Forestar Group Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022. Comparisons are with the three months ended December 31, 2021, unless otherwise noted. Forestar develops residential lots for homebuilders and operates in 52 markets across 20 states. D.R. Horton owned approximately 63% of Forestar at quarter-end.
Financial performance
- Revenue: $216.7 million, down 46.8% from $407.6 million. Residential lot sales were $206.7 million; the company sold 2,263 lots versus 4,516. Average sales price per lot increased to $90,100 from $89,000.
- Profit: Net income was $20.8 million, down from $40.5 million. Diluted earnings per share were $0.42 versus $0.81. Income before taxes was $27.9 million versus $53.5 million.
- Margins: Gross profit was $47.5 million, or approximately 21.9% of revenue, compared with $73.4 million, or approximately 18.0%. SG&A was $22.9 million and 10.6% of revenue, versus $21.5 million and 5.3%. The effective tax rate was 25.4%, compared with 24.3%.
- Cash flow: Operating activities used $49.8 million, versus $5.8 million provided in the prior-year quarter, primarily reflecting investment in real estate and lower accrued development costs. Investing activities provided $1.5 million; financing activities used $0.1 million. Cash declined $48.4 million to $216.4 million.
- Balance sheet and liquidity: Total assets were $2.34 billion and real estate was $2.07 billion. Debt was $706.4 million, including $12.5 million of other notes; there were no revolving-credit borrowings. Cash plus $366.2 million of available revolver capacity provided substantial reported liquidity. Debt-to-total-capital was 36.7%; net debt-to-total-capital was 28.7%.
Material changes and business developments
- Management attributed the sharp reduction in lots sold and revenue primarily to weaker finished-lot demand as homebuilders moderated new-home starts amid higher mortgage rates and elevated inflation.
- Forestar sold 2,094 lots to D.R. Horton for $187.1 million, compared with 4,014 lots for $328.0 million a year earlier. D.R. Horton accounted for approximately 86% of current-quarter revenue, underscoring customer and related-party concentration.
- Owned and controlled lots totaled 82,300 at December 31, down from 90,100 at September 30. Owned lots under contract totaled 18,400. The company invested $31.8 million in residential real estate acquisitions and $205.6 million in development during the quarter.
- No real estate impairment charges were recorded. Land-option deposit and pre-acquisition cost write-offs rose to $2.4 million from $0.6 million.
Outlook, risks and contingencies
- No numerical earnings or operating guidance was provided. Management said weakening demand had persisted through the quarter and could continue; it may need to reduce selling prices or may be unable to offset cost increases. Management cited low net leverage, liquidity, a low-overhead model and its D.R. Horton relationship as supports through changing conditions.
- At quarter-end, the $410 million revolving facility had been extended to October 28, 2026; $43.8 million of letters of credit reduced available capacity. The company reported compliance with its credit and note covenants. Senior notes mature in 2026 and 2028; the $12.5 million secured, non-recourse note matures in October 2023.
- Outstanding surety bonds were $645.1 million, supporting development obligations. The company expects to satisfy the related obligations in the ordinary course. It reported ordinary-course litigation and believes reserves are adequate, while noting charges in a single period could be significant.
- Key disclosed risks include housing-market cyclicality, interest rates and inflation, land and construction input availability and cost, dependence on homebuilder customers and D.R. Horton, access to capital, debt covenant compliance, and availability and cost of surety bonds. D.R. Horton’s control and related-party transactions are also relevant considerations.
Important facts for investors to verify
- Whether finished-lot demand, lot deliveries and pricing stabilize or weaken further as homebuilders adjust starts.
- How much revenue and contracted-lot activity continue to depend on D.R. Horton, and the terms and execution of related-party transactions.
- Whether real estate investment and development spending can be funded while operating cash flow is negative, and how liquidity and leverage evolve.
- The status of the October 2023 other-note maturity, covenant headroom, and the company’s ability to maintain access to its revolver and surety bonds.
- Whether land-option write-offs, deferred development revenue recognition, or impairment assessments change materially in subsequent periods.