Forestar Group Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2020. Forestar is a residential lot developer operating in 50 markets across 21 states; D.R. Horton owned approximately 65% of the company at quarter-end.
Financial results
- Quarter revenue: $159.1 million, up from $65.3 million a year earlier. Residential lot sales were $156.4 million; the company sold 1,951 lots versus 548. Average price per lot was $79,738 versus $86,177.
- Quarter earnings: Income before taxes was $13.7 million versus $16.4 million; net income attributable to Forestar was $9.6 million versus $10.1 million. Diluted EPS was $0.20 versus $0.24.
- Six-month results: Revenue was $406.4 million versus $103.8 million; income before taxes was $35.8 million versus $21.3 million; net income attributable to Forestar was $26.4 million versus $13.4 million. Diluted EPS was $0.55 versus $0.32.
- Margins: Gross margin, calculated as revenue less cost of sales, was approximately 14.1% for the quarter versus 33.2%; for six months it was approximately 13.1% versus 28.4%. Higher sales volume drove revenue growth, while cost of sales rose substantially.
- Cash flow: Operating cash use was $123.8 million for six months, compared with $283.5 million used in the prior-year period, principally reflecting higher sales and a smaller increase in real estate assets. Ending cash was $438.2 million, up from $382.8 million at September 30, 2019.
- Balance sheet and debt: Real estate was $1.20 billion and total assets were $1.68 billion. Debt carrying value was $640.1 million, versus $460.5 million at September 30, 2019. Debt-to-total-capital was 43.4%; net debt-to-total-capital was 19.5%. Stockholders’ equity was $835.9 million.
- Liquidity: The $380 million revolving facility had no borrowings and $349 million available after $31 million of letters of credit. The company reported compliance with its debt covenants.
Material changes and notable items
- Residential lot sales rose to 4,373 lots for the six months from 1,066; lot banking and development-project sales both increased. Six-month revenue also included $30.0 million of residential tract sales, with no comparable sales in 2019.
- Sales to D.R. Horton accounted for 1,906 of 1,951 quarterly lots and $151.2 million of quarterly lot revenue. At quarter-end, 14,200 lots were under contract to D.R. Horton and 14,400 were subject to its right of first offer.
- In February, Forestar issued $300 million principal amount of 5.0% senior notes due 2028. In March, it repaid $118.9 million principal amount of 3.75% convertible notes at maturity. The company also had $350 million principal amount of 8.0% senior notes due 2024.
- On April 20, the board authorized repurchases of up to $30 million of debt securities, effective April 30. This authorization is subsequent to the reporting date.
- Forestar adopted lease accounting on October 1, 2019, recording $2.7 million of right-of-use assets and $2.9 million of lease liabilities; management reported no material overall impact.
Outlook, risks, and contingencies
- Management reported that COVID-19 began affecting operations and lot demand in late March and into April. Homebuilders slowed lot purchases in response to lower home sales orders, although development continued where permitted. The duration and financial effects were uncertain.
- Management said it intended to limit land acquisitions and closely monitor development spending against sales pace. It considered cash, the credit facility, and its D.R. Horton relationship supportive of near-term liquidity, but warned that prolonged market disruption could reduce demand, affect contract terms and liquidity, and lead to potentially significant real estate impairments. No quantified earnings guidance was provided.
- Potential risks include dependence on housing demand and financing conditions, D.R. Horton’s influence and related-party transactions, access to capital, development costs and approvals, and debt covenant compliance. The filing also notes that amendments to lot-sale contracts could change timing, volume, pricing, deposits, or payment terms.
- Outstanding development-related support included $174.6 million of surety bonds and $31.0 million of letters of credit. The company reported ordinary-course litigation and said it did not expect a material adverse effect, while noting charges in an individual period could be significant.
Investor verification priorities
- Track post-quarter lot sales pace, cancellations, and any changes to customer purchase commitments—especially those involving D.R. Horton.
- Assess real estate inventory and impairment indicators as COVID-19 effects and housing conditions develop.
- Reconcile debt principal amounts with balance-sheet carrying value, and monitor refinancing needs, liquidity, and covenant headroom.
- Review the extent of related-party sales, land arrangements, and service costs with D.R. Horton, including their effect on revenue concentration and cash flows.
- Confirm the eventual use and execution of the authorized debt repurchase program.