Forestar Group Inc. — FY2019 Form 10-K
Business context and reporting period
Forestar develops and sells finished residential lots to homebuilders, operating in 51 markets across 20 states. This 10-K covers the fiscal year ended September 30, 2019; quarterly information includes the three months ended September 30, 2019. Because Forestar changed its fiscal year-end, the principal prior-period comparison is a nine-month period ended September 30, 2018, not a full-year comparison.
D.R. Horton owned approximately 66% of Forestar at year-end and is both its controlling shareholder and a major customer. Forestar reported one real estate segment; D.R. Horton generated $326.6 million of FY2019 revenue.
Key financial metrics
| Metric | FY2019 / September 30, 2019 | Comparison or context |
|---|---|---|
| Revenue | $428.3 million | $78.3 million in the prior nine-month period; periods are not comparable in length |
| Net income | $36.3 million consolidated; $33.0 million attributable to Forestar | Prior nine-month period: $70.0 million and $68.8 million, respectively, including a $25.3 million income tax benefit |
| EPS | $0.79 basic and diluted | Prior nine-month period: $1.64 |
| Margins | Gross margin approximately 15.3%; pretax margin approximately 10.7%; Forestar-attributable net margin approximately 7.7% | Calculated from reported FY2019 figures |
| Operating cash flow | $(391.2) million | Cash used principally reflects increased real estate investment |
| Investing cash flow | $(0.8) million | Prior-period investing cash flow was $259.0 million provided, including Starwood sale proceeds |
| Financing cash flow | $439.8 million provided | Included $350 million senior-note issuance and $100.7 million net equity-offering proceeds |
| Cash | $382.8 million | Compared with $318.8 million at September 30, 2018; no restricted cash at FY2019 year-end |
| Debt | $460.5 million carrying value; $468.9 million principal obligations | Includes $350 million of 8.0% notes due 2024 and $118.9 million principal of 3.75% convertible notes due March 2020 |
| Revolver and liquidity | $380 million facility; no borrowings; $339.6 million available under borrowing base | $29.7 million of letters of credit outstanding; company reported compliance with covenants |
| Lots sold | 4,132; average sales price $84,200 per lot | Prior nine-month period: 1,024 lots at $76,600 average |
Material changes versus the prior comparable period
- Revenue and lot sales expanded substantially alongside the growth strategy: FY2019 residential lot sales were $351.7 million, versus $72.0 million in the prior nine-month period. These periods differ in length.
- Forestar invested $559.4 million in residential real estate acquisitions and $290.3 million in development; real estate on the balance sheet increased to $1.03 billion from $498.0 million.
- Operating cash use increased to $391.2 million, primarily due to higher acquisition and development expenditures.
- Debt rose to $460.5 million from $111.7 million, following the $350 million 8.0% senior-note issuance. A September 2019 equity offering raised $100.7 million net and reduced D.R. Horton ownership from 75% to approximately 66%.
- Forestar sold 3,728 residential lots to D.R. Horton for $311.7 million in FY2019. At year-end, approximately 12,800 lots were under contract to D.R. Horton, with a remaining purchase price of $953.8 million.
Outlook, risks, contingencies and unusual items
- Management expects its geographically diversified, phased lot-development strategy and relationship with D.R. Horton to support growth and more consistent returns, but provided no quantified revenue, earnings or lot-sales guidance.
- Management said existing cash and the revolving facility should cover near-term working capital and debt obligations, including the $118.9 million convertible-note principal due in FY2020. Longer-term growth depends on access to financing; the company expects to seek additional debt or equity capital.
- Key risks include housing-market cyclicality, local economic conditions, land and development cost estimates, permitting delays, builder demand, access to capital and covenant compliance. Concentrated ownership and related-party transactions with D.R. Horton may create conflicts and affect relationships with other builders.
- D.R. Horton represented roughly 76% of FY2019 revenue. The Master Supply Agreement gives D.R. Horton rights of first offer on certain projects; dependence on this customer is a significant concentration risk.
- FY2019 included a $3.0 million gain on sale of assets and $0.8 million of real estate impairment charges. All interest incurred was capitalized to real estate inventory; no interest expense was reported for the year.
- Legal proceedings arise in the ordinary course. Management believes reserves are adequate and outcomes are not expected to materially harm long-term results, while noting charges could be significant in an individual period. Outstanding surety bonds were $158.8 million and letters of credit were $29.7 million.
- The revolving credit facility was amended in October 2019 to extend maturity to October 2, 2022. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Assess whether the expansion in lot sales and revenue is sustainable, accounting for the unequal comparison periods and the sharp increase in inventory and operating cash use.
- Review D.R. Horton’s share of revenue, contracted lot purchases, rights of first offer, and the market terms and governance safeguards governing related-party transactions.
- Confirm the source of funds and repayment or conversion outcome for the March 2020 convertible notes, and monitor refinancing and future capital-raising needs.
- Track lot absorption, average selling prices, development costs, impairment assumptions, and the timing of reimbursements from improvement districts.
- Monitor borrowing-base availability, covenant headroom, letters of credit, surety-bond capacity, and potential liquidity effects if housing or capital markets weaken.