Forestar Group Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Amounts below are in millions of dollars unless stated otherwise. Forestar operates in real estate, mineral resources, and fiber resources.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $25.5 | $28.1 | $55.3 | $54.5 |
| Operating income (loss) | $(2.9) | $0.7 | $(1.9) | $0.1 |
| Net income (loss) attributable to Forestar | $(3.9) | $(3.3) | $(6.4) | $(6.2) |
| Basic loss per share | $(0.11) | $(0.09) | $(0.18) | $(0.17) |
| Interest expense | $4.7 | $4.1 | $8.7 | $8.6 |
- Q2 revenue declined about 9% year over year; first-half revenue increased about 2%. Operating margin was approximately negative 11.5% for Q2 2011 versus positive 2.4% in Q2 2010; first-half 2011 operating margin was approximately negative 3.5%.
- At June 30, 2011, total assets were $825.2, debt was $260.8, shareholders’ equity was $509.0, and cash was $5.7. Debt rose from $221.6 at December 31, 2010.
- First-half operating cash flow was negative $33.9, versus negative $18.9 in 2010. Investing cash flow was negative $3.5, while financing cash flow was positive $37.8. Cash increased $0.3 to $5.7.
- The senior facility comprised a $130.0 term loan and $200.0 revolving line. Net unused borrowing capacity was $111.4; available liquidity, including cash, was $115.1. The company reported compliance with its debt covenants.
Changes and operating drivers
- Q2 real estate revenue fell to $19.6 from $21.5, mainly because undeveloped-land sales volume and pricing weakened. Residential lot sales improved: owned and consolidated lot sales were 158 versus 149, and average revenue per lot rose to $59,235 from $53,037.
- First-half real estate revenue increased to $40.8 from $38.8, but segment earnings were affected by higher operating costs and lower undeveloped-land sales. A $1.342 benefit from reallocating a previously recognized venture foreclosure loss also supported 2011 segment earnings.
- Mineral segment earnings declined to $3.1 from $4.3 in Q2 and to $8.7 from $10.4 for the first half, principally due to water-resource development costs. Higher oil prices were offset by lower natural-gas prices and production.
- Fiber revenue and earnings declined: first-half revenue was $2.7 versus $4.0 and segment earnings were $1.3 versus $2.5. Timber volume sold fell, and average prices for pulpwood and sawtimber were lower. Management said reduced timber acreage would likely lower future fiber revenue and earnings.
- General and administrative expense included $2.73 of costs from proposed private debt offerings that Forestar withdrew after market terms deteriorated. Share-based compensation expense fell year over year, principally reflecting stock-price effects on cash-settled awards.
Outlook, risks, and unusual items
- Management described single-family housing conditions as difficult, citing oversupply, weak confidence and sales, constrained purchaser financing, and high unemployment; it said these conditions could persist through 2011. Multifamily conditions were improving. No quantified earnings or revenue guidance was provided.
- Forestar acquired a non-performing loan for $21.1, secured by 900 acres near Houston. The borrower was in bankruptcy; Forestar was not accruing interest and said it could not estimate future cash flows from the loan.
- After quarter-end, on August 5, 2011, Forestar completed a $75.0 cash sale of 50,000 acres of timberland in Georgia and Alabama. The filing does not state the transaction’s resulting gain or use of proceeds.
- Three equity-method ventures had $67.5 of borrowings classified as current maturities and total liabilities exceeding assets. The partners intended to refinance or extend the debt, but success was not assured. Forestar estimated maximum exposure to loss at $36.3, versus a $2.8 investment.
- Environmental remediation at a California site was estimated at $1.94, expected to be paid in 2011 or 2012; the estimate could change. The filing also disclosed ordinary-course litigation and stated that charges in an individual period could be significant, although no material adverse outcome was expected.
- Other risks include real estate demand, prices and approvals; oil and gas prices and activity; timber markets and harvest constraints; interest rates and financing access; and uncertain reimbursement timing from utility and improvement districts.
Important facts for investors to verify
- Whether the August 2011 timberland sale proceeds were used to reduce debt or fund other investments, and the transaction’s gain and impact on remaining timber operations.
- Recoverability and timing of cash flows from the $21.1 non-performing loan and the borrower’s bankruptcy proceedings.
- Refinancing outcomes for venture debt classified as current maturities and whether Forestar must provide additional support.
- Progress on the $36.6 of approved and pending Cibolo Canyons infrastructure reimbursements, which depend on the district’s funding and tax base.
- Whether weak housing conditions, lower timber prices and volumes, and rising variable-rate debt costs continue to pressure results and liquidity.