Forestar Group Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
Forestar operates in real estate, oil and gas, and other natural resources. Its real estate business focuses on land development and sales, income-producing properties and multifamily development; oil and gas includes mineral interests and exploration and production operations. The company reported that it changed its segment presentation in Q1 2013; prior-period segment information was reclassified.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First six months 2013 | First six months 2012 |
|---|---|---|---|---|
| Revenue | $60.1 million | $35.3 million | $157.6 million | $63.4 million |
| Operating income | $3.6 million | $4.0 million | $13.1 million | $12.2 million |
| Consolidated net income | $1.2 million | $1.5 million | $6.2 million | $5.0 million |
| Net income attributable to Forestar | $0.5 million | $0.8 million | $4.5 million | $3.6 million |
| Diluted EPS | $0.02 | $0.02 | $0.13 | $0.10 |
| Cash from operating activities | Not separately presented for the quarter | $34.9 million | $(10.8) million |
Revenue rose 70% in Q2 and 149% in the first half year over year, while Q2 operating income and attributable net income declined. The filing does not provide a single consolidated margin measure; calculated operating margin was approximately 5.9% in Q2 2013 versus 11.2% in Q2 2012. First-half operating cash flow improved, mainly reflecting the Promesa property sale and the timing of real estate development spending.
Balance sheet, debt and liquidity
- At June 30, 2013, cash was $69.1 million, total assets $979.6 million, total debt $331.6 million and total equity $565.5 million. At year-end 2012, cash was $10.4 million and debt $294.1 million.
- Debt included a $200 million term loan and $98.4 million carrying value of 3.75% convertible senior notes due 2020. The notes had $125 million principal; net proceeds were used in part to repay $68 million drawn on the revolving credit line.
- Unused borrowing capacity under the senior secured facility was $196.9 million; cash plus unused capacity totaled $262.3 million of available liquidity. The company reported compliance with debt covenants. Its 35.4% total leverage ratio exceeded the 30% threshold for distributions, so distributions were restricted under facility terms at quarter-end.
- Six-month investing cash outflow was $35.1 million, principally from $32.3 million of oil and gas property and equipment investment. Financing cash inflow was $59.0 million; cash increased $58.8 million over the period.
Material changes and management commentary
- Real estate revenue and first-half segment earnings benefited from selling Promesa, a 289-unit Austin multifamily property, for $41 million. Forestar received $21.5 million net proceeds, repaid $18.9 million of related debt and recognized $10.9 million in segment earnings. The sale was a significant contributor to first-half cash generation.
- Q2 real estate segment earnings increased modestly year over year, with higher average prices for lots and commercial acres offset by lower lot sales volume and commercial acres sold. First-half results also benefited from higher residential lot activity and land sales.
- Oil and gas revenue increased substantially, including contributions from the 2012 Credo acquisition, but oil and gas segment earnings fell year over year in both Q2 and the first half. Management cited lower production from owned mineral royalties, lower average oil prices and reduced delay rental payments; Credo added working-interest production and earnings.
- Other natural resources earnings improved as timber harvesting and customer demand increased. Management described U.S. housing conditions as improving, while identifying restrictive mortgage lending, economic uncertainty and foreclosure risk as continuing threats. It characterized multifamily conditions as strong.
- Share-based compensation expense rose to $11.9 million in the first half from $5.2 million, principally reflecting the increase in Forestar’s share price since year-end 2012 and its effect on cash-settled awards.
Outlook, risks and contingencies
- The company planned to drill or participate in approximately 178 gross oil and gas wells (58 net) during 2013 and reported a $72.5 million annual drilling and completion budget. The budget is subject to operator plans, equipment and service availability, commodity prices, drilling results and potential leasehold acquisitions; management may adjust it. The filing provides no specific earnings or revenue guidance.
- Key risks include cyclical real estate markets, entitlement and development approvals, housing demand and mortgage availability, oil and gas prices and drilling results, financing and covenant compliance, and the timing or approval of reimbursements from special improvement districts.
- Forestar had $26.6 million of outstanding performance bonds and letters of credit for venture obligations, mostly associated with an Austin multifamily project. Three equity-method variable-interest ventures had $44.4 million of liabilities; Forestar estimated maximum exposure to loss at $3.8 million.
- At Cibolo Canyons, $34.3 million of approved and pending infrastructure reimbursements remained outstanding, excluding interest. Reimbursement timing depends on district approvals and available tax-base funding; the company had not recognized income on uncollected interest.
- Estimated remaining remediation costs for a California site were $1.3 million, recorded in accrued expenses; additional remediation or monitoring may be required, but its extent was not clear. The company reported no material change in risk factors from its 2012 Form 10-K and no material adverse outcome expected from ordinary-course litigation, while noting that charges in a single period could be significant.
Important facts for investors to verify
- How much of revenue and earnings growth is recurring versus attributable to the Promesa sale and the Credo acquisition.
- Oil and gas production, realized prices, exploration spending and whether the 2013 drilling plan and budget remain achievable.
- The timing and collectability of Cibolo Canyons reimbursements and other district-related receivables.
- Debt covenant headroom, liquidity needs and the conditions required before distributions can resume.
- Potential venture guarantees, contingent obligations and any changes in remediation or litigation estimates.