Forestar Group Inc. — Q1 2015 Form 10-Q
Business context and period: The filing covers the quarter ended March 31, 2015. Forestar operates in real estate, oil and gas, and other natural resources, with real estate activity concentrated in Texas and Georgia. Financial amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $47.8 | $84.6 |
| Operating income (loss) | $(7.7) | $15.9 |
| Net income (loss) attributable to Forestar | $(8.2) | $8.3 |
| Basic and diluted EPS | $(0.24) | $0.20 basic; $0.19 diluted |
| Operating cash flow | $(18.8) | $5.5 |
| Capital investment cash flow | $(24.7) | $(28.2) |
| Cash and cash equivalents, quarter-end | $126.3 | $170.1 at 2014 year-end |
| Debt, quarter-end | $434.4 | $432.7 at 2014 year-end |
Q1 2015 operating margin was approximately negative 16.2% and net margin approximately negative 17.1%. Real estate segment earnings were $9.1 million, oil and gas segment loss was $2.9 million, and other natural resources segment loss was $0.4 million. The company reported total assets of $1.237 billion and total equity of $703.4 million at quarter-end.
The $300 million revolving credit facility had $284.5 million of net unused capacity, including the effect of $15.5 million of letters of credit; there were no borrowings under the facility. Available liquidity, including cash, was reported at $408.7 million. Forestar was in compliance with debt covenants. Its leverage ratio was 40.5%, above the 40% threshold for restricted payments, so the company was prohibited from making such payments until applicable conditions are met.
Material changes versus prior period
- Revenue declined 43%, principally because Q1 2014 included a $19.7 million undeveloped-land sale and higher residential lot sales. Residential lots sold by owned and consolidated ventures fell to 242 from 836; undeveloped acres sold fell to 731 from 9,329.
- Real estate segment earnings decreased to $9.1 million from $23.6 million. Equity-method venture earnings increased to $3.0 million from $1.0 million, partly reflecting a commercial tract sale.
- Oil and gas revenue fell to $13.2 million from $17.6 million as realized prices weakened, despite higher production volumes. Average total oil price, including NGLs, fell to $38.50 per barrel from $87.18; average gas price fell to $3.18 per Mcf from $4.37.
- Share-based and long-term incentive compensation expense increased to $3.5 million from $0.3 million. Interest expense rose to $8.8 million from $5.5 million.
- Cash decreased by $43.9 million during the quarter. Operating cash use reflected lower land and lot sales and development and acquisition expenditures of $34.8 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said planned 2015 oil and gas expenditures were expected to be significantly below 2014 and primarily tied to existing Bakken/Three Forks commitments; spending could change with prices, drilling plans, costs and opportunities.
- The board and management were reviewing strategic alternatives, including alternatives for the oil and gas business. The filing gives no assurance that a transaction will be pursued or completed.
- Oil and gas results included $1.75 million for the Fort Worth office lease termination and $1.07 million of severance and retention costs, partly offset by a $1.18 million gain on sale of North Dakota mineral leasehold acreage. Real estate cost of sales included a $0.50 million impairment charge. The Fort Worth closure and workforce reductions were part of efforts to lower oil and gas operating costs.
- Management described the housing recovery as tentative, while multifamily conditions remained strong. It cited lower oil prices and weak gas prices as risks to oil and gas economics and activity.
- Real estate reimbursement timing is uncertain: $31.9 million of Cibolo Canyons infrastructure reimbursements had been approved but remained uncollected at quarter-end; no reimbursement was received in Q1. Forestar also cited approval, funding and timing risks for other district reimbursements.
- Risk factors include real estate demand and approvals, commodity prices and production, partner obligations, financing and covenant compliance, project cost estimates, impairment, and environmental and legal contingencies. The company reported no material changes to the risk factors in its 2014 Form 10-K and no material adverse outcome expected from disclosed legal proceedings, while noting individual-period charges could be significant.
- Forestar reported guarantees associated with construction loans of equity-method ventures and potential exposure related to variable-interest entities. For one such entity, estimated maximum exposure to loss was $3.6 million.
Key facts for investors to verify
- Whether the strategic-alternatives review results in a transaction or further oil and gas restructuring costs.
- Real estate sales pace, especially residential lot sales, undeveloped-land sales, and the timing and collectability of district reimbursements.
- Oil and gas realized prices, production, committed capital spending, and the impact of lower commodity prices on future activity and cash flows.
- Liquidity, debt covenant headroom, and the restrictions on distributions while the leverage ratio exceeds the stated threshold.
- Potential obligations from venture guarantees, environmental remediation, and other contingencies; the filing estimates remaining remediation costs at approximately $0.45 million for the disclosed California site.