Forestar Group Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly results are noted below. Forestar operated residential and mixed-use real estate, oil and gas, and other natural resources businesses. Management’s stated priorities included cost reductions, portfolio review, capital-structure review, and expanded disclosure.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $262.4 million | $306.8 million |
| Net income (loss) attributable to Forestar | $(213.0) million | $16.6 million |
| Operating cash flow | $35.1 million | $107.1 million |
| Year-end cash | $96.4 million | $170.1 million |
| Year-end debt | $389.8 million | $432.7 million |
| Debt to total capitalization | 44% | 38% |
- Revenue fell 14% year over year. Real estate revenue was $202.8 million, oil and gas $52.9 million, and other natural resources $6.7 million.
- Real estate segment earnings were $67.7 million, down from $96.9 million. Oil and gas recorded a segment loss of $184.4 million, versus a $22.7 million loss; other natural resources recorded a $0.6 million loss versus $5.5 million earnings.
- The oil and gas results included $164.8 million of non-cash impairment charges ($107.1 million for proved properties and $57.7 million for unproved interests). A further $10.9 million of exploratory dry-hole and pre-drilling costs was reported. Lower commodity prices drove the impairments and reduced production revenue, despite higher production volumes.
- A $97.1 million valuation allowance against deferred tax assets contributed to the reported tax expense. The filing cites cumulative losses, principally from oil and gas impairments, as significant negative evidence in assessing realization.
- Operating cash flow decreased mainly due to lower lot and undeveloped-land sales and fewer district reimbursements; the $42.9 million sale of Midtown Cedar Hill contributed $42.6 million of operating cash flow. Real estate acquisition and development expenditures were $108.0 million.
- Year-end real estate assets were $586.7 million; oil and gas properties and equipment, net, were $80.6 million. Unconsolidated ventures reported $134.7 million of debt, including $28.3 million described as non-recourse to Forestar.
- Fourth-quarter 2015 revenue was $114.0 million and net loss attributable to Forestar was $6.2 million, compared with $80.3 million revenue and an $11.8 million loss in fourth-quarter 2014. Fourth-quarter 2015 operating results included $37.6 million of oil and gas impairment charges.
Material changes, strategy, and outlook
- Forestar stated that multifamily was non-core in January 2016 and planned to exit its portfolio over time, with no new capital allocated to new multifamily communities. It also planned to exit non-core oil and gas working-interest assets and reduce related costs.
- After year-end, Forestar signed an agreement to sell the Austin Radisson Hotel for $130.0 million, subject to customary conditions and expected to close in second-quarter 2016. On March 1, 2016, it sold its remaining Kansas and Nebraska oil and gas properties for $21.0 million, with a possible $2.0 million contingent payment tied to WTI prices.
- Management described housing demand as improving but still vulnerable to economic uncertainty and restrictive mortgage lending. It cited depressed oil prices, high inventories, and the possibility of an extended period of low crude prices. The filing provides no formal earnings or revenue guidance.
- At year-end, the $300 million revolving credit facility had $284.1 million of net unused capacity after letters of credit; the company reported covenant compliance. A third-quarter tangible-net-worth covenant waiver and a temporary reduction in the interest-coverage threshold were disclosed. The filing also identifies covenant limits and refinancing needs as risks.
Risks, contingencies, and unusual items
- Material risks include cyclical real estate and commodity markets, concentrated real estate exposure in Texas and undeveloped land in Georgia, entitlement delays, dependence on homebuilders and venture partners, and difficulty or delays in selling non-core assets.
- Approximately 40,000 Louisiana mineral acres could revert to surface owners in 2017 unless qualifying activity occurs. Oil and gas reserve estimates and asset values are sensitive to commodity-price and operating assumptions; proved undeveloped reserves fell to zero at year-end 2015, from 2.7 million BOE in 2014.
- Forestar had $19.7 million of approved but unreimbursed Cibolo Canyons infrastructure costs pending, excluding interest. Related support included a $6.8 million letter of credit and a $7.9 million surety bond. Reimbursement timing and amounts depend on district approvals and available tax revenues.
- Other disclosed exposures include construction-loan guarantees for multifamily ventures, $23.4 million of off-balance-sheet performance bonds, letters of credit and recourse obligations, and environmental remediation. The Antioch, California remediation liability was $0.7 million at year-end. Forestar said it could not estimate a possible loss or range for a former Credo executive’s overriding-royalty litigation claim.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- Whether the Radisson sale closed on expected terms and how proceeds were used, including any debt reduction or distribution.
- Completion, proceeds, contingent consideration, and any additional loss from non-core oil and gas asset sales.
- Realization of deferred tax assets and the assumptions supporting the $97.1 million valuation allowance.
- Progress on Cibolo Canyons reimbursements and changes in the associated letter of credit and surety bond obligations.
- Liquidity, borrowing-base capacity, covenant headroom, and near-term debt maturities as asset sales and business exits proceed.
- Updated reserve estimates, commodity-price sensitivities, and the potential for further impairments or Louisiana mineral-rights expirations.