Forestar Group Inc (FOR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Forestar Group Incorporated Earnings Conference Call. My name is Shanaida and I will 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. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, 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 third quarter 2010. Joining me this morning is Jim DeCosmo, President and CEO of Forestar.

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

This morning I will highlight our third quarter 2010 financial results. Following this review, Jim DeCosmo will address current market conditions and the key performance metrics for each of our segments and provide an update on the execution of our strategic initiatives. At the completion of our presentation, we'll be happy to take your questions. Thanks, again, for your interest in Forestar.

Forestar reported net income of $8.9 million or $0.25 per share in third quarter 2010 compared with net income of $19.5 million or $0.54 per share in third quarter 2009 and a net loss of $3.3 million or $0.09 per share in second quarter 2010. Third quarter 2010 financial results include an after-tax gain of $0.28 per share from the sale of about 14,100 acres of timberland in Georgia and Alabama for approximately $22.6 million. Third quarter 2009 financial results include an after-tax gain of $0.45 per share from the sale of about 20,000 acres of timberland in Georgia and Alabama for approximately $39.5 million. In addition, during the third quarter of 2010 the company repurchased over one million shares of common stock in connection with it strategic initiative.

Now let me turn to our segment results. Our Real Estate operations reported a segment loss of $1.9 million in the third quarter of 2010 compared with segment earnings of $0.1 million in third quarter 2009 and $2.4 million in second quarter 2010. Our third quarter 2010 Real Estate segment earnings included only $4.4 million of undeveloped land sales compared with $11.3 million in third quarter 2009 and 8.2 million in second quarter 2010.

Mineral Resources segment earnings were $6.2 million in third quarter 2010 compared with $17.8 million in third quarter 2009 and $4.3 million in second quarter 2010. Third quarter 2009 Mineral Resources segment results include approximately $15.8 million in lease bonus payments associated with leasing almost 10,800 net mineral acres for almost $1,500 per acre.

Fiber Resources reported segment earnings of $1.4 million in third quarter 2010 compared with $ 2.1 million in third quarter 2009 and $1.1 million in second quarter 2010. Second quarter and third quarter 2010 Fiber Resources segment earnings were affected by the sale of almost 130,000 acres of timberland since yearend 2008 as well as postponing harvest plans of approximately 59,000 acres of timberland currently held for sale as part of our strategic initiative. Now let me turn the call back over to Jim who will review market conditions and key performance indicators for each of our segments.

Thank you, Chris. I'd like to welcome those who have joined us this morning for our third quarter 2010 conference call. Let me begin by saying I'm encouraged with our progress this year. I'll give you a quick summary of market conditions and progress during the third quarter.

I believe the Texas housing markets continue to improve. Inventories continue to tighten and the state is generating positive job growth sign of recovery. Oil and gas, we continue to see activity and positive trends related to our ownership. However, headwinds from low natural gas prices and elevated storage levels [persist].

Third quarter, Real Estate, over 187 lots, while maintaining attractive gross profit margins, (inaudible). Strategic initiative, those are about 14,100 acres for $22 million, two separate transactions and repurchase of 100 million shares, a million shares of stock.

Minerals, oil and gas, about 9,600 acres leased and 8,500 acres optioned for 3D-seismic in Western Louisiana. Despite the national economic conditions, we firmly believe that the execution of our strategy and our initiative have Forestar well positioned benefit going forward.

I'll start the review with Real Estate and update on housing conditions. If you got the ability or in the market to buy a house today, it's hard to imagine a better time. Housing affordability at 1.7 is significantly better than the baseline index of 1.0 which represents the monthly principal and interest payment equal to 25% of median income.

Issues today include very stringent mortgage loan underwriting standards and ultraconservative appraisal. Even good credit scores of property require significant time of documentation. Given the days of no documentation, an adjustment is certainly warranted. However, we're more than likely experiencing some degree of [over reaction].

(Inaudible) inventory is at its lowest since 1968, a time when the population was 100 million less than today. (Inaudible) inventories 204,000 units is down about 6,000 from the second quarter. Keep it in mind that inventory's not evenly distributed across markets. There's a wide range between overstock and [major] spend.

Unemployment is 9.6%. It's the number one drag on the economy, in particular, housing. A lack of jobs and job uncertainty undermines the consumer confidence. Foreclosures is the source of shallower inventory is a real issue, and it' s important to note that almost half of the US foreclosures were in four states -- California, Nevada, Arizona and Florida. And even in those states it's going to be concentrated.

General consensus is that US housing is flat at best. At a minimum I believe it's mixed when argued that some markets are positioned for recovery. I think it's worth taking just a minute to step back and take a macro view of where we are today. [Star] represents national housing starts last 50 years. Shaded areas are recession. The blue line represents housing starts, those single and multi-family. A couple of observations and insights.

Average housing starts in the last 50 years is approximately 1.5 million per year. Fine, you have a 130 million more people today than we did in 1959. The record for housing starts is about 2.5 million per year, and now in 1972 the peak year in baby boom or household formation with 91 million fewer people than today. We're now moving into the peak household formation area for the echo boomers, ages 20 to 34, the largest segment of the population evidenced by 4.3 million births in 2007, an all-time record.

The fundamental long-term demand for housing has not stopped. Consider this. Starts are at 50-year low to home inventories at a four-year low. We lose over 300,000 units year to destruction and natural causes. Fundamental demand is conservatively estimated at 1 million a year. I would contend that the market is headed in the right direction. However a full recovery is ultimately dependent upon sustained job growth.

Last, all of these metrics vary across markets as well a way to recovery in particular. Texas where the housing market fundamentals are generally stronger, 6.3 months new inventory which is based on a low run-rate. These are normalized run-rates which materially alter the monthly supply of housing.

Currently, 2% of all Texas loans are in foreclosure versus the national average of 4.6%, borrowed at a 12.5%, one of the highest. Housing affordability is at 1.9. However, keep in mind affordability has not been an issue in Texas which has historically been a value state.

Last and most important, the state created over a 150,000 new jobs in the last 12 months. That's a growth rate of 1.6% versus the national average of 0.2%. Keep in mind the number one driver for real estate housing is sustained job growth which also positively impacts consumer confidence. With over 75% of our investment real estate projects in Texas, we're well positioned.

Real estate key performance indicators, sold 187 lots in the third quarter this year and continues to stay consistent interest and activity from homebuilders. Sales are down from the previous quarter and up year-over-year. Average price is lower and margin is up in comparison. On a quarterly basis, our metric can be influenced by a combination of mix and timing resulting to short-term variability.

Commercial tract sales continue to be slow while small tract land sales is somewhat lumpy much like lot sales. It's worth mentioning that we chose not to execute contracts on about 4.5 million small tract land sales due to price terms, notably the reservation minimal interest.

And the last, we remain committed to small tract land sales and recently expanded our marketing campaign that targets potential buyers through multiple channels. In particular, I would encourage you to visit our Web site at landforsale.forestargroup.com.

Also, this week we received a disbursement from the Cibolo Canyons Special Public Improvement District of 1.5 million representing hotel occupancy and sales (inaudible) for less than three quarters of the year less district reserve. Obviously, this time period includes startups, but it's a step in the right direction.

We ended the third quarter of 2010 with a little over 185,000 undeveloped acres, 100,678 acres in entitlement, over 14,500 acres of titled, about 2,000 acres in some stage of development, bringing our total portfolio just under 232,000 acres. This acreage does not include our 58% ownership interest in a venture that controls over 16,000 acres of undeveloped land in Georgia.

I want to shift gears and update you on multifamily. So as we discussed in our San Antonio investor conference earlier this year, we believe Forestar has a great opportunity to create value through multifamily. There are three primary elements.

First, short and long-term fundamentals are compelling. Single family foreclosure issues, weak job growth and tight mortgage market, the middle market is expanding daily. Longer-term the echo boomers who are now the largest demographic segment for forming households will require shelter. As stated earlier, the record housing starts of about 2.5 million was in 1972 when the baby boomers forming households. At the time about 40% of starts were from multifamily; today less than 15.

Second, Forestar's background of multifamily, a solid geographic footprint, market presence, a business that nationally produces multifamily sites and opportunities; and third, a combination of our people, back office sites and assets naturally lends itself to an opportunity to create and deliver value through a number of channels: 1031 tax efficient trades from timberland into multifamily, ventures, or through a multifamily fund. The objective is to leverage our resources in a way that generates attractive returns, recurring income, cash flow.

Shifting gears to Fiber, starting at the bottom, revenue and earnings are in line with the second quarter this year, down from the third quarter of 2009 principally due to the reduction of acreage and postponement of harvest on land held for sale. Volume (inaudible) sawtimber was marginally higher than the second quarter 2010 and down from the third quarter of last year due to lower acreage.

On the price front, (inaudible), we saw timber prices are lower than the previous quarter's mix compared to the same quarter 2009. Our [base] pulpwood market continues to hold up reasonably well while sawtimber prices remain low due to the housing market.

Shifting gears to Minerals, Oil and Gas, with regards to the oil market the long-term global fundamentals are strong. The emerging countries and economies are expected to create incremental demand for energy. Oil as a global commodity with price while heavily influenced by specific regions underpinned by an expectation of global economic growth.

Natural gas principally is a domestic fuel source, faced with elevated inventories, ample supply and soft demand as the US economy slowly recovers. As a result, lower natural gas prices have generally motivated operators in our base to focus investments on drilling whole leases through reserves.

Moving on to our mineral, oil and gas KPIs. We leased 9,600 acres and averaged about $275 per acre mainly in Vernon Parish located in west [Louisiana]. The target formation is (inaudible). Our lease is an extension of a trend that's been moving from east Texas into western Louisiana.

Wells on trend and estimated recovery and range 5 Bcf per well. The lower lease bonus rate reflects the recent market conditions. In fact, the initial drilling will be exploratory in this area. Assuming this acreage is proven up, we'll benefit from our royalty interest potentially at acreage play.

During the quarter we granted an 8,500 acre 3D seismic option also in western Louisiana. The formation of interest is the Wilcox, historically heavily weighted toward oil. We'll use the data and information for negotiating and underwriting future leases prospects. For the quarter both natural gas and oil volumes are within range with the two comparative quarters. Natural gas and oil are both down compared to the second quarter this year.

green symbolizing lease; yellow, available for lease exploration; orange, held by production.

The legend also provides symbols for wells permitted, drilling produced and waiting completion. The gray shaded area represents Bossier-Haynesville approved acreage. Since a very few acres were being productive in 2008, it was about 33 wells drilled, 22 of which were (inaudible).

2009, an additional 26 wells completed and 49 wells drilling at yearend, a much larger productive area developing, Shelby north, St Augustine (inaudible) those counties. But the Devon Kardell well, when the Devon Kardell well came online, it achieved the highest initial production rate for the Bossier-Haynesville and generated high attention for the play.

2010 to date, an additional 24 wells completed in Texas with a proven area trending south and west. Earlier this year the EnCana Blackstone A-43 1H with another record initial production rate and extending the play further south.

Sabine, St Augustine, Shelby, Nacogdoches and Angelina counties. Thirty-seven rigs were drilling Bossier-Haynesville wells, 45 wells' been drilled, and a backlog of 76 wells awaiting on completion.

I want to point out a few notable wells in the area, probably the first callout in about 2 o'clock and I'll move clockwise. Crimson's Grizzly 1H has now gone to sale in our first Bossier-Haynesville participation. EnCana Blackstone's A-17 1H has been spud which is successful brings the play further south.

The next well is Goodrich Petroleum in Angelina county which extends the play further southwest. Goodrich recorded on (inaudible) Henderson 1H produced in the sale at a 24-hour rate, 21,000 Mcf per day on a restricted choke, 10,250 (inaudible), bottom line the top tier Bossier-Haynesville well. We have approximately 42,000 net mineral acres in (inaudible) county. Last, EOG in [echo] with a couple of productive wells further north of St. Augustine, Nacogdoches county.

The Bossier-Haynesville continues its trends to the west and south. Given the majority of the prospective Bossier-Haynesville St Augustine counties were leased in 2008 on a per year term, we anticipate drilling activity on our minerals in 2011.

Before I wrap up, I'm going to give you a quick update on our initiatives. Since we announced our initiatives, we generated significant free cash flow principally due to the sale of 110,000 acres of timberland, produced investments, development and lower costs, enabling us to pay down debt by over $130 million, purchased over one million shares of stock. We have also made substantial strides expanding our minerals disclosures evidenced by earnings releases, investor conferences and filings.

In addition, our marketing program for available lease and prospects substantially beyond the baseline from (inaudible) years ago. Even though the market has softened since our first timberland sale, we continue to actively market our remaining 6,000 acres. Of the 22,000 acres on the contract and disclosed in August 20 8-K, closing on 8,000 acres has been extended into the fourth quarter. Once again, there are no assurances that the outstanding contracts will close at schedule.

The net proceeds of approximately 22 million from the 14,100 acres that closed at third quarter have been placed with a qualified 1031 intermediary. We believe they are tax efficient, strategic investment opportunities in qualified real estate that will create long-term shareholder value. [Operating] ventures will include income produced in multifamily assets and or land within our market.

The current conditions are challenging. We fundamentally believe that during these times will differentiate Forestar through the execution of our strategy and initiatives, moving up the value of our businesses, continuing to improve our position. Today we have one solid mix of land, real estate and natural resource assets located in healthy markets and active oil and gas basins.

Two, a healthy balance sheet position for growth, almost 160 million in liquidity, [ample runway]. Three, last and most important, a proven and experienced team committed to delivering our strategy initiatives. I will say in combination we're well positioned to date to deliver shareholder value. That will cover my prepared remarks, and we'll open up the call for questions.

(Operator Instructions)

And your first question comes from the line of Mark Weintraub with Buckingham Research. Please proceed.

Thank you and good morning. On the timber sale that has been pushed back to the fourth quarter, can you share with us the specifics on that, the acreage and price, et cetera? Is it just -- can we just take what you announced previously and subtract what you did in the third quarter and get the numbers, or is there some other moving parts?

No, Mark, that's probably the best way to look at it. You just take the metrics that we disclosed in the 8-K and back out the sale. You'll end up with what's currently on the contract in the fourth quarter.

Okay. So a little over 7,000 acres for $14 million, $15 million.

Yes.

Okay. Second, can you just walk through a little bit more -- you mentioned you had a $1.5 million Cibolo disbursement. Can you just update us on how cash flows from Cibolo could proceed on a go-forward basis and how that $1.5 million got calculated?

Mark, I can't tell you exactly how the district calculated the $1.5 million. It's an internal policy and practice that the district will use. As I mentioned, the disbursement was for $1.5 million that was for something less than nine months of tax receipts to the district. And then they withheld a reserve.

What I can't tell you is the manner of reserve nor the logic that they use. But I feel fairly confident in saying that given that this is very early in the life of both the resort and the district, they're going to be much more cautious in managing their cash flows as well as their commitment.

Mark, the way I think about it is much like priming a pump. Until you get the pump primed and you get a stable flow of water, you're going to be relatively conservative on any use. So I would tell you that it's -- I understand your question but it's difficult to answer it in such a way that I can give you the exact math and logic.

Okay. Fair enough. On the share repurchase, the one million shares, can you just walk through the thought process on why you chose now to repurchase the shares? If possible, can you tell us the range at which you -- I think it was about a $15 average price. But if you could share us kind of the range and whether or not this is -- whether you're priming the pump there or whether it kind of acts as a one-off?

First comment I'd make, Mark, is when we first announced our initiatives, it included the sale of the timberlands or reduction of -- also reduction in investment that would enable us to pay down debt and repurchase stock. We made a lot of progress there.

As I said in the comments, we paid down over $130 million and had the available cash to look at alternative uses. As I said on a number of occasions, Forestar's -- it's got benefits. There are a number of good opportunities, one of which is repurchase some stock. So when we looked at where the stock was trading, our purchase has averaged somewhere around $15 a share. But I think the range was -- the range was mid-$13 or mid-$15, something like that.

So we're encouraged by that. We think that's a good use of cash on a go-forward basis. We'll stick to the comments that we made earlier that we'll look at all the various alternatives and options, but at the end of the day, we're committed to using cash in a way that creates the greatest value for our shareholders.

Okay. Great. And then, just one last technical question, where was the share count at the end of the quarter, if you have that Chris?

Did you hear that, Mark?

I'm sorry; I did not.

It was $36.4 million.

Was the average. Do you happen to have what the count was at the end of the quarter? Was that any different or was that basically the same?

Mark, I'll follow up with you offline, but it'll be pretty close to that.

Okay. Thank you.

Yes.

At this time there are no further questions. I would now like to turn the call back over to Jim DeCosmo for any closing remarks.

As I said in my comments, we made a lot of progress. We're encouraged about the position we've gotten ourselves into today. We think there's a great opportunity to benefit going forward.

And I just want to thank everybody for joining us this morning and hope everybody has a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.