Forestar Group Inc. — Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2019, the company’s fiscal second quarter and first half. Amounts are in millions except per-share data. Forestar is a residential lot developer operating in 41 markets across 17 states and has been 75%-owned by D.R. Horton since 2017.
Financial performance
- Second-quarter revenue: $65.3, up from $22.6 a year earlier. Net income attributable to Forestar was $10.1, or $0.24 per diluted share, versus $4.5, or $0.11 per diluted share.
- First-half revenue: $103.8, compared with $53.5. Net income attributable to Forestar was $13.4, or $0.32 per diluted share, versus a loss of $13.1, or $0.31 per diluted share. The prior-year period included $7.2 of discontinued-operations tax benefit, but continuing operations had a loss attributable to Forestar of $20.3.
- Gross profit and margin: Second-quarter gross profit was $21.7, about 33.2% of revenue, versus $6.4, or 28.3%. First-half gross profit was $29.5, about 28.4%, versus $14.6, or 27.3%.
- Sales activity: Forestar sold 548 residential lots in the quarter and 1,066 in the first half, compared with 304 and 559, respectively. Average selling price per lot was $86,177 for the quarter and $80,243 for the first half. First-half residential lot sales revenue was $84.0; commercial tract sales contributed $18.5.
- Cash flow: First-half operating cash use was $283.5, versus $137.8 used a year earlier, primarily reflecting higher land acquisitions and development spending. Investing activities used $0.7, compared with $235.6 provided in the prior-year period, which included asset-sale proceeds. Financing activities provided $31.3, primarily from revolving-credit borrowings.
- Liquidity and debt at March 31: Cash and cash equivalents were $66.4; restricted cash was $15.7, for combined cash of $82.1. Debt, net, was $149.2, including $114.2 carrying value of convertible notes and $35.0 outstanding on the revolving facility. The company reported compliance with its revolver covenants.
- Balance sheet: Real estate increased to $851.5 from $498.0 at September 30, 2018. Total assets were $984.9 and total equity was $687.8.
Material changes and notable items
- Growth in lot sales and revenue was attributed primarily to the strategic relationship with D.R. Horton. During the quarter, Forestar sold D.R. Horton 453 lots for $37.7; first-half sales were 908 lots for $70.2. At quarter-end, about 12,100 of the approximately 31,400 owned or controlled lots were under contract to sell to D.R. Horton, which also had rights of first offer on about 9,600 lots.
- First-half 2018 SG&A included $18.1 of merger-related costs. Prior-year equity earnings included $7.8 from Forestar’s share of a multifamily project sale, and prior-year gains on asset sales totaled $2.7. These items affect year-over-year comparisons.
- Interest expense was zero in the 2019 periods presented; management said interest costs were capitalized because of increased active development projects.
- Forestar began reporting one real estate segment in fiscal 2019; prior-period segment allocations were not recast. It adopted ASC 606 on October 1, 2018, with no reported impact on the amount or timing of revenue for the periods shown.
- Subsequent financing: In April 2019, the company issued $350 of 8.0% senior unsecured notes due 2024. The effective annual rate after financing-cost amortization is 8.5%. This issuance was after the balance-sheet date and is not included in March 31 debt or cash figures.
Outlook, risks and contingencies
- The filing gives no quantified revenue, earnings, margin, or cash-flow guidance. Management’s strategy is to expand its national lot-development platform through short-duration, phased projects and its relationship with D.R. Horton; success is not assured.
- Key risks include housing demand and mortgage-credit conditions, interest rates, land acquisition and development estimates, approvals, construction labor and material costs, access to capital, and the ability to meet debt covenants. D.R. Horton’s control and the concentration of sales and lot commitments with that related party also merit attention.
- The revolver has $35.0 outstanding at a 4.8% rate and matures in August 2021; borrowings are subject to a borrowing-base formula. The new notes add substantial debt service and include restrictive covenants and change-of-control provisions.
- Surety bonds outstanding were $95.6; a separate $15.0 letter-of-credit facility was secured by $15.7 of restricted cash. The company reported ordinary-course legal proceedings and believes reserves are adequate, while noting charges could be significant in a single period.
Important facts for investors to verify
- Use of proceeds from the April $350 note issuance, post-issuance cash, total debt, interest burden, and covenant headroom.
- Whether lot growth and cash returns justify the $283.5 first-half operating cash outflow and rapid increase in real estate inventory.
- Exposure to D.R. Horton: related-party sales, contracted lots, purchase options, and the terms governing land transfers and development.
- Comparability of reported growth given prior-year merger expenses, venture gains, asset-sale gains, discontinued operations, segment reorganization, and differing revenue-accounting presentation.
- Execution risks around project timing, sales prices, development costs, approvals, and availability of financing and surety bonds.