Forestar Group Inc (FOR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Forestar Group Earnings Conference Call. My name is Katie, and I'll be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question and answer session towards the end of the conference call.

(Operator Instructions)

I would like to now turn the call over to your host for today, Mr. Chris Nine, 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's joined us by conference call or webcast this morning to discuss the results from First Quarter 2011.

Joining me this morning is Jim DeCosmo, President and CEO of Forestar. I'd like to remind you to please review the warning statements on our press release and our slides as we will make forward-looking statements during this presentation. This morning we will review our first quarter 2011 financial results, and provide an update on current market conditions and our value creation activities at each of our segments. At the completion of our presentation we will be happy to take your questions.

Thanks again for your interest in Forestar, now let me turn the call over to Jim.

Thanks, Chris, and a warm welcome to everybody who has joined us this morning on the call. I want to take just a moment to provide you with a brief overview of what we plan to cover with you today. Now if I was going to headline the call this morning it would be, we live in interesting times that make for interesting opportunity, and Forestar is poised to capitalize on these conditions.

You know, a Chinese philosopher once said, may you live in interesting times. By today's standards I'd say that may be an understatement. Today we are going to walk you through some of the paradoxes we see in the Company, in our businesses and how Forestar's moving to capitalize on these trends to drive both value and growth.

I've characterized the interesting times today as mixed signals, and in many cases, and I've said before paradoxical condition. Let's take housing, the majority of the nation's excess inventory and distress is primarily located in the weakest markets, while the lowest inventories are often located in markets generating demand, yet there remains a lack of confidence in credit to address these needs.

On the energy side, the US has an estimated 100-plus years of domestic natural gas in play, that's trading in under three times the energy equivalent value of oil. So you might ask yourself, how long can these conditions exist? And in a few minutes, I'll spend more time addressing this question, and providing you an update on how Forestar's position to capitalize on these market conditions and opportunity.

So, we've got some interesting things to talk to you about today, but first Chris is going to review our financials. And I will provide you with some market insight, as I'll walk you through the highlights thus far in 2011. Then, I'll conclude with some of our thoughts about the future.

Chris?

Thanks, Jim. First quarter 2011 results were net loss of approximately $2.5 million or $0.07 per share, compared with a net loss of $3 million or $0.08 per share in first quarter 2010 and net income of $2.4 million or $0.07 per share in fourth quarter 2010. Our fourth quarter 2010 results included pre-tax gain of $13.2 million from the sale of 9800 acres of timberland, and non-cash impairment charges of $10.4 million.

Now let me turn to our segment results. Our real estate operation reported segment earnings of $2.6 million in first quarter 2011, compared with segment earnings of $300,000 in first quarter 2010 and a segment loss of $5.5 million in fourth quarter 2010.

As I mentioned earlier, fourth quarter 2010 real estate segment earnings were negatively impacted by non-cash impairment charges of $10.4 million, primarily associated with residential development projects located near Atlanta and Fort-Worth Texas, and a commercial real estate track held in a venture near the Texas Gulf Coast.

Mineral Resource segment earnings were $5.6 million in first quarter 2011, compared with $6.2 million in first quarter 2010 and $6.1 million in fourth quarter 2010. Our first quarter 2011 Mineral Resources segment results include $1.7 million in lease bonus payments associated with leasing over 4900 net mineral acres, and $1.6 million in revenues associated with a seismic exploration agreement on over 31,000 net mineral acres in Louisiana.

Fiber Resources reported segment earnings of $0.6 million in first quarter 2011, compared with $1.4 million in first quarter 2010 and $1.2 million in fourth quarter 2010. Our first quarter 2011 Fiber Resources segment earnings were negatively impacted by the sale of over 24,000 acres of timberland during 2010, principally associated with our near-term strategic initiatives and postponing harvesting activity on 55,000 acres of timberland currently held for sale.

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

Thanks, Chris. Given the mixed signals and the paradoxes, we continue to improve our position, by making meaningful progress responsibly delivering the greatest value from every acre. Simply stated, moving acreage up the value chain through our dimensional land model. But let me share with you just a few of the 2011 highlights thus far.

Number one, in three agreements we have moved 54,000 mineral acres in Louisiana in to play -- three components. First, there's 4900 acres in a standard lease agreement. Second there's a 31,000 acre seismic agreement. And, third, an 18,000 acre exploration agreement. Obviously, each agreement has a depth of a developing production as well as proven up reserves.

Number two; we purchased 1250 acres near Cibolo Canyon that we expect to provide much needed environmental credit to Camp Bullis, which is a significant economic engine for San Antonio. This is a success across multiple dimensions, as well as constituents.

Number three, we sold 214 residential lots and our pipeline of builder option contracts has continued to expand with much better terms and conditions than what we've seen in the past. Number four, we've received really good entitlements on 1,068 acre project in the Atlanta area and last number five; we sold 2600 acres of undeveloped land or timberland, at an average price of about $2,350 an acre.

Now, I'll provide additional details on these accomplishments, in addition to some other areas of notable performance. Suffice it to say we've got a great team, really good assets and active basins in some of the healthiest markets, great resources and a strategy that's going to enable us to continue to create and deliver value, despite the economic and market conditions.

I think it's worth taking a minute to describe the housing landscape. This is truly a paradox or a conundrum. First, excess housing inventory is primarily located in markets with poor economy and, second, population, household formation and jobs are going the fastest predominantly in healthier markets, where lot new home inventories are low and continuing to decline.

As the chart illustrates, the depth and duration of housing starts for single and multi-families is the lowest we've experienced in the last 60 years. This is not sustainable. There are a number of takeaways from the chart, but one in particular that I want to bring to your attention. Notice that multi-families decline from the normal run rate, not from a peak. I'm going to elaborate more on that and its significance in the Forestar multi-family opportunity shortly.

Now when considering US housing, the overwhelming question is, when? Now I can't give you a date certain, but I can tell you that it's dependent on jobs, financing, and it's going to be about market and housing type. So I offer you two takeaways. First, multi-family will most likely lead form a product perspective. Number two, markets with fundamental job growth and balanced inventories will lead from a location perspective.

Let's talk about markets, and maybe more particularly Forestar markets. Over 70% of our investment in real estate, communities and properties and are in the major markets of Texas. Now this chart illustrates that where there is expected job growth, the prevalence of foreclosure, housing inventory or unemployment, the major markets in Texas are among the healthiest in the nation.

Now for over three years now we have watched inventories tighten, and now Texas is experiencing real job growth. In fact, in the last 12 months, Texas has added 250,000 jobs. Now one of the major remaining headwinds is sentiment or confident. In the meantime, there are a number of Texas markets that will need additions to inventory even to maintain the current pace of sale.

As I mentioned earlier sold 214 lots in the quarter, with price and margin holding up well. In addition, we've got about 1,500 lots under option contracts, with improved terms and conditions. As you would expect, this is a significant improvement from a few years back, when there was very little to no interest money and limited terms and conditions.

Now (inaudible) with builders is radically different than two years ago, in fact builders in Atlanta have started asking for meetings again, which is very encouraging. The bottom line, inventories are continuing to climb, and for builders to have pipeline they'll need a secure lot position.

Now we've sold about 2600 acres undeveloped land or timberland for about $2,300 per acre, and through our marketing channels we continue to generate prospects, yet we remain disciplined relative to value.

Now, in viewing the total acres and projects by category, you can see we've got a well-positioned pipeline all the way from undeveloped acreage through to active selling projects. And once again, those are principally located in the major markets of Texas.

Also, as we demonstrated in the past, and as we've articulated as part of our dimensional land model, every acre has to meet our return criteria, if not then it will be monetized or repositioned. You can see from our historic quarterly lot sales we've had quarterly run rates that exceed 1000 lots a quarter. However, over the last several years, builders been operating out of existing finished lot inventory.

Because Texas home prices didn't get overheated like a lot of other markets, our prices and values have held up well.

Now, I think it's important to understand that our performance is not dependent on US single family housing starts, returned 1 million a year, or for that matter, for California, Vegas (inaudible) and Florida recover. Keep in mind, for our project to be successful, we need the economies of Texas to continue to recover and Atlanta to get on the right track.

But you know, even with Atlanta trailing, we've got a significant opportunity creating global value through our dimensional land model. Double product opportunities, one of which continues to be entitlement for future communities. Late in April, the Council approved plans and zoning for Village Burt Creek. It is going to be a great future community.

Forestar led a (inaudible) process that engaged key constituents and stakeholders in the design and throughout the entitlement process. As a result today we've got a -- strong endorsements for the Village of Burt Creek that include 1,591 single family homes, 124 townhomes, 441 apartments, 32 condos, 357 independent living units, 23,000 square feet of retail, 100,000 square feet of office and 10,000 square feet of daycare and public schools facilities. Now that's a village.

The zoning prior to entitlement started only allowed for about 300 lots. Now also as you can see from the concept plan over 50% of the acreage is designated as open space. Now this project -- very similar to Cibolo -- through the zoning and the agreements allow flexibility to make changes in the plan as we move forward to be able to move and respond with the market.

Now the Village of Burt Creek will provide a preferred lifestyle, which is very different than many of the existing distressed developments in North Georgia that are typically large lots with individual wells, septic tanks and limited to no amenities. Like our other North Georgia entitlements, we believe value has really been created, yet it is premature to invest and development.

However, in the interim we'll create and enhance value by selectively selling timber, providing recreational opportunity. We'll certainly examine other product options consistent with our dimensional land model.

With regards to metals, oils and gases there's really no surprises, oil prices and markets are generating quite a bit of activity and natural gas is soft, with the majority of the drilling activity driven by contractual obligations that are required to hold leases. However, I think it's worth noting there have been significant investments by many of the majors in US domestic natural gas in both production and resources. I think that's a vote of confidence.

The timber markets are mixed, sawtimber remains soft and pulpwood is stable. With regards to water, it's important to keep in mind in almost any region -- almost any region throughout the entire US, we have virtually no more surface reservoir capacity than we did 40 years ago. And unfortunately, people in Texas are starting to experience drought conditions again.

Now, I'll move on to review our Fiber Resources and KPI. For the first quarter volumes and price are both down in comparison with the other quarters, and that's primarily due to lower acreage and reduces fiber sales from about 55,000 acres that we have held for sale, in addition to lower harvest volumes by our major buyer.

Price as you know is a function of both product pricing and a mix between pulpwood and sawtimber. I'll say this, the team's done an outstanding job of maintaining recreational lease acreage and rates. I think that's very impressive, given the downturn that we've seen in these economies.

We leased about 4900 acres in Louisiana, for an average of a little over $340 an acre on three year terms and 25% royalty. From a royalty, production and pricing perspective, you can see the variation from both natural gas and oil. Now on a combined oil and natural gas bases that we know the total is MMcfe, our share of the production is up year-over-year and down a little bit from the fourth quarter of 2010.

Now if your using both production and price, in the first quarter of this year royalty revenue is up in comparison to last year and to the previous quarter. Now we ended the quarter with about 496 wells generating royalty, which is up from both the quarters that we've compare to.

As I mentioned, we've generated a number of agreements in Louisiana that call for additional color, and no pun intended. Number one, the picture in purple is a lease of about 4300 acres for $350 per acre bonus, a three year term, a 25% royalty and $350 per acre in delay rental. The target is oil and natural gas liquid.

The second, or number two, which is highlighted in blue, is the 31,000 acre seismic agreement with Seismic Exchange Inc., one of the largest seismic marketing company in the US. The option consideration was $50 an acre. There'll be a 24 month period to shoot 3D seismic and generate prospect.

Now the leases that are granted under the agreement will be $300 per acre bonus, a 25% royalty on a three year primary term, and once again $350 per acre in delay rental. In addition, we'll receive a copy of all seismic data, which is very valuable information. Expected targets include the Wilcox, the Frio, and the [Yago] formation, just to name a few.

And third the 18,000 acres depicted in orange, represents 3D seismic data that we possess and own a license to. Now we've entered into an exploration agreement where a Houston based E&P operator, whose geologists and geophysicists will analyze and develop and market prospects.

In this case, any leases granted under the agreement will carry a 22% royalty payment, and we retain the right to participate in up to a 33% working interest that we can either decline, we can choose to participate, or sell, or some combination. We'll also retain all data, analysis information, relating to any prospects that are developed.

Three wells of particular interest that I want to highlight for you this morning -- the first well noted in the blue call out is Leor Energy Indigo LP Forestar, Number One. Leor is drilling ahead on their way to 19,000 feet in Trinity County. Now, if you recall, this is a lease our team put together in the third quarter 2009, at 10,000 acres at $1500 an acre on a five year term, and a 27% royalty [entry]. Now assuming the well is completed, we'd most likely expect results to be available sometime in the third or fourth quarter.

The second well is the EOG Teal Unit 1H, and it's in the khaki colored call out. And the target is the Bossier Haynesville, and it will extend about 38,000 leased acres or hold 38,000 acres under the lease.

The EOG lease contains a 90 day continual development clause, which requires additional periodic drilling on the lease or the balance of the acreage not held by the production unit will be returned to Forestar. Our net royalty interest in this well is estimated to be about 5%.

Now the last well of interest which is highlighted in the darker green call out is in EnCana Blackstone A-17 1H. This well has been completed and it achieved initial production rate of 10.5 million MCF per day. I'd say this well, and potentially the EOG Teal Unit well, should extend the Bossier Haynesville further south.

Now the upper-right hand corner you can see we have provided you a royalty matrix. Now assuming a mineral owner has a full 25% royalty, you can see the potential gross royalty receipt from an individual well. For example, a single well that ultimately produces 6 billion cubic feet and averages $4 natural gas, yields $6 million in gross royalty to the mineral owner.

Now, even though natural gas price has been depressed, we continue to successfully execute our strategy by responsibly generating the greatest value from every acre, by getting acreage in play and moving it up the value chain.

Now moving on to growth opportunity. If you recall, when we were reviewing the historical housing starts chart, I said that where we are today is not sustainable. The bottom line is that available inventory is primarily in the market where demand is low. And where there's demand today, there's only a portion of the once robust builder and developer community that has liquidity or access to credit. And this is our advantage and opportunity, in both community and multi-family development.

Now with regards to community, I think the recurring theme has been kicking the can down the road. We're just beginning to see opportunity, and I'll ensure you we'll judiciously deploy our capital with discipline, while we leverage Forestar's reputation and capability in our market.

I think our acquisition of 1250 acre Dierks Ranch is a good example. We purchased this distressed, undeveloped property after extensive discussions and negotiations with the owner, their bank, the conservationist, the county, Camp Bullis Army Training Reservation, as well as other agencies.

Now the plan is to sell the surface which includes environmental mitigation credit that will be used to perpetuate the mission and expansion of Camp Bullis. Now a collaborative joint land use study estimates that base expansion will generate $8.3 billion economic impact to the San Antonio metropolitan area. Now that's significant.

Now following these sales will have a low basis in about 97 acres of impervious cover right which are priced on per square foot basis and valued similar to our commercial track sales. We've got the rights to use these credits on our development, or sell them into the open market. This is a stand up triple for San Antonio; environmental, social and economic and for many of the main key constituents. This is our strategy, and it's our land model at work.

Opportunity in [story] is similar multi-family with the exception that most markets multi-family didn't get over billed. The credit dried up. We believe that demand will be robust given the demographic, consumer debt, need for mobility and pent-up demand from millennials who have moved back home with family. Now speaking from experience I can assure you, this is not a long-term solution.

Now we've intentionally positioned Forestar to invest and take advantage of the multi-family opportunity. It's just a natural extension of our business. We've got a great team in place, we've got sites ready for development and markets that we know very well, and coupled with a strong track record.

Our conservative underwriting, analysis and market intelligence indicates that the timing is right. Our business model, which includes a complement of third party equity and financing, positions Forestar to generate returns, fees and promotes a yield of very attractive returns for our shareholders. We think this is a significant value proposition.

In addition, we positioned our mineral and oil and gas business to realize additional terms by negotiating terms and conditions that will enable us to invest in low-cost, low-risk or derisk investment, to generate strong returns and aid in proving up the reserves, and subsequently the value of these assets in our business.

In time, we believe there'll be additional opportunities to invest in water. It appears that the longer the municipalities of the regions wait to address these issues, is most likely the more radical and expensive the solutions are going to become.

Now with regard to use of the capital, we're focused on not over-leveraging the balance sheet. And it's critically important that we invest in ways that clearly generate superior return in shareholder value.

In the last two years, we have been successful executing several new-term strategic initiatives that were designed to create shareholder value and position Forestar for the future. So, in closing, let me leave you with two points. Number one, today we got one of the strongest balance sheets we've had since becoming public late in 2007.

We've got great people, a great team, resources and some of the most active basins and healthiest markets. We got a strategy and model that's designed to recognize and responsibly deliver the greatest value from every acre. It's the Forestar distinctive, and it's our competitive advantage.

Number two, we are well-positioned to take advantage of opportunities to strategically grow and deliver value through disciplined efforts in our businesses. And that obviously includes community development, our multi-families and, of course, our natural resources, particularly minerals, oil and gas. These really are interesting times yet I remain optimistic, but with a healthy dose of caution and discipline.

I want to thank you for joining us this morning on the call, as well as your interest in Forestar. So now, I'd like to open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Mark Weintraub, from Buckingham Research.

Thank you. By the way thanks -- a very comprehensive presentation this time. Appreciate that. Three questions. First, can you give us any update on Cibolo and Wolf Creek developments, any development there in the last three months or so?

Mark, Cibolo continues to perform well. If we look at the lot sales in the first quarter, Cibolo , I think was the number two project with about somewhere around 26 lot sales - something like that. So sales continue to be strong. I haven't got a lot of updates on the district as of late, I was told recently that, March of this year was the best month since they've been open. So, that's very encouraging.

My guess is a lot of that was driven by spring break holidays, and things that made. It's turned into a real family destination. And I would also tell you that the Valero Texas Open which was hosted in May was very successful -- great attendance, wonderful weather. So all in, Cibolo is doing well.

I had an opportunity to speak with builders and residents and everything else, so I think that Cibolo's doing great. You know, we're still very positive about that project and (inaudible) investment.

The Wolf Creek project -- we continue to focus on finding an appropriate anchor for that piece of property. Mark, as you know, there's not many 12,000 acre blocks that are 25 miles from the busiest airport in the US. We've had some encouraging discussions, but we continue to invest resources in finding the right anchor and putting together the right plan for that

Just one quick follow on Cibolo. Any sense in terms of whether there'll be any additional bond offerings this year?

Mark it's hard for me to forecast whether there'll be a bond offering this year, what I can tell you is that San Antonio, probably like any other market in US there's a number of property tax protests. They're probably aggravating the situation a little bit. My expectation would be that if we continue to build AV, at the appropriate time they'll issue bonds.

And a quick question on the stock based compensation. How do we go about modeling that? Because I don't think the stock price has moved at all yet the stock-based comp came in a bit higher than I had expected. How do we go about modeling that?

Yep, Mark it is difficult to model. What I would tell you is that generally if you look at the first quarter each year you'll see a bit of an upward tick, and it's just because grants are granted in the first quarter.

The accounting charge is really related to the acceleration of expense associated with retirement eligible employees, so it's a function of both the grants as well as the aging of those who have received grants. As I said, it's generally a first quarter event. And it's also aggravated to some extent by those that are cash denominated.

So, is there a base number, and then for the full year let's say because I realize that, that may be disproportionally in the first quarter? And then, the -- for the balance we can just take stock price and multiply it by a certain amount.

Mark, I would say one way to think about it is look at the previous years and the total for the year and that ought to be a pretty good indication of what the expense would be. As I said, it's probably going to be a little bit higher than the first and than the second, third and fourth -- aside from stock movement. Now that has been obviously aggravated.

I don't think I've seen you specifically call out the fact that you were delaying harvest on land held for sale previously. Does that indicate that you may be far along in the negotiations on the sales of these properties?

Mark, it's probably the first time you've heard me say it we've tried to include that comment in previous calls, as well as in our filings. I don't think it's an indication of where we are in any discussions and negotiations. It makes for a cleaner more attractive transaction.

I'm still confident that in time that the right buyer is going to come forward, and we will be able to find the appropriate terms and conditions that meet everybody's expectations. But, it just makes for a cleaner offering, Mark, as much as anything.

Okay, and two last ones -- real quick ones. One, the Teal Unit -- should we expect results in the fourth quarter for that one? I think you talked about third and fourth quarter.

Mark, that well is going to be very similar to other Bossier Haynesville wells in that area. They're going to be deep, and they're going to have pretty extensive completion processes. And the hard thing to predict is how quick will it be completed.

There's a fairly significant backlog of wells that have been drilled and waiting on completion crews, but I'm assuming that they're able to address that -- it's likely that it's going to be in the third or fourth quarter.

Okay. And then, lastly, you note that the backlog is building in your single family [lot] business. Can you provide more color on that?

Yes. Mark, it's the first time I've shared that on a call, and the reason for that is I think it is relevant. As I mentioned, it's about 1500 lots that are under option contract, and that's up considerably. It's much better terms and conditions.

And relating to my other comment, what's happening is you've got markets that are generating job growth and you have very little inventory, especially in decent locations. And builders are having to step up and put some lots on a contract in order to have some pipelines for 2012 and 2013.

The comment is meant to be that it's encouraging. I can't guarantee that it's going to persist, but all indications are that it's looking good.

And for instance, this time last year at this time how many lots might have been under option contract?

Mark, I don't have the number off the top of my head, but I feel pretty confident to tell you that it was certainly south of 1500.

And I'm sure there's variation, but what typically might be the terms on these option contracts?

Typically, there's going to be earnest money deposits; obviously from our perspective the more the better. We try to get real earnest money down, so that if a client or a builder chooses not to exercise it there'll be some pain there or some gain to us, however you want to look at it. And there's commitments for so many lots to be taken down each quarter.

So I've use a very simple example, you many have 100 lots under contract and the terms are 25 a quarter within a certain project.

So typically, though, the option contracts aren't longer than say, one or two years at the most. Would that be fair?

I think that's probably would frame up the majority of them-- 12 to 24 months. Yes.

Okay. Thanks, very much.

Thank you, Mark Weintraub.

Thank you. Your next question comes from the line of Jim Wilson, from JMP Securities. Please, proceed.

Thanks, and good morning, guys.

Good morning, Jim.

I was wondering -- under the lot backlog in terms of the volume you're seeing the demand, you're seeing residential lots. Any cities in particular? I know you said better locations, which obviously makes sense and is what the home builders are seeing. Every city I know that's where the demand is.

But, Dallas, Austin better than Houston, or what does it look like for you right now? What do you see coming up over the course of the rest of the year and into 2012?

Jim, what I would say is that the interest is probably for us just as strong in any of the major markets of Texas whether it's DFW, Austin, San Antonio, or Houston. So, we feel good about all three of them. But, Jim, as you well know there's certain projects and markets that are performing better than others, so it is a little bit skewed or mixed.

But I'd say from a market perspective, when you look at slide number eight that we've provided for you, and you kind of look at some of the market elements and statistics, they're all strong in our opinion. I mean, all the elements are there and -- with regards to the inventories and job growth. So, I wouldn't make any gross distinctions between the major markets of Texas.

The other thing that I said too, Jim, which is I think somewhat interesting is builders have started to call for meetings in Atlanta. And as you well know Atlanta got bruised up pretty bad in the downturn but it's -- I think it's a positive sign or signal. I don't think that's -- I don't want to overbuild that, but it is encouraging anyway.

You've got well-located communities, particularly your major ones that particularly tend to be a move-up product. I know that the home builders in recent -- in the last quarter, two have been talking about demand being arguably better for higher -- or move-up than it is for entry level, as that -- probably you've seen that starting to help you or help demand for your lots.

Yes, Jim I think that that's accurate, but keep in mind that north of 90% of everything we sell is first and second move-up in value market. We have a little bit of -- we have a project or two that has some entry level product in it, and a project or two that has a little bit of custom, but we're pretty heavily weighted towards first and second move-up.

Okay. And then, I guess on the mineral side, the only question I know we have talked about in the past is timing. But I guess given lease explorations and everything, would you kind of still characterize that you're going to see a pop in activity and obviously in potential royalties, the signs of that will you be able to report on in the back half of this year? Is that still the most reasonable timing?

Jim, I think you're right in that assessment with regards to leases and drilling, the whole leases. We'll be able to have a much better insight of what's going to be drilled and held versus what comes back to us in the latter half of the year.

The well that I mentioned that's being drilled by EOG is one of those leases that expires, I think -- don't hold me to this, but I think it is the first half of the year. So, that well will hold that 3800 acres for as long as its drilling, but as I mentioned there's some drilling requirements once that well is completed. But that's the first in any indication of some activity, but I'd hate to get ahead of ourselves and speak for what plans are for other companies that are holding these leases.

Okay. That's great. Thanks.

Good. Thank you, Jim.

Your next question comes from the line of Eric Anderson, from Hartford Financial. Please proceed.

Yes, good morning, I have a couple of questions. Let me start first by asking if there's any -- has there been any impact on Forestar properties from either the tornadoes that we've seen or the extreme drought and forest fires in Texas?

The tornadoes in the southeast hit a few of our properties, but I don't think it's material to any of the timber inventories and to the book bases. Generally, in those cases even when you have some storms damage, you're going to be able to reclaim a lot of what we get. So to your first question, yes we were impacted but I don't think it's as significant.

Second, the fires in Texas, the answer is no we have not been impacted by the fires. But to that point, what's -- I think what's probably most interesting is the fires are a result of drought. And generally speaking, when there's drought conditions it provides up an impetus for those that are involved in securing water positions for the future to potentially become a little bit more active. So from that perspective, it could have some impact on the business.

Okay. So then, any tornado damage would just move up the harvest dates for the affected timberlands?

Right. And just --[Alex] just keep in mind, if there's 180,000 acres or thereabouts in total ownership in that part of the world it's unlikely that there was anything over 500 acres that's been impacted.

Okay. My next question relates to slide number 16, when you're discussing your activity in Louisiana to the minerals activity, is the area that you highlighted in orange, in terms of the exploration agreement, is that sort of a new strategy or focus for you? Or, is that something you have done in the past, but maybe on a smaller scale?

[Alex] this is new. We haven't entered into or negotiated or developed agreements quite like this in the past. I think it's really a reflection of the business that we have today. There's been other exploration agreements, but probably not like this one.

What we've done is we've taken data in which we possess and have a license to, and we've found a really good partner, so to speak, who is very well versed in this region to do a lot of analysis and examination and I've put together a prospect to market.

So this is -- as I said earlier, this is central to what we do and it's getting acreage in play and moving it up the value chain.

So then you're going to have this partner then come up with some prospects and you'll try to promote them?

Absolutely.

And if you like them a lot then you'll retain a third for your own account?

I'm sorry, repeat that.

If you want to participate in the actual drilling, then you will [spend] up to about a third of the working interest? Is that what I heard?

Yes, that's true. So it's -- you can participate in up to a third, you can take your third and sell half of it. You've got a number of different options based on whatever the conditions are. It provides a lot of flexibility and optionality.

In this -- I used a term called derisk investment, and in this case a good example would be, if there's been a number of wells that have gone in and they've proven up an area, it's likely it changes your position and your attitude towards the next one you may want to participate. Or, if it's created value you could sell that participation or some combination of both.

What are the target depths that are required in this area?

Generally speaking, it's going to be shallower and the targets -- is going to be wet, it's going to be either oil or natural gas liquid. These are generally going to be shallower.

So, those should be attractive in today's economics?

Yes. And that's really the purpose and the intent of putting the agreement together is that we think that the market will be receptive to and have some real interest in these prospects.

Has there any activity up in the top part of the page, which is you know the [Vernon] Parish? That's an area that you've had long standing activity. Anything new going on up there?

Not to my knowledge, not in particular. Obviously with all this activity in Louisiana it's principally oil driven. And in our ownership Louisiana tends to be obviously more heavily weighted toward oil. I will say that there's been some -- there is some activity and some trending associated with the Austin Chalk.

There's some really good wells in East Texas that are trending to the east and to Louisiana, and that's generating some interest and some drilling activity. And those are proof of some really good wells. Similar to the Haynesville Bossier, though, they're pretty expensive. It's a big investment but they make good wells.

What are the counties in East Texas that would border Vernon?

Oh, I'd have to -

Is Vernon right on the line - state line?

Yes. If you look at our ownership a majority of the ownership that we have is in East Texas, and a majority of the ownership in Louisiana is in West Louisiana.

Okay. So it's not like a contiguous swamp of acreage?

No, it is not contiguous. In fact, there's a -- if you'll look at some of the previous releases and charts we've provided a number of maps, and you can see the location of the acreage by county. And then there's also listings of acres by county. If you just go to the website and go to investor relations and look at previously quarterly releases, and you can see that pretty easily.

Okay. Thank you for taking my questions.

You bet. Thank you.

Thank you. Your next question comes from the line of Robert Powers from Prospector Partners. Please, proceed.

Hi, just wanted to check on, the Burt Creek new entitlement. You hear about all these water issues in Atlanta and how are you able to get an increase of potential development in an area when there's all these water constraints going on?

Great question. Part of this whole entitlement process and what we've been doing in that area is not only to gain entitlement, but also to secure water and sewage capacity. So, that's part of the entitlement process.

You work with the cities and/or municipalities, counties or whatever the appropriations to ensure that they have the capacity and that you get the allocation that's needed for your development. So I didn't mention that but I think that's a really good point.

If we're going to engage in entitlements, that's one of the key things that we're going to make sure that we secure, and that's going to be access to water as well as to sewage capacity.

So is that water that you had access to because of some of your other properties, or did you have to kind of go and acquire some rights?

No. The municipality or the city has the water capacity, and as part of the entitlement process the city or municipality will grant you some element or component of that capacity. So it's not what we had, the city or the zoning agency provides that for you and ensures it.

Let me just say, in every project that we have a lot of what we do is centered around water and sewage.

So you kind of have locked in -- I guess the county or whatever has certain potential new capacity, and you've kind of laid a claim to a share of that?

I think that's one way to put it. Yes, you want to secure your position with those rights.

And I think -- I've been in a past presentation where you've talked about having certain water credits or something like that in the region. Is that a different topic?

Yes, it probably wasn't water credit, it was mitigation credit. I didn't spend much time on it on this all, I talked about it last time. We're in the process of developing mitigation bank in which we sell environmental credits. Generally it's going to be stream credits or wetlands credits or adverse impact. Just assume that you won't know net loss to streams and/or wetlands, so when there's an impact it needs to be offset. And that's what that business does, it sells the credits [to an] offset.

Okay. So, that's really a different topic then, not directly related to giving this -- increased entitlements.

That's right. It is a different topic, but the way we look at land I will tell you that if there was an opportunity to generate some credit from Burt Creek we would do that, in conjunction with the development.

Okay. And then, with the new land purchased at Cibolo and I'm sorry, I can't remember the right term, but from a tax perspective or offsetting the previous land sales does that have any benefits there?

Yes, Robert, the acquisition, where we're going to end up in the near future is we'll have a very low basis in what I call 94 acres of impervious cover. And similar to the conversation we just had that's kind of like a development right. It gives you the rights to have structures on certain elements of a property or a project.

For example, Cibolo Canyon has about 15% impervious cover, which means that we can build houses and roads and everything else on about 15% of the property. What this enables us to do is to use the impervious cover credits or rights, if you will, from this property in other developments or sell them into the market.

Okay, thanks. All right great. That's it for me. Thanks.

Good. Thank you, Robert.

At this time, I'm showing we have no further questions. I'd like to now hand the call over to [Robert Howard], for closing remarks.

Good. I sure appreciate everybody's attendance this morning as well as your interest in Forestar, and I want to wish everybody a great day.

Thank you. Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.