Forestar Group Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. The filing also reports fourth-quarter results; fiscal Q4 is not the full-year reporting period. Forestar develops residential lots for homebuilders and operated in 56 markets across 23 states. D.R. Horton owned approximately 63% of Forestar at year-end and is its controlling shareholder.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $1,325.8 million | $931.8 million |
| Cost of sales | $1,096.6 million | $813.7 million |
| Gross profit (revenue less cost of sales) | $229.2 million | $118.1 million |
| Gross margin (calculated) | 17.3% | 12.7% |
| Income before taxes | $146.6 million | $78.1 million |
| Net income attributable to Forestar | $110.2 million | $60.8 million |
| Diluted earnings per share | $2.25 | $1.26 |
| Cash used in operating activities | $303.1 million | $168.4 million |
- Residential lots sold rose to 15,915 from 10,373; average sales price per lot declined to $81,600 from $84,600. Development-project sales increased, while lot-banking sales declined.
- SG&A was $68.4 million, or 5.2% of revenue, versus $45.7 million, or 4.9%, in FY2020. Fiscal 2021 included an $18.1 million loss on extinguishment of debt.
- Fiscal Q4 revenue was $418.7 million and net income attributable to Forestar was $44.0 million, compared with $347.6 million and $24.2 million, respectively, in fiscal Q4 2020.
- Cash and cash equivalents were $153.6 million at year-end, down from $394.3 million. Real estate inventory increased to $1,905.2 million from $1,309.7 million, reflecting investment in acquisitions and development.
- Debt was $704.5 million, compared with $641.1 million. Debt-to-total-capital was 41.0%; net-debt-to-total-capital was 35.2%, up from 22.1%. The company reported no revolving-credit borrowings and $349.7 million of available capacity, after letters of credit.
- Total lots owned or controlled grew to 97,000 from 60,500. Of owned lots, approximately 21,000 were under contract to D.R. Horton and 18,200 were subject to its right of first offer.
Material changes and financing
- Revenue grew 42% year over year, and net income attributable to Forestar increased from $60.8 million to $110.2 million. Higher lot sales and improved reported gross margin contributed to the increase.
- Operating cash use increased as the company invested in land acquisition and development. It reported $779.7 million invested in residential real estate acquisitions and $850.7 million in development during FY2021.
- In April 2021, Forestar issued $400 million of 3.85% notes due 2026, primarily to redeem $350 million of 8.0% notes due 2024. The redemption included a $14.0 million call premium and contributed to the $18.1 million extinguishment loss. It also had $300 million of 5.0% notes due 2028 and a $12.5 million non-recourse note payable due 2023.
- Forestar issued approximately 1.4 million shares through its at-the-market program for $33.4 million net proceeds. A new $750 million equity shelf registration became effective in October 2021; management anticipated establishing a new at-the-market program.
Outlook, risks and unusual items
- Management cited strong lot demand through FY2021 and believes liquidity, low overhead and the D.R. Horton relationship position the company to operate through changing conditions. It provided no specific numerical earnings, revenue or lot-sales guidance in the supplied filing text.
- Supply-chain disruptions, material shortages and tight labor markets lengthened development cycles in some markets. Inflation and higher land, labor, material or financing costs could pressure costs and margins, while higher interest rates could weigh on housing affordability and demand.
- Forestar is substantially dependent on homebuilder customers and has significant related-party exposure to D.R. Horton. D.R. Horton generated approximately $1.2 billion of FY2021 revenue; its control and contractual rights may affect governance, customer perceptions and business decisions.
- Land purchase contracts had $10.4 million of deposits and approximately $597.5 million of remaining purchase price, with most expected purchases within two years. Failure to acquire contracted land could result in deposit and pre-acquisition-cost losses.
- At year-end, surety bonds totaled $479.3 million and letters of credit under the revolving facility totaled $60.3 million. These generally support development obligations and are expected to be released upon completion, but inability to obtain bonds or delays in governmental-district reimbursements could affect cash flow and returns.
- Management reported no real estate impairment charges in FY2021. Cost of sales includes estimated costs to complete development; the auditor identified these estimates and allocations as a critical audit matter because they depend on labor, material and subcontractor assumptions.
- Ordinary-course legal proceedings were not expected by management to have a material long-term effect, though charges could be significant in an individual period. The company reported effective internal controls and received unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- Whether lot sales, realized prices and gross margins remain resilient as land, labor and development costs change.
- How much of future sales and development activity depends on D.R. Horton, including the terms and timing of contracted lots and right-of-first-offer arrangements.
- Cash needs and financing availability as the company funds its expanding lot pipeline, including the approximately $597.5 million remaining purchase price on land contracts.
- Debt covenant headroom, future capital-raising plans and the effects of refinancing or interest-rate changes.
- Development-cost estimates, project completion timing, surety and letter-of-credit obligations, and recovery timing for district infrastructure reimbursements.