Good afternoon and welcome to Forestar's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode, and the floor will be open for your question and comments following the presentation. I will now turn the call over to Katie Smith, Director of Finance and Investor Relations for Forestar.

Thank you, Catherine. Good afternoon, everyone, and welcome to the call to discuss Forestar's first quarter results. Thank you for joining us. Before we get started today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. 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 filed with the SEC. This afternoon's earnings release is on our website at investor.forestar.com and we plan to file our 10-Q tomorrow. After this call, we will post an updated investor presentation to our Investor Relations site under Events & Presentations for your reference. Now I will turn the call over to Dan Bartok our CEO.

Thank you Katie and good afternoon everyone. In addition to Katie, I am pleased to be joined on the call today by Jim Allen, our Chief Financial Officer. As reflected in our results, we had a strong start to our fiscal year. So I'd like to start the call by thanking the Forestar team. People are the key to our business and I continue to be extremely proud of our excellent performance. Our team's ability to execute and the operational platform that we have built. Our outstanding first quarter is a direct result of the team's capabilities and commitment to Forestar. During the quarter, we maintained our momentum by achieving significant revenue growth and margin expansion. The highlight of the first quarter is an 84% increase in our net income to $40.5 million or $0.81 of earnings per diluted share. Forestar achieved an 83% increase in pre-tax income to $53.5 million and our pre-tax profit margin expanded 360 basis points year-over-year to 13.1%. Revenue increased 33% to $407.6 million, primarily driven by a 27% increase in lot deliveries to 4,516 lots. We continue to make progress delivering more lots from Forestar sourced projects. 22% of our lots sold in the quarter were Forestar sourced compared to 13% in the first quarter of 2021. This combined with our strategy of pricing lots closer to the time of completion, enabled Forestar to take advantage of favorable market conditions when setting finished lot prices. We are maintaining our focus on development projects and are doing less lot banking than a year ago. As a result, our gross profit margin expanded 360 basis points to 18% compared to 14.4% in the first quarter of 2021. We continue to increase our market share in a highly fragmented lot development industry. Forestar made further progress selling…

Thank you, Dan. In the first quarter Forestar's net income increased 84% to $40.5 million or $0.81 per diluted share compared to $22 million or $0.46 per diluted share in the prior year quarter. Consolidated first quarter revenues increased 33% to $407.6 million which included $3.5 million of track sales and other revenue. Lots sold increased 27% year-over-year to 4,516 lots with an average sales price of $89,000. Our ASP was higher this quarter due to the mix of lot deliveries from communities and higher price point markets. We expect our ASP will continue to fluctuate quarter-to-quarter based on the geographic location and lot size mix of our deliveries. 97% of lots sold were from development projects up from 87% in the same quarter of 2021. 89% of Forestar's first quarter lot deliveries were sold to D.R. Horton down from 95% in the first quarter of fiscal 2021. We sold 502 lots to eight customers other than D.R. Horton during the quarter which was a 182% increase in lots sold to other customers compared to the prior year quarter. Dan?

Our pre-tax income for the first quarter was $53.5 million with a pre-tax profit margin of 13.1%. This was an improvement of 360 basis points over the prior year quarter. Our gross profit margin was 18% also a 360 basis point increase from 14.4% a year ago. As I mentioned earlier, this improvement was primarily due to increased margins on lot sales from development projects, which was largely driven by capitalizing on the strong demand for finished lots. SG&A expense as a percentage of revenue in the first quarter was 5.3%, compared to 5% in the prior year quarter. We are extremely pleased with the progress we have made building our team and we continue to attract high-quality talent. We remain focused on managing our SG&A efficiently while building out our infrastructure to support our significant growth. We believe we will continue to manage our business at a mid-single-digit SG&A percentage. Katie?

Forestar's underwriting criteria for new development projects, includes a minimum 15% annual pre-tax return on inventory and a return of the initial cash investment within 36 months. During the first quarter investments in land and land development totaled $380 million of which $135 million was for land and $245 million was for land development. Forestar's lot position at December 31st was 103,300 lots of which 65,700 lots were owned and 37,600 lots were controlled through purchase contracts. At quarter end, we had 4,900 finished lots on hand. Finished lots have accounted for less than 10% of Forestar's owned portfolio for five consecutive quarters demonstrating continued strength in demand. At December 31st, 54% of our owned lots were sourced by Forestar up from 46% a year ago. As Dan said in his opening remarks, 22% of lots sold in the quarter were from Forestar-sourced projects up from 13% a year ago. That percentage will continue to trend higher as more Forestar-sourced projects start to deliver lots. Growth in Forestar-sourced projects supports further improvement in our gross margin and we expect that percentage of our portfolio to continue to increase over time. We also have good visibility into future revenues. Of our 65,700 owned lots 30% are under contract to sell to D.R. Horton representing approximately $1.5 billion of future revenue. Another 28% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. We remain very, disciplined when investing in new projects and our acquisition teams are finding ample opportunities that meet our underwriting criteria. We reiterate our plan to invest at least $1.75 billion in land and land development during fiscal 2022 subject to market conditions and are continuing to target a three year to four year owned inventory of land and lots. Jim?

Forestar remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage. At December 31, we had approximately $500 million of liquidity including $160 million of unrestricted cash and $340 million of available capacity on our revolving credit facility. Total debt at December 31 was $705 million with no senior note maturities until 2026. And our net debt-to-capital ratio at quarter end was 33.9%. Forestar's capital structure is one of our key competitive advantages and allows us the ability to price lots later in the development process. Most traditional land developers are encumbered by project level financing which inhibits them from pricing lots closer to completion after development costs are finalized. Additionally, project level financing can make accelerating or slowing development to match market conditions more difficult. With our access to institutional corporate level financing Forestar has unparalleled flexibility. At December 31 stockholders' equity was $1.1 billion and our book value per share increased to $21.29 up 15% from a year ago. Dan?

Given the strength of our first quarter results and the current market conditions, we are increasing our fiscal 2022 guidance. We now expect to deliver between 19,500 and 20,000 lots this year and to generate approximately $1.7 billion of revenue. We expect our pre-tax profit margin to be between 13.5% and 14% for the fiscal year. Consistent with our last earnings call, we expect revenue to be higher in the second half of the year than the first half and we expect lower pre-tax profit margins in the first half of the year compared to the second half due to the quarterly mix of expected lot deliveries and to a lesser extent operating leverage. Finally, we expect our effective tax rate in fiscal 2022 to be approximately 24.5%. The core drivers of our business remain healthy and strong and our teams and contractors continue to outperform our expectations. The accomplishments of our teams combined with our growth plan and proven business model give us confidence in Forestar's ability to execute through the remainder of our fiscal year and beyond. We're extremely excited about the opportunities ahead of us. Forestar is uniquely positioned to gain market share, increase profitability and generate meaningful value for our shareholders. Catherine, at this time we'll open up the line for questions.

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Carl Reichardt. Your line is live.

Hi, everyone. How are you dong? Thanks for taking the time today. I had a couple for you. One -- the market share story is obviously really important here for the long-term growth of the company. But I'm curious maybe Jim or Dan you talked about the private peers' project level financing what kind of basis point capital advantage do you have? What is the -- what do their debt structures look like? And if the market begins to slow some due to rates or whatever, what's your anticipation of how financing sources will look at those private peers and what they might do? What kind of advantage would that provide you given the stability of your capital sources?

You know, Carl I don't know that I would call it a basis point advantage as much as it's a structural and operational advantage. And I go back to when times are tough banks tend to want to pull in their financing. If one project has a problem the banks have to figure out how to balance that loan or rebalance that loan either through additional equity. And then oftentimes these deals are all cross collateralized for developers. So it just really gives them an administrative issue. The other thing that I think really helps for us is our ability to pay really rapidly their contractors. So I think if anything that does probably generate better cost pricing for us than someone who has to go through the bank loan draw process every month. We pay -- we could build like weekly. And -- or cut checks weekly. So I mean our people as they get that invoice in, it gets approved and paid pretty rapidly. So I think it's more of an operational advantage than I'd say a debt pricing advantage. However, we do have fixed rate financing. So for a long period of time that -- again, we can kind of control on a more conservative basis and I think what happens when a project gets all of a sudden funded on a loan-to-cost basis and costs go up and then how do they balance that loan against new cost structures. Oftentimes, the banks will require to have those sales contracts in hand before they even fund the land acquisition. So they're locking in their sale price even before they really might know their final development costs. So I think there's all kinds of advantages just don't know that it's purely based on the debt pricing itself.

Yes. That makes a lot of sense. Thanks again. And then -- whether it's Horton or some of your other customers, are you seeing demand for communities with larger lot positions increase? We've heard obviously from some who were self-developing that that's the direction they're kind of headed. And if that's an overall trend what does that mean for your margins or growth -- or absorption?

I don't know that we really look at it that way. The demand for lots is strong, whether it's a 99-lot community or a 300-lot community, we also only price based on what we think is a phase or roughly a year's worth of demand. And then as we develop that next phase, we'll put more lots on the ground. We can accelerate it or slow it down based on demand, but we really kind of focus on the phase-by-phase aspect of the larger communities. Although, in some cases, we're delivering multiple product types. So we got room for a builder to have different products in there, or even bring in multiple builders into the same projects. But I think overall, I see -- I probably see more builders competing on land acquisitions for larger projects than I did in the past. But as far as the lot side, they can get a lot position frankly we just recently did a 28-lot deal that made a lot of sense. So the size of it I don't think is really that important for people wanting to buy the finished lots.

Okay. Got it. Thank you. And then if I can squeeze one more in just on the horizontal side. If you're -- we've talked a little about some additional time it's taking to get lots ready to go. Do you see that as a function of -- is it cities and approval processes? Is it the shortage of graders? Is it a shortage of -- or expensive -- hard to get pipe? Can you just maybe talk a little bit about if there are significant or meaningful supply chain challenges you're seeing now and when you might expect those to abate if you're seeing them? Thanks a lot.

It's funny. On an overall basis, from where I sit today than where I sat maybe six months ago, I don't feel like the supply chain is getting worse for us. If anything I think we've learned how to adapt a little better order material sooner in the development process, and really be able to deliver lots really hasn't extended as much as maybe I had anticipated. You kind of see that in our first quarter results. I think we probably guided everybody even though we didn't give direct numbers that we did better than we thought we would this quarter, and I think that shows. But the areas that I'd say, I -- make me most nervous is frankly the utility companies. It's getting projects hot, getting transformers on site and getting the utility companies to get electricity to the lots is probably where I see the biggest issue. And it's sporadic, it's not nationwide, but it is clearly in different parts of the country, we're seeing that similar theme. And then the others a little bit in getting acceptance from the cities where they don't have the same -- the staffing to really manage that final acceptance process like -- because of the volume.

Dan, thank you so much. Take care guys. Thanks a lot.

Hey, Carl, thank you.

Your next question is coming from Deepa Raghavan. Your line is live.

Hi, good afternoon everyone. Thanks for taking the call. First question obviously topical interest rate. Dan does any of the upward pressure in rates that upcoming does that change your capital raising strategy or any of your balance sheet dynamics?

Well, we've always been pretty strategic in our capital raising strategies both in debt and equity. I think we're going to continue to be strategic. And when the opportunities make sense for us, we will continue to grow our capital stack. I think the thing that, I feel may be better about almost daily, one day to the next is that, we can really continue to maintain a pretty strong growth rate without expanding that capital base. I mean just being able to reinvest our earnings look the earnings we had in this quarter alone is really helps fuel that future growth. We just continue operating. We're not really that dependent on adding to our debt or equity stack to really fuel the growth that path that we're on.

Okay. Just following up on Carl's question, but just slightly differently. Does this upward pressure change any of the competitive nature of the industry that you're in specifically to land development? Does it mean -- I mean maybe some of your peers may be unable to compete in this environment and you probably can have a better advantage? Is there any of those possible, just given where the interest rates are probably headed?

Yes, I think --

Well, we're still very low enough that it may not make impact in the next couple of years. I don't know. Just any color there?

Yes. I mean at this point I can't say that we're seeing any change in the demand for lots. I think the demand for lots still outstrips the supply which obviously has given us some pricing power. I think if the market does soften, I know I've alluded to this in past calls, but if the market does soften, I think there's going to be some things that actually will help, I believe will help our business model and gain market share. One is that land or homebuilders historically will stop buying land and want to focus more on buying developed lots and stop developing their own lots sooner in the cycle. And I think that the banks will be more hesitant to do project level financing for the smaller and local developers. I think just those two things alone, I think really helped our business so that even though overall market demand might slow, I believe we still have an ability to continue to grow market share.

Okay. That's fair. Last one. It's pretty strong raise to margins. Can you talk to some of the drivers behind that? And specifically, address is that all coming mainly because of your mix, your self-sourced lots? Or is there a leverage benefit or any other dynamic that's helping you raise your margin guide pretty substantially?

Deepa, this is Jim. Primarily the increases come from more development project lots sold and really more Forestar-sourced lots. And we've talked about that. We've talked about that during the call, the flexibility that Forestar-sourced projects give us compared to builder source projects that allows us to price lots later in -- or closer to when we're ready to sell them. So that's really probably the biggest driver of the increase in margin.

All right. Thanks very much. Appreciate it, Dan and Jim. Take care. Bye.

Thank you.

Your next question is coming from Truman Patterson.

Hey, good afternoon, everyone. Thanks for taking my questions. So look clearly investors are worried about a sustained downturn in housing right now, not necessarily our view. But -- can you just remind us how much of your finished lot cost is discretionary development? And in the event of a downturn do you all pull back on development, shore up liquidity to take advantage of the land market? Or do you continue developing taking market share using that structural advantage you discussed earlier?

Yes. I think to answer your first question Truman, about 30% of the cost of a finished lot for us to develop that lot is in the land itself, and about 70% is in the development cost, the grading, the pipes in the ground, the streets the things that make up a finished lot. That ratio again although it varies from market to market I think overall for us with our national footprint, it still stays pretty close to what we thought it was a couple of years ago I haven't seen any big change in that. As far as what happens going forward I think a little bit the same way that the builders will rack. First thing will be to slow up land purchases. But we'll really look at every project individually and not necessarily make a blanket reaction to all of our projects. We'll look at where our sales is still strong, where is traffic in the model still strong and kind of make those decisions again on the timing of putting those next phases on the ground. But the key is that, I can't sell a lot if it isn't finished, right? So I -- having those finished lots on the ground, I think will continue to be key for us. But we will be very cognizant of keeping that strong balance sheet. And I think as we've said several times before is trying to take advantage of land prices do reset and give us the opportunity to gain market share. The key is we try to continue to keep that strong balance sheet and really look at project by project where the strength is versus the weakness.

Okay. Okay. And then you mentioned in the event of a downturn possibly pulling back in the weaker markets right? But currently in the current environment, are there any areas in the country where you're intentionally curbing land acquisition markets you might perceive as a bit frothy?

Well, I think if you -- I know the investor presentation probably isn't live yet, but we have that map on there. You'll probably see that, some of our owned and controlled lot totals are lower in kind of the western states being Washington, Oregon, Utah, where it probably has come down a little bit, whereas rest of the country continues to grow. And some of that is a function of high land prices, accelerating land prices as well as a little tougher regulatory environment, and a little bit harder to get those lots on the ground. As far as -- I think there was a second question there where am I seeing rapid land inflation, I think my answer is the same as last quarter kind of Austin, Texas and Phoenix are probably where we're seeing pretty big increases in the price to buy land. But again, the demand has been extremely strong. So I think that so far those markets have been able to absorb those land increases for now.

Yes, I know that's definitely encouraging that you haven't seen any deceleration in lot demand despite the uptick in rates. But -- when I'm looking at your SG&A it picked up slightly year-over-year. Just trying to understand the driver of that and whether we should expect some leverage on this line in 2022 or more costs as you continue to build out your infrastructure nationwide.

Yes. We continue to try to guide to the mid-single digits kind of in that maybe 5% to 6% range. I think the uptick is mostly timing. We're continuing to build out our teams in our core markets. Overall, for the year, I think we really kind of look at that -- at the -- our PTI number and probably expect our SG&A being netted out to be pretty close to what it was last year on a percentage basis. So I don't really see a lot of leverage into the good, but I don't really see it -- I don't see this being a trend. If I was at 5% last quarter, or 4.8% where we were last quarter and 5.3% it's not like it's going up significantly. It's mostly the timing of opening offices and adding people and how that kind of hits the timing versus when those lots are being delivered.

Okay. Thank you.

Your next question is coming from Mike Rehaut. Your line is live.

Hi. Doug Wardlaw on for Mike Rehaut. You guys updated your annual guidance this quarter. And I was wondering if you guys could give a further breakdown on how you think that's going to shake out throughout the year. And if there are some changes or you guys feel there could be potential changes what could be some drivers of that?

Yes. So we did increase our lot guidance by 500 lots. And like we said in our scripted remarks, Dan alluded to it that we expect for the higher revenue to come in the back half of the year relative to the first half of the year. So that's where we're going to see probably the greatest pickup. Does that answer your question? Or do you have anything else?

Yes. I just was just curious on -- I know it's only 500 lots but you guys were talking about the uptick in rates. Like is that something that's already been accounted for moving forward in terms of the lot guidance as well?

Yes. We definitely considered that when we were updating our guidance. We've just really continued to see strength in demand and a lot of demand for our lots. And we've been able to develop them a little bit quicker than we had originally anticipated. We were thinking that the supply chain might deteriorate further and we really haven't seen that happen. And so we just felt more comfortable saying that we were going to deliver more lots this year than we did last quarter.

Awesome. Thank you.

Your next question is coming from Anthony Pettinari. Your line is live.

Hi. This is Asher Sohnen on for Anthony. I was just wondering, I think previously you guided to about $1.75 billion of land spend and development spend in 2022, and I was just wondering if that's still intact. And just it kind of implied maybe high single-digit growth over 2021 compared to your roughly 24% lots delivered guidance growth. So, I'm just wondering -- I mean that makes sense given you're at the -- maybe at the higher end of your three to four-year target range for your supply of lots. But I was just wondering going forward is maybe high single-digit growth in land spend with respect to the next couple of years? Or maybe does it step down in 2023? Or how should I think about that?

Yes. This is Katie. I'll take that too. We expect to spend at least $1.75 billion in land development this year. And so that's really our baseline. If we see good opportunities or need to accelerate development that number could obviously fluctuate higher. But we feel really good about being able to put down and to invest that amount of capital in land and land development this year. Going forward, yes, I would say that that sounds about right. But what we've really always said is we have a very good lot position that we've built up so far. And now we really want to develop all of that land and start to generate earnings from those dollars that we had already invested. So you'll see a greater proportion of our land development spend go into development versus just acquiring new positions.

Okay. Thanks. That's helpful. And then -- you talked a lot about that demand for lots on the part of the builders remain strong despite of rates, et cetera. I was just wondering in terms of how pricing negotiations are going for you on uncontracted lots, I mean not on national level we may be seeing some of the home price appreciation to start to slow a little bit and lose some momentum. I'm just wondering if any of that is reflected in kind of the conversations you're having with builders in terms of price growth on your deliveries.

No. Builders never like to see lot prices go up. So I'd say, every time that we start off with a pricing discussion, there's a pushback. It's -- our goal is to find that balance between what we think is the best price we can achieve but at the same time making sure there's velocity in those subdivisions -- because again with our return-focused model, velocity is every bit as important as the margin that we're getting and we're really focused on asset turns. So it's a -- every conversation they always say that their pricing is -- or we can't pay that. But we always find a way to come to a resolution. And there's lots of demand. So it's one of the nice things of the way the master supply agreement works is the right of first offer process. It does allow us to really find what we think is that right market price, again considering velocity into the equation. We get a lot -- builders that -- we continue to get good pricing discovery. But it's -- I say every project is a little different. It's finding around the -- how many -- I probably said it more times than I should but it's that balance that fine balance between price and velocity that we're concerned with.

Yes. And, this is Katie. I would also add, if rates do rise really quickly and we do see some sort of a slowdown in housing, we might see a fires pause, while they digest those new rates. But we're really focused on developing lots for affordably priced homes and we still believe that there will be demand for new affordably priced homes. And so we feel confident in our business model.

Understood. Thanks for taking my questions. I’ll turn it over.

We have no further questions from the lines at this time. I would now like to turn the floor back to Dan Bartok for closing remarks.

Thank you, Catherine and thank you to everyone on the Forestar team for your focus and hard work. We look forward to working together as we strive for increased efficiencies, while continuing our growth. We appreciate everyone's time on the call today and look forward to speaking with you again in April to share our second quarter results. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. You may disconnect at this time and have a wonderful day. Thank you for your participation.