Forestar Group Inc (FOR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Forestar Group, Incorporated Earnings Conference Call. My name is Khiana, and I will be your coordinator today. At this time all participants are in a listen-only mode, and we will accept your questions at the end of this conference.

(Operator Instructions)

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

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 result of the third quarter 2011. Joining me this morning is Jim DeCosmo, President and CEO of Forestar.

Let me 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 I will begin by reviewing our third quarter 2011 financial results, then Jim will provide an update on current market conditions and the 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.

Forestar reported third quarter 2011 net income of $36.4 million or $1.02 per diluted share, compared with $8.9 million or $0.25 per share in third quarter 2010 and a net loss of $3.9 million or $0.11 per share in second quarter 2011. Our third quarter 2011 results include an after-tax gain of $1.12 per share associated with the sale of 57,000 acres of timberland for approximately $87 million.

Now, let me turn to our segment results. Mineral resources reported segment earnings of $3.6 million in third quarter 2011, compared with $6.2 million in third quarter 2010 and $3.1 million in second quarter 2011.

Our third quarter 2011 mineral resources segment results included only $400,000 in delay rental and lease bonus revenues compared with $3.4 million in third quarter 2010 as leasing activity declined during third quarter as the E&P companies concentrated their efforts on drilling wells to hold existing mineral leases. In addition, third quarter 2011 mineral resources segment results include approximately $1 million in cost associated with the development of our water initiative.

Fiber resources reported segment earnings of $0.5 million in third quarter 2011, compared with $1.4 million in third quarter 2010, and $0.7 million second quarter 2011. Fiber sales activity during 2011 was negatively impacted by the sale of over 30,000 acres of timberland during 2010 and postponing harvesting activity on Timberland previously held for sale.

Our real estate operation reported a segment loss of $4.3 million in third quarter 2011, compared with a loss of $1.9 million in third quarter 2010 and segment earnings of $1 million in second quarter 2011. Our third quarter 2011 segment results include $3.4 million in charges, principally associated with environmental remediation activities at a project located near Antioch, California.

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.

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

Thank you, Chris. I want to welcome everybody who has joined this morning for the call. Roosevelt once said, the only limit to our realization of tomorrow will be our doubts of today. That comment may better reflect the world we live in now rather than 1945. Like any business there are things we can control, and things we can't. We are clearly focused on the former.

Here is a key takeaway from the call this morning. Forestar is intently focused on proving up and realizing the value of our assets in our businesses. I like our position and prospects and as we proceed to the call, I think you'll see why. Now let me share with you substantive highlights for the quarter.

Number one, our share of oil production was up over 50% compared to third quarter 2010 and the second quarter 2011. In the third quarter nine new wells were completed, increasing the total to 510 wells at quarter-end.

Number two, we sold 311 residential lots. That's a 66% increase compared to the third quarter 2010 and that's up over 10% from last quarter. In addition, we sold 80 paper lots or undeveloped residential track acreage, about $79,000 an acre. Number three, we closed a sale of 57,000 acres of timberland for $87 million, the Plum Creek and The Conservation Fund, essentially completing the timberland sales portions of our near-term strategic initiatives.

Number four, even with increased lot sales our backlog or pipeline continues to show strength with builder option contracts remaining at about the 1,500 lot level. Number five, we acquired 180 previously-foreclosed developed lots in a community in Houston, Texas, which includes rights to $4 million in reimbursement. In addition we acquired three multifamily sites from Texas, as we develop our pipelines in multifamily opportunity.

Now what I'll tell you; is we are moving the ball down the field on a number of fronts, and I'll begin by highlighting the step up in all production in third quarter. Our oil production was up significantly during the third quarter, and we are encouraged about future opportunities.

The chart on the left illustrates an increase in well count and drilling activity, and the chart on the right, our share of oil and gas production. Now both charts stand the last five quarters.

Much of the increase in the drilling activity is drilling activity is driven by oil and natural gas liquid markets , and our ongoing promotion of prospects particularly in Louisiana. As a result of the increased well count, our share of oil production has increased over 42,000 barrels during the third quarter. As I've said, that's up over 50% compared to previous quarters.

Now much of the increase has been driven by exploration and production in the West Gordon Field, that's an Upper Wilcox formation in Beauregard Parish, Louisiana. Let's take a closer look. We anticipate that working interest investments will provide opportunities to leverage opposition in developing oil and gas plays, particularly in Louisiana.

This is a chart that I shared with you last quarter highlighting our marketing promotion of oil and gas opportunities in Louisiana. Now since the beginning of the year, we successfully placed over 67,000 net mineral acres in the play, primarily, in seismic and exploration agreements that are highlighted in orange and blue.

Highlighted in green, is the West Gordon Field, and as you will see this is a solid example of executing our strategies and a prime example for the type of field we are targeting in our seismic and exploration ventures.

Now, let me tell you about the West Gordon drilling and production activities. In particular, the West Gordon Field can provide us with meaningful working interest opportunities in coming quarters. The green-highlighted area on the map represents about 2,800 net mineral acres with planned 160-acre drilling units which are outlined in black.

The West Gordon Field produces oil and liquid rich gas from Upper Wilcox formation, at about 13,000 feet. The operators projected development plan is to drill up to 14 wells. Now internal estimates, based on seismic, drill logs internal production -- initial production rates from the producing well indicates an average EUR, or estimated ultimate recovery, of about 200,000 barrels of oil per well.

Now based on our analysis in using $90 oil, our gross royalty interest per well should average about $4.5 million. In addition these wells are expected to produce minor levels of natural gas liquids and dry gas.

Forestar will have approximately a 25% net royalty interest in the 14 projected wells. In addition, we negotiated a non-operating working interest option as part of the lease agreement, enabling us to observe and capture data during the testing phase prior to making an election. If all goes as projected, we expect to elect -- to take a 25% non-operating working interest positions in up to five wells.

I'll provide more detail on working interest investments on the next chart using a Forestar 7-2, one of the currently producing wells. As you can see the three working interest options we've elected to take thus far on the map. The working interest options provide Forestar with an additional low cost and low-risk opportunity realized incremental value by securing a greater interest in the oil and gas production.

As you can see on the map, our royalty interest plus our 25% working interest result in a total net interest in each of the three wells of nearly 44%. Today, two wells are currently producing highlighted by the red dots, four wells are being completed, one well is being drilled and two wells are permitted, and up to five wells are planned for permitting and drilling.

Now, let me talk you through the potential economic of Forestar 7-2. The economics of these wells could be compelling. Let me begin by saying these are Forestar's estimates based on electronic logs and initial production data. At year-end, reserves will be reviewed and verified by an independent oil and gas auditing firms, Netherland and Sewell.

Our preliminary analysis indicated that the 7-2 should produce about 330,000 barrels of oil and about 1 bcf of natural gas over the life of the well. By using $90 oil and $4 natural gas, our royalty interest should generate about $7 million in net cash flow.

Our working interest investment $2 million, expected to generate an additional $3 million resulting in a total net cash flow of $10 for the well. In this case the working interest investment in the 7-2 yields an estimated at 31% IRR and a 2.6 cash multiple. We will certainly provide additional update and information in our next call.

Continuing to build our pipeline of prospects, this map highlights a number of target zones and formations which Forestar is currently evaluation. Formations include the Wilcox, the Austin Chalk, Tuscaloosa Marine Shale, Bossier-Haynesville and the (inaudible), just to name a few. Our oil and gas team and staff is experienced, the skill sets and the tools to evaluate market prospects, exploration production companies.

Ample pipeline opportunities. This table illustrates eight oil and gas formations that we are currently evaluating. You can see the perspective acreage by play, whether it's liquids and/or natural gas and range of targeted well production figures. Consistent with EMP industry today, Forestar is focused on generating liquid-rich prospects. In total we are actively evaluating over 162,000 net mineral acres that we believe contain viable prospects.

Recent drilling spans a diversity of formations. As you can see 19 wells have been completed in nine different formations within the last 12 months, several of the same target formations that we are evaluating from the previous chart.

Now as the slide illustrates we have many formations which are both producing, and viable exploration opportunity within our mineral, oil and gas portfolio. Now let me turn to the exploration drilling activity in East Texas as it relates to the Bossier-Haynesville. In East Texas, drilling activity continues to improve up our acreage.

There are currently 24 rigs drilling in the Bossier-Haynesville in our areas of interest. In the third quarter, 37 wells have been drilled, and 39 are waiting on completion. Now this level of activity is down over 20% compared to the second quarter of 2011 is principally a function of natural gas prices below $4 and elevated natural gas inventories.

A few wells that are worthy of note include the Teal Unit, this is at the bottom right of the map, in which we have a small royalty interest and is producing natural gas from the Bossier-Haynesville Shale. In addition, the Zap Minerals 1H which is located at the bottom-center of the map is being drilled by EOG, and is currently waiting on completion.

And the importance to these wells is that they continue to pull the Bossier-Haynesville between south and west toward our acreage, and when successful they will prove our traditional mineral acreage.

Another well to note is the Forestar Number 1, in Trinity County which we've discussed previously. It's in the process of being connected to distribution lines. Now the initial test well encountered Bossier Sands, but were found to be generally tighter than expected.

Based upon the result [Leor] has indicated -- excuse me -- Leor has indicated that they are evaluating the prospect area to determine the viability and the economics of this play. Our leases call for the drilling of two additional wells in 2012 in order to hold the lease.

Even though segment results were down quarter-over-quarter, I believe we made significant progress executing our strategy and that's moving acreage up the value chains, growing our production and reserve. I'm encouraged by our future oil and natural gas prospects and believe the fundamental underpinnings of the domestic US energy are compelling, and we will continue to expand exploration production in our mineral, oil and gas basin.

Shifting gears to fiber. Third quarter fiber resource segment earnings were down about $1 million from the third quarter of 2010 levels, primarily due to lower volume. And that's obviously reflective of the timberland sales and lower log pricing, or sawlog pricing. During the quarter, we sold over 108,000 tons of fiber, sawlog stumpage prices were down over 8% and pulpwood declined nearly 18% from the previous quarter.

Now given they have normally dry weather in Georgia, especially in Texas, logging production is at a peak which compounds supply issues and enables users to easily maintain adequate log inventories.

Now, let's turn to real estate. In housing we continue to see favorable market conditions in Texas. As I've shared with you in the past, we believe the Texas markets will be some of the first to recover from the housing downturn. As you can see on the bottom right, Forestar has over $460 million invested in real estate in the major markets of Texas; 54 projects in the [five] markets representing over 70% of our total investment in real estate at the end of the third quarter.

Texas continues to outperform, the vast majority of the rest of country, and many of the critical segments of the economy, in short, the key to a housing recovery is jobs and confidence, and Texas is moving in the right direction on both counts.

Now we have increased our investment presence in Houston, so this quarter I want to highlight Houston by providing you additional color and disclosure on our portfolio of assets and the current market conditions. Houston is leading the nation in new home closings. It's the second lowest month of supply of lots. It's created 68,000 jobs over the last 12 months. These are positive signs of a recovery.

Now the map on the right-hand side of the slide illustrates the locations of our real estate projects and properties in Houston, representing about $109 million of investment; over 5,400 acres of land, an estimated 5,000 residential lots and over 430 commercial acres.

In total we have 12 real estate projects and properties at the end of the third quarter, comprised of eight residential and mixed-use communities, new projects and entitlements, one multifamily property, and a loan secured of almost 900 acres of real estate.

In summary, the Houston market is heading in the right direction, and we like our investment and position in the market. In fact, about 40% of out third quarter lot sales were in Houston.

As I mentioned earlier, residential lot sales activity continue to pick up in the third quarter this year, while sales prices remain near the $50,000 per lot range. Our lot sales continue to benefit from declining finished lot inventories and relatively stable demand in most of the markets and in some markets which we operate in.

In addition, our backlog or pipeline of lots under option contract remained about 1,500 at the end of the quarter, which is obviously well above 2010 levels. And virtually, all lots under development are under auction contract. Increased lot sales coupled with a growing backlog is an indicator of declining lot supplies in our sub-markets.

Given today's credit constraints for residential development and having the ability to deliver lots is a competitive advantage. Even though third quarter real estate results were down quarter-over-quarter the apparent momentum in lot sales is encouraging.

The last two bullet points reference a few acquisitions I'll review next, and I'll start with Barrington in Houston. Given that Houston is one of the strongest housing markets in the nation, and having ability to deliver lots at a competitive advantage, we required 180 finished developed lots and the rights to $4 million in reimbursements in a project called Barrington.

This community is in the infill section of the Kingwood master-planned community in Houston. And you can see that on the map in the bottom right. The acquisition process started about eight or nine months ago as we reviewed a large portfolio of distressed notes and properties.

We were successful in carving out Barrington and keeping lot contracts in place, which represent about 30% of the 180 lots. Barrington, unlike many land transactions, will have minimal to no development costs and almost immediate cash flow in earnings. We believe Barrington strengthens our competitive position in North Houston, and will deliver near-term value to our business and obviously our shareholders.

Let's move on from single family to multifamily. We are seeing continued momentum in multifamily, particularly in occupancy and rent. This slide provides some additional disclosure and to the performance and market condition of our two multifamily properties. Broadstone, if you remember, was acquired in the fourth quarter 2010 with 1031 sales proceeds from a $23 million timberland sale.

Now this 401 until Class-A multifamily property is located in the energy quarter in Houston. At the end of the third quarter this year occupancy was 95%. That's up from 91% at the end of third quarter last year. 2011 year-to-date rent growth is 7.2%. That's a reflection of demand exceeding supply.

Las Brisas, a 414-unit Class-A multifamily property is located Round Rock, which is the northern suburb of Austin. Within the third quarter occupancy was 92% and that's up from 89% at the end of third quarter of last year. 2011 year-to-date rent growth is 9.8%.

Now Las Brisas originated as a multifamily site at our (inaudible) property and is currently in a development venture. Given the current market conditions and comparable sales, the combined value of these two properties clearly exceed our return expectation of 35% return on cost, which equates to a low to mid-20s IRR.

Our multifamily business development is both timely and in the right market. Forestar's multifamily business initiative remains a key growth opportunity as we make progress to capitalizing on strong fundamentals, and market conditions.

Not pictured on the slide, but as I noted on the last call, we initiated construction on the multifamily development located in the key growth quarter in Northwest Austin. Now this project was previously referred to as Ribelin Ranch, and has recently been branded as Promesa. You can visit marketing website at www.promesaliving.com. We are currently pre-leasing and expect to deliver the first unit in the first quarter of 2012.

This quarter we also acquired a multifamily development site called Robinson Hill, which overlooks downtown Austin central business district, is entitled for 257 Class-A units. It's got a beautiful view. We purchased this previously foreclosed site for $6.5 million.

Also this multifamily market continues to strengthen and is grounded on stable job growth, solid demand, limiting new supply and rent growth forecasted at over 60%. Let me shift gears and give you a quick update on the Cibolo Canyons, special improvement district associated with our project located in San Antonio.

Cibolo District reimbursements picked up considerably. As we previously stated Forestar's entitled to receive from the District, revenues funded by 9% hotel occupancy tax and 0.5% sales in use tax, generated by the JW Marriott Resort & Spa. Now through the first nine months of this year, we received approximately $2.1 million distributions from the district, including about $0.5 million in the third quarter.

In October, Forestar received $3.5 million, and we expect to receive an additional $3 million prior to year-end. In total we expect to receive about $8.7 million from the District in 2011. Now it's important to note that these payments include a mix of (inaudible) sales and use taxes collected by the District in 2010 and 2011.

Nonetheless, we see the District beginning to stabilize and encouraged by the step up in distribution. By year end, we expect to have been reimbursed the total of about $30 million from the District since late 2009.

Our balance sheet and liquidity strengthened. The near-term initiatives we announced in 2009 which targeted the sale of 175,000 acres of timberland, reducing debt $150 million purchasing, up to 20% of the stock. As at the end of third quarter we sold 175,000 acres of timberland, generating total proceeds of $278 million.

Now excluding the $26.5 million non-recourse loan on the Broadstone property, debt is down over $150 million since the first quarter of 2009, completing the debt reduction in land sale portion of our strategic initiatives. In addition, we repurchased 1.2 million shares of stock since the second quarter of 2010.

Our senior credit facility includes covenants, limiting our ability to repurchase stock when our cash and undrawn availability falls below $125 million, which was the case for a majority of the third quarter. On September the 30th, we executed an amendment with our bank -- or I should say our bank group, which resulted in a $65 million increase in available liquidity. And we also exercised a one-year extension option on our revolver.

As a result of the amendment in the timberland sales, we entered the quarter with over $200 million in liquidity. Today we are well positioned to capitalize on strategic opportunities.

As I said at the beginning of the call, there are plenty of distractions related to the struggling economy throughout the world, particularly in Europe. Those issues are out of our control, but what we can control we are intently focused on delivering.

In closing, let me say I'm encouraged by the progress our business is making, and I'm even more encouraged by the determination of our team. Going forward (inaudible) the following. Oil production reserves are expected to benefit from recent drilling results, and we anticipated meaningful additions to year end reserves.

Over 118,000 net mineral acres are in play in Louisiana and Texas, and intend to drive future leasing exploration and production ultimately, targeting fields much like the West Gordon that I shared with you.

Recent acquisitions of distressed properties like those in Houston are expected to provide additional sales, cash flow and earnings contributions. Multifamily market conditions continue to strengthen, driving the value of our properties and business. Now I tell you that we are timely marketing and promoting Forestar's water interest, to provide sustainable solutions to the major metropolitan markets of Texas. I like our products, markets and basin, and coupled with our team. I really like our prospects.

Now in closing, I want to thank you for joining us this morning and for your interest in Forestar, and now I'd like to open up the call for

(Operator Instructions)

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

Thank you. Jim, I just wanted to start off first on that slide you had on page 12 where you list your various acreage -- the mineral rights, and you indicate whether they are oil and gas -- natural gas -- basically all natural gas and some of them also have oil and/or gas liquids.

Can you share with us order of magnitude what percent is oil and gas -- is oil and gas liquids as opposed to nat gas? Because obviously there is a huge difference right now in the value per bcf if it's oil and gas liquids or if it's natural gas.

Mark, at this time it will be very difficult to give you some mix between liquids and gas on this chart, but what I would tell you from a prioritization perspective the team is focused on those plays and formations to provide opportunities that are more liquid-rich.

Okay. And what would that include besides the West Gordon Field -- the Wilcox Formation, which you've been talking about, which would be oil and gas rich?

Yes. An example would be the Austin Chalk. Mark, if you look at some of the recent completed wells you will see that there is a concentration, Austin Chalk and it's -- Austin Chalk is gas but it's also pretty heavily-weighted towards natural gas, liquids. The trade for that is much closer to oil than to dry gas.

Okay.

Yes. Down at the bottom, which is still really early to say a whole lot about Tuscaloosa Marine Shale, but further back to the east that's the shale that's heavy in liquids.

Also just a quick question on the environmental remediation at Antioch, what's going on there, and why the timing of that now? Are you getting close to where you may be realizing value from that property, which accelerated this charge here and is there potential for additional charges down the road?

Well, Mark, from a reserve perspective we are always going to reserve what we think is going to be required to complete the remediation. Obviously, an environment remediation, as you progress, there is going to points in time in which you find out more about the requirement.

But what I would tell you is that Antioch, the way we think about it, it's about 288 acres and we think about it in four parcels. There is an island that's 155 acres that is -- has this environmental certificate, is clean, and all encumbrances have been removed, there is commercial track of 25 acres that separate it, it has its certificate as well.

The West Mill site, we break the site -- the Mill site up in two parcels, the West Mill site of about 28 acres has its certificate and we are in the process of completing remediation on the East Mill site, that's what's in process.

So given that step, there is a total of four different areas, three separate blocks. What I would tell you is that we do have a number of these properties in the market and we are looking at potential monetization opportunities.

Okay. And I guess what strikes me as we went through the presentation and obviously, first of all we saw another timberland sale again, substantially higher prices than where you carry your timberlands at book. You went through some of the mineral rights -- and just in the Wilcox Formation which, quite frankly, hasn't even been a whole big focus of attention up until now.

Doing a quick math, you get potentially $100 million of value there and presumably you've got a lot of additional value in many of the other plays, and that's on the books at zero. And then, you went through and you talked about feeling very good on some of the commercial operating properties, basically, with very high returns. So clearly, that would be worth more than book in your assessment. And you talked a little bit about Cibolo, another big project -- and, again, running the numbers, looks very well positioned.

And now, you've got cash on the balance sheet and yet you haven't been aggressive on share repurchase yet. And it would seem, based on everything that I've heard, that you must have a view that the assets are worth substantially more than where the company is trading for.

So, why not more aggressive on the share repurchase? Is that just a function of getting the credit amendment, and are we basically in a place now where you can be more aggressive?

Mark, you just about answered your question. If you recall, as I've said, through a majority of third quarter the cash and liquidity was below the $125 million limit that was required by the bank group for us -- in order -- for us to be able to buy stock back. That amendment was -- the facility was amended right at the end of the quarter plus with the timberland sales proceeds. We just got back to the position where we can take advantage of those opportunities.

Okay. And did I hear correctly that you now -- you basically have about $75 million of space in terms of --

Yes.

What you could on share purchase?

Yes, that's correct.

And should we still consider the objective to be up to 20% of shares outstanding with $1.2 million already having been done?

Yes, that is still in place. And I think you said it correctly, up to 20%.

Okay. Thank you.

Thank you, Mark.

And our next question comes from the line of Michael Smith with JMP Securities. Please proceed.

Good morning, guys. I just have a question on the big jump year-over-year. And apologies if you went through this in the script, I had to hop on a little bit late But the big year-over-year jump in residential lot sales, how much -- I mean, obviously a year ago, the landmark, it was pretty (inaudible) given where the expiration of homebuyer tax credit.

But I'm wondering how much -- and you don't have to quantify this exactly. But how much of the year-over-year jump is attributable to just homebuilders getting a bit less skittish now that the demand environment, it's not a whole lot better, but at least stabilized somewhat and you don't have the effect of the tax credit, versus how much is some of the new geographies that you guys have opened up and expanded?

You mentioned specifically Houston, versus how much is just -- even in a weak-demand environment there has been so little -- there's been so little development activities, you guys are really scooping a lot of market share in your markets.

Michael, I will tell you it's a combination of the very things you've said and probably more emphasis on your very last comment. I agree with your note with regard to -- demand seems to be fairly stable -- obviously at the low level but fairly stable.

I think what's happening on the supply side is that there's been very few lots that have been delivered and/or developed, so you have a declining lot supply. And Forestar is in a position where we have lots as well as the ability to deliver lots and as I said, we believe that is competitive advantage.

So we've seen -- apparently we see a trend of increasing lot sales for Forestar, and as I just said, I think it's principally due to more of a supply issue than any real pick up in demand.

Assuming that demand continues to be stable and with time -- with consumer housing demand now and it starts to even come back a little bit in your markets, and therefore builders, because they have a relatively short [land to buy ]a lot of them need to go out and start picking up more lots to meet that demand.

What's your sense of how quickly your competitors could get back up and running and fill that demand versus --? And I guess the flip side of that question that I'm asking -- how big is that mote? Or how big is that competitive advantage that you guys have been able to build up, because you have access to capital and because you've been able to do development activity over the last few years? How big of an advantage is that for you, in your mind?

Let's say it's a near-term advantage. To your point, at some point in time, credit will loosen up and there will be other entities that are able to get back in this space and be able to deliver some lots.

But if you -- if we step up and look at the housing market, even within Texas at a very high level, the majority lots that were developed by regional and local, private entities, many of those are no longer in existence and those that are have a pretty tough time getting access to credit.

So that will eventually change and will eventually fall, but in that interim period of time, we are very focused on taking advantage of this window of opportunity and we will grab as much market share as we possibly can. And we are especially going to do it in those markets that we think are going to be recovering first as well as the fastest, and obviously Houston is one of those markets for us.

I guess that's part of what I'm getting at, is I'm wondering how much of the lack of development activity and the lack of sort of capacity, you know what I mean by that, going forward is just on the credit side and the access to capital side -- and I'm talking about for your competitors and especially the smaller private guys.

How much of it is -- they are still there they just can't get access to capital and so when lending standards start to loosen, they will be able to get back in the game pretty quickly? Versus how much of it is, they just don't exist anymore and therefore even if credit does loosen, you still have a pretty significant advantage just because you still exist and you're still in the game?

I would rank them this way, Michael. First, I would say it's principally being a credit constraint. And then, second would be just a number of entities who are still in the development business. There still seems to be more momentum and people getting out of the business than getting in, you know, so that momentum has got to stop and then switch.

The other thing that I think is important to note is that generally it's the regional and the local banks who provided credit for development. And if you look at their investment and the balance sheet they are still heavily weighted towards land in development, and FDIC is still pushing on the banks to reduce their exposure.

So there is still more correction out there and that's -- I think you're asking a great question but it's very difficult to say -- is this going to be a six-month window or is going to be a 24-month window? But for as long as it's open we are certainly going to take advantage of it.

Sure. Well, thanks, Jim. That color is really helpful, I appreciate it.

Good. Thank you, Michael.

(Operator Instructions)

Good. I want to once again, thank everybody for joining us on the call this morning, and I hope that you have a great day. Thank you.

Ladies and gentlemen, that concludes today's conference. You may now disconnect. Have a great day.