Forestar Group Inc (FOR) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2014 Forestar Group, Inc., earnings conference call. My name is Lacey and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the presentation.

(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, Anna Torma, Senior Vice President of 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 discuss Forestar's second-quarter 2014 results.

I am Anna Torma, Senior Vice President, Corporate Affairs. Joining me on the call today is Jim DeCosmo, President and CEO, and Chris Nines, Chief Financial Officer. This call is being webcast and copies of the earnings release and presentation slides are now available on the investor relations section of our website at ForestarGroup.com.

Before we get started, let me remind you to please review the warning statements in our press release and our slides as we will make forward-looking statements during the presentation. 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 Jim for some opening remarks.

Thank you, Anna, and good morning. I would like to welcome everyone who is joining us on the call today. I will begin by letting you know that we are on track to deliver our Growing FORward strategic initiatives. Our second-quarter results are a step in the right direction.

Let me share with you a few of the key highlights. First, we are driving EBITDA. Segment EBITDA in the second quarter was $47 million. That is up 150% from the second quarter of last year. We are capitalizing on our portfolio of assets that are located in strong basins and markets, coupled with our ability and commitment to deliver.

Second, we are investing in Forestar. Second quarter we invested approximately $63 million, with the majority of investments in existing locations, projects, and markets where we have a proven track record. Third, we are selling non-core assets. During the quarter, we sold $8 million of non-core oil and gas properties and year-to-date we have delivered $28 million of the $100 million target.

And, finally, we expect the strength of our balance sheet, cash flows, and liquidity to adequately fund our Growing FORward strategic initiatives. In fact, our liquidity is up $121 million since year-end 2013.

We have got an experienced and proven team with conviction. We have delivered our initiatives in the past and we fully intend on delivering our Growing FORward initiatives.

Now let me turn the call over to Chris for a review of our second-quarter financials.

Thanks, Jim, and welcome to everybody joining us on the call. In second quarter 2014, Forestar reported net income of approximately $14.8 million or $0.34 per diluted share, compared with net income of $500,000 or $0.02 share per in second quarter 2013. Real estate segment earnings were $27.3 million in the second quarter of 2014, up compared with $8.1 million in second quarter 2013.

Our second quarter 2014 real estate segment results include a $10.5 million gain pretax associated with the conversion of over 10,000 acres of timber leases for ownership in approximately 5400 acres of undeveloped land from the Ironstob venture. In addition, higher residential lot and undeveloped land sales were key drivers of the improvement in segment results, which Jim will share with you in greater detail in just a few slides.

Oil and gas segment earnings were $9.5 million in second quarter 2014 compared with $4.2 million in second quarter 2013. This increase is principally due to $5.7 million in earnings associated with the sale of our interest in 97 gross non-core producing wells in Oklahoma and the sale of leasehold interest in 223 net mineral acres in North Dakota, combined with higher production volumes from our working interest investments, principally in the Bakken/Three Forks.

In addition, our second quarter 2014 oil and gas segment results include $2.1 million in additional dry hole expense associated with a working interest in an exploratory well in East Texas. Other natural resources segment earnings were $2.1 million in the second quarter of 2014 compared with $1 million in second quarter 2013. This increase was merely due to approximately $700,000 in earnings from a renegotiated groundwater reservation agreement and a $700,000 gain on the partial termination of a timber lease. As a result of the increased financial performance across all three segments, total segment earnings were $38.9 million in the second quarter of 2014 compared with $13.3 million in second quarter of 2013.

Before I turn the call back over to Jim, let me quickly review our balance sheet and liquidity profile. As we have shared with you in the past, we are committed to maintaining a strong balance sheet and financial flexibility while executing our growth strategy. During the second quarter, we issued $250 million of senior secured notes due in 2022, and we used the net proceeds to repay our existing $200 million term loan under our senior secured credit facility with the remainder for general corporate purposes.

This financing provides a much better match between our debt maturities and the duration of the assets on our portfolio. And, as you can see on the slide, our debt maturities schedule is vastly improved with only minimal debt maturities before 2020, which increased our financial flexibility.

At the end of the second quarter, our financial leverage as measured on a total debt to total capital basis was 35%, in line with our target leverage profile. And we had over $474 million in available liquidity. As Jim shared with you earlier, the combination of our strong balance sheet, the expected cash flows, and our ample liquidity are expected to adequately fund our Growing FORward strategic initiatives.

Now let me turn the call back over to Jim for some additional operating highlights from the second quarter.

Thanks, Chris. And I will start with the real estate segment results. Even though there has recently been some mixed signals in housing, we are just as confident today as we were this time last year, particularly given our locations and inventory levels. I will touch more on the markets on the next slide.

For the quarter, real estate segment earnings were $27.3 million. That is up roughly 200% compared with the second quarter of last year. As the chart illustrates, one of the drivers was a $10.5 million gain associated with our Ironstob exchange or conversion, and other main drivers are healthy and stable demand for residential lot and tract sales.

We sold 537 lots in the second quarter. That is almost up 50% compared with the second quarter of last year. Average lot prices in margins were 11% higher, and that is the highest we have seen in several years. In addition, we sold 79 acres of residential tracts in two communities, which represents about 260 potential future residential lots. And, last, we sold just over 3200 acres of undeveloped land for about $2500 an acre.

Now, looking more closely at our lot sales trends, I think it is important to understand that our investment decisions are based on fundamentals: homebuyer demand and inventories throughout the housing supply chain. As the charts illustrate, Texas fundamentals remain solid. Finished vacant new-home inventories are well below equilibrium levels and job growth continues to be among the nation's strongest.

We have continued to evaluate acquisition prospects to add to our pipeline. However, as I have mentioned on a number of occasions, we have and will continue to maintain investment discipline. It is a key and a requirement for us to meet our ROA target of 10% by 2016.

Relative to lot sales, given that approximately 70% of our real estate investment is located in major markets of Texas, we are maintaining our lean toward the optimistic side. For the year, we anticipate residential lot sales to be in the 2200 to 2300 range, and that is up about 20% compared with the previous year. And, based on existing contracts, we would expect the second half sales to be slightly backend loaded.

I mentioned the Ironstob conversion in the highlights, so let me give you just a little bit more color. Converting a long-term timber lease and the fee ownership is a solid example of value creation. The timber lease originated back into the mid-1960s. Then, in 2007, we formed a joint venture with the land owners that gave Forestar a 58% retained interest at about 17,000 acres of undeveloped land, primarily in Paulding County, Georgia.

During second quarter, we converted over 10,000 acres of timber leases into ownership of approximately 5400 acres undeveloped land, and we left about 2000 acres in the venture, which is earmarked for future conservation land sales. The 5400 acres of feet ownership will either be sold through our retail and sales program, or we'll develop it primarily for residential uses. Although the conversion was a nonmonetary exchange, GAAP required the booking of a $2.5 million gain which is reflective of the difference between our book value of the timber lease and the market value of the fee ownership.

Now let's turn to multifamily. We are continuing to grow and create value in our multi-family pipeline. As you can see at the end of the quarter, we had five multifamily projects under construction, accounting for over 1600 units at various stages of completion. Eleven, our 257-unit community here in downtown Austin, is substantially complete and about 85% leased.

The sale of Eleven expected to close in September or October. The process is taking a little bit longer than expected given the level of interest and the number of offers that required evaluation. Based on what we can see today, we should exceed pro forma on this project.

Also in the second quarter, we broke ground at our project called Littleton Commons, located in Littleton, Colorado, a Denver suburb. We're 25% of the equity with our venture partner, AIG. We sourced and purchased this 18-acre tract during the latter half of 2012 for about $14 million. It is in a good location in a growing submarket with easy access to downtown Denver and major job centers. The garden style project will consist of 385 Class A units with mountain views and, as always, a best of class lifestyle amenity package.

Following quarter end, we acquired a new site in Nashville for $7.1 million. The project, which will be 230 units, is located in the storied Music Row section in Nashville and, once again, has very good access to major Midtown employment and entertainment centers, the key to our site selections. In summary, our multi-family development projects are progressing well and, as the chart illustrates, we expect those investments to yield a 2 to 3 cash multiple, 36 to 48 months following the start of construction. Going forward, consistent with our strategic initiatives, we will continue to capitalize on our real estate portfolio and drive sales across the board: lots, residential, and commercial tract.

I also want to share with you that the Cibolo Canyon Special Improvement District is evaluating the options to accelerate reimbursement to Forestar. The district is currently collecting $5 million to $6 million a year from Halcon sales and use taxes from the resort. Based on current market interest rates, bonding capacity and debt service requirements, the district may be in a position to generate net proceeds that are well in excess of our $25 million basis in the resort.

In addition, based upon increasing ad valorem tax bases within the Cibolo Canyon's project, the district may also have the capacity to accelerate reimbursement of another $5 million to $7 million for our qualified investments and major tract. Assuming that the district is successful, proceeds could be distributed to Forestar prior to year end 2014.

To summarize in real estate, we have a strong portfolio of communities in good locations and, most importantly, economies. It is these attributes coupled with low housing inventories and stable demand that has our real estate business in good position.

Shifting to other natural resources, in the second quarter our other natural resources segment earnings were approximately $2.1 million. That is up $1.1 million from the second quarter of last year. During the quarter, we finalized a five-year groundwater reservation agreement with Hays County for $1 million, generating approximately $750,000 in earnings. Future payments will be based on an annual reservation rate of $22.22 for each permitted acre foot. We currently have permits for 12,000 of the 45,000 acre feet requested. And that is on an annual basis.

In addition, we had a gain of approximately $700,000 on the partial termination of a timber lease associated with Ironstob venture. And during the second quarter, we sold over 107,000 tons of fiber. That is down from 185,000 tons in the same quarter last year. For 2014, we anticipate fiber sales to be in the range of 350,000 tons.

Moving to oil and gas, oil and gas segment earnings were $9.5 million in the second quarter. That is up $5.3 million compared with the same quarter of last year. As the chart illustrates, second-quarter earnings were driven principally by asset sales, higher working interest margin, and partially offset by dry hole and operating expense.

Second-quarter earnings from working interest investments was up $4 million, primarily due to a 56% increase in working interest production versus legacy mineral royalty earnings, which were down due to 28% decline in volume. Dry oil expense was up $3.5 million, principally due to $2.1 million in exploratory well in East Texas.

During the second quarter, we sold our non-core, nonoperated interest in 97 gross for six net wells located in Oklahoma. The $7.5 million sale generated a $4.5 million gain. In addition, during the second quarter, we sold our leasehold interest in 223 net mineral acres in the Bakken/Three Forks, generating a gain of $1.2 million. This acreage was located in the core of the play, but was beginning to approach near-term lease expiration. A private Bakken operator with an idle rig had interest in taking a majority of our position, so we made the decision to reduce our risk by selling down and taking a 10% working interest going forward.

Below the segment earnings is an EBITDAX reconciliation that we provided for you in the past. It is a non-GAAP measure and we provide a reconciliation back to segment earnings in the appendix of the presentation. Second-quarter EBITDAX of $22.1 million was up $11.1 million from the second quarter of last year, mostly due to higher DD&A and working interest margin from Bakken/Three Forks investment and asset sales.

One of the challenges that we faced over the last several quarters has been the impact of declining high-margin royalty from our legacy minerals. This offset has kind of masked the growth and production earnings in EBITDAX from our working interest investments. The two charts provide you with both historical production and EBITDAX from working interest in minerals.

Since acquiring Creed on the fourth quarter 2012, working interest production has grown over 55% while our legacy minerals has declined over 48%. The reduction is primarily due to lower natural gas prices, which, in turn, adversely impact exploration and drilling economics in the East Texas and the Gulf Coast basins.

In light of the downturn from minerals, we have created value from our working interest investments illustrated by EBITDAX, which has grown by nearly 100% over the same timeframe. Investments we have made in working interest are primarily improving locations like our position in the Bakken/Three Forks, your next slide.

As the impact from whether subsided and operations returned to a more normal level, we have seen the rate of drilling completion back to a pace similar to 2013. In the second quarter, 17 Bakken/Three Forks wells came online, seven of which were Halcon wells with working interest ranging from 12% to 19%. Of the seven, four were Bakken and three were Three Forks wells that IP'd at rates ranging from 1800 to 2000 BOEs per day, and expected to generate EURs well above our base case of 500,000 BOEs.

With respect to well results over the last few years, the data suggests a positive trend of optimizing drilling completion that not only drives EURs, but ultimately returns.

One other observation and takeaway: as operators continue to transition to pad drilling, we are likely to see wells come online in multiples rather than singles, which is reflective of drilling the whole leases. So I would expect there to be a little more lumpiness to the Bakken/3 Forks production growth. Nonetheless, I remain confident in our positions as well as the value we have created from these investments.

Case in point, 17 Bakken/Three Forks wells came online in the second quarter. That is up from just three in the first, clearly a function of improved weather conditions and pads come online. At the end of the second quarter, we had 12 wells either drilling or waiting on completion, and we anticipate about 26 wells to come online in the second half of this year. This is down modestly from our previous expectations, primarily due to completion delays.

The table on the bottom right shows our estimated returns for the Bakken/Three Forks for 500,000, 600,000 and 700,000 BOE EURs. For the first time, we are adding a 700,000 BOE case given the approved well results over the last 6 to 12 months. The average type curve of our producing wells continues to show EURs about a 500,000 BOEs with many approaching 600,000 and even greater.

With the recent trend of longer completion times due to pad drilling, we expect the third quarter segment earnings to be in the $5 million to $6 million range. Based on our current estimate, we would expect 2014 working interest production to be up about 300,000 BOEs or 45%, and royalty interest volume to be down 130,000 BOEs or 33%. In total, production should come in around 1.2 million BOEs and that is up about 15% year-over-year.

The chart on the bottom right illustrates, barring unusual events, second half 2014 segment earnings should be roughly 50% above the first half, a little bit more weighted toward the fourth quarter and driven by production from working interest. Consistent with our initiatives, our focus is first invest primarily in development of de-risked locations expected to drive earnings, cash flow, and returns. Second, opportunistically sell non-core assets. And, third, prudently manage capital and, for that matter, all expenses.

I would like to end where I started. After two quarters, we are making good progress and on track to deliver our Growing FORward strategic initiatives. Our second-quarter results are a positive step in the right direction.

Our focus, number one: generating $200 million in segment EBITDA by 2016. On a fully diluted basis, EBITDA per share would be about 4.5 times higher than the annual average from 2008 through 2011. Through the first half of 2014, we generated segment EBITDA of nearly $77 million. That is up over 50% from the first half of 2013 and I would expect 2014 segment EBITDA to be up in the 20%, 25% range year-over-year.

Number two, monetizing $100 million of non-core assets by 2016. Once again, we have divested about $28 million in non-core assets. That is almost 30% of the way to our target in just two quarters.

Number three, growing through strategic and -- let me underline -- disciplined investment. The first six months, we have invested about $136 million of capital in our two core businesses, roughly $47 million in oil and gas and $89 million in real estate, with the majority of the capital invested being invested in existing communities and basins. With two quarters behind us, we anticipate total 2014 capital to be in the $275 million to $300 million range, with oil and gas accounting for about $125 million of the investment.

Relative to financial strength, just let me be very clear. We fully expect our cash flows and available liquidity to adequately fund our Growing FORward initiatives. We ended the quarter with liquidity being up $121 million as compared to year-end 2013. As I look at where Forestar is today, I see a very strong portfolio of assets in the right locations with a team dedicated to delivering results. That is our DNA.

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

(Operator Instructions) Mark Weintraub, Buckingham Research.

A couple questions. First off, on the Cibolo Canyons, there is also the cost of assets that you expect to convey to utility and improvement districts. Is there any update on when you might see any proceeds related to that?

Chris has been heavily involved with the district and working with that process. So I'm going to let Chris respond to that, Mark.

Yes. I would tell you, Mark, at the end of the second quarter, we have roughly $40 million in major tract infrastructure costs that are pending reimbursement from the district. Based on the current ad valorem tax value in the district, we would expect that there could potentially be another bond issue issuance later this year in the range of $5 million to $7 million.

Okay, I think you had mentioned that. But any visibility on the -- would you anticipate a significant amount more potentially next year? Or is this going to be a slow process of $5 million to $10 million a year?

Yes, Mark, it will continue to be a function of the amount of infrastructure that is put on the ground relative to the houses that are built, as well as the commercial sites that are being developed, as well as the changes ultimately in the tax rates for the district. So, when we are aware of potential future reimbursements, we will communicate that to the market, but what we can see today is about $5 million to $7 million between now and year-end.

Mark, this is Jim. It is simply just a function of the rate of increase in ad valorem tax receipts. So, as you build ad valorem tax base, then it will provide additional bonding capacity going forward.

Okay. And then, additionally, on your residential lot expectations, it seems to imply a bit of a slowing in the second half from what was a good pace in the first half of the year. Any additional color you can provide on why that expectation?

Yes, a little bit, Mark. Remember, the first half included a couple of bulk sales that I think elevated the run rate quite a bit. But, if I think about just the core run rate of our business and lot sales, I would tell you it is pretty consistent. But, as I have said on a number of occasions, Mark, the lot sales can be a little bit lumpy in that we have got takedown contracts that fall in and out of quarters, and can create a little bit of variability.

Okay. Because it looks like your -- what is it? About 800 for the balance of the year, is what you are expecting, order of magnitude?

Yes. That's about right.

Okay. And on the higher prices that you were getting on the lot sales in the second quarter, is that the market getting better or is that mix?

Mark, I would have to say it is a combination of both. We have certainly seen some price increases and same-store sales, if you will, or within the same community. But, also, we are going to be somewhat influenced by mix. We had sales for the first time that impacted the average in our Morgan Farms in Nashville, Tennessee, and I think those lots are selling, golly, for like [$180,000, $190,000] apiece. So that is kind of a big number for us in the mix.

Sure. And then, lastly, could you just remind us, what was the book value on Ironstob, at least that part which you were writing up?

Mark, our basis in the Ironstob venture was about $750,000 prior to the conversion, which was effectively our basis in the timber leases.

Okay. So, effectively, you have now -- the way to understand that is you got a little over $11 million as the basis on the 5400 acres or however many acres you had?

That is correct.

Okay. Thank you.

Steve Chercover, DA Davidson.

First of all, if you receive that $5 million to $7 million payment from Cibolo Canyon, how will you treat it? We you call that out as a special item? Or should we just model it as part of your revenue in EBITDA?

It will essentially be basis recovery, so it will not through the flow P&L, Steve.

So it is a cash flow item.

Yes. We will debit cash and credit investment in real estate, so it won't flow through the P&L.

Got it. And then, switching over to the mineral side, if I am not mistaken, your full-year BOE projection, while still up nicely, is down from about $1.5 million earlier this year. So is that due to the legacy ownership diminishing or is it due to the sale of some of the interest that you just announced? Or maybe you can tell us how that flows through.

Sure. Steve, it is the combination of the two. You partially answered your question. One is the decline in production from the legacy minerals. But, second is principally an adjustment that we make to the drilling completion, the production activity from the Bakken/Three Forks.

If you look at the production to date and their schedules in the release, you will see that about half of our production comes from the Bakken/Three Forks. So it is the primary mover. So we try -- we do make adjustments based on intelligence and communications that we have with operators.

Well, they say you should never ask a question where you don't already know the answer, but I promise, I really don't know the answers. And then, with respect to the decline in the legacy minerals, I know that years ago you were trying to move from gas towards liquids. But as the price of the gases improves, presumably, will we see a bit of a reversal in that decline?

Steve, it will certainly help. I think what we need to see as well as other operators is good solid fundamentals underneath the gas price that supports exploration and development in the various zones and formations that are part of our minerals. I will tell you, we are seeing a little bit more activity, even with the recent improvement that we have. But I would be reluctant to say that it is a needle mover, but I am somewhat encouraged.

We do keep a close eye on development of other resource plays. I mean, if you look at where the majority of the capital is being invested today in oil and gas, it is resource plays with longer life and more certain economics, if you will. So we keep a close eye on developments in East Texas and Gulf Coast relative to those types of emerging resources.

So there is some activity. I think I would probably be getting a little bit ahead of us to say that we have got one that is trending into Forestar minerals. But there is a couple of resources that are heading in the right direction, but a little bit too early to call potential.

This is probably way above my pay grade since I am just an equity analyst, but do you guys have a view on the policy towards liquid natural gas exports or energy exports of any kind?

Yes. From a Forestar position, or certainly from my opinion, Steve, we believe that having the option to export hydrocarbons is a good thing for the US as well as the nation. Oil already is a global commodity. NGL is just another form of liquid.

There has been some activity. There has been some proved permits. If you look at the total number of permits that are in place, it is about almost half of the total natural gas production in the US. So, obviously all those permits are not going to get granted. But, given the volume of natural gas that is in place, onshore North America, we believe it is the right thing to do and provides inner security, not only for US, but other regions of the world.

Thank you for that. And then my final question was just trying to determine the size of the water opportunity. And I think what you were discussing here does not represent the totality of your water interest, but when you were talking about getting, I think, $22 per acre foot on what you hope to be 45,000 acres, does that mean you have an income stream of $1 million?

Yes, for the five-year agreement. Ultimately, Steve, where we would like to get to is a production or development agreement, which is tied to the production water. This is similar to a banking instrument, if you will, so as I am sure you probably discerned, there is no water moving. But, ultimately, what we are trying to do is get the permits approved for up to the 45,000 acre-feet per year and ultimately get some portion of that volume flowing on an as needed basis.

But, ultimately, the revenue stream would be well in excess of $1 million, I should think.

Sure. Assuming that we move toward a development agreement, that would be the expectation.

Got it, okay. Thank you.

Steve O'Hara, Sidoti and Company.

I was just curious about the multi-family exposure. That market seems to be really hot. And I am just kind of wondering what your -- maybe the view on what inning we are in, and where you kind of start to maybe back away from that business as that continues to improve and potentially overheat at some point.

Right. Steve, there are certain markets and locations and some markets where we are very concerned about the level of supply in the pipeline that is coming online, especially if you look at it relative to demand and absorption levels. There is other locations that we are comfortable with that we can meet our return expectations without taking on undue risk. So it really does vary a lot by market and by location, Steve. But, even if you look at the numbers on a national level, they are not out of bounds by any stretch of the imagination.

And then, if you look at the other fundamental, too, just the demographics, the millennials or the echo boomers are a significant part of the population. And, if you look at some of the challenges they have, it appears as though they are going to be renters for quite a bit longer than their parents -- the baby boomers.

So to answer your question, Steve, I agree with you. There are certain locations you need to be very careful with. And others, there is still some opportunity.

And maybe another way to put that in perspective, two years ago we probably were able to convert one out of 10 prospects. Today, it is more like one out of 20 to 25. So to that point, yes, it is getting a little bit tighter.

Okay. And then, on Eleven, you commented about the delay or maybe taking longer than expected. And were you saying that it was taking longer than expected or maybe longer than anticipated to sell it, based on the demand for the property? Is that you are seeing better demand that you had expected? Is that fair?

Yes. That was the message, Steve. We had quite a bit of interest and a lot of offers to process. Even though you call for offers, and you have a form that you are looking for, they all come in a little bit different. Nobody follows directions.

Right. And then, just in terms of the -- I think last quarter you said the success rate in Kansas and Nebraska had kind of fallen or hadn't -- or wasn't as high. Could you just talk about what that was in the quarter?

Yes. The fourth quarter of 2013 I think was around 25% or 26%. The first quarter of 2014 was close to 40% and then the second quarter this year was around 45%, 46%, something like that. So that is what we are looking for.

Steve, it is a good question because I'd like to elaborate on that a little bit. The success rate is very important in the way in which it impacts earnings, given that we use successful efforts accounting. But I will tell you what is equally as important is the EURs from the successful wells. So we keep just as close an eye on what we think an estimated recovery is going to be as well as the success rate.

So, to answer your question, we are doing good in Kansas and Nebraska. But, here again, if you look at it over time, there is a little bit of variability there from quarter to quarter.

Right. And so -- just so I am clear, in terms of the success rate, does that -- what is the threshold where it stops to meet your return requirements? Are we well above that at 45%?

Yes. I think we shared that, with a 40% success rate and 35,000 to 40,000 BOEs as EURs, you generate a very attractive return. So you have got downside from there.

As I said, though, we watch both success rates as well as EURs. The return is actually a little bit more sensitive to the EURs than success rate. So we keep a very close eye on both to make sure that we are trending in the right direction.

Okay. And then, finally, just to kind of jump back to the real estate, can you just talk about the Radisson improvements that were made and maybe what the plans are going forward, in terms of how you think that will impact the value there?

Steve, the capital investments to date have been primarily in the redesign and refurbishment of the restaurant and the ballroom, and then, to a minor extent, the pool. The reception and the response so far has been very strong. It has been very good.

We also will be refurbishing the rooms according to the agreement that we have with the flag, which is the Radisson. That is going to happen, I guess, for the balance of this year. Hopefully, we will have that done by the end of the year.

As we underwrite those investments, as you would expect, they certainly meet or exceed our return criteria, which is good, but we also believe that we are creating a lot of value in the property in and of itself, which is your point. So we are encouraged by the investments to date and we are looking forward to finishing up the project.

And just real quickly on that, in terms of when we were there, it seemed like you could definitely tell the difference, obviously. It was a big change in the rooms, the restaurant, et cetera. But does the bigger return come eventually when you get kind of re-rated in terms of people are starting to pay -- willing to pay a little bit higher rates now for the rooms based on kind of a re-rating of the property by consumers?

Yes. Steve, that is accurate. We believe that the improvements will enable us to raise room rates and drive RevPAR as well as NOI.

Okay. Thank you very much.

Chris McDougal, Westlake Securities.

Thanks for the update. You covered a lot of my questions already, but I just want to get a little bit of background on the non-core oil and gas sales. The producing wells in Oklahoma, about how much production were those running at when they were sold?

I don't know the exact production off the top of my head, but what I can tell you is that these were kind of some older relic wells that were part of the Credo acquisition. They were shallow verticals, primarily in the Pennsylvania. About half of them were water floods. So it was a very mature field that -- I have to get back -- I can't remember the exact production on it. But it was, relative to what produced, Chris, it was minor.

Okay. No, that's fine. And then, on your other non-core sales, what is the makeup of this $128 million target by basin and such?

Yes. The target is $100 million.

Okay, $100 million.

$100 million. We have sold [28 to date] -- or through the first two quarters. The makeup is really across the board. It is a combination of undeveloped land, either assets or projects or communities in the real estate portfolio that we believe are not good long-term investments. And then there are some other, what we believe to be some smaller opportunities in oil and gas, somewhat similar to what I reported on for second quarter.

Jeff Bronchick, Cove Capital.

Just kind of running through some things. So when you are just maybe nailing down the adequately fund -- the four initiatives, so that means, no, you don't think you have a need for additional capital in 2014. And does that mean you also don't -- in other words, does that adequately cover 2015 and 2016 or just 2015? Or what are you kind of committing to?

Yes. Jeff, the Growing FORward initiatives are through 2016. And so we are in good shape through 2016. But, as I say that, Jeff, I certainly don't want to imply that you get to the end of 2016 and you have hit the wall. It is important to us that we maintain adequate liquidity and a good solid balance sheet over time.

But, what I am saying, Jeff, is where we are today and given the initiatives that we have, we are in good shape certainly through 2016 and expect that to be the case even going forward.

Got it. And so what was -- maybe talk -- was the dry hole drilled on your own legacy mineral land or was that an additional play?

It was in East Texas, Jeff. It was associated with our minerals. It was a Travis Peak and Pettit target. On occasion, there is going to be locations on our minerals where we believe there is a good opportunity to prove up a field or future wells, if you will, or locations. We don't have much of an appetite just to drill a one-off. To the case that we can prove up as zone or formation in a little bit broader extent, then we will take those opportunities as we see them.

But, as I said in my comments, Jeff, we have got to be diligent in managing the mix between development and exploration. So that is really going to determine the level of capital and the extent we can step out in some exploration opportunities.

Got it. So this was an example of -- one of these ideas of bringing on Credo was to further develop or look at opportunities on existing legacy land and this was an attempt at that.

Yes. That is right, Jeff. As I said, there are certain opportunities. When we look at an opportunity on -- particularly on Forestar minerals, it is little bit different equation, in that if we can prove something up without the cost of lease bonus and having to pay out a royalty, it gives us a little bit of an advantage and -- with certain locations and formations.

And so, obviously, the run rate in spend in oil and gas is seasonally picking up. And so looking out at 2015, barring weather issues, one would expect a higher number than $125 million that you're going to see in 2014.

In 2015, Jeff?

Yes.

Is that your question?

Exactly.

Yes, Jeff, it could be. The main driver for our oil and gas business today is the level of drilling in the Bakken/Three Forks. That is really the governor for our capital spend, if you will. As I have said now a couple of times, the prudently managed capital, we have got to be very diligent in maintaining the mix between development and exploration. The majority of the development is the Bakken/Three Forks. So it is really calibrated and governed by the level of drilling in North Dakota.

Got it. And so you are continuing to acquire acreage in Lansing -- in and around. Is that -- are you done there or is this a continuing program? And then the second part of that is, where else are you nosing around and spending capital outside of Lansing and the Bakken?

Jeff, we picked up a bulk sale for the Lansing-Kansas City and Nebraska. It's within the fairway in which we are drilling. We are in pretty good shape today.

What I would tell you, for as long as we can maintain the economics and returns, we are good with investing in Kansas and Nebraska. But, here again, that is kind of steady as you go. And we are not going terribly fast there. We certainly don't want to outrun our coverage.

And then, relative to other opportunities, we look for locations that have got some good economics, and that we understand we have experience in, or our people have experience in to expand the business. But I will go back to what I said earlier, Jeff. You have got to be very careful with the level of investment that is beyond your development. So we are governed by how much we can invest in new plays or new exploration.

Got it. And, given some of the transactions that have happened in the Bakken over the last three or four months or so, is your phone ringing about interest in your acreage?

No, it has not.

And lastly, just, again, bigger picture, you have a FOR initiative and you are going to hit $200 million in 2016 of EBITDA. That is your target. And then, I hate to ask the question -- and then what? Because your business is cyclical and your business is episodic and transaction oriented, so if you sold every lot you owned this year, and you could hit $400 million or $500 million, that wouldn't really help 2015.

So maybe just talk about given the cycles in your businesses, and then what? Is the whole mission simply to generate $200 million and then reinvest it? Or maybe just talk through how you see the value created for shareholders, just maybe re-articulate it.

Yes. Sure, Jeff, I would be happy to. And I think you know that the initiative is not to get to the end of 2016 and game over. If you look at the history of our initiatives, Jeff, this is the third set in Growing FORward. We have delivered them and we have increased it, and we moved on.

So my expectation is that, before we get to the end of 2016, we will have developed and articulated the next set of strategic initiatives. And I don't anticipate going backward. That is never a good thing.

Relative to the uses of cash, obviously, we will reinvest them into the business. That is a requirement of Forestar today. Yes, there is some cyclicality in the business, but when I look at housing today, to me, it appears to be slow and steady instead of something that is the boom and bust, just because of the underlying fundamentals and the economics that we are dealing with.

And so longer-term, well beyond 2016, I like our position. We have got a nice portfolio of assets in communities. We are reinvesting, not to the extent that is covering our sales, but fortunately we have got a pretty good size of our portfolio.

And then the other comment that I would make is that -- and I sure you heard that we have made some good investments in multifamily, which we think is a nice complement to our community development, our single-family, particularly given the fundamentals and the support that we are seeing with the demographics.

And, Jim, just so -- again, this is my last point and I will turn it over. I don't see the -- you are not building a legacy for your grandchildren, as they say. In other words, why wouldn't you take fallow, un-earning land and increasingly participate in multifamily, which has in other cash flow producing vehicles where -- and then you turn around after three years of a FOR initiative and were left with, hey, $16 million of recurring revenue cash flow, which can be kind of valued and more appropriately and highly valued by the market as opposed to the treadmill, which is, I guess, my point, and I think one of the reasons why your stock has gone nowhere over a number of FOR initiatives.

Maybe just talk through how you think about that and particularly multifamily. What is the point of making it for someone else and letting them have the enduring value, and you put up $10 million and you make $20 million, but then you have got nothing.

Yes. I will put up $10 million and take $20 million all day long. So I don't think there is anything wrong with that. To your point, though, if you look at the underpinning of Forestar today, this is more consistent and its cash flow and earnings characteristics is a lot deeper than it has been in the past.

But as we think about this business going forward, I don't disagree with you. To the extent we can continue to transition Forestar to where we have a more stable and consistent and long run cash flow and earnings business, I think that is the direction that we are heading in.

But keep in mind, too, Jeff, in the multi-family, the first order of business is to establish your position in multifamily. And what we have now built is an opportunity to do just what you said. We can -- whereas before it had been very difficult just to take a piece out of these projects and turn it into longer-term cash flow today, and going forward, we believe that is an option.

But, in summary, Jeff, I wouldn't disagree with you. I think that is a direction that Forestar is heading and the track record we have. We have a much deeper cash flow underpinning and earnings underpinning than we did several years ago. And it is not as transactional-based as it was.

Thank you very much.

And, Jeff, thank you for being concerned about my grandchildren.

Rob Longnecker, Jovetree Capital.

Can you provide a little more color on the bulk sale that you got in Nebraska? Who was the seller of those acres?

The bulk sale in -- it was Oklahoma.

No. Sorry. I mean, who sold you the acres that you bought in Nebraska?

Oh, that was Apache.

Apache. Okay. And you bought -- didn't you buy a package from them earlier in the year as well?

No. That's the same package.

That's the same package. Okay.

And, Rob, I may have commented on the last call, closed in second quarter.

Okay. Got you. And how many years of drilling inventory do you now have in Nebraska?

Rob, we are probably 18 to 30 months of inventory out in front of us.

Well, sorry, so don't you have over 200,000 acres in Nebraska at this point, right?

Yes.

And that all gets drilled in the next two years?

You don't drill the entire portfolio or the entire land base. It is a statistical play so, on average, it takes anywhere from 1500 to 2000 acres per producer.

Okay. At what point would you guys be kind of satisfied with your inventory position you have in Nebraska? Is there a level where you think you have enough?

Sure. It really is dependent upon success. Given the locations that we have today and the analysis that has been performed through 3-D seismic and using some other technology, we are good with where we are. If we continue to have good success and the play extends, then we will move.

Now, if we begin to run into issues associated with success as well as EURs, then you pull the plug. But I will say, Rob, that the Lansing Kansas-City has been good. We like our position today. But I will be the first one to tell you, it doesn't last forever.

Got you. Okay. And then, have you guys updated what your CapEx spend is going to be in the Bakken for 2014?

The total CapEx for the year is going to be somewhere around $120 million to $125 million. And, let's see, at 50 to 60 wells at $1 million a well, we are probably close to two-thirds of that being the Bakken/Three Forks.

Got you. And do you think it will be a similar number in 2015?

Assuming that the pace of drilling is the same, yes; it is a little bit early to call 2015. We are in the process and we will continue to look at the permits that have been filed as well as have conversations with the operators to determine the rate of drilling for 2015.

Mark Weintraub, Buckingham Research.

Real quick, just on Eleven, is that still likely to close this year? And are you suggesting that potentially there could be a little upside to the numbers that you had on the slide?

Yes. That's the message. We expect to close this year. And, based on what we can see today, Mark, we expect to see pro forma.

Okay super, thank you.

That was our last question. I want to once again thank everyone who joined us on the call this morning, and hope that you have a great day. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.