Forestar (US:FOR)2022-04-22 01:09Financial Data and Key Metrics Changes - Net income increased 68% year-over-year to $47.8 million, or $0.96 per diluted share, compared to $28.4 million, or $0.59 per diluted share in the prior year quarter [6][10] - Revenue increased 47% to $421.6 million, primarily driven by a 61% increase in lot deliveries to 5,788 lots sold [6][10] - Pretax income rose 68% to $63.2 million, with a pretax profit margin expanding 190 basis points year-over-year to 15% [6][11] - Gross profit margin expanded 220 basis points to 20.8%, with a non-cash real estate impairment charge of $3.8 million reducing the margin by 90 basis points [11][12] Business Line Data and Key Metrics Changes - Lots sold increased 61% year-over-year to 5,788 lots, with an average sales price of $81,900 [10] - Excluding lot sales from deferred development projects, lots sold increased 39% to 5,001 lots [10] - 39% of lots sold in the quarter were sourced by Forestar, up from 23% in the same quarter of 2021 [10][14] - 82% of second quarter lot deliveries were sold to D.R. Horton, down from 94% in the second quarter of fiscal 2021 [10] Market Data and Key Metrics Changes - Forestar's lot position at March 31 was 96,500 lots, with 64,200 lots owned and 32,300 lots controlled through purchase contracts [13] - 30% of owned lots are under contract to sell to D.R. Horton, representing approximately $1.5 billion of future revenue [15] - The market remains strong with significant demand for lots from home builders, despite supply chain constraints and rising material costs [12][19] Company Strategy and Development Direction - Forestar aims to maintain a strong balance sheet with ample liquidity and modest leverage, with approximately $580 million of liquidity at quarter end [16] - The company plans to invest approximately $1.75 billion in land and land development during fiscal 2022, subject to market conditions [15] - The strategy focuses on capital efficiency and high turnover, with a minimum 15% annual pretax return on inventory [13][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledges ongoing supply chain disruptions and rising material costs but remains optimistic about demand for finished lots [17][19] - The company affirms guidance for fiscal 2022 lot deliveries of between 19,500 to 20,000 lots, generating approximately $1.7 billion of revenue [18] - Management expects pretax profit margin to be between 14% and 14.5% for the year, an increase from prior guidance [18] Other Important Information - Moody's and Standard and Poor's upgraded Forestar's corporate credit rating and senior unsecured notes rating during the quarter [16] - The company recorded a non-cash real estate impairment charge of $3.8 million, which was an isolated issue related to cost overruns in one project [11] Q&A Session Summary Question: Additional details on the SFR transaction and its scalability - Management views the SFR transaction as a successful experiment that provided insights into market demand and capital efficiency, with favorable margins compared to traditional lot sales [21][22] Question: Impact of higher interest rates on the land market - Management has not observed a fall-off in demand for lots despite rising interest rates, although there are some indications of builders potentially not closing on deals [23] Question: Scalability of the SFR business - Management believes there are opportunities to capitalize on the learnings from the SFR transaction, but it is too early to determine if it will become a trend [26] Question: Competition with land bankers - Management does not see land bankers as direct competitors, emphasizing that Forestar's efficiency in delivering lots provides a different value proposition [28] Question: Defensive measures to protect margins and ROE - Management focuses on pricing lots accurately based on known costs to protect margins, while maintaining a strong land position and customer relationships [34] Question: Deferred lot sales accounting in guidance - The 787 lots from the deferred development projects are included in the quarter's sales, with future revenues and margins recognized over time [35] Question: Supply chain constraints and their impact - Management noted that supply chain issues vary by market, with electrical transformers being a significant challenge, but overall demand remains strong [39]