Good afternoon, and welcome to Forestar's Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the call over to Katie Smith, Director of Finance and Investor Relations for Forestar.
Thank you, Paul. Good afternoon, welcome to the call to discuss Forestar's Q3 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 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 tomorrow. 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 Dan Bartok, our CEO.
Thanks, Katie. Good afternoon, everyone. As always, we appreciate your interest in Forestar and taking the time to discuss our Q3 results. In addition to Katie, I'm joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. Our solid Q3 results were driven by stronger market conditions. Our strategy of continuing to develop lots during the market transition positioned us well to capitalize on this increased demand for finished lots from builders. Our Q3 net income increased 18% from the prior quarter to $46.8 million, or $0.93 per diluted share. Pre-tax income increased 18% to $62.4 million, our pre-tax profit margin was 16.9%.
Consolidated revenues increased 20% to $368.9 million, while lot deliveries increased 10% to 3,812 lots. We evaluate each project and local market conditions to determine the appropriate pricing and sales pace to maximize returns. We have demonstrated that our unique and flexible business model can quickly pivot based on changing home builder demand and market conditions. None of that can happen without an incredible team. Their dedication, passion and expertise allow us to continue putting our long-term value creation goals at the center of every decision we make. Thank you to all of our valued team members for your efforts. Jim will now discuss our Q3 financial results in more detail.
Thank you, Dan. In the Q3 , net income increased 18% to $46.8 million, or $0.93 per diluted share, compared to $39.7 million, or $0.80 per diluted share in the prior year quarter. Consolidated revenues for the quarter increased 20% to $368.9 million, compared to $308.5 million in the prior year quarter. The current quarter included $10.3 million in revenue from deferred development projects and $23.8 million in track sales and other revenues. Lots sold in our third fiscal quarter increased 10% to 3,812 lots, with an average sales price of $87,700.
We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Our pre-tax income increased 18% to $62.4 million, compared to $52.7 million in the Q3 of last year, and our pre-tax profit margin this quarter was 16.9%, compared to 17.1% in the prior year quarter. Our gross profit margin this quarter was 23%, up 450 basis points sequentially and down 100 basis points from a year ago. In the Q3 , SG&A expense was $26.4 million. As a percentage of revenue, SG&A expense improved 60 basis points to 7.2% from 7.8% in the prior year quarter.
We will continue to focus on controlling our SG&A costs while ensuring that our infrastructure supports our business. Mark?
As for current market conditions, the supply of new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable despite higher mortgage rates and inflationary pressures. Builder incentives have helped bridge the affordability gap for many home buyers, and low resale supply is a driver of buyers choosing new construction. Buyers are increasing housing starts and many are focused on buying finished lots. Forestar is a key supplier to many home builders and is uniquely positioned to take advantage of the shortage of finished lots for the home building industry. During the Q3 , we sold lots to 16 customers, which was a new quarterly high. The supply of vacant developed lots, particularly at affordable price points, continues to be constrained across our footprint....
Forestar is focused on developing lots for homes at affordable price points, demonstrated by our average sales price of roughly $88,000. While contractor availability and materials are still challenging to procure in certain markets, the availability continues to improve. The cost to develop a residential lot has not declined, and we currently do not expect development costs to decrease, given the strengthening demand from builders in the overall inflationary environment. We will continue to be proactive and work with our trade partners to control development costs. Home builders are returning to the land market to secure lots for future growth, and home prices have generally stabilized. As a result, land prices have not fallen, as many expected at the beginning of this year.
Land sellers have been adjusting back to normal contract terms, resulting in more customary due diligence timelines and takedown structures. Jim?
D.R. Horton is our largest and most important customer. We look to continue expanding our relationships with other home builders and still have an intermediate-term goal of selling 30% of our lots to customers other than D.R. Horton. 16% of our Q3 deliveries, or 625 lots, were sold to other customers, which includes 105 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. 13% of our deliveries in the prior year quarter, or 435 lots, were sold to third-party customers. Growing by expanding our customer base, we have significant runway to grow our market share within D.R. Horton. Our mutually stated goal is for one out of every three homes that D.R. Horton sells to be built on a lot developed by Forestar. Katie?
Forestar's underwriting criteria for new development projects includes a minimum 15% pretax return on average inventory and a return of the initial cash investment within 36 months. During the Q3, we invested approximately $215 million in land and land development, of which $190 million was for land development and $25 million was for land. While our investments this quarter were down compared to the prior year quarter, they were up 17% sequentially. We expect our investments in land acquisition and development to increase in the coming quarters. Our lot position at June 30th was 73,000 lots, of which 53,700 lots are owned and 19,300 lots are controlled through purchase contracts.
The majority of our own lots were placed under contract to purchase from land sellers before 2021, resulting in an attractive cost basis. At quarter end, we had 7,800 finished lots on hand. We generally expect to maintain a higher inventory of finished lots to meet builder demand. When we agree to lot takedown schedules, there's typically a price escalator built in to compensate us for carrying the asset. We remain intensely focused on managing our development in phases, as we strive to deliver finished lots at a pace that matches market demand, consistent with our emphasis on capital efficiency. We are continuing to target a three to four-year owned inventory of land and lots. 28% of our own lots are under contract to sell, representing approximately $1.4 billion of future revenue.
These contracts have $124 million of hard earnest money deposits associated with them. 31% of our own lots are subject to a right of first offer to D.R. Horton, based on executed purchase and sale agreements. Jim?
We are retaining significant liquidity and using modest leverage to keep our balance sheet strong, while maintaining our disciplined approach when investing capital. We ended the quarter with approximately $780 million of liquidity, including an unrestricted cash balance of $400 million and $380 million of available capacity on our undrawn revolving credit facility. Total debt at 30 June was $707 million, with no senior note maturities until fiscal 2026, and our net debt to capital ratio was 19.1%, down from 32.8% in the prior year period. We ended the quarter with $1.3 billion of stockholders' equity, and our book value per share increased to $25.96, up 13% from a year ago.
According to the National Association of Home Builders, project-level land acquisition and development loans continue to become more expensive, which directly impacts the majority of our competitors. Forestar's capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity, particularly in a rising rate environment. Our bonds provide us with operational flexibility and fixed cost debt, while our strong liquidity allows us to take advantage of attractive opportunities when they arise. Dan, I will hand it back to you for closing remarks.
Thanks, Jim. I'm pleased with the Forestar team's execution during our fiscal Q3. They delivered growth and strong profitability, allowing Forestar to maintain double-digit returns. I'm even more pleased with how well we are positioned and the strength of our balance sheet. Our strong balance sheet and ample liquidity give us the flexibility to invest in land opportunities that will drive our future growth and maintain an appropriate level of finished lots and inventory to meet builder demand.
We are the market leader in a highly fragmented and undercapitalized industry, we are uniquely positioned to take advantage of the strong demand for finished lots by homebuilders. We will continue to aggregate significant market share over the next few years, while maintaining our disciplined approach on investing capital to enhance the long-term value of Forestar. Builder incentives have been impactful in bridging the affordability gap for buyers. Forecasts now expect 2023 U.S. single-family housing starts to decline approximately 10%-20% compared to 2022, an improvement from a decline between 15% and 30% forecasted just three months ago. While new home starts and sales have been stronger than expected in 2023, mortgage rates are back to peak levels reached in late 2022, which could impact demand as buyers adjust.
We cannot control the macroeconomic backdrop or directly influence the demand for housing. However, we can and will stay focused on strengthening our platform and increasing operational efficiencies to drive future growth. We are closely monitoring each market, sub-market, and project as we strive to balance pace and price to maximize returns. Our goals have not changed. We still intend to double our market share to 5% over the intermediate term. Looking forward, we believe that D.R. Horton and many other homebuilders will continue to shift their focus towards buying finished lots from third-party developers instead of self-developing. We believe our market share gains will accelerate as financing remains expensive and less available for the majority of our competitors. We have a track record of solid execution and are focused on the long-term opportunity before us.
As appropriate, we will utilize our platform and strong balance sheet to capitalize on opportunities that build shareholder value. With our experienced team that has successfully managed through prior market cycles, we are well equipped to navigate this dynamic environment while investing wisely for our future growth and further strengthening our industry-leading position. Paul, at this time, we'll open up the line for questions.
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker or equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one if you wish to enter the Q&A queue at this time, and please hold while we pull for questions. The first question today is coming from Truman Patterson from Wolfe Research. Truman, your line is live.
Hey, good afternoon, everyone. Thanks for taking my questions. First, your largest customer just suggested that they're positioning for growing potentially kind of 10% in 2024. Your all's net debt to total capital ratio, really healthy at 19%. I'm just trying to understand where that metric might need to go if you all are targeting to potentially support that type of growth as well.
Well, I think our capital structure as it sits today, we are well positioned to meet that growth for them without additional capital. I think as we said before, we believe we can actually grow our volume at about a 20% annual rate without raising additional capital, although it would require, you know, potentially leveraging some additional debt when our, you know, when appropriate.
Got you. Fair enough. Kind of maybe that net debt to total cap to hit a 20% growth rate might creep up to the 30%, maybe 40% range. On your lot ASP, it was up about 3.5%, both year-over-year and quarter-over-quarter. I realize that there's a lot that can impact that metric geographically, lot size, et cetera. I'm just trying to understand how kind of core finished lot pricing has been trending recently, given, you know, the strong rebound in demand, but, you know, builders bumping up incentives to move some of the homes.
Obviously, you can't draw too many conclusions on prices from our ASP. There's, you know, so much impact from mix, right, in there due to lot sizes and geography. That's always going to be changing. I think as far as, you know, pricing goes, you know, we per front foot basis, I mean, we really haven't seen reductions in pricing. We've seen pricing hold consistent, probably reflected, you know, more in our margins than our ASP.
Gotcha. Fair enough. Thank you for your time.
Thanks, Truman.
Thank you. The next question is coming from Carl Reichardt from BTIG. Carl, your line is live.
Thanks, everybody. I did want to follow up, I think, on part of what Truman was asking, really on margin variability and the $1.4 billion you've got in backlog. As you look out the next few quarters or maybe even just the full year of 2024, are you expecting the gross margin to be somewhat less variable than it has been, either due to mix or just strengthened conditions? Do you think you've reached in the past to sort of a peak gross margin that you could achieve in the future, or you expect it to go above your last prior peak?
You know, that's a tough one. We always talk about returns more than margins. Again, it's really about maintaining the appropriate pace and meeting the builders' demands. You know, what's really been interesting over the last several quarters is, you know, really, as we've dialed in on a project-by-project basis, you know, the same as the builders do, and there's been some cases where we've had to make price adjustments and reduce margins. There's also been occasions where we've been able to increase price and increase margins. I think it's gonna be lumpy. You know, hopefully, we haven't peaked. Hopefully, there's some better margins ahead. You know, development costs doesn't look to be coming down. Land costs don't look to be coming down. I think there's gonna be pricing pressure.
We're just gonna have to see how that plays out on a project-by-project basis.
Thanks, Dan. Then, can you talk a little bit about any regional trends, really, over the last two quarters, I think? Obviously, in 2022, we had relative strength in the Southeast Florida, big for you, Carolinas, big for you, Texas, with a lot of weakness in parts of the West. Has that begun to reverse at all in terms of builder demand for lots in 2023? Thanks.
I would say that Phoenix and Denver, two of our markets where we were seeing, kinda late to come back to the market, have both rebounded nicely, and we're definitely seeing demand for lots in those markets return, as we had hoped for. We didn't, we didn't sell a lot during the last several quarters in those markets because of really lack of demand and lack of lot of starts. I think it really goes back to the builders' inventories. Where were they long? Where do they need to kind of rightsize their inventories? It seems like their starts paces have leveled off, and that's kind of on a level and an increasing basis again. Hopefully, that gives us the opportunity to continue to be strategic in each of the markets.
Great. Thanks very much, Dan. I appreciate it.
Thanks, Carl.
Thank you. The next question is coming from Anthony Pettinari from Citigroup. Anthony, your line is live.
Hi, this is Asher Sohnen on for Anthony. Thanks for taking my question. You know, just thinking back to 2022, you saw builder demand kind of pull back on the surge in interest rates, obviously, housing demand fell. I was wondering, just sort of over the course of this quarter and maybe quarter to date, you know, how responsive has, like, builder interest and lots been kind of relative to mortgage rates? You know, as mortgage rates have risen over the past couple of months, have you seen a corresponding cooling of inbound builder demand? Even more finely, chopping more finely, when mortgage rates start to level off for a couple of weeks, do you see builder interest kind of pick up?
Yeah, we're seeing the builders' appetite increase, especially for finished lots. I mean, they're all looking for the option lots. They're all looking for finished lots. Today, we're seeing the appetite increase across the board for the builders. We're not just our number one customer with D.R. Horton, but also with the other builder clients that we have. We're receiving more calls, so we have not seen a falloff. Actually, we've seen the opposite. We've seen an increase in demand.
No, that's helpful. I guess, in your I think in your prepared remarks, you mentioned that your lots are at kind of an attractive cost basis. I was wondering if you're able to kind of size that roughly at all, and then maybe in terms of timing, like, how long before you move through that land? If so, once that happens, is there kind of a meaningful step down in margin kind of baked in?
Yeah, typically, you know, we underwrite to a 12-month development timeframe. It goes to market to market, project by project. It's been interesting in terms of if we elongate that timeline, and we've been able to hold some pricing power just because the demand for finished lots has been there. We're kind of riding those tailwinds at the moment, but, you know, again, we look at the market every time we price lots. We don't price our lots up front, so that's been helpful for us. If we see something in the first, let's say, four months or so of the development that is a concern, we can consider that when we're pricing our lots.
We can't always get back to pricing power to offset the cost increases, but, as Dan said, we're not focused primarily on margin, but protecting our return, maximizing our returns.
Fair enough. Thank you. That's super helpful. I'll turn it over.
Thank you. Once again, if you have any questions, please press star one, that's star one, to enter the Q&A queue. The next question is coming from Mike Rehaut from JP Morgan. Mike, your line is live.
Hi, guys, Doug Wardlaw. I'm from Mike. Taking a step back to the end of last quarter and with your comments on the banking volatility, I just wanted to know if you had any further color and if there's been any change since that last conversation on the banking volatility impact on other land developers. If so, you know, towards the beginning of the previous quarter, did you see any type of material benefit?
Where were you?
Were you asking about banking volatility? Sorry, you were kind of breaking up.
Sorry. Yes, yes. Just if there was any update on banking volatility's effect on your competitors, and if there was, did you guys see any type of benefit?
You want to take it? You know, it's more anecdotes that we hear than anything that we have experienced because we don't, you know, we don't use project-level financing. We have definitely heard that other developers, the terms at which they're being quoted to do deals have gotten, you know, more stringent. Interest rates have clearly risen, you know, to do acquisition development loans for developers. So I... You know, again, the anecdotes are, they are having a more difficult time, in some cases, not being able to get the loans that they would have, needing more equity to balance out and paying higher interest rates.
Got it. Nothing material enough outside of any other stories about finishing to have it?
Yeah. Yeah, I would say nothing in addition to that.
Got it. Thank you.
Thank you. There were no other questions at this time. I would now like to hand the call back to Dan Bartok for closing remarks.
Thank you, Paul. Thank you to everyone on the Forestar team for your focus and hard work. I'm proud of the results the team achieved this quarter. We will stay disciplined, flexible, and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today. Look forward to speaking with you again in November to share our Q4 and fiscal 2023 results. Thank you.
Thank you. This does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day.