Good afternoon, and welcome to Forestar's Fourth Quarter and Fiscal 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 Ashley Dagley, Corporate Securities Counsel for Forestar.
Thank you, John. Good afternoon, and welcome to the call to discuss Forestar's fourth quarter and fiscal 2023 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-K late next 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 Dan Bartok, our CEO.
Thanks, Ashley. We appreciate you filling in for Katie this quarter. Good afternoon, everyone. As always, we appreciate your interest in Forestar and taking the time to discuss our fourth quarter and fiscal year results. I am pleased to also be joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The Forestar team finished the year strong, highlighted by net income increasing 43% from the prior year quarter to $72.4 million, or $1.44 per diluted share. Pre-tax income in the fourth quarter increased 44% to $95.4 million, and our pre-tax profit margin was 17.4%. Revenues for the quarter increased 44% to $549.7 million, while lots sold increased 27% to 4,986.
While our fourth quarter performance was substantially stronger than a year ago, the first half of fiscal 2023 was challenging. Despite the challenges and volatility that occurred this year, we maintained double-digit returns and a strong pre-tax profit margin of 15.4%, while generating $364 million of operating cash flow and increasing our liquidity to $1 billion. Our book value per share increased 14% from a year ago, and our return on equity was 13.2%. As we begin fiscal 2024, Forestar is well positioned, both financially and operationally, to capitalize on builder demand for finished lots. We will continue to focus on investing for our future growth, turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry.
Jim will now discuss our fourth quarter and fiscal 2023 financial results in more detail.
Thank you, Dan. In the fourth quarter, net income increased 43% to $72.4 million, or $1.44 per diluted share, compared to $50.8 million, or $1.02 per diluted share in the prior year quarter. Revenues for the fourth quarter increased 44% to $549.7 million, compared to $381.4 million in the prior year quarter. The current quarter includes $64.1 million in tract sales and other revenue and $4.3 million in revenue from deferred development projects. Lots sold during the quarter increased 27% to 4,986 lots, with an average sales price of $97,400.
We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. For the fiscal year, net income decreased 7% to $166.9 million, or $3.33 per diluted share, compared to $178.8 million or $3.59 per diluted share in the prior year. Revenue for fiscal 2023 totaled $1.4 billion, which includes $132.2 million of tract sales and other revenue and $29 million in revenue from deferred development projects. During fiscal 2023, lots sold decreased 21% to 14,040 lots, with an average sales price of $91,000. Mark?
Our fourth quarter pre-tax income increased 44% to $95.4 million, compared to $66.4 million in the prior year quarter, and our pre-tax profit margin was 17.4%, consistent with the prior year quarter. Our gross profit margin this quarter was 21%, down 200 basis points sequentially and 240 basis points from a year ago.
Pre-tax income for fiscal 2023 totaled $221.6 million, compared to $235.8 million in fiscal 2022, and our pre-tax profit margin for the year was 15.4%. Our gross profit margin for the year was 21.2%, down 10 basis points from the prior year. During fiscal 2023, we recorded $19.4 million of non-cash real estate impairment charges to cost of sales, reducing our pre-tax profit margin by 140 basis points and our gross profit margin by 130 basis points. Excluding real estate impairment charges, our fiscal 2023 pre-tax profit margin and gross profit margin were 16.8% and 22.5% respectively. Jim?
In the fourth quarter, SG&A expense was $26.4 million or 4.8% as a percentage of revenues, compared to $23.7 million and 6.2% in the prior year quarter. For the year, SG&A expense was $97.7 million, or 6.8% as a percentage of revenues, up 60 basis points from 6.2% in the prior year. 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 continues to be a driver of buyers choosing new construction. The supply of vacant developed lots, particularly at affordable price points, continues to be constrained across our footprint. We are uniquely positioned to take advantage of the shortage of finished lots. We are focused on developing lots for homes at affordable price points, demonstrated by our average sales price this year of roughly $90,000. Availability of contractors and necessary materials has improved over the past several months, but we have not seen overall reductions in the cost to develop land.
We will continue to value engineer our projects and work with our trade partners to develop in the most efficient way possible. Home builders continue to compete to secure land and lot positions. Many are looking to replace current closed-out communities to position for future growth. As a result, we are not seeing any softening in land prices. However, in most markets, we have seen an adjustment back to more normal contract terms. Dan?
D.R. Horton is our largest and most important customer. 15% of the homes D.R. Horton closed this year were on a Forestar-developed lot. Our mutually stated goal is for one out of every three homes that D.R. Horton sells to be on a lot developed by Forestar. We have significant opportunity to grow our market share within D.R. Horton. We are also working to expand our relationships with other home builders and have an intermediate-term goal of selling 30% of our lots to builders other than D.R. Horton. We sold lots to 26 unique customers in fiscal 2023, compared to 22 customers in the prior year, and 14% of our fourth quarter deliveries, or 684 lots, were sold to other home builders. Jim?
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 fourth quarter, we invested approximately $340 million in land and land development, of which $210 million was for land development and $130 million was for land. For the full year, we invested approximately $980 million, of which $780 million was for land development and $200 million was for land. In fiscal 2024, we currently expect our investments in land acquisition and development to total $1.5 billion-$1.6 billion. Mark?
Our lot position at September 30th was 79,200 lots, of which 52,400 lots are owned and 26,800 lots are controlled through purchase contracts. 6,400 of our own lots are finished. We continue to target a 3- to 4-year owned inventory of land and lots, and remain focused on managing our development phases to deliver finished lots at a pace that matches market demand, consistent with our emphasis on capital efficiency. 29% of our own lots are under contract to sell, representing approximately $1.3 billion of future revenue. These contracts have $121.4 million of hard, earnest money deposits associated with them. Another 32% 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 have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with approximately $1 billion of liquidity, including an unrestricted cash balance of $620 million and $380 million of available capacity on our undrawn revolving credit facility. Total debt at September 30 was $695 million, with no senior note maturities until fiscal 2026, and our net debt to capital ratio was 5.5%. We ended the quarter with $1.4 billion of stockholders' equity, and our book value per share increased 14% from a year ago to $27.43. 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 today and have continued to become more expensive, which impacts the majority of our competitors. 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 capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities when they arise. Dan, I'll now turn it back over to you for closing remarks.
Thanks, Jim. We are pleased with the Forestar team's execution during fiscal 2023, delivering strong profitability and maintaining double-digit returns. Thank you to all the Forestar team members for your efforts this year. The fourth quarter was especially strong, with our delivery of almost 5,000 lots. The variability we experienced throughout fiscal 2023 illustrates the quarter-to-quarter fluctuations that can occur in the demand and the delivery of finished lots. It also illustrates Forestar's ability and its flexibility to adjust to market changes. The current interest rate environment and market factors create a challenging backdrop as we position the company for the next several years of increasing market share.
As we look forward to fiscal 2024, based on current market conditions, we currently expect to deliver between 14,500 and 15,500 lots and generate $1.4 billion-$1.5 billion of revenue. We are closely monitoring each market as we strive to balance pace and price to maximize returns in each project. We are the market leader in a highly fragmented and undercapitalized industry, and we are uniquely positioned to take advantage of builder demand for finished lots. Our goal remains the same: to double our market share to 5% over the intermediate term. We will continue to aggregate significant market share over the next few years, while maintaining our disciplined approach and investing capital to enhance the long-term value of Forestar.
We have a track record of solid execution and 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 for our future growth and further strengthening our industry-leading position. John, at this time, we'll open 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from Carl Reichardt with BTIG. Carl, please proceed.
Thanks, everybody. So I think if I heard you guys right, you're looking at land spend or development and plus development spend next year, that's up 50%, more than 50% from this last fiscal year. I was wondering if you could talk a little bit about the split between new lots versus investing development on existing lots, and if there were going to be any significant alterations in terms of the geographic mix, new markets, or just the leaning in one direction in markets that you're already in.
Yeah, well, we're seeing some significant opportunities right now, and we expect that our land spend will increase pretty significantly over last year. I mean, our last quarter was probably more reflective of what you'll see in from land spend. As far as the actual split between development costs and land spend, I don't know that I really have that breakout. But we do expect to use some of our liquidity to increase our balance sheet this year. As far as markets that we're in, most of what we're doing is building depth within the markets that we're in. We've got the teams in place. We'll continue to make investments in team as we build out our platform. But I don't really see us opening up a lot of new markets.
I think you'll see on this one, we reentered Seattle this year, this last quarter, and then we actually did a deal in West Virginia, in the western suburbs of D.C. there. So we have entered a couple of new markets, or at least reentered one and entered a new one, and there'll probably be one or two more of those that we probably reenter. But again, I think most of our focus is going to be on continuing to build market share in the markets that we're already in, Carl.
Okay. Thanks, Dan. And then, Jim, you've said this before. You've all said this before, the fluctuation in average revenue per lot or lot prices, and we know it's going to bounce around. Could you give us some type of lower bound and upper bound of the kind of numbers that we might expect based on the lots that you're anticipating on delivering in 2024, or even just the pipeline that you have delivering in 2024 or beyond?
I don't know that we really have that. I mean, our average lot price does bounce around. You know, it's.
Because we underwrite and focus on returns as opposed to margins, you know, there's always going to be changing lot prices and margins due to mix, whether it's geographic or lot size mix. But, I don't know that I can give you a real range. I mean, you can see the range we've had, you know, this year, even from last quarter to this quarter. You know, it's can be pretty significant.
Yeah, I'll add a little bit. When you, what's interesting is when you look back at the year versus any individual quarter, Carl, you know, our ASP this year for the year was up about 6% or 5% from the prior year, and then last year was up about 5% or 6% from the year before that. You know, if I was doing the chart, I would probably assume something in that range for next year. But again, it could fluctuate. Clearly, from quarter to quarter, it's going to fluctuate based on what we're doing in a given market.
But over a year
Okay.
It's probably right.
Okay, that was my default if you didn't answer it. So, and then if I can sneak one more in. So the guidance on deliveries for 2024 sort of matches up more or less with your biggest customer in terms of their delivery volume. Obviously, there's timing differentials, and I know that. So is that basically to say that you expect that outside of your largest customer, in terms of sales to other builders, you'd grow them at a similar rate as to what you'd grow your business to D.R. Horton? Or do you expect that mix to fluctuate more distinctly in 2024 in terms of expanding that base, since I know you want to do that?
Yeah, at this point, looking at the year in front of us, I would assume that it's going to stay, the mix is going to stay pretty much the same, to be honest with you. I think we're getting a lot more interest from other builders, as I think their development partners are also having difficulty, you know, getting financing. But overall, when I look at the lots that we'll be delivering in 2024, you know, that's all stuff we own already and in development. So I would expect that you know, pro rata share would stay pretty flat.
Okay. I appreciate the answers. Thanks so much, guys. Say hi to Katie.
All right. Thanks, Carl.
The next question comes from Truman Patterson with Wolfe Research. Please proceed.
Hey, good afternoon, everyone, and I apologize, my phone has been cutting out, so if this is a duplicate, but I did want to follow up on one of Carl's questions. You know, when we're looking at your fiscal fourth quarter, lot pricing, it increased, like, 10% year-over-year to $97,000. And if I'm looking at your 2024 guide, looks like ASPs remain, you know, at that level moving forward. Is there any geographical mix shift or perhaps consumer mix shift? You know, I'm thinking larger lots, more of a move-up focus, or is this kind of a true pricing power that you're currently recognizing?
You want to take that, or want me take it?
Yeah, I think it's true, just true pricing power. I mean, with inflationary costs are going up, obviously it, it's market by market, community by community, again, geography and just the mix of the lots themselves. But, you know, we, we are, again, pricing our lots to market and trying to pace our deliveries in tune. But, if we can grab additional, returns, we'll go out and grab additional returns. But, I don't think it's anything particular to lot size and itself for the fourth quarter.
Yeah, I think
Geography.
I think fourth quarter is mostly geography.
Yeah.
You know, that spike is not a run rate. You know, it was clearly a mixture of some more expensive lots.
Okay. Okay, gotcha. And then, just looking at your closings range of 14.5 to 15.5 lot sales, trying to understand what would get us toward kind of the lower end or the higher end of that range. And I'm thinking really, you know, whether there are any development or muni delays that are kind of built into this, or if it's just, you know, purely a function of market demand and, you know, potentially, you know, changing interest rates or anything along those lines.
Yeah, I mean, I think, you know, low end, we're going to continue to, you know, to focus on returns and making sure that we're moving lots and that the subdivisions are active. You know, the interest rate environment out there today makes it a little challenging to guess, you know, how the rest of the year is going to play out. But I think we've made our best guess. I think we've taken, you know, what our knowledge is of the difficulties in different municipalities into account as we do our forecasts. So I feel good about that range.
You know, the upside could be, you know, I think we'll have the lots under development and a strong finished lot inventory, that if, for some reason, rates come down and home sales accelerate, I think we'll be in a position to definitely be at the high end of that range.
Okay, perfect. And if I could squeeze one more in, one more in. You all brought up value engineering your lot positions. Could you just elaborate on that a little bit?
Yeah. As we go through and plan our projects, we're looking to be as efficient as possible with timing and cost. So looking to value engineer, basically our plans, upfront for better costs, but also for and we've been very disciplined in phasing our developments, and remain very flexible to be able to turn on, more developments or increase, step on the gas within an existing development, or if we need to take our foot off the gas. But from a value engineering standpoint, it's really related to costs and timing. But we'd look at that on every project and when we're going through due diligence, even after we own an asset, as we phase an asset. So it's something that the teams are doing day in, day out.
All right, thank you all, and good luck in the coming year.
Thanks, Truman.
Up next, we have Mike Rehaut with JP Morgan. Mike, please proceed.
Hi, guys. Good afternoon. Doug Wardlaw for Mike. You guys mentioned, you know, throughout this call, you know, your advantage in, in this industry as, you know, other competitors don't have the same kind of scale as you guys. I was wondering, you know, if you can give, if any, what kind of trends you saw throughout the quarter as the kind of rate volatility progressed throughout the summer, any trends that you saw? And, in addition to that, what you're expecting, at least in the early stages of 2024, amid, you know, likely continued rate volatility.
You're a little fuzzy on the speaker here, but are you looking more from a lot demand standpoint or from a development competition standpoint?
More so from a development, competition standpoint.
Okay. Well, we're definitely seeing opportunities where other developers are having a hard time getting financing in place, and their cost of that financing has run up. So we're, you know, potentially either deals that they've tied up that they can now not close on or get developed, or we're, you know, we're literally their banks are saying, you know, "No more." We saw more of that this last quarter than we did in prior quarters. And it feels like a trend, like maybe it will continue to be a little bit more difficult while we have a high interest rate environment and the banks are nervous. But we're definitely seeing, at least from our standpoint, we're seeing more opportunities to pick up positions that other people can't perform on.
Great. Thank you, guys. That's it for me.
Okay, thanks.
The next question comes from Anthony Pettinari with Citi. Anthony, please proceed.
Hey, good afternoon. On the full year guide, you know, from a big picture perspective, I don't think you've provided full year guidance for the past maybe four or five quarters. Can you talk about what's giving you confidence now in terms of giving the next year outlook, you know, given we still have, you know, a fair amount of rate volatility and macro uncertainty?
I think I'd attribute to a couple of things. You know, last year, you know, between still a lot of supply chain problems and understanding what was happening at the municipal levels for, you know, to get kind of final sign-offs and deliveries, I feel like that has leveled off, or at least we have a better understanding of what those impacts are. Where last year it was a little bit of a wild guess, which is why we didn't give guidance. The other is the interest rate environment. You know, at this point, you know, if you would have told me that builder sales would still be this strong when mortgage rates are approaching 8%, I would have probably laughed at you.
And yet the market state, the builders continue to be selling homes and finding the right market price. So I think that I feel like there's a little bit more consistency in the builders being able to deliver even in this higher interest rate environment. So I think both of those things make us feel pretty good about giving that guidance at this point.
Okay, that's very helpful. And then just in terms of the full year guide, you know, understanding the business is choppy, is there a way to think about kind of quarterly cadence of deliveries implied in the full year guide? Is there any kind of seasonal dynamic that we should kind of keep in mind or any kind of specific cadence kind of baked into your current contracts?
You know, it's really hard to put any kind of a guess on that. The one thing I would say, when I look back the last few years, our fourth quarter has always seemed to be the better quarter. And, but I don't know that it's contractually any reason for that or how, what lots are being delivered. It's just, again, it feels like the. When you look back and try to analyze the numbers, there appears to be a trend there. But it really varies from quarter. I mean, just look at the last four quarters of this year, how different, you know, one quarter was to the next. I wouldn't be able to give you a good cadence.
Okay, understood. I'll turn it over.
Okay, thanks.
We've reached the end of the question and answer session, and I will now turn the call over to Dan Bartok for closing remarks.
Thank you, John. Thanks to everyone on the Forestar team for your focus and hard work. As we enter fiscal 2024, continue to stay disciplined, flexible, and opportunistic while focusing on consolidating market share. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results. Thank you.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.