. I will say that there was a development sometime in 2009 that was certainly interesting. One of the major E&P companies made a fairly strategic shift and had sold a majority of their interest in the Gulf to focus their resources on North America -- continental North America.

So there was already beginning of migration back to North America, which I commented in my comments. Now whether this issue we are seeing today is going to accelerate that or not, I don't know. Our belief is that or opinion is if that is a real travesty, we hate to see that happening. But, we fundamentally believe that the US is going to have to be diligent in taking advantage of all of them -- the energy resources that we have.

So if it moves more activity to continental US then that is good. I hope that it is not just a sacrifice abandoning a resource that has potential though.

One additional question with respect to the interest income producing properties, is there a time frame for when Palisades West and Las Brisas expect to -- is there an interest to increase your ownership there, or is the deal structured where you have 25% ownership, and a 59% ownership? Trying to get a sense of the income in the future, and if there is any strategy to -- given that you know these properties to increase your ownership interest.

Charlie, I don't know that there is a definite plan to try to increase ownership interest in those properties. What we have communicated and articulated is that we do have an interest in further investing in income producing properties.

And as it relates to multifamily, Phil Weber, went through a presentation at our investor conference to highlight some of those initiatives, as well as our strategy. And we think that going forward given the footprint that we have, some of the multifamily sites that we have, the resources that we have, that it is probably the best direction and the best opportunity that we see -- I shouldn't say best, a good opportunity that we see to invest in income producing properties or current income, if you will.

Okay, great. Thanks again.

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

Thank you. I'm sorry, could you just clarify again what you said in terms of the results on the two wells you drilled? I didn't catch that.

Mark, what I said is that there were two wells drilled and completed, but the results are pending. In other words, they are not public yet. And just as soon as those results are available, we will communicate what they were -- what they are.

Okay. And then, when would that likely be available?

Mark, I would say in the near future, and that they being completed, but keep in mind we are not operating the wells, and it is really a function of the operator's duty to report that in a timely fashion. But generally, when they are completed it is not too long after that that some information is made available.

Okay. And then I believe you also said additional wells were being permitted and drilled in the Haynesville Bossier in your area. Did you mean that was on your lands, or is that just on land close to where you have holdings?

Mark, if you look at the chart, our objective there was to show where wells are drilling as well as where they are permitted. And you can see that in relation to our ownership. If you look at that chart you will see quite a bit of wells -- quite a number of wells that are actively drilling in Shelby, and Nacogdoches and St. Augustine County, and others that have been permitted pretty much in the same proximity.

And when you look at that chart you see quite a bit of activity. If you were to look at it over time you would see a positive trend, which is very encouraging. So, what I would tell you is that is heading in the right direction.

Okay. Shifting gears on to real estate. Can you give us the sense you at the end of the quarter, it says that you basically got about 3500, 3600 residential lots that are either developed or under development, how many of those would basically be ready to go? And now much additional capital would be needed to get the remainder in a ready to go state?

Mark, of the lots that are in development I would say that well over half are referred to as vacant developed lots. In other words, they are ready to go. So the capital requirement to fully develop that whole category is -- I don't want to say minimal, but a majority of the capital has been invested from a lot development perspective.

Okay. And then, presumably if I understood you correctly, on average you might expect for the entitled that you need $20,000 to $25,000 per lot to get to the vacant --?

Yes. I would tell you it is going to range anywhere from $20,000 to $30,000 a lot. It is going to vary by project and topography and location and size and things of that matter. You know, but clearly the next lots that we will start developing are going to be in those projects that are in essence either out or very low in inventory. We got active builders that are generating sales.

So it is -- the ramp up is really going to be just a function of how these markets perform, which is as I said in my comments, which is principally going to be driven by job growth and formation.

Great. And lastly, I know, obviously you now got a couple of months of Cibolo operating under your belt. Can you tell us what happened in the first quarter, and also update us on the status of whether you are expecting any additional reimbursements from the municipality this year?

Mark, I will tell you what I know, the district hasn't reported to me exactly what the receipts look like. Of course, we have ongoing discussions to the extent possible to get some sense of how the resort is operating. What I will tell you is that the operators at Marriott are very encouraged by the business through the first quarter in the ramp up, and also encouraged by what they see in future bookings.

Now on behalf of the district, remember it is an independent operating district that for all practical purposes is in start-up, and it has got cash flow needs and requirements and commitments that it has to meet. So I will tell you the district is up and running, but is in the transition stage of really stabilizing a foundation for its operations going forward.

So, what --

So far, everything is encouraging. The Valero Texas Open is next week. It looks like there is lot of hype, and a lot of excitement, and we're looking forward to it, and going to take advantage of that opportunity from a communications and marketing perspective. So, I will just close by saying that we are encouraged.

Great. So when do you start actually getting cash from your interest in the resort, or at least your interest in some of the revenues from the resort?

Clearly, Mark, if we were running the district we would vote for sooner rather than later, but as I said it is an independent district, and they are going to make the determination into how they manage the district from a cash perspective.

I don't know what their targets are or if they are established one for how much cash they are going to keep on hand, how they are going to distribute, how they are going to operator their financing. But clearly as we have said on a number of occasions, there are certain commitments and obligations that the district has, but they have got some leeway in how they operate within that.

Okay. It sounds like it will be kind of --

Clearly, as we have said before, they are incented to make sure that Forestar is reimbursed almost on all fronts, and that there is an interest meter running on them.

Okay. It sounds complicated. I will follow backup some more, later. Thank you.

Thank you, Mark. Have a good day too.

Your next question comes from the line of David Ronco with AGA.

Hi, good morning, guys.

Good morning, David.

How are you doing? You mentioned the strategic review, the expenses that you incurred there -- just wonder if you can elaborate a little bit more on the unsolicited proposal and share any conclusions you may have reached as a result of the review.

David, that was last year and there was an unsolicited proposal, and we put out a press release after the Board had an opportunity to go through an exhaustive review. And I don't remember the exact terminology that was used, but I can just tell you the consensus was that the Company unit prospect from a value perspective exceeded what that proposal was.

Excellent. Thanks.

You're welcome.

And your last question comes from the line of [Albert Sebastian] with Prospect Advisors.

Good morning, gentlemen.

Good morning, Al.

Jim, just touching on what Mark was talking about, can you just refresh our memories now the joint venture with JW Marriott is going to -- what is the accounting protocol for that? I know you are getting revenues in from the room occupancy as well as non-room occupancy revenue, but what is the accounting procedure for that?

Al, whether it is the district in Cibolo or any other district we have in project -- those are generally utility districts, initially those cash receipts are taken as a reduction in phases, until the district has been proven up, so to speak. So, once those cash flows have been stabilized, then we will begin to take them in as income. Obviously we are going to take the cash, but from an accounting perspective that is the best approach that we take. We think that is the prudent way to look at the district in Cibolo as well as any other.

Okay. So you won't show any income until the reduction in your cost base is essentially zero, and then you will be run through the -- then it will be run through the income statement. Is that how it is going to work?

That is almost right, Al. I wouldn't say that the cost basis would be zero before we start taking it in as income, what is most important is a verification that the district and the receipts have been stabilized, and there is a high level of assurance of that same level of cash flow going forward.

And will you have any disclosure? I guess the disclosure probably will show up on the -- well, I guess it is a question when the district sort of finances itself in terms of floating bonds, but I mean, is it going to show up in the cash flow statement then?

Yes, it will show up in cash flow and because this is a significant district for Forestar we're going to make sure that whatever activities have been consummated that we will report that.

Okay. And consummation really occurs when they float a bond, correct?

Either when they float a bond or distribute cash, the bond issue inside of the district, if you will, is a way in which they address some financing and commitments that they have. So, as I said earlier they have got some leeway inside that district, how they choose to operate and what is in the best interest of the district as well as the obligations -- the commitments that they have.

Well, I guess we really won't have any visibility with regards to, for example, how you did in the first quarter with regards to the resort until -- again, until the district does something on the financing side.

That is correct. That is correct.

Okay.

For perspective, I think it is important we keep in mind that the resort opened late in January. The resort is really doing well, and just as soon as we have information that has been verified that we can report with regards to the district and its operations, we will do that.

My second question regards --

It is still very early.

Okay. Okay, thank you Jim. My second question regards the sort of your value creation around the water rights mitigation with the wetland credits and the stream credits. Essentially you have another pipeline. Right? I mean this is -- and so, I guess in terms of --. So, how is the pipeline?

I mean, it is something that you are going to address sort of on a quarter by quarter basis when you report in terms of showing us the progression of your pipeline with regards to the water rights, and the mitigation credits?

Al, I certainly hope to. I think you said it as good as I can. We are in the process of building and developing that pipeline. We think it is a fairly significant opportunity for us, as Bill stated in the review of water and water derivatives, if you will, which is mitigation for stream credits and wetland, we think we are in pretty good position and we are getting lined out with those resources and we have been adding for a while. But as you said, I hope to in the not too distant future be able to report, here is pipeline, here is status, and here is what is happening in that part of our business.

Thank you.

Thank you, Al. That concludes the questions for this morning. Once again, we thank you for your interest in Forestar and your time this morning. And we wish everybody has a wonderful day. Thank you.

Thank you for your participation in today's conference. This concludes presentation, and you may now disconnect. Have a great day.