Business Context and Reporting Period
Company: Forestar Group Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: Forestar operates in three segments: Real Estate (entitlement and development), Mineral Resources (oil, gas, and water interests), and Fiber Resources (timber management). The company spun off from Temple-Inland Inc. in December 2007. During the period, the company executed strategic initiatives to sell higher and better use (HBU) timberland to generate cash flow and reduce debt.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Total Revenues | $45,307 | $33,943 | $114,850 | $122,763 |
| Net Income (Attributable to Forestar) | $19,476 | $872 | $66,501 | $10,230 |
| Diluted EPS | $0.54 | $0.02 | $1.85 | $0.28 |
| Operating Cash Flow | N/A | N/A | $156,109 | ($36,369) |
| Cash and Equivalents (End of Period) | $43,542 | N/A | $43,542 | N/A |
| Total Debt | $224,966 | N/A | $224,966 | $337,402 |
| Total Assets | $816,869 | N/A | $816,869 | $834,576 |
Note: Q3 2008 and 9-month 2008 cash flow and balance sheet data are not provided in the summary tables for direct comparison in the source text, though 9-month 2008 operating cash flow is listed as negative $36.4 million.
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to Forestar increased significantly from $872,000 in Q3 2008 to $19.5 million in Q3 2009. For the first nine months, net income rose from $10.2 million to $66.5 million.
- Gain on Sale of Assets: The primary driver of income was a $24.8 million gain in Q3 2009 and a $104.0 million gain for the first nine months, resulting from the sale of approximately 95,000 acres of timber and timberland to Hancock Timber Resource Group and St. Regis Paper Company.
- Debt Reduction: Total debt decreased from $337.4 million at year-end 2008 to $225.0 million at September 30, 2009. Proceeds from asset sales were used to reduce the term loan by $50 million and repay the revolving line of credit by $70 million.
- Segment Performance:
- Mineral Resources: Earnings increased due to $15.8 million in lease bonus payments in Q3 2009.
- Real Estate: Earnings were negatively impacted by impairment charges ($2.5 million in Q3) related to a condominium project in Austin and joint ventures in Florida, though revenue from undeveloped land sales increased.
- Fiber Resources: Earnings increased due to higher volumes and prices of pine sawtimber.
Guidance, Outlook, and Risks
- Strategic Initiatives: The company continues to market approximately 74,000 acres of undeveloped land and related timber classified as "assets held for sale" to further reduce debt and generate cash.
- Market Conditions: Management notes challenging conditions in the single-family residential industry, characterized by oversupply and depressed sales. They expect difficult housing markets and credit conditions to continue through 2009 and into 2010.
- Mineral Outlook: Oil prices have increased, but natural gas prices remain depressed. Exploration companies are conservative, which may impact future lease activity.
- Tax Rate: The effective tax rate for the first nine months of 2009 was 37%. Management anticipates the full-year 2009 effective tax rate to be approximately 37%.
- Liquidity: The company has $173.7 million in net unused borrowing capacity under its senior credit facility. The facility was amended in Q3 2009 to extend the maturity option to June 30, 2012.
- Contingencies: The company has a $6.1 million liability for tax benefits not recognized for book purposes. Environmental remediation liabilities are estimated at $1.8 million.
Investor Verification Checklist
- Asset Sale Sustainability: Verify the remaining pipeline of "higher and better use" timberland sales and the likelihood of achieving the targeted $175,000 acre sale volume.
- Real Estate Impairments: Assess the magnitude of impairment charges in the Real Estate segment and the status of the Austin condominium project and Florida joint ventures.
- Debt Covenants: Confirm continued compliance with the amended senior credit facility covenants, specifically the interest coverage ratio (currently 7.49:1) and minimum liquidity requirements.
- Mineral Lease Volatility: Monitor the impact of fluctuating oil and natural gas prices on future lease bonus payments and royalty revenues.
- Cibolo Canyons Project: Review the progress and financial exposure related to the JW Marriott resort development and the Special Purpose Improvement District (SPID) reimbursement agreement.