Forestar Group Inc. — FY2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. Forestar operates in real estate, oil and gas, and other natural resources. Its real estate portfolio spans approximately 113,000 acres; its oil and gas interests comprise approximately 960,000 net mineral acres, owned or leased.
Key financial results
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $306.8 million | $331.0 million |
| Operating income | $38.8 million | $46.6 million |
| Income before taxes | $25.7 million | $42.3 million |
| Net income attributable to Forestar | $16.6 million | $29.3 million |
| Diluted earnings per share | $0.38 | $0.80 |
| Cash from operating activities | $107.1 million | $88.8 million |
| Cash and cash equivalents, year-end | $170.1 million | $192.3 million |
| Total debt, year-end | $432.7 million | $357.4 million |
| Assets, year-end | $1,258.2 million | $1,172.2 million |
FY2014 revenue declined about 7% and attributable net income declined about 43% year over year. The filing does not present a single consolidated gross-margin percentage. Cash used in investing activities was $129.7 million, principally reflecting $101.1 million of oil and gas property and equipment investment, the Eleven multifamily venture buyout, and other property investment. Cash provided by financing activities was $0.5 million; cash declined $22.2 million during the year.
Segment performance and material changes
- Real estate: Revenue was $213.1 million, down from $248.0 million; segment earnings increased to $96.9 million from $68.5 million. Earnings benefited from undeveloped-land sales, a timber-rights exchange, the acquisition of the remaining interest in the Eleven multifamily venture, and Cibolo Canyons receipts. Forestar sold 2,343 developed residential lots and more than 22,000 acres of undeveloped land. The segment’s FY2014 results included $26.0 million of gains on asset sales.
- Oil and gas: Revenue increased to $84.3 million from $72.3 million, but the segment reported a $22.7 million loss versus $18.9 million of earnings in 2013. Results included $32.7 million of non-cash impairments—$17.1 million for unproved interests and $15.5 million for proved properties—along with higher exploration and production costs and lower royalty-related volumes and lease payments. Gains of $8.5 million on property sales and higher working-interest production partly offset these pressures.
- Other natural resources: Revenue was $9.4 million, down from $10.7 million; segment earnings were $5.5 million versus $6.5 million. Lower timber harvest volumes were partly offset by gains associated with timber-lease terminations. The company reported $1.1 million of water revenue.
Fourth-quarter 2014 revenue was $80.3 million, but Forestar recorded an $11.8 million attributable net loss. The quarter included $30.6 million of pre-tax non-cash oil and gas impairments.
Debt, liquidity, cash flow, and outlook
- Forestar issued $250 million of 8.5% senior secured notes due 2022 and used proceeds to retire its $200 million term loan. The $300 million revolving credit facility matures in May 2017, with two one-year extension options. At year-end, there were no revolver borrowings and net unused borrowing capacity was $284.6 million, after letters of credit.
- The company reported compliance with its debt covenants. Year-end covenant measures included a 5.27x interest coverage ratio against a 2.50x minimum, a 39.7% leverage ratio against a 50% maximum, and net worth of $669.3 million against a $593.3 million minimum.
- Consolidated debt-to-capitalization was 38%, compared with 33% in 2013. Interest expense increased to $30.3 million from $20.0 million, primarily due to higher average borrowing rates and debt outstanding. Unconsolidated ventures had approximately $102.2 million of debt, substantially all non-recourse to Forestar.
- Management expected 2015 oil and gas capital spending to be significantly lower than 2014, primarily focused on existing Bakken/Three Forks well commitments. The budget remained subject to commodity prices, operator plans, drilling results, and service availability; no numerical budget was provided.
- In December 2014, the board announced a review of strategic alternatives, including alternatives for the oil and gas business; no transaction was assured. In January 2015, Forestar announced closure of its Fort Worth office and a reduction of approximately 20 employees as part of cost reductions and the strategic review.
Management commentary, risks, and unusual items
- Management described the housing recovery as tentative, despite low finished-lot inventories and stronger multifamily conditions. It noted that falling oil prices could weaken oil and gas economics and affect Texas employment and housing demand.
- Key risks include cyclical real estate and commodity markets, entitlement and development delays, concentration of real estate activity in Texas and land holdings in Georgia, dependence on home builders and venture partners, and substantial debt and restrictive covenants.
- Oil and gas risks include volatile prices, uncertain reserve estimates, drilling and operating hazards, potential regulation of hydraulic fracturing and other subsurface activity, and limited control over third-party operators. Some leased mineral acreage was scheduled to expire in 2015; Louisiana mineral rights also face statutory prescription risk.
- Forestar had $21.3 million of disclosed off-balance-sheet performance bonds, standby letters of credit, and recourse obligations, in addition to specified Cibolo Canyons support arrangements. The Cibolo arrangements included a $6.8 million letter of credit and a $9.0 million surety bond at year-end.
- Forestar reported $31.9 million of pending Cibolo Canyons infrastructure reimbursements, excluding interest; reimbursement timing and amounts depend on district approval and available funding. Remaining estimated remediation costs for a former industrial site near Antioch, California, were approximately $529,000.
- The company repurchased approximately 1.49 million shares for $24.6 million during 2014 and stated it did not anticipate cash dividends in the foreseeable future. Its financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Whether the strategic alternatives review led to a transaction or material change in the oil and gas portfolio, and the subsequent operating-cost actions.
- How sustained lower oil prices affect impairments, production, lease income, reserve estimates, and the reduced 2015 capital program.
- The sources and repeatability of real estate earnings, particularly undeveloped-land sales and the significant Cibolo Canyons and other asset-sale gains.
- Debt maturities, refinancing requirements, covenant headroom, interest costs, and the potential dilution from tangible equity units and convertible notes.
- Collection and timing of Cibolo Canyons and other district reimbursements, along with exposure under venture guarantees and other contingent commitments.