Forestar Group Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019 unless noted. Forestar develops residential lots and operates in 51 markets across 21 states. D.R. Horton owned approximately 65% of Forestar at quarter-end.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $307.1 million | $247.2 million |
| Income before taxes | $29.2 million | $22.2 million |
| Net income attributable to Forestar | $22.0 million | $16.9 million |
| Diluted EPS | $0.46 | $0.35 |
| Cash used in operating activities | $158.7 million | $11.6 million |
- Revenue increased 24%. Residential lot sales rose to $307.0 million from $217.1 million, while the prior-year quarter included $30.0 million of residential tract sales and the current quarter included none.
- Lot sales increased to 3,567 from 2,422; average sale price per lot declined to $86,000 from $90,300. Development-project lot sales grew to 3,102 from 1,406, while lot-banking sales declined to 465 from 1,016.
- Cost of sales was $262.9 million versus $216.6 million. Revenue less cost of sales was $44.2 million, or approximately 14.4% of revenue, compared with $30.6 million, or approximately 12.4%, in the prior-year quarter.
- SG&A increased to $15.5 million from $10.5 million and rose to 5.0% of revenue from 4.2%. The company attributed higher cost of sales primarily to increased lot volume. No real estate impairment charges were recorded in either period.
- Operating cash use increased substantially, primarily reflecting a $218.6 million increase in real estate, as the company expanded land acquisition and development. Cash and cash equivalents fell to $237.4 million from $394.3 million at September 30, 2020.
Financial position and liquidity
- At December 31, 2020, total assets were $1.81 billion, real estate was $1.54 billion, total debt was $654.1 million, and total equity was $894.1 million. Debt was $641.1 million at September 30, 2020.
- Net debt to total capital was 31.8%, up from 22.1% at September 30, 2020; management’s long-term objective is to keep this ratio at or below 40%.
- The $380 million revolving facility had no borrowings outstanding and $339.5 million available after $40.5 million of letters of credit. The facility matures October 2022, with extensions possible subject to lender approval. Forestar reported compliance with its covenants.
- Senior notes include $350 million principal amount of 8.0% notes due 2024 and $300 million of 5.0% notes due 2028. A $12.5 million non-recourse, real-estate-secured note payable was issued during the quarter and matures in October 2023. No senior-note maturities are due until fiscal 2024.
- Operating cash flow was partly offset by $2.0 million of investing cash inflow and $0.2 million of financing cash outflow. Cash declined by $156.9 million during the quarter.
Material changes, outlook and risks
- Management said lot sales pace recovered in the second half of fiscal 2020 and continued to improve in Q1 FY2021 after slowing in March and April 2020. It remained cautious about COVID-19 and the uncertain effects on the economy, housing demand, customers, trade partners and employees. No specific earnings or revenue guidance was provided.
- The company owned or controlled approximately 77,500 lots at quarter-end, up from 60,500 at September 30, 2020. D.R. Horton had 18,300 lots under contract and rights of first offer on 16,600 lots. Q1 sales to D.R. Horton were $294.0 million, approximately 96% of total revenue.
- Forestar cited its liquidity, low-overhead model and strategic relationship with D.R. Horton as supports for operating through changing conditions. However, prolonged adverse economic or housing conditions could lead to real estate impairment charges, potentially significant in amount.
- Outstanding surety bonds were $293.8 million, supporting development obligations; management expected those obligations to be completed in the ordinary course. The company disclosed ordinary-course litigation, stating it did not expect a material adverse effect overall while noting charges could be significant in a single period.
- Key stated risks include dependence on homebuilder relationships and D.R. Horton, housing-market cyclicality, COVID-19 impacts, land availability and costs, access to capital and surety bonds, debt covenant compliance, and execution in new markets.
Investor verification points
- Assess whether higher lot volumes and improved gross margin can be sustained despite the lower average lot price.
- Monitor cash consumption and investment in real estate, along with net debt-to-capital and available revolver capacity.
- Evaluate customer concentration and related-party terms, especially sales and land arrangements with D.R. Horton.
- Track COVID-19 and housing-market developments for effects on lot demand, project economics and impairment assessments.
- Review the timing and release conditions for letters of credit and surety bonds, and any developments in litigation or debt covenants.