Forestar Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. All financial amounts are in millions of dollars unless noted.
Business context
Forestar develops residential lots and sells finished lots to homebuilders. It operated in 55 markets across 22 states. D.R. Horton owned approximately 64% of Forestar and is both its controlling shareholder and a major customer.
Financial and operating results
| Metric | Three months ended June 30, 2021 | Prior-year quarter | Nine months ended June 30, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $312.9 | $177.9 | $907.1 | $584.3 |
| Net income attributable to Forestar | $15.8 | $10.1 | $66.2 | $36.5 |
| Diluted earnings per share | $0.32 | $0.21 | $1.36 | $0.76 |
| Residential lots sold | 3,858 | 2,023 | 11,013 | 6,396 |
- Quarterly revenue rose about 76%; nine-month revenue rose about 55%. Residential lot sales drove growth, while tract sales and other revenue declined year over year.
- Calculated gross margin was approximately 17.8% for the quarter and 16.9% for the nine months, compared with 11.7% and 12.7%, respectively, in the comparable periods. SG&A was 5.4% of revenue in both 2021 periods.
- Quarterly income included an $18.1 million loss on extinguishment of debt. Forestar redeemed $350 million of 8.0% notes, funding the transaction primarily with a new $400 million issue of 3.85% notes due 2026.
- Cash from operating activities was negative $340.6 million for the nine months, versus negative $205.7 million a year earlier, primarily reflecting increased investment in real estate. Real estate totaled $1,861.4 million, up from $1,309.7 million at September 30, 2020.
- Cash and cash equivalents were $116.0 million at June 30, down from $394.3 million at fiscal year-end. Debt was $704.1 million, versus $641.1 million. Debt-to-total-capital was 42.1%; net-debt-to-total-capital was 37.8%, up from 22.1% at September 30, 2020.
Liquidity, outlook, risks and contingencies
- The amended revolving credit facility has $410 million capacity, matures in April 2025, and had no borrowings outstanding; $349.8 million was available after letters of credit. The company reported compliance with its debt covenants and no senior-note maturities until fiscal 2026.
- Management said cash and revolving-credit availability should cover near-term working-capital needs, and cited low net leverage, liquidity, a low-overhead model and its D.R. Horton relationship. The filing provides no numerical earnings or revenue guidance.
- Management reported strong lot demand but said construction-material shortages and tight labor markets were lengthening development cycles in some markets. COVID-19, housing-market cyclicality, land availability, financing access, customer relationships and surety-bond availability are among the stated risks.
- D.R. Horton accounted for $300.4 million of quarterly residential lot sales revenue and $860.0 million for the nine months. The company owned or controlled 96,600 lots; 21,500 were under contract to sell to D.R. Horton and 17,900 were subject to its right of first offer.
- At June 30, outstanding letters of credit were $60.2 million and surety bonds were $436.6 million, principally securing development obligations. Forestar said these obligations are generally expected to be completed in the ordinary course. It reported ordinary-course litigation, with no expected material adverse effect, while noting charges in a single period could be significant.
Most important facts for investors to verify
- How much revenue and lot-sale activity remain concentrated with D.R. Horton, and how the related-party relationship affects pricing and access to other builders.
- Whether operating cash outflows and rising real-estate investment can be sustained while preserving liquidity and leverage targets.
- Whether supply-chain and labor constraints delay project completion, lot closings or cash realization.
- The lasting economics of the debt refinancing, including the $18.1 million extinguishment loss and the new notes’ interest cost.
- Potential exposure associated with development obligations, surety bonds, litigation and land purchase contracts.