Forestar Group Inc (FOR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forestar Group fourth-quarter and full-year 2014 earnings conference call. My name is Denise, and I will be the operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Anna Torma. Please proceed.

Thanks, and good morning. I would like to welcome each of you who joined us by conference call or webcast this morning to discuss Forestar's fourth-quarter and full-year 2014 results. I'm 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 comments.

Thank you, Anna. I would also like to welcome everybody who has joined us on the call today. This morning I want to simply say that Forestar is committed to maximizing long-term shareholder value.

In 2014, we delivered record real estate segment EBITDA of over $100 million, further execution of our strategy. On the other hand, the oil and gas segment financial performance was not up to our standard. Segment earnings were adversely impacted by oil price-driven impairments, yet we were successful growing production and proved reserves by 20%.

Given unacceptable results and low oil prices, we have restructured our oil and gas business, and we are intently focused on generating cash flow and earnings as a positive step in the right direction towards maximizing long-term shareholder value.

Also since last call, we've implemented several initiatives specifically focused on enhancing shareholder value. First, we repurchased approximately 1.5 million shares in the fourth quarter of 2014 for $25 million. Second, our Board of Directors voted to recommend declassifying the Board so that all directors would be elected annually. Third, Forestar added two new shareholder-proposed directors to the Board in February; that should expand the Board's perspectives. Fourth, last, and most important, we have listened to our shareholders regarding complexity, capital requirements, and the mix of our businesses. As a result, our Board, management team, and advisers are engaged in evaluating strategic alternatives to enhance shareholder value, and that includes a comprehensive review of our oil and gas business.

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

Thank you, Jim. Let me begin by highlighting our fourth-quarter and full-year 2014 financial results.

Forestar reported a net loss of approximately $11.8 million, or $0.34 per share, in the fourth quarter of 2014 compared with net income of $13 million, or $0.33 per share, in the fourth quarter of 2013. Our fourth-quarter 2014 financial results include special items of $23.2 million after tax principally associated with non-cash asset impairment charges related to our oil and gas segment, driven primarily by lower oil prices. These fourth-quarter 2014 charges include $10.1 million after tax associated with proved property impairments, $9.8 million after tax associated with unproved leasehold interest impairments, and $3.3 million after tax principally associated with severance and other non-recurring costs. Excluding these special items, fourth-quarter 2014 net income was $11.4 million compared with $13 million in fourth-quarter 2013.

For full-year 2014, Forestar reported net income of $16.6 million, or $0.38 per share, compared with net income of $29.3 million, or $0.80 per share, in 2013. Our full-year 2014 financial results includes special items of $24.5 million after tax principally associated with non-cash asset impairments related to our oil and gas segment, driven primarily by lower oil prices. A breakdown of these full-year 2014 charges include $10.1 million after tax associated with proved property impairments, $11.1 million after tax associated with unproved leasehold interest impairments, and $3.3 million after tax associated with severance and other non-recurring costs.

In addition, our full-year 2013 results include a one-time tax benefit of $6.3 million associated with timberland sales from 2009. As a result, excluding special items, full-year 2014 net income was $41.1 million compared with $23 million in 2013. This improvement in our full-year 2000 financial results, excluding special items, was driven primarily by record real estate segment earnings. Now let's turn to full-year and fourth-quarter segment results.

Fourth-quarter 2014 real estate segment earnings were $30 million compared with $27.7 million in the fourth quarter of 2013. This improvement is due to $7.6 million in earnings from the sale of over 8,400 acres of undeveloped land and a $6.6 million gain associated with the receipt of $46.5 million in bond proceeds from the Cibolo Canyons Special Improvement District. In addition, our real estate segment reported record annual earnings of $96.9 million in 2014 compared with $68.4 million in 2013. This improvement in annual results is driven by $26 million in gains associated with the Ironstob exchange, the acquisition of our partner's interest in the Eleven multi-family venture, and a gain related to the proceeds received from Cibolo Canyons as well as higher land sales and increased lot sales activity.

Oil and gas reported a segment loss of $39 million in the fourth quarter of 2014 compared with approximately $1 million in segment earnings in the fourth quarter of 2013. This decline is principally due to non-cash charges of approximately $35.7 million, which includes $15.5 million of proved oil and gas property impairments, $15.1 million of unproved leasehold interest impairments, and $5.1 million of severance and other non-recurring costs.

For full-year 2014, oil and gas reported a segment loss of $22.7 million compared with segment earnings of $18.9 million in 2013. This decline is principally due to non-cash charges of approximately $37.7 million, which includes $17.1 million associated with unproved leasehold interest impairments, $15.5 million of proved property impairments, and $5.1 million of severance and other non-recurring costs.

Other natural resources segment earnings were $3.3 million in the fourth quarter of 2014 compared with $3.7 million in the fourth quarter of 2013. Our fourth-quarter 2014 other natural resources segment results include a $2.7 million gain associated with the termination of a timber lease in connection with the sale of the remaining 2,000 acres of land from our Ironstob venture near Atlanta.

Fourth-quarter 2013 other natural resources results include a $3.8 million gain related to the partial termination of a timber lease in connection with the Ironstob venture. Full-year 2014 other natural resources segment earnings were $5.5 million compared with $6.5 million in 2013. This decline in annual segment results is primarily due to lower fiber sales activity.

Forestar reported a total segment loss of $5.7 million in the fourth quarter of 2014 compared with segment earnings of $32.4 million in fourth-quarter 2013. And total segment earnings was $79.7 million in full-year 2014 compared with $93.8 million in 2013. The decline in segment results in fourth-quarter and full-year 2014 compared with the prior year is principally associated with non-cash asset impairment charges related to our oil and gas segment.

Now let me turn the call back over to Jim to walk through the operating performance and market conditions for each of our segments.

Thank you, Chris. And I will begin with a review and update of our real estate business.

Relative to housing and our view going forward, we believe that the underlying supply and demand fundamentals for both single and multi-family housing are intact and favorable to further expansion. Housing starts in inventories remain below long-term historic averages, while at the same time household formation continues to increase. As a result, and given the temperate pace of the housing recovery, we believe housing starts will continue to increase for some time. In particular, I believe these conditions also true for Forestar given the location and the quality of our communities.

Demand for finished lots is continuing to strengthen our projects, evidenced by lot sales and margins. Rather than pressing lot sales volume, we focus on increasing margins. That's our strategy: the greatest value from every acre.

As the charts illustrate, both the lot margin and total profit is the highest we have generated since 2006. The 2014 total gross lot profit is up almost 5 times compared to our trough in 2009.

Our communities continue to be sought after by homebuyers. That's a solid indicator of preference and demand. We expect 2015 lot sales to be about 1,900 lots, which would be relatively flat with 2014 levels excluding the bulk sales.

Given our investments in Texas, I will make a few comments relative to our view on lower oil prices and housing. Housing supply and demand fundamentals in our Texas markets are stable. Most important, absolute new home and lot inventories remain well below the equilibrium levels. If we were drastically oversupplied, that would be a real problem.

Despite the drop in oil prices, Texas continues to be one of the strongest state economies in the nation, which is evidenced by job and population growth that remains well above the US average. However, it would be hard to argue that the decline in oil prices won't have an impact on Texas job and, in turn, housing.

We've all seen headlines reporting layoffs in the energy sector. Fortunately, energy sector jobs count for only 2.9% of the overall Texas economy, and 4.2% in Houston where we are likely to see the greatest impact on jobs. Nonetheless, Houston is expected to experience positive but decelerating job growth, but yet fortunately remains one of the most affordable housing markets in the nation.

As you can see, our exposure in Houston represents only about 10% of our real estate investment. In addition, our communities are located in healthy submarkets and are well-established, high-quality developments that provide confidence to prospective homeowners and buyers.

For the year, real estate segment earnings were $96.9 million. That's up over 40% compared with last year, a record for our real estate business. Our team is to be credited for driving the increase in segment results. In particular, $10.5 million in earnings related to exchanging 10,000 acres of timber leases for 5,400 acres of owned undeveloped land following the bifurcation of the Ironstob venture property. $7.6 million in earnings associated with acquisition of our partners' 75% interest in Eleven, an Austin multi-family development project. And $6.6 million in earnings from the receipt of $60 million in cash from the Cibolo Canyons Public Improvement District.

During 2014, we also sold over 22,000 acres of undeveloped land for about $2,200 an acre, with the remaining acreage in Georgia located closest to metro Atlanta. We will continue to evaluate our undeveloped land and opportunistically sell non-core parcels for growth and reinvestment.

Relative to lot sales, we sold over 2,300 lots in 2014, and that includes about 370 lots sold into bulk sales. Total lot sales in 2014 were up 24% over the previous year with an average gross profit per lot of $30,000. It's up 17% year over year excluding the bulk sales. In addition, we sold 944 acres of residential tracts at over $8,500 an acre and 32 acres of commercial tract for over $258,000 an acre. Now let's look at the fourth-quarter real estate results.

Fourth-quarter 2014 real estate segment earnings were $30 million; that's up $2.3 million from the previous year. Included in gain on asset sales is the $6.6 million associated with the Cibolo bond offering and a $1.3 million gain from the sale of a land contract near Charlotte.

Other notable fourth-quarter sales, over 8,900 acres of undeveloped land was sold for $2,100 an acre. We had over 500 lots with average gross profit per lot of $35,700; that's up 29% quarter over quarter excluding bulk sales. And last, 26 acres of residential tracts for $54,800 per acre and 25 acres of commercial tracts for over $227,000 an acre. Next, I will highlight an example of strategy execution, one that we're certainly proud of.

As we shared with you last quarter, we reached another milestone at Cibolo Canyons, our 2,800-acre mixed-use community located in San Antonio. As of year-end 2014, cumulative cash flow is now positive. But more important, future net cash flows of Forestar from lot and tract sales plus the district disbursements are expected to exceed $150 million by 2034. Instrumental in becoming cash flow positive were receipt from the Cibolo Canyons Special Improvement District in the fourth quarter.

Recall that the district has two financial responsibilities to Forestar. First, distributing the [HOT] and sales and use tax. After receiving $46.5 million in the fourth quarter, Forestar has received $66 million as of year-end 2014, with a potential for an additional $35 million in payments through 2034. That is assuming no growth in tax collection. And second, reimbursement for major tract infrastructure costs. We received $8 million in the fourth quarter and have now received $34 million as of year-end 2014 and expect to receive an additional $32 million by 2034.

These reimbursements are dependent upon property tax collections, which is simply a function of assessed value. Relative to sales, we sold just over 50% of the 1,769 planned lots. We have about 56 commercial acres remaining to be sold or developed. The success of Cibolo Canyons is a testament to the execution of our strategy, the greatest value from every acre. And with the use of district cash disbursements repurchased stock, it's value returned to shareholders. Moving on to multifamily.

Rental continues to be a mainstay in housing. Given the current demographics, the desire for mobility, the tight mortgage underwriting standards, and the increased propensity to rent among millennials, we believe multifamily will continue to be a significant component of housing going forward. Nearly all of our multi-family submarkets where we currently have projects planned or under construction continue to realize above-average job growth. That is the cornerstone of demand.

At the end of 2014, we had one stabilized multi-family community in our portfolio with 5 projects under construction, accounting for over 1,700 units. Developing our multi-family portfolio is progressing well. We expect these investments to average about a 2 to 2 1/2 cash multiple in 36 to 48 months following the start of construction. We currently anticipate Midtown in Dallas and 360 in Denver to be sold in the latter half of this year.

We ended the quarter with 4 multi-family sites in the pipeline: 1 in Nashville, Charlotte, and 2 in Austin. We are continuing to evaluate additional acquisition opportunities in our core submarkets that are anchored by solid job growth and balanced supply of fundamentals.

In summing up real estate, at year-end 2014, we had over 50 active selling residential communities in 13 markets. Throughout the year, we leveraged the strength of our team and the portfolio to create realized asset value by capitalizing on housing and lot demand from builders. Going forward, we will continue to leverage our team strengths, capitalize on our real estate portfolio, and deliver value through high-margin sales across the board: lots, residential, and commercial tracts.

Strategy, market conditions, and return criteria guide our real estate investments. In 2014, discipline continued to trump growth. In particular, only 5 single-family tracts were acquired that met our return and our underwriting criteria. These projects are expected to deliver nearly 850 lots. That's equivalent to about 40% of the 2014 lot sales. We also acquired our partner's interest in Lantana; that's an award-winning, master-planned community located near Dallas with about 650 lots remaining to be sold. And last, we purchased 3 multi-family development sites that we expect to yield about 700 units.

Given our portfolio and a proven team, our real estate business remains positioned to create and deliver value going forward. Now shifting to other natural resources.

2014 other natural resources segment earnings were approximately $5.5 million. That's down $1 million compared with 2013 principally due to lower fiber sales. We've sold nearly 333 -- 330,000 tons of fiber. That's down about 46% compared with the previous year. Offsetting this decline were lower operating expenses and $1.1 million in revenue and $200,000 in earnings from our water interest.

During the fourth quarter of 2014, other natural resources segment earnings were $3.3 million versus $3.7 million in the fourth quarter of 2013. A $2.7 million gain on timber in the fourth quarter of 2014 was associated with the sale of the last 2,000 acres from the Ironstob venture. For 2015, we expect fiber sales to be in the 275,000- to 300,000-ton range.

In addition, we continue to work toward being a part of the economic water solutions for Texas. We currently have an export permit for 12,000 acre feet, and we are pursuing the balance of the 45,000 acre feet requested here in central Texas. Moving to oil and gas.

Full-year 2014 oil and gas segment results were a loss of $22.7 million compared with segment earnings of $18.9 million the previous year. 2014 results were negatively impacted by non-cash impairments and other charges of approximately $37.7 million, reflective of year-end lower oil prices.

Forestar has been focused on growing the production, reserves, and value from oil and gas assets and investments primarily in the core of the Bakken/Three Forks and the central uplift in Kansas and Nebraska. As a result, our 2014 oil and gas production reached nearly $1.3 million BOEs, up over 20% compared with 2013.

The growth in production is principally attributed the investments in the Bakken/Three Forks. Liquids production from working interest grew by 53% but was offset by a 20% decline in royalty interest production, which contributed to about a $6.1 million reduction in segment earnings from mendels.

Full-year results also benefited from an $8.5 million gain primarily from the sale of Oklahoma water flood production and 650 net acres of leasehold interest in North Dakota. Below segment earnings is the EBITDAX reconciliation. As you know, that's a non-GAAP measure with reconciliation in segment earnings included in the appendix of the presentation. Year-over-year 2014 EBITDAX was up almost $7 million. That is mostly due to higher DD&A from increased production.

Fourth-quarter oil and gas segment results were a loss of $39 million, a $40 million decline from the fourth quarter of 2013. As the bottom-right table indicates, the decrease is primarily due to $35.7 million in non-cash impairments and other costs driven principally by lower oil pricing.

For the quarter, working-interest oil production was up 48% compared to last year, with only 6 new Bakken wells coming online in the fourth quarter. We ended the quarter with 20 wells waiting on completion, averaging about a 10% working interest. Based on operators' plans, we expect about half of these wells or half the 20 wells to come online in the first quarter.

Gross segment earnings once again is the EBITDAX reconciliation, a fourth-quarter 2014 EBITDAX of $5 million. It was down $7.6 million from the fourth quarter of the previous year, with higher DD&A and working-interest volumes largely offset by non-cash impairments and lower pricing. We'll take a look at our year-end 2014 reserves.

Proven reserve volume increased 20% in 2014. Proven reserves from working interest investments were up 26%, while reserves from owned minerals were down 15% year over year. Also note that probable and possible reserves are up from 4.7 million in 2013 to 8.1 million barrel of oil equivalents, or BOEs, in 2014 in mostly all Bakken acreage.

As reviewed and prepared by third-party oil and gas and engineering firm Netherland, Sewell, discounted cash flow for our proved reserves using a 10% rate, or a PV10, was $229 million at year-end 2014, and that's up from $183 million year-end 2013. Working-interest investments added $53 million in PV10, while minerals declined $7 million. For perspective, applying the December 31, 2014 NYMEX strip price of $61.07 to our proved reserves would yield approximately $128 million at a 10% discount rate. Let's take a look at the key drivers of the proved reserve growth.

Total proved reserves increased $2.9 million BOEs during 2014 and was offset by $1.3 million in production, which equates to a net $1.6 million BOE increase in reserves, which is over a 125% reserve replacement. Furthermore, consistent with a strategic initiative to increase production of oil and liquids, our 2014 year-end reserves increased to 76% oil and liquids. That's up from 36% just three years earlier.

Our working-interest investments and mineral-lease acquisitions have been the main driver of continued growth and proved reserves. Kansas and Nebraska proved reserves are up 30% year over year, while the Bakken/Three Forks, the main driver of reserve growth, is up 50% and now represents over half of our total proved reserves.

As the chart on the left illustrates, the investment weighted average proved developed producing estimate of ultimate recoveries by Netherland, Sewell for 2014 is up to 680,000 BOEs, almost 40% above 2013. This further illustrates the substantial improvement operators have made in their drilling completion techniques and operations. We ended 2014 with about 9,300 net mineral acres in the core of the Bakken/Three Forks; that's up about 3,300 acres since acquiring Credo. At year end, we were participating in approximately 120 wells and will have the option to participate in an estimated additional 330 wells.

Clearly, the question is does it make sense to invest given today's strip prices. As you would expect, the answer is largely dependent on drilling and completion costs, estimated ultimate recoveries, and oil prices. Obviously, $50 oil significantly reduces the number of wells that will meet our 20% hurdle rate of return. It's worth noting that we've already -- that we are already seeing substantially lower drilling completion cost estimates from operators. Based on their feedback, we expect costs to continue to go down across all phases of drilling, completions, and production.

Through the first two months of this year, we have declined to participate in 4 or 7 proposed wells. Given operators' guidance, we expect to receive 30 to 35 well proposals, most of which have been in the permitting and the development pipeline. Based on current oil price forecasts, 2015 oil and gas capital expenditures are expected to be down significantly. A majority of the capital is to complete existing wells and participate in a select number of Bakken/Three Forks proposals that meet or exceed a 20% rate of return. We will evaluate each well on a stand-alone basis given operators' cost estimates, EURs, and NYMEX strip prices.

In response to the depressed oil prices and unacceptable financial performance, significant steps have been taken to lower all costs with a focus on generating cash flow and earnings in 2015. With the changes in January and after one-time restructuring costs, 2015 oil and gas operating expenses are expected to be approximately 50% lower in 2014, primarily due to staff reduction associated with the closure of our Fort Worth, Texas, office. Going forward, we will continue to be diligent in identifying and delivering additional cost reductions in our oil and gas segment.

In the last section of the call, let me update you on our strategic review and our shareholder initiatives. Our Board of Directors, the management team, and financial advisors are engaged in exploring strategic alternatives to enhance shareholder value, including a thorough review of the oil and gas business.

Given the current oil and gas pricing environment, and with almost 1 million acres of oil and gas interests, it's important that all options are firmly reviewed to ensure we maximize shareholder value. In the interim, we've taken meaningful actions to reduce oil and gas operating costs and capital expenditures with an intensified emphasis on generating cash flow and earnings. In real estate, we will continue developing the best-of-class business by leveraging our core competencies, investing with the utmost discipline, and generating the greatest value from every acre in our portfolio today and in the future.

Now I will close by saying that that, given my involvement in the process, I'm confident that this body of work is clearly focused on adopting strategies that will maximize long-term value. That's our commitment to shareholders.

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

(Operator Instructions) Steve Chercover, DA Davidson.

Perhaps this one is for Chris, but feel free to chime in, anyone. I wanted to talk about the repo. And first of all, was it front-end loaded? And should we infer that despite that the shares are now lower that you think at $16.77, you are buying well below net asset value?

Steve, I will comment, and then certainly Chris can chime in. But I wouldn't say that it was front-end loaded. We were consistently purchasing for the length of time that the window was open in the fourth quarter. And then the window was closed.

So I think the most important question is, going forward, what's the plan. And Steve, I will tell you since we have engaged in the review of these strategic initiatives, I think it's going to be important for this interim period of time to make sure that we maintain financial flexibility. But I will tell you, in my opinion, I thought those were good investments in the fourth quarter, and it certainly added shareholder value. Chris, you want to comment? Chris says he's good.

Well -- so how long was the window open? Because presumably it closed faster than it normally would because of your engagement with your shareholders.

Yes, I think that, given the announcement on December 8, that was probably the close of the window.

Okay. And should we infer from your comment there that you might not be buying presently until you just the strategic review because you want to maintain that flexibility?

Yes, Steve, what I would say is I think it's prudent from just a financial management perspective, given the work that's ongoing relative to the strategic initiatives, just to maintain financial flexibility. And just as soon as we finish up that body of work, relative to capital investments as always, stock repurchase will continue to be one of the alternatives and options.

Okay. Thank you. And then switching gears a bit, you anticipated a question on the sale of some of your multi-family developments. Since 360 is 80% done, would it be reasonable to assume that that gets monetized in 2016 and maybe another property or two?

Steve, with what we see today relative to the progress in construction and lease-up as well as move-ins, we would forecast that both 360 and Midtown in Dallas would both be sale candidates for the latter half of this year, 2015.

Okay, but Eleven and Midtown were the ones that you identified as being probable for second half.

No, it was 360 in Midtown.

Okay. Pardon me. And then, again, two more questions and I'll turn it over. If oil was $90 a barrel, would we be adding all of the $8.1 million probable and possible to your proven reserves? Is that a way to think of it?

There would be some transition of probables and possibles into the approved category, but, Steve, it wouldn't be 100% of that. It's just a pipeline for probables and possibles to PUDs up to PDPs. So it's just a -- it will migrate in there.

Okay. And then final question, can the tax losses on the oil and gas business be used to offset taxes on the real estate business?

Steve, I'm going to let Chris answer that question. But here again, our taxes are calculated at the corporate level. And so I think that it may be difficult to make that connection.

Yes, I think that's fair, Steve.

Okay. Well, that's what I was hoping. If it's all in the family, if it's at the corporate level, then -- I was just thinking if there are two completely different subsidiaries, you might not be able to co-mingle the loss with gains elsewhere, but it sounds like you probably could.

We also get the benefit of the accelerated depreciation deduction our investment in working interest as well, so that pulls down our cash tax rate as well.

Very good. Thank you.

Mark Weintraub, Buckingham Research.

Question for you on the oil and gas business. You gave us the year-end proved reserves. Now, the same hand, though, you're choosing not to participate in some of the drilling activity. Does that -- as you don't participate in that drilling activity, would that have implications to what the reserves will be? Essentially, does your reserves total go down each time you don't participate in drilling activity?

Mark, you are correct in your comment. Reserves are calculated based on your intent to participate in future drilling. So if conditions would warrant not electing in or not participating, then that would also be reflected in your reserve calculation. So if you have no intent, you not going to -- your company will not get credit for its reserves.

And so when you provided that note underneath where you say applying the $61 strip average oil price, does that factor in that you would potentially be choosing not to participate in several projects, et cetera? And so that the actual amount of probable reserves is lower as well as the price?

That is true for proved. I wouldn't say for probable. It is true for proved, Mark. You are right.

Okay. And then how fast is the decline -- or what type of sensitivity -- if the price is at $50 or -- at $50 instead of the $61, can you give us a sensitivity on where that number would go to for the PV10?

From $61 to $50, Mark? Is that what you're asking me?

Exactly.

Mark, if you look at the slide that Jim walked through on the oil and gas, based on SEC average prices for the year, our PV10 was $229 million. Using the strip price at year end, which was only $61, that PV10 value would be $128 million. So down about $100 million versus the SEC average price.

Understood. And so if you were to use -- and you may not have this handy or want to provide it. But if you were to use $50 instead of $61, closer to where the current strip price is, can you give a sense as to where that PV10 would be?

Yes, Mark, this is Jim. We can't -- this morning, we didn't calculate a $50. We can calculate a lot of different numbers. As you know, it's moving every day. It could be lower by midyear, could be higher by the end of the year. So we are reluctant to calculate a lot of reserve estimates based on various pricing assumptions. As you know, nobody has ever been right (multiple speakers).

Right. Understood. Totally appreciate it. Just was hoping to get a sense of sensitivities. Clearly, you could do $70 as well. Just was hoping maybe to get a little sense just as on that next chart, I believe, you show where -- a couple of charts later you show where breakeven is under different scenarios. Was curious if we could get a few more scenarios. But understood.

Shifting gears for a moment just to the real estate side, first off, so the undeveloped land, you were averaging at $2,100, $2,200 per acre on those land sales. Do you think that those sales were representative of your undeveloped acreage or were perhaps either better or not quite as good as average acreage? I know in the past, you have tended to sell stuff that was further out. Was that continuing to be the case, or how would you characterize the land you were selling?

Mark, the $2,200 is a combination of a couple of larger sales as well as some retail sales. So, given the mix, I would say the $2,200 is representative of a kind of an average range, if you will, of undeveloped land. With what's left, Mark, there's clearly some properties that are -- I think lend themselves to larger bulk sales and others to retail. So I would say the mix in the sales in 2014 would be representative of what is left.

Okay. And then one last one. I'm assuming in the 2015 lot sales guidance, you are assuming no bulk sales as a part of that. Is that fair?

That's correct. It's very difficult to forecast bulk sales. If you look at that chart, you can see that there has been some bulk sales over the past several years. Very difficult to forecast that, though.

Okay. So just to be fully clear, so it's possible there would be, but you are just not forecasting it given the lack of visibility on something like that.

That's correct. That is correct.

Thank you so much.

Steve O'Hara, Sidoti and Company.

I just had a question, I guess first on Eleven. Where does that show up now? And maybe what was the NOI, or maybe what's a -- kind of a, I don't know, fourth-quarter NOI with Eleven. I assume Eleven is the net portfolio now. If you just talk about that a little bit.

We would expect an annual NOI out of Eleven in the range of about $3 million.

Okay. And is that -- it's just in the real estate segment now?

Yes, that would be in the real estate segment, in the commercial and income properties revenue and cost of sales lines.

Okay, okay.

And it's obviously fully on balance sheet now.

Okay. And then just with the increase to the EURs for the Bakken land, could you just talk about what that does to the -- maybe the OpEx or the other costs in the oil and gas business? It sounded like most of the OpEx was going to be down due to the headcount reduction and closing of office. And I'm just wondering what the impact of the increase in the EURs is on expenses going forward, if anything.

Steve, I don't think that there is any connection between increased EURs and operating expenses. Obviously, if there's greater production, there's going -- production costs in total would be up. But what I will say that I think is important relative to what we're seeing already in 2015, with a few AFEs or proposals that have come in, it's dramatic how fast the drilling and completion cost is coming down. And we are seeing this across the board relative to our lease operating expenses, drilling completion costs. It's moving down rapidly. And that's a good thing. That's a good thing.

And just to go back to the EURs, does that impact depletion at all or anything like that? Because I guess a lot of these wells would be on the books at lower EURs, so your depletion rate, I guess, would be higher than what it should be going forward per barrel. Does that make sense, or no?

Yes, I will let -- you are heading in the right direction. I will let Chris answer that for you.

Yes, Steve, you're absolutely right. With higher EURs, we're going to amortize the drilling and completion costs over a much larger reserve base, which is going to reduce the DD&A cost on a per-barrel basis. So in 2014, the depreciation and depletion in our oil and gas segment was just under $30 million. As Jim said, with the EURs up over 30% year over year, we would expect that DD&A number to come down on a per-barrel basis. So assuming the same level of production in 2015, our DD&A would be down 20% to 30% next year.

Great. Okay. And then just maybe lastly on the lot margin, if you could -- I assume the lot margin is up, that's great. In terms of the -- maybe a constant mix, I assume it's up as well. Is that fair on a same-store sales basis? It's not a -- most of it is not an increase -- a change in mix or an improvement in mix. Correct?

That's correct. Steve, there would be a little bit of mix in it, but it is primarily same-store sales, as I said in the comments. One of the things that we have really focused on -- given the difficulty in replacing these lots, we want to make sure that we are selling at a pace and a rate that we realize as much margin as we possibly can, which has been a real focus, and it is spot on what our strategy.

Okay. And then I apologize, one last one. In terms of the headcount reduction and the closing of the office, how long can you operate the oil and gas business in the state it's in with a reduced headcount?

Steve, I think that we are adequately staffed to manage this portfolio given our view of what the future looks like. I think it's clear based on the ramp-up over the last couple of years that we were growing that business and that we made a significant change from that direction at the end of 2014. The strategy, if you will, will be much more passive, is the word that I would use. And I think that we can do a much better job at doing more with less.

Okay. All right. Thank you very much.

Robert Howell, Prospective Partners.

Quickly on the last question, you talked about the DD&A going down 30% or so next year. Is that just on a GAAP basis, or does that kind of impact taxes as well so you won't have as big a deduction for taxes?

Does it impact -- can you repeat the question again?

Just -- you were talking about the reduction in the depreciation depletion, that that was going down. I just was wondering is that just a GAAP reduction, or is that also impact your tax books as well?

No, that's a GAAP reduction. Amortizing those upfront costs associated with our working-interest investments over a larger resource base will reduce DD&A and obviously improve earnings. But from a working-interest perspective, we accelerate about 80% of that investment for DD&A purposes for taxes.

Okay, okay. Great. And then with the slowdown in drilling, how does that impact -- or how much time do you have for getting land to be held by production? Do you have a pretty wide window still, or does the slowdown in drilling mean that there's risk of not being able to hold onto some of your land or acreage?

Yes, Rob, you have to -- clearly, you've got to manage that, and we take that into consideration with the various proposals that we get. I think we ended 2014 with about 60% of the Bakken acreage held by production. So the other 40% of that acreage that is not held by production, there are not any immediate dates that are coming up in 2015 that we would lose out.

What we've done in the past is that when we see a parcel that may be at risk from lease termination or a region in the lease, we have put packages together and sold to monetize those. So there is a mitigation plan, if you will, for any leases that potentially may expire.

Okay, great. And last, I know you guys do minimal hedging with your production, but do you have any forward sales at all going into this year from -- at higher prices?

No, we don't.

Okay. All right, that's it. Thanks.

David Spier, Nitor Capital.

Could you talk about what's driving your strategies here in terms of multifamily? What's the rationale, I guess, behind your strategy?

Yes, David, I guess back in 2010, it was obvious to us when we were evaluating the housing recovery that multifamily/rental was going to be a significant part of the housing recovery then and particularly now. So we were by de facto -- because we are in land development, we've been involved in multifamily and have believed that it's a great opportunity and just a natural extension from our single-family business. So we capitalized on that, and it didn't take much of a ramp-up relative to staff to be able to establish the position in the platform that we have today. The pipeline that's been developed to date, I think, is a good start, and it's healthy. But we've managed it in such a way that it works within a C corp, and also given the capital constraints that we have.

Understood. Because you know -- I guess to take the question or more, I guess, the issue, the strategy seems to be continuing down the path of more or less developing and then flipping these properties upon completion, where then, after all, you're forced to then do it over again, going to develop a new property and then flip it. I think it was mentioned in your presentation you are looking to sell Midtown this year, the property that you own 100% of. And to us at least, it couldn't be more clear that if you really want to maximize and increase long-term shareholder value, you'd be far better off holding onto these properties, building up a substantial portfolio of income-generating properties. This way, you would be able to grow annual and operating income. You would also have, like you mentioned, minimal much -- lower capital requirements overall, where you would be able to have a little bit more flexibility in terms of the overall Company. But we seem to be continuing with the strategy where we constantly have to recycle capital, which I would say only adds more risk in inconsistency earnings.

So it's kind of hard. So I understand the move into multifamily, but it's kind of hard (technical difficulty) in our opinion the strategy of developing and flipping rather than building a real pipeline of solid portfolio where we see, on an annual basis, real NOI growth and asset growth.

David, your point is well taken. And as it relates to the strategic review for Forestar, that is certainly one of the alternatives that we are exploring. But keep in mind, too, when you said throw off income, typically these new multi-family developments -- due to GAAP accounting, you don't throw off much GAAP income. So keep that in mind.

Yes, I forget about accountants (multiple speakers) cash flow and earnings. I'm not -- as investors in the Company, wherever the accounting may be, okay, that's understandable. But in terms of building value and generating cash flow, you get whether it's GAAP or whatever it may be, it doesn't really make a difference at the end of the day.

Yes, David, I wouldn't argue with you. If you build up enough of a portfolio and head that direction, then you've got to make some -- you've got to be willing to make some structural decisions. But I will say this: relative to the reinvestment risk, I wouldn't argue that.

But keep in mind you said why did you get in the business and the strategy and where we are today. If you look at the presentation today and the previous presentations that we've made, just through the development, we create quite a bit of both earnings as well as gains and profits. It's very impressive. We have been successful to date of being able to reinvest and find new parcels and new locations and sites. So (multiple speakers).

I understand. I commend you for that, and you definitely had a -- it's been impressive the results you have had in terms of building it. But I would say this. If you look at the stock price and where the stock is, I would say our clear rationale is any investor analyzing, looking at this Company sees you are paying close to $30 million in annual interest expense. And the question then comes, what happens to our lot sales and our ability to monetize these developments in the event of a cyclical slowdown or an economic slowdown of growth. What's going to happen then?

On the other hand, if we -- this wouldn't be a major concern to an investor if we had a portfolio of operating assets with recurring cash flow that could fall back on and handle this -- handle that interest. At the same time, you'll be able to, because of the minimal capital requirements, have the financial flexibility to pursue activities here and there and opportunities that come on the horizon. So I would just leave it at that.

If you are a company, in our opinion you are supposed to be increasing shareholder value and building something for the future. And it doesn't -- by building and flipping, you're not really building anything at the end of the day, but adding to inconsistent earnings. Yes, over time, it might grow, but they are inconsistent and require a lot of capital. And I can really only imagine what this Company would be if income-generating assets were maintained. And I think you look at a company like Consolidated-Tomoka -- if you take a look at that company and take a page out of their playbook, they're trading at a substantial premium to book value. And I could only imagine if we took a page out of their playbook and went down that direction that we would be hopefully one day trading at the same type of level and getting the value that we deserve more or less. So I appreciate it, and thank you very much.

Thank you, David. Okay, that was our last question for the morning. Once again, I want to thank everybody for joining us today on our earnings conference call, and I hope that you have a great day. Thank you.

This concludes today's conference. You may now disconnect. Have a great day, everyone.