Business context and reporting period
Forestar Group Inc. filed this unaudited Form 10-Q for its fiscal quarter and six months ended March 31, 2024. Its core business is acquiring and developing land and selling finished residential lots to homebuilders. D.R. Horton owned approximately 62% of Forestar at quarter-end and is a significant related party.
Financial and operating results
| Metric | Three months ended March 31, 2024 | Six months ended March 31, 2024 |
|---|---|---|
| Revenue | $333.8 million, up 11% year over year | $639.7 million, up 23% |
| Net income | $45.0 million, versus $26.9 million | $83.2 million, versus $47.7 million |
| Diluted EPS | $0.89, versus $0.54 | $1.65, versus $0.95 |
| Gross margin | Approximately 24.9%, versus 18.5% | Approximately 24.4%, versus 20.0% |
Gross margins are approximate, calculated as revenue less cost of sales divided by revenue. SG&A was $29.2 million for the quarter and $57.2 million year to date; as a percentage of revenue, it was 8.7% and 8.9%, respectively. The effective tax rates were 23.6% for the quarter and 24.4% year to date.
Forestar sold 3,289 lots in the quarter and 6,439 year to date; average sales prices were $98,400 and $97,400, respectively. Year-to-date residential lot sales revenue was $630.1 million. D.R. Horton accounted for $581.1 million of that revenue, indicating substantial customer concentration.
Liquidity, debt and cash flow
At March 31, 2024, cash was $416.2 million, real estate inventory was $2,115.9 million, total debt was $705.7 million, and total equity was $1,472.9 million. Cash declined from $616.0 million at September 30, 2023. Debt to total capital was 32.4%; net debt to total capital was 16.4%, up from 5.5% at fiscal year-end.
Operating cash flow was a use of $215.9 million for the six months, versus $21.3 million provided in the prior-year period, primarily reflecting a $316.1 million increase in real estate. Investing activities used $0.8 million; financing activities provided $16.9 million, including $19.7 million of net proceeds from an at-the-market stock issuance.
The $410 million revolving facility had no borrowings outstanding; $28.0 million of letters of credit left $382.0 million available. Debt included $400 million principal amount of 3.85% notes due 2026, $300 million of 5.0% notes due 2028, and a $9.9 million secured, non-recourse note due 2025. The company reported compliance with debt covenants.
Changes, outlook and risks
- Revenue growth reflected more lot sales and higher average selling prices, which management attributed to improved homebuilder demand, particularly for affordable homes. Year-to-date lot sales increased from 5,242 to 6,439.
- No real estate impairment charges were recorded in the 2024 quarter or six-month period, compared with $19.4 million in the prior-year periods. Land contract deposit and pre-acquisition write-offs were also lower.
- Real estate investment was significant: the company reported $350.0 million for acquisitions and $450.3 million for development during the six months. Lots owned and controlled increased to 96,100 from 79,200 at September 30, 2023.
- Management said affordable-home demand remained strong, while higher mortgage rates and inflation remain market pressures. Municipality delays continue to lengthen development cycles and development costs remain elevated; the company may not be able to offset cost increases through higher prices.
- No specific financial guidance was provided. Management said existing cash and revolver capacity should cover near-term working capital needs, while long-term growth depends in part on obtaining sufficient financing.
- Risks include housing and land-development cyclicality, interest rates, land and labor availability and costs, customer concentration, access to capital and surety bonds, regulatory and weather impacts, and dependence on D.R. Horton. Outstanding surety bonds were $660.9 million. Land purchase contracts had approximately $752.0 million of remaining purchase price, with $11.7 million of deposits.
- Legal proceedings arise in the ordinary course. The company believes reserves are adequate and outcomes are not expected to materially affect its long-term results, but charges could be significant in an individual period. A real estate acquisition from an entity controlled by D.R. Horton’s chairman’s adult sons is also disclosed.
Important facts for investors to verify
- How much of future lot sales and cash receipts depends on D.R. Horton, including its contracted purchases and right-of-first-offer arrangements.
- Whether elevated land acquisition and development spending converts into sales and operating cash flow, given the six-month operating cash outflow.
- Whether selling prices and project execution can offset development-cost inflation and municipality-related delays.
- Available liquidity and covenant headroom under the revolver, and the timing and refinancing implications of the 2026 and 2028 notes.
- The terms and governance of related-party transactions, including the disclosed acquisition involving R&R.