Forestar Group Inc (FOR) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forestar second-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Anna Torma. Please go ahead.

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 2015 results. I'm Anna Torma, Senior Vice President of 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 opening remarks.

Thank you, Anna, and I'd also like to welcome everyone who's joined us on the call this morning. On May 12, we announced that the Board and management unanimously approved and initiated a focused plan to enhance shareholder value by growing net asset value through investment in real estate, our core business.

Execution of the following four principal initiatives is key.

First, as a market-driven company, we'll make disciplined investments in acquisition, design, entitlement, and development of highly desirable residential and mixed-use communities. That's the cornerstone of Forestar's real estate.

Second, we'll invest in our multifamily business with objectives of growing net asset value and increasing recurring cash flow. As a market-driven company, we will evaluate each project in determining whether the property provides the greatest value as a longer-term hold or a sale.

Third, harvesting cash flow from our non-core oil and gas business by significantly lowering capital and operating costs.

Fourth, given the low basis in our quality timberland, we expect to tax-efficiently transition certain acreage over time, primarily into multifamily. This is an opportunity to create NAV and increase current cash flow.

And last, we're committed to managing the business so that we maintain a healthy balance sheet and adequate liquidity to fund growth or manage through downturn.

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

Thank you, Jim. And I would also like to welcome everyone joining us on the conference call and webcast this morning. As we announced last week, second-quarter 2015 financial results were negatively impacted by almost $57 million in non-cash charges related to our non-core oil and gas properties. Principally as a result of these charges, the Company reported a net loss of approximately $34.5 million or $1.01 per share in the second quarter 2015, compared with net income of $14.8 million or $0.34 per share in the second quarter of 2014.

On an after-tax basis, second-quarter 2015 non-cash charges related to our non-core oil and gas properties were $36.7 million, or $1.07 per share, and include $16.3 million of proved property impairments; $13.5 million of unproved leasehold interest impairments principally associated with the suspension of exploration and drilling activity in Oklahoma, Nebraska, and Kansas, which is consistent with the execution of our strategic initiatives to harvest cash flow from our oil and gas business by significantly lowering its capital investments and operating costs; and $6.9 million of dry hole expenses, principally related to an exploratory well in Oklahoma.

Excluding these special items, second-quarter 2015 net income was $2.2 million or $0.06 per share, as compared with net income of $14.8 million or $0.34 per share in the second quarter of 2014.

Turning to our segment results. This next slide illustrates our second-quarter 2015 segment financial results, as reported, compared with second-quarter 2015 segment results, excluding the previously mentioned special items and second-quarter 2014 actual results.

Let me begin with our real estate segment. Real estate segment earnings were $15.5 million in second-quarter 2015 compared with $27.3 million in the second quarter of 2014. This decline in year-over-year results is principally due to a $10.5 million gain associated with the exchange of leasehold timber rights for 5,400 acres of undeveloped land from the Ironstob venture in the second quarter of 2014. Excluding this gain, real estate segment earnings in second-quarter 2015 were in line with prior year, reflecting relatively stable market demand in our communities and low housing inventories.

Oil and gas segment loss in the second-quarter 2015 was approximately $56.9 million compared with earnings of $9.5 million in second-quarter 2014. This year-over-year decline was driven by almost $57 million in non-cash charges related to our non-core oil and gas properties.

Excluding these charges, our second-quarter 2015 oil and gas segment results were essentially breakeven, as the decline in commodity prices was offset by increased oil production and significantly lower segment operating expenses.

Other natural resources reported essentially breakeven segment results in the second-quarter 2015 compared with earnings of $2.1 million in second-quarter 2014. As a reminder, our other natural resources segment results in the second quarter of 2014 included approximately $1.4 million in gains related to a groundwater reservation agreement and the partial termination of a timber lease associated with land sales from our Ironstob venture.

Principally as a result of the $57 million in non-cash charges related to our oil and gas segment, the Company reported a total segment loss of $41.4 million in second-quarter 2015.

Excluding these non-cash charges, second-quarter 2015 total segment earnings were $15.1 million compared with $38.9 million in the second quarter of 2014.

Now let me turn the call back over to Jim to discuss our segment operating results, market conditions, and the further execution of our strategic initiatives.

Thanks, Chris. Although our second-quarter financial results were certainly not up to our standards as a result of non-cash charges and depressed oil prices, I continue to be encouraged with our real estate business. We have very desirable communities in locations where home buyers or renters want to be.

Let me begin the review with our real estate segment.

Real estate segment earnings of $15.5 million in the second quarter were down $11.8 million year-over-year, principally due to $10.5 million gain in the second quarter of last year that resulted from the exchange of timber leases in the Ironstob venture for fee ownership. In addition, mitigation credit and undeveloped land sales were lower in the second quarter of this year.

Most important, market and builder demand for finished lots remained steady, as we sold 519 lots during the quarter. We continue to focus on maximizing value, which equates to managing for lot margin first, followed by velocity.

For the quarter, lot sales price averaged $73,400 per lot at an average gross profit of $34,400. And last, we sold 783 acres of non-core residential tracts near Atlanta for approximately $4 million, generating $1.3 million in earnings.

Shifting gears to an update on our view of the Texas housing market conditions. Given the decline in oil prices, we closely monitor the Texas economy housing markets, looking for signs of weakness or slowdown. As the charts on the left indicate, new home inventories remain at low levels; and demand, measured by job growth, is outpacing the national average in all markets except Houston. Even though there has been a slowdown in Houston's job growth, we've yet to see a widespread impact on new home starts and sales.

Current market intel notes that new home price points above the $400,000 range has met some resistance. But below that price point, which is where our communities are priced, demand continues to be stable. At the lower price points, particularly for new home entry level, demand is strengthening.

One of the more common questions we get asked is, how is business in Texas? Or in particular, what are you seeing in Houston? To address the questions, we provided year-to-date lot sales by market on the right. As the schedule illustrates, about 45% of Forestar's first-half lot sales were in Houston. In fact, we closed 158 lots in Harper's Preserve in the second quarter. That's a community located just east of The Woodlands. Internally, we believe these paydowns will be a good barometer for the market. As it turned out, builders didn't hesitate to close, and I think that's a good sign. So I'd sum it up by saying Texas is in good health today.

Relative to the balance of the year, let's take a look at the next chart. One way to view or think about the balance of the year is backlog, which is illustrated on the left. We continue to have just under a year's worth of sales under option contracts. As I noted on the last call, and I'll repeat today, we still expect lot sales to be in the 1,800 to 1,900 range; heavier in the fourth quarter than the third, which is just a function of construction or development schedules. Developments in Houston are recovering from 40 inches of rain in the first half of the year, and that's 18 inches above normal.

As noted, we have about 300 lots in development that are scheduled to close late in the year that are dependent on normal weather conditions, contractor performance, and administrative approvals. If there is a potential risk to our estimate, it's development delays.

Moving to multifamily. Similar to single family, multifamily market conditions continue to offer opportunities. The pros: one, strong job growth for rental cohort 20- to 34-year-old. Two, household formation is accelerating with job growth and an improving economy. Three, occupancy and rent growth remain strong. Four, difficulty qualifying for single family mortgages persist. Five, a preferred lifestyle for locations that provide mobility, flexibility, and easy access to jobs and recreation. And last, as the chart illustrates, housing is generally undersupplied, particularly multifamily.

The cons: one, some concerns regarding affordability, reflective of a strong rent growth. Two, construction costs are more difficult to control, particularly materials and labor or crafts. And last, sites are becoming more difficult to underwrite.

On balance, we continue to be optimistic relative to our multifamily business and we'll stay true to our strategy: invest and operate with discipline.

At the end of the second quarter we had about 2,600 units in six markets in our portfolio: two completed and stabilized projects, and another six projects under construction. In the second quarter, we started construction on two new wholly-owned multifamily projects expected to be longer-term hold, one in Nashville and one in Charlotte, representing over 600 units. I'll provide additional color on these two projects in the next series of slides.

Eleven, a wholly-owned project in downtown Austin, remains 95% occupied and expected to generate about $3 million in net operating income in 2015. Our Midtown Cedar Hill project near Dallas is substantially complete and nearly 84% leased at quarter end. As I mentioned last quarter, Midtown is being marketed for sale in the second half of this year. Given our new strategy, we will evaluate offers and determine if the greatest value is through a sale or holding for recurring cash flow and value appreciation.

During the second quarter we delivered the first units at our 360 project in Denver, which is now over 95% complete and over 65% leased. In addition, we delivered first units at Acklen in Nashville, which is now over 95% complete and about 34% leased. And we expect HiLine in Denver to deliver units in the third or early fourth quarter of this year. And last, we currently have a site for potential development in Austin. And in addition, we are evaluating other sites in several markets.

Now for additional color on our two multifamily projects recently started. One of our second-quarter multifamily starts is in Nashville and located on Music Row, which is how the project got its name. As standard with our Class A communities, significant planning and design, expertise, operate with a common mission: to develop a property and lifestyle that prospective renters can't live without.

Equally important is to manage the development process then deliver at a cost that generates a return, cash flow, and value that meet our standards. All-in costs for the 230 units at Music Row is expected to be in the $47 million to $48 million range; and, when stabilized, net operating income in estimated to be above $3.5 million.

Another critically important element is location, which is the next slide. Our multifamily team assembled six parcels and a parking lot along Music Square West, followed by a successful rezoning for multifamily. Since that time, a temporary moratorium has been placed on rezoning in the area. Within walking distance are 20,000 Vanderbilt and Belmont University students, and approximate to 20,000 employees associated with four hospital campuses.

In addition, the surrounding employment base includes 7.5 million square feet of office in the central business district, 1.5 million square feet of retail, and easy access to nightlife at The Gulch in Midtown. We expect construction to be completed in mid-year 2017 and reach stabilization within the following six months. Once again, this 100%-owned property is expected to be held longer-term.

Moving to Dillon, located in Charlotte. Our second start in the quarter is called Dillon, and located in Charlotte. This 379-unit Class A project is located less than 2 miles from downtown Charlotte. The structure will have five stories of apartments, including high-end studio, one- and two-bedroom units, on top of three stories of parking. In addition, the project will include 12,000 square feet of ground floor retail.

Development costs for Dillon, including land, is expected to be in the range of $81 million to $83 million. Construction should be completed in the next 24 to 30 months, and stabilized late in 2018. At that time, the project is expected to generate net operating income in the $6 million range. Like Music Row, location is key for Dillon.

Charlotte has emerged as a financial distribution and transportation nexus for the Southeast, and is one of the nation's fastest-growing regions. Dillon is a short 1.9 mile commute to Charlotte's central business district, comprised of 21 million square feet of office and 83,000 jobs. And as you can see on the map, the project is located across the street from the Carolinas Medical Center, with current staffing of 2,400 employees. Also in close proximity are parks, retail, and entertainment. Like Music Row, Dillon is 100% owned, and is expected to be held longer-term.

I want to leave you with two thoughts on our real estate business. First, housing is undersupplied in underlying fundamentals. Demographics, household formation, inventories, and job growth are healthy. I believe this to be equally true across our target market for both single and multifamily communities, evidenced by the chart on the left. We are generating some of the highest gross profits from lots since 2006.

Second, we're focused on increasing net asset value by investing with discipline in real estate, our core business. Year-to-date, we have acquired five future community development sites in five markets which should yield over 640 highly desirable lots. We started two multifamily projects on balance sheet and in the quarter, with eight multifamily projects stabilized or under construction, representing almost 2,600 units in solid locations.

Shifting to other natural resources. During the second quarter this year, other natural resources segment results were essentially breakeven, down from $2.1 million in the prior year. This is principally due to reduced short-term mill quotas. For comparative purposes, 2014 included earnings of $1.4 million associated with a gain on a timber lease termination and execution of a groundwater reservation agreement.

We sold over 55,000 tons of fiber; that's down 49% compared with the same quarter last year. For 2015, we continue to anticipate that fiber sales are going to be in the range of 275,000 to 300,000 tons. Average fiber pricing was down 19% compared with the same quarter last year, and that is due to higher mix of pulpwood volume and lower pulpwood prices.

Moving to oil and gas. Second-quarter 2015 oil and gas segment results were a loss of approximately $56.9 million, compared with earnings of $9.5 million in the same quarter of last year. This decline is principally due to the previously mentioned impairment. Excluding these non-cash charges, second-quarter 2015 oil and gas results are essentially breakeven.

Contributions from production volumes is up $4.6 million. That's reflective of a 24% increase in working interest production, mostly attributable to production growth in the Bakken/Three Forks. Nine new wells came online in the second quarter, most of which were committed to in 2014. We ended the quarter with 10 wells waiting on completion, with about a 6% working interest on average.

Despite the decline in costs and increased production, average realized oil prices were down almost 46% from the same quarter last year, offsetting these improvements. Four new AFEs were signed during the second quarter for wells located in the core of the Bakken/Three Forks. In most cases, these are wells proposed in units with existing production, which increases the accuracy of our EUR estimates.

We also elected not to participate in other wells due to low returns, once again due primarily to a combination of higher costs and lower EURs.

Our focus is on harvesting cash flow and preserving value. In the second quarter, the oil and gas segment generated about $8.8 million in cash flow prior to capital investment. Excluding restructuring costs, we've reduced oil and gas segment operating costs by 44% compared to 2014. And, furthermore, we are pursuing additional reduction.

As I shared with you on last call, our plan for 2015 new capital commitments is expected to be in the $10 million to $15 million range as compared to approximately $110 million last year. So far, the majority of capital spending this year is associated with a carryover of 2014 commitments. As one of our key initiatives, we are targeting the oil and gas segment to generate cash flow, on an after-CapEx basis, by year end. The initiative is based on quarter-end NYMEX strip prices.

Relative to initiatives, I'll close the call with an update on our progress to date. We believe executing the initiatives will drive net asset value and shareholder value. We officially started the fourth quarter of 2014. We made good progress to date, and we're 110% committed to the plan.

In community development, we've acquired five new tracts for $24 million, representing over 640 future lots that I believe we could put under contract tomorrow. In multifamily, we started construction on two new projects on balance sheet, and expect to add over 600 units to the portfolio, growing net asset value and expected to generate an estimated net operating income of almost $10 million.

As I just stated, we are intently focused on generating cash flow from oil and gas. Excluding restructuring costs, segment operating costs are down almost 45% from 2014, and new capital has been limited to a small number of Bakken/Three Forks wells versus $110 million in 2014.

Company-wide, we are focused on lowering operating costs and expenses across the board, as second-quarter G&A costs were 7% lower than the same quarter in 2014.

The bottom line. I believe we've got the right strategy: focus on growing net asset value; and our employees, management, and Board are committed to executing initiatives designed to maximize long-term shareholder value.

And equally important, we're looking forward to telling you more about it. I'm excited to announce that we'll be holding an investor conference this year in Nashville. The conference will begin with dinner on November 18, with a presentation on housing market conditions. The following day, we'll have presentations from our senior management team followed by a tour of multifamily and community development projects.

It would be a great opportunity for you to spend time with our broader senior leadership team, visit some new projects, and gain additional insight into Forestar. We have a block of rooms that are set aside at the Omni for a limited time, so I encourage you to RSVP to Anna if you plan to join us.

Once again, I want to thank you for joining us on the call this morning, as well as your interest in Forestar.

I'll open up the call for questions.

(Operator Instructions). Steve Chercover, D.A. Davidson.

So, I just want to make sure I understand the nuance. Maybe it's not even nuance; maybe it's just blunt. You are definitely shifting your strategy towards holding the income-generating properties as opposed to developing, selling, and using the funds to fund growth. Is that correct?

Yes, Steve, I think that's materially correct. We will look at each project and make the decision, is it of greatest value to Forestar in its value to hold it longer-term, or to sell it. You are correct that prior to the announced initiatives and strategy that we put out, it was principally a merchant build model and now we're shifting to holding these properties longer-term.

Even Midtown in Dallas, which is for sale, might ultimately turn out to be something that's held. Does that mean you'll change the amount of leverage you'll run the business with?

I'm sorry, Steve. Can you repeat that?

Would the amount of leverage required to run the business change as you hold more assets?

Steve, what I would say -- and I'll encourage Chris to jump in here too -- is that the more stable and the deeper the cash flow, recurring cash flow underpinning is of the business, the more leverage the balance sheet can stand.

Chris, do you want to chime in? Or do you want to tell us what that leverage ratio might be (multiple speakers)?

I would say relative to the construction of these assets, our intent would be to use 60% to 65% attractive project-level financing for the development of those multifamily assets, which today is very attractively priced at -- call it, all-in, in the 2% to 2.5% range. Long-term, if we decide to hold these assets, we would probably look to put more permanent type financing on those, 7- to 10-year range.

So the answer is, yes, I think certainly to the extent we begin to generate a portfolio of multifamily assets that generate more recurring cash flow, the business can certainly have a little bit more leverage. But I would tell you we are still committed to maintaining balance sheet strength and financial flexibility.

So we're going to make sure that even as we grow that portfolio, we're going to want to maintain an appropriate leverage position going forward so we can continue to grow the business.

Okay. And just a couple more questions. What kind of return on capital do you expect on projects like Music Row and Dillon? We saw what the NOIs would be, but what kind of returns?

Yes, in terms of targets, on a return on capital, if you look at the entire asset, it's probably in the 6% to 7% range today for development. From a return on equity perspective, it's probably in the 10% to 12% range on an ongoing basis. So based on our equity investment in a project, assuming we have 60% to 65% financial leverage and about 30%, 35% equity in those communities, based on the cost to develop it, we'd probably be looking at a return on that equity investment in the low double digits, at 10% to 12%. And that would be as stabilization; then, obviously, the hope would be with continued rent growth that those returns would go up from there.

Okay. And last two questions. So the swaps of timberland into urban residential land, is that a like kind exchange?

Yes, that's the intent, Steve. I think as you know that there's minimal opportunity to create value with timberland for Forestar. So to the extent that we can tax-efficiently exchange into multifamily sites and develop, there's an opportunity to create value to maintain the -- some tax efficiency. Plus, there's also a step-up in the cash flow that the asset would generate, comparing apples to apples.

Okay. And finally, switching gears, in your pre-release last week, you said that non-core oil and gas assets are likely to be sold. What about core assets in the Bakken, Texas, and Louisiana?

Yes, the releases have been pretty consistent, Steve. We said that oil and gas operating assets are non-core, period. So I would tell you that the Bakken/Three Forks, Kansas, Nebraska, Oklahoma -- everything but the minerals -- is deemed to be long-term non-core.

Now I will say that there's certainly a difference in the assets between the Bakken/Three Forks -- which is a resource play where we've got really good position in the core, versus Kansas/Nebraska, which is a very nice platform for a conventional play and probably attractive to some of the private operators.

Thank you very much.

Mark Weintraub, Buckingham Research.

Just first, obviously you had the impairment charge at the end of last year on the oil and gas, and now you have the additional write-down. At this point, have you gone through and made all the adjustments that you would anticipate as you go through the process of looking to exit? Or is this a step-by-step process, and there may be more additional actions that would be reflected in the P&L and balance sheet, yet to come in your opinion, at this point?

Mark, what I would say is that we don't forecast or anticipate impairments. There's a process where we look at it on a quarterly basis. A lot of these impairments are price-driven. And so it's very difficult for us to sit here this morning and say either there's more or there's not, because we just -- I think as you well know, it's extremely difficult to predict what's going on with oil prices.

Sure. Well, I guess in this particular situation, why then would have there been no impairment, say, in the Bakken? Obviously the price changes are affecting all of your various oil and gas assets.

Yes, Mark. Big picture, as we look at impairment for oil and gas, as well as real estate on a quarterly basis, the first step in that analysis is basically taking the strip price at quarter-end and looking at those future cash flows that are expected to be generated from those assets. To the extent those future, undiscounted cash flows exceed your basis, you essentially don't have an indication of impairment.

So, every quarter-end, we'll get to look at what our basis is on each of the oil and gas basins that we have investments, take the strip price as of quarter-end. To the extent those undiscounted cash flows exceed our basis, it is unlikely that we would have impairment.

To the extent that those future undiscounted cash flows come up short of our basis, we would then have an impairment, at which point we would discount it back at our weighted average cost of capital, similar to the way we do impairments for real estate.

And at the end of the second quarter, based on strip prices, the expected cash flows based on the proved reserves that we had in the Bakken, exceeded our basis in those properties.

Okay. So effectively you had more cushion in the Bakken/Three Forks, is that the way to (multiple speakers)?

That's correct. There was more expected cash flow than our existing basis at the end of the second quarter, based on current strip prices at the end of June.

And I apologize, so were strip prices, though, higher or lower than when you took -- because you did take impairment on the Bakken and Three Forks at the end of last year, correct?

Yes, most of the impairments, Mark, in the Q4 not related to Bakken/Three Forks. They were located to unproved leasehold interest in Texas and Georgia and Alabama; as well as projects in the Texas Panhandle, principally in the Cleveland and Tonkawa formations that came with the acquisition of Credo. There was not a significant amount of impairment associated with the Bakken.

Okay. And just help me out on the $11 million on the dry hole costs. Was that also somehow related -- why would that be taken now as opposed to have been taken previously?

Yes, Mark, in the second quarter, based on the drilling activity in Oklahoma, and roughly 90 days of production activity, two things occurred. One, our operations and engineering team determined that one of the wells obviously stopped producing oil and gas. So at that point, it was deemed by the operations and engineering team as a dry hole. And when that occurs, you effectively expense those costs because the well obviously isn't producing oil and gas.

In the second case, relative to proved properties, we had a well, and after 90 days of production the oil and gas engineering group basically determined what the ultimate economic recoveries for the well were going to be. And then based on those recoveries compared to our current basis, we took an impairment against that investment as well.

So it's really a function of the oil and gas engineering team looking at each individual well, determining whether it's a producer or not, and then ultimately what the economic recoveries of that well is going to be relative to our current basis in those wells.

Mark, it's not too dissimilar from the dry hole costs that we've taken over the last couple of years in Kansas and Nebraska. Our accounting is based on successful efforts. So when there's either a dry hole or low production, it's taken in which the quarter is determined.

Shifting gears, just on the timberland potential sales, redeployment into multifamily -- at this point, is there any bank, so to speak, from the multifamily activities of potential sheltered income from the timberlands? Roughly, if so, what would that number be, at this stage?

Mark, can you ask that question again, please?

Well, as I understand it, essentially as you -- for the 1031 exchanges you sell timberlands; and then those proceeds can be used for acquiring multifamily properties on a tax-effective basis, so there's no leakage on the timberlands sale. But I believe you can also buy the multifamily first, and then essentially do the timberlands sales after.

So the question is, do you have any -- effectively any bank of sheltering from having already made moves on the multifamily side?

Yes, I understand now, Mark. There's -- as I said in my comments, there's a number of sites that are being evaluated. But there's not a bank of acquired sites that are in place to execute the exchange.

Okay. And then lastly, just wanted to clarify. When you are talking about 10% to 12% ROE on the multifamily, I assume that's in -- is that after-tax or pre-tax?

Pre-tax. NOI.

Pre-tax.

And again, that would be a start. Certainly you would expect rent growth above and beyond that going forward. So longer-term, the returns would hopefully be better than that.

Okay, thank you.

Steve O'Hara, Sidoti & Company.

Could you just talk a little bit about maybe the lots that you bought and maybe the cost per lot there, how that could potentially -- or what the outlook is on, let's say, lot margin due to cost per lot, revenue per lot? And then also just in the quarter, the ventures lot sales seemed high, I think, relative to what it's been recently. Could you just talk about why that was, and if there's any financial impact there? Thank you.

Yes, relative to the lots that were acquired in the five acquisitions, Steve, we are consistent in the underwriting. We underwrite for 35% return on cost, which I explained several times. That equates to a mid-to low-20s IRR. So, it is still a very healthy margin. These are typically smaller communities, anywhere from 200 to 400 lots to manage duration risk.

So from a margin standpoint, we obviously have got some communities selling at some very high margins, and others a little bit tighter. But I think the key message here in answers, Steve, is that we remain disciplined in the way that we underwrite and continue to expect attractive margins going forward.

What was the second part of your question, Steve?

Just on the venture (multiple speakers).

The mix of venture sales. Steve, that's going to happen from time to time. As I mentioned in my comments, there were 158 lots that closed late in second quarter in Harper's Preserve in Houston, and that's in a venture. Typically what we see in some of these projects, especially master-planned, you'll get some sizable takedowns in quarters. So I would tell you it's -- I don't think it's an indication of a trend. It's more reflective of the mix in the quarter.

Okay. And when you get to that -- the 1,800 to 1,900 lots, we're including the ventures in that, correct?

Yes, that's true.

Okay. But you think that -- I guess it sounds like the mix should be different in the second half.

Yes, it's going to vary by quarter a little bit, Steve. But if we look at the balance sheet. and look at investment in wholly owned projects versus joint ventures, there's not a material change. There can be some variability and change from quarter to quarter (multiple speakers).

Okay, okay. And then just on the multifamily strategy, is there a desire to maybe add some sort of, let's say, commercial leasing or anything like that, retail or anything like that, to that portfolio potentially at some point?

And then is there maybe the ability to -- when do you start breaking that -- the results out? I know you gave the NOI on Eleven for the quarter. I think it was for the quarter, for the year. But I'm just wondering at what point -- obviously you got to get more projects in there -- but when do you start breaking that out and reporting on that directly?

Yes, I think you kind of answered your questions. When you get more projects in there, it will lend itself to provide more detailed metrics for the portfolio and also at the project level.

Relative to the first part of that question, Steve, is that we will certainly be opportunistic, given the land positions that we have. But I will also tell you that we're going to continue to be focused on multifamily as well as community development, which is principally single family.

Okay. And I'm sorry, just one more. I know you -- there had been a renovation of the Radisson in Austin. I'm just wondering what type of improvement there's been, possibly in NOI, or maybe rate per room or whatever. If you could talk about that briefly, that would be great. Thanks.

Okay, Steve. The answer is yes; there has been a step-up in RevPAR. We are in the process of finishing up that renovation on the rooms. And I think that the best way to address that is we'll provide some additional color and detail on the Radisson at the investor conference and provide some additional light, as well as insight, on that property.

Okay. Thank you very much.

David Spier, Nitor Capital.

Can you give a little detail on possible future plans for the 3,700 acres that are in entitlement at Lake Houston? I know it's on your books for about under $2 million. But at least from a distance it seems, especially based on the location in Houston and the size of the acreage, that it could represent a significant amount of value.

David, that parcel is referred to as the Lake Houston tract. It's one of the relic and legacy parcels that were associated with Temple-Inland when we spun out. So it's in good location. Location is improving as the infrastructure is being developed. There is currently plans for the extension of some of the major road networks to provide better access to that property.

So, we are principally focused on the entitlements. There is activity around it, so we are encouraged. But I won't speak to value on that individual parcel today, though. But you are right; it's a nice piece of property that looks better today than it did two or three years ago.

Got it, got it. Understood, thanks. And then in terms of the -- just on the strategic initiatives front, I'd say for the past several years there were a couple different strategic initiatives, most of which were not really met with much success. And even in the past quarter, where real estate numbers were pretty solid and the oil and gas is breakeven, the Company still barely made a slight profit. And especially because of the fact the G&A expense and interest expense is still running at about $14 million on a quarterly basis, so I'm just curious to hear your take on the fixed expense side. And if there are any future -- if there are any plans to materially reduce that number.

Yes, David, as I mentioned in my comments, there was some reduction in those expenses quarter-over-quarter. There is an initiative where we are evaluating and targeting, and we're going to get additional costs out of the system. And as I mentioned to Steve, relative to the Radisson, we'll talk more about that at the investor conference.

Got it. Because bigger-picture here, it just seems as if you are running at over a $25 million annual G&A, and then combined with debt, you're basically looking at about over $50 million annual fixed overhead expenses that has to be -- that you have to overcome, essentially, if you want to make profit. That's a pretty big hurdle.

I think you still have around 150 employees, which seems like a significant number compared to some of your peers. I think a company like CTO, which is almost approaching your market size, has 14 employees and pays out $6 million in G&A. So I just think if that's something that can be targeted, that just seems to be one of the big items here. And if focus was placed in reducing that number, there would be a lot more room for profitability. And I think until that number is reduced, we're going to have trouble here.

So I would really -- appreciate the efforts you guys are putting in, but I think more has to be placed on that number in order to make significant improvements. But I appreciate the time, guys.

Yes, David, what I would say is we're down about 40 employees from the 150.

So you are at 110, currently?

Yes, so we're in the 110 range. The strategy and the initiatives that we shared -- streamlining and focusing Forestar enables us to further streamline support as well as G&A costs. So it's all part of the plan.

And is there any way to possibly tackle the 8.5% debt that was taken out in 2014? Because that's running at about over $20 million a year, so is there any way to refinance or somehow approach that debt? Because that just seems to be a major overhang on the expense side.

David, there is some opportunity there. I will tell you today, based on what we see, it's probably somewhat limited. But here, again, as I just mentioned, when we look at whether it's interest expense or G&A or any other cost in the business, it's all on the table.

All right. I do appreciate it. Thanks.

Rob Longnecker, Jovetree.

I just wanted to clarify. So you're totally done drilling in Kansas, Nebraska, Oklahoma? There's no new capital going in there?

Yes, I think I heard your question. We've suspended all exploration and drilling in Kansas and Nebraska.

Is that like you are fully pulling out; eventually you're just going to monetize? Or is that just pending oil prices? Or I'm not sure what suspended means.

Suspended means that we're not investing any capital in Kansas and Nebraska. Obviously at today's prices, it would be very difficult to generate any returns. And with improved oil prices, as we said, these assets are non-core. And also as we mentioned in the recent press release, that there is a likelihood of sale. So, one of the big drivers here is oil price.

Sorry, you said Kansas, Nebraska. What about Oklahoma?

True for Oklahoma as well.

Okay. And the $40 million in carryover that you said you had from 2014 -- is that predominantly in the Bakken?

Yes.

And is that something that you could dial back as well? Or is that something you are fully committed on?

The 2014 commitments, you can't dial back on those. But what I'd say that we've probably have funded the majority of those at this time. And as far as going forward, Rob, we make individual well elections. So, as I said in my comments, there's some that we've elected into, and many others we have not.

And the ones where you have elected into, given strips and the EURs expected, what do you think the returns are now?

Well, we don't elect in until we can generate a 20% return. One of the things that's happened, Rob, within the last 6 to 9 months is the drilling completion cost has come down considerably; which is a big impact to return, because that's all up-front cost, as you know. In addition, the elections are only -- typically made in units where there's existing production, and there is a high level of confidence in what the EURs or the total recoveries are going to be.

Great? That makes sense. And then, given that there's obviously been a lot of impairments, and you guys have done a lot of well assessments and whatnot, is there any way that you guys can provide -- I don't even know, like an updated PV10 or something along those lines, at current strip prices?

Can we provide an updated PV10 at the current strip prices?

Yes, given that there's been so many impairments and so much movement around in your portfolio, that would be kind of useful, from a valuation perspective.

Yes. Rob, we typically don't provide updates on PV10 in reserves, except at year-end. And I don't think the impairments impacted PV10. That's a function of the future production, right?

Well, I guess it is also a function of price. I think you guys have in presentations in the past -- I believe, I'd have to go back -- but I think you had it in a footnote. You had some commentary about what the PV10 would look like at the current strip prices, I think a couple presentations ago.

Yes, would have been year-end 2014, Rob, when we report reserves.

Got you.

Rob, this is Chris. The one thing I would say is that obviously if you look at our basis on oil and gas, ignoring (technical difficulty) at the end of the second quarter it's probably in the range of about $225 million. If you look at strip prices at the end of the second quarter, the expected cash flows out of those proved properties in those units would support $225 million of basis. That's (multiple speakers) but that would be an undiscounted cash flow value.

Got you. Okay, thank you.

Thank you. And I'm showing no further questions at this time.

I'd like to turn the conference back over to Mr. Jim DeCosmo for closing remarks.

Thank you very much. Once again, I want to recognize and thank everyone who's joined us on the call this morning, as well as your interest in Forestar. And I hope that you have a wonderful day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.