Good day, ladies and gentlemen, and welcome to the Forestar Group Inc, Fourth Quarter and Full Year 2013 Financial Results Conference Call. My name is Dominique, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms. Anna Torma, Senior Vice President of Corporate Affairs. Please proceed.

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 fourth quarter and full year 2013 results. I'm Anna Torma, Senior Vice President, Corporate Affairs. And 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 Chris for a review of our financial results.

Thanks, Anna. Let me welcome everybody joining us on the call this morning. And let me begin by highlighting our full year financial results. For 2013, Forestar reported net income of approximately $29.3 million or $0.80 per diluted share, compared with net income of $12.9 million or $0.36 per share in 2012. Our full year 2013 financial results include a previously unrecognized tax benefit of approximately $6.3 million or $0.17 per share, related to qualified timber gains from sales in 2009. In addition, full year 2012 results include after-tax expenses of approximately $7 million or $0.20 per share, associated with the acquisition of CREDO Petroleum and loss on extinguishment of debt related to the amendment and extension of our term loan. Real Estate segment earnings were $68.4 million in 2013, up compared with $53.6 million in 2012. The primary driver of this improvement in real estate, is an increase in residential lot sales and margins and higher residential and commercial track sales, which Jim will share with you in greater detail in a few slides. Oil and Gas segment earnings were $18.9 million in 2013 compared with $26.6 million in 2012. This decline is principally due to lower royalty income and lease bonus related to our own minerals and higher exploration costs related to exploratory drilling in Kansas and Nebraska. Other natural resources segment earnings were $6.5 million in 2013 compared with essentially breakeven results in 2012. This improvement was primarily due to the $3.8 million gain on the termination of a timber lease. Total segment earnings were $93.8 million in 2013, as compared with $80.2 million in 2012, with the improvement driven principally by improving real estate sales activity. Now let's turn to a review of our fourth quarter 2013 financial results. In the fourth quarter of 2013, Forestar…

Thank you, Chris, and I'd also like to welcome everyone to the call this morning. We developed our Triple in FOR initiatives in the second half of 2011, targeting performance metrics in the period from 2012 to 2015. I'm glad to report that based on our performance through 2013, we've essentially reached our targets 2 years ahead of time. I'll review the fourth quarter and full year 2013 results and close with the key tenets of our next chapter, drilling forward. Let me begin with Real Estate segment results. Full year 2013 Real Estate segment earnings were $68.4 million, and that's up nearly 28% over 2012. 1,883 lots in 2013, that's up almost 40% in volume and 28% in gross profit per lot compared to 2012. I think, that's a reflection of strong market fundamentals, low inventory levels and most importantly, our ability to deliver lots. As expected, homebuilder demand for residential tracts expanded in 2013. We classify residential tract as a section of undeveloped lots, in some cases, the remaining acreage in a project. In total, we sold 1,617 acres within 8 communities. That when developed could potentially yield 3,300 residential lots. The economics are pretty straightforward. These sales generate a higher rate of return versus developing and selling the finished lot. Please note that lots associated were residential tract sales are above and beyond our reported finished lot sales. Also contributing to the year was the sale of 171 commercial acres, for over $197,000 per acre. That's a positive indication of economic recovery within a submarket. In addition, we sold Promesa during the first quarter of 2013, generating gain of almost $11 million. Now let me turn to the fourth quarter results. In the fourth quarter of 2013, Real Estate segment earnings were $27.7 million, that's up $6…

[Operator Instructions] And your first question comes from the line of Mark Weintraub of Buckingham Research.

I'm glad to see the way you're setting up your new target metrics is focused on ROA rather than just kind of a growth metric. And just one thing I wanted to just verify I could. You said ROA -- you said corporate EBIT. Is that any different than just EBIT? How we would normally consider it?

No. The point I was trying to make Mark, is it's EBIT at the corporate level. I just want to make sure that was clear.

Okay. So basically you're going to include any corporate related expenses in that EBIT number.

Yes.

Very good. And I guess, 2 follow-ups on that is, are you anticipating that the trajectory to that 10% will be relatively evenly paced? As far as you can set at least with a softer 2014, that we should see you go from 6% to 7 to 8%, and then, 8% to 9% and then to the 10% or is it more going to be chunky? Or stair-step-y?

Mark, ideally, it would be a nice, smooth, symmetrical increase from where we are today to the 10%, which is as I need to remind you that interim target. However, I think, that you know, that Forestar can be somewhat of a lumpy business, particularly on a quarterly basis, even on annual basis. So to the extent possible, we want to operate Forestar in such a way that, that we become more consistent in our performance and also in the way that we reach our targets. But it's hard to sit here today, Mark, and guarantee that we've got a nice straight line from 2013 to 2016.

Understood. And certainly, it's evident that the wind on the Real Estate side is kind of coming through, and we're seeing that in the performance. I guess, it's -- and I apologize, this may be my shortcoming rather than what you're actually doing. But it's a little harder to see it on the Oil and Gas side that it's playing out exactly as I would have anticipated. I guess the -- I mean, I think, you throw down a $35 million profit number for 2014. For instance, which doesn't seem to be as much progress as I would've anticipated given the amount of spend that's already taken place, maybe you could debunk my thought process there or just clarify?

Yes. Mark, there is this kind of 2 things happening here, simultaneously, and we saw some of it in 2013. As we continue to invest, we are getting, I think, very nice results from the investments. I think, the reserves are a good support and proof of that for what we have in front of us, unfortunately, at the same time, Mark, we've got declining incomes and contributions from legacy minerals or the royalty. And in fact, in 2013, royalty income alone was down over $7 million, lease bonus was down. So we've got kind of 2 things happening simultaneously. Ideally, we get little bit of more activity or we promote and generate a little bit more activity in our legacy minerals in East Texas and Louisiana to augment the earnings and the contribution from that part of the business. So there's a little bit of noise, little bit of noise going on there Mark. I'm encouraged by the investments and the response there, not so much so on our legacy mineral business.

And your next question comes from the line of Steve O'Hara of Sidoti & Company. Stephen O'Hara - Sidoti & Company, LLC: I guess, the question I had in terms of the Real Estate business, in terms of lot margins, developing the Atlanta surrounding properties. Does that, maybe mitigate any improvement in the lot margin going forward? Is that still small enough where it doesn't have that much of an impact? And then, maybe you could just kind of give us your thoughts on where we are in the cycle? And where you see any negative impact from interest rates or anything like that?

Okay. The first part of your question was related to Atlanta and growth in that market for Forestar, as well as for our investments. We are making some investments in development in the Atlanta market, primarily in existing communities, where there is a pipeline and there is demand in place and generating some very attractive gross profits and margins. When we look at some of other developments, I think, they're still a ways out and in fact, one of the residential tract sales that we had in 2013 was a piece of property that had been entitled. The prospective buyer made an offer that in our opinion made real good sense, relative to be able to take those cash proceeds and reinvest them. So, it's just there is a little bit of a mix for us in Atlanta. What I would say is that where we've got some momentum in projects, which we got -- I guess, probably, 4 or 5 today. We'll continue to invest in and breaking ground on a brand new project and spending substantial capital on the major tracking infrastructure. We think, really hard about doing that. It's going to be very, very important to us, going forward that capital we invest meets our return target. That's imperative for us to be to reach the targets that have outlined in growing forward. Relative to where we are in the housing recovery today, I would say that you're somewhere in the mid-innings. Another way that I think about that, Steve, is, when I look at the markets or the sub some markets where we've got communities investments, I'm encouraged by the demand. I'm equally as encouraged by existing low inventories, hasn't been an overbuilding in lots and new homes, and based on the forecast for economic growth and job growth at the metro area, I'm encouraged. So I will tell you that from our perspective, we are somewhere in the mid-innings. Stephen O'Hara - Sidoti & Company, LLC: Okay. And then, just as a follow-up. Do you kind of -- in terms of the lots, do you anticipate producing kind of as fast as you can? You anticipate kind of something that's a little more measured given where you think you are in the cycle? Just how you think about that kind of relative to where we are in the cycle?

Yes, Steve, our position is as we will move with the market. We don't -- we typically have not tried to out run it or lag it. But there may be some strategy there with -- it just hasn't proven to really drive returns for us. We also have to keep in mind that we've got customers. And builders who are taking down lots and we don't have much an appetite to try starve them or force anything down their throat. It's -- we think, a longer-term, the best way to operate the business is to respond and move with the market and the demand. Obviously, taking into considerations supplies or inventories. Stephen O'Hara - Sidoti & Company, LLC: Okay. And then, maybe, just one last one in terms of the entitlement of process. I mean, kind of anything that's maybe close to kind of exiting or do you not comment on that until it's kind of done?

I'm sorry, Steve, ask me that again? Stephen O'Hara - Sidoti & Company, LLC: In terms of projects that are in entitlement, or you have lands that are in entitlement, do you comment on where you are in that process?

Yes. Steve, we are constantly entitling properties and projects. There is a slide in the presentation where, I guess, there's probably 4 or 5 acquisitions, several of those were not closed until we had succeeded with entitlements. So entitlements, is just an ongoing activity for us. That even existing projects oftentimes, we're going back and getting some new zoning and/or entitlements. So it's just ongoing process. Now you may be referring to the properties in -- around in Atlanta, but we are moving forward with those entitlements. We don't have our foot pressing hard on the accelerator. I'll go back to your comment that I made earlier. We are moving with the market, the majority of the sales and the demand in Atlanta market are still relatively close in and really defined or constrained by the I-85 or I-75 growth corridor. So that's where our focus is.

Your next question comes from the line of Steve Chercover from D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: 3 disparate questions. Absent the gain on the sale of Ironstob land, it seems like the timber segment would have actually had a small loss. And is that because you're volume was down by 70,000 tons? And why was the volume down so much?

The accounting on that is -- in my words, Steve, is a little bit strange. Ideally, if I was the master of accounting, to me, it's just a timberland sale -- excuse me, or land sale that would've shown up in real estate. So it introduced a little bit of noise to the numbers. I don't foresee how it could have actually been a loss in that sale anyway to fiber or to the segment in the sale itself. Without the sale, the segment would have been pretty much at breakeven in the fourth quarter.

And Steve, the reason those sales were down in the fourth quarter was principally due to planned mill outages in the Rome, Georgia, linerboard mill that International Paper owns. Steven Chercover - D.A. Davidson & Co., Research Division: Got it. Actually, I think I should have known that. And then on oil and gas, I'm not sure I understood, Jim, exactly why the success rates in Kansas City, Nebraska were down so substantially. Although, I also heard that you've had 25% rates previously. So it doesn’t sound like it's out of the ordinary.

Right. But Steve, I believe you're correct in your comment. You heard what I say correctly. There has been a range of success rates on a quarterly basis from 25% to 65%, for the year it was 47%, long-term average is 40%. So that's -- I think we're going to expect that. Now in saying that, too, Steve, we continue to keep a very close eye on drilling completion activities, and we want to make sure that we've got a success rate that supports the returns that we're targeting. So we're very conscious of that and want to make sure that -- as I've said now a couple times, that we hit our return hurdles. Steven Chercover - D.A. Davidson & Co., Research Division: But it would be premature from 1 quarter to determine that perhaps you've culled -- cut the low hanging fruit, and it's going to be lower success rates going forward in that region.

Right. We expect that over time that we'll continue to generate a 40% success rate. That's correct. Steven Chercover - D.A. Davidson & Co., Research Division: Great. And sticking with oil and gas. It looks like Keystone XL, that big pipeline, is a little closer to becoming a reality, and it's still controversial. But if it was built, would that benefit you?

Well, potentially. Steve, the way I look at it is there is a significant amount of oil that's being produced in the Williston Basin in North Dakota, and it's got to move. And there's been a substantial investment in rail infrastructure and rail loading facilities, and a majority of that oil is moving today. I'll clarify, the differential between West Texas Intermedia and what we'll pay for the year was $6 -- yes, $8 to $10. So if the XL pipeline could help us for -- to cut that in half, it would be helpful. But I don't think it's a game changer. Steven Chercover - D.A. Davidson & Co., Research Division: Yes. But oil is -- or sorry, rail is becoming increasingly controversial as well.

Little bit, little bit, yes. Steven Chercover - D.A. Davidson & Co., Research Division: Final question, I guess I just want to hear once again in my own ears. It's clear that you're comfortable with the balance sheet, and I don't think there's been any real change in your CapEx outlook for '14. So that current $400 million CapEx should be funded with cash on hand and from operations. You don't need to come back to the market. Is that correct?

Yes. We don't -- yes, we -- given our operational plan and everything we see, Steve, we'll end the year still with a very healthy balance sheet and ample liquidity and basically an undrawn revolver. So everything we can see today, Steve, we're in good shape.

Your next question comes from the line of Robert Howard of Prospector Partners.

Let's see. The big increase on the PV-10, is there -- can you sort of quantify how much of that is sort of improvement on the proving up of the reserves versus a better pricing number? Does that get broken down at all?

We didn't provide that in the presentation or in the comments. But Rob, I'll tell you it's about, what, 80% to 85%, driven by volume improvements in the results of operations and maybe 15% thereabouts by price. So it's principally a reflection of the investments in the operations.

Okay. Great. And you're talking about the impact of the cold on production. Does that -- like, I guess, one thing I was curious about with all frac-ing is does the cold sort of make frac-ing tough? Because you're using so much water, and you're worried about that freezing, or are there kind of other things that are -- that also big issues that the cold sort of slows your production?

Yes, Rob. Rob, that's part of it. It's not only freezing water issues, but you have -- when you have temperatures that are 35 to 40 below 0, it's very difficult for people to work in period, regardless of what's happening in the valves and pipes and water freezing. A lot of things freeze at 35 and 40 below, so it's just a -- it's a very, very difficult environment to try to operate in. In fact, most companies and operators are more defensive than they are offensive in that type of climate just to maintain damage control, if you will.

So will there be extra costs just in terms of like in -- or just kind of maintaining the production? The well's already been producing, then you get this 35 below. Does that put at risk losing a couple days production just because some valve breaks or something like that or...

Yes. The production is impacted by this -- by the extremely cold temperatures. There's -- we saw a few wells that have been shut in due to the extremely cold temperatures. So production is impacted. And assuming that the total cost is flat for that period of time, and production down, then the cost per unit would have been up. But here, again, this is -- I think this is principally seasonal. And hopefully, we'll be working out of this environment here pretty soon.

Yes. Okay. Great. With the Ironstob venture sale that you had, how does that land that you sold compare to the rest of the land? Is it sort of a typical example of it, or is there some characteristic of it that might be a lot different than the rest of the Ironstob hold?

Rob, I don't think that it's radically different. The buyer was the Department of Natural Resources in Georgia. It was a bolt-on or add-on to a cultivation area that we had sold property to earlier, several years ago, maybe back in '07 or something like that, maybe '07, '08. So my comment is I don't see it as being radically different. There are a few parcels in there that we look at extremely hard, kind of back to an earlier question I had from Steve, in that they may have some development potential. And those may not be sale candidates, but those who want a potential look at developing.

Okay. And I think you kind of addressed this a little bit in the call, but just sort of wanted to have a little more detail on -- you had talked about you had a big increase of land sales this past year, and I just sort of wanted to get a better feel for kind of the remaining land that you have, how that compares to what you were selling this year. I mean, okay, you had a bunch of sales this year, does that mean that a bunch of developments all closed out and so now those big ones are gone, or kind of how do we compare the last year to the inventory that you still have?

Yes. Well, Rob, our retail land sales in 2013 were actually down from 2012. We sold, I don't know, maybe a little over 9,000 acres in 2012 and a little over 6,000 in '13. So as we think about land sales going forward, I'll go back to the initiative we laid out, we're going to look at, as we always do, all of our noncore, nonperforming properties and make sure that in time they're going to be able to generate the returns and the value that we're looking for. Otherwise, they become candidates for being repositioned. And that's true for properties that are part of real estate or part of the Timberlands or oil and gas or any other part of Forestar.

Yes. Okay. Great. And then lastly, again, you talked little bit at just sort of acquisitions, and I was just sort of wondering how do you see the opportunity for acquisitions. I mean, when you're going through -- people are probably throwing lots of ideas in front as to buy this from us or whatever. I mean, how does the market look for you in terms of -- are you finding it more difficult to look at the potential properties to buy in terms of making the numbers pencil out, or is the market still -- are the kind of opportunities you've been having the last few years still out there?

Yes. Rob, I'd answer that question by saying it's much more challenging today than it was a year ago versus 2 years ago. The acquisitions that we're successful on, I'll tell you that we comb through lots and lots of different properties and potential buys or deals. So the real key there for us is maintaining the discipline that we need. I guess I'll be saying this for the third time now, it's just going to be so important to make sure the investments that we make reach or exceed our hurdle rate of returns. The other benefit we have, too, Rob, or I'd say number two is, is that we do have a pipeline, and it's not as though we've got 2 communities and we're going to sellout by the second quarter. We've got a nice pipeline, particularly in the major markets of Texas. So fortunately, we're not in a position where we have a gun to our head, and we've got to go buy properties. We also don't have a fund that's driven by generating returns, so I like our position, I like our balance sheet, I like our pipeline. And I think our team has done a very nice job in acquisitions, and they're real pros, and we're going to be disciplined about that.

And your next question comes from the line of Albert Sebastian of Prospect Advisors.

So let's focus on oil and gas. And specifically with regards to Kansas in Nebraska, looking at Slide 21, it seems as though the single well economics, you've changed the economics here from previous slides. Previous slides, you had PV-10 of 1.1 million, and returns above a 100%. So can you just tell us what assumptions changed to lower the economics associated with single well in Kansas, Nebraska?

Yes. The only change, Al, is we'd included -- we've done, I think, a better job of including all the costs associated with the wells, and that's what you see on Slide 21, and that's included in the footnote. Generally, oftentimes, what you see reported in returns at the well level is principally just drilling completion cost and lease operating expenses, or LOEs. So that was the way -- that was the first report. We've gone even further to include all G&G costs, land, seismic. This is an all-in cost, which I think is more accurate and reflective of your investments.

Okay. So the -- other than that, there hasn’t been any change in terms of pricing or drilling and completions or anything associated with Williston Basin?

No, no, no. It's based on the costs that we've included, and I believe the price deck in the forecast is still the same. The EURs, ultimate recoveries, are about the same as well a success rate of about 40%.

With regards to hurdle rates, do you have a different hurdle rate for oil and gas than you have for real estate, or do you sort of use the same hurdle rates across the entire enterprise?

Pretty close, Al. If the project level or investment level in oil and gas or in real estate, we're typically looking to achieve at least a 20% rate of return as I've -- as we've commented in the past, we also look at another metric very strongly in real estate, which is a return on cost, with the hurdle there being 35%. And that typically equates to the mid-, low-20s IRR. But all in and out, they're pretty close. When we look at the risk associated with these businesses and the returns, they're pretty similar.

Why don’t you use a higher hurdle rate for oil and gas given the inherent risk? It seems that oil and gas, and I think most investors on the call would agree with this, is an area that inherently is riskier than real estate. Why wouldn't you use higher hurdle -- a higher hurdle rate for oil and gas?

Yes. Al, it's depending upon what you're investing in. And as I said in the comments, the majority of our investments last year, as well as this year, are in the Bakken/Three Forks, which is a resource play, and the Central Uplift in Kansas and Nebraska, which is a statistical play where we've got a long track record. So when you think about the risk associated with that, it's -- these are not perspective in exploratory. The way that we underwrite an investment, whether it's oil and gas or real estate, whether it's perspective or it's development, we look at risk-adjusted returns. So if we were look at a potential investment that was truly perspective. that's a very high risk, it's going to be included in the analysis. So we -- what I was going to say, Al, is that we certainly take into consideration risk regardless of what the investment maybe or where it is in the risk profile in oil and gas, real estate or any other part of our business.

Well, taking a look at the Bakken/Three Forks, if you look at the well economics here, you get PV-10 of $0.4 million. You're assuming $90 oil, is that $90 oil for the Bakken, correct? That's not WTI?

It's $90 oil, but there will be a deduct for a takeaway capacity for a period of time. So there's a little bit of differential for us for a few years, Al.

So assuming $90 oil and $3 natural gas price over the well, that $90 oil, that's WTI, is that the assumption, $90 WTI, or is it $90 or...

It's $90 at the well head, and then there'll be a little differential for a takeaway cost.

Okay, okay. $90 at the well head, so -- okay, okay. And again, the differential could be $6, $7 then, off of that for the takeaway?

Yes.

Okay. And in terms of the -- can you give us some sort of sensitivity where the PV-10 would be essentially 0? Given -- instead of a $90 oil price, what type of oil price would cause the PV-10 to go to 0?

Yes. That's a -- Al, that's a good question. Let me answer it this way. We always look at price sensitivities for all of our investments in oil and gas. And across our portfolio, $60 oil produces a mid- to upper-single-digit return.

Okay. That was $60 oil?

Yes.

Mid-single digit?

So our breakeven is going to be sub-$60. And that's not -- and Al, that's not too terribly different than most operators, who have portfolios that are similar to ours.

Okay. Can you give a little bit more granularity on -- you mentioned going forward you're going to review your portfolio in -- both in real estate and, I guess, in undeveloped land and also, Oil and Gas in terms of asset sales? And you're looking at kind of $100 million in assets sales. Can you give us a little bit more granularity of what you might be selling, and what are the -- you're going to be sort of the characteristics of a typical asset sale?

Yes. The bottom line, Al, are assets that we don't think are going to meet our return thresholds and hurdles over time. Obviously, there is some timberland assets that we look very hard at. But also, even in Real Estate, there are certain properties that -- they're in a struggle to meet our return criteria, and so we need to reposition those. In many cases, it means accelerate the workout of those properties in oil and gas or maybe a few pieces that -- of a royalty stream or something like that, that don’t seem to make sense. So as I said earlier, Al, it's everything on deck. We've got a portfolio that includes oil and gas, and real estate and timberland, and we're going to look at all of it. But we think that the $100 million is about the right number.

And would it be -- when you take look at the $100 million, is it going to be more in real estate or less and more in oil and gas or what are you thinking there?

Al, I'd tell you it's probably more heavily related to real estate, and I'm just going to put all land in Real Estate. Okay?

Okay, okay. And finally, can you give us an update on the approval entitlement process -- planning process with the Hidden Creek Estates in California?

Yes. The -- I think that I've mentioned this before, Craig Knight, who ran our real estate business for several years, continues to work for us on a contract basis, and he is totally focused on those entitlements, Al. So he has got approvals through the Planning Commission and I think the next round is through the council. So we're making progress. And hopefully, we're going to get that one across the finish line. And just as soon as we do, I'll be the first one to raise the banner.

Is there any -- can you get a little more specific in terms of expectations when you think that might happen?

If it was Atlanta or San Antonio, I would say yes, Al. This is California. And I think it'd be presumptuous to begin to forecast when we get the preliminary plat approval.

And your next question comes from the line of Anthony Hammill of Broadview Capital Management.

Just a couple of specific questions and then kind of a bigger picture issue statement after that. The 2013 acquisitions you guys made, just doing the quick math on the single family, it looks like about $13,700 per lot you paid and then under contract for this year, and obviously, not all those might close. It looks like almost double that amount. Are those in any way comparable, or are you looking at different types of communities, perhaps that are more fully along in the entitlement process or in higher value communities?

Yes. The sales in 2013 generated a little bit over 40% gross profit margin on a lot basis. The acquisitions that we're looking at may not be quite as strong, but they're comparable, Anthony. There -- to your point, there is a little bit difference in mix there as well. One of those projects is not only -- most all of them have got -- have their entitlements. One of them is already in development and generating sales. And some of the sales of those lots are north of $200,000 a lot just because of its location in the market that it's in. So there's a little bit of difference there in the mix. But we're still working to generate some nice margins.

Right. So not a sign that you guys are reaching for -- to pay up for lots?

No, no. In fact, it's opposite. Anthony, I'd go back to what I said earlier, and that's just there is a lot of discipline. I think one of these days, what I'd like to be able to show you in the market is all the "no"s because there is probably 15 "no"s for every "yes."

Right. Well, I guess we'll see that in a way because of the percentage of those that you've mentioned are under contract that actually get purchased. If we look out, say, a year from now.

Yes. The pipeline always has properties moving in or moving out.

Right. So the -- if you had twice as much capital to spend in the real estate business, would you, or is it -- or is it just...

What I would tell you, Anthony, is I don’t think of the business as being capital constrained. Given our positions in markets and the organization and the horsepower we have, we think that what we're currently investing makes a good sense. But what limits our capital investment more than how much capital you have is finding the acquisition opportunities that meet your return to risk profile. That -- I think that's really the limiting factor. It's not capital so much as it is finding the right opportunities.

Right. And just getting into the weeds a little bit here. I noticed that you added a community to the projects in the development process, which is Park Place in Collin County. Are you currently selling lots as of today, or is that still for reserve? [ph]

Yes, Anthony, and that's a bolt-on to an existing project that we've had in Houston for a number of years. So to the extent that we can find add-ons or bolt-ons that can leverage the position that we have in the marketplace, those are typically very good acquisitions, very strong acquisitions. Obviously, it's a significant risk mitigate.

Right. Okay. So that was something you recently acquired as opposed to something that you brought from -- you developed [indiscernible]?

Right, right. It's an existing community in which we purchased some adjoining property, correct.

Good enough. Okay. And any sense on -- in terms that you mentioned, you're selling in 41 communities. By the end of next year, do you expect it to be in and above that range, or is there a number? Would you expect that number to change materially?

If it was going to up or down, I would say there's -- it's more likely that it goes up. When I look at the sales in 2013, the communities that are selling versus 2012, there is a little bit more diversity. And you're beginning to see some communities that have -- that were idle or slow for a number of years begin to pick up a little bit. I think a real good example is what I had mentioned on the call, particularly in Atlanta. I'll give you a specific project, Seven Hills, which is a very nice massive land community in Atlanta, virtually went to lights out for a couple years. In 2013, I think we probably sold, what, 50 to 60 lots, Chris? Yes, somewhere around 50 lots. So considering that we're somewhere in the mid-innings of this housing recovery, and it appears to be tempered in the home pace, I would expect that you'd gradually have a few more communities begin to pick up some sales.

Right. And in the Atlanta market, you mentioned 99 last year. Is there any sense of how many lots you could sell in more of a stabilized Atlanta and surrounding market for year out?

It's -- anything that does [indiscernible] improves opportunity and the potential will certainly increase, the other factor that really determines the rate of sales or how many projects you have that are in active development can generate sales. So we have been -- we've been very judicious in investment development in Atlanta just because of the rate of that recovery and the depth of that downturn. So we expect Atlanta to continue recover, and we're going to take advantage of every opportunity that we have there. But it as -- has been thematic in my comments, it will be measured with different ones. [ph]

Okay. And so a big picture issue, the land business, it's difficult to find anything there that isn't deserving of some sort of applause. You're selling more lots. You're selling at a higher margin. You're in the commercial acreage. The diversity of sales is improving. It's a great story, yet the stock has been stagnant. You mentioned today in the oil and gas business, you're targeting $35 million, which is less than you made in 2008, about what you made in 2009, and that was, what, $300, $350 million ago in terms of capital you're going to have already and are going to pour into that business by year end. For us who don't understand geology and aren't -- can't just look at the formations and see the value there, how are you going to tangibly prove to us and those who are sitting on the sidelines that this foray into oil and gas is worthwhile because we're 1.5 year plus into Credo, and you've raised capital a couple of times, and it's frustrating for us who are seeing this phenomenal value creation in the real estate business being masked, obscured, what have you, by just the very capital intensive business of oil and gas, which is inherently riskier and, so far, lacking any tangible proof that it's been worthwhile?

Yes. Anthony, a couple of things. I'd ask you to keep in mind in 2008 and 2009, the natural gas prices, it's -- by dollar, way up to $12 to $14 per Mcf.

Right, but crude prices were lower.

Pardon me?

But crude prices were lower.

Crude prices had spiked up to $140 million. So when -- they might not have been on top of each other, but they were in the same period. Given those prices, it created a lot of activity in the legacy minerals, principally from a lease bonus perspective. If I'm not mistaken, in 2008, we had kind of these close to $35 million or $40 million just in lease bonus, and that's other operators' leasing minerals. So I think we've got to be careful in making those comparisons. Number two, relative to your comments to our investments in oil and gas, 2013 earnings were mostly impacted by a downturn in the legacy minerals, in addition to some costs and some weather impacts. Anthony, our focus is on making sure that we've got discipline, and we're generating the returns that meet or exceed our hurdle rate, which is 20%. I think a very positive indication of the results are demonstrated in the reserve growth. So if we look at the step up in the reserve growth, not only in volume or in future cash flows, but in PV-10, I think it's a positive indication of the investments that we've made, and I believe that, that will continue to prove itself as we go forward.

Okay. But if -- that sounds like we'll be looking into not necessarily this year, but next year to see a number that, again, us neophytes can point to, to say, there is value being created in the oil and gas business. Because $35 million, even if you don't consider the legacy oil and gas business, but just what you've poured into new drilling and Credo, $35 million isn't going to make that look like that great of an investment, so -- but we will have to wait 2015.

Anthony, let's just continue to watch the results. I think it's more of a trend than just a year. And I'd also say of the -- and in 2014, the -- there is just a minimal contribution from the legacy minerals.

And your next question comes from the line of Brett Morrison [ph] of Wilmore Capital Management [ph].

Can you give us some priority on some -- on identifying some of these nonperforming assets? Because you have assets that don't produce any cash flow, and then you have some that produce less than optimal cash flow. Can you kind of just help us understand where you're going to target first?

To your point, target, no more on priorities, though, that wouldn't produce any. So -- but here is a way to think about that. There is -- I don't know that we have -- there is very few assets, if any, that are in a portfolio that will not generate some return or some cash. And as you might expect, we start at the bottom where we've got the greatest opportunity, and there is a market demand to be able to prioritize the repositioning or the dispositioning of those assets. And as I've said in response to an earlier question, that's going to be a probably more heavily related into the real estate assets, which I'm going to put all the land in just from a comment perspective.

Okay. And then what about kind of the mineral rights and the water rights and kind of those less intuitive or less transparent assets?

Yes. The mineral rights and the water rights virtually have no basis and very little, if any, carry cost. And I will use the minerals for example, and I think it's also relevant and pertinent to water what I'm about to say is that you've got natural gas and oil that's in place in various formations. And because we own the minerals, there is no costs associated with delay rentals are or managing those minerals. So it's -- there is significant opportunity on a go-forward basis. What's really driven this renaissance in the energy world in North America has been principally technology, and we see technology continue to advance in the activity around various plays. So I am not a big proponent of selling minerals. However, I will say that on the real estate side, when we look at some of the land assets or even some of the projects. We'll be a little bit more focused on the return potential of those assets or properties.

Okay. The reason why I ask is, you're right, they don't have any cash cost today, but you're out there kind of raising dilutive debt. You're -- so you're diluting the equity holders, but then your continuing to invest in the oil and gas. But then you're sitting on the these idle assets that have an opportunity cost. In addition, you spent new money for ground water rights in 2010. But then kind of mothballed it or part of the Triple FOR initiative is to increase disclosure on the water rights, but we don't really hear much about it. And so that's where my question comes from.

Okay. Brett [ph], if you look at the investment in water relative to the entire the balance sheet, it's still minimal. We did make some investments back in late 2010 in some central Texas assets that we think still make very good sense. This part of the world is still in a drought, and I think it's got some really long-term issues relative to water, and we still support that acquisition and the opportunities that we think are commensurate with those assets. Now what I would say is, and I've been very clear about this in all of my comments, it's going to take a while to develop water assets. However, we believe that given our position, the number of assets we have that it's a very significant opportunity and potential for our business.

Sure. No. It sounds very lucrative, but we don't hear much about it. And as analysts here, we can't value it properly.

Yes. We -- Brett [ph], we believe the best way to begin to ascribe value to it is to secure groundwater withdrawal permits, and as well as purchase and sale agreements with buyers, whether they be municipalities or counties or industrial users. We think that's the best proxy for value, and that's what our real focus is in the business, it's securing those permits and agreements.

Sure, sure. And my last question, so I'm kind of going back in the filings. In 2009, you guys elected to take a strategic initiative and look at some of your assets and kind of delever and buy back stock. And then it looked like that kind of was put on hold and a further investment towards oil and gas kind of took its place. Do you mind commenting on that, and if there's any thoughts of revisiting that?

Yes. The initiatives that we adopted in 2009, I think the team did an outstanding job of executing the -- but one of the #1 targets was to divest some of the low-returning timberland assets. And in fact, we generated, oh, probably somewhere in the neighborhood of $225 million of sales from timberland, a significant amount of other cash flows associated with just the business operations, reflective of reducing cost and everything else. So we paid down about $150 million in debt. We bought back some stock. The -- I think the company was in an excellent position at that time. Our vision had always been to have a very healthy balance sheet and ample liquidity. In that when the housing market turned and the economy began to take a turn, there would be some very attractive investment opportunities. And in fact, we have been making those investments. So it's -- we were very consistent along the way, providing thoughts into the future and also growing this business. I mean, from the time that we spun out, we've always had a growth strategy. Initially, as you well know, in 2008 through '11, it was more defense than offense.

And your next question comes from the line of David Spier of Nitor Capital.

I was actually going to ask you about how you were planning on funding the CapEx program, but that question must have already been asked. I was curious, do you guys have a shareholder equity number at the end of 2013?

Let me get Chris to answer that. I'm pretty sure that there is.

Yes. It's about $715 million.

Right. So I mean, based from the appearance, the current mark caps around $650 million, and which will mean the company is selling at a considerable discount NAV. I think the past few callers, and you and myself would probably even argue, that the real estate side alone, which should support this type of our valuation, and that's actually quite surprising considering the underlying growth and tailwinds you keep referring to. So -- but as investors, how should we be confident that management's going to narrow this discount and, even more so, get the stock to trade at a valuation that reflects the growth that you keep referring to?

Sure. David, I believe that with the progress and the performance that we've made in the real estate, we're proving up to value of that part of the business and the assets. I also equally believe that given the short time frame from the time that we acquired Credo and the investments that we're making, they we'll begin to prove up that part of the business as well, and I think that, as I said earlier, the step-up in our reserve growth in both volume and value is a positive indication of those investments. We believe that with time and performance, with performance being the key in this business, that Forestar's value will be appropriately reflected in the marketplace.

Right. I mean, listen, we hope so because at the current run rates, it looks like your almost investing annually 30% of the company's total net worth into oil and gas, and we just hope that those returns reflect that type of investment. As previous callers mentioned, the $35 million number, we hope to be a little bit higher. And even regardless of that number, the company's current valuation, that number shouldn't even matter because the real -- as I said, the real estate side alone should reflect this stock price. So at the current price, the oil and gas business seems to be assigning a 0 value. So any positive results on that should be nice to see.

Yes. We would agree. That's our last question for this morning. Once again, I want to thank everybody for joining us on the call this morning, as well as your interest in Forestar. We hope you have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.