Forestar Group Inc (FOR)

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Forestar Real Estate Group Inc. (FOR)

Q2 2008 Earnings Call

August 6, 2008 10:00 am ET

Executives

Christopher L. Nines - Chief Financial Officer

James M. DeCosmo - President, Chief Executive Officer and Director

Analysts

Mark Winetraub - Buckingham Research

[Analyst for Ben Lawrence - Suttonbrook]

Presentation

Christopher L. Nines

This is Chris Nines, Chief Financial Officer of Forestar Real Estate Group and I’d like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for second quarter 2008. Joining me this morning is Jim DeCosmo, President and CEO of Forestar Real Estate Group.

Let me remind you to please review the warning statements in our press release and our slides concerning forward-looking statements as we will make forward-looking statements during this presentation. This morning Jim DeCosmo and I will provide an update on our value creation activities for second quarter 2008. At the completion of the presentation we will be happy to take your questions. Thanks for your interest in Forestar Real Estate Group.

I’d now like to turn the call over to Jim.

James M. DeCosmo

Good morning and welcome to the call and the webcast. Before Chris reviews the financials, I want to make a few comments relative to the quarter current state of business in the markets.

With regard to housing markets my comments certainly won’t be a surprise. The markets continue to slow and are best characterized by poor buyer and builder sentiment, tightening mortgage requirements, minimal credit availability, high inventories and foreclosure rates. Fortunately, the majority of our active projects are in the major markets of Texas where we continue to generate sales albeit at a slower rate and our prices are stable. Given our mix of markets, a low basis portfolio, natural resources and a healthy balance sheet we’re well positioned for this phase of the cycle.

As you would expect, record oil and elevated gas prices in the second quarter generated significant activity in our mineral assets. We’ll provide additional detail and commentary in upcoming slides.

The distress in the housing and the financial markets are expected to create acquisition opportunities. There were no projects acquired in the quarter. To date there have been very few distressed properties priced at levels that meet expected returns. Generally speaking bid and ask spreads are still too wide.

In the next few slides I’ll briefly comment on our performance related to our strategy. In the second quarter we saw just over 500 undeveloped acres at an average price of approximately $5,900 an acre. As you’d expect in today’s market, most sales are all cash. Very little financing is available which limits the buyer pool. We moved 4,500 undeveloped acres into the entitlement process and we secured entitlements on 2,000 acres with a solid mix between residential and commercial uses. Real estate sales were 264 lots at an average price of $55,000 per lot and 47 commercial acres at an average price of just over $271,000 per acre. We continue to stay focused and advance execution of our real estate strategy.

In the second quarter we leased approximately 47,000 acres and were granted an option on another 17,000 acres. A map illustrating the location of activities is provided in the mineral section of our presentation. Our royalty interest generated $5.1 million in revenue and was driven by our net production of 277 million mcf of natural gas and 23,000 barrels of oil. We’re encouraged by the recent activity in the market and especially the addition of Flavious Smith who will lead our minerals business. He comes to us with an extensive experience and a proven track record in creating value through minerals, oil and gas.

Our fiber resources segment sold 218,200 tons of pulpwood and 44,000 tons of sawtimber yielding timber revenues of approximately $2.6 million. Our objective is to maximize timber revenues while enhancing real estate values. Timber is a unique asset. Trees left on the stump continue to grow volume and value providing flexibility with regards to timing sales. With this flexibility we’ll meet our contractual agreements yet remain disciplined during down timber markets holding volume for improved conditions.

Now let me turn it back over to Chris to review financials for the quarter in comparative financial metrics.

Christopher L. Nines

Despite challenging market conditions for our real estate segment, net income for second quarter 2008 was $9.6 million or $0.27 per diluted share outstanding compared with net income of $14.4 million or $0.41 per diluted share in the second quarter 2007 and a net loss of $0.2 million or $0.01 per share in the first quarter 2008. Second quarter 2008 results reflect the benefit of our value creation strategy in maximizing the value of our natural resources by increasing leasing activity on our mineral acres.

Second quarter 2008 financial results included a $2.3 million after-tax charge or $0.06 per diluted share principally related to environmental remediation activities at our San Joaquin River project located near Antioch, California. This 288-acre site located outside of Oakland was transferred to us from Temple-Inland prior to our spinout last year. Portions of this site were used for a container-board mill which was shut and dismantled in 2002. To date we have received environmental certification of completion on approximately 180 acres and we are currently working on the balance of the site. This project is located along the San Joaquin River, a major shipping lane, and its greatest value will most likely include commercial and/or industrial uses following the completion of our remediation activities.

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