Forestar Group Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Forestar operates in real estate, oil and gas, and other natural resources. On May 12, 2015, the company announced a strategic shift to grow its core real estate business, invest in multifamily properties, reduce oil and gas capital spending and operating costs, and transition timberland into real estate.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $57.4 | $83.0 | $105.2 | $167.6 |
| Operating income (loss) | $(52.7) | $26.9 | $(60.5) | $42.8 |
| Net income (loss) attributable to Forestar | $(34.5) | $14.8 | $(42.7) | $23.2 |
| Basic and diluted EPS | $(1.01) | $0.34 | $(1.25) | $0.54 basic; $0.53 diluted |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(17.5) | $19.0 |
| Investing cash flow | Not provided for quarter | Not provided for quarter | $(52.4) | $(47.7) |
At June 30, 2015, cash was $98.8 million, debt was $434.8 million, total assets were $1.192 billion, and total equity was $670.4 million. The $300 million revolving credit facility had no borrowings, $14.8 million of letters of credit outstanding, and $285.2 million of net unused capacity. Cash plus unused capacity provided $380.4 million of available liquidity. The company was in compliance with debt covenants: interest coverage was 3.23x, total leverage was 40.4%, and covenant net worth was $632.7 million.
Six-month oil and gas capital expenditures were $40.3 million; real estate acquisition and development expenditures were $57.4 million. Cash declined $71.4 million during the six months.
Material changes versus prior year
- Q2 revenue fell 31% year over year; six-month revenue fell 37%. Real estate revenue declined to $39.4 million in Q2 and $72.2 million for the first half, mainly on lower undeveloped-land and residential-lot sales. Six-month undeveloped-land sales were 1,634 acres versus 12,279 acres a year earlier.
- Oil and gas revenue declined to $16.2 million in Q2 and $29.4 million for the first half, despite higher production volumes, as realized commodity prices fell. The average total oil price, including NGLs, was $50.00 per barrel in Q2 versus $92.75; average gas price was $2.68 per Mcf versus $4.49.
- Oil and gas segment results swung to a $56.9 million Q2 loss and a $59.8 million first-half loss, largely due to $56.5 million of impairment, dry-hole and pre-drilling charges. Real estate segment earnings were $15.5 million in Q2 versus $27.3 million, and $24.6 million for the first half versus $50.9 million.
- Operating cash flow shifted from $19.0 million provided to $17.5 million used, reflecting lower real estate sales and development expenditures exceeding real estate cost of sales. Interest expense increased to $17.5 million for the first half from $12.9 million, primarily due to higher average borrowing rates and debt outstanding.
Outlook, commentary and risks
The filing provides no numerical earnings or revenue guidance. Management described the U.S. housing recovery as tentative, while noting healthy multifamily occupancy and rent trends. It expects 2015 oil and gas capital expenditures to be significantly lower than in 2014, primarily for existing commitments, but says spending may change with commodity prices, drilling results, liquidity, and opportunities.
Key risks include continued low oil and gas prices, uncertain housing and land-sale conditions, permitting and development costs, timing and approval of utility-district reimbursements, and the ability to meet debt obligations and covenants. The company had $65.3 million of net deferred tax assets; management warned that reduced expectations for future taxable income could require a valuation allowance and material non-cash expense.
Unusual items include non-cash oil and gas impairments, dry-hole and pre-drilling charges; $1.75 million of oil and gas office lease-termination costs and $1.57 million of severance and retention costs in the first half; and a $1.16 million Q2 gain from a reduced surety bond. Cibolo Canyons had $31.9 million of approved but unpaid infrastructure reimbursements at quarter-end, excluding interest; the timing depends on district funding. The company also disclosed a $6.8 million letter of credit supporting district bonds and guarantees related to certain multifamily venture loans.
Management said ordinary-course litigation is not expected to materially affect the company, though charges in any single period could be significant. Estimated remaining remediation cost for a California site was $332,000. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether additional oil and gas impairments, restructuring costs, or asset dispositions follow the strategic review.
- Realized oil and gas prices, production, and the effect of reduced capital investment on future cash flows.
- Residential lot and land-sale volumes, multifamily occupancy and performance, and execution of the real estate growth strategy.
- Collection timing for the $31.9 million of approved Cibolo Canyons reimbursements and exposure under related credit support.
- Liquidity and covenant headroom as cash declines, including the restrictions on distributions while the leverage and other conditions are not met.
- Recoverability of the $65.3 million deferred tax asset and any resulting valuation allowance.