Forestar Group Inc (FOR) 2011 Q2 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Forestar Group Second-Quarter 2011 Financial Results Conference Call. My name is Audrey, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of today's conference.

(Operator Instructions)

I would now like to turn the presentation over to Mr. Chris Nines, Chief Financial Officer. You may proceed.

Thank you, and good morning. This is Chris Nines, Chief Financial Officer of Forestar Group. I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for second quarter 2011. Joining me this morning is Jim DeCosmo, President and CEO of Forestar.

Let me 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, we will review our second-quarter 2011 financial results and provide an update on current market conditions and activity related to 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. And now, let me turn the call over to Jim.

Thanks, Chris, and a warm welcome to all of you joining us this morning, or should I say a hot and dry welcome from Austin, Texas? It's been said that success happens when preparation meets opportunity.

Now if there's a key thought I'd want to leave with you this morning, it's that we're focused on ensuring that our assets and our businesses generate significant value for shareholders. In what continues to be a fragile economy, we see some positive signs that provide a glimpse of what the future may hold.

Let me share with you a couple of highlights with the focus on the second quarter. We continue to improve our competitive position by creating and delivering the greatest value from every acre. Now, simply stated, through our dimensional land model we move land and resources up the value chain. Let me share with you a few of our highlights.

Number one, we sold 283 residential lots at 32% higher than the first quarter, and with a backlog of about 1,500 lots under contract. Number two, in July we entered into a definitive agreement to sell 50,000 acres of timberland for $75 million. It's another significant step towards the successful completion of our near-term strategic initiative. And, we sold 780 acres of undeveloped land for about $2.5 million. That's about $3,300 an acre.

Number three, we secured entitlement on 1,068 acre project or mixed-use project just north of Atlanta. And number four, in a mix of agreements, we put over 31,000 net mineral acres into play in Louisiana and Texas. I'd say that's principally in Louisiana. And number five, we acquired a non-performing real estate loan secured by 900 acre mixed-use project in one of the most desirable submarkets in Houston.

And last, we started construction of a class A multi-family community in Austin. We're excited about this project which will provide rental opportunities for about 289 units within a short commute to several business centers.

We've got several interesting things to discuss with you this morning, but first, Chris is going to review our financials and I'll provide you with some market insight as I walk you through performance highlights as well as a few comments about our future.

Thanks, Jim. Second-quarter 2011 results were a net loss of approximately $3.9 million, or $0.11 per share, compared with a net loss of $3.3 million, or $0.09 per share in second quarter 2010, and a net loss of $2.5 million or $0.07 per share in the first quarter of 2011. Our second-quarter 2011 results include approximately $2.7 million of expenses associated with our private debt offerings, which were withdrawn due to the deterioration in terms that were available to us in the capital markets.

Now, let me turn to our segment results. Real estate reported segment earnings of $1 million in second quarter 2011, compared with segment earnings of $2.4 million in second quarter 2010 and $2.6 million in first quarter 2011. Our second-quarter 2011 real estate segment results included only $2.5 million in undeveloped land sales, compared with $8.2 million in second quarter 2010 and $6.1 million in first quarter 2011.

In addition, our second-quarter 2011 real estate segment results include a $1.3 million benefit associated with the reallocation of a previously recognized loss from us to a non-controlling interest venture partner.

Mineral resources segment earnings were $3.1 million in second quarter 2011, compared with $4.3 million in second quarter 2010 and $5.6 million in first quarter 2011. Our first-quarter 2011 mineral resource segment results included $1.7 million in lease bonus payments associated with leasing almost 4,900 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 $0.7 million in second quarter 2011, compared with $1.1 million in the second quarter of 2010 and $0.6 million in first quarter 2011. Fiber sales activity during 2011 were negatively impacted by the sale of over 30,000 acres of timberland during 2010, principally associated with our near-term strategic initiatives, as well as postponing harvesting activity on over 50,000 acres of timberland currently held for sale.

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

Thanks, Chris. Before I discuss our real estate segment results, I want to highlight the real estate market conditions and activity in Texas, especially as it compares to the US averages or the norm. Texas is going to drive Forestar's real estate performance in the near future, and it's not the other 49 state. We have over $440 million invested in 52 projects in Texas, which represents over 70% of our total real estate investment.

The Texas real estate markets are well positioned for an economic and a housing recovery, which ultimately is going to be driven by job growth and maintaining a balance of inventory. Texas's forecasted job growth is currently about two times the national average. In addition, Texas house prices didn't get overheated, primarily due to minimal supply constraint and limitations on equity withdrawal from home. The low new home inventories are essentially in balance today in spite of a low sales rate.

After several years, or several years in consistently going -- looking back, Texas has been rated the number one state for businesses, and that's due to its more corporate friendly tax system, less regulation, tort reforms, quality of life, and certainly the quality of the workforce. As you can see on the table on the right, Texas continues to outperform the rest of the nation. Now we believe in the long-term fundamental underpinnings of Texas and will continue to invest in communities that create and maximize long-term shareholder value.

I'll share with you some real estate highlights. In the second quarter of this year, real estate segment earnings of $1 million were about $1.4 million lower than the second quarter of last year. Our residential and commercial sales were up about $3.1 million, and it was principally due to higher volume of lot sales and pricing, but it was more than offset by a decline in our retail land sales.

We sold 283 residential lots in the quarter. That's over 32% higher than the first quarter, and it's markedly above the first quarter of 2009, which we view to be at trough level. Pricing and margins were steady, and were up from the second quarter of last year.

Commercial acreage demand remains challenging, principally due to financing constraint. It's typically lumpier from a timing perspective. However, we continue to expect ongoing interest in many of our projects.

We sold over 780 acres of undeveloped land for about $3,300 an acre. The lower volume really reflects limited credit availability, as well as poor buyer confidence. We continue to generate prospects through our marketing channels, but as we have in the past, we'll remain disciplined relative to value.

In the second quarter, we received $1.6 million of resort HOT and sales tax from Cibolo Canyon's improvement district. Now as district receipts stabilize, we would expect more consistent receipt going forward. Now since the opening last year, we received about $2.6 million in HOT and sales tax proceeds from the district. And, finally, we secured entitlement for a 1,068 acre project just north of Atlanta.

Other highlights, in KPIs related to real estate. To your left you can see a chart of our last five quarters of lot sales and price, which again reflects the quality and the location of our real estate portfolio and their favorable market condition. Based on what we see today, we anticipate that 2011 lot sales will be in the 900 to 1,000 range with fairly stable pricing.

In addition, you can begin to see the increase in residential lots under contract, which increased in the second quarter of this year. Now at the same time, we have about 500 lots under contract that are planned for development or currently in development. Now to mitigate risk, we'll generally negotiate a 10% to 15% cash deposit and/or substantial contractual terms prior to starting development.

Entitlements, as we mentioned on our last call, the council approved plans and zoning for the 1,068 acre Village of Burt Creek community in late April. We believe this will become a solid Forestar project, ultimately creating a unique and preferred lifestyle option in North Georgia.

The current concept plan for the village designates over 50% of the acreage as open space and includes a nice mix of single family homes, townhomes, apartments, condos, independent living units, retail office, daycare and public school facility. That's what it takes to make a village. Investment. After reviewing and passing on numerous potential investments, we acquired a non-performing bank loan for $21 million.

The loan is secured by 900 acre master plan mixed use community called Discovery at Spring Trails, and it's located in Houston, Texas. The real estate and the financial characteristics clearly meet our investment criteria and it's a solid strategic fit. Let me share with you just a few of the key elements of Discovery.

The development is ideally located in a growing and highly desirable submarket which is about 20 miles north of downtown Houston, and just a few miles southeast of the nationally renowned Woodlands Community. And it's just across from the to-be-developed ExxonMobile campus. And then you can see at the bottom-right the submarket has solid housing fundamentals. That's our criteria, and exactly what we've been looking for.

I also want to bring your attention to another project that we have almost due north called Harper's Preserve. Once again, this was a distress acquisition we purchased in a venture several years back. Recently, we ran a community entitled for some commercial uses and about 1,722 lots, 13 of which closed in the second quarter, leaving about 167 under contract. The project has three strong active builders in the community, and it will also be hosting its grand opening this week with about 150 realtors already signed up to attend.

Shifting gears to a little bit larger sale. As we announced a couple of weeks ago, we entered into a definitive agreement with Plum Creek to sell 50,000 acres of timberland for $75 million, or about $1,500 an acre. About 70% of the timberlands were located in Georgia, with the remainder in Alabama. We expect this transaction to close this quarter or third quarter 2011. We retain the mineral rights associated with acreage, as well as 1,000 acres of mitigation participation right.

Now you can see by the map, this acreage is generally located in around our previous sales principally to the west of Atlanta. This is another meaningful step towards completion of our near-term strategic initiative, which I'll provide you a quick update on.

During this prolonged downturn, we've really focused on executing our strategy and our near-term strategic initiative. Following the close of 50,000 acres we have under contract, we'll have sold 169,000 acres at an average price of just over $1,600 an acre.

And we've provided significant upgrades in our minerals disclosure to include PDP reserves, a number of key performance metrics, website and numerous maps providing you updates on leasing, drilling activity, and certainly important trends.

Our performance has resulted in an $88 million reduction in debt, the repurchase of over 1 million shares of stock and two investments in Houston; the Broadstone Apartments and a bank loan secured by Discovery at Spring Trails, both very selective strategic and value-add investment.

Today I will tell you that Forestar is poised with a strong balance sheet, and with assets in preferred locations, I'd say uniquely positioned to accelerate value realization. Going forward, as in the past, we'll continue to use capital in ways that maximize long-term shareholder value.

Let me give you a quick update on multi-family. Our multi-family strategy is geared to leverage our operating platform and our multi-family sites for third party equity and project level financing to create and realize value.

Our plan calls for an effective use of our land and cash, with an expected contribution to be in the range of 10% to 20% of the equity, and generate distribution reflective of the value that we bring as well as we create for the entity. For comparison purposes, we generally expect at least double the value realized through this model versus an outright land sale.

As part of this initiative we began construction of a multi-family development strategically located in a key growth quarter of northwest Austin. The 16 acre site is one of the last remaining parcels we have at our Ribelin Ranch project. The development is going to consist of a 289 unit class A multi-family community that's going to be laid out, and 13 garden style buildings, an upscale amenity package, all in close proximity to several job centers. We're delivering a preferred lifestyle.

The development has also been carefully designed to earn EPA's ENERGY STAR certification, and it will certainly incorporate Forestar's key strength in conservation design. The first units are expected to be delivered in the first quarter of 2012, with the final sale planned following stabilization.

Moving on to fiber resources -- a few highlights. In the second quarter, fiber resources segment earnings were $0.7 million. That's approximately $0.4 million lower than second quarter of last year. That was driven principally by lower volumes as a result of our timberland sales and lower log prices. Now this is partially offset by small cash gain from the termination of a timber lease that we held. Our recreational leasing activity remains strong, with almost 98% of all available land leased for recreational purposes.

Other segment highlights and KPIs. In our fiber resources segment we saw a decline in both sawlog and pulpwood pricing. Sawlog's stumpage, in particular, was down nearly 8% from the previous quarter, as dry weather in Georgia improved logging conditions and supply, enabling customers to easily maintain adequate log inventory.

In addition, stumpage prices were adversely impacted by increased volumes of low value tornado or salvage wood that continues to move in the basin. And we expect southern sawlog markets to continue to soften, but to begin to recover as we see and experience more typical weather patterns in the future.

Shifting gears to mineral resources, a few highlights in the second quarter. Mineral resources segment earnings were $3.1 million, that's about $1.2 million lower than the second quarter of last year.

The leasing and the royalties were about $0.3 million lower, while operating expenses were up $0.9 million year-over-year. And that's primarily due to increased costs associated with water operating expense, which is principally associated with lease rental payment. Net of water, our mineral resources results were only down slightly year-over-year.

Some additional KPIs and insights into minerals. We leased about 2,500 acres in the quarter for an average of $187 per acre. However, and don't be alarmed, we had 1,500 acres that had no lease bonus payment, but included a requirement to drill by the end of the third quarter of this year.

Generally, leases call for three year terms with a 25% royalty. I'll say operators in and around our East Texas minerals continue to focus their capital principally to drill the whole existing mineral leases. However, we're encouraged by the significant investment that many of the majors continue to make in domestic gas production and proven reserves.

In addition, we think our success in negotiating [working] interest options in several recent leases should help accelerate value realization from minerals and oil and gas business. Now we continue to see an increase in number of wells drilled on our leased acreage, which is evidenced by an increase of 19 producing and selling wells year-over-year.

Royalty revenues in the quarter were up modestly over the first quarter this year, as nearly a 24% increase in oil pricing and over a 5% increase in natural gas pricing was principally offset by lower natural gas production per volume. Now we've been very focused executing our strategy, moving acreage up the value chain.

Since the second quarter of 2010, we've moved over 90,000 net mineral acres in the various leases, seismic and expiration agreement, with the ultimate objective to increase production reserves and to prove up value.

I'll give you an update on East Texas and the Bossier-Haynesville activity. As I mentioned, we've generated a number of new agreements in the quarter, and we also had about 31,000 acres of Encana leases expire in Sabine and St. Augustine County. Nonetheless, given that these were legacy leases, we're looking forward to the opportunity to market and promote these properties with improved terms and conditions.

In our area of interest, there are currently about 31 rigs drilling and about 61 Bossier-Haynesville wells waiting on completion. That's still a significant level of activity, yet certainly slower than what we've seen in the past. All the wells that we've highlighted with the exception of the Forestar 1, that's in the blue call out box, has a potential to extend the proven Bossier,-Haynesville range south and/or west.

We'll have a small interest in four wells that we've identified with the blue borders around the call out boxes. The EOG Teal Unit 1H, which is the bottom center, which we also highlighted last quarter, will extend about 38,000 leased acres -- or hold 38,000 leased acres.

The Forestar 1 in Trinity County has reached total depth of about 19,000 feet and is waiting on completion. We look forward to providing additional results in the latter half of this year, following completion and testing of these wells.

Louisiana. I think the team has been very successful moving the acreage into play in Louisiana within the last year. I'm going to review drilling activity and targets, which will help put the leasing and expiration seismic agreements in perspective.

Now to the north in [Varnish] Parish, located in the center of the map, you see a dark green block that we leased in 2010. This is a perspective Austin Chalk acreage which has been trending east from Texas. A few of the E&P companies have been making some impressive wells, heavy in natural gas liquids with estimated ultimate recoveries in the 3 BCF to 5 BCF per well range.

These are good wells. We currently have one well permitted on this acreage block. If successful, there's potential for up to 15 additional drilling units.

Due west, in purple is a 15,000 acre lease with a short-term drilling requirement. Once again, Austin Chalk is the target. Now to the south, the dark green color in Beauregard Parish is another 2010 lease with nine wells permitted targeting oil in the Upper Wilcox.

As of today, there's three wells planned, there's one drilling, there's three being completed and two awaiting completion. Early indications are encouraging, but we'll need to wait for additional testing and production data before we'll be able to make any reliable estimate of the expected ultimate recovery.

Now all of the recent seismic and expiration agreements that we generate are targeting similar play, oil and liquid focus. Agreements which utilize existing Forestar 3-D seismic and new 3-D seismic data, will be used to generate new prospects on Forestar minerals. Ultimately, as a result of these initiatives and agreements, we expect at least bonus royalty and additional working interest opportunity.

To date, we've got three types of agreements in Louisiana. Standard leases are depicted in purple and green and these leases are generally for $300 per acre bonus, 25% royalty and three-year term. The seismic agreements, which total about 39,000 acres, are highlighted in blue.

These agreements provide for a $50 per acre seismic option payment, which has been exercised and payment received. The balance will be standard -- the balance of the terms will be standard for our business, and include an option to participate with up to a $25 working interest in 31 of the 39,000 acres.

Expiration agreement totaling over 28,000 acres are in orange. These agreements provide for a two-year option term. During that period of time, the operator will evaluate Forestar 3-D seismic data and other available geologic information, seeking to develop oil and gas drilling prospects, once again on our mineral.

Now the leases for the prospective acres will be $300 an acre bonus, 22% to 25% royalty and a three-year term. And once again, Forestar will retain the right to participate for up to a 33% working interest in all the prospects generated.

In closing, let me leave you two points. Number one, despite the nation's ongoing economic and political woes, we've been very successful in executing our initiatives and strategy. As a result, I believe our ability and preparedness to deliver shareholder value is as strong as any time since becoming public. Creating and delivering the greatest value from every acre is a Forestar distinctive and it's a competitive advantage.

And number two, the fundamental underpinnings of demand supporting US domestic energy, water needs and housing is compelling although challenged. It's our unique mix of real estate and natural resources that's been key to our execution to-date; it's what will propel us going forward as conditions improve.

We've certainly been operating in times of uncertainty. We can't do anything about that, but what we can do is continue to create and deliver the greatest value from every acre, and that's what we will do. That's maximizing value for shareholders.

I want to thank you for joining us this morning and for your interest in Forestar. And I'd like to open up the call for questions.

Thank you, sir.

(Operator Instructions)

And our first question will come from the line of Michael Smith representing JMP Securities. You may proceed.

Good morning, guys. A couple of questions for you. One is I'm wondering -- obviously you're going after the multi-family stuff here as a recurring revenue stream. Are there other things that you're thinking of doing on some of your land outside of multi-family as far as residential goes or real estate goes that you might consider doing, assisted living or more commercial stuff? Or, are you really focusing specifically on the multi-family now? And if so, why is that your highlight there?

Yes. If you look at all the various food groups within real estate, multi-family is clearly the very best opportunity that is out there. The fundamentals underneath that business and, if you look at the demographics, the supply, the location of our projects and sites, it's a very compelling proposition.

Michael, as I said in my comments, the other part of this plan is to really leverage the operating platform, as well as our site being used in the capital. So it's a very efficient use of capital, one that will create a lot of value and one in which we're certainly pursuing.

Let me make one other comment relative to that, and that's going to be outside of real estate. In my comments I had mentioned that over the last year or two, part of the terms that we have been negotiating in our mineral leases has been options to participate in working interest. That's a great benefit and really leveraging our minerals platform that not many can get. So, that's another opportunity that we may have to efficiently use capital and also to generate recurring earnings.

Can you give a little color on how some of your discussions are -- I know you probably can't get into specifics -- but just in general how discussions are going with potential partners for the multi-family deals?

Are you guys talking to public REITs, private REITs, smaller operators, private equity? Just in general how are those discussions going, and is there a lot of interest out there in leveraging your platform?

Michael, what I would tell you is that the opportunity that Forestar has generated for other investors is compelling. If you look around the nation, or especially in the markets that we are in, I don't believe that there are many entities who have an offering like Forestar, with a pipeline of projects in sight and with the team in place and with a little bit of track record.

So I would just tell you that I like our position, and I think it's reflected by the responses that we've been getting.

Great. Thanks, guys. I'll let somebody else have a shot now. I appreciate it.

Okay, Michael. Thanks for joining us this morning.

And our next question will come from the line of Robert Howard representing Prospect Partners. Please proceed.

Good morning, guys.

Good morning, Robert.

All right, just a couple of thing. One, you started getting some money back from the Cibolo tax district. I'm just wondering how much is left. And are you only getting money back, or is there still money that you're investing that again is going to have to get reimbursed in the future as well?

No. The investments and commitments that we've made for the resort have been satisfied for actually quite some time, I would say probably the last year, maybe two years. So there's no more obligation to the resort from a use of cash. And with regards to any disbursement that we received from the district -- if I understand your question correctly -- they've just been receipts and there's been no reinvestment.

Okay. But, how much is still due to you to be reimbursed?

Robert, don't hold me to this -- and I'm going to get you in the infield anyway -- there was a total of about $43 million, and after the reimbursements we're going to be pretty close to about $40 million that's still due to us.

Okay. Great. And then on slide 12, you had that map there and just looking at the remaining acres that you have compared to the ones that you just sold, is the big difference just that they're closer to the center of Atlanta, or there's some other thing that changes in comparing the ones that remain versus those that you sold?

Yes. Two things, Robert, one is obviously in the proximity to Atlanta, and then the other would be the current infrastructure that's in place, or the planned infrastructure which is a little bit more difficult to see on a map of this scale. So, it's a combination of two things. It's proximity to Atlanta, and the infrastructure in place or plan to be in place, and then obviously growth patterns as well.

Yes. Okay. And then comparing on that map again, just this latest sale versus the other sales that you made earlier, if I remember right, those were on a slightly higher dollars per acre number. And it looks like those -- a lot of those sales are nearby this recent sale.

So is infrastructure potential an issue on making that pricing differential? Or, is it just that market prices have decreased a little bit since then -- or the differentiation between the prices of this most recent one versus those previous ones?

Robert, I would say it's principally a reflection of the change in market prices. The largest sale we had was at approximately $1,600 per acre and then the one that we just recently announced is at $1,500, and I'd say it's principally reflective of market conditions.

Yes. Okay. And then, sorry if I missed this, but you had an increase in the number of residential sales or residential lab sales, significant compared to the past. Was there -- did you say, a particular driver for that, or is it just you have more stores opened or whatever for selling? What was behind that?

Robert, I would not say it's because there's a lot of additional stores. The way I would characterize it is that demand is fairly stable, but supplies of available lots continue to shrink and diminish. And in the markets today, after the two to three years of pretty devastating downturns that we've experienced, there's not many entities left in the market who have got the capability to deliver lots and certainly to develop lots.

So I would say it's, in summary, a fairly stable demand but it's more of a reflection of reduced supply and we happen to have a nice pipeline.

Yes. Okay. Great. That's it for me. Thanks a lot.

Good. Thank you, Robert. Thanks for joining us.

Our next question will come from the line of Mark Weintraub representing Buckingham Research. Please proceed.

Thank you. I apologize. I got on the call a little bit late, so if you already answered this, again I apologize. So I see on slide 13 you talk about completing the 50,000 acre sale for $75 million. Did you specifically say what you were going to do with the proceeds?

Yes, Mark, I did comment on it. I said that we're going to use cash for capital in such a way that maximizes long-term value for shareholders. In the past, we've used this cap or cash to maintain a healthy balance sheet. We've repurchased stock and we've made a few very selective investments in the business.

So in the future as we go forward we'll evaluate the use of the cash, and we'll also do it in a way that's in light of whatever economic conditions we're dealing with.

And given where things stand today, is there a priority? I recognize that can change as the situations change, but given where everything stands today, how would you rank order the reducing debt, buying back stock, seeking out acquisitions?

Yes, Mark, what I would tell you is that the priority is to use that cash in some way that's in the best interest of the shareholders. We've been patient. And we'll cross that bridge when we get to it and the deal closed and it gets funded and we reassess where we are. Going back to what I said earlier, Mark, we're going to take the same approach we have in the past, and so it's going to be in some combination of the three alternatives that I outlined.

Fair enough. And do we have a specific timeframe of -- I think you mentioned third quarter, but do you know when in the third quarter you expect the deal to close?

No. I don't have a specific date, Mark, but I will say that based on everything I know that we're pretty confident that it should close.

Okay. Thank you.

Thank you, Mark.

Our next question will come from the line of Eric Anderson representing Hartford Financial. Please proceed.

Yes. Good morning. I appreciate you taking my call. I have a couple of some unrelated questions. If I could just begin with slide number 11, where you talk about your strategic initiatives in the business, can you review for us the Discovery at Spring Trails' transaction?

Basically you've taken out a bank loan on that, so do you now need to take that to foreclosure or where are you in the process of acquiring control of the development?

Yes, the answer to your question you kind of answered yourself. Yes, the plan is to take it through foreclosure and (multiple speakers).

All right, so right now though you've just bought the loan from the bank?

Yes. That's right.

Okay. And what's the process in terms of timing? How long does that take?

It's variable. I think you can look at other similar type transactions and see that it could be anywhere from six to nine to 12 months, generally speaking.

Okay. And then once you've got control, how much capital do you envision having to sort of allocate to continuing the buildup?

One of the real benefits, assuming that you go through the process and you're controlling the real estate, is that if you look at the cash flow stream of a project like this which has some vacant developed lots as well as some paper lots and everything else, the amount of capital required on a go-forward basis from a cash flow perspective is not too terribly bad.

I say that really in comparison to if you buy a piece of raw unentitled property you're going to pay for land and there's going to be entitlement development expenses of major infrastructures. So, that's one of the real benefits of Discovery for us.

And you reference this as your second time doing this or this is the second investment?

No, what I said is that we've really had in the last couple years just a couple of significant investments. This is one of them. The other was really more of a repositioning where we had some acreage in Alabama and Georgia and, through a 1031 exchange, moved it into the Broadstone Apartments and the Energy Quarter in Houston.

Okay. I remember that.

So if you go back to the comments that I just made that log prices are down, pulpwood prices are down, there's issues on the timberland side. I would also report this morning that in the last six months rent growth at the Broadstone is up 10%. So if you consider that 1031, that transaction, we're feeling really good about that.

Let me also say, too, that when you're looking at slide 11 and looking at Discovery, I also mentioned the project to the north called Harper's Preserve. We purchased that property in a very similar fashion. The developer had some real issues. The bank actually sought us out as a partner in solution to that for a number of various reasons. So, even that project to the north was bought under some similar circumstances.

Okay. So you've got experience acquiring a project like this.

Yes, but more than -- I tell you, Eric, what's more important than just being distressed or being able to buy it right or the fundamentals, the submarkets that we're in, the inventories, the job centers, the job growth, quality of education, quality of life, those are just as important to us as anything else. It's one thing to buy something cheap. You're going to have to be able to deliver and that's going to be -- fundamentally depend upon the market conditions as well as our performance and execution.

Yes, and it all gets back to location obviously.

Absolutely.

Yes. Another question, in addition to the stock buyback that you've referenced, has there been any thought about possibly instituting some type of a modest dividend just to get a little bit of cash out there in terms of return to shareholders?

Eric, certainly there's been consideration in returning value to shareholders. I think it's evident certainly by some of the stock that we've repurchased. A dividend is an alternative. I will tell you that given the conditions we've been operating in actually since becoming public and what we're seeing today it'd be a little bit more difficult. Hopefully going forward that's going to be a real viable option for us.

Okay. That's fair. And my last question relates to slide number 20 where you're really detailing in some specificity your Louisiana mineral strategy. And I'm wondering does all this acreage or net mineral fee that you've shown here, does this overlie the Tuscaloosa Marine Shale that's been getting a lot of press recently?

There's potential.

Potential.

Eric, there certainly is potential. I think it's a little bit premature for me to make any real conclusive remarks or comments relative to the Tuscaloosa Marine Shale, but I can tell you that our team is certainly aware of it and diligently exploring our position there.

When you do put out these acres to lease, is the lessee getting basically all zones from ground level to basically as far as they can drill? Or, are there specific zones that in essence you're leasing out, and then anything maybe below that you're reserving?

That is correct, Eric. Our general conditions include the Pugh Clause, which limits the horizons and the extent in which these wells will hold, and it kind of depends upon the terms of the agreement. Generally if a lessee wants everything then they're going to have to pay for everything. If there's a specific target then there will be different terms associated with that. But in many cases our group has used the Pugh Clause.

Okay. So basically then, for example, if someone says, I think this acreage is perspective for all the Austin Chalk, and then if the Tuscaloosa Marine Shale underlies it, they're not going to get that for free if they have to be successful.

That would certainly be our intent and objective.

Okay. That's good. All right, thanks very much for your answers.

Thank you, Eric.

Ladies and gentlemen, our final question will come as a follow-up from the line of Michael Smith representing JMP Securities. Please go ahead, sir.

Hi. Good morning, guys. I just had a follow-up. Jim, you were talking a little bit about the lack of pipeline that a lot of your competitors have and that being part of the reason why lot sales jumped year-over-year. And I'm wondering if you're seeing that show up in pricing. I see here in the release that average pricing did tickup somewhat.

Have you started to see any pricing power on your end that's starting to come into the market because of the lack of developed lots out there? Or, do you expect that to start happening more over the next six to 12 months, or am I jumping the gun a little bit?

You might be getting just a little bit ahead of yourself. The pricing from quarter to quarter is going to have some volatility in it that's driven by the mix of projects that we're selling.

What the reduced supply has helped as much as anything is velocity and we would hope and expect that to continue to improve going forward. But, more importantly, it's enabled us to have a different type of discussion when it comes to negotiating terms and condition.

As I've mentioned, in the lots under contract there're some pretty nice earnest money deposits as well as other performance requirements and guarantees, so that's really the first sign of the benefit that we have. I'll tell you a couple three years ago it was hard to negotiate hardly anything in these contracts. So, that's how I would frame that up.

Okay. And so you'd expect whatever pricing power to come from a relative lack of supply to come further down the road once end demand picks up some and builders start to --

Michael, if I had my choice, if you look at our pricing and our margins, they're in good shape and that's one of the real benefits of being in Texas. Obviously, if I could push a button, I'd push the velocity button.

Okay. That's fair. Appreciate it, guys. Thanks, again.

Good. Thank you. I want, once again, to thank everybody for joining us this morning, and looking forward to serving you going forward. Thank you. Have a nice day.

Ladies and gentlemen, this does conclude your presentation. At this time you all may disconnect, and enjoy the rest of your day.