Forestar Group Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2021. Forestar is a residential lot developer operating in 54 markets across 22 states. D.R. Horton owned approximately 64% of the company and is its controlling shareholder and a significant customer.
Financial highlights
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $287.1 million, up 80% year over year | $594.2 million, up 46% |
| Net income attributable to Forestar | $28.4 million vs. $9.6 million | $50.4 million vs. $26.4 million |
| Diluted EPS | $0.59 vs. $0.20 | $1.04 vs. $0.55 |
| Gross margin (revenue less cost of sales) | 18.6% vs. 14.1% | 16.4% vs. 13.1% |
| Cash from operations | Six-month use of $249.5 million vs. $123.8 million used |
At March 31, cash was $167.2 million, real estate inventory was $1.699 billion, total debt was $654.6 million, and stockholders’ equity was $943.7 million. The company had no revolver borrowings and $334 million of available capacity after letters of credit. Debt-to-total-capital was 41.0%; net debt-to-total-capital was 34.1%, compared with 22.1% at September 30, 2020. Six-month real estate investment included $484.6 million for acquisitions and $369.4 million for development.
Changes and operating drivers
- Quarterly residential lot sales rose to 3,588 from 1,951; six-month sales rose to 7,155 from 4,373. The increase primarily reflected development-project sales and business growth.
- Average sales price per lot declined to $78,100 from $79,700 for the quarter and to $82,100 from $85,600 for six months. SG&A rose in dollars but was 5.7% of quarterly revenue, down from 7.0%.
- Operating cash use increased as the company expanded its land-development investment. Cash fell by $227.1 million over the six months.
- At March 31, Forestar owned or controlled 84,500 lots, up from 60,500 at September 30, 2020.
Outlook, risks and notable items
- Management said lot sales pace had remained strong in the first half of FY2021 after recovering from the initial COVID-19 slowdown. It cited liquidity, low overhead and its D.R. Horton relationship as support for operating through changing conditions. No specific earnings or revenue guidance was provided.
- In April 2021, Forestar issued $400 million of 3.85% notes due 2026 and gave notice to redeem its $350 million 8.0% notes due 2024 for $365.6 million, including premium and accrued interest. The redemption was scheduled for May 7, 2021; management expected a debt-extinguishment loss. The revolver was also amended in April: capacity increased to $410 million and maturity extended to April 2025.
- Sales and strategic operations are significantly linked to D.R. Horton: 6,747 of 7,155 lots sold in the six-month period were sold to it. The filing also reports D.R. Horton contract balances and related-party service and development payments.
- Letters of credit were $46.0 million and surety bonds were $368.6 million. Management expected related development obligations to be completed in the ordinary course. The company reported no real estate impairment charges; land option write-offs were $0.9 million for six months.
- Risks include housing and land-development cyclicality, COVID-19 impacts, dependence on homebuilder relationships and access to capital, land availability and cost, debt covenant compliance, and the controlling shareholder relationship. The company reported compliance with debt covenants and effective disclosure controls. Ordinary-course litigation was not expected to have a material adverse effect, though charges could be significant in a single period.
Investor verification priorities
- Confirm completion and accounting impact of the May 2021 redemption, including the recognized extinguishment loss and use of note proceeds.
- Assess whether lot sales, pricing and margins remain sustainable, especially given D.R. Horton’s concentration in sales.
- Track cash consumption, real estate investment, net leverage and liquidity as the lot portfolio expands.
- Review the terms, capacity and covenant headroom of the amended revolver, plus outstanding letters of credit and surety bonds.