Participants

Chris Hibbetts; Vice President of Finance & Investor Relations; Forestar Group Inc

Anthony Oxley; President, Chief Executive Officer; Forestar Group Inc

James Allen; Chief Financial Officer, Executive Vice President; Forestar Group Inc

Mark Walker; Chief Operating Officer, Executive Vice President; Forestar Group Inc

Clark Lampen; Analyst; BTIG Inc

Asher Sohnen; Analyst; Citi Group

Presentation

Operator

Good morning and welcome to first quarter, 2025 earnings conference call.
(Operator Instructions)
Please note this conference is being recorded. I will now turn the corner over to Chris Hibbetts, Vice President of Finance and Investor Relations of Forestar, Chris.

Chris Hibbetts

Thank you. Good morning and welcome to the call to discuss (technical difficulty) first before we get started. I want to remind everyone that today's call includes forward-looking statements as defined by the private Securities Litigation Reform Act of 1,995. Although Forestar believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Forestar on the date of this conference call and we do not undertake any obligation to update or revise any forward-looking statements publicly.
Additional information about factors that could lead to material changes in performance is contained in Forestar's annual report on form 10-K and its most recent quarterly report on form 10-Q, both of which are or will be filed with the securities and exchange commission. Our earnings release is on our website at investor dot Forstar dotcom and we plan to file our 10-Q later this week after this call, we will post an updated investor presentation to our investor relations site under events and presentations for your reference. Now, I will turn the call over to Andy Oxley, our President and CEO.

Anthony Oxley

Thanks Chris and welcome to the team for those who haven't met Chris yet. He joined our team in December as part of a planned transition with Katie Smith joining D.R. Horton January 1st. I'm also joined on the call today by Jim Allen, our Chief Financial Officer and Mark Walker, our Chief Operating Officer. The Forestar team delivered 2,333 lots generating revenues of $250.4 million during the quarter and earnings per diluted share of $0.32 demand for finished lots remains solid and our owned lots under contract have doubled from a year ago and the percentage of our owned lots under contract is at the highest level since June of 2020.
The Forestar team continues to expand our operating platform including making significant investments in land acquisition and development and adding key personnel in our local markets and entering new markets. Our owned lot position has increased 23% compared to a year ago and our community count has increased 25%. Over the same period, we remain focused on investing in compelling land parcels, turning our inventory maximizing returns and consolidating market share in the highly fragmented lot development industry. Fourt star's unique blend of financial strength, operating expertise and geographic reach is a significant competitive advantage enabling us to be in the leading supplier of finished loss. Jim will now discuss our first quarter results in more detail.

James Allen

Thank you, Andy. In the first quarter, net income was $16.5 million or $0.32 per diluted share compared to $38.2 million or $0.76 per diluted share in the prior year quarter. Our pretax income was $21.9 million compared to $51.2 million in the first quarter of last year. And our pretax profit margin this quarter was 8.7% compared to 16.7% in the prior year quarter. As a result of reduced operating leverage revenues for the quarter totaled $250.4 million compared to $305.9 million. In the prior year quarter.
We sold 2,333 lots in the quarter with an average sales price of $105,500. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. We continue to expect that the first quarter will be our lowest delivery quarter of the fiscal year. Our gross profit margin for the quarter was 22% compared to 23.8% for the same quarter.
Last year, the prior year quarter was positively impacted by an unusually high margin. Lot sales related to the closeout of a legacy community, excluding the high margin, lot sales from that legacy community. Our prior year first quarter, gross profit margin was approximately 22.8%. Chris.

Chris Hibbetts

In the first quarter, SG&A expense increased 29% from the prior year quarter to $36 million. Primarily due to a 30% increase in employee count to 427 employees compared to 329 employees a year ago. We have increased our employee count to support the expansion of our operating platform including entering new markets and increasing community count.
SG&A expense as a percentage of revenues was 14.4% compared to 9.2% in the prior quarter. Primarily as a result of the year over year decrease in lot deliveries. We are pleased with the progress we have made building our team and we continue to attract high quality talent. We remain focused on efficiently managing our S DNA while investing in our teams to support continued growth mark.

Mark Walker

Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points. Generally, remains limited and demographic supporting housing demand remain favourable. Despite continued affordability challenges, mortgage rate buydown incentives offered by builders have helped to address affordability and spur demand. Our ongoing focus remains to develop lots primarily for homes at affordable price points, availability of contractors and necessary materials has improved, and the cost of developing land has stabilized while we continue to see modest improvement in cycle times, government delays continue to extend cycle times above historical norms.
We utilize best management practices and work with our trade partners to develop lots in the most efficient way possible. Homebuilders are competing to secure land and lot positions and many are looking to replace current closed out communities to position themselves for future growth. As a result, we have not seen any softening of land prices. However, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities.

James Allen

Jim D.R. Horton is our largest and most important customer. 15% of the homes, D.R. Horton started in the past 12 months were on a Forestar developed lot with a mutually stated goal of one out of every three homes. D.R. Horton sells to be on a lot developed by Forestar. We have significant opportunity to grow our market share within D.R. Horton.
We also continue to work on expanding our relationships with other homebuilders. 9% of our first quarter deliveries or 221 lots were sold to other homebuilders including new two new customers. Chris.

Chris Hibbetts

Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment. Within 36 months, we are positioning to return to strong volume growth in future periods supported by our increased investments in land acquisition and development. Over the last several quarters.
During the first quarter, we invested approximately $685 million in land and land development, which was a 50% increase from the prior quarter. 57% of our investment was for land acquisition and 43% was for land development. Our land acquisition pipeline is front end loaded this fiscal year, and we expect the pace of our investment in land acquisition to moderate for the remainder of the year. We still expect to invest approximately $2 billion in land acquisition development in fiscal 2025' subject to market conditions. Mark.

Mark Walker

Our total opposition on December 31st increased 29% from a year ago to 106,000 lots of which 68,300 or 64% was owned and 37,700 or 36% were controlled through purchase contracts. 8,100 of our own lots were finished at quarter end. Consistent with our focus on capital efficiency. We target owning a 3-to-4-year supply of land and lots and manage our development phases to deliver finished lots at the pace that matches market demand.
Own lots under contract to sell increased 51% from a year ago to 25,200 lots for 37% of our own lot position. $207 million of hard earnest money deposits secured these contracts which were expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 28% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements, Jim.

James Allen

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with $645 million of liquidity including an unrestricted cash balance of $132 million and $513 million of available capacity on a revolving credit facility in December. The company amended its credit facility which among other things extended the maturity date from October 2026 to December 2029, reduced pricing and increased the aggregate lender commitments from $410 million to $640 million.
We were also pleased to receive an upgrade to our corporate credit rating from S&P earlier this month. Taking us from B plus to double B minus total debt on December 31st was $807 million with no senior note maturities until May 2026. And our net debt to capital ratio was 29.5%. We ended the quarter with $1.6 billion of stockholders' equity. And our book value per share increased 13% from a year ago to $31.84. Forestar capital structure is one of our biggest competitive advantages and it sets us apart from other land developers, project level, land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors.
Other developers generally use project level development loans which are typically more restrictive, have floating rates and create administrative complexity especially in a volatile rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities as they arise, and I will hand it back to you for closing remarks.

Anthony Oxley

Thanks Jim. We are pleased with the continued expansion of our operating platform. We have made significant investments in land and land development growing. Our team with best-in-class talent entered new markets alongside D.R. Horton's footprint and have a breadth of new opportunities being evaluated by our team. I believe there's tremendous opportunity ahead. Forestar is uniquely positioned to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans combined with constrained finished lot supply across the majority of our diverse national footprint positions us for further success.
Our guidance for fiscal 2025 remains unchanged based on current market conditions, we expect to deliver between 32,500 lots and to generate $1.6billion to $1.65 billion of revenue. We expect our first quarter will be our lowest delivery quarter of the year and we still expect our revenues in the second half of fiscal 2025 to be higher than the first half. The variability we experienced throughout fiscal 2024 illustrates the quarter to quarter fluctuations that can occur in delivery of finished lots. We are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project.
We are the market leader in a highly fragmented and undercapitalized industry and uniquely positioned to take advantage of builder demand for finished lots. Our goal remains the same to double our market share to 5% over the intermediate term. We expect to aggregate significant market share over the next few years while maintaining our disciplined approach when investing capital to enhance the long-term value of four star with a clear strategic direction, a dedicated team and a strong operational and financial foundation in place. I'm excited about Forestar future Jen at this time, we'll open the line for questions.

Question and Answer Session

Operator

Thank you very much. At this time, we will be conducting our question-and-answer session.
(Operator Instructions)
Thank you. Your first question is coming from Clark Lampen of BTIG. Carl, your line is live.

Clark Lampen

Thanks. Hey guys, nice to talk to you. So I wanted a little more detail on the stabilization of cost and land development. Andy. Can you expand on that a little bit? You know, the particular aspects of of horizontal development where you're starting to see that kind of stabilization and just as a follow up, I'm assuming the cycle time issue as we discussed before is really related to the entitlement and approval process and not other dynamics.

Mark Walker

Hey, Carl Mark, in terms of the cost and stabilization, we've seen that really over the past trailing 12 months. Our development costs have been stable. Our teams have done a great job making sure the budgets are updated throughout the life of the project. We're not really seeing price increases come across our desk like we were maybe 12 months ago. So that's a very positive sign for calls. In terms of cycle times, we decreased our cycle times again, 30 days this quarter. So that's about 120 days off the peak.
And so, the cycle times we continue to see come down. We still are seeing the entitlement hang ups, particularly at substantial completion with the government jurisdictions. That's something we're going to continue to work on this fiscal year with the hope that we can get down to a normalized cycle time by the end of the fiscal year.

Clark Lampen

Thank you, Mark. And then on the on the cost leverage, obviously recognizing the negative leverage this quarter, 30% increase in employee count and and new market set up. How are you thinking about the growth in that employee count in new markets as you look the next year or two, an improvement in that leverage, that's more substantial, especially back half of this year as you build out that pool of lots you have coming or is that something we'd expect to see, in the next couple of years and then I have one more after that.

James Allen

Carl Yeah, we would expect to see our SG&A expense moderate for the remainder of the year. You know, we're still, based on our revenue guidance, we would still expect it to be kind of high single digits for the year.

Clark Lampen

Thanks Jim and then last just on dollars. But we model revenue per lot versus pricing just because it's a little easier. But this seemed like particularly high relative to last year's revenue per lot. Was, was there something particular this quarter that drove that higher? I think Horton talked about 3% increase in lot supply. Although obviously it's a lag to you. What are you seeing or what can we expect in terms of revenue per lot as we go through the year? Recognizing there might be some ball in it depending on the particular land that you sell.

James Allen

It was really just mix for this quarter. You know, we had one particular infill project with some pretty significant lot prices that skewed that ASP up for the quarter.

Anthony Oxley

And we're pretty much predicting that, low to mid-single digit escalate rising lot price.

Clark Lampen

All right, I appreciate it guys. Thanks so much.

Anthony Oxley

Thank you, Carl.

Operator

Thank you very much. And your next question is coming from Anthony Pettinari of Citigroup, Anthony, your line of life.

Asher Sohnen

Hi, this is Asher Sohnen in on for Anthony. So, thanks for taking my question. I just wanted to ask how, how's builder demand been, kind of trending here to date and then have you seen Horton or any of your other customers maybe delay or otherwise alter their scheduled lock, take downs.

Mark Walker

The builder demand remains strong, particularly where we can get new communities open and on board, builders are lining up at the door essentially to get into new communities and existing communities. We're seeing the same. There are on occasion when we deal with this quarter, over quarter, some inventory build up and it's project by project. If there's the ability to bring in a new builder, we will do that. We have been doing that in the past. But the builder demand is strong, overall demand for finished lots remain solid.

Asher Sohnen

Great. No, that's good. And then just separately, are you able to just help us a little bit more with? And you talked about this a little bit in the prepared marks, but you know, details on kind of the cadence of deliveries over the balance of the year just given the softness in the first quarter.

Anthony Oxley

Well, it was really, you know, we had a really strong fourth quarter and so, October was a little softer, it improved in November, December got pretty much back to normal. And then as we go through what we've seen over the last several years is that we have that first quarter seasonally is our lowest. And you know, we have a majority of our deliveries in the second half of the year. So we see that same progression pretty much similar to what 2024 was.

Asher Sohnen

Great, thanks. That's helpful. I'll turn it over.

Operator

Thank you very much.
(operator Instructions)
Okay. I'm not seeing anyone else come into the queue for questions. I will now turn the call back over to Andy for any closing remarks.

Anthony Oxley

Thank you, Jenny and thank you to everyone on the Forestar team for your focus and hard work, stay disciplined, flexible and opportunistic. As we continue to consolidate market share, we appreciate everyone's time on the call today and look forward to speaking with you again April to share our second quarter, fiscal 2025 results.

Operator

Thank you very much, Andy, this does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.