Business Context and Reporting Period
Company: Forestar Group Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Forestar operates in three segments: Real Estate (entitlement and development), Mineral Resources (oil and gas interests), and Fiber Resources (timber management). The company is navigating a difficult residential housing market and declining commodity prices while executing a strategic plan to sell timberland to reduce debt and repurchase stock.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $29.1 million | $37.2 million |
| Net Loss (Consolidated) | $(3.0 million) | $0.3 million (Income) |
| Net Loss Attributable to Forestar | $(3.9 million) | $(0.2 million) |
| Net Loss Per Share (Basic & Diluted) | $(0.11) | $(0.01) |
| Operating Cash Flow | $(10.5 million) | $(14.1 million) |
| Total Debt | $349.2 million | $337.4 million |
| Cash and Cash Equivalents | $8.5 million | $8.4 million |
| Total Assets | $834.4 million | $834.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 22% to $29.1 million, driven primarily by a 34% drop in Real Estate revenues ($18.8M vs. $28.4M) due to reduced residential lot sales and commercial activity.
- Segment Performance:
- Real Estate: Earnings fell to $0.5 million from $3.5 million due to lower sales volume and $0.6 million in asset impairment charges.
- Mineral Resources: Earnings declined to $4.8 million from $6.5 million due to lower oil prices and lease bonus revenues.
- Fiber Resources: Revenues increased 74% to $4.4 million due to higher sawtimber prices, though earnings remained flat compared to Q1 2008 which included a one-time lease termination gain.
- Operating Expenses: General and administrative expenses increased to $7.6 million from $5.0 million, largely due to $3.2 million paid to outside advisors regarding an unsolicited shareholder proposal.
- Debt Levels: Total debt increased by $11.8 million to $349.2 million, primarily due to increased utilization of the revolving credit facility to fund development expenditures.
Guidance, Outlook, and Strategic Initiatives
- Strategic Pivot: On February 11, 2009, management announced a plan to sell approximately 175,000 acres of "higher and better use" timberland to generate cash, reduce debt by ~$150 million, and repurchase up to 20% of common stock.
- Subsequent Event: On May 2, 2009, the company entered a definitive agreement to sell ~75,000 acres of timberland for $120 million. Proceeds are intended for debt reduction.
- Assets Held for Sale: Approximately 171,000 acres of undeveloped land and timber (carrying value ~$76.1 million) have been reclassified as assets held for sale.
- Market Outlook: Management expects difficult housing market conditions and credit constraints to persist throughout 2009. Oil and gas demand remains weak due to lower commodity prices.
- Liquidity: The company maintains $172 million in net unused borrowing capacity under its senior credit facility and is in compliance with all financial covenants.
Investor Verification Checklist
- Timber Sale Execution: Verify the closing of the $120 million timberland sale to Hancock Timber Resource Group and the subsequent application of proceeds to debt reduction.
- Real Estate Inventory: Monitor the absorption rates of the 20,467 remaining residential lots and 1,704 commercial acres in the face of continued housing market weakness.
- Covenant Compliance: Track the Interest Coverage Ratio and Total Leverage Ratio to ensure continued compliance with the senior credit facility, especially as the Interest Coverage requirement tightens to 2.0:1.0 in Q2 2009.
- Cibolo Canyons Project: Assess the status of the JW Marriott resort construction in San Antonio, as the opening by July 1, 2011, is a critical condition for receiving $49.5 million in infrastructure cost reimbursements.
- Share Repurchase Program: Confirm the initiation of the authorized 7 million share repurchase program once asset sales are completed.