Anna Torma - Senior Vice President, Corporate Affairs Jim DeCosmo - Chief Executive Officer Chris Nines - Chief Financial Officer

Mark Weintraub - Buckingham Research Group Steve Chercover - Davidson Steve O'Hara - Sidoti & Company David Spier - Nitor

Good day, ladies and gentlemen and welcome to the First Quarter 2015 Forestar Group Incorporated Earnings Conference Call. My name is Crystal and I will be the operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the call over to your host for today Ms. Anna Torma. Please proceed.

Thanks and good morning. I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss Forestar’s first quarter 2015 results. I am Anna Torma, Senior Vice President, Corporate Affairs. Joining me on the call today is Jim DeCosmo, President and CEO and Chris Nines, Chief Financial Officer. This call is being webcast and copies of the earnings release and presentation slides are now available on the Investor Relations section of our website at forestargroup.com. Before we get started, let me remind you to please review the warning statements in our press release and our slides as we will make forward-looking statements during the presentation. In addition, this presentation includes non-GAAP financial measures. The required reconciliation to GAAP financial measures can be found at the back of our earnings release and slides or on our website. Now, let me turn the call over to Chris for a review of our financial results.

Thank you, Anna. I would also like to welcome everyone joining us on the call this morning. Let me begin by highlighting our first quarter 2015 financial results. Compared with the first quarter of 2014, operating results were adversely impacted principally by the timing of real estate sales activity and lower commodity prices. As a result, Forestar reported a net loss of approximately $8.2 million, or $0.24 per share in the first quarter of 2015 compared with net income of $8.3 million, or approximately $0.19 per share in the first quarter of 2014. Turning to our segment results, real estate reported segment earnings of $9.1 million in first quarter 2015 compared with $23.6 million in the first quarter of 2014. The decline in earnings year-over-year is principally due to lower undeveloped land and residential lot sales activity. Our first quarter 2014 real estate segment results included $16.2 million in earnings or approximately $0.24 per share after-tax associated with the sale of over 9,300 acres of undeveloped land. Oil and gas reported a segment loss of approximately $2.9 million in first quarter 2015 compared with $0.8 million of earnings in the first quarter of 2014. This decline is principally due to approximately $2.8 million in restructuring costs, primarily associated with the addition of the Fort Worth office leased and severance cost associated with previously announced staff reductions. In addition, lower commodity prices negatively impacted first quarter 2015 results, which were partially offset by a significant increase in production volumes and a gain of approximately $1.2 million associated with the sale of 290 net acres of leasehold interest in the Bakken/Three Forks. Other natural resources reported a segment loss of $400,000 in first quarter 2015 compared with a loss of $500,000 in first quarter 2014. This improvement is principally related to earnings associated with the previously announced groundwater reservation agreement in Central Texas. As a result, total segment earnings were $5.8 million in the first quarter of 2015 compared with $23.9 million in first quarter 2014. Now, let me turn the call over to Jim to walk through the operating performance and market conditions for each of our segments.

Thank you, Chris and I would also like to welcome everyone who is joining us on the call this morning. First quarter results that Chris shared with you were principally reflect the timing of real estate sales and the oil and gas prices. The first quarter real estate sales were lower compared to previous quarters. I believe by year end, the 2015 results will better reflect the momentum we have generated in the business. Relative to oil and gas, there is no argument that today’s commodity prices are impacting our oil and gas segment financials. We can’t control prices, but we can control how we operate Forestar. We will continue create and deliver value in real estate and we will carefully manage oil and gas investments and costs with the focus on cash flow and value. I will begin to review with real estate. Segment earnings were $9.1 million in the first quarter of this year, that’s down $14.5 million quarter-over-quarter and that’s primarily due to lower undeveloped land and residential lot sales. As in the past, retail land sales tend to be lumpy. By all accounts, builders’ appetite for finished lots remained steady. Rather than pressing lot sales volume, we are focused on maximizing lot margins. That’s what delivers the greatest value from every acre. As a result, average lot prices for the quarter were $76,200 per lot, with an average gross profit of $37,500 and that’s the highest quarterly average we have ever reported. In addition, we sold approximately 33 acres of commercial tracks and two joint venture projects for over $314,000 per acre. Relative to acquisitions, we acquired two new communities and one bolt-on to an existing project for about $19 million. In total, the project should yield about 600 lots and as most lots in our portfolio, these are for first and second move-up. And last, we received $4.4 million as the final payment associated with a non-performing loan that we purchased in the second quarter of 2011 for $21 million. It was secured by a master planned community near Houston. In total, we received $38 million that’s about 1.8 cash multiple in just less than 4 years. We shift gears and give you an update on the Texas housing market and the conditions. Given lower oil prices we closely monitor the Texas housing markets, looking for signs of the slowdown. Absolute new home inventory and months of supply continue to be in good share. On the demand side, year-over-year job growth remains above the U.S. average yet the rate of growth is slowing. The drop in oil prices and a stronger U.S. dollar is impacting job growth in Texas, a trend which is expected to continue for the near-term. Now, despite the slowdown in job growth, overall Texas economy is in good health and most forecasts continues to suggest positive job growth for the state in 2015. Of the four major markets in Texas, the Houston economy is the most vulnerable to low oil prices. Our exposure in Houston today represents less than 10% of our total real estate investment. Furthermore, our Houston communities are well into development and sales, which is a low risk position in starting up major track investments on large master-planned projects. Nonetheless, we continue to closely monitor the markets and manage lot inventories accordingly. Based on market conditions and builder commitments, we continue to expect 2015 lot sales to be in the 1,800 to 1,900 range. Excluding bulk sales, 2015 should be similar to 2014. Moving on to multifamily, consumer balance sheets and lifestyle preferences, we believe multifamily will continue to be an integral component of U.S. housing. To-date, demand is absorbing supply, yet the market for good sites is tightening. There continues to be opportunities, but it takes more deal flow to produce a project that meets our underwriting standards, that’s to be expected and while we adopt a strategy that starts with discipline and strategy investments. Today, nearly all of our multifamily projects are in submarkets underpinned by positive job growth, which is key. In the first quarter, we had one stabilized multifamily community in our portfolio with five projects under construction accounting for over 1,700 units. Development in our multifamily portfolio is progressing well and we expect these investments to average about a two plus cash and value multiple in 36 to 48 months following the start of construction. Eleven continues to be about 95% leased with rent and occupancy levels above the market averages. Just a short walk away, the development of the University of Texas Medical School is schedule to open in 2016 which would generate additional demand for Eleven. Our Midtown project near Dallas is essentially complete and over 65% leased. Midtown was the finest and the best multifamily real estate deal of 2014 by the Dallas Business Journal. That’s the testament to the overall quality of the community Forestar delivers to the market. As I mentioned in February, we are expecting Midtown and Dallas to be solid in later half of 2015. Our 360 project in Denver is 87% complete and nearly 40% leased and Acklen one of our national projects is 85% complete and about 20% leased. We entered the quarter with three multifamily sites in the pipeline one each in Nashville, Charlotte and Austin, with discipline we will continue to evaluate additional acquisition opportunities in submarkets anchored by solid job growth and balanced supply of fundamentals. Relative to our real estate pipeline, we entered the quarter with just over 112,000 acres with over 40 communities in development or generating sales. We point your attention to the next last column on the right developed and underdevelopment. We entered the quarter with about 2,350 lots in development just over 1,000 are completed and likely be sold this year. In addition, we have just under 1,300 in some phase of development, most of which are either on a contract or expected to be on a contract at the time of completion. The rising market delaying and shortening the contract period allow us to better maximize lot profits. Assuming average sales price of $60,000 a lot for the 2,352 lots in development equates to sale of over $140 million. Keep in mind, all the land cost and most of the development costs has been invested plus these lots represents just 711 acres. With regards to the balance of the pipeline as long as properties or communities can meet our return requirements, we will hold and invest. In cases where returns can’t be achieved those properties will be repositioned. It simply boils down to recognizing and delivering the greatest value from every acre and investing with discipline. As I mentioned earlier average profit per lot was an all time high in the first quarter and we will continue to grow lot profits to the extent markets and community additions – conditions allow. Average profit per lot in the first quarter was $37,500 and it should be up year-over-year after selling about 1,800 to 1,900 lots. The greatest value from every acre includes commercial sales and profits as well. [Technical Difficulty] properties that we believe are ready for the market. It's unlikely we will close all the tracks this year, but it’s safe to say that it’s not as much a matter of if but when. Relative to growing and creating value, we acquired three communities in three markets. In total these tracks should yield about 600 lots. Going forward we will continue to evaluate residential community or multifamily opportunities while maintaining the discipline to meet our return and underwriting criteria. And last, we are making progress creating value through the development of our multifamily pipeline and portfolio. Just in other natural resources, during the first quarter of this year other natural resource segment results were a loss of $0.4 million and its up from a loss of $0.5 million in the first quarter of last year. And that’s driven principally by annual payment for a water reservation agreement. We sold nearly 48,000 tons of fiber and that’s down 17% compared to the same quarter last year. For 2015, we anticipate fiber sales to be in the range of 275,000 to 300,000 tons. And last, average fiber pricing is down due to higher mix of pulpwood sales. Relative to prices pulpwood was down marginally in the first quarter and sawtimber is essentially flat as compared to the same period last year. Moving to oil and gas, first quarter 2015, oil and gas segment results were a loss of approximately $2.9 million that’s a $3.7 million decline from the first quarter of last year and that’s principally due to lower commodity prices and restructuring costs. Earnings from working interest production, is up $10.7 million, reflective of oil and gas production of 380,000 BOEs, that’s up over 50% compared with the first quarter of 2014. The growth in production is reflective of past investments in the Bakken/Three Forks, in fact oil production working interest grew by nearly 85% compared with the same quarter last year. Price more than offset the gain from production. As our realized price in the first quarter was down $33.57 per BOE or 50% from the first quarter of last year, 17 new Bakken wells went to sales in the first quarter all carryover from 2014, we ended the quarter with 10 wells waiting on completion that will average about a 9% working interest on average. Seven new AFEs for $8.9 million were signed during the first quarter for wells located in the core of our acreage in the Bakken/Three Forks. Our underwriting is based on the five year NYMEX strip, substantially lower drilling completion cost budgets and estimated EURs generally greater than 650,000 BOEs per well. In most cases, these well proposals and units with existing production which substantially lowers risk and preserves value. We also elected not to participate in four wells due to lower returns, once again primarily due to combination of cots and EURs. The team did a nice job of selling approximately 290 net mineral acres of leasehold interest in the Bakken/Three Forks for $2 million generating a $1.2 million gain in earnings. Most of this acreage was associated with the wells and locations we elected not to invest in. And last below segment earnings is the EBITDAX reconciliation. First quarter 2015 EBITDAX of $4.7 million is down $5.1 million from the first quarter of last year with lower pricing more than offsetting the benefit of higher working interest volume. Our focus is on cash flow and value. To that point, in the first quarter, the oil and gas segment generated about $7 million in cash flow prior to capital investments. Excluding restructuring costs, we have reduced operating costs and capital investments in our oil and gas segment with an objective to reduce operating expenses by over 50%. The chart on the left shows our current progress compared to last year. The bulk of the savings to-date is driven by the closure of our Fort Worth office and staff reduction. As I shared with you on the last call, our planned 2015 oil and gas capital investments are expected to be down significantly compared with last year. The wells proposed thus far in 2015 are mostly 2014 pipeline carryover. The permitting and site work was started in the latter half of ‘14. Based on operator feedback and assuming NYMEX oil price forecast we expect well proposals to slowdown considerably for the balance of the year. What determines oil and gas capital investments in the Bakken, on a well by well basis election will largely be determined by drilling and completion costs to EURs with some consideration given the preserving value or leasehold interest in core locations. In summary, let me say we still have more work to do. We will continue to reduce operating costs and maintain the utmost discipline relative to capital investments which will primarily be in select locations in the Bakken/Three Forks. In the last section of the call, let me update you on our strategic review. Given our guidance principle to maximize long-term shareholder value, our Board of Directors, the management team and our financial advisors continue to explore strategic alternatives to enhance shareholder value and that certainly includes a review of the oil and gas business. Although I said exploring, we started taking action at year end 2014 and have already made meaningful progress producing oil and gas operating costs and capital expenditures. The focus is on generating cash flow. I will also say it’s important that all options are thoroughly reviewed to ensure we maximize long-term shareholder value. As you are aware, we have almost 1 million acres of oil and gas interest, including over 9,000 net mineral acres in the Bakken/Three Forks and we own almost 600,000 net mineral acres at essentially no basis. Given the current oil and gas pricing environment and oil and gas assets, we must adhere to our core principle and that’s to maximize long-term shareholder value. In real estate, we will continue developing our real estate business by leveraging our strength, investing without utmost discipline and generating greatest value from every acre in our portfolio yesterday and in the future. I will close by saying that given my involvement in evaluating strategic alternatives, I am confident that this body work is clearly focused on adopting strategies that will maximize long-term value. That’s our commitment to shareholders. These are certainly times of change, so I want to take this occasion to thank our employees. I applaud their perseverance and their contribution through this process. It is my objective to maximize long-term stakeholder value and that certainly includes our employees. Once again, I want to thank you for joining us on the call this morning as well as your interest in Forestar. And I’d like to open up the call for questions.

[Operator Instructions] Our first question will come from the line of Mark Weintraub with Buckingham Research Group. Please proceed.

Thank you. I just want to first start on the residential real estate side you indicated you are still expecting lot sales to be similar to your early expectations yet. Clearly, the first quarter was light. Is it that we are going to see more in the second quarter – why the lightness in the first quarter, was it temporary delays or maybe provide some more color that would be helpful?

Mark, it was principally timing. In the plan this year, there is a couple of large takedowns that are planned for the second quarter. So, we look at our second quarter estimates or forecast as compared to the first, I think it assuming lots close that the second quarter will be up substantially, but I will go back to my comments earlier and we still anticipate lot sales to be in the 1,800 to 1,900 range for the year.

And I guess just trying to tease out, any lots that didn’t close in this quarter what were the reasons for that that you had expected to close?

Yes, Mark, I don’t know that we didn’t have any lots that didn’t close that were planned to close. Maybe another way to respond to that is if the question were did we not close lots, because builders wouldn’t take an answer that is no. I mean, we continue to have pretty strong builder appetite as I said is principally a function of timing. But as I look at the forecast for the balance of the year in the quarters, they will be up certainly over the first quarter.

And are you beginning to get any visibility into the early part of next year on the sales of the real estate pipeline and are you seeing any shift in momentum, I mean, given that there are concerns about oil prices having an impact on the Texas markets?

Mark, the answer to that is we do have some visibility into 2016, but I will tell you that given what we can see today through 2015 and I will even comment in the early 2016 we don’t see any pushback or slowdown yet, but I will also go back to the comment that I made to is that we are very attentive to market signals that we want to make sure that if there is a slowdown that we are responding accordingly if not being proactive. The important thing here is very closely manage inventories.

Okay, great. Helpful. And one last one if I could, just on the oil price during the quarter and then kind of on a look-forward basis, what is the best indicator we should use and how to – it came in a bit lower than what I would have anticipated and what’s the best indicator to use and kind of the delta maybe to use against that or how do you tend to look at it?

Yes, Mark, the average price it reported also includes the differential coming out of the Bakken, so WTI less differential in the Bakken is somewhere in the neighborhood of $10 a barrel. So, what you see in our report takes out of consideration. Relative to going forward, I am not in the business and I don’t know anybody does any good of predicting oil prices. Obviously, there has been some improvement over last 2 to 3 weeks, but I would think that we will continue to operate and manage our oil and gas business with the greatest of caution. This is just Jim’s opinion. The fundamentals are still pretty tough. I would say, demand is on the anemic side and there are some pretty significant supplies in inventories.

Okay. And so WTI minus 10 though is the best way to?

Yes.

Gauge where pricing will be. Okay, thanks so much.

Yes. Thank you, Mark.

Our next question will come from the line of Steve Chercover from Davidson. Please proceed.

Thank you. Good morning, everyone.

Good morning, Steve.

So, first of all, I guess this is – I noticed you haven’t discussed the share purchase at all, is it safe to assume that’s still on hold until the strategic review is complete?

Yes, that’s safe to assume.

Okay, thank you. And then you said that you will try to grow your average value per lot going forward, would $3,700 a lot be a good full year average in 2015?

Steve, it’s $37,000 per lot margin. The first quarter is the strongest quarter we have ever reported or seen. I don’t know that’s a proxy for the year, but as I said in my comments, excluding bulk sales, I do expect 2015 average lot margins to be up over 2014.

Got it. Thanks, Jim. Sorry if I misspoke there.

It’s okay.

And then thirdly how are you going to market with your timber, is it safe to assume that you are selling stumpage and could you add value by merchandising it or are you simply too small there?

Steve, it’s a combination of stumpage sales as well as some delivered sales. I think it’s a good point that you make. In some cases if it’s a thinning that’s principally for stand improvement or for civil culture reasons, then that lends itself to stumpage sales. Now, if the product is going to include more of the solid wood component, then it’s likely that that we would sell it on a delivered basis. So, we actually do both. At one time, we were predominantly all supply stoppage sales. We have migrated towards more deliver sales as these tracks that we have in Georgia have matured.

Have you seen any benefit from some of the pellet facilities that are being built to supply offshore utilities?

Steve, not directly, I think it’s a good utilization of fiber and resources in another outlet, but we have not been significantly impacted relative to sales, revenues and margins.

So, at best may be a waterbed or secondary effect. Okay. And my last question is on water, I recognized you are not in California, but the news is just so striking that you think that any jurisdiction where water was scarce, they would be scrambling to secure the water right. So, is there any movement there?

Steve, there is a lot of activity. Net-net, I don’t know that I would characterize it as movement. There is just a lot of discussion, the Texas legislatures and session. There is a lot of discussion there. Completely, it’s all the way across the board. Particularly for Central Texas, Steve, the Highland Lakes which is the predominant source of water for the Austin economy and even down river, those reservoirs are still less than 40% of capacity. So, it’s top of mind and its attention of every body. But I will also say to your point Texas is closely watching what’s going on in California.

I should hope so. And to the extent that you can determine your own inventory, I guess you measure it in acre-feet, if I am not mistaken, is yours stable or it is?

I am sorry Steve. Yes, it’s measured in acre-feet, what was the last part of your question?

Is your inventory dissipating or are you stable?

Stable. A majority of all our interest is in our groundwater. So it is not – it’s not subject to evaporation, certainly it’s impacted by rainfall but groundwater supplies are typically much more stable.

Yes. You got to make sure no one sticking straws deeper than your groundwater. Okay. Thank you.

Alright. Steve, thank you.

Our next question will come from the line of Steve O'Hara from Sidoti & Company. Please proceed. Steve O'Hara: Hi, good morning.

Good morning, Steve. Steve O'Hara: Just, I mean, I think you guys – correct me if I am wrong, you recently did you buy a multifamily project or a site in Houston. And I guess if so what was – kind of what’s the thinking there, I mean I guess I would see Houston as one of the more impacted markets in general and maybe the valuation is just that good at this point, I am just kind of curious about the strategy there. And then also on the multifamily segment in general or business in general, is there any change in strategy I know you guys still own Eleven maybe you could talk about what the plan is there and is there any talk of maybe turning this more into a leasing portfolio rather than kind of selling these projects? Thank you.

Hi, Steve. Relative to the investment in Houston, we do have an investment in a project in Houston that was underwritten, given its location which is to have some barriers to entry. So there are two things we got be to very mindful of is demand and second is supply. So we feel pretty good about the investment from the supply side. We continue to monitor the job growth and demand as well. So of all the projects that we had this one was probably, I don’t have to characterize it at the most risk, but at the same time it’s – this investment we are not losing sleep over. Relative to the second part of your question, holding multifamily assets versus development and sale, as I said in my closing comments we are fully engaged in a review of strategic alternatives for our business. I would tell you that it’s comprehensive, it’s also robust and everything is being evaluated. But I would be a little early at making that comment at this time. Steve O'Hara: Okay. And then I mean in terms of the just the real estate segment, so I mean in terms, I mean it seems like you guys are pretty comfortable what may be segment earnings in the $70 million range, I guess 1,850, times $37,000. And I am just wondering I mean those tend to be lumpy and timing is tough to kind of get around, but I mean is that kind of a decent baseline based on where you sit today and maybe what kind of upside you think is possible and is it – does that come from bulk of lot sales or maybe commercial tracks? Thanks for taking the question.

Hey Steve, the foundation of the real estate business is in lot sales that’s the – that’s the way I think of the base load of the business. And as I mentioned we still anticipate either 1,800 and 1,900 lots for the year. So it’s going to be certainly at a greater run rate than the first quarter. Relative to other sales that are somewhat lumpy as I mentioned there is a number of commercial tracks that are being in marketed somewhere in the $15 million range, it’s difficult to forecast the timing of those, but they tend to be lumpy. And then the other comment that will influence the real estate in 2015 is the sale of Midtown probably in the latter half of the year. That’s a very good project. I think that we are going to do very well there from an execution and sales perspective. And it’s in the location of the submarket that bears venture lower and certainly I think that’s criteria in the candidate for sale. Steve O'Hara: Okay, great. Thank you very much.

Alright, Steve.

Our next question will come from the line of David Spier from Nitor. Please proceed.

Hey, how are you guys?

Good David.

So it just seems from the overall call that regardless of the strategic reviews, etcetera, you seem to be continuing down the path that you guys were in the last 3 years where you are continuing to operate essentially as a trading company, buying an asset, developing and flipping going to the process again. If you look back at the company’s performance over the last few years and especially relative to the peers in this business that have seemed to develop business models and strategies of developing, holding, building communities, building portfolios and properties and it doesn’t seem to be any evidence that supports continuing down this path of essentially acting like a trading company, so while we hear all these developments and all of these strategic reviews under place what leads anyone to believe that this is a strategy that we should continue down the path of just flipping a multifamily property even though you believe in the strength of the multifamily market you are selling the property, so what should investors have any confidence that this strategy should work going forward more or less?

David, as I commented the Board and management are fully engaged in a review looking at alternatives, I will say that the Board and its advisors and management have worked and focused very hard on a review that ends up with a strategy that truly creates the greatest value for shareholders. In that process, we have examined a number of strategies and alternatives and as I said I am confident that we will come out with a strategy that truly does create the greatest value and is appreciated by the market. So given where we are today it’s – that’s all I should say. But as I said I am confident that the strategy that we come up with is or that we deliver and execute is going to create value for shareholders.

Well, I just – I appreciate that and I just I hope when the Board and whoever it is reviewing and coming up with a strategy they realize that if one does believe in the strength of the multifamily market, one of the real ways to create value would be holding on to these properties that you have developed, creating a portfolio of stabilized growing cash flow and building of that portfolio which is the market strength and that portfolio is only going to increase in value. And I would just leave at this, that if you look at this quarter compared to last year where essentially it’s proof of the past strategy, revenues across the board were down, interest expense went up, cash on hand went down, net debt increased by over $100 million and compensation expense was surprisingly up. So I think, at some point someone should be accountable and held accountable for these results? And I appreciate the time and good luck.

Thanks for you comments, David.

Our next question will come from the Mark Weintraub from Buckingham Research Group. Please proceed.

Thank you. Jim is there a specific timeline that we can expect to hear an update on thoughts vis-à-vis strategy?

Mark, I certainly don’t want to get ahead of the Board and the process. I will just say that there has been a lot of work that has gone into this, the Board as well as management takes our roll and our responsibility very seriously. And we are certainly accountable for whatever actions that we take and the communication that we share. So, we have been working on this for a while and the Board is certainly undertaking its responsibilities and we will communicate at appropriate time.

Thank you. And is it fair to say that it would likely be a 2015 timeline recognizing you don’t want to get too specific?

Yes. Mark I would say that the Board is moving at its pace and its schedule and wanting to ensure that the strategy that is supported and endorsed is one that truly creates the greatest value for shareholders. So, I am reluctant to say tomorrow or by the end of the year, I am confident in saying that we have got a very strong Board, a very confident Board and we just need to let them work at this time.

Okay, thank you.

At this time, I would like to turn the call back over to Jim DeCosmo for closing remarks.

Good, thank you. Once again, I want to thank everyone who has joined us on the call this morning and we look forward to sharing results and communicating with you in the future. Thank you.

Ladies and gentlemen that concludes today’s presentation. You may now disconnect. Have a great day.