Forestar Group Inc. — Q2 FY2022 10-Q
Business context and reporting period. This filing covers the three and six months ended March 31, 2022. Forestar develops residential lots and sells primarily to homebuilders; it operated in 53 markets across 23 states. D.R. Horton owned approximately 63% of Forestar and is its controlling shareholder.
Financial results and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $421.6 million, up from $287.1 million | $829.2 million, up from $594.2 million |
| Gross profit (revenue less cost of sales) | $87.5 million; approximately 20.8% margin, versus $53.3 million and 18.6% | $160.9 million; approximately 19.4% margin, versus $97.5 million and 16.4% |
| Net income attributable to Forestar | $47.8 million, versus $28.4 million | $88.3 million, versus $50.4 million |
| Diluted EPS | $0.96, versus $0.59 | $1.77, versus $1.04 |
SG&A was $24.3 million for the quarter and $45.8 million for six months; as a share of revenue, it was 5.8% and 5.5%, respectively. The six-month effective tax rate was 24.3%.
For the six months, operating cash flow was positive $76.6 million, compared with cash used of $249.5 million in the prior-year period. Cash and cash equivalents were $233.7 million at March 31, 2022, up from $153.6 million at September 30, 2021. Real estate was $1,960.5 million. Debt was $705.3 million, including $696.0 million carrying value of senior notes and a $12.5 million other note payable. There were no revolver borrowings; available capacity was $349.5 million. Debt to total capital was 38.9%, and net debt to total capital was 29.9%.
Material changes and operating developments
- Revenue growth reflected higher lot sales: 5,788 residential lots sold in the quarter versus 3,588 a year earlier; six-month sales were 10,304 versus 7,155. Average sales price per lot, excluding deferred-development lots and contract-liability impacts, was $81,900 for the quarter and $85,300 for six months.
- D.R. Horton accounted for $390.2 million of quarterly lot sales revenue and $718.2 million for six months. The company also sold 787 undeveloped or partially developed lots to another customer for a total transaction price of $54.7 million; $12.5 million was recognized as revenue through March 31, with the remainder expected to be recognized as development is completed.
- Six-month operating cash flow improved substantially year over year, principally because of earnings and increases in liabilities and accrued costs, while real estate investment was a cash use of $61.1 million in the cash-flow statement.
- Owned lots were approximately 64,200 and lots controlled through purchase contracts were 32,300 at March 31, 2022, for a total owned and controlled position of 96,500.
Outlook, risks, contingencies and unusual items
No numerical earnings or revenue guidance is provided. Management reported strong housing demand into fiscal 2022 and said it believed liquidity, low net leverage, a low-overhead model and the D.R. Horton relationship positioned the company to operate through changing conditions. It also noted that material shortages and tight labor markets had lengthened development cycles in some markets.
- A $3.8 million non-cash impairment charge was recorded in the quarter for one real estate project. Land-option and pre-acquisition cost write-offs were $2.2 million for the six-month period, versus $0.9 million a year earlier.
- At March 31, the company had $60.5 million of letters of credit and $570.8 million of surety bonds supporting development obligations. Management expected the underlying obligations to be completed in the ordinary course.
- Risks identified include homebuilding and land-development cyclicality, inflation and higher interest rates, supply and labor constraints, land availability and cost, access to capital, debt covenant compliance, surety-bond availability, and dependence on homebuilder relationships. D.R. Horton’s controlling ownership and the concentration of sales to it are also relevant considerations.
- The company reported compliance with debt covenants. It disclosed ordinary-course litigation and stated that it did not expect the proceedings to materially adversely affect its financial position or long-term results, while noting that charges could be significant in an individual period.
Important facts for investors to verify
- How much of sales growth and future lot demand depends on D.R. Horton, and how the related-party relationship affects pricing and customer diversification.
- Whether construction-material and labor constraints continue to delay development, and how delays affect lot deliveries, costs and cash conversion.
- The pace and returns of land acquisition and development relative to the 96,500-lot owned-and-controlled position and the company’s capital needs.
- Recognition timing and remaining development costs for the $54.7 million deferred-development transaction, alongside the project impairment and land-option charges.
- Liquidity and covenant headroom, including the revolver’s borrowing-base limits and the company’s ability to finance planned growth.