Forestar Group Inc. Q3 2026 Earnings Call

Good morning, and welcome to Forestar's third quarter 2026 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar's third 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 and its most recent quarterly report on Form 10-Q, both of which are 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.

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 achieved solid third quarter results with revenues of $407 million, up 4% from the prior year quarter, on 3,659 lots sold. Earnings per diluted share increased 8% to $0.70, and pre-tax income increased 12% to $48.7 million. Book value per share increased 10% from a year ago to $36.40, and our contracted backlog remains strong with visibility towards $2.3 billion of future revenue. Ongoing affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flexibility, and we ended the quarter with approximately $1.1 billion of liquidity. We also reached a significant milestone this quarter, delivering our 100,000th lot since D.R.

Horton made its transformative investment in Forestar in 2017. Forestar has grown to a proven scalable platform, and we couldn't be prouder of what our teams have built to get us here. Looking ahead, we remain focused on turning our land and lot inventory efficiently, maximizing returns, and consolidating market share. With a strong balance sheet, operating expertise, and a diverse national platform, Forestar is well-positioned to navigate market conditions and extend its leadership position in the highly fragmented lot development industry. We will now discuss our third quarter financial results in more detail. Jim? Thank you, Andy. In the third quarter, net income attributable to Forestar increased 9% to $35.9 million, or $0.70 per diluted share, compared to $32.9 million or $0.65 per diluted share in the prior year quarter.

Our pre-tax income increased 12% to $48.7 million, compared to $43.6 million in the third quarter of last year, our pre-tax profit margin increased 80 basis points to 12%, from 11.2% in the prior year quarter. Revenues for the third quarter increased 4% to $407 million, compared to $390.5 million in the prior year quarter. Mark? We sold 3,659 lots in the quarter with an average sales price of $108,800.

We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our delivery. Our gross profit margin for the quarter was 20.7%, compared to 20.4% for the same quarter last year. Chris? In the third quarter, SG&A expense increased 2% to $38.3 million, compared to $37.4 million in the prior year quarter.

As a percentage of revenues, SG&A was 9.4%, down from 9.6% in the prior year quarter. Our headcount declined 9% from a year ago as we remain focused on efficiently managing SG&A while maintaining strong teams across our national footprint to support future growth. We expect our headcounts to remain relatively flat for the remainder of the year. Jim? D.R. Horton is our largest and most important customer. 14% of the homes D.R.

Horton started in the past 12 months were on a Forestar-developed lot. 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 significant opportunity to grow our business with D.R. Horton. We also continue to expand our relationships with other home builders, selling 289 lots or 8% of our third quarter deliveries to 12 other customers this quarter. Mark? Our total lot position on June 30th was 91,700 lots, of which 62,200 or 68% were owned and 29,500 or 32% were controlled through purchase contracts. 9,600 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 demand.

At quarter end, 23,500 or 38% of our own lots were under contract to sell. $202 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.3 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 31% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris? 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 third quarter, we invested $312 million in land and land development. Roughly 80% of our investment was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year to more efficiently manage our inventory, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will enable us to return strong volume growth in future periods. We still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim? 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 $1.1 billion of liquidity, including an unrestricted cash balance of $395 million and $670 million of available capacity on our undrawn revolving credit facility. Total debt at June 30th was $793.8 million, with no senior note maturities in the next 12 months. Our net debt to capital ratio was 17.7%. We ended the quarter with $1.9 billion of stockholders' equity. Our book value per share increased 10% from a year ago to $36.40. Forestar's capital structure is one of our biggest competitive advantages. It sets us apart from other land developers. Project-level land acquisition and development loans have become less available and more expensive in recent years, impacting most of our competitors who generally rely on this type of financing.

These loans 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.

Thanks, Jim. Forestar team delivered solid results in the third quarter, including increased revenues and profits while further strengthening our balance sheet. As outlined in our press release, we are maintaining our fiscal 2026 lot delivery guidance of 14,000-14,500 lots and our revenue guidance of $1.6 billion-$1.7 billion. Our teams have a proven track record of adjusting quickly to changes in market conditions. We closely monitor each of our markets and balance the pace and price of lot sales to maximize returns across our projects. With more than 200 active projects across our broad national footprint, we have operational flexibility to allocate capital strategically based on local demand and market dynamics.

Although home affordability constraints and cautious consumer sentiment are expected to remain near-term headwinds for 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. Consistent execution of our strategic and operational plans, combined with constrained supply of finished lots across many of our markets, positions us well for further success. With a clear strategy, an experienced team, and strong operational and financial foundation, we are optimistic about Forestar's future. Jenny, at this time, we will open the line for questions.

Thank you. The floor is now open for questions. If you have any questions, please press *1 on your phone keypad now. We ask that while you're posing your question, you please pick up your handset if you're listening on a speakerphone to provide optimum sound quality. *1 if you would like to ask a question. Please wait a moment whilst we poll for the questions. Thank you. Our first question is coming from Ryan Gilbert of BTIG. Ryan, your line is live.

Hi. Thanks. Good morning, everyone. I was hoping you could give us an update on the competition that you're seeing in the land market from other land developers and land bankers as well. Horton talked to maybe a slower than expected home buyer market in the quarter, and I'm wondering if that translated into the land market as well.

Land market's been relatively stable. Haven't seen much change in land price. We have seen a little bit of improvement on being able to negotiate terms. For example, getting land on takedowns, getting through full entitlement and permitting. We're able to focus on shovel-ready deals. Overall, I would say we'd see a somewhat less development activity across the board in quite a few markets. Most markets are still slightly undersupplied, so we think that gives us opportunity for future growth.

Got it. Sorry, slightly undersupplied from a finished lot perspective.

That's correct. Okay, got it.

I'd appreciate any directional thoughts on 2027, just given the decline in your controlled lot count. Do you think that the land position puts you in a position to grow market share in 2027?

Yeah. Our own lot supply, we want to target that to be around three to four months of supply today.

Year supply. I'm sorry, year supply.

Three to four year supply. Today, it's a little bit over, just north of four, so we feel good about our own lot supply. We have to finish lots on the ground this year to execute. Moving on next year, in terms of consolidating market share, we feel really good about our opportunity to grow our market share, not just within D.R. Horton, but with other builders.

We have a very robust pipeline of future projects, so we think we can expand in the Horton footprint as well as with some third parties.

Okay, great. Any change in the, I guess the M&A pipeline or opportunities for growth via M&A? I'm just kind of looking at the cash balance building over the course of the year.

Yeah, I think there are opportunities. We continue to see opportunities. That's part of the reason we want to have strong liquidity, is to be able to take advantage of opportunities when they arise.

Okay, great. Thank you. Thank you very much.

Just a reminder there, you can still join the queue by pressing star one on your phone keypad. Our next question is coming from Trevor Allinson of Wolfe Research. Trevor, your line is live.

Hi. Good morning. Thank you for taking my questions. At times in the past when the market's been weaker, you guys have used that as an opportunity to pick up head count to try to help grow your share. I think here recently, including in the prepared remarks, you've continued to talk about keeping your head count flat. I guess I would ask, what's different this time with weaker conditions? Why are you not being more aggressive to pick up head count like you have in past periods?

We had pretty significant head count growth in 2024 and the first half of 2025. We intentionally moderated that in the second half of 2025 and have been relatively flat, slightly down this year. We will see an increase in head count as we go into 2027 as we develop out more land capabilities, particularly out West.

Okay. Got you. Makes sense. Second, on cycle times, can you update us on how those are trending? Maybe where those stand versus a year ago or what you would consider a normalized cycle time for you guys. Historically, the municipalities have been frequently cited as the biggest bottleneck. Are you seeing any relief there?

Okay, I'll talk about cycle times first. It really comes back to a couple things. Contractor availability continues to free up. Not just free up, but also we're seeing what we would say are A-rated contractors we'll be able to utilize. We do manage our developments in phases. Cycle times over the past trailing, we'll say 36 months, have come down close to six months. They settled in around 12 months. We're currently operating in the 12-month cycle time. We do think there's further opportunities for efficiencies to reduce our cycle times and our costs. You hit the nail on the head. I think basically our complete to close in terms of governing jurisdictions, that's kind of been our bottleneck to reduce our cycle times further. I do believe there's opportunities to reduce our cycle times as we go into the future.

Okay, great. Definitely encouraging. Maybe one more if I can. Gross margins in the quarter were at the lower end of your 21%-23% historical range. I know there's always mix impacts. We've also seen diesel costs come up here in site work. Were there any impacts in the quarter from diesel as well, or was that primarily a mix impact?

Not really. It's primarily mix and just the environment, just a slower absorption environment. As we manage price and pace on a project-by-project basis, our margins have been kind of the lower end of our historic range over the last three or four years.

Okay, makes sense. Thank you for all the color. Good luck moving forward. Thank you very much.

Our next question is coming from Ryan Gilbert of BTIG. Ryan, your line is live.

Hi, thanks. Just a quick follow-up from me. I think Horton mentioned some relief on horizontal construction costs on the call, and I'm wondering if that's something that you're seeing as well. To the extent you are seeing some cost relief, when you would expect that to flow through the income statement.

Our costs have stabilized, I would tell you, over the past 12 months. I mean, we're seeing some reductions in some categories, and we're seeing some increases in others. I would say relative to direct costs, they're pretty stable. We haven't seen a big decrease in cost.

Okay, got it. Thanks, guys.

Thank you. Thank you very much.

Well, we appear to have reached the end of our question and answer session. I will now hand back over to Andy for any closing comments.

Thank you, Jenny, and thank you to everyone on the Forestar team for your dedication and commitment. Let's stay focused, flexible, and opportunistic as we continue to strengthen our market position. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter and full year results on Thursday, October 29th.

Thank you very much. This does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.