Good day, ladies and gentlemen and welcome to the Forestar Group Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would like to introduce your host for today's conference Ms. Anna Torma. Ma'am please go ahead.

Thanks and good morning. I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss an update on Forestar's previously announced key initiatives and fourth quarter and full year 2015 results. I'm Anna Torma, Senior Vice President of Corporate Affairs. Joining me on the call today is Phil Weber, Chief Executive Officer; Chuck Jehl, Chief Financial Officer and Michael Quinley, President, Community Development. 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 and on our website. Now, let me turn the call over to Phil to provide an update on our key initiatives.

Okay. Thank you, Anna and thank you for joining us this morning. We told you three months ago it was a new day, a new team and we were focused on changing Forestar. Forestar has made significant progress on all four of our key initiatives, which we will highlight today. Our first initiative is to reduce cost across the entire organization. We've taken actions to eliminate over $30 million in SG&A cost in 2016 as compared to 2015 actual spending. We expect to achieve additional savings as we exit non-core assets resulting in Forestar having reduced its SG&A by over 50%. Our second initiative is to review our entire portfolio of assets. We've assigned NAV to every asset in the portfolio using multiple assumptions and scenarios. The Board and Management are using this NAV analysis to guide capital allocation decisions and as a tool for exiting non-core assets. Our third initiative is to review our capital structure. In fourth quarter 2015, we purchased and retired over $19 million in senior secured notes, which will reduce our annual interest cost by $1.6 million. Our fourth initiative is to provide additional information. Based on our review of our portfolio of assets, we have discontinued entitlement efforts on eight projects in Georgia and determined 12 previously entitled Georgia properties are not likely to be developed in the near term. We've classified these acres within our non-core undeveloped land. Now let me turn to the next slide and provide additional information on the cost reductions made across the entire organization. For 2016 budgeting, we use zero base budgeting. We started from scratch and evaluated every dollar we spend. To date we've taken actions to eliminate over $30 million in annual SG&A cost. In 2015, SG&A totaled approximately $87 million by exiting the previously identified…

All right. Thank you, Phil. I would also like to welcome everyone joining us this morning. I'll provide a review of our fourth quarter and full year 2015 financial results. Forestar reported net loss of $6.2 million or $0.18 per share in the fourth quarter 2015 compared with a net loss of approximately $11.8 million or $0.34 per share in fourth quarter 2014. Fourth quarter 2015 results includes special items of $21.5 million after-tax, principally associated with non-cash asset impairment charges related to our oil and gas properties, driven primarily by lower oil prices and the likelihood of these non-core assets will be sold. Fourth quarter 2015 special items include a $10.8 million after-tax cost associated with proved property impairments and $13.6 million associated with unproved leasehold impairments, principally related to our Bakken/Three Forks assets in North Dakota and a $2.9 million after-tax benefit associated with the change in our deferred tax asset valuation allowance in the quarter. Excluding these special items in the fourth quarter 2015, net income was $15.3 million or $0.45 per share compared with $11.4 million or $0.32 per share in fourth quarter 2014. Now let me provide some comments on full year 2015. Forestar reported net loss of $213 million or $6.22 per share compared with net income of $16.6 million or $0.38 per share in 2014. Full year financial results were negatively impacted by approximately $205 million in special items including a deferred tax asset valuation allowance and asset impairment charges related to non-core oil and gas assets. On an after-tax basis, full year 2015 special items include a deferred tax asset valuation charge allowance of $96 million, principally as a result of impairment charges recorded in oil and gas in our company being in a three-year cumulative loss position. $69.6 million in proved…

Thanks Chuck and good morning to everyone on the call. In our core community development business, we primarily identify and purchase sites, entitle and develop the sites and sell lots to our home builder customers so they can build homes. We're a value resource for builders who often do not have access to capital or who want to acquire a larger site that cannot be accommodated by their balance sheet or that do not have the internal land development expertise required. In 2015 I am pleased to report that for the first time in four years, we've acquired more new inventory than we sold. We acquired five new sites for $28 million, which represents a combined 933 planned or future lots in Charlotte, Nashville, Atlanta and Tucson. Several of these sites were fully entitled and are therefore expected to have lots on the ground by late 2016 or early 2017. We also invested about $21 million in six ventures with 1,069 planned housing units and/or lots located near Madison, Wisconsin, Salt Lake City, Raleigh–Durham and in Tucson. So majority of these investments are land development and homebuilding joint ventures with respected homebuilders within the respected MSAs. In total, we replaced over 2,000 units or lots and these units or lots support our initiative to diversify our community development platform to other strong markets outside of Texas, which historically has been 60% to 70% of our portfolio. We ended 2015 with over 1,300 lots in backlog located in 25 communities, which is actually up modestly from our fourth quarter of 2014. Now option contracts with builders for lots generally include a 10% to 15% cash earnest money deposit. We did not see any builder to option terminations in our markets in the fourth quarter of 2015 or to date in 2016.…

Thank you. [Operator Instructions] Our first question comes from the line of Steve Chercover with D.A. Davidson. Your line is open. Please go ahead.

Thank you. Good morning, everyone. So starting with oil and gas, the rational for buying Credo as I understand it was to become a producer, so you can quantify and discuss your legacy oil and gas reserves in Texas. So did you accomplish that task and I know you're going to continue to collect royalties, but can you quantify how it might look?

Yes. Hi Steve. How are you doing? This is Chuck. Yes as we acquired Credo in 2012 that was definitely one of the strategies of leveraging our minerals and our base there. Lots changes since 2012. We made the decision to exit the working interest asset. We made the decision that our legacy minerals are core asset. We've got a team of three to four people that are really qualified to continue to promote those minerals as we exit the working interest asset. We see that as a nice cash flow stream for us and a low risk business and to promote those minerals and as gas prices and oil prices recover in the future you can see value added there in that business. So we look forward to working on those minerals in the future with the team we have in place.

But will you quantify the proven and probable reserve there?

Historically on our minerals before we acquired Credo, it was more just producing -- developed producing reserves that we will disclose and the probables and possibles were not historically disclosed, but we've got 500-plus royalty wells we have interest in on our acreage and a lot 590,000 acres that we own across Texas, Alabama, Louisiana and Georgia. So we will continue to promote that and work that to do the best we can. It's obviously a challenging commodity price environment today.

Sure. But it will be a decent annuity to fluctuate with the price of oil and gas and since Kansas and Nebraska were sold for $21 million and as I understand it was not nearly as productive or maybe just more exploratory than the Bakken, it's safe to say that the Bakken is going to have significant value, perhaps not only paid for, but there is value.

Yes, we believe there is obviously value to the Bakken and we hire Tudor Pickering and Holt. As you know we announced cash back in November. Energy investment bank out of Houston that's well versed in this space and in particular the Bakken. So yes, we're running a process right now and are in the middle of that process and as we move forward and get closer to a decision, we'll announce our intentions, but I don't think it's in the best interest today to talk about where we are in that process. Yes Kansas and Nebraska was more of as you said an exploratory play and I am really proud of the team in Denver and the good work to sell those assets and the Bakken more of a resource play and less from exploratory, more development and exploratory so.

So if we're in the middle of the process three months into it. So that mean we should expect a response through definitive agreement three months from now?

Steve, this is Phil. No I wouldn't read into. We are in the process and I think our view is similar to the sale of Kansas and Nebraska assets. We'll give you more guidance when we've taken action and Tudor Pickering and Holt has added lot of value to us and we’re in the process and we’ll give you more color when we’ve taken action.

That’s perfect. I was trying to pass words like a hedge fund guy and then maybe I missed this, but what are we going to do with the money received from the Radisson sale? Is that going to be debt repayment, share repurchases on some blend?

Yeah, I would say that in terms of capital allocation decisions going forward, we've a heavy focus right now on reducing cost and exiting the non-core assets that we’ve identified previously and today. And as we complete those sales, you will see us take actions and through those actions, we'll provide more color on potential capital allocation. Similar to Kansas Nebraska, which you know, we didn’t talk a whole lot about, I think you'll see and get the guidance people are looking for when we take action.

Okay, and I promise, this will be my last question, what’s going on with the water rights?

Well, the water rights, as we’ve disclosed, we have two significant projects that we have permitted now, one in Central Texas and one in East Texas and the projection for the State of Texas is to go from $27 million people to $50 million people per the state’s office demographics. And the water infrastructure in the State that's mostly surface water right now can supply the existing population fairly well if we don’t go into a drought and so it is a longer term asset and we believe that in the future and I don’t want to put a timetable on the future, conjunctive ground water use along with surface water will be used by the large municipalities. And so there will be an opportunity for Forestar or the owners of those assets to be part of the water supply system in Texas in the future.

Great. Thank you very much.

Thank you. And our next question comes from the line of Mark Weintraub with Buckingham Research Group. Your line is open. Please go ahead.

Yes good morning, it’s actually Brendan Munson on for Mark. Two questions for you, first one is actually a two part. So any additional color on what precipitated the decision to stop the entitlement process on the Georgia land. And since you've concluded the Georgia lands are no longer going to be developed, is there any reason that we should be thinking of these 20,000 acres differently than your other Timberland acreage?

Yes hi. This is Michael. We went through an evaluation process of kind of where those entitlements were perfected and we decided that as we start to look at the growth of around Atlanta, these were just not in the areas where we thought it was the best for investment for the shareholders. As it relates to how they are valued is any different than regular Timberland, yeah we view these as Timberland plus, a little bit of HPU they may have good road frontage. They may have some other attributes that will allow us to market them as a premium a little better than just pure timberland.

Okay. That's great. Thanks and…

I'll add some more color to that. So in my remarks, I mentioned that when we're looking -- we've just begun the process of exiting the timber portfolio, but we're thinking about it and really in three different buckets. You've got the 14,000 acres in Texas. And then you have the 49,000 acres of Timberland in Georgia and Alabama that is really industrial and then there is the 25,000 some of which is the discontinued entitlement and entitlement and process assets in Georgia. So we're going to look at what's best and we could package those as where we're going to work with an intermediary that will add some value to us. We're going to look at what is -- what's the best way to market those could be in -- could be the one buyer. Could be to -- where you create one large package, but then have a series of smaller packages that have higher value to them. So, we're going to be very strategic about how we do this. And I can tell you where there is lots of interest from folks. When we made the changes in September we got lots of calls from people saying if you're going to exit your timber, let me know. So we know that community. I would further add that Ashton Hudson who just joined our Board has a lot of experience in the timber area. Is a great addition to our Board and so we're going to be very thoughtful about how we do it and maximize the value that we realize.

Okay. Great. Appreciate the detail there and then last one and then I’ll jump off, any update on the Hidden Creek project following capping of the Ranch gas leak.

We continue to work on that project through the entitlement phase and as we get further along, that we'll be able to bring that out and discuss more guidance on that.

Thank you. And our next question comes from the line of Steve O'Hara with Sidoti. Your line is open. Please go ahead.

Hi, good morning. I think you said you had assigned NAVs to the portfolio. I was wondering if you would be willing to may be comment in terms of your estimated NAV. And then how that might drive your capital allocation decisions and what you can do in terms of repaying debt or buying stock as some of these non-core assets are sold. Thank you.

Steve, good morning. I don’t think it’s in the best interest of shareholder for us to disclose what our entity level may have calculations are and as we've gone through today and as we've said, we have a heavy focus on exiting non-core assets. And so as a seller I’m also reluctant to put out into the market what I think the value because those assets are because I want a buyer who may be is a better owner and places higher value on those assets to make a bid for what it's worth to them. We might have a very different view in our NAV calculation of what asset is -- I’m not going to comment on the amount, but if you look at Kansas Nebraska, I think is a good example of -- we’re not in that business. It’s not a core business for us. The buyer is in that business. It’s a core business for them. They have probably different assumptions that they’re using. They're maybe looking at a different horizon for owning that asset than we could and so that's kind of the process that we’re going to go through and I don’t think it’s in the best interest for us to publish the NAV.

Okay. I assume that was the answer, but I figured I had to ask it anyway.

Sure.

And then in terms of your ability to repay debt or re-buy -- repurchase some of the debt maybe what's the desire or the ability to do that, versus maybe the desire to grow some -- let’s say core business as well, if you could just talk about that briefly and that's it from me. Thank you.

Yes sure, let me take the second part of it first. I think one of our goals today and Michael I think did a terrific job of giving you some pretty specific guidance on the core community development business of what we see 2016 looking like 1,600 to 1,800 lot sales, which is a positive increase over last year and our view of that business is the fundamentals of that business are stable and positive moving forward. In terms of the first part of your question, again our heavy focus is on exiting the non-core assets and as we get sales proceeds from those, we will take action that's in the best interest of shareholders/ I don’t think it's in the best interest of the shareholders to telegraph any specific strategies for those proceeds right now.

Okay. Thank you.

Thank you. And our next question comes from the line of Edward Okine with Basso. Your line is open. Please go ahead.

Well thank you. My questions have been asked. Thank you.

Thank you. And we will move on. Our next question comes from the line of Kevin [Coberly] [ph] with Prospector. Your line is open. Please go ahead.

Hello. May be already answered this one, but with the ongoing cost cuts, what should we think in terms of…

We can’t hear you…

Can you hear me now?

Yeah, little bit better.

Alright sorry. Yeah with the ongoing cross cuts, what should we expect in terms of 2016 G&A not allocated to segments and directionally how should we think about that once all of the non-core asset sales are completed.

Yeah, Kevin this is Chuck. Yeah the slide that Phil walked through earlier, as we look at -- as we exit a lot of the cost reductions are contingent upon the timing of exiting certain non-core assets and that’s across the organization, the segments as well as G&A, but on the 2016 estimate of $56 million, our G&A unallocated is a little under $20 million in that $56 million estimate provided and that’s down from about $27 million in 2015 actual. As we look forward in the target, that number is about $17 million of the $39 million target that Bill discussed earlier and again that target timing is really dependent on our execution of the non-core assets and the further reduction of those cost.

Thank you.

You’re welcome.

Thank you. And our next question comes from the line of David Spier with Nitor Capital. Your line is open. Please go ahead.

Hey good morning everyone. Looks like you guys are off to a solid start for executing the plan that's been laid out. So in regards to the I just wanted to clarify the Kansas and Nebraska asset sale. I just wanted to confirm that sale closed subsequent to Q4. So the cash hasn’t shown up in numbers yet right.

Yeah, that’s right David. It actually closed yesterday.

Got it. Okay. So it's not -- obviously it's not the numbers that were put out.

Not it's not in the $96 million that’s in the release at yearend cash on the balance sheet.

Got it. Then following the closing of Radisson and oil and gas sale, is there any idea of how much cash the company could be sitting with?

Yes as Phil talked about earlier, I think we will provide more details on cash on hand as we in our initiatives to strategies and allocation of capital as we execute the sales, but I don't think today as we complete the sales, we will announce that, but doing that prematurely I think would -- we're getting ahead a little bit.

Got it, but it just looks like by at least our numbers, should be sitting with something well over at least $200 million, but again that's our numbers. So I just like the point -- the following point of capital allocation, seems like you guys could buy -- do a significant buyback here. So I think that should be something of a priority right behind the debt reduction. So I just wanted to mention something that I guess could be repeated to the Board, but it seems like you have more than capable of being able to execute that. And then just the last question is any idea of what the book value on the remaining residential and commercial land is?

The book value on the remaining commercial?

Yes the investment based book value?

Yes we're actually going to David, going to be filing our 10-K later this week. So that information will be in the K when it comes out.

Got it, all right. Thanks guys. I appreciate it.

You bet. Thank you.

Thank you. And our next question comes from the line of Ben Claremon with Cove Street Capital. Your line is open. Please go ahead.

Good morning, this is Jeff Bronchick in for Ben. How are you?

Hey Jeff.

Hey just two quick questions, so is it correct to assume that all the write-offs from oil and gas can be used to shield gains on sales from real estate?

No Ben, the oil and gas tax basis is approximate book basis. So the oil and gas assets when they're sold at estimated fair value there will be a tax book or pretty much an alignment there. So there would not be a large tax loss associated with oil and gas. But there is -- as we look at non-core community development and other assets that we’re evaluating, one of our strategies with gains and gain properties is to look at high basis, tax basis properties as well. So we can have strategies to offset those gains with higher tax basis in particularly similar to Antioch California.

May be I didn't answer that question correctly, the write offs that we had to date can be used to shield gain.

The right-offs of the oil and gas assets.

Correct. When you just look at the big loss we just reported…

And I’m saying no, the answer is that in the oil and gas business as you expand drilling and completion cost the most of now you deduct 100% of the IDCs and intangible drilling in the years, you spend it and we've not been drilling wells in the oil and gas business and participate as much as in the past. So a lot of those deductions have been taken so for against current taxable income. So the tax basis approximate look on the oil and gas assets.

Got it. Thanks guys

You’re welcome.

Thank you. And our next question comes from the line of Robert Howard with Garnet Research. Your line is open. Please go ahead.

Hi, just wanted to ask a question maybe a big picture thing, you guys are taking about all these asset sales since you’ve been reducing all these costs I am just wanted to get a feel for after all this process is done over the next year or so, what do you want Forestar to look like? It is just going to be just developing land? Are there going to be any assets that you're going to be saying, we want to hold these long term. So we do have some supplemental income streams to get us through the up and down time. So, what are you thinking for a big picture?

Rob thank you. This is Phil. As I said we've heavy focus on reducing cost and exiting the non-core assets and I don’t want to minimize that’s a lot of work. And as we've said with the multifamily portfolio, we have five assets we're marketing. We have a strategy on the remaining three, four and the Radisson Hotel is under contract. It hasn’t closed yet. There is work to be done. So we’re just beginning the process for exiting the timber and so we have a lot of work to do there. And as we complete the sales, then I think we will be able to give more guidance on what our strategies will be moving forward. And if you look at Forestar from a year ago, basically we are taking action on almost all of the assets that we owned other than the Legacy Mineral assets and the core community development business. And when I took this job, on my first call I said, our core business is lot development and Michael gave you a lot of guidance today on what we’re going to be doing in 2016 in that business. So it’s -- I view it as two tracks of exiting the non-core assets and we gave you the guidance of the plan for 2016 in the core business, Chuck gave you some guidance on the Legacy Mineral Assets as he said the goal there is to reduce the cost where those are producing positive cash flow for us without lot of expenses, the royalty interest. So it’s a really good place to be. And as we make progress on non-core, we will quickly get to having to make decisions on core going forward.

Okay. So is there going to be -- I guess you envision there being any -- I guess you have the mineral assets you’re saying that will be something that we'll be bringing the income in. I guess one thing I’m kind of thinking about is obviously markets real estate development there is good times and bad times and is there going to be anything that gives you an income stream to help you get through that. I know you’re talking about selling timberland and that's something that would help provide income stream during a wait and those types of things, Do you envision there being any type of asset that you're going to be holding on to help stabilize things?

Well, I think near term, I think we’re looking somewhat at the legacy mineral assets would fall into that category of -- there is not a lot of operating expense to them. There is not a lot of people expense to them. But having said that, one of the criteria that we've used on everything is are there better owners of assets that we own that place a higher value on them than Forestar does or can? And so I don’t want to be definitive on the future of the legacy mineral assets because it is entirely possible that somebody who places a much higher value on those it would be in the best interest of Forestar for us also to potentially exit those, it’s not our near term plan to do that. And with the core community development, I think we’ve given you the guidance we want to give you for 2016 which is a positive increase over next year. We think the fundamentals of the business are solid, but as we work through this year, as we make decisions and working with our Board and getting guidance from our Board we will share those strategies with you going forward.

Okay. Thanks for your time.

Thank you, sir.

Thank you. And our next question comes from the line of Albert Sebastian with Prospect Advisors. Your line is open. Please go ahead.

Good morning.

Good morning, Al.

What are your NOLs at year end?

Our NOLs would be about little under $38 million going forward and it will be announced in the 10-K later this week.

Okay. You sold about 14, almost 14,000 acres of undeveloped land in 2015. When you take a look at the undeveloped land that you’re going to be selling, you get the three buckets, which bucket this 14,000 acres sold, which bucket does it fall in? Is it Timberland or higher and better use? What is it?

Al, this is Michael. It was a blending throughout last year. Just like we try to do every year, we're about maximizing that value. So I would tell you that of those 14,000 acres we sold, it would be just a blend across all three buckets.

Al, we did have one sale in the fourth quarter that was out of the Timberland bucket that was about 7,000 acres, that's correct. So the 14,000, about half I would say was in the Industrial Timberland.

Can you say in the fourth quarter you had 7,000 acres that were sold out of the Timberland bucket?

Right. It was like -- I think my KPI earlier about 7,267 total acres in the fourth quarter about 6,900 of that was a bulk transaction. So that would have been from a retail bucket for our Timber Plus.

Okay. The higher and better used Timberland.

Yes.

Okay. That will do with me. Thank you.

Thanks Al.