Forestar Group Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2023 (fiscal year ending September 30, 2023). Dollar amounts are in millions unless stated otherwise. Forestar develops residential communities and sells finished lots to homebuilders; D.R. Horton owned approximately 63% of Forestar at period end.
Financial results
| Metric | Three months ended June 30, 2023 | Prior-year quarter | Nine months ended June 30, 2023 | Prior-year period |
|---|---|---|---|---|
| Revenue | $368.9 | $308.5 | $887.1 | $1,137.7 |
| Income before taxes | $62.4 | $52.7 | $126.2 | $169.4 |
| Net income | $46.8 | $39.7 | $94.5 | $128.0 |
| Diluted earnings per share | $0.93 | $0.80 | $1.89 | $2.57 |
| Gross margin, calculated from revenue less cost of sales | 23.0% | 24.0% | 21.2% | 20.6% |
- Quarterly revenue increased 20%, with 3,812 residential lots sold versus 3,406. Average selling price per lot was $87,700 versus $86,500.
- Nine-month revenue declined 22%, primarily reflecting fewer lots sold: 9,054 versus 13,777, including deferred-development lots. Income before taxes and net income also declined.
- Quarterly SG&A was $26.4 (7.2% of revenue), versus $24.1 (7.8%). Nine-month SG&A was $71.3 (8.0%), versus $69.9 (6.1%).
- The nine-month period included $19.4 of real estate impairment charges and $4.2 of land-option and pre-acquisition cost write-offs. No impairment charges were recorded in the quarter.
Cash flow, balance sheet and debt
- Cash from operating activities was $136.2 for the nine months, compared with $10.2 of cash used in the prior-year period. The current-period inflow reflected net income, noncash charges and an $87.7 decrease in real estate inventory; cash use in the prior-year period included a $170.3 increase in real estate.
- Cash and cash equivalents were $401.0 at June 30, 2023, up from $264.8 at September 30, 2022. Total assets were $2,375.4 and equity was $1,296.5.
- Debt was $707.2, including $400 of 3.85% senior notes due 2026, $300 of 5.0% notes due 2028, and a $12.5 non-recourse note due October 2023. The revolving facility had no borrowings; $380.2 of capacity remained after $29.8 of letters of credit.
- Debt-to-total-capital was 35.3%; net-debt-to-total-capital was 19.1%, down from 37.1% and 26.9%, respectively, at September 30, 2022. The company reported compliance with debt covenants.
Business trends, outlook and risks
- Management said finished-lot demand weakened through the first six months of fiscal 2023 amid higher mortgage rates and inflation, then improved in the June quarter as homebuilders increased starts, particularly for more affordable homes. The filing gives no quantified earnings or revenue guidance.
- Forestar operated in 52 markets across 20 states and owned or controlled 73,000 lots at June 30, down from 90,100 at September 30, 2022. It described low net leverage, liquidity, a low-overhead model and its D.R. Horton relationship as strengths.
- D.R. Horton is a major customer and controlling shareholder. It purchased $270.4 of residential lots in the quarter and $677.4 in the nine months. At period end, 13,600 owned lots were under contract to sell to D.R. Horton, representing a remaining sales price of $1,272.4.
- Key stated risks include homebuilding-cycle and housing-demand volatility, higher interest rates and inflation, land and labor availability and costs, regulatory and weather impacts, access to capital and surety bonds, debt covenant compliance, and dependence on homebuilder relationships and D.R. Horton.
- Surety bonds of $616.3 and letters of credit of $29.8 supported development obligations. Management did not expect ordinary-course legal proceedings to materially affect long-term results, but noted charges could be significant in an individual period.
Important facts for investors to verify
- Whether the June-quarter improvement in lot demand persists, and how it affects lot sales volume and pricing.
- The timing and economics of contracted lot sales, especially those to D.R. Horton, and the extent of customer concentration.
- Whether operating cash generation is sustainable as real estate inventory, development spending and accrued costs change.
- The effect of impairment charges, land-option write-offs and the October 2023 maturity of the $12.5 note.
- Potential exposure from land purchase commitments with approximately $295.7 of remaining purchase price, alongside surety bond and other development obligations.