Forestar Group Inc (FOR) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third 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 like to introduce your host for today's conference Mr. Chuck Jehl. Sir, 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 key initiatives and third quarter 2016 results. I'm Chuck Jehl. Joining me on the call today is Phil Weber, our Chief Executive Officer and Michael Finley, President of Community Development. This call is being webcast and copies of the earnings release and presentation slides are now available at 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 on our slides as we will make forward-looking statements during the presentation. Let me turn the call over to Phil to provide an update on the key initiatives.

Good morning, thank you for joining us today. November 4th of last year, just over a year ago was my first earnings call as CEO and also was Chucks first as our new CFO. We laid out four key initiatives for the Company to move forward. The first to reduce cost to match our size company and real estate focus and second to review our entire portfolio of assets and we made the point there were likely better owners of many of our non-core assets. Third, to review or capital structure with the goal of matching our leverage and liquidity targets to the core community development business and fourth to review providing additional information on our non-core assets.

One year later is reflected on slide three our transformative results speak for themselves. Let me highlight a few key accomplishments on slide three. We've taken action to reduce SG&A by $50 million and reduced head count by 50%. We have sold almost $425 million in non-core assets reduced debt by approximately $320 million. Significantly reduced leverage and now have a debt to cap of 18% versus 46% and we eliminated $23 million in annual interest expenses. We also provided additional information in our disclosures and discontinued entitlement activities and eight Georgia projects eight Georgia projects totalling 20,000 acres and determined twelve Georgia in title assets would not be developed.

In addition to the past accomplishment I just went through that are listed on page three we are also making additional significant progress. I want to highlight a few key areas from slide four which shows our core and remaining non-core assets at the end of Q3 of 2016. First, in addition to selling five multi-family communities we have completed construction on all three remaining multi-family venture deals. They are all in lease-up and we expect to begin working with our partners to bring these communities to market for sale as we get closer to stabilization. Akron in Nashville is 83% occupied and 85%. leased.

HiLine near Denver is 76% occupied and 79% leased and finally Elan in Houston is 52% occupied and 57% leased. Our remaining two multi-family sites in Austin are under contract and are in (inaudible). Second, we have completed the second round of our timberland sales process and have reached agreement to sell over 58,000 acres of our Georgia and Alabama timberland for an average price of nearly $1,800 per acre. We are expecting these deals to close by year end. We are separately negotiating the sale of the remaining 12,000 acres and mitigation banking credits in Georgia and the remaining roughly 4,000 acres we own in Texas.

We are very pleased with the interest revel in these remaining acres and mitigation assets. Third, we have several non-core community assets under contract and provided an update on the status of these assets on slide 13 in the appendix. These transactions will provide valuable tax offsets to the Radisson hotel sale and other low basis non-core asset sales such as our timberland to minimize taxes paid. Last example here I want to mention you will also note on slide four that we are under contract to sell our Central Texas water assets. You can see a potential path by year-end 2016 for Forestar in a little over one year to have almost completely exited or have under contract to sell almost all of its non-core businesses.

The hotel, oil and gas working interests, timberland, water leases and non-core community development assets. The remaining non-core assets are mostly owned mineral assets in either water royalty interest or owned water rights are either cash flow positive or cost almost nothing to hold. And as with other non-core assets we an active dialogue going on with some potential buyers of these assets. If we can get the right price we are open to selling. We also have a very valuable core community development business that is producing much needed finished lots in several of the top home building markets in the country.

We have over 55 active real estate developments in eleven states in fifteen markets and have developed lots for over 35 national, regional and local home builders in 2016. Builder demand for residential lots in our key communities remains steady. The last point I want to make before turning it over Chuck. Similar to the point we made on last quarter's call, we fully understand that all of these results are good but you want to know what is next? I want to close by reinforcing our Chairman, Jim Rubright's statement in our release we remain focused on maximizing shareholder value including evaluating the next best step for Forestar. Thanks again for being with us this morning and with that I will turn it over to Chuck.

Thank you, Phil. I would like to move to slide five and discussion our-- financial results. As a reminder in the second quarter of 2016 we began reporting our non-core oil and gas working interest result as discontinued operations which at the third quarter end 2016 we have divested substantially all of these properties.

Let me turn to the results. Net income from continuing operations was $16.8 million, or $0.40 per share compared with a net loss from continuing operations of $57.3 million or $1.67 per share in third quarter of 2015. Loss from discontinued operations net of taxes was $7.2 million in third quarter 2016 or $0.17 per share loss and $106.9 million in third quarter 2015 or $3.12 loss per share.

After discontinued operations Forestar reported net income of $9.7 million or $0.23 per share in third quarter 2016 compared with a net loss of approximately $162.4 million or $4.79 loss per share in third quarter of 2015. Now let's look at an overview of our segment results for third quarter 2016. Real estate segment earnings were $15 million in third quarter of 2016 compared to $5.2 million in third quarter 2015.

I will provide additional details on the real estate segment result in a moment. Now let me turn to mineral resources. Mineral resources segment earnings were $1.2 million compared with approximately $100,000 in net income-- segment earnings in third quarter 2015. Mineral resources earnings increased in third quarter 2016 compared with third quarter 2015 principally due to a non-cash impairment charge of $1.8 million in 2015 related to non-operated wells on our own mineral interests.

In addition in third quarter 2016 royalty revenues declined due to lower oil and gas production and prices. Other segment results were a loss of $200,000 in the quarter of -- excuse me third quarter 2016 compared to a loss of $100,000 in third quarter 2015. Fiber revenues have decreased due to the of deferral of timber harvest activity as a result of our initiative to sell our timberland on undeveloped land. Let's turn to the real estate activity in more detail.

Third quarter real estate segment results were $15 million compared to $5.2 million third quarter 2016. Significant items for the quarter as follows, we sold 332 residential lots in third quarter 2016 which was in line with third quarter 2015 levels. Average lot prices were nearly $70,000 per lot and average lot gross profit was approximately $26,100 per lot. We also sold 110 commercial track acres for $76,200 per acre and 243 residential track acres for 26,800 per acre.

On the commercial acres sold,108 acres were from our San Joaquin River Project in Antioch CA, that was sold for $7 million. This sale generated over $37 million in tax losses to offset tax gains in 2016, minimizing income taxes paid as we divest non-core assets and transform our company. In addition in the quarter we sold approximately 6500 acres of undeveloped land for an average price of $2,410 per acre this generate approximately $12.8 million of earnings and consisted principally of acreage sold in Texas. We recorded $7.6 million in non cash impairments in third quarter 2016 primarily associated with a multi-family site in Austin, Texas which is under contract to be sold and two non-core community development projects which are also under contract to be sold.

As Phil mentioned, slide 13 and the appendix provides an update of our non-core community development assets. We plan to exit these assets--non-core assets in the near term and as you can see a majority of which are under contract to be sold or in the case of Antioch, a portion has closed in the third quarter. These combined sales will generate approximately $110,000 million in tax losses to offset tax gains from other non-core asset sales and will reduce annual operating costs by approximately $2.6 million. Now let me turn to our final slide and make a few comments on our core community development business.

We sold 1,105 residential lots in the first nine months of 2016 and continue to project 2016 lot sales in the 1600 to 1800 range from our core asset. At the end of Q3 we have over 2,080 lots, finished vacant developed lots and lots under development under contract with builders. This represents over 70% of our available total finished and lots under development inventory. This is the highest number of lots under option contract in over five years. We also have over 10,000 remaining lots located in our key markets where we are already selling to current homebuilders and the lots are located in some of the strongest housing markets. As Phil mentioned builder demand for our residential lots remains steady. Thank you for joining us this morning and your interest in Forestar. Those are our prepared comments and we would now like to open the call up to are few questions.

Thank you. (Operator Instructions). Our first question comes from the line of Mark Weintraub with Buckingham Research. Your line is open. Please go ahead.

Good morning. Tremendous amount going on. I will try to ask some of the questions and hopefully they are relevant and reasonable ones. First off, on the non-core community development project update you highlighted that the sales could trigger up to $110 million in tax losses to offset tax gains from the other sales. Can you share with us order of magnitude, what the proceeds from those sales might amount to?

Hello, Mark, good morning. We were working-- Antioch was already sold as I mentioned and it was sold for $7 million for 108 acres of that project. And that generated as I mentioned about $37.4 million roughly in tax losses. The remainder of the assets are on slide 13. They are under contract and we are continuing to get those to closing and the team is working very hard. We prefer not to discuss the prices on those as we continue to move those closer to closing. There will be more announced on that as we get the transactions closed.

Fair enough. On the $37.4 million tax loss, now there wasn't a book loss associated with that sale, at least not to that magnitude. Can you help explain where you would have a tax loss that was very different than the book loss and is that also the case from the other non-core community development projects that were going to trigger up to $110 million of tax losses.

Right, Mark that is a good question. On Antioch that is the legacy asset that we spun out with from Temple-Inland that was a former mill site of Temple-Inland. The reason that had such a significant tax loss over book-- and I will tell you we did not have a book loss on that. The $7 million was very close to break even for book so there was no GAAP loss. The tax loss was many years of remediation environmental costs that were incurred not only by Forestar but by also Temple-Inland carried over its spin-off. . This has been a legacy asset with high tax basis and as we looked and as we have gone through our initiative to review every asset in the portfolio we saw this as an opportunity to monetize now with some of the divestments on our other high gain assets so it was an opportunity for us to shelter and offset. As it relates to the other community development assets, and I think I have talked about this on prior calls under the IRS rules you capitalize certain costs for tax that you expense for book and on certain of these communities we have got higher built in loss tax basis than book and as we evaluated the asset to exit with cash tax consideration and business plan changes that has driven our decision to exit these non-core assets.

Would it be fair to say that while there may be book losses related to the remaining non-core community development projects being sold--that they would be substantially less in all likelihood than the tax loss benefits that you identified?

You know, Mark, if you recall in the second quarter we provided an update and incurred year-to-date non cash impairment including non-core community development and multi-family we plan to exit about $57 million in non cash impairments on the book side, GAAP side. So, with the transactions of these that are under contract to be closed I don't anticipate any material-- additional non cash impairments on the books.

Okay, that is very helpful. I have other questions but if there are folks if queue I'm happy to circle back around.

Go ahead, Mark.

Just on the timberland side so you basically -- I'm sorry you had said that how much acre, 58,000 or something was under contract?

Well, Mark, I will let Phil and Michael jump in as well. We reached agreement and are working at putting those under contract. Over 58,000. Of the roughly $70,000 that we mentioned in the east that we are planning to sell and have been marketing.

Okay. And now you did also have some acreage in California that historically was in that grouping. What is the status of the California acreage.

Mark-- so that is not-- in California what you are thinking of is the entitlement process acres which we--I think at quarter end we have 4430 acres in that category. That is excluded from the timberland sales. That is the 700 lakes that you are talking about is our hidden creek entitlement project in Los Angeles County.

Right. So that does --doesn't include any of--that, so, the 70,000 doesn't include any of the entitlement in process. Okay, good.

No, sir.

Is there any color you would be comfortable providing in understanding the 12,000 remaining versus the 58,000 that are where agreement is in process.

Michael has been managing this for us, so why don't you talk about what we are doing there.

Mark, good morning. We are in conversations and we are marketing it as part of the whole package we started marketing earlier this year when we released it. We identified it as non-core we continued to work through opportunities and we are happy with the activity it has been very steady and we are hopeful that we will have something to announce on this transaction.

I would add to that. On several of those parcels in the 12,000 acres there is mitigation banking credits. So in some ways it is a different set of buyers that are interested in buying timberland that also has mitigation credit and there are some timberland owners that are not interested in owning mitigation credits. So, it is a different set of buyers for those assets and that is why we pulled them out of the package.

Okay. So the having the mitigation credit so you-- have been paid for those mitigation credits already, or is there certain things that can or cannot be done on those lands or there is value yet to be received for the mitigation credits.

We sold some credits already. We will sell additional credit with the sale of the -- (inaudible) and we also have some additional mitigation credits in Texas. So, it is a combination of both.

Okay. That's good for now. Thanks so much.

Thanks, Mark.

Thank you. The next question comes from line of Chris Reynolds with Neuberger Berman. Your line is open. Please go ahead.

Good morning gentlemen. Could you provide commentary about your--how your balance sheet will look after of the divestitures which you outlined that you expect to close at the end of the year. For all intents and purposes you are debt free and have one convertible issue outstanding. I want to understand what the priorities for use of the cash will be and also the impact of capital gains on such divestitures. It sounds like you will be able to offset most of the gains. Can you confirm that?

Hi Chris, it is Chuck. As relates to the balance sheet we don't usually give guidance on the projections. We have the non-core assets that are in the slides that we are working to close and we exited the quarter with about $122 million in cash on the balance sheet at Q3 end. You mentioned the converts are outstanding. On a net cash basis net of that debt we were on a consolidated basis $10 million net cash for the quarter. We really strengthened the balance sheet and over the last year and paid down the high interest 8.5% coupon debt and continued to evaluate all options as we execute the non-core asset sales and as we move forward. Everything is kind of on the table to be reviewed as we execute and get these remaining assets closed.

And your other question was on the tax losses on the shelter? You know, we are projecting and you can see in our tax provision when the Qs fall which I believe it fell last night. Our effective tax rate for year-to-date, nine months of 2016 was an 18% tax rate. We had a nice benefit in the third quarter due to the initiatives and the assets we are selling. We believe with the decisions we are making to divest the certain high basis non-core assets as well as legislation that is available on the timberland sale for (inaudible) savings, we believe that we have an opportunity to shelter and minimize a lot of taxes. So, we are working very hard to minimize taxes paid.

Okay. And I have a follow-up on the balance sheet. The goodwill and other intangible assets of roughly $43 million, will-- that entry be affected by any subsequent divestitures.

That is a good question . That $43 million is made up of-- $38 million is related to our mineral assets enterprise value--the minerals and the remaining portion call it $4 million, $5 million that is related to goodwill and tangibles on our water asset. As we on a book perspective, as we monetize and evaluate those non-core assets over time that would obviously be allocated to the GAAP side or the book side. Goodwill for taxes is disallowed, so there is no tax basis.

Okay. And I have one final question. And I apologize if you have covered this, but the investment in the Cibolo Canyon where the J.W. Marriott is located. Do you have an investment basis in that currently? Or is that part of an asset that you are looking to dispose of?

Our investment in the 10-Q back in the MD&A we have a nice write-up on Cibolo and there are two components there is the master plan community as well as the resort hotel spa and golf development which we don't have ownership in. Our net investment in civil canyons at third quarter end is about $55 million divested in that project.

Really?

And we have -- Cibolo is a great project, been a great project for the company and we have 1,830 residential lots which we have sold I guess about 1,100 to date so we have 700 plus lots ahead of us there in the master plan community and a bit of commercial acre. So that is a core asset that we have in the portfolio.

Okay. Thank you so much.

You bet.

Thank you. The next question a follow-up question from Mark Weintraub with Buckingham research. Your line is open. Please go ahead.

Obviously with Cibolo the lots are part of the core asset and how do you think of the--rent agreement for lack of a better terminology with the resort itself?

Yeah, Mark are you talking about the hotel occupancy?

Yes.

The other 9%. So that something as you recall in 2014 the district-- the special improvement district, monetized and we received a little over $46 million in proceeds. We are the beneficiary of the residual of that over the debt service that is paid. It is a nice revenue team stream for us but we are looking at opportunities to if there is a better holder of that revenue stream. We get the residual through 2034 as you know, after debt.

And then on the multi-family side on page 4. You listed the five sites, two under contract, the ones that aren't, Acklen, HiLine, Elan, how long have they---since when have they been completed and give us a sense as to where you are in those projects and how feasible is it to be getting, closer to 95% type leasing situations. Maybe a little bit more color just on the health of those projects.

Mark, this is Phil. You are asking where are we on Acklen, HiLine and Elan or are you asking about the two sites in Austin?

On these three, you tell us where you are, you're 80% occupied and 85% leased in Acklen. Are we still kind of in a building phase where that would be expected to increase meaningfully over the next three to six months or kind of just the sense as to -- in particular with the Elan, how long is it been in process that you have been, where is that likely to be going? Is that going to be all likelihood of 90%, 95% leased within the next six months or kind of where are we in those projects.

So, we were at [indiscernible] occupancy on all of these roughly August, September of this year. And so Acklen and HiLine, I would talk about those kind of in the same light as you look at where they are occupied and leased, they are leasing up. This occupancy is getting closer to 90%. And we are planning with our partners would be to probably bring those to markets as we get closer to the 90% occupancy for 90 days which is eligibility for agency financing.

Elan in Houston because there is quite a bit of additional supply in the sub- market we are in, is probably going to take us longer to lease that up and get that to stabilization. So, I would see us getting near stabilization on Acklen by year end. I would see us getting to stabilization on HiLine in the first quarter. And I would see Houston pushing out probably to possibly end of the second quarter or would be even third quarter before we get to stabilization

Great. Exactly what I was trying to get. Thanks so much.

And I would add to that. I mean we have the option of doing a presale on these assets. We believe they are great properties and sought after communities. Our view is it is in the best interest for us to continue to work towards stabilizing them and selling them. We get inquires from people who want to know -- inquiries from people who want to know if we are interested in selling them now. There a chance that we could accelerate selling one or two of these if we chose to do that. So these are really good assets. We are very pleased with how they are leasing up. The Houston one is a little more challenged as you would expect. And we will be very strategic about how we exit them.

Thank you.

Thank you. And our next question comes from the line of John Dasher with Pinnacle. Your line is open. Please go ahead.

Hi. We are a fairly new shareholder and we had a question about the 6% tangible equity units, which I guess were issued about three years or so ago. Reading the disclosure in the 10-K, it looks like on or around December 15, you are going to issue between 6.5 million and 7.9 million new shares. Is that correct? Am I reading this correctly?

Hi, John. Yes, you are. And the debt portion of that security will pay the final amortizing note payment and interest in December and then also for the contract -- stock contract settlement will issue between that range of shares and that's still a good range. And I will point out in our diluted EPS based on where the current stock is trading. It would be closer to the 7.8 million shares.

Okay. So closer to where the stock is currently trading, it would be closer to the 7.8 million.

That's right.

What would make it --

And that is what -- a stock price below $19.09 roughly is where that would be.

Okay. So and does that occur immediately on December 15, 2016 or what's the timing exactly of those new shares being issues?

Yes, sir. It will be right around December 15, 2016 is the timing of that.

Okay. And you're going to pay-off the remaining balance of the note, which I think was about $2.2 million.

$2.2 million at the end of third quarter. That will obviously be paid off.

So the whole entity or issue will be put to bed December 15.

Yes, sir.

Thank you very much.

Thank you and that is the end of our question and answer session for today and I would like to turn the conference back over to Chief Financial Officer, Chuck Jehl for any closing remarks.

Thank you for your interest in Forestar and we appreciate you calling in and thank you for the questions. Have a great day.

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