Forestar Group Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended December 31, 2021 (Forestar fiscal 2022 first quarter). Forestar develops residential lots for homebuilders across 55 markets in 23 states. D.R. Horton owned approximately 63% of Forestar and is both its controlling shareholder and a major customer.
Financial and operating results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $407.6 million | $307.1 million |
| Income before tax | $53.5 million | $29.2 million |
| Net income attributable to Forestar | $40.5 million | $22.0 million |
| Diluted earnings per share | $0.81 | $0.46 |
| Operating cash flow | $5.8 million | $(158.7) million |
- Residential lot sales revenue was $404.1 million, versus $307.0 million. Forestar sold 4,516 lots, up from 3,567; average sales price was approximately $89,000 versus $86,000.
- Cost of sales was $334.2 million. Gross profit was approximately $73.4 million, or 18.0% of revenue, compared with $44.2 million, or 14.4%, in the prior-year quarter; these margins are calculated from reported revenue and cost of sales.
- SG&A was $21.5 million, or 5.3% of revenue, versus $15.5 million, or 5.0%. The effective tax rate was 24.3% in both periods.
- Cash and cash equivalents were $162.5 million at December 31, 2021, compared with $153.6 million at September 30, 2021. Total assets were $2.16 billion and total equity was $1.06 billion.
- Debt was $704.9 million, nearly unchanged from $704.5 million at September 30, 2021. Debt-to-total-capital was 40.0%; net-debt-to-total-capital was 33.9%. The company reported $343.7 million of available revolver capacity and no revolver borrowings.
- Real estate inventory was $1.96 billion. The company owned approximately 65,700 lots and controlled another 37,600 through purchase contracts.
Material changes versus the prior comparable period
- Revenue increased 33%, while net income attributable to Forestar rose to $40.5 million from $22.0 million. Lot volume, average sales price, and sales to customers other than D.R. Horton all increased.
- Operating cash flow improved to $5.8 million from cash use of $158.7 million, primarily reflecting a smaller increase in real estate inventory than in the prior-year period. Inventory still increased by $55.5 million during the quarter.
- Forestar sold 4,014 lots to D.R. Horton for $328.0 million, compared with 3,389 lots and $294.0 million a year earlier. D.R. Horton sales represented approximately 81% of residential lot sales revenue in the current quarter.
Outlook, risks, contingencies, and unusual items
- Management said housing demand and demand for residential lots remained strong. Supply-chain shortages, construction-material constraints, and tight labor markets lengthened development cycles in certain markets. The filing provides no quantified earnings or revenue guidance.
- Management cited low net leverage, liquidity, a low-overhead model, and its strategic relationship with D.R. Horton as support for operating through changing conditions. It intends over the long term to maintain net debt to total capital at approximately 40% or less.
- Key stated risks include housing and economic cyclicality, land and labor availability and costs, inflation and higher interest rates, access to capital and surety bonds, dependence on homebuilder relationships, and the company’s relationship with controlling shareholder D.R. Horton.
- At quarter-end, letters of credit totaled $66.3 million and third-party surety bonds totaled $528.2 million, principally supporting development obligations. Management expects the related obligations to be completed in the ordinary course; no material third-party guarantees were reported.
- There were no real estate impairment charges. The quarter included a $0.5 million gain on sale of an investment and $0.6 million of land-option charges. All interest incurred was capitalized to real estate in the current quarter.
- Forestar reported ordinary-course legal proceedings and believes adequate reserves are established, but stated charges could be significant to results or cash flow in a single period. It was in compliance with debt covenants at quarter-end.
Most important facts for investors to verify
- The extent of reliance on D.R. Horton: customer concentration, its control position, and the terms of the companies’ commercial arrangements.
- Whether strong lot demand can be converted into completed developments and sales despite labor and supply constraints, and how development-cycle delays affect cash flow.
- Liquidity and leverage, including revolver availability, covenant compliance, debt maturities, and capital needs to fund growth.
- The scale and timing of obligations secured by letters of credit and surety bonds, and the potential financial impact of litigation or development-related contingencies.