Forestar Group Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. Forestar operates real estate, oil and gas, and other natural resources businesses. The quarter reflects a stated strategy to reduce costs and exit non-core assets, including multifamily properties and oil and gas working interests. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $41.9 | $47.8; down 12% |
| Operating income (loss) | $0.6 | $(7.7) |
| Net loss attributable to Forestar | $(4.4) | $(8.2) |
| Loss per diluted share | $(0.13) | $(0.24) |
| Operating cash flow | $5.0 | $(18.8) |
| Cash and cash equivalents at quarter-end | $142.6 | $96.4 at year-end 2015 |
| Debt, reported carrying amount | $372.8 | $381.5 at year-end 2015 |
| Total assets | $948.1 | $972.2 at year-end 2015 |
Operating margin was approximately 1.4%, compared with approximately negative 16.2% a year earlier; these reported operating results include gains on asset sales. The income tax benefit was $2.6 million. The company had a $95.4 million valuation allowance against deferred tax assets, citing cumulative losses as significant negative evidence.
Material changes versus the prior comparable period
- Real estate revenue rose to $36.1 million from $32.8 million, and segment earnings increased to $20.2 million from $9.1 million. Q1 2016 included a $9.6 million gain from selling its interest in the 360° multifamily venture and a $4.0 million gain on the Music Row sale.
- Oil and gas revenue fell to $5.4 million from $13.2 million. The segment recorded a $12.4 million loss, including a $11.0 million loss on sales of non-core properties; lower commodity prices and reduced production also weighed on revenue.
- Other natural resources revenue declined to $0.4 million from $1.8 million, and the segment reported a $0.6 million loss.
- Operating cash flow improved by $23.8 million year over year, principally as real estate development and acquisition expenditures fell to $14.8 million from $34.8 million. Investing cash flow was $51.4 million, largely reflecting asset-sale proceeds; financing cash flow was a $10.3 million use, including debt repayments. Cash increased by $46.2 million during the quarter.
- Real estate sales and other revenue increased, but residential lot volume was broadly comparable and average price per lot declined 8%. Undeveloped land sales increased to 1,972 acres from 731 acres.
Outlook, management commentary, risks and unusual items
- Management said planned 2016 oil and gas drilling and completion expenditures were expected to be significantly lower than in 2015 as the company exits non-core working-interest assets. No quantified earnings or revenue guidance was provided.
- After quarter-end, Forestar sold Eleven on April 18 for $60.2 million, Radisson Hotel & Suites on May 4 for $130.0 million, and its remaining Bakken/Three Forks properties on May 6 for $50.0 million. Reported net proceeds were $35.2 million, $112.0 million, and $46.5 million, respectively. Management expected an additional loss on the Bakken sale from allocated goodwill; the North Dakota working-interest exit was complete.
- At quarter-end, $106.5 million of assets and $0.8 million of liabilities were classified as held for sale, principally hotel and multifamily properties and certain oil and gas assets. No impairment was recorded on assets held for sale in Q1.
- Liquidity included $142.6 million of cash and $265.2 million of net unused borrowing capacity under a $300 million revolving facility, which matures May 15, 2017, with two one-year extension options. The company reported compliance with debt covenants. Its interest coverage ratio was 3.18x against a temporary 2.25x requirement; total leverage was 40.1% against a 50% maximum.
- Risks highlighted include housing and multifamily market conditions, mortgage-credit availability, commodity-price volatility, development approvals and costs, timing and approval of utility-district reimbursements, debt covenants, and venture-partner performance. A 10% decrease in realized oil and gas prices would have reduced quarterly production revenue by an estimated $0.5 million; no commodity hedges were outstanding.
- Forestar had $19.7 million in pending Cibolo Canyons infrastructure reimbursements, excluding interest; timing depends on district approval and available funds. The company also disclosed an unresolved former executive royalty-interest lawsuit for which it could not estimate a possible loss, and estimated $0.7 million of remaining environmental remediation costs.
Most important facts for investors to verify
- Whether completed and planned asset sales deliver the expected net proceeds and whether the remaining oil and gas exit produces further goodwill-related losses.
- How much of the Q1 improvement in real estate earnings came from one-time disposition gains versus recurring lot sales, development fees, and property operations.
- Whether liquidity and covenant headroom remain adequate as non-core asset sales may reduce borrowing-base availability; also verify the revolving facility’s maturity and extension terms.
- The timing and collectability of Cibolo Canyons reimbursements and the ultimate exposure from the lawsuit, environmental remediation, and venture guarantees.
- Whether lower oil and gas production and weak commodity prices, alongside housing-market and development risks, affect future cash generation and the realizability of deferred tax assets.