Forestar Group Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023; comparisons are to FY2022. This is an annual report, not a standalone fourth-quarter results report. Forestar develops and sells finished residential lots to homebuilders across 54 markets in 22 states. D.R. Horton owned approximately 63% of Forestar and was its largest customer.
Financial and operating results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $1,436.9 million | $1,519.1 million | Down 5.4% |
| Income before taxes | $221.6 million | $235.8 million | Down 6.0% |
| Net income | $166.9 million | $178.8 million | Down 6.7% |
| Diluted EPS | $3.33 | $3.59 | Down 7.2% |
| Operating cash flow | $364.1 million | $108.7 million | Up $255.4 million |
| Cash and cash equivalents | $616.0 million | $264.8 million | Up $351.2 million |
| Debt, carrying value | $695.0 million | $706.0 million | Down $11.0 million |
- Gross profit was approximately $304.1 million, with a gross margin of about 21.2%, versus $324.0 million and 21.3% in FY2022. Net margin was about 11.6%, compared with 11.8%.
- Forestar sold 14,040 lots, down from 17,691, while average sales price per lot rose to $90,900 from $86,300. Residential lot sales revenue before deferred-development revenue declined to $1,275.7 million from $1,455.5 million.
- Tract sales and other revenue increased to $132.2 million from $36.8 million, primarily reflecting sales to D.R. Horton of 820 tract acres for $114.1 million.
- Operating cash flow benefited from a $206.3 million decrease in real estate inventory. Investing cash flow was positive $0.3 million; financing cash flow used $13.2 million, primarily to repay a $12.5 million note payable.
- At year-end, total assets were $2,470.7 million and stockholders’ equity was $1,368.9 million. Stated debt-to-total-capital was 33.7%; net debt-to-total-capital was 5.5%, down from 26.9%.
- Cash plus available revolving-credit capacity was approximately $998.3 million: $616.0 million cash and $382.3 million undrawn capacity. The $410 million facility had no borrowings outstanding; $27.7 million of letters of credit reduced availability.
Changes, outlook and material matters
- Management reported that demand weakened from the fourth quarter of FY2022 through the first half of FY2023 as mortgage rates rose and inflation remained elevated. Demand for finished lots improved in the second half as homebuilders increased new-home starts, particularly at affordable price points.
- Owned lots declined to 52,400 from 61,800; total lots owned and controlled declined to 79,200 from 90,100. Approximately 15,000 owned lots were under contract to sell, including 14,400 to D.R. Horton, with approximately $1.3 billion of remaining contract sales price.
- Real estate impairment charges increased to $19.4 million from $3.8 million. Land-purchase-contract deposit and pre-acquisition cost write-offs were $4.6 million, down from $8.7 million.
- Management gave no numerical earnings or sales guidance. It said it expects cash and the revolving facility to cover near-term working-capital needs; longer-term growth depends in part on access to financing. It cited low net leverage, liquidity, a low-overhead model and its D.R. Horton relationship as supports for operating through changing conditions.
- Key risks include housing-market cyclicality, high mortgage rates and affordability, cost or availability of land, labor and materials, permitting delays, impairments, weather and natural disasters, regulatory and environmental requirements, cyber incidents, and reliance on homebuilders. The filing notes that supply-chain constraints had eased in most markets, although labor availability and governmental approval delays remained concerns.
- D.R. Horton concentration is material: it bought 12,249 of 14,040 lots sold in FY2023 and accounted for $1,094.7 million of residential lot sales revenue. Its control and related-party arrangements may create conflicts or affect relationships with other builder customers.
- Forestar had $632.3 million of outstanding surety bonds and $27.7 million of letters of credit. It reported ordinary-course legal proceedings, with reserves for probable losses; outcomes were not expected to materially affect long-term financial position or results, although charges in a single period could be significant.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The critical audit matter concerned estimates of land-development costs to complete and allocation to lots. Management said its critical accounting review identified no critical accounting estimates.
Investor verification points
- Assess whether the second-half improvement in finished-lot demand continued, and how mortgage rates, homebuilder starts and affordability affect volumes and pricing.
- Verify the quality and expected conversion of the 79,200-lot owned-and-controlled position, including contract timing, cancellations and the roughly $427.1 million remaining purchase price on land contracts.
- Review the sensitivity of impairment charges and project margins to cost-to-complete estimates, absorption assumptions and local market conditions.
- Evaluate related-party sales, supply rights, shared services and governance implications of D.R. Horton’s controlling ownership and customer concentration.
- Monitor liquidity and refinancing needs against $400 million of 3.85% notes due 2026 and $300 million of 5.0% notes due 2028, plus revolving-facility covenants and access to future capital.