Forestar Group Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Forestar operates in real estate, mineral resources, and fiber resources, with substantial real estate holdings in Texas and Georgia. Unless noted otherwise, dollar figures below are in millions.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $35.3 | $25.5 | $63.4 | $55.3 |
| Operating income (loss) | $4.0 | $(2.9) | $12.2 | $(1.9) |
| Income (loss) attributable to Forestar | $0.8 | $(3.9) | $3.6 | $(6.4) |
| Diluted earnings (loss) per share | $0.02 | $(0.11) | $0.10 | $(0.18) |
- Q2 revenue increased about 39% year over year; first-half revenue increased about 15%. Q2 operating margin was approximately 11%, compared with a loss in the prior-year quarter.
- At June 30, cash was $45.5, total assets $778.0, debt $201.9, and shareholders’ equity $519.6. Debt was $221.6 at 2011 year-end.
- For the first six months, operating cash flow was negative $12.0, versus negative $33.9 in 2011; investing cash flow was positive $27.8, versus negative $3.5; financing cash flow was positive $11.4, versus positive $37.8. Cash increased $27.2 to $45.5.
- Gross margin is not separately presented as a consolidated metric in the filing; segment results and costs are reported by category.
Performance changes and notable items
- Real estate segment earnings were $7.7 in Q2 and $19.2 for the first half, compared with $1.0 and $3.6, respectively, in 2011. Results included a $3.4 gain on a Dallas-area land sale in Q2 and a $11.7 gain from selling Forestar’s 25% interest in Palisades West during the first half.
- Real estate benefited from higher residential lot sales: 345 lots sold in Q2 versus 158 a year earlier. First-half lot sales were 482 versus 303, although average revenue per lot declined.
- Mineral resources revenue rose to $7.1 in Q2 and $16.6 for the first half. Higher oil production supported results, partly offset by lower natural gas prices and higher operating costs.
- Fiber resources earnings declined to $0.6 in Q2 and $1.0 for the first half. Management attributed weaker first-half sales volume largely to timberland sold in 2011.
- First-half results included $2.5 of external advisory costs related to the proposed CREDO acquisition. The filing also reports a $1.1 yield-accretion benefit on a real-estate-secured loan.
Liquidity, debt, and commitments
- The senior secured facility comprised a $130.0 term loan and a $200.0 revolving line. Net unused borrowing capacity was $145.5; cash plus unused capacity totaled $188.8. The company reported compliance with its debt covenants.
- Variable-rate debt was $172.0. The filing estimates that a sustained 1 percentage-point rate increase would reduce pretax income by about $1.7 over the next 12 months, under its stated assumptions.
- Forestar agreed to acquire CREDO Petroleum for $14.50 per share in an all-cash transaction, with an indicated equity purchase price of approximately $146.0. Closing was expected in the second half of 2012, subject to customary conditions and CREDO stockholder approval. Forestar had bridge financing commitments and intended to amend its credit facility to fund a significant portion. It estimated approximately $4.5 of remaining transaction costs.
- Forestar had $34.4 of approved and pending Cibolo Canyons infrastructure reimbursements, excluding interest; collection timing depends on the district’s approvals and funding. The filing also describes uncertainty around resort-related receipts.
- Forestar disclosed maximum estimated exposure of $34.6 related to three unconsolidated variable-interest entities, whose liabilities included $63.5 of current borrowings. Refinancing was being pursued by third-party managers, with no assurance it would be achieved; additional funding could be required in some circumstances.
Outlook, risks, and contingencies
- Management described signs of stabilization in some housing markets and stronger multifamily conditions, but cited weak housing demand, limited mortgage credit, unemployment, foreclosure inventory, and uncertainty over the pace of recovery.
- Management noted weaker oil prices and historically low natural gas prices, which could affect leasing, exploration, and royalty revenue. Depressed sawtimber demand and the company’s reduced timber acreage may constrain fiber results.
- Five lawsuits had been filed in connection with the CREDO transaction, alleging fiduciary-duty breaches and that the acquisition consideration was inadequate; plaintiffs seek, among other remedies, to enjoin the transaction. Forestar said it considers the claims without merit and intends to defend them.
- Environmental remediation at a former manufacturing site was estimated at $2.2 and accrued; additional remediation or monitoring could be required, but its extent and cost were unclear.
- Other stated risks include entitlement and permitting outcomes, district reimbursement timing, real-estate valuation and impairment estimates, financing access, partner obligations, commodity and market conditions, and regulatory changes. The filing provided no numerical earnings guidance.
Important facts for investors to verify
- Whether the CREDO acquisition closed, its final financing terms, total transaction costs, and any outcome of the related litigation.
- Whether real-estate earnings and cash generation remain positive excluding the disclosed asset-sale gains and loan yield accretion.
- Actual collections and timing for Cibolo Canyons and other district reimbursements.
- Refinancing outcomes and any funding obligations or losses involving the three unconsolidated entities.
- Subsequent trends in housing and multifamily demand, oil and natural gas production and prices, and timber sales and pricing.