Forestar Group Inc (FOR) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2012 Forestar Group Earnings Conference Call. My name is Chris and I will be your conference moderator for today. As a reminder, this conference is being recorded for replay purposes. Presently, all participants are in listen-only mode. Later, we will facilitate a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. And at this time I would like to turn the conference over to your presenter for today, Miss Anna Torma, Senior Vice President, Corporate Affairs. Ma'am, you may proceed.

Thanks, and good afternoon. I would like to welcome each of you who have joined us by conference call or webcast today to discuss Forestar's First Quarter 2012 results. I'm Anna Torma, Senior Vice President, Corporate Affairs, and joining me on the call today is Jim DeCosmo, President and CEO, and Chris Nines, Chief Financial Officer.

This call is being webcast and copies of the earnings release and presentation slides are now available on the Investor Relations section of our website at forestargroup.com. Before we get started, 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 the presentation. Thanks for your interest in Forestar, now let me turn the call over to Jim for some introductory.

Thank you, Anna, and welcome to all those joining us on the call this afternoon. William Ward once said, the pessimist complains about the wind, the optimist expects it to change, and the realist adjusts the sails. At Forestar, our sales have been adjusted to deliver our new strategic initiatives. I think the take-away from the call today is Building sustainable momentum while increasing financial flexibility. We're very focused on our Trip14 initiatives we announced last quarter: focusing on accelerating value realization, optimizing transparency and disclosure, and raising our net asset value through strategic and disciplined investment.

Our progress in 2012 includes continuing to grow our share of oil and gas production, capturing gains by selling our interest in certain assets while strengthening our balance sheet and liquidity, posting year-over-year improvement in residential lot sales, launching our new website this week, and last closing the CL Realty and TEMCO transaction, and investing in oil and gas working interests. I'm encouraged by our progress. Now let me turn it back over to Chris who will review our First Quarter financials.

Thank you, Jim. First Quarter 2012 Forestar reported earnings of $2.8 million, or $0.08 per share, compared with a net loss of $2.5 million, or $0.07 per share during the First Quarter of 2011. The year-over-year improvement was generated principally by the sale of our 25% interest in the Palisades West commercial venture in Austin, TX. As we have previously disclosed, we sold our interest in the venture for $32 million, generating an $11.7 million gain, or $0.22 per share on an after-tax basis.

Mineral Resources reported total segment earnings of $5.9 million in First Quarter 2012 compared to $5.6 million in First Quarter 2011. This improvement is principally due to higher oil production primarily related to the Upper Wilcox Formation in Louisiana, which is partially offset by lower lease bonus revenues and incremental personnel costs.

Real Estate Segment reported earnings of $7.5 million for First Quarter 2012 compared with Segment earnings of $2.6 million in First Quarter 2011. The increase was principally due to the gain associated with the sale of our interest in Palisades West.

Fiber Resources reported total segment earnings of $400,000 in First Quarter 2012 compared with $600,000 First Quarter 2011. The decline in earnings was the result of lower harvest activity due to the sale of over 4,000 acres of timberland since year-end 2010. Now, let me turn the call back over to Jim for additional operating highlights.

Thanks Chris. Let me share with you a number of our First Quarter 2012 highlights, and let me begin with Minerals, Oil and Gas. Our share of oil production was up over 115% from the first quarter of 2011 when 40 wells came online increasing the total to 540 producing wells at quarter end. We also leased about 800 mineral acres in Texas and invested almost $2 million in working interest in the Upper Wilcox well located in the west Gordon field in Louisiana.

Lot sales of 285 is up 33% compared to the first quarter of 2011 and our pipeline remains strong with builder-option contracts at nearly 1,200 lots. We sold just under 25,000 tons of fiber with nearly all of our available land leased for hunting and recreation.

In the first sales of its kind in San Antonio, TX, we sold seven acres of (technical difficulty) Rights for over $1 million. And, as we highlighted in our last call, we sold our 25% interest in Palisades West, and we closed acquisition of 17 projects from the CL Realty and TEMCO ventures.

Let's take a look at the oil and gas business beginning with a brief market update. Resilience oil and liquids market primarily driver of exploration and production in our basins. Oil pricing remained relatively firm in the first quarter supported by demand growth from emerging markets yet subject to geopolitical risks and economic uncertainty. On the other hand, natural gas prices remain under pressure due to record high inventories and exacerbated by unseasonal mild US weather.

As a result, most CNP companies are principally focused on oil and natural gas liquid which adversely impacts our leasing activity in East Texas as it relates to natural gas given the prices of natural gas prices as a competitive advantage being in a significant mineral ownership position with minimal caring cost and no drilling obligation.

Let's take a closer look at the first quarter mineral segment results. Our share of oil production is up over 115% in the first quarter of 2012 compared to the first quarter of 2011. In addition, we received $1.1 million in delay rental payments from last season in Louisiana. Overall, our first quarter mineral resources earnings of $5.9 million were up about $0.3 million compared to year low levels principally due to an increase in $3.8 million in royalty and partially offset lower lease bonus for additional cost of sales in recent investment and talent.

Let's take a look at the formations and basins which produced new wells and productions in the first quarter. Well completion and production were up in the first quarter. The chart on the left illustrates the increase in active well count over the last five quarters. The chart on the right shows a marked increase in share of oil production over that same timeframe. Oil and gas is gaining traction in executing our strategy generating increased exploration in production as well as reserves.

Our interest in oil production increased over 69,000 barrels in the first quarter of 2012. That's up 115% compared to the first quarter of 2011, and is up almost 40% as compared to the fourth quarter of 2011. The majority of the increase is driven by drilling production in the Upper Wilcox formation located in the West Gordon Field in Beauregard Parish, Louisiana and the Austin Chalk located in Newton County, Texas.

Let's take a closer look at the last 12 months drilling activity. As you can see, the new production continues to be distributed to the formations and basins with about 39 new wells coming online in the last 12 months. We've seen ongoing momentum in drilling activity in East Texas and Louisiana throughout the first quarter of 2012. There were four new well completions across our target formations in the quarter; three new wells in the Upper Wilcox formation and one new Bossier Haynesville well in Macadoscious County, Texas.

For today's call, I want to update you on a trend we're seeing and experiencing in the Austin Chalk formation. The map illustrates two predominant Austin Chalk trends; the Master's Creek to the South, and the Brooklyn to the North. As customary we highlight our minerals as available for lease in yellow, leased in green, and by production in orange. To give you a sense of scale, the green blob just about in the center of the map, or just below the center, is about 9,500 acres and is leased as perspective Austin Chalk and will likely be drilled this year. The strata graphic column on the right illustrates the depth of Austin Chalk in relation to other target formations in the basin. When you visit the new website you'll see the summer strata graphic column for each basin where we have mineral interest.

As the wells shown on the map, all the wells on the map are shown as Austin Chalk wells. The 22 that we receive royalties from and four more recent completions are identified by the stars. Given the broad technological advancements in drillings, completions, and engineering, these recent wells generate good production and economics as you'll see on the next chart.

This table provides additional information on the four most recent Austin Chalk wells. Note that the well completion dates begin in November of 2009 to the most recent completions just last month. These wells produce a heavy mix of condensate and natural gas liquids as compared to dry gas. The condensate gas commensurate with oil and natural gas liquids priced about 50% of oil. These wells continue to be economic to the operators. The volume shown represents just our share of production based on our net royalty interest and our internal estimate of ultimate recovery. To illustrate potential growth royalties from these wells we use a 12 month strip price for oil and gas and use 50% of the oil price for natural gas liquid.

The total royalty revenue under the scenario is about $25 million. Keep in mind that we started receiving payments early in 2010 from one of the wells. The Forestar Binary A32 Unit 1, which was completed late in the fourth quarter of 2011 paid out almost $1.5 million in royalties net of production and service taxes in the first quarter of 2012. These wells come on strong early in the buying curve. As I previously noted, we have a significant amount of perspective Austin Chalk acreage in the Brooklyn and the Masters Creek trend. We'll certainly keep you posted on the Austin Chalk development.

Shifting gears to fiber. First quarter fiber resources second earnings were down $200,000 from the first quarter of 2011 and that's primarily due to lower volume reflective of less Timberland acreage. During the quarter we sold nearly 29,000 tons of fiber but the average pricing was up over 8% compared to the first quarter of 2011 which was relatively flat to the fourth quarter. And relative to leases, we continue to have nearly 100% of our available land to lease to neighbors for recreational and hunting purposes.

Now, let's turn to real estate with a brief market update. Our real estate investments continue to benefit from Texas's economic and housing market conditions. In housing, Texas outperforms the majority of the rest of the country in many of the critical segments related to housing. In particular job growth, the most critical driver is household formation and sales. In combination, the major markets of Texas are outperforming the majority of US markets in job growth while home prices continue to hold up well.

Posts to CL Realty and TEMCO transactions, Forestar's investment and residential development in the major markets of Texas has increased to $306 million with 39 residential and most of these properties represent over 89% of our total investment in residential development at the end of the first quarter of 2012.

Now let's turn that real estate segment results. First quarter 2012 Real Estate segment results were well above the first quarter 2011 and that's basically due to an $11.7 million gain mostly of sales of our 25% interest in Palisades West. First quarter results also benefited from the sale of [imperves] covered development rights. Our residential lot sales increased in contribution from income producing properties. These benefits were offset by the decline of nearly $5.4 million in undeveloped land sales as we sold only 450 acres this quarter at an average price of about $2,400 per acre.

Next slide. Excuse me. The next slide shows how residential lot demand continues to show improvement. First Quarter 2012 Residential Lot Sales of [$285] or 33% above the first quarter for 2011 with sales prices averaging just over $53,000 a lot, which is up 10% over the first quarter of 2011.

At quarter end, a backlog or pipeline of lots under contract remain in good shape, at nearly 1,200 lots. Virtually all the lots are being developed under contract. So we're encouraged by the momentum in their proven sales but we still got a long ways to go to return to normalized levels and what I believe is our potential.

The next slide illustrates our pipeline of residential and commercial real estate. Our real estate pipeline continues to be well positioned for recovery. And given today's credit restraints, residential development and having the ability to deliver lots is a key Forestar advantage. We continue to have over 2,800 residential lots developed or are under development with the majority of those lots located in the healthier Texas market. We also have a strong pipeline of over 24,000 residential lots that are entitled and ready to be phased in for development as demand warrants. At the bottom of the table we included an update of element projects by category. We have 16 entitlement, 18 titled, and 63 in some phase of development which includes four commercial income producing properties.

Let's shift gears and review our progress on our Triple in FOR initiatives. We're very focused on proving up and growing that asset at value in our Triple in FOR strategic initiatives. You know surely we've made significant progress towards our three major goals that we set out for over the next several years. First, accelerating (inaudible) of our real estate natural resource. It's a Triple play story. As compared to our historical average targeting a triple in residential lot sales, a triple in oil and gas production, and a triple in our segment financial performance, we're off to a good start in 2012 with oil production up 115%, and lot sales up 33% compared to the first quarter of last year.

Second, optimize transparency in disclosure in our report oil and gas, and groundwater entry. An important first step is the new website that we launched this week which provides additional information on Forestar, particularly the dimensions of our business and people. And third, raising our asset value for strategic and discipline investment to help prove up our asset value and certainly exceed return expectation.

Now, let me further highlight our progress in accelerating value realization and optimizing transparency. A component of accelerating value realization includes evaluating stabilizing income producing assets in certain projects better suited to be monetized with proceeds used for strategic growth and investment opportunities. Two examples of this so far in 2012 were Palisades West and Light Farm.

During the first quarter of this year we closed the sale of our 25% interest in Palisades West and also joint ventures in (inaudible) Dodgers here in Austin. We had a little over $20 million invested. We realized a gain on the sale of $12 million. We received about $4 million in distributions over the last three years generating about $16 million cash flow on our $20 million investment.

The next slide highlights the second transaction we executed to accelerate value realization. Light Farm. In April, we announced the sale of Light Farm. It's a venture of about 800 acres located near Dallas, originally purchased in 2006 as a replacement for Lantana, one of our very successful communities with about 1,500 lots left to be sold.

Given the real estate downturn and annual carrying cost in the cash flow profile, it's associated with the early stages of large development, we just believe that we can redeploy the proceeds and enhance returns and obviously shareholder value. As a result we capitalized on the opportunity to sell Light Farms, which generate $25 million in cash, reduce consolidated debt of $31 million, and a gain on sale of $3.4 million. You can see the impact on the balance sheet as illustrated on the right, reducing total debt to cap on a pro forma basis of 28%.

As our other properties real full economic values as market conditions warrant, agri-Palisades will harvest value. Barring any unforeseen economic surprises, I'd expect that two of our multi-family projects will reach their economic maturity this year.

Moving on to increased transparency. We're very excited to have launched our new Forestar website this week. The new site takes you on a journey through Forestar using our dimensional land model. It highlights the strength of our assets, how we deliver the greatest value for every acre, and our talented teams that create and deliver value for multiple dimension. We've got several videos that highlight our strategy for taking land and natural resources to their highest purpose which provide you an opportunity to become more familiar with our management team.

In our Oil and Gas section we provide maps and strata graphic columns for our various basins and formations. We have an updated water section, a new multi-family section, highlighting opportunity and initiative. In addition, you'll see significant coverage of (Inaudible) of sustainability and corporate responsibility, fundamental core value, it's just a part of who we are, and it's something you'll hear more about in our Triple on FOR initiative.

We encourage you to explore the website. Check back frequently. The site's going to be a dynamic source of information. Let's turn to an example of how we recently strategically invested in Forestar. One of our top priorities is expertise strategic acquisition. The CL Realty and TEMCO transaction is a good example of the leverage and strategic investment that immediately return expectations and generate near-term cash flow and earnings. We provided the detail of these transactions last quarter so I'll just summarize the transactions which closed in the first quarter.

We acquired 100% of the ventures assets in 17 communities, largely located in Texas were $23.5 million net investment. Using 80% of our average sales price, which is about $40,000 per lot, for just the 546 developed lots yields almost $22 million. This investment is expected to easily exceed our return expectations plus generate about $3.9 million in additional margin just in 2012, not to mention the tax benefit of about $11 million.

An additional investment target is the multi-family. After starting construction about a year ago, we recently celebrated the official opening of Promesa in West Austin. The first of 14 buildings and amenities have been completed and we expect to have a certificate of occupancy for the last building by the end of the third quarter. Upon completion, we'll have $31 million invested in the project, $4.5 million in land or book basis, $8.5 million in additional equity, and $18 million in project-level financing.

Promesa's a reflection of our multi-family initiative to develop communities where residents can embrace a wide range of lifestyle amenities, enjoy high quality finishes often not available in rentals. The community is expected to be certified by the off-energy green building program. Our design and delivery provides residents a unique opportunity to live with purpose. Leasing is on track and we're excited about the outlook for Promesa. Once stabilized, we'll begin to evaluate the sales process.

The next slide highlights that we're also building a pipeline for our multi-family initiative. Our multi-family pipeline continues to develop. We've got two communities, Las Presas and Broadstone, that are both stabilized and have seen strong occupancy and rent growth. In addition, we continue to work on preparing for our next project. Eleven, located in downtown Austin, and 360 located in Denver. These projects are anticipating to be developing ventures by leveraging our investment in sites with co-investing equity partners and secured project level financing.

We provide an example of a potential project economics on the right hand side of the chart. In this case, Forestar contributes $4 million of equity which may be made entirely by the contribution of our land; and an equity partner contributes $7 million; and we secure $23 million in private financing to complete construction. Following (Inaudible) Forestar's expecting a net of about $10 million from a project. We'll bring you more details regarding all of our initiatives in future calls and releases.

Another compelling opportunity for strategic investment exists in our minerals, oils, and gas business. We made good progress in our minerals, oils and gas business. Given the foundation that we've built, we feel incremental value will be realized. Going forward we'll continue to promote and participate in the exploration development of our mineral holding. As you know, this entails leasing our minerals to third parties and generating lease bonus payments (inaudible) royalties. And where conditions warrant we'll enter into seismic option agreements investing working interest and consider drilling our own minerals.

In 2012 we'll continue targeting the number zones in formulation including the Wilcox, the Austin Chalk, Tuscaloosa Marine Shale, (inaudible), just to name a few. In addition to our growth strategy, we routinely evaluate opportunities to prove up the value of our minerals and expand our reserve disclosures. In connection with that strategy, we'll continue to evaluate growth opportunities both organically as well as opportunistic ventures, partnerships, acquisitions, or other strategic transactions.

We recognize that a mature evaluation creation tool could have the ability to create wells at lower risk in proven formation. We've got a very capable oil and gas team in place with the breadth and depth of experience across and in many US basins. Before I turn the call over to Q&A, let me give you a few thoughts for the future. First, we're intently continuing to build momentum by increasing our oil and gas production and mineral reserves. Second, as housing markets continue to recover, we'll leverage our capability and position, and capture additional marketshare and value. And third, we'll continue to harvest value through stabilizing income producing properties and make an investment to contribute the near-term cash flow earnings, and most importantly, create shareholder value.

We are encouraged by our product and even more encouraged by the determination of our team. We look forward to updating you on these initiatives and celebrating the milestones we reach as we continue to deliver in Triple on FOR. We built a strong foundation on Forestar and it's now time we capitalize on this position. On closing, thank you for joining us this afternoon and for your interest in Forestar, and now I'd like to open it up the call for questions.

(Operator Instructions)

Our first question comes from the line of Mark Weintraub with Buckingham Research. You may proceed.

Thank you. Good morning. On the Triple on FOR site 23, can you let us know off of what base--are you just using the 201 as a base? And, can you give us a sense recognizing - you probably can't be too exact--but, what type of timeframe are you talking about?

Mark, how are you this afternoon?

Well, thank you.

Good. The base that we're working off is the average over the first four years; and the Triple on FOR timeframe is over the next three to four years. So it's like a look back to the previous four, to looking forward to the next four.

Okay. So 2008 to 2011 kind of average?

Yep.

Okay.

And let me make one other comment relative to that one. When we say we want a triple segment operating financial performance, that's the real focus. The business, I think that benefited quite a bit form the first strategic initiative with some significant timberland sales. That's not a part of the plan going forward.

Okay. Great. Obviously this will take a bit of time. I'll try to crank some numbers and I'll throw them at you and get some feedback later.

Okay.

Not right now. And just a quick question, the star based compensation tends to be very high in the first quarter. There's probably something that goes on in the first quarter because you're stock wasn't up but the stock based compensation was. How does the stock base comp work again, please?

Mark, we generally hit the first quarter as accelerated vesting for retirement-eligible employees, and that generally is what drives the first quarter more than anything. And then also, any awards that are cash based, they're going to be adjusted market-to-market on a quarterly basis. So, any movement in the stock price will impact that as well, either way. The first comment that I shared with you is the one that's probably the biggest driver in the first quarter.

Okay. Thank you.

(Operator Instructions)

The next question comes from the line of Steve Chercover with D.A. Davidson. You may proceed.

Thanks, and I'll say good morning since it's still morning here. Since you sold the interest in Palisades West, and some of the other land sales, do you have other projects lined up - and I'm not saying you have to give specifics--but things that are as attractive as opportunities?

Yea. I think I had mentioned in the comments that we believe that Broadstone and Las Presas, which are two multi-family projects-- one wholly-owned and one as a venture. We believe that they'll likely meet their economic maturities sometime in 2012. So, I think those are two properties that would fit that criteria, or that definition.

Okay. And, do you maintain that selling them off is the best outcome? Because I think one of the major homebuilders this week announced that they're creating a private (inaudible) and they're actually buying back properties that they had built previously. Would that be an opportunity for you?

Steve, I'd have to say that was probably pulling that one out of the rough. It makes more sense for the homebuilders than it does Forestar. I understand the concept and strategy behind what the homebuilder's doing but I don't think that's a good fit for Forestar.

Okay. Thanks, Jim.

You too Steve. It was good talking to you. That's our last question for this afternoon. I want to thank all of you who joined us for our call and I wish everybody a great day. Thank you.

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