Forestar Group Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2023. Forestar develops residential lots for homebuilders and operates in 52 markets across 20 states. D.R. Horton owned approximately 63% of Forestar and is a significant customer and related party.
Financial results and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $301.5 million, down 28.5% from $421.6 million | $518.2 million, down 37.5% from $829.2 million |
| Net income | $26.9 million, down from $47.8 million | $47.7 million, down from $88.3 million |
| Diluted EPS | $0.54, versus $0.96 | $0.95, versus $1.77 |
| Operating cash flow | $21.3 million for six months, versus $76.6 million in the prior-year period |
Cost of sales was $245.6 million for the quarter and $414.8 million for the six months. Derived gross margin was approximately 18.5% for the quarter versus 20.8% a year earlier, and 20.0% for the six months versus 19.4%. SG&A was $22.0 million for the quarter and $44.9 million year to date; as a share of revenue it rose to 7.3% and 8.7%, respectively, from 5.8% and 5.5%.
At March 31, 2023, cash was $286.7 million, total debt was $706.8 million and total equity was $1,248.8 million. Net debt was approximately $420.1 million; net debt to total capital was 25.2%. The $410 million revolver had no borrowings and $367.4 million of available capacity after $42.6 million of letters of credit. The company reported compliance with debt covenants. Debt included $400 million principal of 3.85% notes due 2026, $300 million of 5.0% notes due 2028, and a $12.5 million non-recourse note due October 2023.
Material changes versus prior year
- Residential lot sales volume fell to 2,979 lots for the quarter from 5,788 and to 5,242 for the six months from 10,304. Management attributed the decline to homebuilders slowing new-home starts amid higher mortgage rates and persistent inflation.
- Average sales price per lot, excluding deferred-development lots and contract-liability effects, increased to $84,700 for the quarter from $81,900, and to $87,000 for the six months from $85,300.
- Quarterly real estate impairment charges increased to $19.4 million from $3.8 million. Six-month operating cash flow also declined, reflecting lower earnings and decreases in accounts payable and accrued development costs.
- 2023 revenue included $41.1 million of quarterly tract sales and other revenue, versus $0.1 million a year earlier; this included $32.5 million of tract sales to D.R. Horton. Related cost of sales was $25.5 million.
Outlook, risks and contingencies
Management gave no quantified earnings or revenue guidance. It said weaker lot demand may persist, and that continued challenging conditions could require lower selling prices or make it harder to offset cost inflation. Management cited cash, unused revolver capacity, low net leverage, a low-overhead model and its D.R. Horton relationship as support for operating through changing conditions.
Key risks include housing-market cyclicality, higher interest rates and inflation, land and labor availability and costs, dependence on homebuilder customers, financing and covenant compliance, and the strategic relationship with controlling shareholder D.R. Horton. The company had $635.1 million of surety bonds supporting development obligations and $293.5 million of remaining purchase commitments under land contracts. It reported ordinary-course litigation and said outcomes were not expected to materially harm its financial position or long-term results, while noting charges could be significant in an individual period.
Important facts for investors to verify
- Whether lot demand, homebuilder starts, sales volumes and pricing improve or weaken further.
- The drivers and potential for further impairment charges, land-contract write-offs, and the carrying value and recoverability of real estate.
- The sustainability of operating cash flow and liquidity as development spending, working-capital balances and lot closings change.
- Revenue concentration and related-party terms: D.R. Horton purchased 2,666 of 2,979 lots sold in the quarter and 4,760 of 5,242 for the six months.
- Near-term repayment or refinancing of the $12.5 million note due October 2023, and ongoing compliance with credit-facility and senior-note covenants.