Forestar Earnings Call: Growth Intact, Margins Under Strain

Forestar ((FOR)) has held its Q1 earnings call. Read on for the main highlights of the call.

Forestar Balances Growth Momentum With Margin Pressure in Latest Earnings Call

Forestar’s latest earnings call painted a picture of a company growing steadily but navigating a more demanding market backdrop. Management highlighted solid top-line growth, stronger book value, ample liquidity, and a sizable contracted backlog that underpins revenue visibility. At the same time, they acknowledged pressure on margins, a modest dip in net income, and pockets of weaker demand tied to affordability and resale competition, especially in key Sun Belt markets. Overall, the tone was cautiously optimistic, with executives emphasizing disciplined underwriting, conservative leverage, and operational efficiency as the foundation for sustaining returns through a more volatile housing cycle.

Revenue Growth, Volumes and 2026 Targets

Forestar delivered Q1 revenues of $273 million, up 9% year-over-year from $250.4 million, on 1,944 lots sold in the quarter. Management framed this as evidence of healthy demand for finished lots despite affordability pressures weighing on parts of the housing market. Importantly for investors, the company reaffirmed its fiscal 2026 revenue guidance of $1.6 billion to $1.7 billion and its lot delivery target of 14,000 to 15,000 lots, underscoring confidence in its pipeline and market positioning. The combination of higher revenue and steady volumes suggests Forestar is continuing to scale its platform, even as it remains cautious about how fast to push development in more challenged regions.

Book Value Growth Signals Strengthened Equity Base

Book value per share rose 10% year-over-year to $35.10, reinforcing the idea that Forestar is steadily compounding intrinsic value even in a more uneven housing environment. For shareholders, this increase in book value reflects not only earnings retained in the business but also a conservative approach to leverage and capital deployment. Management repeatedly emphasized that capital allocation decisions are being made with a focus on sustaining returns through cycles, suggesting that the growing book value is meant to be durable rather than driven by short-term risk-taking.

Liquidity and Capital Structure Provide Cushion

Forestar ended the quarter with roughly $820 million of liquidity, including $212 million in unrestricted cash and $608 million available on its undrawn revolver, against total debt of $793 million. The net debt to capital ratio stands at a conservative 24.6%, and there are no senior note maturities over the next 12 months. This balance sheet profile gives the company flexibility to keep investing in land and development, while also providing a buffer if demand softens further. For investors, the combination of strong liquidity and modest leverage reduces refinancing risk and enhances Forestar’s ability to be opportunistic if attractive land deals emerge.

Backlog and Deposits Underpin Revenue Visibility

Management stressed the strength of Forestar’s contracted backlog as a key source of visibility. The company holds about $210 million in hard earnest money deposits on contracts expected to generate approximately $2.2 billion of future revenue. These deposits help lock in commitments from builders and mitigate cancellation risk, giving Forestar greater confidence in its forward revenue stream. The backlog also provides a clearer runway for meeting the company’s medium-term delivery goals, even if near-term market conditions remain choppy.

D.R. Horton Relationship Anchors Demand

Forestar’s strategic alignment with D.R. Horton remains central to its business model. Over the past 12 months, 16% of D.R. Horton’s housing starts were on Forestar-developed lots, and 23% of its finished lot purchases came from Forestar. Meanwhile, 28% of Forestar’s owned lots are subject to a right of first offer to D.R. Horton, and management reiterated its ambition for one in three D.R. Horton homes to ultimately sit on Forestar lots. For investors, this relationship offers a built-in demand channel from the nation’s largest homebuilder, supporting volumes while still leaving room for diversification with other builders over time.

Disciplined Land Investment and Underwriting Standards

The company invested $415 million in land and land development in Q1, with roughly 75% directed to development and 25% to acquisition. Despite the large spend, management underscored that underwriting discipline remains non-negotiable, with new projects required to meet a minimum 15% pretax return on average inventory and return the initial cash investment within 36 months. Looking ahead to fiscal 2026, Forestar still plans around $1.4 billion of land acquisition and development investment, contingent on market conditions. This measured stance is designed to ensure growth does not come at the expense of long-term returns, a key watchpoint for shareholders as the capex ramp continues.

Operational Efficiency and Cost Control

Cost discipline was another key theme. SG&A expenses were $36.5 million in Q1, nearly flat in dollar terms year-over-year, but down as a percentage of revenue to 13.4% from 14.4%, indicating improved operating leverage. Headcount declined about 3% versus a year ago, reflecting tighter cost management. Management also noted that land development costs and cycle times have stabilized, and that best practices are being applied across operations to drive efficiency. These efforts are intended to help offset margin pressure from a more competitive environment and support profitability even if pricing or volumes wobble.

Net Income and Pretax Margins Edge Lower

Despite higher revenue, profitability softened modestly. Net income was $15.4 million, or $0.30 per diluted share, down from $16.5 million, or $0.32 per share, in the prior-year quarter. Pretax income dipped to $20.8 million from $21.9 million, and pretax margin slipped to 7.6% from 8.7%, a 1.1 percentage-point decline. Management attributed the margin compression mainly to mix and a specific low-margin transaction, but the results also reflect the reality of operating in a more price-sensitive market. For investors, this underscores that while the growth trajectory remains intact, earnings leverage is currently constrained.

Gross Margin Compression and Mix Effects

Gross profit margin declined to 20.1% in Q1 from 22.0% a year earlier, a 1.9 percentage-point drop. A key driver was a track sale completed at an unusually low margin, which weighed disproportionately on the quarter. Excluding this item, management said gross margin would have been around 21.5%, still below last year and reflective of mix headwinds. As Forestar shifts between different geographies, lot sizes, and product types, margins can fluctuate, and the mix in Q1 skewed less favorably. Investors should note that this variability may continue, making year-over-year comparisons noisier even if the underlying business remains healthy.

ASP Volatility Adds Another Layer of Variability

Average sales price for the quarter came in at $121,000, elevated by a heavier concentration of higher-priced lot deliveries. Management cautioned that ASP is likely to remain volatile quarter to quarter, given exposure to diverse markets and product types. Geographic mix, lot size differences, and the timing of specific projects all feed into ASP swings, which in turn influence revenue and gross margin trends. For market watchers, this means headline pricing metrics may not always reflect underlying demand strength, and understanding the mix behind the numbers will be important when assessing future quarters.

Demand Headwinds in Key Markets

While overall demand for new homes remains supported by long-term housing needs, Forestar acknowledged meaningful near-term headwinds. Affordability constraints and cautious consumer sentiment are slowing the pace of new-home sales, with Texas and Florida called out as relatively more challenged markets due to elevated resale inventory. In response, the company is moderating development activity selectively in those states. This tactical pullback is meant to protect returns and avoid overbuilding, but it also signals that some of Forestar’s largest markets are facing a tougher backdrop, an important consideration for investors tracking the cycle.

Investment Levels and Execution Risk

Forestar’s continued high level of investment, including $415 million spent in Q1 and a plan to deploy roughly $1.4 billion over fiscal 2026, carries clear upside but also risk if demand or pricing falter more than expected. Management argued that strict underwriting and a strong balance sheet mitigate this risk, yet the strategy still relies on the market remaining broadly supportive. If affordability pressures deepen or resale inventory further crowds out new-home demand, returns on these investments could compress. The company’s ability to pace spending and adapt project pipelines will be crucial in preserving margins and returns through any downturn.

Moderated Gross Margin Outlook

Looking forward, management expects gross margins to trend toward the lower end of the company’s historical range of 21%–23%. This guidance effectively acknowledges that the combination of mix shifts, competitive dynamics, and affordability constraints is likely to keep margins under pressure, even if volume growth continues. While not a dramatic reset, it does temper expectations for margin expansion in the near term. Investors should interpret this as a pragmatic stance: Forestar is prioritizing disciplined growth and inventory turns over squeezing out every last basis point of margin in a challenging demand environment.

Guidance and Outlook: Steady Targets Amid Choppy Conditions

Forestar reiterated its fiscal 2026 guidance for revenues of $1.6 billion to $1.7 billion and lot deliveries of 14,000 to 15,000, signaling confidence in its land position, backlog, and builder relationships despite macro uncertainties. The company still plans to invest about $1.4 billion in land acquisition and development, subject to market conditions, while maintaining strict underwriting hurdles of at least a 15% pretax return on average inventory and a cash payback within 36 months. With $820 million of liquidity, $793 million of total debt and a net debt to capital ratio of 24.6%, plus a contracted backlog of about $2.2 billion backed by $210 million in deposits and a total lot position of 101,000, management believes it is well equipped to meet its multi-year targets. The overall message to investors was that Forestar intends to grow through the cycle, but will adjust project timing and capital deployment if market conditions warrant.

In closing, Forestar’s earnings call portrayed a company leveraging its scale, balance sheet strength, and strategic partnerships to drive growth, even as margins and certain markets come under pressure. Revenue and book value are moving in the right direction, liquidity is ample, and contracted backlog provides a solid base of future business. At the same time, margin compression, ASP volatility, and demand headwinds in key regions underscore that execution and disciplined capital deployment will be critical. For investors, the story is one of cautious growth: a structurally well-positioned lot developer aiming to compound value through the housing cycle, while acknowledging that the path ahead is unlikely to be perfectly smooth.