Business context and reporting period
Forestar Group Inc. filed this Form 10-Q for the quarter ended September 30, 2016. Its continuing operations comprised real estate, owned mineral interests, and other assets including timber and water resources. The company had divested substantially all oil and gas working-interest properties and presented those operations as discontinued operations.
Financial performance and position
| Metric | Third quarter 2016 | Third quarter 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Revenue from continuing operations | $47.2 million | $32.2 million | $132.8 million | $113.2 million |
| Operating income (loss) | $6.3 million | $(8.5) million | $89.4 million | $(6.0) million |
| Net income (loss) from continuing operations | $17.4 million | $(57.4) million | $33.7 million | $(60.2) million |
| Net income (loss) attributable to Forestar | $9.7 million | $(164.2) million | $14.9 million | $(206.9) million |
| Basic earnings (loss) per share | $0.23 | $(4.79) | $0.35 | $(6.04) |
Cash flow, first nine months: Operating activities provided $29.8 million, versus $15.0 million used in 2015. Investing activities provided $311.2 million, principally from asset-sale proceeds; financing activities used $315.3 million, mainly for debt repayments. Cash ended the period at $122.1 million, up from $96.4 million at year-end 2015.
Debt and liquidity: Debt, net, was $112.3 million, down from $381.5 million at year-end 2015. The revolving credit commitment was reduced from $300 million to $125 million; none was drawn at quarter-end, and net unused capacity was $111.3 million after letters of credit. Cash plus unused capacity was reported as $226.9 million of available liquidity. The company was in compliance with its debt covenants.
The filing does not present a single overall gross-margin measure. Real estate segment earnings were $15.0 million for the quarter and $108.5 million for the first nine months; the year-to-date figure includes substantial asset-sale gains.
Material changes versus prior periods
- Continuing-operations revenue increased 47% in the quarter and 17% year to date. Higher undeveloped-land sales and residential lot activity contributed; revenue from hotel and multifamily properties fell following sales.
- First-nine-month operating income included $121.7 million of gains on asset sales, compared with $1.6 million in 2015. Sales included the Radisson hotel, Eleven, Dillon, Music Row, and the company’s interest in a multifamily venture.
- Non-cash real estate impairment charges were $56.5 million for the first nine months, including $7.6 million in the third quarter, following portfolio review and decisions to market certain properties for sale.
- The company reduced debt substantially through asset-sale-related repayments and repurchases of senior notes. Debt retirement also generated a $35.9 million year-to-date loss on extinguishment, including tender premiums and related costs.
- Mineral-resources revenue declined to $3.8 million year to date from $7.6 million, reflecting lower production volumes and prices. Oil and gas working-interest results are reported as discontinued operations.
Outlook, commentary, risks, and unusual items
- Management described cost reduction, portfolio review, and capital-structure review as key initiatives. It provided no quantified earnings or revenue guidance in the filing.
- Management cited housing demand support from job growth and limited finished-lot supply, but noted risks from restrictive mortgage lending, economic uncertainty, competition, development approvals, labor and material costs, and housing-market cycles.
- Asset-sale proceeds and earnings are not necessarily recurring. The company’s results also depend on the timing of land sales, development spending, and reimbursements from utility and improvement districts; approved but uncollected Cibolo Canyons reimbursements were $18.3 million at quarter-end.
- The company recorded a $9.7 million income-tax benefit in the quarter, while retaining an $88.8 million valuation allowance against deferred tax assets. Management cited cumulative losses as significant negative evidence regarding future realization.
- A jury verdict in the Huffman litigation resulted in a $1.1 million accrual; the company said it intended to contest the verdict, and other claims remained unresolved. It also recorded charges related to potential environmental liabilities for plugging and abandoning certain oil and gas wells.
- Some Louisiana mineral interests may revert to surface owners unless qualifying drilling or production occurs before October 2017. Commodity-price weakness could also reduce leasing activity and affect mineral-asset recoverability.
Important facts for investors to verify
- How much of reported profit and cash generation depends on completed asset disposals, and what non-core assets remain to be sold.
- Whether real estate impairments, sale timing, and average lot pricing affect future segment earnings and cash flows.
- The timing and collectability of district reimbursements, including the Cibolo Canyons balance, and the effect of asset sales on borrowing-base capacity.
- Refinancing or extension plans for the revolving facility maturing in May 2017, as well as ongoing covenant compliance and liquidity.
- Developments in the Huffman claims, well-abandonment obligations, deferred-tax-asset valuation, and Louisiana mineral-interest expirations.