Forestar Group Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company changed its fiscal year-end from December 31 to September 30, effective January 1, 2018. Forestar is a residential and mixed-use real estate developer and, since October 2017, a majority-owned subsidiary of D.R. Horton.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $22.6 million | $22.3 million |
| Operating income | $3.6 million | $36.2 million |
| Net income attributable to Forestar | $4.5 million | $25.2 million |
| Diluted earnings per share | $0.11 | $0.59 |
| Cash used in operating activities | $114.0 million | $2.4 million |
| Cash and cash equivalents at period-end | $436.4 million | — |
- Real estate sales were $22.6 million, up about 9%. Real estate cost of sales was $15.6 million; the approximate gross margin on real estate sales was 31%, versus 43% in the prior-year quarter.
- Real estate segment earnings were $9.7 million, down from $10.5 million, primarily reflecting lower earnings from unconsolidated ventures. Owned and consolidated residential lot sales increased to 304 from 190; average revenue per lot fell 25%, largely due to sales mix.
- Cash used in operations reflected $149.1 million of net real estate acquisition and development expenditures, including $130.5 million spent to acquire 14 projects representing nearly 5,500 planned lots. Investing cash inflow was $228.7 million, principally from asset and venture sales; cash increased $114.6 million during the quarter.
- Debt, net, was $109.8 million at March 31, compared with $108.4 million at year-end 2017. The balance included $118.9 million principal amount of 3.75% convertible notes due 2020, carried net of discount. Cash included $40.0 million of restricted cash, principally supporting the letter-of-credit arrangements.
Material changes and unusual items
- The sharp year-over-year earnings decline largely reflects the prior-year period’s $74.2 million gain on sale of mineral assets, partly offset by a $37.9 million noncash goodwill impairment. Forestar sold its remaining mineral assets in 2017; there was no significant related activity in the current quarter.
- In February 2018, Forestar sold 24 legacy projects to Starwood for $232.0 million, receiving $217.5 million net proceeds after adjustments and costs. The sale generated a $0.7 million gain. It included developed and future lots, acreage, and multifamily assets.
- Forestar also sold a venture interest for $11.0 million net proceeds and recognized a $2.0 million gain. Current-quarter gain on asset sales totaled $2.7 million.
- The effective tax rate was 1%, compared with 40% in the prior-year quarter. The current rate included the Tax Cuts and Jobs Act and a benefit from releasing part of the valuation allowance. The company reported a substantial remaining valuation allowance against deferred tax assets.
Liquidity, outlook and risks
Management said available cash was expected to fund near-term growth objectives and working capital needs. Forestar plans to invest primarily in land development, is evaluating its longer-term capital structure, and intends to pursue a new credit facility; additional debt or equity financing may also be considered. It provided no quantified earnings or revenue guidance in the filing.
Forestar owned or controlled 13,600 residential lots at quarter-end: 3,300 were under contract to D.R. Horton, which also had rights of first offer on 5,400 lots; 500 lots were under contract to other builders. Since the merger, Forestar had acquired 20 projects representing nearly 8,200 planned lots. D.R. Horton owned approximately 75% of Forestar and is a related party. During the quarter Forestar sold 183 lots to D.R. Horton for $8.5 million and paid it for shared services, benefits, and assigned land-contract costs.
Risks cited include housing demand, mortgage-credit availability and interest rates; development costs, labor and materials availability; entitlement and permitting outcomes; timing of district reimbursements; project estimates and potential impairments; venture partners’ performance; and the effects of D.R. Horton’s control and commercial relationship. The company reported ordinary-course litigation and environmental matters, with reserves for probable losses; it cautioned that charges could be significant in an individual period. Management stated that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether the pace and returns of new land acquisitions and development support management’s growth strategy and cash-flow needs.
- The details and economics of lots under contract or subject to rights of first offer with D.R. Horton, including related-party terms.
- Convertible-note terms and liquidity implications, including the planned cash settlement of principal upon conversion.
- Realization of deferred tax assets and any future adjustments to the valuation allowance or tax attributes subject to Section 382 limits.
- Final purchase-price adjustments, obligations, and any contingent liabilities associated with the Starwood sale and other asset dispositions.