Forestar Group Inc. — 2016 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2016. Forestar is a residential and mixed-use real estate developer, with 50 projects spanning approximately 4,600 acres in 10 states and 14 markets. Its strategy was to focus on core community development, reduce costs, sell non-core assets, and review its capital structure. Oil and gas working-interest results are reported as discontinued operations.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $197.3 million | $218.6 million |
| Net income (loss) attributable to Forestar | $58.6 million | $(213.0) million |
| Continuing-operations income (loss) attributable to Forestar | $75.5 million | $(26.9) million |
| Diluted earnings (loss) per share | $1.38 | $(6.22) |
| Operating cash flow | $66.9 million | $35.1 million |
| Cash from investing activities | $420.7 million | $(60.3) million |
| Cash used in financing activities | $(318.3) million | $(48.5) million |
| Year-end cash and cash equivalents | $265.8 million | $96.4 million |
| Year-end debt, net | $110.4 million | $381.5 million |
| Year-end total assets | $733.2 million | $972.2 million |
| Year-end shareholders’ equity | $560.7 million | $501.6 million |
Revenue declined about 10%. Real estate contributed $190.3 million, mineral resources $5.1 million, and other activities $2.0 million. Reported earnings were substantially affected by asset sales and impairments: the company recorded $166.7 million in total gains on asset sales and $56.5 million in non-cash real estate impairments. Continuing-operations income also included a $35.9 million loss on extinguishment of debt. These items make reported operating results and margins less indicative of recurring performance.
Operating cash flow improved from 2015, with management citing lower development spending, land-sale proceeds, and higher lot sales. Investing cash flow chiefly reflected non-core asset divestitures. The company reduced debt by approximately $277.8 million during 2016. At year-end, the revolving credit facility had no borrowings and $71.3 million of net unused capacity; cash plus unused capacity was reported as $332.9 million. The facility matured May 15, 2017, with two one-year extension options. The company reported compliance with its financial covenants.
For fourth-quarter 2016, revenue was $64.5 million, net income attributable to Forestar was $43.7 million, and diluted EPS was $1.03.
Material changes versus the prior comparable period
- Net income attributable to Forestar improved from a large 2015 loss, which included $186.1 million of discontinued-operations losses, to $58.6 million of income in 2016. The 2016 result included a $16.9 million discontinued-operations loss.
- Real estate segment earnings rose to $121.4 million from $67.7 million, despite lower segment revenue, aided by property divestitures and higher residential lot and undeveloped-land sales. The segment also recorded substantial impairment charges.
- General and administrative expense fell to $18.3 million from $24.8 million, which management attributed to cost-reduction efforts. Interest expense declined to $20.0 million from $34.1 million as debt was repaid.
- Mineral resources revenue fell to $5.1 million from $9.1 million, reflecting lower commodity prices, production, and lease payments. Other-segment revenue declined to $2.0 million from $6.7 million, principally due to reduced timber harvesting.
- Forestar sold or divested substantial non-core holdings, including hotel and multifamily assets, timberland, and oil and gas working interests. The company reported $481.9 million in pre-tax net proceeds from 2016 non-core asset sales.
Outlook, risks, contingencies, and unusual items
- Strategy and outlook: Management emphasized cost reduction, a focus on community development, and further non-core asset sales. The filing provides no quantified earnings, revenue, or cash-flow guidance.
- Subsequent event: On February 17, 2017, Forestar sold substantially all remaining oil and gas assets for $85.6 million; $75.0 million was received at closing and the balance was placed in escrow pending title review and transfer matters. Management expected to recognize an approximately $82.4 million gain, with $10.6 million deferred, and a separate $37.9 million non-cash charge for impaired oil and gas enterprise goodwill.
- Business risks: Real estate development is cyclical and exposed to housing demand, interest rates, local economic conditions, entitlement delays, development costs, and dependence on home builders and venture partners. Operations are concentrated in Texas, and management identified potential exposure to weaker Texas growth, including energy-sector effects. Asset sales could reduce the credit facility borrowing base and available capacity.
- Other material exposures: Approximately 70,000 Louisiana mineral acres could revert to surface owners unless qualifying drilling or production occurs before October 2017. The company also disclosed uncertainty in the timing and amount of infrastructure reimbursements from the Cibolo Canyons district, and provided a $6.8 million standby letter of credit and a surety bond with a $6.6 million year-end balance in connection with resort-related obligations.
- Contingencies and unusual charges: A litigation matter was settled for the amount accrued, $2.99 million. Forestar also accrued $1.16 million for potential Wyoming well-plugging environmental liabilities. Legal and environmental matters could still result in charges that are significant in an individual period.
- Taxes and controls: The 2016 effective tax rate was 17%, affected by a decrease in the deferred-tax-asset valuation allowance; $73.4 million of valuation allowance remained at year-end. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also reported effective controls.
Important facts for investors to verify
- Reconcile reported earnings to recurring performance, particularly asset-sale gains, real estate impairments, debt-extinguishment costs, and discontinued operations.
- Confirm the final proceeds, escrow release, title transfers, gain recognition, and goodwill charge for the February 2017 mineral-asset sale.
- Review the credit facility’s maturity, extension status, borrowing-base effects from divestitures, and covenant headroom after year-end.
- Track housing demand, lot sales and pricing, development spending, and the pace and terms of remaining non-core asset sales.
- Monitor the Louisiana mineral-servitude deadline, Cibolo Canyons reimbursement collections and bond-related obligations, and outstanding legal or environmental exposures.