Greetings, and welcome to the D. R. Horton Conference Call to discuss its merger proposal. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Hansen. Please go ahead.
Thank you, Kevin, and good morning. Welcome to our call to discuss the merger proposal we have submitted to Forestar Group and that we announced in our press release this morning. Please visit investor. Diorhorton.com/for for a slide deck detailing our proposed transaction. Before we start, I need to say that today's call may include comments that constitute forward looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Although D. R. Horton 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 D. R.
Horton on the date of this conference call and D. R. Horton does not undertake any obligation to publicly update or revise any forward looking statements. Additional information about issues that could lead to material changes in performance is contained in D. R.
Horton's Annual Report on Form 10 ks and our most recent quarterly report on Form 10 Q, both of which filed with the Securities and Exchange Commission. This morning's press release can be found on our website at investor. Drhorton.com along with the slide deck detailing the proposed transaction. We will open the call to a question and answer session after our prepared remarks and we also encourage anyone with questions after the call to e mail us at investorrelationsdrhorton.com. Now, I will turn the call over to David Auld, D.
R. Horton's President and CEO. D. R.
Horton:] Thank you, Jessica, and good morning. Addition to Jessica, I'm pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer and Bill Wheat, our Executive Vice President and Chief Financial Officer. I trust you have all seen our press release and we thank you for joining us on short notice to discuss the details of what we believe is a compelling proposal to acquire 75% of Forestar's outstanding shares for 16 point $2.5 per share in cash. This represents a $2 per share or 14% premium to the transaction that they currently have with Starwood Capital and it allows Forestar to continue as a publicly traded company strategically aligned with the largest homebuilder in the country. This alignment creates significant opportunities for growth and meaningful upside value creation for all Forestar shareholders.
As background, Forestar is a publicly traded land development company headquartered in Austin, Texas. As of March 31, 2017, Forestar owned interest in 49 residential and mixed use projects in 14 markets across 10 states, representing approximately 9,700 residential lots. As many of you know, D. R. Horton has been focused on limiting the number and duration of lots that we own.
This has improved our returns, but has also created tremendous appetite for optioned lots and lots developed by others. We believe that Forestar can help satisfy this demand and become a large national publicly traded land development company. With a close strategic relationship with Doctor Horton, we think that Forestar would have significant growth potential. We respect Forestar's management team and together we believe we could grow this platform and take advantage of this exciting marketing opportunity. Last year, we evaluated and pursued a potential transaction with Forestar, but we were unable to reach mutually acceptable terms.
Since then, the Forestar team has made significant progress disposing of non core assets and on focusing its business. As a Forestar Board has agreed to a transaction that would take their company private and there is a stockholder vote scheduled for July 7. We feel it is important to express our interest publicly now to give the Forestar Board and its shareholders time to review our proposal. We believe our proposal is clearly superior and we sent a letter to the Forestar Board this morning encouraging them to move promptly to capture this increased value for their shareholders. Simply put, we believe this transaction is mutually beneficial to Forestar and D.
R. Horton shareholders. Forestar shareholders will receive a substantial premium over their current transaction and have the opportunity to participate in the upside of a company that is strategically aligned with D. R. Horton, which intends to use its scale, resources and relationships as the largest homebuilder in the U.
S. To organically grow Forestar more aggressively than it has grown in the past. And for D. R. Horton shareholders, our proposal is consistent with our stated long term strategy of developing strong relationships with land developers across the country and growing the option portion of our land and lot positions to enhance both operational efficiency and returns.
The proposed transaction would provide D. R. Horton a unique platform to accelerate this strategy. We are excited about this strategic opportunity for both companies. I will now turn the call over to Mike Murray, our Chief Operating Officer, who will provide more details about the proposal.
Mike?
Thank you, David. As you saw in our press release and as David just discussed, we are offering to purchase 75% of the outstanding shares of Forestar for $16.25 per share. The remaining 25% or approximately 10,700,000 shares that D. R. Horton does not acquire would remain publicly traded, ensuring that Forestar continues to have access to growth capital to support the increasing scale of its business.
Through its operating relationship with D. R. Horton, the future Forestar would have the potential to become a large scale national land developer. While we are the largest homebuilder in the country with market leading positions in many of the largest U. S.
Housing markets, including the number one position in 4 of the top 5 markets, we are continually focused on increasing share in our current markets and finding new markets to serve. We are uniquely positioned to accelerate and maximize value from Forestar's existing communities and to help organically grow their platform into the leading residential land development company in the United States, selling lots to D. R. Horton and other homebuilders. We have developed a set of reasonable estimates to represent our view of the potential value creation from this proposal.
Over a 5 year period, we believe this strategic relationship could result in over 10,000 incremental annual lot deliveries with no new significant capital requirements by leveraging existing Forestar assets and people from both companies. We expect this would generate more than $1,000,000,000 in additional annual revenue and attractive returns on capital. As part of our proposal, the future Forestar would be led by Executive Chairman, Donald Tomitz, who served as Chief Executive Officer of D. R. Horton for over 15 years, along with the strong management team that is expected to include Forestar's current experienced professionals.
D. R. Horton is proposing to acquire a significant 75% ownership position in Forestar to ensure we have the necessary management control to establish the strategic direction and drive the operational execution that would be required to maximize the future value potential of Forestar. We strongly believe that our offer is a clearly superior proposal due to combination of our higher cash offer per share and the ability for Forestar's shareholders to regain a 25% ownership position in a company with potential for substantially higher valuation due to enhanced growth prospects resulting from a strategic relationship with BR Horton. Given the opportunity, we look forward to engaging in collaborative discussions with the Forestar Board to determine the final terms of the proposed merger, the operational relationship, board structure and shareholder governance between D.
L. Horton and Forestar. We have already drafted a proposed merger agreement, master supply agreement and shareholder agreement and believe these could be finalized very quickly. I'll now turn the call over to Bill Wheat, our Chief Financial Officer, for some additional commentary on the financial profile of the future Forestar and D. R.
Horton's funding of the proposed transaction. Bill? Thank you, Mike. In the near term following the proposed merger, we expect Forestar to fund its growth across new and existing markets with its cash on hand and by redeploying the capital generated as they sell through their current assets. Forestar has recently been generating cash from the sale of assets unrelated to its residential land development business.
And as of March 31, 2017 had a cash balance of $337,000,000 and outstanding debt of $112,000,000 This is a solid conservative financial profile that the proposed relationship with D. R. Horton would begin to build on to drive additional value. In the future, we expect that Forestar will be well positioned as a public company to opportunistically raise capital in the public debt and equity markets to help fund its growth and achieve scale. D.
R. Horton is rated investment grade and has the cash and other immediately available capital to fund the approximately $520,000,000 cash investment. After the close of this proposed transaction, we expect our homebuilding leverage, which is D. R. Horton's homebuilding debt to total capital to remain below 30%.
We do not expect this transaction to have an impact on our previously issued fiscal 2017 guidance. David?
Thank you, Bill. In conclusion, let me say again that we are excited about our strategic relationship with Forestal and the significant opportunities a merger creates for both of our companies. The $16.25 per share value and our offer is superior to the Forestar's current merger agreement and allows Forestar to remain a public company partnered with the largest homebuilder in
the United States. This strategic relationship will create significant value for shareholders of both companies and enhance both companies' operational efficiencies, returns and growth potential. Thank you. Jessica? This concludes our prepared remarks and we will now host any questions.
If you have additional questions after the call, please e mail us at investorrelationsdrhorton.com. Kevin?
Thank you. We will be conducting a question and answer session. Our first question today is coming from Bob Wettenholm from RBC Capital Markets. Please proceed with your question.
Hey, good morning. So the first thing I noticed, D. T. Has got a very interesting definition of retirement. So it's clearly a much superior proposal to the Starwood offer.
So that's obviously constructive towards getting a transaction done. I was hoping you could speak to this in the context of the industrial logic of what this does as a platform. Forestar has got 9, 10000 lots, that's like 1 quarters of deliveries for D. R. Horton.
So it's obviously something not just a land story. It sounds like there is something else here like a platform construct you're trying to build or use Forestar to evolve into. Maybe you could just flush that out. What kind of platform do you envision this becoming? What kind of corporate governance do you see between the D.
R. Horton 4 Star relationship? How should this take shape in 1 or 2 years after the transaction closes?
Thank you, Bob. This is Mike. We are very excited about the platform opportunity as you put it within the 4 Star program. They do have currently do have community development assets today. They have a heavy concentration in the state of Texas.
We like to build a lot of houses in the state of Texas. We think we can be very constructive with those assets. But more importantly for us, this is about the go forward relationship between 2 public companies, Forestar Group going forward and D. R. Horton.
We see the ability for our very large team of land acquisition professionals across the country, 78 markets in 27 states that are continually sourcing various deal opportunities to bring those opportunities in consistent with our strategy of developing relationships with land developers and have other developers take those opportunities on for us, develop lots, sell substantial portion of the lots to D. R. Horton as well as selling lots to other builders as well. We would see that we would have a supply agreement between Horton and Forestar as well as providing a committee of the independent directors of the Board to make sure they monitor any of the related party transactions. But we're very excited about Forestar's future growth potential and prospects as a separate public company able to access the public capital markets to support future growth and scale in the business.
Thank you. That's helpful. And Bill, would you provide a little bit of color? Your initial guidance for 2017 is free cash flow of $300,000,000 to $500,000,000 This is a relatively small acquisition with strategic potential in the big picture. Can you talk about financing this transaction and the potential, how this fits in with the portfolio from a right side of the balance sheet standpoint?
How should we think about this? What's the path going forward? Will this be an accretive acquisition? And what does it look like 1 or 2 years out from today? What kind of contribution are you anticipating?
Certainly, Bob. Certainly, today, our guidance for our operating cash flow generation from D. R. Horton continues to remain in the $300,000,000 to $500,000,000 range. This will be an investment that we will make in investing use of cash of the approximate $520,000,000 to fund this transaction.
We have the cash and immediately available funds available to fund the transaction in order to bring it into the fold here. As we move forward, we see tremendous growth potential at Forestar. As we mentioned, they have a conservative financial profile as well. They have $337,000,000 of cash on their balance sheet as of the end of March. So they have capital ready readily available to invest into opportunities for land development on the within Forestar today.
They also have assets that they are selling on an ongoing basis today and generating cash from that that cash can also be redeployed into their business. So they have significant amount of capital that can provide tremendous growth potential for Forestar as they begin to receive projects for land development from D. R. Horton. And then certainly from the D.
R. Horton shareholder perspective, this will represent a more programmatic significant land development relationship in which with a partner that will be very well capitalized. And so from a forward cash flow perspective on the D. R. Horton side, it's certainly very positive.
From a return perspective on the D. R. Horton side, it's certainly very positive because we will have a well capitalized partner to be able to hold land and develop and deliver finished lots to us, which certainly has a much higher return profile for us going forward. So we do have a slide that kind of outlines that in our deck that talks about value creation from the go forward important opportunities. I spoke to that briefly in my remarks.
What I'd also like to point out is that we do see benefits to the homebuilding operation with the efficient delivery of lots to the building platform. But we also believe in the lot development business and we're making a $500,000,000 cash investment in that program and we expect that to also return proceed return to the Horton shareholders as it is. We think we can greatly grow the 4 star platform going forward.
Thank you. Our next question is coming from Mark Weintraub from Buckingham Research. Please proceed with your question.
Thank you. Two questions. First, on I believe you indicated how you can leverage the platform up very substantially. And it sounded like you could do that with the existing platform without adding a lot of SG and A, yet at the same time, you're going to be presumably using some of the resources at Horton currently. How will that all get managed from an expensing standpoint?
How should one think about the type of expense that we'll need to create the platform to drive the type of growth that you've outlined for Forestar?
So I think what we'll see Mark is if you look at it from the life cycle of a given project in that Horton's land acquisition professionals are continually in the markets looking for projects that are going to make great communities for our homeowners. As we find those, sometimes we see and they meet our 2 year cash return hurdles within our homebuilding balance sheet that we will buy and develop ourselves. Sometimes, they're longer than that and we look for local development partners to take those opportunities over for us. And so we see opportunities for those types of slightly longer duration projects to be great 4 star projects for them to develop a lots and sell them to Horton and potentially other builders. In addition, there were times when we have fully invested our market inventory allocation.
And so when a given division is at its cap, they would might see other opportunities that present themselves that otherwise meet the underwriting hurdles, but they're fully invested. And so we would see this as an opportunity for Forestar to be able to support that business with additional lots in the future. So in that regard, there's really not any incremental SG and A for either party. It's simply a giving Forestar perhaps an early look at some good deals coming on the pipeline. In markets where Forestar does not have a presence today for development execution and it makes sense for them to do a project there, we would see Horton being able to serve as a development manager at market rates to manage the development services, but we would over time encourage Forestar to organically grow their platform in those markets as we're growing the business alongside the Horton platform.
But certainly the ability to incrementally scale with Horton de risks from an SG and A perspective that growth is that they can grow into markets on a pure variable cost basis versus having to make significant fixed cost SG and A investments growing into a new market. And then certainly, we would look to synergize as many of the sort of the non core processes and activities Forestar will continue to do and look to provide some of those services from Horton.
Okay. So I mean, so it does sound like and I certainly understand how they're synergies, that's for sure. At the same point, there will be some sort of allocation process of expense for personnel who are effectively helping both entities?
There will be for development activities. There are currently there are developers that provide those services today, development managers that provide those services. If Horton were to step into and support a 4 Star project by managing the development activities, they would be paying a per lot basically fee to support that development. In terms of the land acquisition folks that are out there across the company that are Horton people today, we would not see there's any need to allocate cost to the Forestar platform because oftentimes they're currently finding opportunities that they might be introducing other local developers to. So that's part of their job today.
It's not really an incremental cost to them. And that's in addition to Forestar's acquisition teams, sourcing communities and sourcing projects and bringing those forward. So we're not looking at the need to immediately gain scale by investing in SG and A, but we do look to grow the 4 Star platform over time as the business grows and scales alongside Wharton's national footprint.
Thank you. Our next question today is coming from Stephen East from Wells Fargo. Please proceed with your David, maybe this is for you. Have you all had discussions yet with Forestar this time around?
We have not.
Okay. All right. And just to follow on to that, what do you see today that you didn't see previously?
The 4 Star management team has done a very good job of getting down to a core business. And we were looking at them a year ago. There was a lot of unknown about what they believe they could get done on getting out of the non core businesses. And I can tell you, when you have uncertainty in that kind of arena, it makes you more conservative in evaluating and valuing the company. But they have exceeded what they said they would do.
The company is, to me today, down to a core operation, well capitalized, low leverage and positioned to grow. So they just need what I think we have, which is a national platform and access to land sellers that we have created relationships with over the last 10, 15, 20 years.
Thank you. Our next question is coming from Alan Ratner from Zelman and Associates. Please proceed with your question.
Hey, guys. Good morning. So I guess my question is why structured in a way to keep 4 Star a public company? I know you mentioned down the road an ability to raise additional capital. But I would guess, if you were to buy in and keep it as kind of a wholly owned subsidiary, you probably have a lower cost of capital under the Horton brand for now.
And then if it ultimately grows to be a significant business, I'm sure you could always spin it out down the road. So just curious why structure it this way? And you mentioned it sounds like you think there's an advantage to current Forestar holders. So maybe you can elaborate on that a bit? Thank you.
We do. And certainly as we look at our proposal and wanting to make sure we're bringing a proposal that should bring value to those shareholders, thinking about the future value that we can bring to Forestar and to their shareholders with this relationship is a key part of the proposal, a key part of the value that we believe that Forestar shareholders will need to evaluate. So leaving that 25% outstanding, we believe enhances the overall value equation for anyone of evaluating the proposal. Certainly, going down the line with the tremendous growth potential, with the tremendous ability for Forestar to scale, having ready access to public capital will certainly be an advantage for them. And we believe with conservative financial profile today and with a strong relationship to scale that business and become more profitable down the line and the relationship with D.
R. Horton, certainly expect their credit profile to be continue to be enhanced down the line and their cost of capital over time to decline from where it may have been in the past as well. So we believe it's a very good structure for creating value for those shareholders and then continuing to provide a consistent capital avenue for them as a public company. Alan, we look at the growth opportunities in front of Forestar just on our appetite, continued appetite for lots and communities, our growth in our home closings this year is probably more than double their total lot deliveries in the past year. So we see a great opportunity for them to help step in and supply some of that current appetite we have as well as our future growth expectations.
Got it. I appreciate that. And second question, I might have missed it, so I apologize. But assuming this moves forward, is there any plans to make a transfer of land into Forestar, effectively sell some of your more raw land or some land that requires additional development to Forestar out of the gate? Or is that not in the plans right now?
Absolutely no plans to pursue anything like that. We want this to be a very clean, very transparent, no smoke and mirror program.
Thank you. Our next question is coming from Carl Reichardt from BTIG. Please proceed with your question.
Good morning, guys. Alan just asked my question, but I did want to ask if you had any historic relationship with Forestar in terms of optioning lots from them from their current platform?
It has been a while, but we have bought lots over the years from Forestar, but I don't we don't have any current significant relationships with them in projects.
Okay. Thank you.
You bet.
Thank you. Our next question today is coming from Mike Dahl from Barclays. Please proceed with your question.
Hi. Thanks for taking my questions. My first question, just on the follow-up to some of the discussions you had with Forestar last year. Curious as you've structured some of the proposed things like the supply agreement in particular, if that's something where you actually made it to that part of the discussions last time around last year? And just any color you could give us on whether or not that's something that you have history knowing that they're that that's something they view favorably?
Yes. Thanks, Mike. As far as any prior discussions or the nature of those discussions today, we're not going to comment about any details of any prior discussions. We're focused on our current offer, which we believe brings significant value to the Forestar shareholders and we've certainly fleshed out what we believe to be a mutually beneficial relationship and master supply agreement business relationship with Forestar going forward.
Hey, Mike, I'll just reiterate. Those guys did a great job with the transition. And if you look at the company a year ago and you look at the company today, you're talking about apples and oranges.
Got it. Okay. My second question, I guess just thinking about this strategically, I know you talked about it as an avenue to enhance your ability to option land going forward. And I can see that mechanically having the 2 separate entities. But for all intents and purposes, you will be the owner of Forestar.
And my understanding would be 75%, you'd ultimately consolidate all the operations onto your own books. So I guess, can you help us understand the accounting of how some of that investment would work if that's indeed the case that it would be consolidated? Because then I think it would be at least it would be a little less clear optically where the benefits would come as far as the returns.
Certainly, yes. This would be a business acquisition for accounting purposes. So it would be consolidated on our balance sheet. The assets and liabilities would be stated at their values on our balance sheet. There would be a minority interest of the 25% on our balance sheet as well.
To the extent that there are transactions, but related party transactions between D. R. Horton and Forestar. There would certainly need to be eliminations, profit eliminations related to those transactions as well. But certainly those transactions would certainly be summarized disclosed in our financials.
So there would be as clear and transparent information available regarding the economics of those transactions. Certainly from the ability to improve returns and generate returns on both sides of the business, we will certainly strive to ensure that all the information is available to investors, both companies to ensure that they can fully evaluate the economics of the transactions. While it will be consolidated for financial statement purposes, Mike, it is a separately capitalized public company that gives us a platform to grow and scale a land development business that if it were to be wholly owned today, at some point might have to go through an IPO or some other process like that, which there's a lot of transactional risk with something like that. We see this as potentially getting that done ahead of time as it grows its capital needs.
You. Our next question today is coming from Stephen Kim from Evercore ISI. Please proceed with your question.
Yes, great. Thanks very much guys. I guess I'm trying to frame the upside that Forestar brings over and above what you all were poised to do anyway. So obviously, you spent a lot of time and planning in putting together this proposal. And I think on Slide 9, you talked about 8 projects that you were looking to you are looking to bring to Forestar within the 1st year.
And so I guess I'm trying to understand, can you help us can you frame for us what you would do if Forestar hadn't come along or agree. It looks like you've got a bunch of plans sort of ready to go. What would you do if Forestar doesn't materialize? Would you bring in land bankers? What's your plan B on all the stuff that you've been preparing here?
Thank you, Stephen. What we would look at is continue to do what we're doing today and that's working market by market with various individual development partners across the country to look at these sorts of deals. And some of these deals currently would meet our underwriting hurdles and requirements for the builder balance sheet. It's just maybe a situation where this extends a division's inventory cap and I'd rather buy the lots finished than they would to develop themselves.
This really just, Steve, accelerates our strategy. So if it doesn't get done, we still feel very comfortable with our current lot position and our ability to continue to option lots with land developers. But we do believe if we're able to get this deal done, it would accelerate the strategy that we've been talking to you all about for the last couple years.
Steve, we will continue to work with local developers extensively. I mean looking at we think we have a very exciting opportunity with the 4 Star platform to grow it to over 10,000 lots in 5 years. But if you look at where D. R. Horton, we probably expect to be 5 years from now and the number of lots that's going to require to support that growth, there's a lot of opportunity for a lot of people to develop lots for D.
R. Horton.
Yes, no doubt, no doubt. A broader question, I guess, touching on an earlier question that somebody asked about the fact that the fact that you will be Forestar with these 2 to 5 year land horizon type projects. In the last cycle and the build up to the last cycle, as I recall, DT actually was would frequently say that the tombstones of many builders in the past was long said long and wrong. And obviously, I think that resonates with a lot of people today. Can you help us understand how Forestar by being having this relationship with Horton, Whenever the next downturn comes, if your plans come to fruition over the next several years and Forestar is a materially larger entity and owns a significant amount of land assets.
How the relationship with Horton would change its ability and enhance ability to be more nimble in the next downturn whereas it may not without D. R. Horton's relationship?
Well, a couple of things. I think having all of us having lived through a very catastrophic downturn in the industry, we all appreciate the conservative leverage position that companies need to enjoy that are in this business. Combined with the fact that they'll be having a strategic alignment with the largest and arguably the strongest homebuilding in the country that even the depths of the last downturn, we were starting houses and we were buying lots throughout the process. Every month, we started houses, every month we were acquiring lots and moving through communities and making money. I mean it was not what it was and thankfully we are far larger today than we were then.
But we continued through those 3 trough years to build homes and we will continue to do so. Our job as a homebuilder is to be able to buy lots at market rate lots and make as the best returns in the industry off of those market rate lots operating our platform with our people across the country. That's our job as the homebuilder. Forestar will be a lot supplier to that, aligned with that lot supplier and able to take advantage of that relationship.
Thank you. Our next question today is coming from Mark Weintraub from Buckingham Research. Please proceed with your question.
Thank you. Now you explained on the land purchases how the relationship would work. And when it comes to selling lots, how would the experience with Forestar perhaps be different than with your own existing land acquisition and development teams or would it be quite similar?
Quite similar. I mean, this is a market the relationship between Forestar and Doctor Horton is going to be a market based relationship. We're going to incentivize the Forestar guys to make money. We incentivize the Wharton guys to make money. It's going to be a negotiation.
Make money and generate acceptable returns.
Great. And lastly, one question on the so you start off with a 75% stake. Is that something that as Forestar becomes quite successful that it would likely decrease over time or you keep it 75% or yet to be decided?
I think that's yet to be decided. We are focused on buying today, not selling anything. And so we'd like to focus on this opportunity we have in front of us and get this deal done. And then before we do anything else beyond that, we've got to create value, build value, enhance the platform. That's what we're excited about today.
Thanks, Mark.
Thank you. Our next question today is coming from Nishu Sood from Deutsche Bank. Please proceed with your question.
Good morning. Thanks for taking my question. I wanted to ask about the types of deals that D. R. Horton would be sourcing into Forestar.
And in particular, I'm just thinking about this on Slide 11, where the deals that would be prevented I'm sorry, presented to Forestar, if there's a failure to agreement on terms, Horton would retain the opportunity. Now the current sort of deals that Forestar is pursuing wouldn't fit the profile of what you folks have been keeping on balance sheet to date. So what kinds of deals are we talking about that Horton would want to retain the opportunity on? Will this change what sorts of deals that Forestar is pursuing? Or how will the source deals from D.
R. Horton shape Forestar going forward?
I think what you're going to see at Forestar is access to a lot more deals than they have seen in the past. Our acquisition teams across the country are biased slightly, granted, but in my opinion, by far the best in the industry. And we don't do every deal we see out there. We pass on a lot of good deals because of capital constraints, where we have a set amount, we'll invest in a market. And so there are going to be lots and lots of deals out there.
A 4 story is going to be able to evaluate them, underwrite them and buy them if they choose to. If there is a difference of opinion about the value of the deal and Forestar opts not to do the deal, then if it's a deal that the division wants to do, then we'll put it on our books to do it. I mean, our goal is to create a national platform with a very efficient capital structure that's going to be around for many, many, many years. Because if you look at what's happening in the market today, there are just not enough lots being put on the ground. And this is just one more vehicle to help us put lots on the ground in an efficient, low risk way.
Got it. So the projections you lay out just keep me on this track, the projections you lay out on Slide 9, dollars 1,200,000,000 in revenues potentially from the deals that the Deer Horton is sourcing. That dwarfs the land sales that Forestar has ever achieved. So this entity would end up becoming essentially an in house by these projections would end up becoming essentially an in house development vehicle. So I guess asking you a little bit differently, like what is that is that the long term vision here?
Because I mean, it would still be only 75% owned. I mean, clearly, the 25% will give some visibility and access to capital markets as you've talked about. But is that interpretation correct? Or do you see 4 Star's in house capabilities growing as well and doing a lot of independent deals such that the ratio wouldn't change so much of how much is Deer Horton and how much is
outside? I think you would see that sort of called 4 StarSource deal increase. We didn't try to put any pencil to paper on that. But I do believe, as David said before, we're going to be incentivizing the Forestar team and their compensation plans to make money for Forestar create good returns for the Forestar shareholders of which D. R.
Horton is a very significant and interested shareholder. At the same time, all the D. R. Horton team members that are out there today are very incentivized to create good returns with the capital that they are stewards of. So we are very focused on both of that.
And so I do think we will see the 4 Star platform grow in deals that are not initially Horton sourced down the road as their teams continue to develop.
Thank you. Our next question is coming from Michael Rehaut from JPMorgan. Please proceed with your question.
Hi, thanks. Good morning, everyone.
Good morning, Tom.
First question, just on some of the go forward nature, if this transaction is completed in your favor. Just want to understand and I apologize if this wasn't I'm not in front of the slide, I'm calling in. But in terms of the kind of go forward relationship, in terms of the now new access to land that you would have through Forestar, would there be some type of first right of refusal that Dior Horton would enjoy across Forestar's portfolio? And also in terms of the portfolio itself with Horton being majority owner, you mentioned before that Forestar kind of whittled down and sold some of the non core assets and even currently is a mixed use property developer to a degree, would you guys be shifting Forestar's focus to be predominantly residential oriented? Or would they be able to continue to pursue more mixed use deals with multiple end markets?
So sorry for the 2 parts there, 2 separate questions.
I'll take the latter part first. They have done some mixed use developments as part of some larger residential developments. There have been components of that to it. Again, Mike, that's a deal by deal situation as those things present and make sense, they would certainly be able to do But the primary focus for the opportunities we'll be presenting to Forestar will be residential, largely residential in focus to support the homebuilding business and where we see kind of a void in lot development occurring across the country right now. And then with regards to any kind of a ROFR or special rights on Forestar's existing portfolio blocks, no, we don't envision that at all.
I mean, if it makes sense for Horton can add value to a given community, in evaluating it today to operate it for a better return in the short term, certainly we would look at that and explore that. But today, there's a program in place and Forestar's community development teams have generated customer relationships and relationships with other builders in creating communities where people want to live and we want to see that continue.
So just along those lines, Mike, if the relationship that Forestar has in selling the lots of its own existing communities. If those mechanics don't change, how does this enhance Horton's access to lots over the near to medium term? Is it just that you have a better visibility into the pipeline? Because I assume that if Forestar isn't changing how they sell the lots, how would that change your access to those lots or enhance any type of land relationship
that you previously had?
So we have over several 100 folks on our team that are primarily focused on finding new land opportunities to create communities for D. R. Horton. We see a lot of opportunities that are a little bit outside of our time duration that we would like to do, but our we have some underwriting guidelines that we're not going to do those. And so we would be presenting those opportunities to Forestar, still very good development opportunities that Forestar as a closely aligned yet separate company would be able to pursue those opportunities, put those lots on the ground and we would expect Horton would be the logical buyer for the large majority of all those lots in those communities that we would source to them.
We just have a lot more people out looking for lots for a much greater lot user in Wharton.
And our people have been entrenched in those markets for multiple years and have relationships with the sellers that Forestar just couldn't duplicate. So the opportunity for growth is new deals being sourced in our existing markets that better return profile that is favorable if 4 Star puts them on the ground for us.
Thank you. Our next question is coming from Jack Micenko from SIG. Please proceed with your question.
Hey, good morning. I wanted to understand the step up a little more. If my math is right, it looks like you're paying or not paying rather, offering or valuing Forestar about 28,000 a lot say ex cash and your 2021, 2022 on Slide 9 is putting lot top line at about 78,000 a lot. So trying to figure out, is that a function of Forestar having a lot of unfinished land? Or is there something in transition here that I'm missing or is my math wrong?
I'm just trying to think about what you think you're potentially bidding for and the step up from valuation today to out 2 or 3 years?
Right. Jack, the land that the Forestar currently has is not reflected in these projections. These projections are simply net new deals that D. R. Horton would be bringing to Forestar.
So they represent deals representative deals that we have either currently owned or controlled and those are current market prices there that are represented and extrapolated into future years. The current lot portfolio that Forestar has would be essentially worked through and gone over the next few years.
Okay. And then on the last slide or second to last slide, I think you put out a 3,000,000,000 dollars land spend number this year. Is the $500,000,000 and change from this proposal in that $3,000,000,000 dollars
No.
Okay. Thank you. Thank you. Our next question today is coming from Jay McCanless from Wedbush. Please proceed with your question.
Hey, good morning, everyone. Good morning. Just wanted to clarify, since this is going to be treated as an acquisition for GAAP, are you guys going to have to write up the fair market value of the acquired lots from Forestar? And will that weigh maybe on their gross margins at least in the 1st year or so? We will.
We will write all the assets to fair value. We've not had the detailed access to look at individual project data as of yet to make any evaluation as to what the net result of that write up would be. But yes, we will have to write those assets to current fair values. Okay. All right.
Thank you for clarifying that. The other question I had is just on non core assets. I think they have some mineral rights in some timberland. How far along are they in the process of selling those? And how long if your bid is successful, how long do you expect the
rest of that to take?
Well, they've got they've made a lot of progress on that and it's disclosed in their filings. And I think in reading the T leads in those filings, I think they expect to have those pretty well taken care of within the next 12 months.
Okay, great. Thank you.
Thank you. Our next question today is coming from James Finnerty from Citi. Please proceed with your question.
No, these are separately separate public companies, separately capitalized. There would be no guarantee from Horton to any of the 4 star debt. The primary portion of their public debt today are convertible notes. And then there's a little bit left from prior senior note issue out there. So but it's fairly limited conservative debt profile right now.
Okay. And just with regard to the proposed transaction, was this run by the rating agencies ahead of announcing? Just curious.
No, not ahead of announcing. We certainly informed them and made them aware of it and we'll be having conversations with them about it. But as I stated earlier, D. R. Horton has the cash and readily available capital to fund the transaction.
Our leverage will remain below 30%. And we believe that Forestar has a conservative financial profile as well. So 2 companies that are very conservatively structured, very well prepared for future growth together.
Thank you. Our next question today is coming from Will Randolph from Citigroup. Please proceed with your question.
Hey, good morning and thank
you for taking my questions.
I guess, can you get any more specific on earnings accretion as well as what makes you feel like you're the most credible buyer for the asset? Asset? I mean, you might be going head to head with folks in the real estate business who might be a bit more aggressive.
Well, one of the things that makes us a very credible buyer is that we're a significant end user of the finished product of the 4 star company. In fact, nobody buys more finished lots in the country than we do and has an appetite and a stated desire to continue to acquire finished lots and increase our purchasing levels of that. And we would, of course, expect the transaction if we're able to move forward to be accretive, but it's way too early for us to say, what that would look like.
Okay. And then, I mean, you guys already have, numerous oil rights across the country. Do you have a strategy for kind of consolidating oil rights overall? And you've been laying short for the past cycle and the cycle before. What's changed in your mind in terms of being a bit more land long?
So those two questions. I think the first what's one of the things that David mentioned that the Forestar team has done a great job of is disposing of non core assets and they had identified their oil and gas operating interest as non core. So that's they've already taken care of the disposition of those assets. With regard to a change in the outlook of a land business, whether we're going to land long, we don't view this as a land long transaction. We view this as making an investment in a land a lot development company that we can grow a platform of as a business of producing lots on a real time basis for the homebuilding company.
It's a different manufacturing input to the homebuilder, but to create that same discipline and manufacturing mindset within the land and lot development business like we've done in the homebuilding business. And in terms of the land that we're buying today or that's part of Forestar's balance sheet today, it's a little less than 10,000 lots, which we're purchasing probably more than 10,000 lots each quarter in our business. So it certainly supplements that pipeline potentially to the extent that any of those deals we would work with them down the line, but it's not a significant move in our land position at all.
Thank you. Our next question today is coming from Jade Rahmani from KBW. Please proceed with your question.
Thanks very much. Could you comment on what the anticipated ROI on the investment would be? For example, looking at your, say, 2023 projections for lot operating profit, it would imply I think around the 13% ROE. Is that consistent with how you've underwritten the transaction?
We certainly do look to see returns in that business that are certainly in the high teens range. And in today's market place, what we've seen in the market, returns for land developers, lot developers delivering to builders are fairly similar to where homebuilders are today. That can vary at different times in the market and in the cycle, but today that's certainly our expectation.
And the are there other land development companies across your markets where if this transaction for whatever reason doesn't work out you could enter into similar transactions or perhaps joint ventures?
We do that every day on a much smaller scale with individuals and smaller companies. What we're trying to do with Forestar is to create a national platform that is a very efficient way to drive capital to the development business. It's something that is restricted today. Banks are not lending money like they used to. Having a public vehicle that can efficiently raise capital to support that business, I think it's going to be good for the entire industry, certainly going to be good for D.
R. Horton.
Thank you, ladies and gentlemen. As the market is open, it does conclude today's question and answer session. I will turn the floor back over to management for any further or closing comments.
Thank you, Kevin. We appreciate everyone's time on the call today and look forward to beginning conversations with the 4 Star Board, and we will update you on our progress as appropriate. We encourage you to use Investor Relations at drhorton.com to reach out to us with any feedback or questions. Thank you again and have a great day.
You. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.