Forestar Group Inc (FOR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Forestar Group earnings conference call. My name is Tony and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Anna Torma, Senior Vice President of Corporate Affairs. Please proceed, ma'am.

Thanks and good morning. I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss Forestar's fourth-quarter and full-year 2012 results. I'm Anna Torma, Senior Vice President, Corporate Affairs, and joining me on the call today is Jim DeCosmo, President and CEO; Chris Nines, Chief Financial Officer; and Flavious Smith, Chief Oil and Gas 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, please, to review the warning statements in our press release and our slides, as we will make forward-looking statements during the presentation. In addition, this presentation includes non-GAAP financial measures; the required reconciliation to GAAP financial measures can be found at the back of our earnings release and slides or on our website.

Now let me turn the call over to Chris for a review of our financial results.

Thanks, Anna, and welcome to everybody joining us on the call this morning. Let me begin by highlighting our full-year 2012 financial results and how the execution of our Triple in FOR strategic initiatives is beginning to benefit the bottom line.

In 2012, Forestar reported net income of approximately $12.9 million or $0.36 per share, compared with net income of $7.2 million or $0.20 per share in 2011. Our 2012 financial results include special items of approximately $0.20 per share and include after-tax expenses of $0.12 per share associated with the acquisition of Credo Petroleum and an after-tax loss of $0.08 per share related to the extinguishment of debt associated with the amendment and extension of our term loan.

In addition, our 2011 financial results include special items of $0.24 per share, which consists of an after-tax loss of $0.06 per share associated with withdrawal of private debt offerings; an after-tax loss of $0.82 per share, principally related to impairments associated with entering into agreements to acquire certain assets from the CL Realty and TEMCO ventures; and an after-tax gain of $1.12 per share from the sale of 57,000 acres of timber land. As a result, net income excluding special items was $0.56 per share in 2012, compared with a loss of $0.04 per share in 2011. This improvement reflects stronger segment operating results, which are highlighted on the following slides.

Real estate reported segment earnings of $53.6 million for full-year 2012, compared with a loss of $25.7 million in 2011. Let me remind you that our full-year 2011 real estate segment earnings include approximately $45.2 million in non-cash asset impairment charges principally associated with the acquisition of certain assets from the CL Realty and TEMCO ventures.

The improvement in our 2012 real estate segment results primarily reflect the sale of two stabilized multifamily properties and our interest in a commercial office project, increased residential lot sales activity, and the reduction in non-cash asset impairment charges. Jim will share this with you in more detail in just a few minutes.

Mineral resources reported total segment earnings of $21.6 million for full-year 2012 compared with $16 million in 2011. This year-over-year increase was primarily driven by higher oil production, the acquisition of CREDO Petroleum, and increased mineral leasing activity.

Fiber resources reported total segment earnings of $5 million in 2012 compared with $1.9 million in 2011 due to increased fiber sales activity and higher average pricing. As a result, we reported total segment earnings of $80.2 million for 2012 compared with a loss of $7.8 million in 2011, illustrating yearly benefits of executing our Triple in FOR strategic initiatives.

Now let me turn to our fourth-quarter results. In the fourth quarter of 2012, Forestar reported net income of approximately $10 million or $0.28 per share, compared with a loss of $22.9 million or $0.65 per share in the fourth-quarter 2011. Our fourth-quarter 2012 results include special items of approximately $0.01 per share associated with the acquisition of CREDO Petroleum.

In addition, our fourth-quarter 2011 results include approximately $0.82 per share after-tax related to the non-cash asset impairments associated with the CL Realty and TEMCO transactions, which I described earlier. As a result, our net income excluding special items was $0.29 per share in fourth-quarter 2012 compared with $0.17 per share in fourth quarter 2011. These results once again reflect a significant improvement in our segment operating results, which are highlighted on the following slides.

Real estate reported segment earnings of $21.6 million in fourth-quarter 2012 compared with a loss of $45 million in fourth-quarter 2011. Again, our fourth-quarter 2011 real estate segment earnings include $44.5 million in non-cash asset impairment charges related to the CL Realty and TEMCO transactions. In addition to the reduction in non-cash asset impairment charges, our year-over-year improvement was driven by an $8.2 million gain on our venture sale of the Las Brisas multifamily community located near Austin, and higher sales of residential lots and commercial tracts.

Mineral resources reported total segment earnings of $5.7 million in fourth-quarter 2012 compared with $3.7 million in fourth-quarter 2011, driven by higher oil production and leasing activity. The acquisition of Credo Petroleum added approximately $2 million in additional segment earnings in fourth-quarter 2012.

Fiber resources reported total segment earnings of $2.3 million in fourth-quarter 2012 compared with $100,000 in fourth-quarter 2011, primarily due to higher fiber sales. Total segment earnings were $29.6 million in fourth-quarter 2012 compared with a loss of $21.2 million in fourth-quarter 2011.

Now let me turn to our balance sheet and our focus on maintaining financial strength while executing our growth strategy. In 2012 we generated $108 million in pretax cash flow and reduced debt by $86 million through our Triple in FOR strategic initiatives to accelerate value realization. These sales include our 25% interest in Palisades West; the sale of approximately 800 acres from our Light Farms venture; reimbursements of investment in land and the formation of two multifamily ventures; and the sale of two of our stabilized multifamily properties, Broadstone and Las Brisas. The sale of these assets allowed us to make several strategic investments during the year including the acquisition of Credo Petroleum for $146 million equity purchase price and over $50 million of real estate acquisitions for both community development and multifamily.

The table on the left highlights our financial leverage at year-end 2012. We had approximately $294 million in total debt outstanding, with $50 million of that being consolidated debt, most of which is nonrecourse to Forestar.

Our total debt to total capital ratio was about 36% at year-end 2012 and our available liquidity stood at $159 million, slightly above year-end 2011. We remain very focused and committed to maintaining balance sheet strength.

As we continue to execute our growth strategy, we are committed to preserving financial flexibility and maintaining ample liquidity to generate the greatest value from every acre. As a result, we will continue to reposition non-core assets and monetize stabilized multifamily assets to support reinvestment and debt reduction.

In addition, we expect to generate additional liquidity over time through acquisitions as well as additions to our proven reserves, to further grow our borrowing base. We are targeting to maintain a least $100 million in available liquidity throughout the cycle, which we remain well above today.

As you can see on the debt maturity chart on this slide, we have no significant near-term debt maturities for the next several years. In addition to our senior credit facility, we also actively monitor and assess public debt markets for additional liquidity for growth and investment.

The combination of our strong portfolio, well-located assets, the right strategy, a great team, and our commitment to maintaining balance sheet strength and financial flexibility has Forestar well positioned to maximize and grow shareholder value. Now let me turn the call over to Jim for some additional highlights.

Thanks, Chris. I would also like to welcome everybody that is joining us this morning on the call as well as the webcast.

Chris pointed out our financial results improved considerably compared to 2011 despite prolonged economic weakness. In the early stages of the housing recovery and what I believe will prove to be a North American energy renaissance, I am encouraged by our prospects.

Acquisition of Credo transformed our minerals management operations into an established oil and gas business with a prime pipeline of oil and liquids prospects. In real estate, we have capitalized on improving housing markets by accelerating lot sales and margins. And furthermore, we generated cash and earnings from the sale of several stabilized commercial properties.

As the chart illustrates, these results are the primary drivers of over $90 million in 2012 EBITDA. This is the source of our momentum going into 2013. We have got our sights set on delivering Triple in FOR as the path to delivering the greatest value for our business and particularly our shareholders.

If I were to headline the call this morning, it would be -- momentum in Forestar. Take a look at a few of the highlights for 2012.

As you can see, almost every dimension of Forestar contributed to our 2012 results. Compared to 2011, oil and gas production is up significantly; multifamily property sales contributed for the first time; lot sales profit is up handily; and fiber revenue is up almost 90%. We will cover the highlights in more details within the segment sections of the presentation.

Much like 2012, every part of the business contributed to the fourth-quarter results. The one point that I will cover before reviewing the segment is the repurchase of 100,000 shares in the fourth quarter at an average price of $14.90 a share. That is one of the just many sound investments in 2012.

I believe our results for the quarter and year are a step in the right direction. So let's begin by taking a look at our mineral resources segment.

Our fourth-quarter mineral resources earnings of $5.7 million were up $2 million year-over-year. That is principally due to higher oil and gas production and leasing activity.

Oil production was up over 245% compared with the fourth quarter of 2011 as 16 additional wells came online. Full-year 2012 mineral resource earnings of $21.6 million were $5.7 million above 2011, once again driven by an increase in oil production and leasing activity. Last, we have invested in oil and gas talent that we believe will create long-term value for the business.

Let's take a look at our increase in oil production. Both charts illustrate an increase in drilling and oil production over the last two years and, as you can see, a significant step change with the acquisition of Credo. Our production increased almost 2.5 times as compared to the fourth quarter last year, with Credo accounting for 68% of the oil production.

We will continue to drive production growth through promoting exploration and drilling on our legacy fee minerals, investing in the Bakken/Three Forks and the central uplift in Kansas and Nebraska. We expect the step-up in drilling to drive oil production, cash flow, and reserves.

Estimated year-end 2012 proven reserves of 5.6 million barrels of oil equivalent is up 2.6 million from year-end 2011, and that is primarily due to the acquisition of Credo. In addition to Bakken wells, I am encouraged that 2012 year-end reserves now included a number of wells in the Three Forks formation.

As anticipated, operators are now testing, producing, and proving up various benches of Three Forks. That is a significant development.

Our legacy reserves are down 1.1 million BOE principally due to record production in 2012, lower SEC pricing, and less drilling due to depressed natural gas and natural gas liquids pricing. SEC pricing for natural gas is down $1.21 per MCF, or about 30% year-over-year as we look at 2011 versus 2012 year-end reserves.

Production and pricing account for the majority of the reduction of proven reserves on our own legacy minerals. I'd just remind you, the benefit of owning minerals and the associated oil and gas is still in place and owned. It's not leased. As pricing and technology advance, production reserves will follow.

In addition, and as noted, there is an estimated 0.7 MBOE of unproven probable and possible reserves. As the chart illustrates, on the right, we have been successful shifting our proven reserve base to oil. We ended 2012 with 57% of our reserves in oil; that is twice the level of 2010.

I'm going to turn the call over to Flav, who'll provide you with a number of the key updates and a focus on 2013 investments as well as expectations.

Thanks, Jim. Activity in the Bakken/Three Forks continues to accelerate as many operators are moving from drilling to whole leases to scalable pad drilling. As with all resource plays, the operator's objective is to reduce costs through operational efficiencies and economies of scale, particularly in drilling and completion related expenses.

As of year-end 2012 we are participating in 35 producing wells. That is up over 20 wells compared to last year. 15 wells are currently drilling, with about 10 waiting on frac and final completions.

Estimated ultimate reserves for producing Bakken and Three Forks wells is also trending in the right direction. The chart highlights our production type curves to date from 35 producing wells in comparison to 400,000, 500,000 and 600,000 EUR type curves.

Note the solid orange type curve. That is our estimate of the average EURs given in production to date from the 35 wells. We expect continued upward revision to EURs as operators optimize completion prescriptions in this part of the basin.

Two other points. First, as we have shared before, our underwriting for our investment in Credo was based on 500,000 barrels of oil per well in the Bakken. Second, at this early stage on the Fort Berthold Indian reservation, year-end 2012 EUR estimates are about 400,000 barrels per well. Additional time and production data will provide greater certainty in estimated EURs.

We are continuing to acquire leasehold interest in mineral acreage in Kansas and Nebraska. At year-end 2012 we had nearly 122,000 net mineral acres leased. We acquired leases on approximately 25,000 net acres in Nebraska for an average price of $25 per acre in the fourth quarter.

Our target is the Lansing-Kansas City formation. These are shallow, 4,000 to 5,000 foot conventional vertical wells that cost generally around $500,000 to drill and complete.

We are expecting to participate in about 82 gross wells in 2013; 57 of them we will be operating. Historically, we have realized about 40% success rate in this play. At $90 oil we estimate risk-adjusted returns far surpass our 20% target rate of return.

One of the real benefits benefits of our Kansas-Nebraska project is at this point in time it is both scalable and repeatable. It fits well within our low-risk investment profile.

Due to lower retail gas prices, drilling activity in East Texas and Louisiana slowed down slightly in 2012. 13 wells were completed in our legacy fee minerals with the majority targeting oil and natural gas liquids in the Austin Chalk and Upper Wilcox in Louisiana. In 2012 revenues from legacy minerals were $34 million, providing a cash flow underpinning for our oil and gas business.

We have about seven wells planned in 2013 over several horizons, primarily targeting the Lower Cleveland, Rodessa, James Lime, Pettit, Glen Rose, and Wilcox formations. We are currently drilling our first well in Henderson County, Texas, and this well should reach total depth within the next 10 days.

Our 2013 capital investment for drilling and completion program for 2013 is estimated to be about $70 million to $75 million. We will participate in 178 gross wells, amounting to a little over 58 net wells.

The Bakken accounts for the majority of the capital program, with 54 wells planned at a cost of about $43.7 million. That is up about 35 wells from operators' estimates in November. Using the same assumptions shared earlier, this investment should yield about 1.9 million barrels of oil equivalent in future production and over 120 million barrels of net cash flow.

We will continue to drill in Kansas-Nebraska, a lower-cost, low-risk play expected to generate attractive returns. We have identified 82 well locations which together account for about 20% of our capital plan or about $14.5 million. On average, we will have about 54% working interest in those wells.

About 13% of the capital plan or about $9 million will be invested in drilling in Texas and Louisiana, where we retain a working interest of about 20% to 25%. Many of these wells will be drilled in our legacy minerals, where we also retain a low-cost royalty interest. Now I'll turn the call back over to Jim.

Thank you, Flav. In the fourth quarter, fiber was up $2.2 million and up over $3.1 million for the year. During the quarter, we sold over 162,000 tons of fiber and nearly 494,000 tons for the year.

Our average stumpage price in the fourth quarter was up over 42% from a year ago due to greater mix of larger sawlogs. Even though housing starts and lumber prices have picked up, we have yet to see the stumpage markets follow. It will more than likely take low inventories coupled with wet conditions.

I also want to add that the team has done a great job in keeping almost 99% of our available land leased for recreational uses. That's the greatest value from both an economic and community stewardship perspective.

Switching gears to real estate, our real estate segment results are reflective of two key elements of our business and our strategy. Number one, our position and ability to deliver single-family lots and multifamily rental units. Number two, the early innings of the US housing market recovery.

In 2012, we accelerated value realize from real estate across a number of dimensions. A 22% increase in lot sales increased our share of gross lot margin by 60%; that is a combination of price and recent acquisitions and investments. Harvesting value we created in the multifamily business through the sale of two properties. An increase in residential and commercial tract sales and no asset impairment in 2012.

Prior to -- or before 2011 impairments, 2012 segment earnings were up $34.1 million or 175%. That is another solid step in the right direction.

One of the fundamental drivers has been our investment in development and acquisition. Recognizing the housing recovery early on, we invested about $77 million in acquisitions targeting locations that were supported by long-term job growth and a close proximity to employment centers and, most importantly, exemplary education. In addition, investments that generate near-term cash flow and earnings and, equally important, commmunities where prospective home buyers would enjoy a superior lifestyle and have confidence in investment in their homes.

As the slide indicates, these acquisitions contributed almost $30 million in cash and $11.7 million in earnings in 2012. I believe we will continue to see and experience additional cash and earnings in 2013.

In addition to acquisitions, we invested about $32 million in community development. We would expect as housing continues to recover, our investment in development should increase accordingly.

Let's take a step back and take a look at the entire real estate portfolio. We shared this map with you on a number of occasions. As the chart illustrates, we ended 2012 with about 70% of our real estate investment in the major markets of Texas, which is certainly where we want to be, as consistent with the last slide, where a majority of the acquisitions and investment have been in Texas.

As I mentioned earlier, we are encouraged by the improvement in housing. In fact, we are beginning to see some signs of recovery in Atlanta. Now keep in mind, Atlanta is coming out of a very deep trough.

The bottom line, Forestar has invested in many of the best housing markets in the US and, we believe, in the right product type.

Let's take a look at our lot sales trends. Residential lot sales increased in 2012 to 1,365; that's about 22% above 2011 and a little over 2 times the 642 lots we sold in 2009, which was our trough. Yet it is still well below our previous peak of 3,600.

Average lot margins have also continued to improve, with our 2012 average margin a little over $19,500. That is up 11% over 2011.

In addition, our backlog of lots under contract remains in good shape at 1,340 lots at year end. Having communities in A locations with the ability to deliver lots remains a distinctive Forestar advantage.

Let's shift gears to multifamily. During 2012, we sold two of our multifamily communities, Broadstone in the third quarter and Las Brisas in the fourth. Total sales consideration was $97 million, with Forestar receiving about $40 million in cash, $18.4 million in earnings, and generated returns well above our cost of capital.

Given multifamily fundamentals and market conditions, we continue to look for additional sites that fit our criteria, underwriting, and model. A good example is the site that we acquired in the fourth quarter.

This site is located in Charlotte, North Carolina, and was acquired for $6 million. The 1.5-acre site is located just outside the central business district in close proximity to one of Charlotte's best entertainment and dining destinations. Residents also have easy access to the Little Sugar Creek Greenway, which includes a 6 mile hike and bike trail for recreation and enjoyment.

There are several major employers nearby, including the largest hospital in Charlotte located directly across the street. The sub-market has the highest rental rates in Charlotte, 6% annual rent growth, and over 97% occupancy.

We are currently in discussions with prospective equity partners and anticipate starting construction in the second half of this year and start leasing in the second half of 2014. Consistent with our model, I would expect to have about $3 million to $5 million of equity in the project at time of completion.

Our team continues to bid on a pipeline of A class development projects. We completed construction at Promesa at the end of the year, and the property is now approximately 80% leased. We are currently marketing it today and anticipate closing in the first half of this year.

We are also on track developing two communities, Eleven located in Austin and 360 located in Denver. Eleven should begin pre-leasing in April, with planned stabilization and sale as early as 2014. 360 should begin pre-leasing in June with stabilization and sale in 2015.

Pro forma Forestar cash flows from these three properties are estimated approximately $46 million. In addition, we currently have three development sites in the pipeline, one each in Nashville, Charlotte, and Dallas, with several other locations under review.

In the last section of the call I want to update you on the execution of our Triple in FOR initiatives. As you've heard several times now, we are very focused on proving up and growing our net asset value. We made good progress on our Triple in FOR strategic initiatives.

First, accelerating value realization. We listed many of the drivers of our 2012 performance. Yet the bottom line is segment earnings are up over $80 million or almost 65% from our 2008 through 2011 average.

Second, optimized transparency and disclosure. Our acquisition of Credo expands our ability to report reserve categories, and we will be reporting PUDs for the first time this year. We provided additional information and insights at our December investor conference in New York; and today we are launching the first phase of our Forestar data utility.

Third, raising our net asset value. Credo is clearly a big step toward this goal. However, I am just as encouraged with our investment in community development and multifamily -- all investments I'd do again tomorrow if given the opportunity.

Now let's recap where we are headed next with Triple in FOR. Optimizing transparency and disclosure. We have been focused on increasing transparency and disclosure; today we are launching the first phase of an easy-access Excel-based utility that includes historical financials and key performance metrics.

The first phase provides real estate financial data, and phase two will provide oil and gas data released as reserves are finalized. The tool can be accessed from the About Us section in the Investor Relations section of the Forestar website. We hope you will find this tool helpful.

In that vein, we are also launching additional segment data in Excel that is intended to facilitate analysis and prospects for additional value creation. Given the metrics we are providing in calls such as this, SEC filings, and various presentations, we believe that consolidating information for easier analysis and providing a platform to expand oil and gas and water reporting should be a benefit to the market.

Switching gears to oil production. In the first 4-year period, we averaged about 115,000 barrels of oil a year. In 2012 we produced 371,000 barrels and expect to produce about 700,000 barrels in 2013, a step in the right direction. As we invest in exploration and drilling we expect to grow oil production but, more importantly, generate solid returns. We are committed to remaining disciplined and vigilant as we invest and deliver our oil and gas Triple in FOR initiatives.

Turning to real estate. On the real estate side our trough in lot sales as I mentioned earlier was in 2009 at about 640 lots. In comparison, we doubled lot sales in 2012, and we expect to see lots sales in the 1,900 range with continued margin growth in 2013.

As housing continues to recover, we expect to see a pickup in demand for residential and commercial tract sales. Historically and particularly at the market level, housing leads commercial development and investment.

As the chart on the bottom left illustrates, we should be in good position to deliver our real estate initiatives. The combination of driving sales, margin, disciplined investment, disciplined investing, and repositioning these underperforming real estate assets are key to our future success.

In total, if you look at our segment-level EBITDA over the last four years, delivering Triple in FOR boils down to just one critical item -- accelerating real estate sales and oil and gas production and margins that meet or exceed our return requirements. That's typically a mid to low 20s IRR.

Meeting our return expectation calls for strategic and disciplined investing in real estate and in oil and gas; and that is simply our strategy. Even though we're in the early innings of a housing recovery and North American energy renaissance, I am encouraged. But what gives me even more confidence is knowing we have a committed and capable team, a portfolio of assets in good locations, and the right strategic initiatives.

We are making good progress. Yet I believe we are just beginning to realize our true potential.

In closing, once again I want to thank you for joining us on the call this morning as well as your interest in Forestar. Now I would like to open up the call for questions.

(Operator Instructions) Mark Weintraub.

Thank you. Good morning. Jim, I am looking at the slides on page 39, where are you have the Triple in FOR; and it looks like you have a very sizable goal on the EBITDA increase for 2014 versus 2013. Can you talk a little bit about what the key drivers -- I think in 2013 you talk about higher lot sales and oil production. Is it more of the same, or are there other things that go into the 2014 versus 2013 expectation?

Mark, I would tell you that it's a combination of every part of the business. One of the expectations we have as this housing market recovers is we will continue to see a pickup in commercial tract sales. Historically that has made a pretty significant contribution when the markets were in pretty good shape. As the 2012 results begin to indicate, we are seeing a step up in that.

But, Mark, I think you addressed your own question pretty well. It is an expectation of continued growth in the production of oil and gas, and in lot sales, multifamily contribution, as well as commercial and residential tract sales.

Okay. I will circle back and if I have time ask more questions later. Thank you.

Albert Sebastian, Prospect Advisors.

Good morning. A couple questions. On the realized price for oil, I saw that it was -- I think it was $80 in the fourth quarter. Flavious, can you give us just an idea of what is going on there in terms of -- is there a particular reason why you are selling at it seems like a meaningful discount to WTI pricing?

Is that due to a quality difference in terms of it being heavier crude? Or is it something to do with cost of transportation from the wellhead to market?

Well, part of the issue is in North Dakota with some of the oil we produced there, that oil was trading at a differential down from West Texas for a while as transportation out of the basin has been limited. That has actually started to shift now to equal to or actually better than West Texas Intermediate as we are moving 700,000 or 800,000 barrels a day by train. You know, though the industry is out of the marketplace.

The other thing driving the oil prices down is simply the world market. We just don't see the prices we had last year as the economies have faltered.

Al, I think that you and Flav have kind of answered the question. It is a combination of both quality but more importantly it is just the takeaway cost from wherever the oil is being produced.

As Flav said, the transportation infrastructure has stepped up considerably in the last year in North Dakota. And of course there is going to be somewhat of a deduct in Nebraska and Kansas, given the location of those wells. But that is the primary driver in that delta.

The only thing is, though, Jim, can you give us a little bit of it a feel and an understanding of -- given that differentials have basically closed to zero, what does that mean in terms of earnings? What were the differentials in the fourth quarter? And it sounds like going forward they're going to be zero; so what does that mean in terms of the impact on earnings?

Well, let's think about it this way, Al, and I will use a number that I mentioned in my comments. If we produce 700,000 barrels of oil in 2013, then $10 is $7 million.

Okay. And that obviously pretty much goes to the bottom line, although there might be some royalties in that as well. Okay. Just let me -- I'm going to ask you a couple other questions, then I will get back in the queue.

Just quickly, any update on the water initiatives for -- and then also, I saw that the residential lots under option contracts look like they were down a little bit. Can you just comment on that? And then I will get back in queue.

Sure. Al, with regards to water, as Phil shared with the market in December in New York, we are working on a number of initiatives with prospective buyers as well as permitting agencies and entities. Our position today is consistent with what we talked about in December. We are encouraged. We think we have got good assets in good locations and we can deliver an economically viable solution to a number of entities.

I will say since we met in December, the legislature here in Texas has convened. There is a lot of attention on these water issues for the state. In fact I will tell you it's in the top two with regards to the bills that have been introduced by both the Senate as well as the House.

So we are encouraged by that from a funding perspective. Then we are also looking for this state to consider a different structure relative to water so that there is some state leadership, which we believe is also important.

So net-net, Al, I'd tell you that we remain encouraged. We like our position. We think we've got some good solutions. And as Phil said in New York, we think it's not a matter of if; it's a matter of when.

Relative to lots that are under option contract, Al, that's going to bounce around a little bit from quarter to quarter and time to time. I will tell you that when you look at the chart in the comments, it has been relatively flat.

But keep in mind the faster that you are selling out of there, it puts pressure on maintaining that in a good position. But I don't think that there is any real news in that, Al. We are encouraged with where we are today.

And as I have said on previous calls, too, a majority of those option contracts for lots are lots that we hadn't even developed yet. So we are okay with where we are.

Thank you.

Steve Chercover, D.A. Davidson.

Things. Good morning, everyone. First question for Jim and then a couple for Flav, please. So you said that you are marketing Promesa right now; it is about 80% occupied; and you've got high confidence it will be monetized the first half. Is that par for the course, that you can sell a multifamily unit while it is still in the process of being marketed?

Steve, I think it is reflective of the quality of the project, the product, and its location, the market that it is in. If it's in a different location in a different market, probably wouldn't be the same story.

I will tell you that given the amount of interest in traffic and tours that we have already provided, we are very encouraged. There is a chance, Steve, that from the time that we broke ground till we closed this sale it's going to be within the realm or within the time frame of two years, which is really great.

I have shared this before. When we looked at Promesa and developed the pro forma and underwriting, at that time the plan was based on a sale in Year 7. So this is quite a bit ahead of our expectations from the time that we were involved in the underwriting.

Terrific. Okay. Then switching to resource, the acceleration of your drilling expenditures versus the plan you articulated a few months ago, is that because you are being pulled by your partners. Or the returns are just that compelling? Or maybe you could expand.

Did you say deceleration?

No, I set acceleration.

Acceleration, okay.

You went from about $40 million to -- the low $40 millions to the low $70 millions if I am not mistaken.

Yes, Steve, the majority of that delta is all driven by the operators' drilling plans in the Bakken and the Three Forks. In November of 2011, the estimates that we had at that time were in the 20 range; and since then as operators have firmed up their plans, that is up, what? Almost 34 wells.

The principal driver in the delta is the capital plan for drilling and completion. One of the other things that is driving that capital budget, Flav mentioned it in his comments, is that -- and this is a good thing. The operators initially, and this is the way the plays develop, initially will begin to drill the whole leases.

And now the operators have got a couple of different locations where they are going to start pad drilling. That is drilling multiple wells from the same location. So that is going to drive a big pickup in the number of wells.

But more importantly, and we are encouraged by this, is it provides some efficiencies and economies of scale with mobilization cost, drilling costs, completion costs. So getting costs down while maintaining proving the ultimate recovery is a good thing.

Okay. Then finally, the dip in your proven reserves. I guess that is a function of both timing and, for lack of better words, mark-to-market regulations?

Yes, there is a little bit of that involved. As I said in the comment, a majority of the delta from '11 to '12 is production and price. 2012 production was a multiple again from what we saw in 2011; and price of both natural gas and natural gas liquids is down considerably year-over-year. And that drives some of these wells as being uneconomic and will not show up in reserves.

But most importantly, if there is one comment that I make that I think is very important for all of us to understand, it's that these legacy and these owned minerals, the oil and gas associated with this ownership still in place. We hadn't lost anything.

It's not leased. There is no lease expense. There is virtually no carry costs.

So over time as we see some price improvements as well as improvements in technology, I think that we will get that oil and gas. So obviously we always like to see reserves going up; but in this case given that we own minerals, we are obviously not quite as concerned.

And we should hear the, I guess, additional disclosure on what is behind the pipe in undeveloped within in the Forestar legacy assets shortly?

Yes. Now Steve, as we have shared with you and the rest of the market, when we bought Credo that enables us to begin to report additional proven reserves, as well as unproven reserve categories. But it is not a light switch; it is going to happen over time. But as I said in my comments, we will begin to report those beginning -- for this 2012 year-end report.

Great. Thank you very much.

David Woodyatt, Keeley Asset Management.

Yes, I went into your website and I clicked on something called Reserve Estimates; and instead of getting reserve estimates I get a writeup about non-GAAP financial measures. I was wondering if -- my question I guess is, once you get, I guess, the right material in there, is that going to be additional information? Or is that the same information that is in your slide deck?

It will be mostly the same information that is in the slide deck. There will be additional information.

We just recently, like yesterday, finalized the reserves with Netherland and Sewell. So the website will be updated and additional information will be provided, Dave.

What exactly would be the timing on that additional information?

Dave, we are still in the process of receiving the final report from Netherland and Sewell. But as soon as we can get the report and get the information out, we are going to put it out there.

Okay, so you are talking about within days? Or is this something longer?

I'd say it is either days or weeks. But what I will say is that I don't expect to see any material differences from what we reported this morning.

Oh, okay. Fine. Thank you. I think my other questions were answered. Thank you.

Mark Weintraub, Buckingham Research.

Thank you. If I go to on slide 23 where you talk about the capital investment in oil and gas, just one clarification. It says the drilling and completion CapEx is about $72.5 million. If I look at the chart on the right, where it says capital investment versus cash flow, it looks like more on the order of $90 million.

Are there other expenditures going on in the oil and gas business beyond the drilling and completion CapEx numbers?

Yes. The majority of the CapEx and the most important investment we make, Mark, is in the drilling and completion. But there is a little bit of capital in there for G&G and leasing activity.

But it is also important to understand that, as Flav said in his comments, in that bottom right-hand chart, that is cash flow at the wellhead.

But the capital investment -- so this business -- am I right to understand there will be roughly $90 million being invested in this business in 2013?

That's correct. It is in the $90 million ballpark.

Okay. Obviously 2014 looks like a similar capital investment. Is this the type of number you'd expect to be investing on an ongoing basis? Or is there a big ramp these first couple years and then it goes back down? This is assuming no other acquisitions or anything like that?

Mark, without getting too far ahead of myself, the big step-up is principally driven by the Bakken/Three Forks. And assuming that the operators are on a schedule of roughly 50 wells a year, then we would see it as being relatively stable.

Relative to the chart that you are referring to on the bottom right, we just made the assumption that 2014 the capital plan would be similar. It is just to show that what is happening is that a big step-up in 2013 would generate production and cash flow that by 2014 will cover the capital expense.

Got it. If I understand correctly, to a certain extent -- well, to a large extent, your capital plans are going to be driven by what the other operators want to do. And then you have to decide whether you are going along or not. Is that fair?

That's true. That's true. We have -- we participate in a working interest in the Bakken/Three Forks. It is at our election.

So the operators will obviously share their plans with us. But the decision point is when they send you an ASE, and Flavious and his team determine -- are we in or are we out?

If you decide that you don't want to be in, do you get -- how does that play out?

Let me turn that over to Flav and he can give you a sense of what it means when you don't elect to participate in a unit.

Well, Jim is right. When we get an AFE for each one of these operators, we make an election. And typically in these resource plays, I will tell you that the tendency is to participate in wells, because you typically are not going to drill any dry holes unless you have a mechanical failure or something along that line.

So we are more inclined to feel pretty good about our spend level this year. But I will say we evaluate every AFE that comes in it. Our geologists and geophysicists look at where we are going to drill. And then we make a decision based on -- do we believe we will recover the oil we need to make the well economic?

I will say that as a part of the process, we are evaluating our acreage all the time to determine whether we like where we are, or reposition, or do what we need to do. But when we make these decisions, we have the right people in the room to make them. So we feel pretty good about it.

Flav, if you don't -- if you elect not to participate, are you out for the balance of that unit, or --?

In North Dakota it is a well-by-well election under the state rules. But we have elected to enter into operating agreements with a lot of our operators. So if you are out, typically you will be out of the offsets as well. So there is a little bit of a penalty there if you don't participate.

But again, we take all that into consideration when we make decisions, and we feel good about that so we will -- but again the capital spending plan is based on what we believe we will elect into this year.

Okay. Now, Jim, you mentioned lot sales potentially going up to 1,900, which would be terrific, in 2013. But I also imagine that means that there is going to be more lot development spending to get lots in position.

That's right.

Can you give a sense what that might tally?

Yes, Mark. As I mentioned, in 2012 that number was about, $30 million to $33 million, somewhere in that range. Assuming that we've got a good forecast, we'd expect the capital required to put lots on the ground would be closer to the $50 million range in 2013.

Okay, and then --

Mark, the only thing I would add to that, that is encouraging for me. That just means that we have got markets and communities that are responding to improved conditions.

And a majority of that development will be for lots that are already under contract. So it is not as though we are putting speculative -- many speculative lots on the ground.

Right, and obviously you are doing this with the expectation of getting nice margins on the investment. That is totally understood.

Yes, yes. It looks like margins continue to improve. Obviously, they will level off somewhere, but right now we are certainly encouraged.

And real quick, any update of Cibolo Canyons of note?

The update for Cibolo Canyons would be the project is continuing to perform well. I will tell you that Chris and his team and those responsible for Cibolo are obviously continuing to examine various alternatives in how to best manage cash flow stream associated with the Improvement District.

Given where market conditions are, especially bond markets and everything else, we are going to work hard to be opportunistic and to make some things happen there.

Do you think we could see something happen in 2013 on the bonding side?

Mark, what I will tell you, if we could get something done next week we would do it. But we are absolutely focused on making something happen sooner rather than later.

Okay. If I could, one last one. You mentioned you are beginning to see signs of recovery in Atlanta. Could you expand a little bit on that?

Perhaps even more important, as you see signs of recovery in Atlanta, what actions is that going to prompt you to consider taking?

Let me -- I tried to temper the comment with the condition that Atlanta was in at the bottom, and it is getting better. The context of that comment, Mark, is that we're starting to sell some lots again in Atlanta. There is more interest.

As you know in a couple of the acquisitions that we made in the last year or so they were distressed communities. They are good communities in distressed situations, and those projects are doing extremely well.

So activity has picked up. Selling some lots again. May have to put a few lots on the ground in Seven Hills, and then we will look at some of the legacy assets further down the road.

But once again, I don't want to get too far out in front of the market. We are going to be very, very disciplined as it relates to starting development in the projects in Atlanta.

Okay, thanks.

One more question.

Albert Sebastian, Prospect Advisors.

Yes, gentlemen, it looks like the performance in fiber resources was quite good in the fourth quarter. For modeling purposes, what should we assume in terms of an ongoing, normalized rate for segment earnings?

Yes, Al, I would be reluctant to use a quarter and annualize it, because there are some variability just based on the harvesting plans of the mills that we have agreements with. So if there is a lot of harvesting activity in a quarter, or not, it can certainly impact that flow.

I would say that 2012 was a good year. Obviously in our harvest plans we always try to put together plans that would enable us to maintain that level of volume sustainably over time.

The only caveat being is, keep in mind, Al, the acreage in that part of the world is always changing. You just need to take that in consideration as well.

Okay. Sounds like for the year $5 million is not a bad number to use for an annual basis?

Yes, I think, Al, what I would say is that 2012 should be in the ZIP code of 2013.

Okay. Just one last question. Can you just give us a little bit of how management and maybe the Board thinks about the Triple in FOR initiative? Because it looks like things are moving in the right direction, and I like the initiatives you are taking. But it seems as though the capital spend is higher.

So how does the Board and the management think about the fact that you are going to be spending more capital? And should there also be other considerations in terms of evaluating performance, such as maybe return on invested capital or free cash flow?

Yes. Your last comment, Al, I think is central to the question. When we think about investing capital, number one is the return that capital is going to generate for the business and obviously for our shareholders.

So I can tell you I am involved in all acquisitions and investment, and the number-one metric that we look at is return, whether it is oil or gas or it is real estate or any part of our business. So that is the real focus for management, and I will tell you it is the same focus for our Board.

When we have meetings and we provide updates and insights into capital plans, the number-one metric that we share and have discussions with our Board is all about return.

Thank you.

All right. Thank you, Al. Have a good day.

Once again, we want to thank everybody for joining us on the call this morning as well as your interest in Forestar and hope that you have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.