Forestar Q1 2026 Earnings Call - Solid revenue growth and disciplined capital allocation amid affordable housing challenges

Jenny, Conference Call Operator: Good morning and welcome to Forestar’s first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode, and the floor will be open for questions following the presentation. If anyone should require operator assistance during this conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Thank you, Jenny. Good morning and welcome to our call to discuss Forestar’s first quarter results. Before we get started, I want to remind everyone that today’s call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 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, which is filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.forestar.com, and we plan to file our 10-Q later this week.

After this call, we will post an updated investor presentation to our investor relations site under Events and Presentations for your reference. Now, I will turn the call over to Andy Oxley, our President and CEO.

Andy Oxley, President and CEO, Forestar: Thanks, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The Forestar team delivered a solid first quarter generating revenues of $273 million, a 9% increase from the prior year quarter on 1,944 lots sold. Our book value per share has increased 10% from a year ago to $35.10, and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue. While affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales, we are managing with discipline to balance inventory investments with liquidity and flexibility. We ended the quarter with $820 million of liquidity, and approximately 75% of our investments this quarter were for land development, and 25% were for land acquisition.

We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise, and diverse national footprint enables us to consistently provide essential finished lots to home builders and navigate current market conditions effectively. We will now discuss our first quarter financial results in more detail. Jim?

Jim Allen, Chief Financial Officer, Forestar: Thank you, Andy. In the first quarter, net income was $15.4 million or $0.30 per diluted share, compared to $16.5 million or $0.32 per diluted share in the prior year quarter. Our pre-tax income was $20.8 million compared to $21.9 million in the first quarter of last year, and our pre-tax profit margin this quarter was 7.6% compared to 8.7% in the prior year quarter. Revenues for the first quarter increased 9% to $273 million compared to $250.4 million in the prior year quarter. We sold 1,944 lots in the quarter with an average sales price of $121,000. Our average sales price this quarter was impacted by an outsized mix of lot deliveries from communities with higher price point lots. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries.

Our gross profit margin for the quarter was 20.1% compared to 22% for the same quarter last year. The current year quarter was negatively impacted by a tract sale with an unusually low margin. Excluding the effect of this item, our current year quarter gross margin would have been approximately 21.5%.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Chris?

Jim Allen, Chief Financial Officer, Forestar: In the first quarter, SG&A expense was $36.5 million or 13.4% as a percentage of revenues, compared to $36 million or 14.4% as a percentage of revenues in the prior year quarter. Our headcount decreased 3% from a year ago as we remain focused on efficiently managing our SG&A while maintaining our strong operational teams across our national footprint for future growth. We expect our headcount to remain relatively flat for the remainder of the year.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Mark?

Jim Allen, Chief Financial Officer, Forestar: Demand for new homes continues to be impacted by affordability constraints and cautious consumer sentiment. However, mortgage rate buy-down incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes, particularly at more affordable price points. Our primary focus remains developing lots for new homes at prices that target entry-level and first-time buyers, which is the largest segment of the new home market. The availability of contractors and necessary materials remains solid. Land development costs and cycle times have stabilized. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Jim?

Jim Allen, Chief Financial Officer, Forestar: D.R. Horton is our largest and most important customer. 16% of the homes D.R. Horton started in the past 12 months were on a Forestar developed lot, and 23% of their finished lot purchases over the same timeframe were lots developed by Forestar. With a mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by Forestar, we have a significant opportunity to grow our market share within D.R. Horton. We continue to work on expanding our relationships with other home builders. 16% of our first quarter deliveries were 317 lots sold to other customers, which includes 146 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to six other home builders.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Mark?

Jim Allen, Chief Financial Officer, Forestar: Our total lot position at December 31st was 101,000 lots, of which 65,600 or 65% was owned and 35,400 or 35% were controlled through purchase contracts. 10,400 of our own lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three- to four-year supply of land and lots and manage development phases to deliver finished lots at a pace that matches market demand. At quarter end, 24,100 or 37% of our own lots were under contract to sell. $210 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry.

Another 28% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Chris?

Jim Allen, Chief Financial Officer, Forestar: Forestar’s underwriting criteria for new development projects remains unchanged at a minimum 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. During the first quarter, we invested $415 million in land and land development. Roughly 25% of our investment was for land acquisition, and 75% was for land development. Although we have moderated our land acquisition investment over the last 12 months, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will allow us to return to strong volume growth in future periods, and we still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions.

Chris Hibbetts, Vice President of Finance and Investor Relations, Forestar: Jim?

Jim Allen, Chief Financial Officer, Forestar: We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with approximately $820 million of liquidity, including an unrestricted cash balance of $212 million and $608 million of available capacity on our undrawn revolving credit facility. Total debt at December 31st was $793 million, with no senior note maturities in the next 12 months, and our net debt to capital ratio was 24.6%. We ended the quarter with $1.8 billion of stockholders’ equity, and our book value per share increased 10% from a year ago to $35.10. Forestar’s capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors.

Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks.

Andy Oxley, President and CEO, Forestar: Thanks, Jim. The Forestar team delivered increased revenues this quarter while maintaining strong liquidity and executing our disciplined investment strategy. As outlined in our press release, we are maintaining our fiscal 2026 revenue guidance of $1.6 billion-$1.7 billion and our lot delivery guidance of 14,000-15,000 lots. Our teams have a proven track record of adjusting quickly to changes in market conditions, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. Our national footprint and more than 200 active projects are a strategic advantage and provide flexibility to allocate capital based on local market conditions.

While we expect home affordability constraints and cautious consumers to continue to be near-term headwinds for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans, combined with a constrained finished lot supply in a majority of our diverse national footprint, positions us for further success. With a clear direction, a dedicated team, and a strong operational and financial foundation in place, we are excited about Forestar’s future. Jenny, at this time, we’ll open the line for questions.

Jenny, Conference Call Operator: Thank you very much. We’ll be now conducting our question and answer session. If you would like to ask a question, please press Star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press Star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Our first question is coming from Anthony Pettinari of Citi. Anthony, your line is live.

Ashley Sohn, Analyst (representing Citi), Citi: Hi, this is Ashley Sohn on for Anthony. Thanks for taking my questions. Just starting on gross margins, I think maybe even excluding the tract sale, the 21.5% gross margin might have been down Q1 to Q1 year over year, maybe also versus Q4. Can you just talk about the pros and cons there and kind of what gross margins might look like over the next few quarters?

Jim Allen, Chief Financial Officer, Forestar: Yeah, the biggest impact on margin in the quarter was really due to mix. And there’s always going to be an impact based on the mix of projects that are delivering lots in the quarter. And that was the case this quarter. The lots that delivered really just had a lower gross margin. Looking forward, at this point, we don’t see any reason why our gross margins wouldn’t be kind of in the historical range that we’ve seen, kind of 21%-23%, probably at the lower end of that range, just given our given, I guess, trying to match price and pace or balance price and pace in a slower demand environment.

Ashley Sohn, Analyst (representing Citi), Citi: Got it. Okay. No, that’s really helpful. I mean, following up on that, I mean, when it comes to D.R. Horton and third-party customers, it sounds like you’re getting some maybe pushback on price. I think last time we saw price pushback on softer demand, there was more pushback on maybe takedown schedules and slowing those down. So I’m just curious if you could talk about what you’re seeing from your customers.

Andy Oxley, President and CEO, Forestar: Market to market, we’re continuing to meet with all of our customers. There has been a movement away from large bulk takedowns that had been sort of the norm in the post-COVID environment to more of a structured quarterly takedown. We’ve gone through most of that through fiscal 2025. There’s probably a few pockets where that’s still going on. We really haven’t seen a lot of change on price. Sometimes in a community where the pace is slower, we’ll meet with our customers and work through some things. It’s largely gone back to what we would consider a normal market environment in terms of quarterly lot takedowns.

Ashley Sohn, Analyst (representing Citi), Citi: Okay. That’s helpful. If you don’t mind me sneaking one more in there, I think SG&A spend was pretty flat year over year on a dollars basis. Is that just kind of something we should expect for the next few quarters, or are there any puts and takes to think about there?

Andy Oxley, President and CEO, Forestar: Yeah, our headcount is actually down a little bit from a year ago and from last quarter. And we expect our headcount to remain pretty stable for the remainder of the year. Headcount and labor costs are the majority of our SG&A. So we would expect it to be pretty stable.

Ashley Sohn, Analyst (representing Citi), Citi: Thank you. I’ll turn it over.

Jenny, Conference Call Operator: Thank you very much. Just a reminder there, if anyone has any questions, you can still join the queue by pressing Star 1 on your phone keypad now. Okay. I’m not seeing any further questions in the queue, so I will now hand it. Oh, apologies, we do have a question. We have a question in from Paul Przybylski of Wolfe Research. Paul, your line is live.

Paul Przybylski, Analyst, Wolfe Research: Thank you. Good morning. I guess to start off, you mentioned that your ASP was due to mix to higher price homes. Is that planned, or was that more a function of market conditions and weak entry level? And then how would your inventory of developed lots or anything you could bring to the market over the next 12 months, how does that break out between entry level and move up?

Andy Oxley, President and CEO, Forestar: So it was planned. As we’ve grown our development platform in the West, they tend to have higher ASPs. And so you’re starting to see some of that flow through. And so we think over time that will continue. We don’t think it will be as much in the remaining quarters of this fiscal year as it was in Q1. And also, it was kind of amplified due to just the lower volume of lot closings overall. We’re really not changing our strategy in terms of development plans for primarily the first-time homebuyer and entry level. That’s the largest section of the market, and it’s where our biggest customer focuses a lot of their attention. So we’re very focused on maintaining affordability and think that that’s the position to be in the marketplace.

Paul Przybylski, Analyst, Wolfe Research: Okay. Thank you. And then I guess Texas and Florida, you really have outsized exposure to those two states. Are you looking to maybe rebalance a little bit given higher resale inventory in those two markets or two states?

Andy Oxley, President and CEO, Forestar: Yeah. I mean, we look at that on a month-to-month and quarter-to-quarter basis and reallocate because our national platform allows us to do that. And right now, Texas and Florida are a couple of the more challenged markets with inventory. So we’re being very selective in what we’re looking at and what we’re doing there and moderating our development activities there where appropriate to make sure that we don’t have excess inventory. But those are still huge markets. They still have great in-migration. And so we think the fundamentals for those markets long-term are real solid. But we will continue to evaluate on a quarter-by-quarter basis and make investments based on current local market conditions.

Paul Przybylski, Analyst, Wolfe Research: And then just the last one. I would assume that you’re probably pulling back on the size of your phased developments. How does that impact your cost structure? Does that have any meaningful headwinds to margin?

Andy Oxley, President and CEO, Forestar: There’s no real impact on our cost structure. We do pull it back just based off the need to meet demand so we can meet sales absorptions. Really, we’re seeing supply of materials and contractor availability is in really good shape. So we continue to work with those trade partners and government jurisdictions to reduce cost and cycle times. It helps us reduce cycle times a bit when we pull back and reduce those phases. Obviously, we’re trying to deliver lots to meet the market demand. And just that continued increase in contractor availability alongside cooperating with the government jurisdictions is really the key to driving those lower development costs and cycle times.

Paul Przybylski, Analyst, Wolfe Research: Okay. All right. I appreciate it. Thank you.

Andy Oxley, President and CEO, Forestar: Thank you. Thank you, Jenny. And.

Jenny, Conference Call Operator: I was just closing up, and you beat me to it. Thank you very much. I’ll hand it over to you.

Andy Oxley, President and CEO, Forestar: Thank you, Jenny. And thank you to everyone on the Forestar team for your focus and hard work. Stay disciplined, flexible, and opportunistic as we continue to consolidate market share. We appreciate everyone’s time on the call today and look forward to speaking with you again to share our second-quarter results on Tuesday, April 21st.

Jenny, Conference Call Operator: Thank you very much. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.