Forestar Group Inc (FOR) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Forestar Group Q1 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (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 an update on Forestar's previously announced key initiatives and first-quarter 2016 results. I am Anna Torma, Senior Vice President Corporate Affairs. Joining me on the call today is Phil Weber, Chief Executive Officer, and Chuck Jehl, Chief Financial Officer.

This call is being webcast and copies of the earnings release and presentation slides are now available in the Investor Relations section of our website at ForestarGroup.com.

Before we get started, let me (technical difficulty) please review the warning statements in our press release and our slide as we will make forward-looking statements during the presentation. Now let me turn the call over to Phil to provide an update on our key initiatives.

Good morning and thank you for joining us this morning. As reported, Forestar has made significant additional progress on our key initiatives to reduce costs, exit non-core assets, and simplify the Company. Let me point out a few highlights this morning.

So starting on Slide 3 in the deck, in Oil and Gas during the first quarter of 2016, we sold our remaining Kansas and Nebraska Oil and Gas properties for $21 million and a portion of our Bakken/Three Forks assets for $9.5 million. Additionally, on May 6, we closed the sale of the remaining Bakken/Three Forks assets for $50 million. These combined sales generated over $75 million in net proceeds to Forestar and will reduce annual operating expenses and corporate G&A by an estimated $2.5 million.

Shifting over to the Radisson Hotel, we closed that sale on May 4, which generated pretax net proceeds after debt repayment to Forestar of $112 million. In multifamily, we closed on the sale of our venture interest in Denver 360 at the end of the first quarter. The buyer was our existing venture partner. Also during the quarter, we closed on the sale of our Music Row multifamily site in Nashville for $15 million. These two multifamily transactions generated combined net proceeds to Forestar of $29.1 million.

During the second quarter we also sold Eleven, our multifamily community in downtown Austin, for just over $60 million, $60.2 million. We repaid the debt of $23.9 million and generated pretax proceeds of approximately $35 million.

We also executed an agreement for the sale of our Dillon site in Charlotte. We are expecting the closing on that this month. Downtown Edge, or Pressler, we've also referred to it as Pressler before, is the site we own in Austin, is presently being marketed.

Last on multifamily, we are developing marketing plans with our partners on the remaining three venture assets, Acklen in Nashville, Elan 99 in Houston, and Hiline in Littleton.

Let me shift now to undeveloped land. Forestar has commenced a process to opportunistically exit its remaining 87,000 acres of timberland and undeveloped land. We sold nearly 2,000 acres in the first quarter of 2016. We have retained LandVest to advise us on the sale process on approximately 72,000 acres located primarily in Georgia. The initial bids for this are due in July. We will provide more color as we make progress on exiting this timberland portfolio.

Separately, we are opportunistically selling the remaining roughly 15,000 acres of timberland in Texas. So the easy way to think about it is there's roughly 72,000 acres in Georgia, and 15,000 acres in Texas, and the Texas assets we are selling separately from the Georgia property using intermediaries in Texas versus LandVest.

So, to conclude on asset sales, we've made lots of solid progress on exiting the non-core assets, which is helping to reduce costs and simplify the Company.

Let me shift now to cost reductions, which is Slide 4 in your deck. As we outlined on our last call, we've taken actions to eliminate over $30 million in SG&A cost in 2016 as compared to 2015 actual spending. With the exit of the non-core assets scheduled for this year, we estimate full-year 2016 SG&A to be approximately $56 million.

In the first quarter, we reduced SG&A by 24% compared with Q1 last year. We continue to target an annualized run rate of $39 million or less once all of the previously announced initiatives are fully implemented.

We remain focused on our cost reduction initiatives and will continue to work to further cut costs. As a good example, as we put in the release and furtherance of the Company's initiatives to reduce costs, the Board took action yesterday to reduce its size from nine to seven members, and that will be effective September 1 of this year. So lots of progress in asset sales, lots of progress in reducing costs.

With that, let me turn it over to Chuck, who will review the first-quarter 2016 results.

Thank you Phil. I would also like to welcome everyone joining us this morning. I will provide a review of our first-quarter 2016 financial results beginning on Slide 5.

Forestar reported a net loss of $4.4 million, or $0.13 per share, in the first quarter 2016 compared with a net loss of approximately $8.2 million, or $0.24 per share, in the first quarter 2015.

Now let's look at an overview of the segment results for the first quarter of 2016. Our Real Estate segment earnings were $20.2 million in the first quarter 2016 compared with $9.1 million in first quarter 2015. I will provide additional details on our Real Estate segment results in a moment on the next slide.

Let me turn to our Oil and Gas segment. Oil and Gas results in first quarter 2016 were a loss of $12.4 million compared with a loss of $2.9 million in first quarter 2015. First quarter 2016 includes a net loss of approximately $11 million related to the sale of nearly 191,000 net leasehold acres and 185 gross, 65 net, to our interest Oil and Gas wells, primarily located in Nebraska, Kansas, Oklahoma and in North Dakota as a result of our initiative to exit non-core Oil and Gas working interest assets.

First quarter 2015 segment results include $2.8 million in restructuring costs. As Phil mentioned earlier, the combined Bakken/Three Forks and Kansas/Nebraska transactions generated meaningful cash proceeds to us and eliminate future capital allocation to non-core Oil and Gas assets. These transactions substantially complete our exit of non-core Oil and Gas assets and eliminate working interest exposure to fluctuations in oil and gas prices.

Now let me turn to our Natural Resources segment. Our results were a loss of $600,000 in first quarter 2016 compared with a loss of about $400,000 in first quarter 2015. We have limited harvest activity in first quarter 2016 as a result of our initiatives to explore the opportunistic exit of our timberland and undeveloped land, as Phil mentioned.

Now let's take a closer look at real estate activity in greater detail for the quarter. First quarter 2016 -- this is Slide 6 -- first-quarter 2016 Real Estate segment earnings were $20.2 million compared with $9.1 million first quarter 2015. We sold our 360 multifamily venture interest and also received a development fee for the project for a total of $15.1 million, which generated $10.8 million in earnings, and we sold our Music Row multifamily site in Nashville for $15 million, generating a gain of about $4 million. In addition, we sold 1972 acres of undeveloped land for about $2,890 per acre in the quarter. We sold 284 residential lots, relatively flat with year-ago levels. Average lot gross profit was approximately $25,300 per lot in first quarter 2016, down from prior-year levels principally due to mix sold in the quarter. In addition, we sold eight commercial track acres for over $331,000 per acre.

Touching on OpEx and as a result of one of our initiatives to reduce costs across the organization, first-quarter 2016 OpEx was higher than first quarter 2015 in our Real Estate segment principally due to $1.4 million in one-time severance costs in the quarter as a result of this initiative.

Now, finally, I'll make a few comments about market conditions and then will open the call up for some questions. On Slide 7, we continue to see stable market conditions throughout Texas and in our other key markets. Job growth continues to outpace the national average in most Texas markets as well as Atlanta, Charlotte and Nashville. Houston continues to see slower job growth than that of the national average. The combination of low housing inventories and solid job growth should continue to drive steady demand in our communities.

We ended first quarter 2016 with nearly 1,400 lots in backlog. We are at or above target in all of our markets to meet our full-year planned lot sales of between 1,600 and 1,800 lots for full-year 2016. So we remain optimistic about demand for homeownership in all of our markets.

Thank you for joining us this morning, for your call -- our call, and your interest in Forestar. Now I would like to open it up for questions.

(Operator Instructions). Mark Weintraub, Buckingham Research.

Thank you. Congrats on all of the progress you're making. I guess I'm just trying to think through how, when all the assets have been sold, etc., and we look at what -- the underlying business remaining, and we match that up against the $39 million in targeted annual SG&A costs, how that all plays out. And just here's some simple math and maybe if you could just fill in maybe stuff that I'm missing. If we were just to assume 2,000 in lot sales just as a starting point, and $30,000 or $35,000 in gross profit per lot, and then we've got the SG&A going against that and maybe some interest expense, are there any other kind of big variables that play into what the much more simplified Company is going to look like that you would really highlight?

This is Chuck. I would point you to Slide 4 on our chart that we show the progress from 2015 SG&A actual spend, and then our run rate for 2016 and then the target. I'll tell you the $39 million again is a target and we're working very hard in the Company to further reduce costs to the size of Company that we will be once we sell all of the non-core assets. So I wouldn't stop at that number. As Phil said in his comment, it would be $39 million or less and it's really dependent on executing these asset sales and the timing of those because we are not done. So we continue to stay very focused on that and will continue to reduce that where we can as we exit assets.

Okay. And maybe just a little clarity too. On that project level expenses that are embedded in there, it looks like $10 million or so, what exactly is that?

That's project and property taxes for the projects, if there's homeowner association dues, anything to support and carry the real estate asset on the balance sheet as we own it. So community maintenance, just a lot of different things.

And that $0.30, $0.35 gross profit per lot, which kind of -- I think that is a number that has historically has been thrown out there as representative of potential obviously higher than what was booked in this quarter. Is that in your judgment still a reasonable normalized level of profitability on your lot sales?

This is Phil. I'm going to ask Michael Quinley, President of our Community Development Group, to answer that.

Good morning. The decrease in the margins are really primarily due to mix. I'd kind of remind you that -- two points. First, in 2015, we saw a higher margin than we did in previous years because we had a maturing lot mix and we had higher lot prices. For example, in Houston alone, we had 20 plus more lot sales Q1 2016 over Q1 2015. However, many of those sales in 2015 were at a much higher price. They were kind of our second and third kind of move up product, subdivisions yielding sales prices over $100,000 per lot. Now, we've sold out of that product and now we are replacing that product. And the product we are replacing it with is more of your moderate priced homes and it's the first and second move up which, for Houston, is exactly where you would want to be in today's market. So we expect to see overall margins in line with our historical rate.

Great. Thank you.

And that rate -- Mark, you're right, that rate will be somewhere around 30% to 35% of your lot sale.

Thank you.

Steve Chercover, Davidson.

Thank you and good morning. First quick question. Now that you've exited the Bakken and most of the kind of operating environments in Oil and Gas, will you still be collecting royalties from your original Texas land?

It's Chuck. Good morning. Yes, we will. We have basically substantially exited, as I said, the working interest assets, but our legacy mineral assets in both Texas and Louisiana where we have over 530 producing wells or active wells, yes, we will continue to have that revenue stream. With no -- excuse me, I'm sorry?

Sorry, I did interrupt, but go ahead please.

I was going to say and recall there's no cost participation there and drilling obviously in future wells.

Which is great, you just get checks. So will it remain a segment? And I know it will vary depending on the price of oil. Can you tell us what the price will be, or what the revenue will be?

The answer to whether it will be a segment or not, we evaluate that on a quarterly and annual basis -- I'm sorry Steve, but yes. On the revenue, it's in the $5 million to $6 million range of cash flow streams historically as of last year, so on the mineral platform.

Great, thanks. And then switching gears to water, is there any update you can provide on your efforts to monetize the water?

This is Phil. First of all, we have significantly reduced all of the costs that we've -- we are spending on developing the water assets. We've pretty much suspended pretty much what we've been doing there.

We continue to have some discussions with potential buyers of produced water. We also have had some interest in potentially partnering with us in the Lee County projects that we have the permits on. And then we have some interest in our Houston Liberty County project that we've talked about before.

But I wouldn't want to be -- I wouldn't want to be definitive on anything there. There are kind of ongoing discussions, and with the rain that we've had -- you know we've had record rainfall here. Most of the surface water reservoirs in the state are 100% full, so it's really taken some of the pressure off of looking at groundwater as a conjunctive supplement to surface water.

I was going to be flippant, but decided not to make any noise or comments. And then can you just talk about the strategy of retiring your debt? When all of the sales that are already completed thus far in Q2 were pending, could we think of you guys being net debt free?

I would say, in terms of cash management, liability management, we are working with the Board on that. And as we have more to say about that, we will talk about it.

Okay. Thanks. That's all I had.

Anthony Hammill, Broadview Capital.

Good morning and congratulations on the divestitures and all the work you've done as a board and management team. A couple of quick housekeeping questions and a more bigger picture question. What's the approximate -- and I know the K is not out, but the approximate book value of the Oil and Gas business now on the asset side?

We filed our 10-Q yesterday. Basically our working interest assets remaining about $42 million at Q1 end.

Okay. And the 360, what was that on the books for, the interest there?

Our interest -- let me look to that -- $3 million to $3.5 million. So we had about a $9.6 million gain there. Plus we received a development fee for completion of construction for a total of $10.8 million in earnings.

Okay. I thought it was $3.5 million, so I was shocked at the (multiple speakers)

Yes, that's right.

-- I guess it was. So obviously nice work on that one. And then Dillon is now under contract. Will that also be -- obviously not -- you may not be able to give us an order of magnitude, but will that also be a profitable sale based on what it's on the books for?

Yes. We believe so. Yes, it will be. (multiple speakers) under contract.

Is there anything on, in terms of identifying further non-core assets that may potentially be for sale, is there anything you can do on Cibolo, whether it's the SPID or the interest in the JW Marriott to monetize there, or is that something that's out of your hands?

I want to first clear up, we don't have an interest in the JW Marriott. We've got economic development agreements that we have interest in from the Cibolo master plan and in the hotel from years ago.

So what was your original question on Cibolo, on the (multiple speakers)

Just is there a (technical difficulty) there because there is a cash flow stream that comes off of the resort too. I know it's not an interest, but there is a cash flow stream based on the resort. And is there any way to monetize that separate from -- ?

We are always looking at opportunities to potentially bond the ad valorem tax stream on the district, but keep in mind, in 2014, we did bond the hot sales stream and had significant cash flows in in 2014 of about $46 million to the Company. So those bonds are in place, and they are servicing their debt. And we get residual cash flows from that going forward.

Okay. So with all the sales that have closed and are soon to close, a bit of a follow-on to the last question about whether you could be -- have essentially no net debt. And you mentioned that you're going to get back in due course about uses of cash. What can you tell us about the process there to determine when will be the right time to return cash to shareholders, and in what amount and whether it's a buyback or a special dividend, and if it's a buyback, how that buyback will be -- is there a committee set up specifically to do that? Is there a set Board meeting? Is there anything you can give us in terms of shedding light on the process and potential timing?

This is Phil. I would give you the same answer. We are working with the Board on that. And we'll just leave it at that.

Okay. But the Board is engaging and the departure two board members is not going to delay that process in any way?

No. Our Board is very engaged. The management team and the Board are working very closely together. We have seven outstanding Board members. The two Board members that are retiring also are not retiring until September, so they will be involved in August Board meeting, and we are working very closely with the Board on that.

Very good. I appreciate the work and look forward to an announcement on the return of cash to shareholders. Thank you.

David Spier, Nitor Capital.

Good morning. I know you guys mentioned that you will be accepting bids I believe in July for the timber assets. Any idea of when you would expect that to close? Would you expect the deal to get done before the end of the year?

Yes, there's a chance it could get done by the end of the year, so I would say late fourth quarter. it might spill over into first quarter. And one of the keys there is, as we've said, we are opportunistically exiting, and so we're going to be very, very prudent in how we go through the process and make sure that we are getting a very attractive price for those very valuable assets.

Got it. And how much of the acreage is HBU, high very use acreage, and how much is really more standard timber?

It's Chuck. I'll point you to our 10-Q. We actually have a good disclosure in there that's got a table on the timberland and undeveloped land. So, in the HBU category, a little under 20,000 acres in Georgia, and then we also have a category entitled "undeveloped land" that's about 5,000 acres. And then the balance is timberland in Alabama, Georgia, and Texas.

Understood. And then I would assume that that sale number would come at a substantial increase over book. So have you guys thought about -- and is the sale process around more or less the most tax efficient way to monetize that asset?

You bet. We are constantly thinking about the most efficient ways on the asset sales to be the most tax efficient as possible.

Okay. That's all for me guys. Keep it up and looking forward to more to come. All the best.

Mark Weintraub, Buckingham Research.

Thank you. Maybe a bit of a follow-up to the last question in some regards. Given the sales that have been completed, including the ones in the second quarter already, can you give us any sense as what cash tax implication there would be when you net it out all together?

As kind of a follow-on to David's, we're trying to be as tax efficient as possible on the asset proceeds. We've got $37 million in NOLs that carry forward from 2015 and about $3.5 million in AMT tax credits. So we will utilize that and then any other opportunities and strategies that we may have as we exit other assets.

And did you get any tax benefits from the sale of the Oil and Gas business this year?

No. I think -- remember on the last call we had a discussion about that. The $80 million roughly in Kansas/Nebraska, and the Bakken that we have sold year-to-date, those assets approximated or approximate -- the tax and book approximate each other. So very little cash tax leakage or benefit there at all on the Oil and Gas. We have taken those deductions, as you recall, intangible drilling costs in the year drilled and we have not drilled any wells or participated in some time. So the benefit of those deductions have been taken.

Okay, thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over for any closing remarks.

This is Phil. Thank you very much for joining us this morning.

As we noted in the release and our earnings statement, we are making a lot of progress. We continue to work hard. We are very pleased with the sales prices on the Radisson, Kansas/Nebraska, the Bakken, and the multifamily communities that we've sold. Several exceeded our NAV range and all were within our NAV range. And we are going to continue to use our NAV to guide us both on our asset sales and our future capital allocations as we go forward.

So thanks for your time today, and we look forward to making progress and continuing to work hard. Thanks a lot.

Have a great 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.