Business context and reporting period
Forestar Group Inc. is a U.S. residential and mixed-use land developer. D.R. Horton owned 75% of the company following the October 2017 merger. This Form 10-Q covers the three and six months ended June 30, 2018; following a fiscal-year change, Forestar’s year-end is September 30.
Financial results and position
Unless otherwise noted, amounts are in millions of dollars.
- Revenue: Q2 revenue was $23.6 million, down 16% from $28.0 million; first-half revenue was $46.2 million, down 8% from $50.3 million.
- Earnings: Q2 operating income was $8.4 million versus $7.0 million. Net income attributable to Forestar was $9.4 million, or $0.22 per diluted share, compared with a $2.6 million loss, or $0.06 loss per diluted share. First-half attributable net income was $14.0 million ($0.33 per diluted share), versus $22.6 million ($0.53) in 2017.
- Real estate segment: Segment earnings were $13.3 million in Q2 versus $11.5 million. Owned and consolidated venture lot sales increased to 297 from 252, while average revenue per lot declined 13%, primarily due to product mix.
- Cash flow: First-half operating cash use was $182.2 million, compared with $11.4 million in 2017, principally reflecting $260.8 million of land acquisition and development spending. Investing activities provided $229.0 million, mainly from asset-sale proceeds. Cash and cash equivalents increased $46.0 million to $367.8 million.
- Liquidity and debt: Restricted cash was $40.0 million. Debt, net, was $110.5 million; this included convertible notes with $118.9 million principal due 2020 and a 3.75% stated coupon (8% effective rate on the liability component). A $30 million secured letter-of-credit facility had $21.5 million outstanding. Management said current cash should fund near-term growth and working capital, and was pursuing a revolving credit facility.
- Balance sheet: Total assets were $810.9 million and total equity was $620.2 million at June 30, 2018.
Material changes and unusual items
- Forestar sold 24 legacy projects to Starwood for $232 million; net proceeds after adjustments and costs were $217.5 million, with a $0.7 million gain. The company said proceeds would principally support new land development.
- First-half acquisitions included 24 projects for $213.7 million, representing nearly 9,300 lots. Forestar owned or controlled about 19,100 lots; over 4,400 were under contract to D.R. Horton, which also had rights of first offer on nearly 6,700 lots.
- Prior-year comparisons include significant one-time items: a $28.0 million timberland-sale gain in Q2 2017, a $20.0 million merger-termination fee and related transaction costs, and a first-half 2017 mineral-asset sale gain and goodwill impairment. These items make year-over-year earnings comparisons less representative of recurring performance.
- The effective tax rate was 1% for both the quarter and first half of 2018, including the effects of the Tax Act and a partial valuation-allowance release. The company reported a $35.9 million valuation allowance against deferred tax assets and noted cumulative losses as negative evidence in assessing realizability.
- On July 30, 2018, Forestar sold its interest in FMF Littleton for $19.2 million and expected to record an approximately $14.4 million gain; the sale also ended its guarantee of venture debt.
Outlook, risks and contingencies
Management’s stated 2018 priorities were significant land acquisition and development investment to expand the business geographically and completion of non-core asset sales. The filing provides no quantified earnings or revenue guidance. Risks cited include housing demand, mortgage-credit availability and interest rates, land approvals, construction costs and labor availability, project timing and pricing, partner performance, and the effects of D.R. Horton’s controlling ownership and commercial relationship. Legal and environmental matters arise in the ordinary course; management believes reserves are adequate, but charges could be significant in an individual period. Surety bonds outstanding were $50.9 million at June 30.
Important facts for investors to verify
- Whether land investment and lot sales can generate sustainable operating cash flow after the first-half cash use.
- How much of the lot pipeline depends on D.R. Horton, including the terms and execution of related-party sales and purchase arrangements.
- Availability and terms of the planned revolving credit facility and any future financing, alongside the 2020 convertible-note obligation.
- Whether non-core asset-sale proceeds and the expected Littleton gain are realized as described, and how proceeds are redeployed.
- The effect of the deferred-tax valuation allowance, project-level impairment exposure, and legal, environmental and surety obligations.