Forestar Group Inc. — Q1 2013 Form 10-Q
Business context and period. The filing covers the quarter ended March 31, 2013, compared with Q1 2012. Forestar operates in real estate, oil and gas, and other natural resources. It reorganized its reportable segments in Q1; prior-period segment data was reclassified, with no effect on consolidated earnings or cash flows.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $97.5 million | $28.1 million |
| Operating income | $9.5 million | $8.2 million |
| Income before taxes | $7.0 million | $5.1 million |
| Consolidated net income | $5.0 million | $3.5 million |
| Net income attributable to Forestar | $4.0 million; $0.11 per diluted share | $2.8 million; $0.08 per diluted share |
| Operating cash flow | $32.4 million | $(47.5) million |
| Investing cash flow | $(13.5) million | $29.4 million |
| Financing cash flow | $57.3 million | $6.6 million |
Revenue grew substantially, led by the real estate segment, including the $41 million sale of the Promesa multifamily property. The company reported $10.9 million in segment earnings from that sale. Q1 2012 operating income included an $11.9 million gain on asset sales, so year-over-year operating income comparisons include a significant prior-period gain. Q1 2013 operating margin was approximately 9.8% of revenue.
Segments and notable drivers
- Real estate: Revenue was $78.7 million versus $17.9 million; segment earnings were $19.4 million versus $11.6 million. Results benefited from Promesa, increased residential lot sales and undeveloped-land sales. Owned and consolidated residential lot sales rose to 355 from 137.
- Oil and gas: Revenue was $15.5 million versus $9.4 million, while segment earnings fell to $5.1 million from $7.1 million. The 2013 results included $9.6 million of revenue and $1.7 million of segment earnings from the 2012 Credo acquisition. Management cited lower production volumes and prices, and lower delay rentals, as offsets to acquisition-related production.
- Other natural resources: Revenue increased to $3.3 million from $0.7 million and segment earnings improved to $1.3 million from a loss of $0.9 million, mainly due to higher timber harvest volumes and customer demand.
Financial position and liquidity
- At March 31, 2013, cash was $86.7 million, up from $10.4 million at year-end 2012; total assets were $972.7 million.
- Debt was $328.6 million, compared with $294.1 million at year-end. Cash less reported debt was approximately negative $242.0 million. The company issued $125 million principal amount of 3.75% convertible senior notes due 2020; net proceeds were used in part to repay revolving borrowings.
- The secured credit facility had $192.7 million of unused borrowing capacity, including the effect of $7.3 million of outstanding letters of credit. The company reported compliance with its debt covenants and $274.7 million of available liquidity for the facility’s liquidity calculation.
- Operating cash flow benefited materially from the Promesa sale. Investing cash outflows included $13.0 million for oil and gas properties and equipment. Q1 2012 cash flows were also affected by real estate acquisitions and the sale of a venture interest.
- Share-based compensation expense rose to $10.4 million from $5.2 million, principally because a 26% increase in the stock price raised the value of vested cash-settled awards.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management’s stated strategy emphasizes realizing value from real estate and natural resources and pursuing disciplined growth investments.
- Management described signs of stabilization in single-family housing and strong multifamily conditions, while noting constraints from unemployment, mortgage-credit availability and foreclosure inventory. Oil prices had weakened and natural gas remained depressed amid abundant supply; commodity prices may affect production, leasing and royalty revenue.
- Key uncertainties include real estate demand, lot-sale timing and pricing, development approvals, impairment estimates, oil and gas production and reserve estimates, commodity prices, financing and covenant requirements, and the timing and approval of special-improvement-district reimbursements.
- At Cibolo Canyons, the company had $34.3 million of approved and pending infrastructure reimbursements and $32.5 million invested in the resort development. It received no special-improvement-district reimbursements in Q1; collection timing and amounts remain uncertain.
- The company reported $26.6 million of performance bonds and letters of credit outstanding, largely relating to multifamily construction obligations. It also disclosed guarantees associated with venture construction loans and a maximum estimated loss exposure of $4.2 million for certain unconsolidated variable-interest entities.
- Forestar estimated $1.3 million in remaining remediation costs for a California site, included in accrued expenses. Management said ordinary-course litigation and environmental reserves were adequate, while acknowledging that additional charges could be significant in an individual period.
Important facts for investors to verify
- How much of the revenue and earnings increase is repeatable after the Promesa sale, and how do ongoing lot sales and multifamily operations perform?
- Whether oil and gas volumes, realized prices, costs and Credo-related production support segment profitability and the company’s planned investment program.
- Debt maturity, conversion and dilution terms for the 2020 notes, as well as continued covenant compliance, borrowing-base availability and liquidity.
- The timing, approval and collectability of Cibolo Canyons reimbursements and other venture-related obligations or guarantees.
- Whether higher share-based compensation and real estate development spending materially affect future earnings and cash generation.