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Forestar Group Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Forestar Group Inc. for the period ended June 30, 2010. The company operates in three segments: Real Estate, Mineral Resources, and Fiber Resources. Forestar is an accelerated filer incorporated in Delaware. As of August 3, 2010, there were 36,424,072 shares of common stock outstanding.

Key Financial Metrics

Note: Q2 2009 results were significantly impacted by a one-time gain on the sale of timberland.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 30% in Q2 2010 compared to Q2 2009. This was driven by lower undeveloped land sales due to difficult market conditions and reduced fiber sales volume following the sale of over 110,000 acres of timberland in 2009.
• Profitability Shift: The company reported a net loss of $3.3 million in Q2 2010, compared to a net income of $50.9 million in Q2 2009. The 2009 figure included a non-recurring gain of $79.2 million from the sale of timberland.
• Cash Flow: Operating cash flow turned negative, using $18.9 million in the first six months of 2010, compared to providing $112.4 million in the same period in 2009. The 2010 outflow was primarily due to a $10 million loan to a third-party investor in the JW Marriott resort and income tax payments.
• Debt Reduction: Total debt decreased to $202.2 million from $216.6 million at year-end 2009, reflecting ongoing debt paydowns.

Outlook, Risks, and Management Commentary

• Market Conditions: Management cites difficult conditions in the single-family residential industry, characterized by oversupply, depressed sales, and low consumer confidence. Timberland market conditions have also deteriorated due to limited capital availability.
• Strategic Initiatives: The company continues to market approximately 74,000 acres of undeveloped land classified as "assets held for sale" to generate cash flow, though no sales were completed in the first six months of 2010.
• Segment Performance:
  • Real Estate: Earnings declined due to lower land sales. Residential lot sales volume increased, but average prices were negatively impacted by a higher mix of smaller, entry-level lots.
  • Mineral Resources: Earnings declined due to reduced lease bonus revenues as exploration companies focused on drilling rather than leasing. This was partially offset by higher oil prices.
  • Fiber Resources: Earnings decreased due to reduced volume from the 2009 timberland sales.
• Subsequent Event: On August 6, 2010, the company amended its senior credit facility, extending maturities and reducing the interest coverage ratio requirement from 1.75x to 1.05x. Fees of approximately $5.5 million were incurred.
• Risks: Key risks include the ability to obtain financing, the timing of entitlements, and the potential need to provide additional equity to unconsolidated ventures with current maturities totaling $74.8 million.

Investor Verification Checklist

• Asset Sales Progress: Verify the status of the 74,000 acres held for sale and the timeline for potential transactions given the deteriorated market.
• Debt Covenants: Confirm continued compliance with the amended credit facility covenants, specifically the reduced interest coverage ratio and liquidity requirements.
• Unconsolidated Ventures: Review the financial health of the four partnerships with $74.8 million in current borrowings and the company's potential exposure to additional funding requirements.
• Reimbursement Timing: Assess the uncertainty regarding the timing and amount of infrastructure cost reimbursements from the Special Purpose Improvement District (SPID) for the Cibolo Canyons project ($37 million pending).
• Real Estate Inventory: Monitor the mix of residential lot sales and pricing trends in key markets (Texas and Georgia) to gauge recovery potential.