Forestar Group Inc. (NYSE: FOR) is a leading national residential lot development company that has established itself as a dominant player in the highly fragmented lot development industry. With a strong financial position, operational expertise, and a geographically diverse portfolio, Forestar is well-positioned to capitalize on the robust demand for finished lots, particularly at affordable price points.
Financials
In the fiscal year ended September 30, 2024, Forestar delivered impressive financial results, generating annual revenue of $1,436.9 million and net income of $166.9 million. The company's annual operating cash flow reached $364.1 million, while free cash flow stood at $362.8 million, underscoring its ability to generate substantial cash flow to fund its growth initiatives.
During the third quarter of fiscal 2024, Forestar's revenues decreased 14% to $318.4 million, compared to $368.9 million in the prior-year quarter. Net income for the quarter declined 17% to $38.7 million, or $0.76 per diluted share, from $46.8 million, or $0.93 per diluted share, in the same period last year. The decrease in revenues and net income was primarily due to a 15% decline in the number of lots sold, from 3,812 in the prior-year quarter to 3,255 in the current quarter.
Despite the quarterly fluctuations, Forestar's performance remained strong, with a pre-tax profit margin of 16.2% in the third quarter. The company's return on equity for the trailing 12-month period ended June 30, 2024, expanded by 190 basis points to 13.8%, further demonstrating its ability to generate attractive returns for shareholders.
Lot Position
Forestar's lot position continued to grow, reaching 102,100 lots as of June 30, 2024, a 40% increase from the prior-year period. Of this total, 57,900 lots were owned, and 44,200 were controlled through land and lot purchase contracts. Notably, 35% of Forestar's owned lots were under contract to be sold, representing approximately $1.8 billion in future revenue.
Strategic Relationship
The company's strategic relationship with its majority shareholder, D.R. Horton, the largest homebuilder by volume in the United States, remains a significant competitive advantage. Forestar's lots accounted for 15% of the homes D.R. Horton started in the past 12 months, and the companies have a mutual goal of Forestar developing one out of every three homes sold by D.R. Horton.
Geographic Diversification
Forestar's geographic diversification is another key strength, with operations in 60 markets across 24 states. This diversification helps mitigate the impact of local and regional economic cycles, enhancing the company's earnings potential. While Forestar has a strong presence in high-growth markets like Florida, Texas, and the Carolinas, it also maintains a disciplined approach to pursuing new land acquisition opportunities, focusing on markets with favorable demographics and affordable price points.
Liquidity
The company's liquidity position is robust, with $359.2 million in unrestricted cash and $385.2 million in available borrowing capacity on its revolving credit facility as of June 30, 2024. Forestar's net debt-to-total capital ratio stood at 18.7%, reflecting its prudent use of leverage to support its growth initiatives.
Outlook
Looking ahead, Forestar has revised its fiscal 2024 guidance. The company now expects to deliver between 14,600 and 15,100 lots, compared to its previous guidance of 14,500 to 15,500 lots. Forestar still anticipates generating $1.4 billion to $1.5 billion in revenue for the fiscal year.
The company's management team remains focused on investing in compelling land parcels, turning its inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Forestar's unique blend of financial strength, operational expertise, and geographic reach positions it as a leading supplier of finished lots to homebuilders, particularly those focused on affordable price points.
Conclusion
Forestar Group Inc. is a well-positioned residential lot development company that has demonstrated its ability to navigate the challenges of the current market environment. With its strong financial foundation, strategic relationships, and disciplined approach to capital allocation, Forestar is poised to continue its growth trajectory and capitalize on the robust demand for finished lots in the years ahead.