Forestar Group Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. This filing reports annual results; standalone fourth-quarter figures are not clearly provided in the supplied text.
Business context
Forestar develops and sells finished residential lots to homebuilders, operating in 53 markets across 21 states. Its strategy emphasizes phased, short-duration projects and selective lot- and land-banking. D.R. Horton owned approximately 63% of Forestar at year-end and is its controlling shareholder and largest customer.
Financial and operating results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $1,519.1 million | $1,325.8 million |
| Gross profit, calculated as revenue less cost of sales | $324.0 million; 21.3% margin | $229.2 million; 17.3% margin |
| Income before taxes | $235.8 million | $146.6 million |
| Net income attributable to Forestar | $178.8 million | $110.2 million |
| Diluted earnings per share | $3.59 | $2.25 |
| Cash provided by (used in) operating activities | $108.7 million | ($303.1 million) |
| Cash and cash equivalents at year-end | $264.8 million | $153.6 million |
| Debt at year-end | $706.0 million | $704.5 million |
- Revenue increased 14.6% and net income attributable to Forestar rose approximately 62%. Cost of sales increased to $1,195.1 million from $1,096.6 million; SG&A rose to $93.6 million from $68.4 million. SG&A was 6.2% of revenue, up from 5.2%.
- Forestar sold 17,691 lots, up from 15,915, while average sales price rose to $86,300 from $81,600. The year-end position was 90,100 lots owned or controlled, down from 97,000.
- Sales to D.R. Horton totaled $1.23 billion, approximately 81% of FY2022 revenue. Sales to customers other than D.R. Horton increased substantially year over year.
- Net debt to total capital was 26.9%, compared with 35.2% in FY2021. The company reported $356.7 million of unused revolving credit capacity, with no revolver borrowings and $53.3 million of letters of credit outstanding.
Material changes and unusual items
- Operating cash flow turned positive from FY2021, when substantial investment in real estate contributed to cash use. FY2022 operating cash flow included a $142.3 million increase in real estate, partly offset by net income and increases in accrued liabilities.
- Forestar recorded $3.8 million of real estate impairment charges and $8.7 million of land-contract deposit and pre-acquisition cost write-offs in FY2022; corresponding totals in FY2021 were no impairments and $3.0 million of write-offs.
- FY2021 included an $18.1 million loss on extinguishment of debt associated with redeeming $350 million of 8.0% notes. No such charge was recorded in FY2022.
- FY2022 included sales of 854 undeveloped or partially developed lots for a cumulative transaction price of $64.1 million. Forestar recognized $26.8 million of related revenue during the year and expects to recognize the remaining revenue as development obligations are completed.
Outlook, risks and contingencies
- Management said demand was strong through most of FY2022 but had more recently weakened as mortgage rates rose substantially and inflation remained elevated. It gave no specific numerical earnings or sales guidance.
- Supply-chain delays, material shortages, tight labor availability and delayed governmental approvals extended development cycles and increased costs. Management noted that higher costs may not be offset by lot-price increases if market conditions weaken.
- Key risks include housing-market cyclicality, affordability and interest rates, land and labor costs, local permitting and environmental requirements, weather and natural disasters, and reliance on homebuilder customers. D.R. Horton’s control and the related-party relationship may also create conflicts or affect relationships with other builders.
- Outstanding debt included $400 million principal amount of 3.85% notes due 2026 and $300 million of 5.0% notes due 2028, plus a $12.5 million non-recourse note due October 2023. The revolving facility was amended in October 2022 to extend maturity to October 28, 2026. Forestar reported compliance with debt covenants at year-end.
- Outstanding surety bonds were $632.7 million. The company also had $490.3 million of remaining purchase commitments under land contracts, supported by $10.0 million of deposits. Management stated that ordinary-course litigation was adequately reserved and was not expected to materially affect long-term results, while noting that period-specific charges could be significant.
Important facts for investors to verify
- Whether the recent demand slowdown affected lot orders, cancellations, selling prices and absorption after September 30, 2022.
- How much revenue, backlog and future cash flow depend on D.R. Horton, and whether related-party transactions remain on market terms.
- Whether development-cost estimates and margins hold up as projects complete; land development cost estimation was the auditor’s critical audit matter.
- Liquidity, covenant headroom, land-purchase commitments and the ability to obtain financing if housing conditions deteriorate.
- Timing and collectability of deferred-development revenue and infrastructure reimbursements from governmental districts.