Forestar Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2019. Forestar is a residential lot developer operating in 50 markets across 20 states and is majority-owned by D.R. Horton, which held 75% of its common stock following the 2017 merger.
Financial performance
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $88.2 million | $192.0 million |
| Gross profit (revenue less cost of sales) | $12.9 million; 14.6% margin | $42.4 million; 22.1% margin |
| Income from continuing operations before tax | $8.4 million | $29.6 million |
| Net income attributable to Forestar | $6.9 million | $20.3 million |
| Diluted earnings per share | $0.16 | $0.48 |
| Net cash used in operating activities | Not provided for the quarter | $450.1 million |
At June 30, 2019, cash and restricted cash totaled $223.2 million, debt was $458.9 million net of discounts and fees, and total equity was $695.3 million. The company reported net debt to total capital of 25.3% and $358.3 million of available revolving-credit capacity.
Changes versus prior comparable periods
- Quarterly revenue rose to $88.2 million from $23.6 million; nine-month revenue increased to $192.0 million from $77.0 million. Growth was primarily tied to the expanded business and strategic relationship with D.R. Horton.
- Quarterly net income attributable to Forestar declined to $6.9 million from $9.4 million despite higher revenue. Nine-month attributable results improved to $20.3 million from a $3.6 million loss; the prior-year period included $7.2 million of discontinued-operations tax benefit and elevated merger-related costs.
- Residential lot sales were 1,158 in the quarter and 2,224 year to date, versus 297 and 856, respectively. Nine-month sales included $18.5 million of commercial tract sales, compared with $9.2 million a year earlier.
- Real estate inventory increased to $1,049.5 million from $498.0 million, reflecting land acquisitions and development investment. Operating cash outflow increased to $450.1 million from $206.0 million, principally due to those investments.
- Debt increased from $111.7 million to $458.9 million, principally following the April 2019 issuance of $350 million of 8.0% senior notes due 2024. Cash declined from $335.0 million to $223.2 million.
Outlook, risks and unusual items
- Management described a growth strategy centered on land acquisition and phased development, with the goal of building a geographically diversified national lot-development platform. The filing provides no numerical revenue or earnings guidance.
- Forestar owned or controlled approximately 37,400 lots; approximately 13,900 were under contract to sell to D.R. Horton, which also held rights of first offer on approximately 10,200 lots. In the quarter, Forestar sold D.R. Horton 995 lots for $75.2 million, highlighting customer and related-party concentration.
- The 3.75% convertible notes, with $118.9 million principal, mature in March 2020. Management intended to settle principal in cash and any excess conversion value in shares. The new 2024 notes carry an 8.0% coupon and an 8.5% effective annual rate after financing-cost amortization.
- Management cited risks including housing demand and mortgage-credit conditions, interest rates, land pricing and development estimates, entitlement approvals, construction costs and labor availability, access to capital, surety-bond availability, covenant compliance, and dependence on D.R. Horton. It reported compliance with debt covenants at June 30.
- Outstanding surety bonds were $111.4 million. The company said ordinary-course litigation was not expected to materially affect its financial position or long-term results, while noting charges could be significant in an individual period.
- ASC 606 was adopted October 1, 2018 using the modified retrospective method. The company reported no impact on revenue amount or timing for the periods presented; $9.9 million of contract liabilities at June 30 related to development obligations for 382 lots sold to D.R. Horton.
Important facts for investors to verify
- Whether lot closings, average selling prices and development costs sustain margins as the portfolio expands.
- The extent of revenue and lot-sale dependence on D.R. Horton, and the terms and execution of related-party arrangements.
- Funding needs and liquidity through the March 2020 convertible-note maturity, given inventory growth and operating cash outflows.
- Whether the company can meet its targeted long-term net-debt-to-capital ceiling of 40% while financing growth.
- Potential impacts from land-development estimates, approvals, housing-market changes, contingencies and debt covenants.