Forestar Group Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the three months ended December 31, 2023; unaudited. Comparisons are with the three months ended December 31, 2022 unless otherwise noted. Forestar develops residential lots and sells finished lots primarily to homebuilders. D.R. Horton owned approximately 63% of Forestar at quarter-end.
Financial and operating results
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $305.9 million | $216.7 million |
| Income before taxes | $51.2 million | $27.9 million |
| Net income | $38.2 million | $20.8 million |
| Diluted EPS | $0.76 | $0.42 |
| Cash used in operating activities | $156.7 million | $49.8 million |
- Revenue increased 41% year over year; net income increased 84%. Residential lot sales revenue was $304.2 million, including $272.8 million from D.R. Horton.
- Forestar sold 3,150 lots, up 39%; average sales price per lot was $96,400, up from $90,100. Gross margin, calculated as revenue less cost of sales divided by revenue, was approximately 23.8%, versus 21.9%.
- SG&A was $28.0 million, versus $22.9 million, but declined to 9.2% of revenue from 10.6%. The reported effective tax rate was 25.4% in both periods.
- Cash and cash equivalents were $458.9 million at December 31, down from $616.0 million at September 30, 2023. Operating cash use primarily reflected a $209.8 million increase in real estate inventory. Cash decreased by $157.1 million during the quarter.
- Debt was $705.3 million, compared with $695.0 million at September 30. The company reported debt-to-total-capital of 33.4% and net-debt-to-total-capital of 14.9%, versus 33.7% and 5.5%, respectively, at September 30.
- Liquidity included $385.7 million of available revolving-credit capacity; there were no revolver borrowings. The company reported $24.3 million of letters of credit and was in compliance with its debt covenants.
Changes, outlook and risks
- Management attributed stronger lot sales to improved homebuilder demand, particularly for affordable new homes, and a faster pace of home starts. It cited limited affordable housing supply and low resale inventory as supportive factors.
- Real estate assets increased to $2.01 billion from $1.79 billion at September 30, including $228.0 million of residential land acquisitions and $226.5 million of development investment during the quarter.
- Management noted that municipal delays continue to lengthen development cycles and development costs remain elevated, although supply-chain disruptions and labor tightness have improved. Pricing and costs may not move favorably together if market conditions weaken.
- The filing provides no specific numerical earnings or sales guidance. Management said it intends to invest selectively and manage lot sales pace and pricing to optimize returns.
- Risks include housing-market cyclicality, higher interest rates and inflation, land, labor and material availability and costs, development delays, access to capital and surety bonds, and reliance on homebuilder relationships. Legal proceedings are described as ordinary-course matters with reserves for probable losses; the company cautions that charges could be significant in an individual period.
- Forestar’s relationship with D.R. Horton is material: Horton is the controlling shareholder and a major customer. Horton purchased 2,834 lots for $272.8 million during the quarter. The filing also discloses a $11.3 million land acquisition from an entity owned and controlled by the adult sons of D.R. Horton’s chairman, alongside a finished-lot purchase agreement with D.R. Horton.
- No impairment charges were recorded; land option and pre-acquisition write-offs were $0.2 million, down from $2.4 million. All interest incurred was capitalized because active real estate exceeded debt.
Key facts for investors to verify
- Whether stronger lot demand and the higher average selling price persist, and how sales to D.R. Horton affect customer concentration and pricing.
- How the large increase in real estate investment and operating cash use translate into future lot deliveries, cash generation and leverage.
- Progress on development timelines and costs amid municipal delays and elevated costs, and the recoverability of land and contract deposits.
- Liquidity, covenant compliance and debt maturities, including the $400 million 3.85% notes due in 2026 and $300 million 5.0% notes due in 2028.
- Exposure from $669.1 million of surety bonds, land purchase contracts with approximately $483.9 million of remaining purchase price, and related-party transactions with D.R. Horton and the disclosed land seller.