Forestar Group (NYSE:FOR) reported higher revenue and profit in its fiscal second quarter, while executives cited ongoing affordability pressures in the housing market and said the company is managing inventory investments with “discipline and flexibility.”
President and CEO Andy Oxley said the company generated revenue of $374.3 million, up 7% from the prior-year quarter, on 2,938 lots sold. Pre-tax income rose 8% year over year to $43.9 million, and book value per share increased 10% from a year ago to $35.66. Oxley also pointed to “visibility towards $2.2 billion of future revenue” through the company’s contracted backlog.
Quarterly financial results
Revenue of $374.3 million included $42.9 million in tract sales and other revenue, which Allen said was “primarily from sales of residential and commercial tracts,” and “to a lesser extent,” a second sale of a multifamily site.
Chief Operating Officer Mark Walker said Forestar sold 2,938 lots at an average sales price of $112,800, adding that the company expects quarterly fluctuations in average pricing based on “the geographic and lot size mix” of deliveries.
Forestar’s gross profit margin was 21.4% versus 22.6% in the year-ago quarter. Walker attributed part of the change to $6.3 million of land option charges tied to deposits and pre-acquisition cost write-offs, compared with $900,000 a year earlier. Excluding the net change in write-offs, Walker said gross margin would have been approximately 22.9%.
Vice President of Finance and Investor Relations Chris Hibbetts said SG&A expense declined 1% to $37.9 million, representing 10.1% of revenue, compared with $38.4 million, or 10.9% of revenue, in the prior-year quarter. Hibbetts said headcount declined 8% from a year ago and is expected to remain “relatively flat for the remainder of the year.”
Customer mix and backlog
Allen reiterated the importance of D.R. Horton as Forestar’s largest customer. He said 14% of the homes D.R. Horton started in the past 12 months were on a Forestar-developed lot, and noted a “mutually stated goal of 1/3 of the homes D.R. Horton sells to be on a lot developed by Forestar.” Allen said that target represents “significant opportunity” for Forestar to expand its share within D.R. Horton.
Forestar also emphasized continued efforts to broaden its builder relationships. Allen said 17% of second-quarter deliveries, or 488 lots, were sold to other customers, and that Forestar sold to 12 other home builders during the quarter, including three new customers.
Walker said Forestar’s lot position at March 31 was 94,400 lots, with 63,500 owned and 30,900 controlled through purchase contracts. Forestar finished 9,300 of its owned lots by quarter-end, and Walker said the majority were under contract to sell.
At quarter end, 24,100 of Forestar’s owned lots were under contract to sell, Walker said, secured by $209 million of hard earnest money deposits. He said those contracts are expected to generate approximately $2.2 billion of future revenue. Walker added that another 29% of owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements.
Investment pace, underwriting, and liquidity
Hibbetts said the company’s underwriting criteria remain unchanged, including a minimum 15% pretax return on average inventory and a return of initial cash investment within 36 months. During the quarter, Forestar invested approximately $279 million in land acquisition and development, with about 80% directed to development and 20% to acquisition. Hibbetts said Forestar has moderated land acquisition spending over the last year but remains “disciplined, flexible and opportunistic” when evaluating new opportunities.
Hibbetts also said Forestar still expects to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, “subject to market conditions.”
Allen said Forestar ended the quarter with more than $1 billion of liquidity, including $362 million of unrestricted cash and $672 million of available capacity on an undrawn revolving credit facility. He noted that the company increased the revolver’s capacity by $50 million during the quarter and collected $130.9 million of reimbursements related to infrastructure costs in utility and improvement districts.
Total debt at March 31 was $793.5 million, Allen said, with no senior note maturities in the next 12 months and a net debt-to-capital ratio of 19.2%. Stockholders’ equity totaled $1.8 billion at quarter end.
Allen characterized Forestar’s capital structure as a competitive advantage, saying project-level development loans are “less available and have become more expensive in recent years,” and are commonly used by competitors at floating rates with more restrictive terms. He said Forestar’s liquidity provides “operational flexibility” and the ability to pursue opportunities as they arise.
Outlook and Q&A themes
Oxley said the company is updating its fiscal 2026 lot delivery guidance to 14,000 to 14,500 lots, while maintaining revenue guidance of $1.6 billion to $1.7 billion. He said affordability constraints and cautious consumer sentiment are expected to remain near-term headwinds for home demand, but Forestar remains confident in long-term demand for finished lots and its ability to gain market share in a “highly fragmented” lot development industry.
During the Q&A, management addressed several investor topics:
- Controlled lots and closing cadence: In response to BTIG’s Ryan Gilbert on market share goals and controlled lots, management said builders have been working through inventory in recent quarters and that Forestar anticipates “going back to a more robust lot closing pattern in the second half of fiscal 2026.”
- Land option charges: On the quarter’s land option charges, management said the charges were in “a handful of communities” and reiterated that Forestar will either work to bring projects back within underwriting standards or “simply move on” given a robust pipeline.
- Share repurchases: Asked about buybacks given the cash position, management said it continues to believe the “best use of cash is investing for future growth,” while maintaining liquidity for flexibility.
- Demand from other builders: Wolfe Research’s Trevor Allinson asked about trends among builders other than D.R. Horton. Management said it continues to “hear strong demand” and attributed fluctuations to cadence of communities coming online, noting that the prior-year quarter included 362 lots sold to a lot banker.
- Fuel costs and margins: On higher fuel prices, management said it is not currently seeing cost increases due to fuel charges but is monitoring the situation, adding that contractor availability has been improving, contributing to “cost and time improvements.”
Oxley closed by thanking employees and emphasizing continued focus on staying “disciplined, flexible, and opportunistic” as the company seeks to consolidate market share. Forestar said it plans to report third-quarter results on Tuesday, July 21.
About Forestar Group (NYSE:FOR)
Forestar Group Inc, headquartered in Austin, Texas, is a residential lot development and management company focused on delivering finished home sites to homebuilders across the United States. The company acquires, entitles and develops land for single-family and multi-family housing, managing zoning, infrastructure and environmental approvals to prepare lots for construction. Forestar’s integrated approach to land development spans from initial site acquisition through final lot delivery, providing homebuilders with ready-to-build parcels in a variety of markets.
In addition to lot development, Forestar operates a retail homebuilding segment through joint ventures and strategic partnerships with national and regional homebuilders.
