Forestar Group Inc (FOR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forestar Group Inc. fourth quarter and full year 2013 financial results conference call. My name is Dominique, and I'll be your operator for today. At this time, all participants in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Miss Anna Torma, Senior Vice President, Corporate Affairs. Please proceed.

Thanks and good morning. I would like to welcome each of you who have joined us by conference call or webcast this morning to discussion Forestar's fourth quarter and full year 2013 results. I'm Anna Torma, Senior Vice President, Corporate Affairs, and joining me on the call today is Jim DeCosmo, President and COE, 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. 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 let me welcome everybody joining us on the call this morning. And let me begin by highlighting our full year financial results.

For 2013, Forestar reported net income of approximately $29.3 million or $0.80 per diluted share, compared with net income of $12.9 million or $0.36 per share in 2012. Our full year 2013 financial results include a previously unrecognized tax benefit of approximately $6.3 million, or $0.17 per share related to qualified timber gains from sales in 2009. In addition, full year 2012 results include after tax expenses of approximately $7 million or $0.20 per share associated with the acquisition of Credo Petroleum and loss on extinguishment of debt related to the amendment and extension of our term loan.

Real Estate segment earnings were $68.4 million in 2013, up compared with $53.6 million in 2012. The primary driver of this improvement in Real Estate is an increase in residential lot sales and margins and higher residential and commercial tract sales, which Jim will share with you in greater detail in a few slides.

Oil and Gas segment earnings were $18.9 million in 2013, compared with $26.6 million in 2012. This decline is principally due to lower royalty income and lease bonus related to our own minerals, and higher exploration costs related to exploratory drilling in Kansas and Nebraska.

Other Natural Resources segment earnings were $6.5 million in 2013, compared with essentially breakeven results in 2012. This improvement was primarily due to a $3.8 million gain on the termination of a timber lease.

Total segment earnings were $93.8 million in 2013, as compared with $80.2 million in 2012, with the improvement driven principally by improving Real Estate sales activity.

Now let's turn to our review of our fourth quarter 2013 financial results. In the fourth quarter of 2013 Forestar reported net income of approximately $13 million or $0.33 per diluted share, compared with net income of $10 million or $0.28 per share in the fourth quarter of 2012.

Real Estate Segment earnings were $27.7 million in fourth quarter 2013, compared with $21.7 million in fourth quarter 2012. This improvement was driven by a higher residential lot sales and margins and higher residential and commercial tract sales. Real Estate segment results for the fourth quarter of 2013 were the strongest quarterly Real Estate segment results we have ever reported as a standalone public company.

Oil and Gas segment earnings were approximately $1 million, compared with $7.1 million in the fourth quarter of 2012. This decline is principally driven by lower royalty income on our own mineral acreage and higher exploration costs, principally associated with dry holes in Kansas and Nebraska, and higher operating costs.

Other Natural Resources segment earnings were $3.7 million in fourth quarter 2013, compared with $800,000 in fourth quarter 2012. This improvement is driven principally by a $3.8 million gain on the termination of a timber lease in connection with the sale of approximately 2,400 acres of timberland near Atlanta from the Ironstob venture.

Total segment earnings were $32.4 million in fourth quarter 2013, compared with $29.6 million in fourth quarter 2012, with the improvement driven principally by improved Real Estate sales activity.

Before I turn the call back over to Jim, let me quickly review our balance sheet and liquidity profile. At Forestar we are committed to maintaining financial strength while executing our growth strategy. During 2013 we issued $125 million of convertible notes and $150 million of tangible equity units to strengthen our balance sheet and liquidity profile.

As a result, we ended 2013 with total debt of $357 million and a leverage ratio of approximately 33%, as measured on a total debt to total capital basis. In addition, we ended the year with over $350 million in available liquidity. Going forward, we are well positioned to continue to invest in attractive oil and gas and real estate opportunities which meet our return requirements.

We also continue to watch the public debt markets to assess opportunities to better match our debt financing with the duration of the assets in our portfolio. The execution of our strategic initiatives, combined with our balance sheet strength and liquidity, positions Forestar to generate additional earnings and cash flow growth going forward.

Now let me turn the call over to Jim for some additional operating highlights from the fourth quarter and full year 2013.

Thank you, Chris. And I would also like to welcome everyone to the call this morning.

We developed our Triple in FOR initiatives in the second half of 2011, targeting performance metrics in the period from 2012 to 2015. I'm glad to report that based on our performance through 2013, we've essentially reached our targets two years ahead of time. I'll review the fourth quarter and full year 2013 results and close with a key tenant of our next chapter going forward.

Let me begin with the Real Estate segment results. Full year 2013 Real Estate segment earnings were $68.4 million, and that's up nearly 28% over 2012. As the chart illustrates, the main driver was increased residential sales.

We sold 1,883 lots in 2013. That's up almost 40% in volume and 28% in gross profit per lot compared to 2012. I think that's a reflection of strong market fundamentals, low inventory levels and most importantly our ability to deliver lots.

As expected, home builder demand for residential tracts expanded in 2013. We classified residential tract as a section of undeveloped lots and in some cases the remaining acreage in a project. In total, we sold 1,617 acres within eight communities that when developed could potentially yield 3,300 residential lots.

The economics are pretty straightforward. These sales generate a high rate of return versus developing and selling the finished lots. Please note that lots associated with residential tract sales are above and beyond our reported finished lot sales.

Also contributing to the year was the sale of 171 commercial acres for over $197,000 per acre. That's a positive indication of economic recovery within a sub market. In addition, we sold Promesa during the first quarter of 2013, generating a gain of almost $11 million.

Now let me turn to the fourth quarter results. In the fourth quarter of 2013, Real Estate segment earnings were $27.7 million. That's up $6 million compared with the same quarter last year, and that's principally due to increased residential and commercial sales.

We sold 530 lots at over $276,000 gross profit. That's up almost 40% in volume and 18% in profit compared to the same quarter last year. We sold 1,129 acres of residential tracts for an average price of $12,400 per acre. That represents a potential of over 3,000 developed lots.

In addition, we sold 115 commercial acres for over $210,000 per acre. Included in that is the sale of 33 acres at Cibolo Canyons in San Antonio, which generated a gain of approximately $7.3 million. And last, we sold over 3,510 acres of undeveloped land for over $3,100 per acre.

Let's take a little bit closer look at our lot sales trends. The sale of 1,883 finished lots is certainly a major step change from the trough of 2009. The increase in sales and average lot margins is reflective of the location by communities and our ability to deliver preferred products and lifestyle.

We ended 2013 with a healthy builder demand, a relatively low inventory of lots and new homes in our markets, and a backlog of about 1,600 lots on a contract. Barring any significant movement in the schedule, we would expect closings in the fourth quarter to be in the 550 to 650 range, and then 2,100 range for finished lot sales in 2014.

Given an almost 40% increase in lot sales activity and a 28% increase in average lot margin, the total lot gross profit in 2013 was up over 100% compared to 2012. Last year lot sales in communities in Dallas, Houston, San Antonio and Austin accounted for 90% of our lot sales gross profit for the year. We ended 2013 with a healthy pipeline of lots in Texas. We've got 41 active projects expected to yield about 14,300 lots.

In addition, we're participating in the housing recovery in Atlanta. In fact, we sold 99 lots in 2013. That's up from just 26 in 2012, and that's a trend we expect to continue into 2014.

Shifting gears to multi-family. In addition to our single family communities, we've got four multi-family projects under construction, which represent about 1,235 units. Eleven, our 257 unit community in Austin's urban core is over 92% complete and 40% leased. And our plans are to market Eleven for the sale during the first half of this year.

360, our 340 unit community in Denver, is about 53% complete, and it's currently preleasing with the first unit expected to be delivered in March. Midtown, which is located in the Dallas metro, is about 10% complete, and that's 100% owned by Forestar. Preleasing for this project expected to begin in the second quarter.

We originally broke ground on 320 unit project in Nashville, and we expect preleasing to begin in the first quarter of 2015. More than likely, our Charlotte and Littleton Colorado projects will be [in ventures] and commence construction this year. All good progress.

In 2013 we acquired five single family communities in five markets, expected to yield about 1,346 lots and generate about a 2.5 cash multiple. We also acquired two multi-family sites in two markets, expected to yield 545 units and approximately a two cash multiple.

Now to give you some sense of pipeline, we have eight different tracts under a contract in a mix of single and multi-family communities. I'm encouraged by our 2013 acquisitions. These properties are in good markets, good locations, with plenty of builder and investor interest. These are all good tracts, but there's no guarantee that they'll all close.

Going forward, we'll continue to capitalize on the housing recovery by first, growing lot sales; second, accelerating residential tracking commercial sales; and third, expanding our single and multi-family pipeline. In the fourth quarter of last year, we generated Real Estate [segment] EBITDA of $28.3 million, and $71.5 million for the year. I believe that's a positive step in the right direction.

We see residential lot sales and margins expand as the housing recovery gained meaningful traction. We're also encouraged by a pickup in demand for residential and commercial tracts, which is generally associated with housing recoveries and improving local economies.

Let's shift over to Natural Resources. For the full year 2013 Other Natural Resources segment earnings were $6.5 million. That's up from essentially breakeven results in 2012.

During 2013 we sold almost 610,000 tons of fiber. That's up over 23% compared with 2012. And we also had a higher saw timber mix. Both pulpwood and saw timber prices are up from year ago levels. The 2013 results include a $3.8 million gain in the fourth quarter associated with a 2,400 acre timberland sale out of our Ironstob venture in Paulding County, Georgia. The sales price was about $2,650 per acre, and you'll see this recorded as a partial termination of a timber lease in our filings.

In the fourth quarter, our Other Natural Resource segment earnings were $3.7 million. That's up $2.9 million compared with the fourth quarter of 2012. Also during the quarter fiber sales were 43% lower than the fourth quarter 2012, in large part due to mill outages at the Rome, Georgia, converting facilities. Looking ahead into 2014, we would estimate fiber sales to be in the 400,000 ton range.

Now let's turn to Oil and Gas. Full year 2013 Oil and Gas segment earnings were $18.9 million. That's down almost $8 million compared with 2012. Oil production rose nearly 88%, principally driven by the addition of 85 gross wells, and as you'll see later the PV10 of our proved reserves is up $45 million year-over-year.

Full year 2013 results were negatively impacted by a decline of over $7 million in royalty income from our legacy minerals, a 27% drilling success rate in Kansas and Nebraska in the fourth quarter, and frigid weather conditions in North Dakota that adversely impacted both operations and production.

The table in the bottom right shows year end status of our working interest wells. During the fourth quarter, our average daily production was almost 2,100 barrel oil of equivalents, or BOEs, per day, with about half of the production coming out of the Bakken/Three Forks. Due to the extreme cold conditions, we had 18 wells either drilling or waiting on completion at year end, nearly all of those being in the Bakken/Three Forks. As conditions improve, we should see a significant step up in 2014 production.

Below segment earnings is the EBITDAX reconciliation. That's a non-GAAP measure, and we provide reconciliation in the appendix. Year-over-year 2013 EBITDAX was up $16.1 million.

Fourth quarter 2013 Oil and Gas segment earnings were approximately $1 million. That's about $6.1 million below the fourth quarter of the previous year. As noted, the decrease is primarily due to a decline in royalty income, higher exploration costs resulting from 27% drilling success rate in Kansas and Nebraska, and weather related completion delays in North Dakota.

For the quarter, oil production was up nearly 14% compared with the same quarter last year, with 13 new growth wells coming on line. Below segment earnings is the EBITDAX reconciliation year-over-year. The fourth quarter EBITDAX is relatively flat, principally impacted by higher operating costs.

Taking a look at production. Commiserate with our investments, 2013 production increased almost 2,900 barrels of oil equivalents per day. That's up 50% compared with 2012. Daily production from our royalty continues to decline as a result of lower natural gas pricing adversely impacting exploration development due to the returns in East Texas and Louisiana.

As the chart on the left illustrates, the reduction in royalty volume was more than offset by the growth in production resulting from our working interest investments. Approximately 63% of our daily production in 2013 is attributable to our working interest investments in comparison to 2011, where working interest production was almost negligible.

The chart on the right provides additional detail relative to the general locations driving growth and daily production from our working interest investments. 2013 daily production is up nearly 2.7 times from 2012, principally driven by our acquisition of Credo, investments in the Bakken/Three Forks, and the Lansing-Kansas City formations in Kansas and Nebraska. We're encouraged by results to date, and we fully expect Oil and Gas investments to drive production, reserves, earnings and most importantly values going forward.

Relative to the Bakken/Three Forks, an additional 44 Bakken/Three Forks wells came on line in 2013, bringing the total to 80 gross wells producing at year end. Due to several periods of extremely low temperatures in North Dakota, only 12 wells were added during the fourth quarter. Wells that did generate initial production rates in the fourth quarter averaged almost 1,700 BOEs per day. At year end 16 wells with an average of about 8.2% working interest were drilling or waiting on completion.

As we discussed on previous calls, our average working interest in wells gradually picked up throughout the year, with the fourth quarter averaging almost 9%. As the chart on the upper right illustrates, average daily production has increased from 526 BOEs in the first quarter of 2013 to 1,033 BOEs in the fourth quarter, and that's a 96% increase.

Relative to 2014, we continue to expect the rate of drilling to pick up as the weather conditions improve, and once again we anticipate the number of producing wells to double in 2014 as in 2013. Operators are continuing to gain drilling completion efficiencies. That's good news.

In particular, the number of days to drilling complete is continuing to drop as the development of the resource progresses. In addition, operators are continuing to test and prove up lower benches of the Three Forks formation. As a result, we should see the downward trend in cost per well continue, plus the potential for additional recoveries.

We ended 2013 with 7,390 net mineral acres leased in the Bakken/Three Forks. Assuming eight wells per unit at an average 8% working interest, we would expect to participate in an additional 400 wells going forward. Using a conservative PV10 of $500,000 per well, that's approaching $200 million in potential value.

Now let's move south to another important region, and that's Kansas and Nebraska. For the year we had a 47% drilling success rate in the Lansing-Kansas City. During the year we added 36 gross producing wells, bringing the total in Kansas and Nebraska to 97.

Our 2014 plan is to drill 120 to 130 gross wells, which should add about 50 new gross productive wells, most of which we'll operate. Similar to North Dakota, the fourth quarter production in operations in Kansas and Nebraska was down sequentially due to severe cold temperatures and a higher percentage of dry holes.

Let me give you a little bit of perspective here. We drilled 15 wells in the fourth quarter, of which four were producers, giving a 27% success rate. Over the last five quarters, our success rate has varied from a low of 25% to a high of 65%, with a life of project average of about 40%.

Economics on a risk-adjusted basis continues to support returns well above our 20% target when costs [is fully burden] with dry hole, land seismic drilling, lease operating and protection severance taxes. Given our success, we continue to ramp up 3D seismic shoots to further develop our inventory of drillable locations.

Now let's shift gears and take a look at year end 2013 reserves. We're encouraged to report solid reserve growth in 2013, which is reflective of our Oil and Gas investments. Audited year end proved reserves of 8.5 million barrel of oil equivalents are up 50% from $5.6 million at year end 2012.

We've also continued to successfully shift our proved reserve toward oil and liquids. At year end oil and liquids accounted for almost 70% of our proved reserves, up from 36% just two years ago. Similar to 2013, we expect to continue drive both production and reserve growth through the drill bit in 2014.

Let's take a look at what formations really drove the reserve additions. Our investments in Oil and Gas over the past two years have diversified formations -- the formations generating reserves. In 2013 the Bakken/Three Forks accounted for 80%, and Lansing-Kansas City 14% of the proved reserve addition. Furthermore, we increased proved developed non-producing and proved undeveloped reserves, which further develops our pipeline of drilling locations and production.

Let's turn to the proved reserves valuation metrics. Increase in production reserve growth clearly reflects the execution of our strategy and initiatives. As estimated by our auditors, Netherland Sewell, total estimated cash flows from our proved reserves is $317 million at year end 2013, and that's up nearly 43% from year end 2012. Using a 10% discount rate, the PV10 was estimated at $183 million at year end 2013. That's up $149 million from 2009.

In addition, our investments in exploration and development resulted in a reserve replacement ratio of 272%, just another way of saying we replace production 2.7 times. I'm encouraged by the momentum in production and reserve growth. I believe it's a confirmation of our strategy and the ability of our Oil and Gas team to drive results.

Now let's turn our capital investment plans in Oil and Gas for the year. We expect and we've planned for the pace of drilling in North Dakota, Kansas and Nebraska to pick up in 2014. With that, we anticipate capital investment for Oil and Gas this year to be between $175 million and $200 million, with almost three quarters of the capital to be invested in drilling and completion.

North Dakota and Kansas and Nebraska account for about 75% of the investment plan. That's a resource and a statistical play that has in essence been derisked. [General] drilling completion, a majority of the seismic and leasehold acquisition is targeted for the Bakken/Three Forks and the Lansing-Kansas City. Primarily both [arms] are extensions of existing leasehold acreage.

The balance in the minority of the Oil and Gas capital is designated for other plays and formations that we anticipate will extend our pipeline of Oil and Gas opportunities.

We finished 2013 with the production of $1.1 million BOEs. That's up over 50% from 2012, and barring any significant shifts in market conditions, we anticipate production to grow approximately 50% in 2014.

From a cost perspective you can see our gross margin for the segment in 2013 was in the 26% range, or $18 per BOE. Keep in mind cost of $50 for BOE is fully burdened with all of our segment operating costs divided by production. We continue to focus on returns and on profitably growing our Oil and Gas business.

Assuming Oil and Gas market conditions remain relatively stable, I would expect 2014 segment earnings to be in the $35 million range, and the first quarter of this year looks similar to the last quarter in 2013, given the extreme cold conditions we already experienced so far this year.

Last section of the call, I want to update you on our strategic initiatives. As I mentioned earlier in the call, based on our performance through 2013 we've essentially reached our Triple in FOR targets two years ahead of time. Let's take a look at a few of the key Triple in FOR metrics.

Number one, triple total segment EBITDA. 2013 total segment EBITDA is approximately $117 million. It's clearly on track to exceed the average of $120 million a year over the 2012 through the 2015 period.

Number two, triple Oil and Gas production of 1.1 billion BOEs. Oil and Gas production 2013 was essentially at 1.1 million BOEs.

And number three, residential lot sales of 2,200 lots. Not including over 3,000 potential lots sold as residential tracts, we sold over 1,880 finished lots in 2013. In fact, the gross profit on the 1,883 lots surpasses the gross profit we estimated for the 2,200 lot margin.

When we developed these goals in the second half of 2011, the strength of the housing recovery was relatively uncertain. We hadn't acquired Credo or materially invested in Oil and Gas or issued tangible equity units. Given our investments and that Triple in FOR has been largely accomplished almost two years ahead of schedule, we've set new initiatives, Growing Forward.

Our initiatives are designed to create and deliver shareholder value. That's our focus. There are two primary components. Number one, growing through strategic and, let me emphasize, disciplined investment. We expect to invest about $400 million in 2014, which is pretty evenly split between Oil and Gas and Real Estate.

And number two, proving up the value of our portfolio by increasing return on assets. We've made significant progress since becoming public, yet our vision is for Forestar to become a truly great company.

Let's take a closer look at each metric. Growing. In Real Estate, the majority of the capital is for development in existing communities that are generating solid sales and profit margins, and in Oil and Gas our growth in investments are predominantly in low risk basins and formations such as the Bakken/Three Forks and Lansing-Kansas City. We're targeting investments and operating results to essentially doubled 2013's total segment EBITDA by 2016.

That's a combined segment EBITDA in the $200 million range, and targeting return on assets of approximately 10% by 2016, with ROA defined as corporate EBIT divided by the beginning of the year assets. In addition, we're targeting to reposition $100 million of non-core or non-performing assets over the next three years. These assets are located across our portfolio in Real Estate, Oil and Gas, and Other Natural Resources.

Our keys to conclude -- our keys to continue progress going forward are three fold. Number one, ensure disciplined investments meet or exceed our [hurdle] rate of return. Number two, accelerate value realization returns from our core assets. And number three, reposition non-core or non-performing assets. As we grow forward, we'll maintain a sound balance sheet, financial flexibility, and we'll continue to focus on maximizing long term shareholder value.

Let me close by saying I'm proud of the team and the progress we've achieved in Forestar. We've come a long way, but I firmly believe we're just beginning to realize potential in Forestar. I'm confident our team will keep us on track to deliver growing forward in shareholder value.

Since becoming a public company in 2013, 2013 was the first year I felt we had the wind at our backs. Some the market created; most we created. I like the road we're on and what lies ahead.

Once again I want to thank you for joining us this morning as well as your interest in Forestar, and I would like to open up the call for questions.

(Operator Instructions). And your first question comes from the line of Mark Weintraub of Buckingham Research.

Thank you. Good morning.

Good morning, Mark.

I'm glad to see the way you're setting up your new target metrics is focused on ROA rather than just kind of a growth metric. And just one thing I wanted to just verify if I could. So you said ROA -- you said corporate EBIT. Is that any different than just EBIT, how we'd normally consider it?

No, it's the -- point I was trying to make, Mark, is it's EBIT at the corporate level. I just wanted to make sure that was clear.

Okay. So basically you're going to include any corporate related expenses in that EBIT number?

Yes.

Very good. And I guess two follow ups on that, are you anticipating that the trajectory to that 10% will be relatively evenly paced, as far as you can -- at least with a thought to 2014? That we should see -- you go from 6% to 7% to 8%, and then 8% to 9%, and then to the 10%? Or is it more going to be chunky? Or stair stepping?

Mark, ideally it would be a nice, smooth, symmetrical increase from where we are today to the 10%, which as I need to remind you, is an interim target. However, I think that you know that Forestar can be somewhat of a lumpy business, particularly on a quarterly basis and even an annual basis.

To the extent possible we want to operate Forestar in such a way that we become more consistent in our performance, and also in the way that we reach our target. But it's hard to sit here today, Mark, and guarantee that we got a nice straight line from 2013 to 2016.

Understood. And certainly it's evident that the wind on the Real Estate side is kind of coming through, and we're seeing that in the performance. I guess it's -- and I apologize, this may be my shortcoming rather than what you're actually doing, but it is a little harder to see it on the Oil and Gas side, that it's playing out exactly as I would have anticipated. I guess the -- I think you'd thrown out a $35 million profit number for 2014, for instance, which doesn't seem to be as much progress as I would have anticipated, given the amount of spend that's already taken place. Maybe you could debunk my thought process there or just clarify?

Yes, Mark, there's -- kind of two things happening here simultaneously, and we saw some of it in 2013. As we continue to invest we're getting I think very nice results from the investments. I think the reserves are a good support and proof of that for what we have in front of us.

Unfortunately at the same time, Mark, we've got declining incomes and contributions from the legacy minerals or the royalty. And in fact in 2013 royalty income alone was down over $7 million. Lease bonus was down. So we got kind of two things happening simultaneously.

Ideally we get a little bit more activity or we promote and generate a little bit more activity in our legacy minerals in East Texas and Louisiana to augment the earnings and the contribution from that part of the business. So it's a -- there's a little bit noise little bit of noise going on there, Mark. I'm encouraged by the investments and response there. Not so much so on our legacy mineral business.

Thank you.

And your next question comes --

Thank you , Mark.

Your next question comes from the line of Steve O'Hara of Sidoti & Company.

Hi, good morning.

Good morning, Steve.

I guess the question I had, in terms of the Real Estate business, in terms of lot margins, developing the Atlanta surrounding properties, does that maybe mitigate any improvement in lot margin going forward? Is that still small enough where it doesn't have that much of an impact? And then maybe you could just kind of give us your thoughts on where we are in the cycle and whether you've seen any negative impact from interest rates or anything like that.

Okay. The first part of your question was related to Atlanta and growth in that market for Forestar as well as our investments. We are making some investments in development in the Atlanta market, primarily in existing communities where there's a pipeline and there's demand in place and generating some very attractive growth profits and margins.

When we look at some other developments, I think they're still a way out, and in fact one of the residential tract sales that we had in 2013 was a piece of property that had been entitled. The prospective buyer made an offer that in our opinion made real good sense, we ought to be able to take those cash proceeds and reinvest them. So there's a little bit of a mix for us in Atlanta, but what I would say is that where we've got some momentum in projects, which we got I guess probably four or five today, we'll continue to invest in.

Now, breaking ground on a brand-new project and spending substantial capital on the major tracking infrastructure, we think really hard about doing that. It's going to be very, very important to us going forward that the capital we invest meets our return targets. That's imperative for us to be able to reach the targets I've outlined in Going Forward.

Relative to where we are in the housing recovery today, I would say that we're somewhere in the mid innings. Another way that I think about that, Steve, is when I look at the markets or the submarkets where we've got communities investments, I'm encouraged by the demand.

I'm equally as encouraged by existing low inventories. There hasn't been an over-building in lots and new homes. And based on the forecast for economic growth and job growth at the metro area, I'm encouraged. So I will tell you that from our perspective, we're somewhere in the mid innings.

Okay. And then just as a follow up, do you kind of -- in terms of the lots, do you anticipate producing kind of this as fast as you can? Do you anticipate kind of something that's a little more measured, given where you think you are in the cycle? Just how do you think about that kind of relative to where we are in the cycle?

Yes, Steve, our position is we'll move with the market. We don't -- we typically have not tried to outrun it or lag it. There may be some strategy there, it just hasn't proven to really drive returns for us.

We also have to keep in mind that we've got customers, and builders who are taking down lots, and we don't have much of an appetite to try to starve them or force anything down their throat. It -- we think longer term the best way to operate the business is to -- is respond and move with the market and the demand. Obviously taking into consideration supplies or inventories.

Okay. And then maybe just one last one in terms of the entitlement process. Anything that's maybe close to kind of exiting, or do you not comment on that until it's kind of done?

I'm sorry, Steve, ask me that again?

In terms of projects in are in entitlement or lands that are in entitlement, do you comment on where you on in that process?

Yes, Steve, we're constantly in entitlement proprieties and projects. There's a slide in the presentation where, oh, I guess there's probably four or five acquisitions. Several of those were not closed until we had succeeded with entitlements. So entitlement is just an ongoing activity for us, that even existing projects often times we're going back and getting some new zoning and/or entitlements. So it's just ongoing process.

Now, you may be referring to the properties in and around Atlanta. We are moving forward with those entitlements. We don't have our foot pressing hard on the accelerator. I'll go back to a comment that I made earlier, we're moving with the market.

A majority of the sales and the demand in Atlanta market are still relatively close in and really defined or constrained by the I-85, I-75 growth corridor. So that's where our focus is.

Okay. Thank you very much. I appreciate the time.

Yes. Thank you, Steve.

Your next question comes from the line of Steve Chercover of D.A. Davidson.

Good morning, everyone.

Good morning, Steve.

Three disparate questions. Absent the gain on the sale of the Ironstob land, it seems like the timber segment would have actually had a small loss. Is that because your volume was down by 70,000 tons? And why was the volume down so much?

Yes, the accounting on that is -- in my word, Steve, is a little bit strange. Ideally if I was the master of accounting, to me it's just a timberland sale -- excuse me -- or land sale that would have shown up in Real Estate. So it introduced a little bit of noise to the numbers.

I don't foresee how it could have actually been a loss in that sale anyway to fiber or to the segment in the sale itself. Without the sale the segment would have been pretty much at break even in the fourth quarter.

And, Steve, the reason those sales were down in the fourth quarter is principally due to planned mill outages in the Rome, Georgia, liner board mill that International Paper owns.

Got it. Actually, I think I should have known that. And then on Oil and Gas, I'm not sure I understood, Jim, exactly why the success rates in Kansas City, Nebraska were down so substantially, although I also heard that you had 25% rates previously, so it doesn't sound like it's out of the ordinary .

Right. Steve, I believe you're correct in your comment. You heard what I said correctly. There's been a range of success rates on a quarterly basis from 25% to 65%. For the year it was 47%. Long term average is 40%. So that's -- I think you know we're going to expect that.

Now, in saying that, too, Steve, we continue to keep a very close eye on drilling completion activities and want to make sure that we've got a success rate that supports the returns that we're targeting. So we're very conscious of that and want to make sure that, as I've said now a couple times, that we hit our return hurdles.

But it would be premature from one quarter to determine that perhaps you've culled -- cut the low hanging fruit, and it's going to be lower success rates going forward in that region?

Right. We expect that over time that we'll continue to generate a 40% success rate, that's correct.

Great. And sticking with Oil and Gas, it looks like Keystone XL, that big pipeline, is a little closer to becoming a reality. It's still controversial, but if it was built, would that benefit you?

Oh, potentially. Steve, the way I look at it is there's a significant amount of oil that's being produced in the Wilson Basin in North Dakota, and it's got to move. And there's been a substantial investment in rail infrastructure and rail loading facilities, and a majority of that oil is moving today.

Chris, the differential between West Texas intermediate and -- what we'll pay for the year was 6 -- yes, $8 to $10, so if excel pipeline could help us for to cut that in half, it would be helpful, but I don't think it's a game changer.

Yes, but oil -- or, sorry, rail is becoming increasingly controversial as well.

Little bit. Little bit .

Final question, I guess I just want to hear it once again in my own ears. It's clear that you're comfortable with the balance sheet, and I don't think there's been any real change in your CapEx outlook for 2014. So that current $400 million CapEx should be funded with cash on hand and from operations. You don't need to come back to the market. Is that correct?

Yes, we don't -- yes, given our operational plan and everything we see, Steve, we'll end the year still with a very healthy balance sheet and ample liquidity and basically an undrawn revolver. So everything we can see today, Steve, we're in good shape.

Very good. Okay, thanks. Good luck.

Thank you.

Your next question comes from the line of Robert Howard of Prospector Partners.

Good morning, guys.

Good morning, Rob. How are you this morning?

Trying to stay out of the snow. That's the big thing here. Let's see. So big increase on the PV10, is there a -- can you quantify how much of that is improvement on the proving up of the reserves versus a better pricing number? Does that get broken down at all?

We didn't provide that in the presentation or in the comments, but, Rob, I'll tell you it was about what, 80% to 85% driven by volume improvements and the results of operations, and maybe 15% thereabouts by price. So it's principally reflection of the investments in operations.

Okay. Great. And you were talking about the impact of the cold on production. Does -- like, I guess one thing I was curious about with all the fracking, does the cold make fracking tough, because you're using so much water, and you worry about that freezing? Or are there kind of other things that also are big issues that the cold slows the production?

Yes, Rob, that's part of it. It's not only freezing water issues, but you have -- when you have temperatures that are 35 to 40 below zero, it's a very difficult for people to work in, period, regardless of what's happening in the valves and pipes and water freezing. A lot of things freeze at 35 and 40 below, so it's just a -- it's a very, very difficult environment to try to operate in. In fact, most companies and operators are more defensive than they are offensive in that type of climate, just to maintain damage control, if you will.

So would there be extra costs just in terms of -- just kind of maintaining the production, the well has already been producing, then you get this 35 below. Does that put at risk losing a couple days production just because some valve breaks or something like that?

Yes, the production is impacted by this -- by the extremely cold temperatures. There's -- we saw a few wells that had been shut in due to extremely cold temperatures. So production is impacted, and assuming that the total cost is flat for that period of time, production down, then the cost per unit would have been up, but here again, this is -- I think this is principally seasonal, and hopefully we'll be working out of this environment here pretty soon.

Yes. Okay, great. With the Ironstob venture sale that you had, how does that land that you sold compare to the rest of the land? Is it a typical example of it, or is there some characteristic of it that might be a lot different than the rest of the Ironstob holdings?

Rob, I don't think that it's radically different. The buyer was the Department of Natural Resources in Georgia. It was a bolt on or add on to a conservation area that we had sold property to earlier, several years ago. Maybe back in 2007 or something like that, maybe 2007, 2008.

So to -- my comment is I don't see it as being radically different. There are a few parcels in there that we look at extremely hard, kind of back to an earlier question I had from Steve, that may have some development potential. And those may not be sell candidates, but those who want to potentially look at developing.

Okay. And I think you kind of addressed this a little bit in the call, but I just wanted a little more detail. You talked about you had a big increase in land sales this past year, and I just wanted to get a better feel for kind of the remaining land that you have, how that compares to what you were selling this year. I mean, you had a bunch of sales this year. Does that mean a bunch of developments all closed out, and so now those big ones are gone, or kind of how do we compare the last year to the inventory that you still have?

Yes, Rob, our retail land sales in 2013 were actually down from 2012. We sold maybe little over 9,000 acres in 2012 and a little over 6,000 in 2013. So as we think about land sales going forward, I'll go back to the initiative we laid out.

We're going to look at, as we always do, all of our non-core non-performing properties and make sure that in time they're going to be able to generate the returns and the value that we're looking for. Otherwise they become candidates for being repositioned. And that's true for properties that are part of Real Estate or part of timberlands or Oil and Gas or any other part of Forestar.

Okay, great. And then lastly, again, you talked a little bit just acquisitions, I was wondering how do you see the opportunity for acquisitions? When you're going through -- people are probably throwing lots of ideas in front of you, buy this from us or whatever. I mean, how does the market look for you in terms of -- are you finding it more difficult to look at potential properties to buy in terms of making the numbers stencil out? Or is the market still -- or the kind of opportunities you've been having the last few years still out there?

Yes, Rob, I would answer that question by saying it's much more challenging today than it was a year ago versus two years ago. The acquisitions that we were successful on, I'll tell you we combed through lots and lots of different properties and potential buy or deals.

So the real key there for us is maintaining the discipline that we need. I guess I'll be saying this for the third time now. It's just going to be so important to make sure the investments that we make reach or exceed our hurdle rate of returns.

The other benefit we have too, Rob, or I would say number two is that we do have a pipeline, and it's not as though we got two communities and we're going to sell out by the second quarter. We've had a nice pipeline, particularly in the major markets of Texas, so fortunately we're not in a position where we have a gun to our head and we have got to go buy properties. We also don't have a fund driven by generating returns.

So I like our position. I like our balance sheet. I like our pipeline. And I think our team has done a very nice job in the acquisitions, and they're real pros, and we're going to be disciplined about that.

All right. Great. Thanks a lot.

Thank you, Rob.

And your next question comes from the line of Albert Sebastian of Prospect Advisors.

Good morning, gentlemen and Anna.

Good morning, Al. How are you this morning?

Doing very well. Doing very well. Congratulations on some very good earnings in Real Estate, but some difficulties in Oil and Gas. So let's focus on Oil and Gas, and specifically with regards to Kansas and Nebraska. Looking at slide 21 it seems as though the single well economics you changed the economics here from previous slides. Previous slides you had PV10 of $1.1 million and returns above 100%. So can you just tell us what assumptions changed to lower the economics associated with the single well in Kansas, Nebraska.

Yes, the only change, Al, is we included -- we've done I think a better job of including all the costs associated with the wells. And that's what you see on slide 21.

Okay.

That's included in the footnote.

Okay.

Generally -- often times what you see reported in returns at the well level is principally just drilling completion costs and lease operating expenses, or LOEs. That was the way -- that was the first report we've gone even further to include all G&G costs, land, seismic. This is an all-in cost, which I think is more accurate and reflective of your investments.

Okay. So other than that, there hasn't been any change in terms of pricing or drilling and completions or --

No. It's based on the costs that we've included, and I believe the price [deck] in the forecast is still the same. The EURs -- ultimate recoveries -- are about the same as well, a success rate of about 40%.

With regards to hurdle rates, do you have a different hurdle rate for Oil and Gas than you have for Real Estate, or do you use the same hurdle rate across the entire enterprise?

Pretty close, Al. At the project level, the investment level in Oil and Gas or in Real Estate we're typically looking to achieve at least a 20% rate of return. As I've - as we've commented in the past, we also look at another metric very strongly in Real Estate, which is return on cost, with the hurdle there being 35%. And that typically equates to the mid to low 20s [IOR], but all in, Al, they're pretty close. When we look at the risk associated with these businesses and the returns, they are pretty similar.

Why don't you use a higher hurdle rate for Oil and Gas, given the inherent risk? It seems that Oil and Gas -- and I think most investors on the call would agree with this -- is an area that inherently is riskier than Real Estate. Why wouldn't you use higher hurdle rate for Oil and Gas?

Yes, it's -- Al, it's dependent upon what you're investing in. As I said in the comments, a majority of our investments last year as well as this year are in the Bakken/Three Forks, which is a resource play, and the Central Uplift in Kansas and Nebraska, which is a statistical play where we got a long track record.

So when you think about the risk associated with that, it's -- these are not prospective and exploratory. The way that we underwrite an investment, whether it's Oil and Gas or Real Estate, whether it's prospective or it's development, we look at risk adjusted returns. So if we were to look at a potential investment that was truly prospective, that's a very high risk, it's going to be included in the analysis.

And with regards to --

So -- go ahead. I'm sorry.

No, you go ahead.

So what I was going to say, Al, is we certainly take into consideration risk regardless of what the investment may be or where it is in the risk profile in Oil and Gas, Real Estate, or any other part of our business.

Well, taking a look at the Bakken/Three Forks, if you look at the well economics, here you've got a [peak] (inaudible -- mike fade) of 0.4 million. You're assuming $90 oil. Is that $90 -- that's $90 oil for the Bakken, correct? That's not WTI?

It's $90 oil, but there will be a deduct for takeaway capacity for a period of time. So there's a little bit of differential for a few years, Al.

So assuming $90 oil and $3 natural gas price over the well, that $90 oil, that's WTI? Is that the assumption? $90 WTI or $90 --

It's $90 at the well head, and there will be a little differential for takeaway costs.

Okay. $90 at the well head. So -- okay. Okay. So -- and again the differential could be $6, $7 then, off of that for the takeaway?

Yes.

Okay. And in terms of this -- can you give us some sensitivity where the PV10 would be essentially at zero? Given instead of a $90 oil price, what type of oil price would cause the PV10 to go to zero?

Yes, that's a -- Al, that's a good question. Let me answer it this way. We always look at price sensitivities for all of our investments in Oil and Gas, and across our portfolio $60 oil produces a mid to upper single digit return.

Okay. That was $60 oil?

Yes.

Mid single digits.

So our break even is going to be sub $60. And that's not -- and, Al, that's not too terribly different than most operators who have portfolios that are similar to ours.

Okay. Can you give a little bit more granularity on -- you mentioned going forward you're going to review your portfolio, both in Real Estate and I guess in undeveloped land and also Oil and Gas in terms of asset sales, and you're looking at kind of $100 million in asset sales. Can you give us a little bit more granularity of what you might be selling and what are going to be the characteristics of a typical assets sale?

Yes, the bottom line, Al, are assets that we don't think are going to meet our return thresholds and hurdles over time. Obviously there's some timberland assets that we look very hard at, but even in Real Estate there's certain properties that are going to struggle to meet our return criteria, and so we need to reposition those. In many cases it means accelerate the work out of those properties.

In Oil and Gas there may be a few pieces that -- of a royalty stream or something like that that don't seem to make sense. So as I said earlier, Al, it's everything on deck. We've got a portfolio that includes Oil and Gas and Real Estate and timberland, and we're going to look at all of it. But we think that the $100 million is about the right number.

And would it be -- when you take a look at the $100 million, is it going to be more in Real Estate or less, and more in Oil and Gas, or what are you thinking there?

Al, I would tell you it's probably more heavily related to Real Estate, and I'm just going to put all land in Real Estate, okay?

Okay. Okay. And finally, can you give us an update on the approval entitlement process -- planning process with Hidden Creek Estates in California?

Yes, the -- I think that I mentioned this before, Craig Knight, who ran our Real Estate business for several years, continues to work for us on a contract basis, and he is totally focused on those entitlements, Al. So he has got approvals through the planning commission, and I think the next round is through the council. So we're making progress, and hopefully we're going to get that one across the finish line, and just as soon as we do I'll be the first one to raise the banner.

Is there any -- can you get a little more specific in terms of expectations when you think that might happen?

If it was Atlanta or San Antonio, I would say yes. This is California, and I think it would be presumptuous to begin to forecast when we get the preliminary plat approval.

Thank you.

All right. Thank you, Al.

And your next question comes from the line of Anthony Hamill of broad view Capital Management .

Good morning, gentlemen and Anna. Thanks for taking my call. Good quarter on the Real Estate front. Just a couple specific questions, and then kind of a bigger picture issue statement after that.

The 2013 acquisitions you guys made, just doing the quick math on the single family, looks like about $13,700 per lot you paid. And then under contract for this year -- and obviously not all those might close -- it looks like almost double that amount. Are those in any way comparable, or are you looking at different types of communities perhaps that are more fully along in the entitlement process or in the higher value communities?

Yes, the sales in 2013 generated a little bit over 40% gross profit margin on a lot basis. The acquisitions that we're looking at may not be quite as strong, but they're comparable, Anthony. To your point, there's a little bit different in mix there as well.

One of those projects is not only -- most all of them have got -- have their entitlements. One of them is already in development and generating sales, and some of the sales of those lots are north of $200,000 a lot, just because of its location in the market that it's in. So there's a little bit of difference there in the mix. But we still [look to] generating some nice margins.

Right. So not a sign that you guys are reaching for --

No.

To pay up for --

No. No. In fact, it's the opposite. Anthony, I'll go back to what I said earlier, and that's just there's a lot of discipline. I think what -- one of these days what I would like to be able to show you in the market is all the no's.

Right.

Because there's probably 15 no's for every yes.

Right. Well, I guess, we'll see that in a way, because of the percentage of those that you've mentioned are under contract that actually get purchased. If we look out, say, a year from now .

Yes. That pipeline always has properties moving in and moving out.

Right. So the -- if you had twice as much capital to spend in the Real Estate business, would you? Or is it just --

What I would tell you, Anthony, is I don't think of the business as being capital constrained. Given our positions in markets and the organization and the horsepower we have, we think that what we currently are investing makes good sense. But what limits our capital investment more than how much capital you have is finding the acquisition opportunities that meet your return and risk profile .

Right.

I think that's really the limiting factor. It's not capital so much as it is finding the right opportunities.

Right. And just getting into the weeds a little bit here, I noticed that you added a community to the projects in the development process, which is Park Place in [Carroll] County. Are you currently selling lots as of today or is that -- [where is that?]

Yes, Anthony, that's a bolt on to an existing project that we've had in Houston for a number of years. So to the extent that we can find add ons or bolt ons that can leverage the position that we have in the marketplace, those are typically very good acquisitions, very strong acquisitions. Obviously it's a significant risk mitigant.

Right. That was something you recently acquired, as opposed to something that you brought from -- you developed an undeveloped [land at some point]?

Right. It's an existing community in which we purchased some adjoining property. Correct.

Fair enough. Okay. And any sense on -- in terms of you mentioned you're selling in 41 communities, by the end of next year do you expect it to be in and about that range, or is there a number -- would you expect that number to change materially?

If it was going to go up or down, I would say there's -- it's more likely that it goes up. When I look at the sales in 2013, the communities that are selling versus 2012, there is a little bit more diversity. And you're beginning to see some communities that have -- that were ideal or slow for a number of years beginning to pick up a little bit.

I think a real good example is what I mentioned on the call, particularly in Atlanta. I'll give you a specific project, Seven Hills, which is a very nice master plan community in Atlanta, virtually went lights out for a couple years. In 2013, I think we probably sold what, 50 or 60 lots, Chris? Somewhere around 50 lots. So considering that we're somewhere in the mid innings of this housing recovery, and it appears to be tempered and on pace, I would expect that you would gradually have a few more communities begin to pick up some sales.

Right. And in the Atlanta market, you mentioned 99 last year. Is there any sense of how many lots you could sell in more of a stabilized Atlanta and surrounding market for a year out?

It's -- Anthony, as Atlanta improves, opportunity and the potential will certainly increases. The other factor that really determines the rate of sales are how many projects you have that are in active development and can generate sales.

We have been very judicious in investment and development in Atlanta just because of the rate of that recovery and the depth of that downturn. So we expect Atlanta to continue recovery, and we're going to take advantage of every opportunity we have there. But as has been thematic in my comments, it will be measured with discipline.

Okay. Well thanks for that. And appreciate specifically you guys running a little longer on this call. They have been shorter in the past. So I appreciate you leaving some extra time so we can all get our questions answered.

So a big picture issue, the land business, it's difficult to find anything there that isn't deserving of some sort of applause. You're selling more lots, you're selling at a higher margin, the commercial acreage, the diversity of sales is improving. It's a great story, yet the stock has been stagnant.

You mentioned today in the Oil and Gas business you're targeting $35 million, which is less than you made in 2008, about what you made in 2009, and that was, what, $350 million ago in terms of capital you going to have already and are going to pour into that business by year end. For us who don't understand geology and aren't -- can't just look at the formations and see the value there, how are you going to tangibly prove to us and those who are sitting on the sidelines that this foray into Oil and Gas is worthwhile?

Because we're year and a half plus into year Credo, and you've raised capital a couple times, and it's frustrating for us who are seeing this phenomenal value creation in the Real Estate business being masked, obscured, what have you, by just the very capital intensive business of Oil and Gas, which is inherently riskier and so far lacking any tangible proof that it's been worthwhile.

Yes, Anthony, a couple things. I would ask you to keep in mind in 2008 and 2009 the natural gas prices had spiked all the way up to $12 to $14 per Mcf. And --

Right. But crude prices were lower.

Pardon me?

But crude prices were lower.

Crude prices had spiked up to $140, so when -- they may not have been on top of each other, but they were -- in the same period. Given those prices, it created a lot of activity in the legacy minerals, principally from a lease bonus perspective. If I'm not mistaken, in 2008 we had close to $35 million or $40 million just in lease bonus, and that's other operators leasing minerals. So I think we've got to be careful in making those comparisons.

Number two, relative to your comments to our investments in Oil and Gas, 2013 earnings were mostly impacted by downturn in the legacy minerals, in addition to some costs and some weather impacts. Anthony, our focus is on making sure that we've got discipline and we're generating the returns that meet or exceed our hurdle rate, which is 20%.

I think a very positive indication of the results are demonstrated in the reserve growth. So if we look at the step up in reserve growth, not only in volume or in future cash flows, but in PV10, I think it's a positive indication of the investments that we've made, and I believe that will continue to prove itself as we go forward.

Okay. But that sounds like we're looking into not necessarily this year but next year to see a number that, again, us neophytes can point to say there is value being created in the Oil and Gas business. Because $35 million, even if you don't consider the legacy Oil and Gas business but just what you poured into new drilling and Credo, $35 million isn't going to make that great of an investment. So -- but we'll have to wait until 2015.

Anthony, let's just continue to watch results. I think it's more of a trend than just than just a year. I would also say of the -- in 2014, there's just a minimal contribution from the legacy minerals.

All right. Okay. Well, thanks for taking my questions.

All right. Thank you, Anthony.

And your next question comes from the line of [Brent Morrison] of [Zuma] Capital Management .

Good morning. Can you give us --

Good morning, Brent.

Good morning. Can you give us some priority on some identifying some of these non-performing assets? Because you have assets that don't produce any cash flow, and then you have some that produced less than optimal cash flow. Can you kind of just help us understand where you're going to target first?

To your point, target -- number one priority is those that wouldn't produce any. So -- but here is our -- here's a way to think about that. There' s --I don't know that we had -- there's very few assets if any that are in the portfolio that will not generate some return or some cash.

And as you might expect, we start at the bottom where we've got the greatest opportunity and there's a market demand to be able to prioritize the repositioning or the dispositioning of those assets. And as I said in response to earlier question, that's going to be probably more heavily related in -- to the Real Estate assets, which I'm going to put all the land in, just from our comment perspective.

Okay. And then what about kind of the mineral rights and the water rights and kind of those less intuitive or less transparent assets?

Yes, the mineral rights and the water rights virtually have no basis and very little if any carry cost. And I'll use the minerals, for example, and I think it's also relevant and pertinent to water what I'm about to say, is that you've got natural gas and oil that's in place in various formations, and because we own the minerals there's no cost associated with delay rentals or managing those minerals. So it's -- there's significant opportunity on a go forward basis.

What's really driven this renaissance in energy world in North America has been principally technology, and we see technology continued advance and activity around various plays, so I am not a big proponent of selling minerals. However, I will say that on the Real Estate side we look at some land assets or even some of the projects, we'll be a little bit more focused on the return potential of those assets or properties.

Okay. The reason why I ask is, you're right, they don't have any cash cost today, but you're out there kind of raising dilutive debt. So you're diluting the equity holders, but then you're continuing to invest in the Oil and Gas, but then you're sitting on these idle assets that have an opportunity cost. In addition, you've spent new money for ground water rights in 2010, but then kind of mothballed it, or part of the Triple in FOR initiative is to increase disclosure on the water rights, but we don't really hear much about it.

Yes, that's --

That's where my question comes from.

Okay. Brent, if you look at the investment in water relative to the entire balance sheet, it's still minimal. We did make some investments back in late 2010 in some Central Texas assets that we think still make very good sense. This part of the world is still in a drought, and I think it's got some really long-term issues relative to water, and we still support that acquisition and opportunities that we think are commensurate with those assets.

What I would say is, and I've been very clear about this in all of my comments, it's going to take a while to develop water assets. However, we believe that given our position, the number of assets that we have, that it's a very significant opportunity and potential for our business.

Sure. It sounds very lucrative, but we don't hear much about it, and as analysts here we can't value it properly.

Yes, we -- Brent, we believe the best way to begin to ascribe value to it is to secure ground water withdrawal permits and as well as purchase and sell agreements with buyers, whether it be municipalities or counties or industrial users. We think that's the best proxy for value, and that's what our real focus is in the business, is securing those programs and agreements.

Sure. And my last question, from kind of going back in the filings, in 2009 you guys elected to take strategic initiatives and looked at some of your assets and kind of delever and buyback stock. And then it looked like that was kind of put on hold, and a further investment towards Oil and Gas kind of took its place. Do you mind commenting on that and if there's any thoughts of revisiting that?

Yes, the initiatives that we adopted in 2009, I think the team did an outstanding job of executing. The -- one of the number one targets was to divest some of the low returning timberland assets, and in fact we generated, oh, probably somewhere in the neighborhood of $225 million in sales from timberland, a significant amount of other cash flow associated with just the business operations reflective of reducing costs and everything else. And we paid down about $150 million in debt, we bought back some stock. I think the Company was in excellent position at that time.

Our vision had always been to have a very healthy balance sheet and ample liquidity, and that when the housing market turned and the economy began to take a turn there would be some very attractive investment opportunities, and in fact we have been making those investments, so it's -- we were very consistent along the way providing thoughts into the future and also growing this business. From the time that we spun out we've always had a growth strategy. Initially, as you well know, in 2008 through 2011, it was more defense than offense.

Great. Thank you.

All right, thank you, Brad.

And your next question comes from the line of [David Spire] of [Nicor Capital].

How are you?

Good. How are you this morning, David?

Great. Great. I was actually going to ask you about how you're planning on funding the CapEx program, but that question has already been asked. I was curious, do you guys have a shareholder equity number at the end of 2013?

Let me let Chris answer that. I'm pretty sure that there is.

Yes, it was about $715 million.

All right. So, I mean, at least from the appearance, the current market cap is around $650 million, and which would mean the Company is selling at a considerable discount NEV. I think the past through callers [and here] myself would probably even argue the Real Estate side alone would type this type of valuation. And that's actually quite surprising, considering the underlying growth in tail winds you keep referring to. So, [more or less], as investors, how should we be confident that management is going to narrow this discount and even more so get the stock to trade at valuation that reflects the growth that you keep referring to?

Sure. David, I believe that with the progress and the performance that we've made in the Real Estate, we're proven up the value of that part of the business in the assets. I also equally believe that given the short time frame from the time that we acquired Credo and the investments that we're making, that we'll begin to prove up that part of the business as well.

And I think that as I said earlier the step up in reserve growth in both volume and value is a positive indication of those investments. We believe that with time and performance, with performance being the key in this business, that Forestar's value will be appropriately reflected in the marketplace .

Got it. I mean listen, we hope so, because at the current run rate it looks like you're almost investing annually 30% of the Company's total net worth into Oil and Gas, and we just hope that those returns reflect that type of investment. As the previous callers mentioned, the $35 million number we would hope to be a little bit higher. And even regardless of that number, the Company's current valuation, that number shouldn't matter , because as I said the Real Estate side alone should reflect this stock price. So at the current price the Oil and Gas business seems to be assigning zero value. So any positive results out of that should be nice to see.

Yes, we would agree.

All right. I appreciate it, guys. Good job on the Real Estate. Thank you.

Good. Thank you, David.

That's our last question for this morning. Once again I want to thank everybody for joining us on the call this morning as well as your interest in Forestar. We hope 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 wonderful day.