Forestar Group Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Comparisons are with Q1 2011 unless noted.
Business context
Forestar operates in real estate, mineral resources and fiber resources, with real estate activity concentrated in Texas and Georgia. The company reported challenging housing conditions, including weak sales and financing constraints, alongside improving multifamily conditions. Oil prices were higher, natural gas prices remained depressed, and timber markets were weak.
Financial performance and liquidity
| Metric | Q1 2012 | Comparable period / reference |
|---|---|---|
| Total revenue | $28.1 | $29.8 in Q1 2011 |
| Operating income | $8.2 | $1.0 in Q1 2011 |
| Income before taxes | $5.1 | Loss of $2.4 in Q1 2011 |
| Net income attributable to Forestar | $2.8; $0.08 per diluted share | Loss of $2.5; loss of $0.07 per diluted share |
| Cash from operating activities | Use of $47.5 | Use of $6.4 in Q1 2011 |
| Cash from investing activities | Provided $29.4 | Used $1.2 in Q1 2011 |
| Cash from financing activities | Provided $6.6 | Provided $7.8 in Q1 2011 |
| Cash and cash equivalents | $6.8 at March 31, 2012 | $18.3 at December 31, 2011 |
| Total debt | $227.9 | $221.6 at December 31, 2011 |
| Total assets / shareholders’ equity | $797.8 / $516.9 | $794.9 / $511.2 at December 31, 2011 |
Operating income included an $11.7 gain on the sale of Forestar’s Palisades West venture interest; the reported operating margin therefore benefited materially from this unusual gain. No adjusted margin is provided. Operating cash use reflected real estate development and acquisition spending, including the CL Realty and Temco transactions, and tax payments. The company reported $154.9 of unused capacity under its senior secured credit facility and $161.0 of available liquidity including cash; it was in compliance with debt covenants.
Material changes and unusual items
- Revenue declined about 6% year over year. Real estate revenue fell to $17.9 from $21.1, while mineral resources revenue rose to $9.4 from $7.3 and fiber resources revenue fell to $0.7 from $1.4.
- Real estate segment earnings increased to $11.6 from $2.6, primarily due to the $11.7 Palisades West gain. The venture interest was sold for $32.1.
- On March 29, Forestar acquired interests in 17 residential and mixed-use projects for $47.0, receiving $23.4 in distributable cash after closing. The acquired assets included approximately 1,130 developed lots, 4,900 planned lots and more than 460 commercial acres; their Q1 operating results were not significant.
- Mineral segment earnings rose to $5.9 from $5.6, helped by higher oil production and prices, partly offset by lower lease bonus payments and higher costs. Fiber segment earnings declined to $0.4 from $0.6, chiefly due to lower harvest volumes.
- Subsequent to quarter-end, on April 20, a consolidated venture sold approximately 800 acres at Light Farms for $56.0. Forestar received $25.0 in distributable cash, reduced consolidated debt by about $31.0 and recognized an approximately $3.4 gain.
Outlook, risks and contingencies
Forestar described its 2012 “Triple in FOR” initiatives: accelerate value realization from real estate and natural resources, improve transparency and disclosure, and raise net asset value through disciplined investments, including multifamily and lower-risk oil and gas opportunities. The filing gives no numerical earnings or revenue guidance.
- Management noted signs of improving demand for finished lots in some Texas markets, but emphasized uncertainty around the timing and strength of broader housing recovery. Multifamily occupancy and rents were improving.
- Key exposures include real estate sales prices and timing, entitlement and development approvals, mortgage credit and foreclosure competition, oil and gas prices and activity, timber demand, costs, financing availability, and collection timing for utility and improvement district reimbursements.
- Three equity-method partnerships had $63.5 of borrowings classified as current maturities and substantial liabilities relative to assets. Partners intended to extend or refinance the debt, but success was not assured; Forestar could in some circumstances be required to provide additional funds. Estimated maximum exposure to loss was $34.7.
- A $20.7 non-performing loan remained outstanding at quarter-end. The borrower’s bankruptcy reorganization became effective in Q2 2012, establishing $33.8 principal due in April 2017, with interest rates stepping from 9% to 12% over the term.
- Forestar had $34.8 of approved and pending Cibolo Canyons infrastructure reimbursements, excluding interest, and received none in Q1. Collection depends on district approvals and funding capacity. Estimated remaining remediation costs at a California site were $2.4; additional remediation may be required, but its scope was unclear.
- Variable-rate debt was $197.9 at quarter-end. The filing estimates that a sustained 1 percentage-point rate increase would reduce pretax income by about $2.0 over the next 12 months.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring operations versus the $11.7 Palisades West gain, and whether the Light Farms sale gain was recognized in the subsequent quarter.
- Progress and returns from the acquired CL Realty and Temco projects, and the cash requirements to complete development, including the Austin multifamily project.
- Whether partnership borrowings are refinanced or extended, and whether Forestar must provide additional capital.
- Timing and collectability of Cibolo Canyons reimbursements and recovery prospects for the non-performing loan.
- Cash needs and debt capacity as development spending continues; quarter-end cash was $6.8 despite substantial unused revolver capacity.