Forestar Group Inc. Stock

Good morning, and welcome to Forestar's Fourth Quarter and Fiscal 2026 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, Matthew. Good morning, and welcome to the call to discuss Forestar's fourth quarter and fiscal year 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 available on our website at investor.forestar.com, and we plan to file our 10-K in the next few weeks.

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 Andy Oxley, our President and CEO.

Thanks, Chris. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer.

Before discussing our fourth quarter and fiscal year results, I want to recognize Don Tomnitz. As announced in yesterday's press release, Don will retire as Executive Chairman of Forestar effective October 31. His leadership has played a vital role in shaping the company's strategic direction and driving its significant growth. We are deeply grateful for his dedicated service and many contributions, and we wish him all the best in retirement.

Now turning to the results. The Forestar team had a solid finish to the fiscal year, generating over $580 million of revenue in the fourth quarter and $1.6 billion for the full year within our most recent guidance range. Ongoing affordability constraints and cautious consumer sentiment continue to weigh on new home sales and higher mortgage interest rates added further pressure during the quarter. Despite these challenges, we increased our book value per share by 8% to $37.56 at year-end and further strengthened our balance sheet, ending the year with $1.3 billion of liquidity while continuing to position us to achieve our long-term objectives.

Over the last 5 years, we have invested more than $7 billion in land acquisition and development and delivered approximately 75,000 finished lots to local, regional, and national homebuilders. During the same period, our book value per share increased 83%. These results reflect the strength of our business model and teams that we have built across our national footprint.

For fiscal 2027, we will continue to allocate capital prudently, manage inventories efficiently and focus on generating solid returns to strengthen our market-leading presence in the highly fragmented lot development industry. With a differentiated combination of financial resilience, deep expertise, and a substantial operating platform, we are well equipped to supply homebuilders with the finished lots they need while successfully navigating current market dynamics.

Jim will now discuss our fourth quarter and fiscal 2026 financial returns in more detail.

Thank you, Andy. In the fourth quarter, net income attributable to Forestar was $59.2 million or $1.15 per diluted share on revenue of $580.8 million. Fourth quarter revenue includes $38.7 million in tract sales and other revenue. For the year, net income attributable to Forestar was $142.6 million or $2.78 per diluted share on $1.6 billion of revenue, which includes $129.1 million of tract sales and other revenue. We sold 5,004 lots during the quarter, bringing our total lots sold for the full fiscal year to 13,545. Our average sales price was $108,300 for the quarter and $111,200 for the year. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of the lots we sell.

Our gross profit margin for the fourth quarter was 17.8% compared to 22.3% for the same quarter of fiscal 2025. This quarter's margin was reduced by higher costs to close out one project due to increased regulatory compliance requirements as well as $7.6 million of real estate impairment charges related to two projects. Excluding these items, our gross profit margin would have been 20.8%. Our gross profit margin for the year was 19.7%. Excluding those same items, our full year gross profit margin would have been 20.8%.

Our fourth quarter pretax income was $78.6 million, and our pretax profit margin was 13.5%. Pretax income for the year totaled $192.1 million, and our pretax profit margin this year was 11.7%. Pretax income and profit margin for the quarter and the year were reduced by the items I just mentioned and partially offset by a $10 million gain on sale of assets in the fourth quarter. Chris?

SG&A expense for the fourth quarter decreased 10% to $38.4 million, representing 6.6% of revenue. The decline compared to the same quarter in fiscal 2025 was largely driven by lower headcount and variable compensation. For the year, SG&A expense decreased 2% to $151 million or 9.2% of revenue. We remain focused on managing SG&A efficiently while maintaining strong teams across our national footprint to support future growth. We expect headcount to remain relatively flat in fiscal 2027. Mark?

Ongoing affordability constraints and cautious consumer sentiment continue to weigh on new home demand. Buydown incentives offered by builders are helping to bridge the affordability gap. However, recent increases in mortgage rates are further constraining affordability. Meanwhile, homebuilders remain focused on shortening cycle times and efficiently managing their inventory of homes and finished lots, which is affecting the timing and volume of finished lot purchases. Our primary focus remains developing lots for new homes at prices for entry-level and first-time buyers, which is the largest segment of the new home market.

However, we maintain the flexibility to pursue projects targeting other segments of the new home market as well as those offering multiple product types. Availability of contractors and necessary materials remain solid. Land development costs have been stable, which have been helped by our team actively working with trade partners on project costs and taking advantage of less land development activity occurring across the industry. We have also seen stable cycle times despite continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim?

D.R. Horton is our largest and most important customer. In fiscal 2026, 14% of the homes D.R. Horton started were on a Forestar-developed lot. With a mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by Forestar, we have a significant opportunity to grow our share of their business.

We also continue to expand our relationships with other homebuilders. In fiscal 2026, we sold 1,916 lots or 14% of our total to customers other than D.R. Horton. This includes 146 lots sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. Excluding those lots, sales to other homebuilders were the highest percentage of our annual lot sales since 2018. We sold lots to more than 25 different homebuilders this year, including eight new customers. Chris?

Our underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the fourth quarter, we invested $299 million in land acquisition and development. And for the full year, we invested $1.3 billion. For both the fourth quarter and full year, approximately 80% of our investment was for development and 20% was for land. In fiscal 2027, we currently expect to invest approximately $1.3 billion in land acquisition and development.

For new investments, we are prioritizing projects that are in undersupplied markets, smaller and faster turning or offer multiple product types. For land development, we are aligning our investment pace with current demand through disciplined project phasing and subphasing. As industry-wide development activity slows and higher rates pressure homebuilders and developers, our ongoing commitment to both new and existing projects keeps us well positioned to deliver finished lots to the market. Mark?

Our lot position at September 30 was 84,400 lots, of which 58,200 or 69% are owned and 26,200 or 31% are controlled through purchase contracts. Of our owned lots, 8,100 are finished, down 16% from the third quarter. Majority of our finished lots are under contract to be sold. Consistent with our focus on capital efficiency, we target owning a three- to four-year supply of land and lots and manage our development phases to deliver finished lots at a pace that matches market demand.

At year-end, 21,500 or 37% of our owned lots were under contract to sell. Approximately $200 million of hard earnest money deposits secure these contracts, which are expected to generate $2.2 billion of future revenue. Our contracted backlog supports our ability to continue gaining market share. Another 18,600 lots or 32% of our owned 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 year with $1.3 billion of liquidity, including $657 million of unrestricted cash and $658 million of available capacity on our undrawn revolving credit facility.

Total debt at September 30 was $794 million with no senior note maturities until fiscal 2028, and our net debt-to-capital ratio was 6.7%. Stockholders' equity at year-end was $1.9 billion, and our book value per share increased 8% from a year ago to $37.56.

Forestar's capital structure is one of our biggest competitive advantages and sets us apart from other land developers. Project-level land acquisition and development loans are less available today and continue to be more expensive, which affects the majority of our competitors. Those loans are generally more restrictive, carry floating rates and create administrative complexity, particularly in a higher interest rate environment. Our capital structure provides us with financial and operational flexibility, and our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I will now turn it back to you for closing remarks.

Thanks, Jim. Fiscal 2026 was a solid year for Forestar. We generated $1.6 billion of revenue and grew book value per share by 8%. We continue to execute our strategy by investing in land acquisition and development across our broad operating platform. We also strengthened our balance sheet, ending the year with $1.3 billion of liquidity.

Thank you to all of the Forestar team members for your continued efforts this year. As we look forward to fiscal 2027, based on current market conditions, we expect to deliver between 12,000 and 13,000 lots and to generate $1.4 billion to $1.5 billion of revenue. Similar to fiscal 2026, we currently expect our first quarter will be our lowest lot delivery and revenue quarter of the year, and we expect our lot deliveries and revenues in the second half of fiscal 2027 to be higher than the first half. We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project.

Forestar has consistently demonstrated its ability to navigate changing market conditions. While we expect home affordability constraints and cautious homebuyers to remain near-term headwinds for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. We are well positioned for continued success with our portfolio across our diverse national footprint, operating expertise and strong balance sheet. Matthew, at this time, we'll open the line for questions.

[Operator Instructions] Our first question is coming from Ryan Gilbert from BTIG.

I'm wondering if you could talk in a little more detail about how you plan to achieve the mutually stated goal of 1/3 of D.R. Horton's deliveries on Forestar lots and maybe some specific levers that you can pull in '27 or '28 to make progress towards that goal. It just seems like if you're going to do 12,000 to 13,000 lot sales in '27, that's a deeper year-over-year decline than what Horton is guiding to currently.

Thanks, Ryan. We have made significant progress on that 1/3 in a lot of markets. It's just that they're in so many more markets than we are. We're in 65 markets and they're in around 130. So overall, we have to grow at a faster pace than they grow, which has been a challenge. But as we've scaled up the organization, particularly with our growth out West, we think we can make meaningful progress in '27 and into '28.

Okay. Got it. And then just on the cash balance, $650 million. Can you talk about how you're thinking about deploying that into land versus potentially strategic opportunities or even buying back the stock, given where it's trading?

Yes, Ryan. So we're still planning to invest $1.3 billion in land and development. The majority of that will be in development for fiscal '27. As far as stock buybacks, it's not that the current stock price isn't compelling. We just believe that the highest priority for our cash is to reinvest in the business and the long-term growth opportunity that this company has.

Okay. Understood. And then last one for me, just given the weakening in the end market, the housing market over the last few months, are you seeing any distressed opportunities start to emerge in any of the markets that you're operating and that could be a potential opportunity to deploy that cash? When we had talked, I think probably coming up on five or six months ago now, it seemed like there was pretty limited opportunities on the distressed front.

We are seeing more opportunities pick up, particularly in the back half of the quarter. We're reviewing each of those opportunities as they present themselves, and we think that there will be more opportunities as the year persists.

Any detail that you could provide there? I'm wondering if maybe you're seeing some opportunities come out of the land banking competition.

Haven't really seen it out of the land banking competition. I think it's more around private builder developers that are looking at what happened in '26 and what the forecast is for '27. And they're looking for ways to unlock the value of their organizations that they've built, understanding that the next year or longer may be a rougher environment.

[Operator Instructions] Your next question is coming from Paul Przybylski from Wolfe Research.

To start off, I was wondering, could you frame the gross margin degradation between, maybe higher input costs or some better pricing you may have to offer your customers?

The lower gross margin in the quarter was really caused by a couple of unusual factors. We had two impairments in the quarter for $7.6 million. And then the closeout of another project that had additional costs for legal and regulatory requirements around on-site stormwater remediation and maintenance. Those two things together really -- if you exclude those, our gross profit would be 20.8%. And really within kind of our normalized gross margin that we've seen for the last several years between 20% and 23%.

We really haven't seen increases in costs. Earlier in the year, we actually had started to see some decreases in certain components. I think those in the second half of the year were largely offset by some other increases, particularly related to fuel. But really, pricing has been pretty stabilized and contractor availability definitely has improved.

And couple that with the reduced land development activity, I think that there will be some opportunities if the inflationary pressures can be reduced to decrease our cost structures, direct costs.

I think one other point, too, if you just look at our core lot sales margin, which excludes tract sales and impairments for the year was at 21% compared to 21.3% last year. So we really haven't seen a significant decrease in that core lot sales margin.

Okay. Okay. You mentioned the West being an opportunity to increase your share with Horton to get closer to that 1/3 goal. But that has kind of been one of the weaker demand regions. Do you go ahead and purchase lots now? Or do you kind of sit on the sidelines and wait until that market stabilizes so you can get a better understanding on your underwriting?

So we're focused on our smaller, quicker turning deals. We're not looking to do really large projects. And particularly where the Horton team has a great pipeline, we're able to open up and very efficiently start to expand in those markets. And we've seen that have good success over the last couple of years that we'll continue with that program.

The other thing, too, is we have a very robust pipeline. So it's allowing us to select investments that really fit our model. That's something that we're seeing as well.

Okay. And just my last one, to follow up back up on the cost. You really hadn't seen oil, I guess, pricing flow through much in '26. But are you getting surcharges or any increases in '27 that might be a headwind for your margin?

We are not seeing today any material impact of that. A lot of that's due to, again, reduced land developer activity, and we're seeing more contractor availability. So the more contractors we have, the better projects. So we're really pushing back on that to the extent that we can. And our teams are working with our trade partners day in, day out to find ways to reduce cost. And if that was to come through, it takes us 12 months to put a lot on the ground. So it's going to take some time for those higher costs to work their way through.

That concludes our Q&A session. I will now hand the conference back to Andy for closing remarks. Please go ahead.

Thank you, Matthew, and thank you to everyone on the Forestar team for your focus and hard work. As we enter fiscal 2027, 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. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Good morning, and welcome to Forestar's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar's third quarter results. Before we get started, I want to remind everyone that 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 later this 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 Andy Oxley, our President and CEO.

Thanks, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. The Forestar team achieved solid third quarter results with revenues of $407 million, up 4% from the prior year quarter on 3,659 lots sold. Earnings per diluted share increased 8% to $0.70 and pretax income increased 12% to $48.7 million. Book value per share increased 10% from a year ago to $36.40 and our contracted backlog remains strong with visibility towards $2.3 billion of future revenue.

Ongoing affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flexibility, and we ended the quarter with approximately $1.1 billion of liquidity. We also reached a significant milestone this quarter, delivering our 100,000th lot since D.R. Horton made its transformative investment in Forestar in 2017. Forestar has grown to a proven scalable platform, and we couldn't be prouder of what our teams have built to get us here. Looking ahead, we remain focused on turning our land and lot inventory efficiently, maximizing returns and consolidating market share. With a strong balance sheet, operating expertise and a diverse national platform, Forestar is well positioned to navigate market conditions and extend its leadership position in the highly fragmented lot development industry. We will now discuss our third quarter financial results in more detail. Jim?

Thank you, Andy. In the third quarter, net income attributable to Forestar increased 9% to $35.9 million or $0.70 per diluted share compared to $32.9 million or $0.65 per diluted share in the prior year quarter. Our pretax income increased 12% to $48.7 million compared to $43.6 million in the third quarter of last year, and our pretax profit margin increased 80 basis points to 12% from 11.2% in the prior year quarter. Revenues for the third quarter increased 4% to $407 million compared to $390.5 million in the prior year quarter. Mark?

We sold 3,659 lots in the quarter at an average sales price of $108,800. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Our gross profit margin for the quarter was 20.7% compared to 20.4% for the same quarter last year. Chris?

In the third quarter, SG&A expense increased 2% to $38.3 million compared to $37.4 million in the prior year quarter. As a percentage of revenues, SG&A was 9.4%, down from 9.6% in the prior year quarter. Our headcount declined 9% from a year ago as we remain focused on efficiently managing SG&A while maintaining strong teams across our national footprint to support future growth. We expect our headcount to remain relatively flat for the remainder of the year. Jim?

D.R. Horton is our largest and most important customer. 14% of the homes D.R. Horton started in the past 12 months were on a Forestar-developed lot. With a mutually stated goal of 1 out of every 3 homes D.R. Horton sells to be on a lot developed by Forestar, we have significant opportunity to grow our business with D.R. Horton. We also continue to expand our relationships with other homebuilders, selling 289 lots or 8% of our third quarter deliveries to 12 other customers this quarter. Mark?

Our total lot position at June 30 was 91,700 lots, of which 62,200 or 68% were owned and 29,500 or 32% were controlled through purchase contracts. 9,600 of our owned lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a 3- to 4-year supply of land and lots to manage development phases to deliver finished lots at a pace that matches demand. At quarter end, 23,500 or 38% of our owned lots were under contract to sell. $202 million of hard earnest money deposits secured these contracts, which are expected to generate approximately $2.3 billion of future revenue.

Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 31% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the third quarter, we invested $312 million in land and land development. Roughly 80% of our investment was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year to more efficiently manage our inventory, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will enable us to return to strong volume growth in future periods. We still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim?

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with approximately $1.1 billion of liquidity, including an unrestricted cash balance of $395 million and $670 million of available capacity on our undrawn revolving credit facility. Total debt at June 30 was $793.8 million with no senior note maturities in the next 12 months, and our net debt-to-capital ratio was 17.7%. We ended the quarter with $1.9 billion of stockholders' equity, and our book value per share increased 10% from a year ago to $36.40.

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 have become less available and more expensive in recent years, impacting most of our competitors who generally rely on this type of financing. These loans are typically more restrictive, have floating rates and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks.

Thanks, Jim. Forestar team delivered solid results in the third quarter, including increased revenues and profits while further strengthening our balance sheet. As outlined in our press release, we are maintaining our fiscal 2026 lot delivery guidance of 14,000 to 14,500 lots and our revenue guidance of $1.6 billion to $1.7 billion. Our teams have a proven track record of adjusting quickly to changes in market conditions. We closely monitor each of our markets and balance the pace and price of lot sales to maximize returns across our projects. With more than 200 active projects across our broad national footprint, we have operational flexibility to allocate capital strategically based on local demand and market dynamics.

Although home affordability constraints and cautious consumer sentiment are expected to remain near-term headwinds for home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in highly fragmented lot development industry. Consistent execution of our strategic and operational plans, combined with constrained supply of finished lots across many of our markets positions us well for further success. With a clear strategy, an experienced team and strong operational and financial foundation, we are optimistic about Forestar's future. Jenny, at this time, we will open the line for questions.

[Operator Instructions] Our first question is coming from Ryan Gilbert of BTIG.

I was hoping you could give us an update on the competition that you're seeing in the land market from other land developers and land bankers as well. Horton talked to maybe a slower-than-expected homebuyer market in the quarter. And I'm wondering if that translated into the land market as well.

Land market has been relatively stable. I haven't seen much change in land price. We have seen a little bit of improvement on being able to negotiate terms, for example, getting land on takedowns, getting through full entitlement and permitting. So we're able to focus on shovel-ready deals. Overall, I would say we'd see a somewhat less development activity across the board in quite a few markets. But most markets are still slightly undersupplied. So we think that gives us opportunity for future growth.

Got it. Sorry, slightly undersupplied from a finished lot perspective?

That's correct.

Okay. Got it. I'd appreciate any directional thoughts on 2027, just given the decline in your controlled lot count. Do you think that the land position puts you in a position to grow market share in 2027?

Yes. Our own lot supply, we want to target that to be around 3 to 4 months of supply today. I'm sorry, year supply, 3 to 4 year supply. Today, it's a little bit over, just north of 4. So we feel good about our own lot supply. We have to finish lots on the ground this year to execute and moving into next year in terms of the consolidating market share, we feel really good about our opportunity to grow our market share, not just within D.R. Horton, but with other builders.

And we have a very robust pipeline of future projects. So we think we can expand in the Horton footprint as well as with some third parties.

Okay. Great. Then any change in the, I guess, the M&A pipeline or opportunities for growth via M&A? I'm just kind of looking at the cash balance building over the course of the year.

Yes. I think there are opportunities. We continue to see opportunities. So that's part of the reason we want to have strong liquidity is to be able to take advantage of opportunities when they arise.

[Operator Instructions] our next question is coming from Trevor Allinson of Wolfe Research.

At times in the past, when the market has been weaker, you guys have used that as an opportunity to pick up headcount to try to help grow your share. I think here recently, including in the prepared remarks, you've continued to talk about keeping your headcount flat. So I guess what I'd ask what's different this time with weaker conditions? Why are you not being more aggressive to pick up headcount like you have in past periods?

So we had pretty significant headcount growth in '24, in the first half of '25. We intentionally moderated that in the second half of '25 and have been relatively flat, slightly down this year. We will see an increase in headcount as we go into '27 as we develop out more land capabilities, particularly out West.

Okay. Okay. Got you. Makes sense. Second, then on cycle times. Can you just update us on how those are trending, maybe where those stand versus a year ago or what you would consider a normalized cycle time for you guys? And then historically, the municipalities have been frequently cited as the biggest bottleneck. Are you seeing any relief there?

Okay. I'll talk about cycle times first. And it really comes back to a couple of things. Contractor availability continues to free up, not just free up, but also we're seeing what we would say are A-rated contractors we'll be able to utilize. We do manage our developments and phases. Cycle times over the past trailing, let's say, 36 months have come down close to 6 months. They settled in around 12 months. We're currently operating in a 12-month cycle time. We do think there's further opportunities for efficiencies to reduce our cycle times and our cost. And you hit the nail on the head. I think basically our complete to close in terms of governing jurisdictions, that's kind of been our bottleneck to reduce our cycle times further. But I do believe there's opportunities to reduce our cycle times as we go into the future.

Okay. Great. Definitely encouraging. And maybe one more, if I can. Gross margins in the quarter were at the lower end of your 21% to 23% historical range. I know there's always mix impacts, but we've also seen diesel costs come up here and stay up. Were there any impacts in the quarter from diesel as well? Or is that primarily a mix impact?

Not really. It's primarily mix and just the environment, just a slower absorption environment as we manage price and pace on a project-by-project basis, our margins have been kind of the lower end of our historic range over the last 3 or 4 years.

And our next question is coming from Ryan Gilbert of BTIG.

Just a quick follow-up from me. I think Horton mentioned some relief on horizontal construction costs on the call. And I'm wondering if that's something that you're seeing as well. And to the extent you are seeing some cost relief when you would expect that to flow through the income statement?

Our costs have stabilized, I would tell you, over the past 12 months. I mean we're seeing some reductions in some categories, and we're seeing some increases in others. But I would say relative to direct costs, they're pretty stable. We haven't seen a big decrease in cost.

Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Andy for any closing comments.

Thank you, Jenny, and thank you to everyone on the Forestar team for your dedication and commitment. Let's stay focused, flexible and opportunistic as we continue to strengthen our market position. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter and full year results on Thursday, October 29.

Thank you very much. This does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.

Good morning, and welcome to Forestar's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, Paul. Good morning, and welcome to our call to discuss Forestar's second quarter results. Before we get started, I want to remind everyone that 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 later this 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 Anthony Oxley, our President and CEO.

Thanks, Chris. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. The Forestar team achieved solid second quarter results, generating revenues of $374.3 million, a 7% increase from the prior year quarter on 2,938 lots sold. Our pretax income increased 8% from the prior year quarter to $43.9 million. Our book value per share increased 10% from a year ago to $35.66 and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue. Persistent affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flexibility, which allowed us to end the quarter with more than $1 billion of liquidity.

We remain focused on turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise and a diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively.

We will now discuss our second quarter financial results in more detail.

Jim?

Thank you, Andy. In the second quarter, net income attributable to Forestar increased 2% to $32.1 million or $0.63 per diluted share compared to $31.6 million or $0.62 per diluted share in the prior year quarter. Our pretax income increased 8% to $43.9 million compared to $40.7 million in the second quarter of last year, and our pretax profit margin this quarter was 11.7% compared to 11.6% in the prior year quarter. Revenues for the second quarter increased 7% to $374.3 million compared to $351 million in the prior year quarter. The current quarter includes $42.9 million in tract sales and other revenue, which was primarily from sales of residential and commercial tracts and, to a lesser extent, our second sale of a multifamily site.

Mark?

We sold 2,938 lots in the quarter with an average sale price of $112,800. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Our gross profit margin for the quarter was 21.4% compared to 22.6% for the same quarter last year. The current quarter margin includes $6.3 million of land option charges related to deposits and pre-acquisition cost write-offs compared to $900,000 in the prior year quarter. Excluding the effect of the net change in write-offs, our current quarter gross margin would have been approximately 22.9%.

Chris?

In the second quarter, SG&A expense declined 1% to $37.9 million or 10.1% as a percentage of revenues compared to $38.4 million or 10.9% in the prior year quarter. Our headcount decreased 8% from a year ago as we remain focused on efficiently managing SG&A while maintaining our strong operational teams across our national footprint to support future growth. We expect our headcount to remain relatively flat for the remainder of the year.

Jim?

D.R. Horton is our largest and most important customer. 14% of the homes D.R. Horton started in the past 12 months were on a Forestar developed lot. With a mutually stated goal of one out of every three homes 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 also continue to expand our relationships with other homebuilders. 17% of our second quarter deliveries or 488 lots were sold to other customers. We sold lots to 12 other homebuilders this quarter, including three new customers.

Mark?

Our lot position at March 31 was 94,400 lots, of which 63,500 or 67% was owned and 30,900 or 33% were controlled through purchase contracts. 9,300 of our owned lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a 3- to 4-year supply of land and lots and manage development phases to deliver finished lots at a pace that matches demand.

At quarter end, 24,100 or 38% of our owned lots were under contract to sell. $209 million of hard earnest money deposits secured these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 29% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements.

Chris?

Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the second quarter, we invested approximately $279 million in land and land development. Roughly 80% of our investment was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities.

Our current land and lot position will allow us to return to strong volume growth in future periods, and we still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions.

Jim?

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with more than $1 billion of liquidity, including an unrestricted cash balance of $362 million and $672 million of available capacity on our undrawn revolving credit facility. During the quarter, we increased the capacity of our senior unsecured revolving credit facility by $50 million. In addition, we collected $130.9 million of reimbursements related to infrastructure costs in utility and improvement districts.

Total debt at March 31 was $793.5 million with no senior note maturities in the next 12 months, and our net debt-to-capital ratio was 19.2%. We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 10% from a year ago to $35.66. 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 and have become more expensive in recent years, impacting most of our competitors.

Other developers generally use project-level development loans, which are typically more restrictive, have floating rates and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities as they arise.

Andy, I will hand it back to you for closing remarks.

Thanks, Jim. The Forestar team remained focused on execution in the second quarter, delivering higher revenues and profits and a stronger balance sheet. As outlined in our press release, we are updating our fiscal 2026 lot delivery guidance to 14,000 to 14,500 lots while maintaining our revenue guidance of $1.6 billion to $1.7 billion. Our teams have a proven track record of adjusting quickly to changing market conditions. We are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project.

Our national footprint and more than 200 active projects represent a strategic advantage, providing flexibility to allocate capital based on local market conditions. While home affordability constraints and cautious homebuyers are expected to remain near-term headwinds for home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry.

Consistent execution of our strategic and operational plans, combined with a constrained supply of finished lots across much of our diverse national footprint positions us well for further success. With a clear strategy, a strong team and solid operational and financial foundation, we are optimistic about Forestar's future.

Paul, at this time, we will open the line for questions.

[Operator Instructions] And the first question today will be from Ryan Gilbert from BTIG.

I was hoping you could talk a little bit more about your goals for market share in the context of the reduction that we've seen in controlled lots, I guess, this quarter, but then also the last couple of quarters as well.

So what we've encountered is with a lot of lots in the homebuilders' portfolio that they gradually work through in Q4 and Q1, now accelerating starts and sales in Q2, we anticipate going back to a more robust lot closing pattern in the second half of fiscal '26.

Okay. Got it. And then I was hoping you could expand a bit on the land option charges that you incurred in the quarter. Was that concentrated in a single community or a handful of communities? Was it more widespread? And what's -- I guess, what's the -- how are you thinking about that line going forward?

Yes. It was in a handful of communities, but the team remains focused and disciplined on our approach to land acquisitions. So if a project falls outside our underwriting standards, the team works to bring that project back in line or we just simply move on from the project. So as we evaluate these month-to-month, quarter-to-quarter, the team tries to work back into the queue, but our pipeline remains very robust. So we don't have to go through and purchase assets that don't meet our standards.

Okay. Got it. Last one for me, just on -- given the cash position and where the stock is trading, what's your appetite? Or how are you thinking about share repurchases here?

We still continue to believe that our best use of cash is investing for future growth of the business; however, I mean, maintaining strong liquidity gives us flexibility to respond to further changes in market conditions as well as the ability to take advantage of opportunities as they arise.

[Operator Instructions] And the next question is coming from Trevor Allinson from Wolfe Research.

First question is on demand trends you've seen from other builders other than D.R. Horton. I believe your sales to those builders were down close to 50% year-over-year. And if I recall correctly, last quarter, they were up. So can you just talk about more generally the trends there? Is that just a comp issue due to sales to a lot banker? Or any color on demand from those other customers would be helpful.

We're still seeing and hearing strong demand from our other customer base. So that remains strong. I think to Andy's point earlier, the industry just continues to work down inventory levels. So I really think it's just based on the cadence of when those communities are coming online.

Yes. And to your point, last year, we did have 362 lots that were sold to a lot banker, so that influenced the number from last year.

Okay. Got you. Makes sense. And then the next question on fuel prices, obviously moving higher across the country. Can you remind us what portion of development costs fuel account for? Are you able to pass those along to your customers or any concerns about gross margins as we get into the back half of this year and early next year from higher fuel costs?

Yes. As of today, we're not seeing cost increases due to fuel charges, but we're closely monitoring it. Contractor availability continues to free up, which is contributing to cost and time improvements.

And there were no other questions at this time. I would now like to hand the call back to Andy Oxley for any closing remarks.

Thank you, Paul, and thank you to everyone on the Forestar team for your focus and hard work. Stay disciplined, flexible and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today and look forward to speaking with you again to share our third quarter results on Tuesday, July 21.

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning, and welcome to Forestar's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar.

Thank you, Jane. Good morning, and welcome to our call to discuss Forestar's first quarter results. Before we get started, I want to remind everyone that 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, which is 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 later this 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 Andy Oxley, our President and CEO.

Thanks, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. The Forestar team delivered a solid first quarter, generating revenues of $273 million, a 9% increase from the prior year quarter on 1,944 lots sold. Our book value per share has increased 10% from a year ago to $35.10, and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue.

While affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales, we are managing with discipline to balance inventory investments with liquidity and flexibility. We ended the quarter with $820 million of liquidity and approximately 75% of our investments this quarter were for land development and 25% were for land acquisition.

We remain focused on turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise and diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively.

We will now discuss our first quarter financial results in more detail. Jim?

Thank you, Andy. In the first quarter, net income was $15.4 million or $0.30 per diluted share compared to $16.5 million or $0.32 per diluted share in the prior year quarter. Our pretax income was $20.8 million compared to $21.9 million in the first quarter of last year, and our pretax profit margin this quarter was 7.6% compared to 8.7% in the prior year quarter. Revenues for the first quarter increased 9% to $273 million compared to $250.4 million in the prior year quarter.

We sold 1,944 lots in the quarter with an average sales price of $121,000. Our average sales price this quarter was impacted by an outsized mix of lot deliveries from communities with higher price point lots. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Our gross profit margin for the quarter was 20.1% compared to 22% for the same quarter last year.

The current year quarter was negatively impacted by a tract sale with an unusually low margin. Excluding the effect of this item, our current year quarter gross margin would have been approximately 21.5%. Chris?

In the first quarter, SG&A expense was $36.5 million or 13.4% as a percentage of revenues compared to $36 million or 14.4% as a percentage of revenues in the prior year quarter. Our head count decreased 3% from a year ago as we remain focused on efficiently managing our SG&A, while maintaining our strong operational teams across our national footprint for future growth. We expect our head count to remain relatively flat for the remainder of the year. Mark?

Demand for new homes continues to be impacted by affordability constraints and cautious consumer sentiment. However, mortgage rate buydown incentives offered by builders are helping to bridge the affordability gap to spur demand for new homes, particularly at more affordable price points. Our primary focus remains developing lots for new homes at prices that target entry-level and first-time buyers, which is the largest segment of the new owned market.

The availability of contractors and necessary materials remain solid. Land development costs and cycle times have stabilized. Our teams utilize best management practices and work closely with our trade partners to develop a lot to drive operational efficiency. Jim?

D.R. Horton is our largest and most important customer. 16% of the homes D.R. Horton started in the past 12 months were on our Forestar developed lot and 23% of their finished lot purchases over the same time frame where lots developed by Forestar. With a mutually stated goal of 1 out of every 3 homes D.R. Horton sells to be on a lot developed by Forestar, we have a significant opportunity to grow our market share within D.R. Horton.

We continue to work on expanding our relationships with other homebuilders. 16% of our first quarter deliveries were 317 lots were sold to other customers. which includes 146 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to 6 other homebuilders. Mark?

Our total lot position at December 31 was 101,000 lots, of which 65,600 or 65% was owned and 35,400 or 35% were controlled repurchase contracts. 10,400 our own lots were finished at quarter end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a 3- to 4-year supply of land and lots in managed development phases to deliver finished lots at a pace that matches market demand.

At quarter end, 24,100 or 37% of our own lots were under contract to sell, $210 million of partners money deposits secure these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 28% of our own lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris?

Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the first quarter, we invested $450 million in land and land development. Roughly 25% of our investment was for land acquisition and 75% was for land development. Although we have moderated our land acquisition investment over the last 12 months, our team remains disciplined, flexible and opportunistic when pursuing new land acquisition opportunities.

Our current land and lot position will allow us to return to strong volume growth in future periods, and we still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim?

We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with approximately $820 million of liquidity and including an unrestricted cash balance of $212 million and $608 million of available capacity on our undrawn revolving credit facility. Total debt at December 31 was $793 million, with no senior note maturities in the next 12 months, and our net debt-to-capital ratio was 24.6%.

We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 10% from a year ago to $35.10. 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 and have become more expensive in recent years, impacting most of our competitors.

Other developers generally use project level development loans, which are typically more restrictive, have floating rates and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks.

Thanks, Jim. The Forestar team delivered increased revenues this quarter while maintaining strong liquidity and acting our disciplined investment strategy. As outlined in our press release, we are maintaining our fiscal 2026 revenue guidance of $1.6 billion to $1.7 billion and our lot delivery guidance of 14,000 to 15,000 lots. Our teams have a proven track record of adjusting quickly to changes in market conditions, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project.

Our national footprint and more than 200 active projects are a strategic advantage and provides flexibility to allocate capital based on local market conditions. While we expect total affordability constraints and cautious consumers to continue to be near-term headwind for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry.

Continued execution of our strategic and operational plans, combined with a constrained finished lot supply in a majority of our diverse national footprint, positions us for further success. With a clear direction, a dedicated team and a strong operational and financial foundation in place, we are excited about Forestar's future. Then at this time, we'll open the line for questions.

Thank you very much will be now conducting our question-and-answer session. [Operator Instructions] Our first question is coming from Anthony Pettinari with Citigroup.

This is Asher Stone on for Anthony. Just starting on gross margins. I think maybe even excluding the track sale, the 21.5% gross margin might have been down 1Q on a year-over-year at versus 4Q. Can you just talk about the puts and takes there and kind of what gross margins might look like over the next few quarters?

Yes. The biggest impact on margin in the quarter was really due to mix, and there's always going to be an impact based on the mix of projects that are delivering lots in the quarter, and that was the case this quarter, the lots that delivered really just had a lower gross margin. Looking forward, at this point, we don't see any reason why our gross margins wouldn't be in kind of in the historical range that we've seen kind of 21% to 23%, probably at the lower end of that range, just given our -- given, I guess, trying to match price and pace or balance price and pace in a slower demand environment.

Got it. Okay. No, that's really helpful. I mean following up on that. I mean, so it comes like D.R. Horton and third-party customers, it sounds like you're getting some maybe pushback on price. I think last time we saw prices like push back on softer demand, there was a lot -- there was more pushback on maybe takedown schedules and slowing those down. I'm just curious if you could talk about what you're seeing from your customers.

So market to market, we're continuing to meet with all of our customers. And there has been a movement away from large bulk takedowns that had been sort of the norm in the post-COVID environment to more of a structured quarterly takedown. We've gone through most of that through fiscal '25. There's probably a few pockets where that's still going on. But we really haven't seen a lot of change on price sometimes in a community where the pace is slower, we'll meet with our customers and work through some things. But it's largely gone back to what we would consider a normal market environment in terms of quarterly lot takedowns.

Okay. That's helpful. If you don't mind me sneaking 1 more in there, I think SG&A spend was pretty flat year-over-year on a dollars basis. Is that just kind of something we should expect for the next few quarters? Or are there any puts and takes to think about there?

Yes. Our head count is actually down a little bit from a year ago from last quarter. And we expect our head count to remain pretty stable for the remainder of the year. Head count and labor costs are the majority of our SG&A. So so we would expect it to be pretty stable.

[Operator Instructions] I'm not seeing any further questions in the queue. So I will now hand it -- apologies, we do have a question. We have a question in from Paul Pushilski of Wolfe Research.

I guess to start off, you mentioned that your ASP was due to mix to higher-priced homes. Is that planned? Or is that more a function of market conditions and weak entry level? And then how would your inventory of developed lots or anything you could bring to the market over the next 12 months? How does that break out between entry level and move up?

So it was planned. As we've grown our development platform in the West, they tend to have higher ASPs and so you're starting to see some of that flow through. And so we think, over time, that will continue. We don't think it will be as much in the remaining quarters of this fiscal year as it was -- and also, it was kind of amplified due to just the lower volume of lot closings overall. And we're really not changing our strategy in terms of development plans for primarily the first-time homebuyer and entry level that's the largest section of the market. And it's where our biggest customer focuses a lot of their attention. So we're very focused on maintaining affordability and I think that, that's the position to be in the marketplace.

Okay. And then I guess, Texas and Florida, you really have outsized exposure to those 2 states. Are you looking to maybe rebalance a little bit given higher resale inventory in those 2 markets or 2 states.

Yes. I mean, we look at that every -- on a month-to-month and quarter-to-quarter basis and reallocate because our national platform allows us to do that. And right now, Texas and Florida are a couple of the more challenged markets with inventory. So we're being very selective in what we're looking at and what we're doing there and moderating our development activities there where appropriate to make sure that we don't have excess inventory. But those are still huge markets. They still have great end migration. And so we think the fundamentals for those markets long term are real solid.

And -- but we will continue to evaluate on a quarter-by-quarter basis and make investments based on current local market conditions.

And then just the last one. I would assume that you're probably pulling back on the size of your phase developments. How does that impact your cost structure. Does that have any meaningful headwinds to margin?

There's no real impact on our cost structure. We do pull it back just based off to meet demand. So we're -- we can meet sales absorptions. Really, we're seeing supply materials and contractor availability is in really good shape. So we continue to work with those trade partners and governing jurisdictions to reduce cost and cycle times. It helps us reduce cycle times a bit when we pulled back and reduce those phases.

Obviously, we're trying to deliver loss to meet the market demand. And just that continued increase in contractor availability alongside cooperating with the government jurisdictions is really the key to driving those lower development costs and cycle times.

Thank you very much. I'ill hand it over to you.

Thank you, Jenny, and thank you to everyone on the Forestar team for your focus and hard work. Stay disciplined, flexible and opportunistic as we continue to consolidate market share. We appreciate everyone's time on the call today and look forward to speaking with you again to share our second quarter results on Tuesday, April 21.

Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.

Good morning, and welcome to Forestar's Fourth Quarter and Fiscal 2025 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the call over to Mr. Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar. Sir, the floor is yours.

Thank you, [ Ole ]. Good morning, and welcome to the call to discuss Forestar's fourth quarter and fiscal year 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 available on our website at investor.forestar.com, and we plan to file our 10-K in the next few weeks. 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 Andy Oxley, our President and CEO.

Thanks, Chris. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. As always, we appreciate your interest in Forestar and taking the time to discuss our fourth quarter and fiscal year results. The Forestar team finished the year strong, generating over $670 million of revenue in the fourth quarter and $1.7 billion of revenue for the full year, which was above the high end of our most recent guidance range. Despite the challenges for new home demand due to ongoing affordability constraints and cautious consumer sentiment this year, we grew annual revenues by 10% and increased our book value per share to $34.78, up 11% from a year ago.

We achieved these results, all while maintaining a strong balance sheet and ending the year with $968 million of liquidity. Over the last 5 years, Forestar invested more than $7.3 billion in land acquisition and development and delivered more than 75,000 finished lots to approximately 60 local, regional and national homebuilders. During the same period, our book value per share has increased 92%. These results reflect the strength of our business model and our market-leading teams we have built out across our national footprint. Thank you to all the Forestar team members for your efforts this year.

In fiscal 2026, we will continue to execute our strategic plan by investing for future growth, turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise and diverse national footprint enables us to provide essential finished lots to homebuilders and effectively navigate current market conditions. Jim will now discuss our fourth quarter and fiscal year '25 financial results in more detail.

Thank you, Andy. In the fourth quarter, net income increased 7% to $87 million or $1.70 per diluted share. For the year, net income totaled $167.9 million or $3.29 per diluted share. Revenues for the fourth quarter increased 22% to $670.5 million. The current quarter includes $103.4 million in tract sales and other revenue, which was primarily for sales of residential tracts and to a lesser extent, our first sale of a multifamily site. Revenue increased 10% to $1.7 billion in fiscal 2025, which includes $118.1 million of tract sales and other revenue.

In the fourth quarter, we sold 4,891 lots with an average lot sales price of $115,700. And for the year, we sold 14,240 lots with an average lot sales price of $108,400. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Our gross profit margin this quarter was 22.3%, down 160 basis points from a year ago.

Our gross profit margin in the prior year fourth quarter was positively impacted by lot sales from an unusually high-margin project. Our fourth quarter pretax income increased 4% to $113.1 million, and our pretax profit margin was 16.9%. Pretax income for the year totaled $219.3 million, and our pretax profit margin this year was 13.2%. Our pretax income and profit margin for the quarter and the year were positively impacted by a gain on sale of assets of $4.5 million. Chris?

SG&A expense for the fourth quarter was $42.7 million or 6.4% as a percentage of revenues. And for the year, SG&A expense was $154.4 million or 9.3%. Our average employee count for fiscal year 2025 increased 24% compared to the prior year, which has supported the continued expansion of our platform, including entering new markets and increasing community count. Roughly 90% of new hires in fiscal 2025 were in our local market operations. We are pleased with the progress we have made building our team and our ability to attract high-quality talent. We remain focused on efficiently managing our SG&A while investing in our teams to support our continued growth. Mark?

New home sales have been slower than last year as continued affordability constraints and cautious consumer sentiment continue to weigh on demand. However, mortgage rate buydown incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes, mainly at more affordable price points. Our primary focus remains developing lots for new homes at prices for entry-level and first-time buyers, which is the largest segment of the new home market. The availability of contractors and necessary materials remain solid and land development costs have been stable. We have also seen improvement in cycle times despite continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim?

D.R. Horton is our largest and most important customer. 15% of the homes D.R. Horton started this year were on a Forestar developed lot. With a mutually stated goal of 1 out of every 3 homes D.R. Horton sells to be on a lot developed by Forestar, we have a significant opportunity to grow our market share within D.R. Horton. We also continue to work on expanding our relationships with other homebuilders. 17% of our fiscal 2025 deliveries or 2,489 lots were sold to other customers, which includes 927 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to more than 20 different homebuilders this year, including 6 new customers. Chris?

Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the fourth quarter, we invested $347 million in land and land development, of which approximately 80% was for land development and 20% was for land. For the full year, we invested approximately $1.7 billion in land and land development, of which 2/3 was for land development and 1/3 was for land. In fiscal 2026, we currently expect to invest approximately $1.4 billion in land acquisition and development. Mark?

Our lot position at September 30 was 99,800 lots, of which 65,100 or 65% are owned and 34,700 or 35% are controlled through purchase contracts. 8,900 of our owned lots are finished, which is down 11% from the third quarter. The majority of our finished lots are under contract to be sold. Consistent with our focus on capital efficiency, we target owning a 3- to 4-year supply of land and lots and manage our development in phases to deliver finished lots at a pace that matches market demand. Owned lots under contract to sell increased 13% compared to a year ago, 23,800 lots or 37% of our own lot supply. $193 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.1 billion of future revenue. Another 27% of our owned 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 $968 million of liquidity, including an unrestricted cash balance of $379 million and $589 million of available capacity on our undrawn revolving credit facility. During September, we redeemed the remaining $70.6 million of 3.85% senior unsecured notes that were due in 2026. Total debt at September 30 was $803 million with no senior note maturities until fiscal 2028, and our net debt-to-capital ratio was 19.3%.

We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $34.78. 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 be 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 an elevated interest 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. Andy, I'll now turn it back over to you for closing remarks.

Thanks, Jim. Fiscal 2025 was another successful year for Forestar. We delivered revenue growth of 10% and increased our book value per share by 11%. We continue to execute our strategy to expand the business through significant investments in land and land development and growth of our team. These investments helped us enter 7 new markets and increase our community count by over 10%. We further strengthened our balance sheet through extending near-term debt maturities and increasing our liquidity. As we look forward to fiscal 2026, based on current market conditions, we expect to deliver between 14,000 and 15,000 lots and to generate $1.6 billion to $1.7 billion of revenue.

We currently expect our first quarter will be our lowest delivery quarter of the year, and we expect our revenues in the second half of fiscal 2026 to be higher than the first half. We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project. While we expect home affordability constraints and cautious homebuyers to continue to be near-term headwinds for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. We are well positioned to continue success with our lot portfolio across our diverse national footprint, operating expertise and strong balance sheet. Ole, at this time, we'll open the line for questions.

[Operator Instructions] Our first question today is coming from Trevor Allinson with Wolfe Research.

Looking at your '26 guidance, it looks like you're expecting deliveries to be up low single digits. That's roughly the same growth as your largest customer. As we think about you deepening your penetration with Horton, why would you not grow faster as we look into next year? Is it an expectation that sales to other builders come down? Or is it just some conservatism? What's driving kind of the in-line growth with Horton?

Thanks, Trevor. It's just their size. They -- if they grow at low single digits, we need to grow at mid-single digits just to maintain pace with them. So they've entered some new markets. We've entered 6 or 7 new markets for the year. We are growing market share in the markets where we are in, but it's just a matter of us catching up with them in those additional markets. We have the land. We have the team in place. So we are positioned if the market is there, we could increase those units, but it's really going to depend on the spring selling season to see what the year gives us.

Okay. Makes sense. That's helpful. And then you talked about employee count being up 24% in fiscal '25. You built out your teams ahead of some anticipated growth here over the next couple of years. With that in mind, how should we think about your headcount moving forward and your leverage on SG&A in fiscal '26?

Well, our headcount has remained basically flat since the first quarter of fiscal '25. Most of that increase in headcount actually occurred in fiscal '24, but only partially recognized in fiscal '24. I would expect our headcount to continue to remain flat or maybe even drift down slightly as we move into fiscal '26.

[Operator Instructions] Our next question is coming from Anthony Pettinari with Citigroup.

This is Asher Sohnen on for Anthony. I just wanted to ask, I think last week, we saw a builder talking about how they were getting some cost concessions and extended takedown schedules on their lots. So I was just wondering with Horton or your third-party customers, are you seeing any pushback on lot prices or maybe extended takedown schedules or anything like that?

Yes. From a land acquisition perspective, we've been successful renegotiating time and terms, but not so much land value. Throughout the years, our teams and we have developed a proven underwriting due diligence and market research strategy that helps us ensure that we're purchasing land at current market rates. In terms of lot pricing, lot pricing has -- we haven't seen a whole lot of pushback on our lot pricing today. Again, we manage that project by project to maximize returns.

All right. That's helpful. And then I just wanted to drill down a little bit. I think you guys have a big presence in Texas and Florida. I was wondering if you can talk geographically around those regions specifically, what kind of trends you're seeing there?

Yes. We are seeing some pressure in some markets in Texas. It's choppy. Probably see a little bit more pressure in Florida, parts of Florida. But those are really large markets and particularly at the affordable price point where we tend to concentrate our business, we're still seeing good absorptions.

Great. That's helpful. And then if you won't mind me sneaking in one more, just a modeling question. In terms of the cadence of deliveries in 2026 in your guide, I think 2025 was pretty back half weighted. I'm just wondering if there's any thinking around '26.

Yes. I mean, I think we're projecting '26 to be a similar cadence of '25. Certainly, our deliveries will be larger in the second half of the year, similar to this year.

[Operator Instructions] Okay. As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Andy Oxley for any closing remarks.

Thank you, [ Ole ], and thank you to everyone on the [ Forestar ] team for your focus and hard work. As we enter fiscal 2026, 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. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.