Forestar Group Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this is an annual filing; quarterly figures are noted where relevant. Forestar is a land, mineral-rights and timber company operating in real estate, mineral resources and fiber resources.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $135.6 million | $101.4 million |
| Operating income | $58.1 million | $18.9 million |
| Net income attributable to Forestar | $7.2 million | $5.1 million |
| Diluted earnings per share | $0.20 | $0.14 |
| Operating cash flow | $35.0 million | $13.6 million |
| Debt at year-end | $221.6 million | $221.6 million |
| Cash at year-end | $18.3 million | $5.4 million |
- Revenue increased 34%, led by real estate revenue growth. Real estate represented 78% of 2011 revenue; mineral resources 18%; fiber resources 4%.
- Operating income included $61.8 million of gains on timberland sales. Real estate recorded $45.2 million in non-cash impairment charges, including impairments recorded through equity-method ventures. These items materially affect comparability and underlying profitability.
- Segment earnings (loss): real estate $(25.7) million, minerals $16.0 million and fiber $1.9 million, versus $(4.6) million, $22.8 million and $5.1 million, respectively, in 2010.
- Cash flow from investing activities was $(4.9) million and from financing activities $(17.2) million. The company repurchased about 907,000 shares for $13.0 million in 2011.
- Year-end unused borrowing capacity under the senior facility was $156.1 million; available liquidity, including unrestricted cash, was approximately $173.2 million. The company reported compliance with debt covenants. Debt was 30% of total capitalization.
- Gross margin is not clearly presented as a single annual measure in the filing. Annual net income margin was approximately 5.3% of revenue, calculated from reported figures.
Material changes and operating developments
- Real estate revenue rose to $106.2 million from $68.3 million, reflecting higher residential lot sales, undeveloped land sales and income from a Houston multifamily property acquired in late 2010. Forestar sold 1,117 developed lots across owned and venture projects, up 39% from 2010.
- Undeveloped land sales totaled 17,130 acres at an average $2,365 per acre. A sale of about 9,700 Georgia acres generated $18.0 million in revenue and approximately $13.4 million in segment earnings.
- Mineral revenue was broadly flat at $24.6 million. Higher oil prices and oil production supported royalty revenue, while lower lease-bonus revenue and higher water-resource development costs weighed on results. Oil production increased more than 32%; proven developed reserves were reported at 17.9 Bcfe, up 26% from 2010.
- Fiber revenue fell to $4.8 million from $8.3 million, as timber harvest volumes declined following substantial timberland sales. Timber sales were 323,000 tons versus 537,200 tons in 2010.
- Forestar completed its 2009 timberland-sale and debt-reduction initiatives: cumulative timberland sales were 176,000 acres for $284.4 million, and debt had fallen about $154.1 million since first-quarter 2009, excluding specified non-recourse property debt.
- In Q4 2011, revenue was $54.0 million, but Forestar recorded a net loss attributable to the company of $22.9 million. The quarter included a $30.8 million equity-method venture loss, largely associated with impairments at CL Realty and TEMCO.
Outlook, risks and unusual items
- Management announced the 2012 “Triple in FOR” initiatives: increase residential lot sales, oil and gas production and segment earnings; expand resource and groundwater disclosures; and pursue disciplined investments, including a low-capital multifamily business and lower-risk oil and gas opportunities. No numerical earnings or revenue guidance is provided.
- Management described single-family housing conditions as challenging, with weak sales, limited buyer financing and foreclosure competition, while noting stronger demand for finished lots in Texas and improving multifamily occupancy and rents. Oil prices were higher, while natural gas prices remained soft; timber markets were pressured by weak construction demand.
- Key exposures include real estate-market and commodity cycles; land-entitlement timing and valuation; concentration of development activity in Texas and undeveloped holdings in Georgia; dependence on homebuilders and venture partners; and covenant, refinancing and liquidity risks.
- Environmental remediation at the Antioch, California property was estimated at approximately $2.45 million remaining at year-end. The company noted that additional work may be required. Ordinary-course legal matters were not expected to materially affect long-term results, though charges could be significant in an individual period.
- Three equity-method partnerships had $63.4 million of current-maturity borrowings; Forestar stated it could be required to provide additional equity in certain circumstances. Its estimated maximum exposure to loss for three VIEs was $35.6 million.
- Subsequent to year-end, Forestar sold its 25% interest in Palisades West for approximately $32.1 million, with an estimated pre-tax gain of $11.7 million, and agreed to acquire assets in 17 CL Realty and TEMCO projects for $47.0 million.
- Cash dividends were not anticipated in the foreseeable future. The company reported an unqualified audit opinion and effective internal control over financial reporting.
Most important facts for investors to verify
- How much of 2011 earnings and operating income depended on timberland-sale gains, and how recurring operating performance compares after those gains and impairments.
- Whether the announced venture-asset acquisitions, subsequent Palisades West sale and planned investments meet return and funding expectations.
- Actual cash collections and timing of approved Cibolo Canyons and other district reimbursements; the filing cites uncertainty around SID decisions and receipts.
- Debt maturity, borrowing-base availability and covenant headroom, particularly given variable-rate debt and the $131.3 million scheduled 2015 maturity.
- Progress on remediation costs, VIE refinancing or equity requirements, and risks to mineral-rights value, including Louisiana non-use rules and potential hydraulic-fracturing regulation.
- Whether lot sales, oil and gas production and segment earnings improve as targeted; the filing provides strategic goals but no quantified guidance.