Forestar Group Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Forestar operates in real estate, mineral resources, and fiber resources; its portfolio included approximately 136,000 acres of real estate, 590,000 net acres of owned mineral interests, and 121,000 acres of timber.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $172.6 million | $135.6 million |
| Operating income | $27.2 million | $58.1 million |
| Net income attributable to Forestar | $12.9 million | $7.2 million |
| Diluted EPS | $0.36 | $0.20 |
| Operating cash flow | $(26.0) million | $35.0 million |
| Investing cash flow | $(105.1) million | $(4.9) million |
| Debt at year-end | $294.1 million | $221.6 million |
| Cash at year-end | $10.4 million | $18.3 million |
At December 31, 2012, assets were $918.4 million and Forestar shareholders’ equity was $529.5 million. Debt was 36% of total capitalization, versus 30% in 2011. The company reported $153.2 million of unused capacity under its senior secured credit facility and compliance with its financial covenants. The filing does not provide a single consolidated gross-margin measure.
Fourth-quarter 2012 revenue was $68.6 million and net income attributable to Forestar was $10.0 million, or $0.28 per diluted share. The fourth-quarter contribution included substantial real estate gains and venture earnings.
Material changes versus the prior year
- Revenue rose 27%, while operating income fell 53%, primarily because 2011 included $61.8 million of timberland-sale gains; 2012 included only $16,000 of such unallocated gains. FY 2012 operating income also included $26.0 million of real estate asset-sale gains.
- Net income attributable to Forestar increased 81%. Real estate segment earnings turned positive at $53.6 million, compared with a $25.7 million loss in 2011, when the segment recorded significant impairment charges. 2012 real estate results included gains from asset and venture sales.
- Mineral resources revenue increased to $44.2 million from $24.6 million, reflecting the September acquisition of Credo, increased production and lease bonuses. Mineral segment earnings rose to $21.6 million from $16.0 million.
- Operating cash flow turned negative, principally reflecting real estate investment and acquisition spending, including the acquisition of assets from CL Realty and Temco. Investing cash outflow increased chiefly because of the Credo acquisition.
Outlook, commentary, risks, and unusual items
- Management described single-family housing as showing signs of stabilization and improved demand for developed lots in key Texas markets, but cited unemployment, tight mortgage credit, and foreclosure competition as ongoing headwinds. Multifamily conditions were described as strong; management noted healthy occupancy and rent growth in many markets.
- Natural gas prices remained near historically low levels amid abundant supply; oil prices had weakened versus 2011. Management’s “Triple in FOR” initiatives target increased lot sales, oil and gas production and segment EBITDA, along with disciplined investment. These are strategic aims, not quantified earnings guidance.
- The 2013 mineral drilling and completion budget was $72.5 million, subject to commodity prices, operator plans, service availability, and drilling results. No consolidated earnings or revenue guidance is provided.
- Credo was acquired on September 28, 2012, for approximately $146.4 million of equity consideration, with $8.8 million of debt repaid. It contributed $10.1 million of revenue and $1.5 million of net income after acquisition. The acquisition added $58.4 million of goodwill and other intangible assets; management cautioned that integration and expected benefits were uncertain.
- On February 26, 2013, Forestar issued $125 million of 3.75% convertible senior notes due 2020. Proceeds were used in part to repay $68 million drawn on the revolving line, with remaining proceeds intended for general corporate purposes, including investment.
- Operating risks include cyclical real estate and commodity markets, entitlement and construction delays, oil and gas price and reserve uncertainty, drilling and environmental hazards, and dependence on third-party operators and venture partners. A significant portion of Louisiana mineral rights may expire under state non-use rules. The International Paper fiber supply agreement expires at year-end 2013.
- Forestar estimated approximately $1.6 million of remaining remediation costs for a California property. Credo-related shareholder litigation was subject to a settlement memorandum requiring confirmatory discovery and court approval. The filing says ordinary-course litigation reserves were considered adequate, but charges in an individual period could be significant.
Most important facts for investors to verify
- How much 2012 earnings came from recurring lot, royalty, and operating activity versus property and venture sale gains.
- Whether the Credo acquisition delivers sustained production and cash flow, and how its goodwill, reserves, and leasehold acreage evolve.
- Whether negative operating cash flow and higher debt remain manageable after the convertible-note issuance and planned 2013 drilling spending.
- Progress on lot sales, multifamily project sales, and Special Improvement District reimbursements, including their timing and collectability.
- Commodity-price exposure, reserve revisions, Louisiana mineral-title risks, and environmental remediation obligations.