This quarter we initiated a position in Forestar Group Inc. (FOR, Financial), a highly differentiated national residential lot developer. The company purchases batches of entitled but undeveloped residential land. It then develops the land by adding roads, utilities, grading, landscaping, and amenities for the community. The finished lots are sold to homebuilders in phases. Frequently, the company presells the first phase of developed land, accelerating returns and reducing the project’s risk.
Forestar’s growth prospects are closely tied to those of D.R Horton, the largest homebuilder in the U.S. D.R Horton delivers over 55,000 homes annually, with a national footprint and a focus on entry level homes, which is the fastest growing segment of the U.S. housing market. D.R. Horton is in the process of transitioning its business from a vertically integrated homebuilder and land developer into a pure “home manufacturer,” with Forestar serving as its supplier of developed land. Don Tomnitz, former CEO of D.R. Horton, has been named Chairman of Forestar, and Horton currently owns 75% of Forestar’s shares.
We believe that Forestar’s strategic relationship with D.R. Horton is a sustainable competitive advantage. We expect Forestar to scale quickly by leveraging D.R. Horton’s national footprint and local land expertise to build out a national platform. The symbiotic relationship creates significant visibility into the supply of undeveloped land and the demand for developed parcels, enabling management to optimize the deployment of its resources and capital. Finally, we expect Forestar to leverage D.R. Horton’s capital markets relationships to access debt and equity financing at costs that are far lower than those of local developers.
We expect D.R. Horton to eventually source more than 30% of its lots from Forestar annually. This equates to 17,000 lots delivered annually, up 300% from the 4,000 lots expected to deliver in 2019. Forestar is also developing relationships with other homebuilders to diversify and grow its operating platform. D.R. Horton and Forestar have together outlined a business plan that should allow Forestar to grow from $100 million of revenue in 2018 to approximately $1 billion of revenue in 2021, with significant room to grow over the longer term.
From Ron Baron (Trades, Portfolio)'s Baron Growth Fund third-quarter 2019 shareholder letter.
