Forestar Group Inc (FOR) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second-quarter 2016 Forestar Group 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, this conference is being recorded.

I would now like to turn the call over to Anna Torma. Please go ahead ma'am.

(technical difficulty) webcast this morning to discuss an update on Forestar's previously announced key initiatives and second-quarter 2016 results. I'm Anna Torma, Senior Vice President (technical difficulty) 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 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.

Now let me turn the call over to Phil to provide an update on our key initiatives.

Thank you Anna. Good morning and thanks for joining us. I'll make a few remarks and then turn it over to Chuck for results on the quarter. We will then open it up for questions.

As reflected in our slide deck, over the past 10 months, we have made significant progress towards transforming Forestar. Our new board and management have been and remain focused on maximizing shareholder value with a heavy focus on realizing the highest after-tax value from our diverse portfolio.

Let me highlight some of the key results we've achieved. First, our core community development business sold 773 residential lots during the first half of this year. We remain on track for 1,600 to 1,800 lot sales for the year. Second, we generated $366 million in total pretax cash proceeds from the non-core asset sales since the end of the third quarter of last year. Third, we exited the working interest oil and gas business and eliminated future capital allocations to it through the sale of the Bakken and Kansas Nebraska assets for approximately $81 million earlier this year. Fourth, we significantly reduce leverage and strengthened our balance sheet by retiring nearly all of our high-yield debt and some convertible securities. Fifth, we sold five our 10 multi-family assets and are working with our partners to maximize the sale proceeds from the remaining three venture owned assets and the two sites we own in Austin. And the last highlight here, we made significant progress on our process to monetize our remaining timberland assets.

Let me now shift to cost reductions, which is Slide 4 in your deck. As reflected in the slide, we have cut our SG&A significantly, and have a new target annual run rate of $33 million. We expect to achieve this target run rate with the completion of previously announced non-core asset sales.

You can also see here that $7 million included in the $33 million annual SG&A run rate projection is project level cost. So taking that out, people and non-property operating expenses are projected to be down to $26 million.

We worked very hard and accomplished a great deal in a short period of time. We are committed to further reducing expenses as we monetize additional non-core assets.

And so the next obvious question is, great, now what? I want to make two points on that question.

First, we have an outstanding board that is very talented, experienced, actively engaged and has worked very closely with the management team throughout this transformation. All of the obvious questions on what's next have been and are actively being considered by the board.

To be more specific, the board and management are very much aware of the idea of economies of scale in the community development businesses and the challenges faced by a small-cap public real estate company to recognize value over the long run. The board is actively discussing these issues and others and the best next steps for Forestar.

Second point here, as I've pointed out on previous calls, realizing the highest value from assets often involves a process that is better served by speaking in past tense about accomplishments instead of making forward predictions on expected results. This applies to Forestar's real estate and natural resources assets as well as securities repurchases.

So let me close by reiterating that the board and management are very focused on continuing to generate value for our shareholders, and we carefully factor in the time value of money in all of our decisions. We will continue to share our process with all stakeholders in a rational fashion and we look forward to updating you appropriately as additional decisions are made.

Now I'm going to turn it over to Chuck, who will highlight the second-quarter 2016 results.

Thank you Phil. I would also like to welcome everyone joining us this morning. I'll provide a review of our second-quarter 2016 financial and segment results.

On Slide 5, in second quarter 2016, we began reporting our non-core oil and gas working interest asset results as discontinued operations as we have substantially exited, as Phil said, all these assets with the completion of the Bakken Three Forks sale in the second quarter 2016. We will no longer allocate these results to our segment results or continuing operations. In addition, we changed the name of our oil and gas segment to Mineral Resources to reflect this change and will only include the results of our own mineral interests going forward.

Net income from continuing operations was $11.7 million, or $0.28 per share, compared with net income from continuing operations of $2.5 million, or $0.06 per share, in second quarter 2015. Loss from discontinued operations net of income taxes was $2 million in second quarter 2016, or $0.05 per share, and $37 million loss in second quarter 2015, or $0.87 per share. So after discontinued operations, Forestar reported GAAP net income of $9.6 million, or $0.23 per share, in second quarter 2016, compared with a net loss of approximately $34.5 million, or $0.81 per share, in second quarter 2015.

Now let's look at our overview of our segment results in the second quarter. Real estate earnings were $73.3 million in second quarter compared with $15.5 million in second quarter 2015. I will provide additional details on the real estate segment results in just a moment.

Let's turn to Mineral Resources. Mineral Resources segment earnings were $900,000 compared to $1.8 million in second quarter 2015. The decrease in earnings is primarily due to lower oil and gas prices and production volumes related to our own minerals, but was partially offset by cost reductions and offsetting -- it was offset by lower operating costs over the year.

Other segment results were a loss of $200,000 in second quarter 2016 compared with breakeven results in second quarter 2015. Fiber revenues have decreased due to the deferral of timber harvest activity as a result of our initiative to explore the opportunistic sale of our timberland and undeveloped lands.

Now let's turn to Slide 6, which will take a more detailed look at activity of the real estate segment. Second-quarter, again, 2016 real estate segment earnings were $73.3 million compared to $15.5 million last year.

Significant items for the quarter are as follows. We sold the Radisson Hotel and Suites in Austin for $130 million, which generated a $95.3 million gain. We sold our 11 multi-family community in Austin for $60.2 million, generating a gain of $9.1 million. And we also sold Dillon, a multi-family site in Charlotte, for $26 million, generating $1.2 million in gains. In addition, we sold 5,425 acres of undeveloped land for an average price of $2,360 per acre, generating $10.6 million in segment earnings. This consisted principally of acreage sold in Texas.

Now let me turn to our core community development business for the quarter. As Phil mentioned, or the release mentioned, we sold 489 residential lots in the second quarter, which was in line with second-quarter 2015 levels, but was up approximately 72% over first quarter 2016. Average lot price was $66,600 per lot and average lot gross profit was approximately $23,900 per lot. We also sold three commercial tract acres for over $376,000 an acre and 10 residential tract acres for $35,500 per acre.

During the quarter, we completed the review of five previously identified non-core community development assets. Of these five assets, two are legacy Texas coast properties purchased in 2006 targeted at second-home resort purchasers. The other is not located in our core markets. We approved business plan changes in the quarter related to these projects, and incurred $48.8 million in non-cash impairment charges. We plan to exit these assets over time, reducing our annual carrying costs and generating tax losses to offset tax gains from other non-core asset sales. In the appendix, we provided a slide to provide additional information on the five communities or assets in which we took the non-cash charges in the quarter.

Let me turn to the last slide and provide an update on our capital structure and the progress in transforming the capital structure. We have significantly reduced our outstanding debt and annual interest expense burden over the past three quarters which has strengthened our balance sheet and created financial flexibility. We have used non-core asset sale proceeds to reduce leverage and the second quarter 2016 alone reduced our outstanding debt by nearly $261 million, and reducing annual interest expense going forward by approximately $19.7 million. These actions were taken through a cash tender offer on our -- related to our 8.5% senior secured notes, open market purchases of both our senior secured notes and convertible notes, and paying in full project level debt. As a result of these actions and at the end of the second quarter 2016, our total debt to total capital ratio was 18% compared to 46% at the end of the third quarter 2015 with nearly $320 million in available liquidity, of which $107 million was in cash on the balance sheet.

We'd like to now open -- that's our prepared comments for the call. We'd like to now open it up for questions at this point.

(Operator Instructions). Mark Weintraub, Buckingham Research.

Thank you for all the details. And one question. So, you had, as you indicated previously, identified the five non-core community development projects where you change strategy on. Is it correct to conclude that this process has now been kind of thoroughly done and there are no other community development projects that you identify as non-core, or is this something that is sort of ongoing and we could get new indications sooner rather than later?

It's Chuck. I'll start by answering. As we announced previously I believe it was at year-end, certain projects that were non-core in community development, our process, one of our key initiatives is to review the entire portfolio. I'll tell you that's an ongoing process, but I'll also tell you that two of these assets that I mentioned in my remarks were Texas Coast legacy Texas Coast property purchased over 10 years ago, two properties undeveloped north of Denver that I think are 30 miles to 40 miles north of Denver that aren't in our core MSAs that we develop in, and then an additional legacy project that we have in Bastrop, Texas. But the point is it's a continual process that we do to review returns and what's the best use of the investment and capital allocation. But our current intentions are obviously to develop our remaining projects and continue forward with those. So that's my comment there on that question.

So, is it fair to think of it that essentially you cleaned up the portfolio with these actions and, sure, the world can change from how you expect it to be, but that you've essentially cleaned up the portfolio relative to the world as you see it today?

Yes. Based on our current intention, yes. We plan to develop the remaining projects out.

And the other thing I will tell you is these projects, we consider not only the development dollars going in or whether we would develop these out, we also consider with the non-core asset sales. And as we look at tax savings and tax consideration, these projects were older legacy assets with high tax basis, and the decision was made that exiting these now and offsetting tax gains from other assets was a good strategy for the Company. So, we considered not only the future development of these, but also current cash needs and allocations and tax savings.

Makes a lot of sense. I guess what I'm trying to get at, and I realize this may not be a question you can or would want to answer, but whether or not -- you've now pretty much gone through the portfolio, identified the assets that would likely have meaningful write-downs, and they are now out of the portfolio, or whether or not that is not a conclusion one can jump to, that would be premature to conclude that.

I think significant impairments for the second quarter, and based on our intentions to not develop these and change the business plan, I would say that we believe in our remaining 50 so odd projects in community development -- that our community development plans there are to continue to develop those out and realize value for shareholders.

This is Phil. I would add to that. It's an ongoing process. We are constantly reviewing our portfolio. At the present time, it's our present intention to continue to develop all of the communities in our community development portfolio and take the action we've already talked about on the multi-family assets that we've got.

Okay. Thanks very much.

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

Thank you. Good morning everyone. So, I haven't had the opportunity to do this very well, but if we were to back out the asset sales like Radisson in 11 and Dillon, what would sustainable contribution from residential lots be like? Should we look at that as like $73 million in earnings less the $106 million in asset sales and add back the $48 million in impairments? Would that be the way to think of it going forward?

Yes, I think that's the math. Yes, you can definitely do that. And I think as we in the release and as we file our Q next week, there will be more transparency into that. And we lay out very well the gains and the returns on each of those assets. So I think you can get to that number.

Okay. My second question was on the timberlands that are being marketed. Can you characterize them? Were they typical southern plantations that were established by a timber company but operated for a decade by a real estate company? And what are the stocking levels? I guess, first of all, should we think of them as southern plantations?

Are you talking about what we sold in the quarter, or what we are marketing for sale with LandVest that we previously announced?

Yes, the $70,000 that's being marketed by LandVest.

This is Phil. I'm going to let -- Michael Quinley is here, and he has been managing that process for us, so I'm going to let him respond to that.

These are primarily timberland products. They do have -- some of our portfolio has what we call the higher best use categories where they have certain categories or strategic enhancements like road improvement, or they are in areas that have some type of maybe a farm and rec program. We call those the timber plus, but these are just traditional timberland properties which we've now decided to identify and take those as non-core and take those and monetize those to the shareholders.

But even in the South, we've got to kinds of timberlands, the ones that have been established effectively like a row crop, and then the other that are I guess more wild and haven't been cultivated. So --

These are really timber investments that we have improved as far as they are not just wild. We are SFI certified. We have different types of management practices. We do thinnings throughout, as Chuck mentioned earlier. We have delayed those as a result to not take timber off of the property that we'll be ending up selling.

So the stocking level could be quite good?

Yes, the stocking levels are pretty good, and this is not something that we -- we are not a clear-cut. We are not in there. These are -- we have really good interest on these properties. And it's a valuable commodity. There's timber on the property. We didn't clear-cut all this property 10 years ago, and now we are looking at just dirt.

This is Phil. We are in the middle of the process, and as I said in my remarks, we are very pleased with the progress we've made and we feel very, very good about how this is progressing.

Thank you. I appreciate that. And I wasn't trying to -- I think it's great that you're not negotiating on the phone in public. That's why I just wanted to get a characterization of how they were as opposed to -- we've got a view on values. Okay, thank you.

Mark Weintraub, Buckingham Research.

Just coming back to the real estate lot sales, and I think, in the second quarter just ended, the gross profit per lot was about $24,000, and I know I think it was like $25,000, $26,000 in the first quarter as well. Last year was a little bit north of that, more in the $30,000s. I'm just trying to get a sense as to whether or not that's primarily a function of mix, whether it's a function of particular the Texas market having softened a little bit. How would you characterize this year versus what we were seeing last year?

This is Phil. It's a combination of mix. The other thing, and Michael Quinley can add more to this, but the other point I would make is, if you compare it to last year, you have to also compare last year to the previous year. So, last year was exceptionally high, and this year, our margins are solid. It's just they are not as high as last year partly due to mix but also because last year was significantly higher than previous years. And that was also a function of mix also.

If you look at the lot margins in 2015, they were higher due to multiple projects that had higher prices, lot prices, which produced a higher margin. These projects we've either sold out of those or we haven't produced any lots that have sold thus far in 2016.

We've had some properties that have some additional cost increases. That has impacted margins, but if you look at the margins that we are producing in 2016, they are really representative to kind of a normal margin.

If you go back to what Phil was saying, if you look since 2016, our average margin on the lots sold is about $20,500 and our average lot sales price is about $55,000. So if you take those kind of percentages and then look at the $66,600 that Chuck talked about, we are hitting pretty much right on target.

Okay. That's helpful. How would you characterize the market today? Is it -- has it softened a little bit, or is it -- how would you characterize it?

In most of our markets, we continue to see stuff to be fairly steady. The activity for those entry-level projects, they are just crazy aggressive.

If you look at markets that are kind of slowing, you can say that Houston in our portfolio, our Houston mix is only slowing in those really northern and kind of far north markets and west, and it's on those products that are priced over $400,000.

In our markets, we are seeing our builders continue to do the takedowns without any kind of delay. However, on those newer opportunities, specifically those targeting kind of a second move-up buyer, we are seeing a little change in negotiating terms whereby the builder is requesting more of a lot option contract as opposed to guys that would previously buy in bulk. And as I said, on that entry-level product and first move-up product, it's becoming very, very aggressive, the builders are, and so what we're seeing is just a very solid and steady market for us.

Great. And would you characterize your lots as more geared to that first move-up and entry-level, or how would you characterize the lots you have?

It's a real mix. It's a real mix, and the great thing we've got is we've got market diversity in the different states that we operate in, and we have different price points and different product mix. So it's a very mixed portfolio.

Great. Thank you for the color.

(Operator Instructions).

No other questions? Great. Thank you very much. Enjoy the rest of your summer.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a great day.