Forestar Group Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results; fiscal 2020 is not a calendar-year reporting period.
Business context
Forestar is a residential lot developer operating in 49 markets across 21 states. It acquires and develops land, primarily for single-family communities, and sells finished lots to homebuilders. D.R. Horton owned approximately 65% of Forestar and is its controlling shareholder, strategic partner and largest customer. Forestar’s strategy emphasizes short-duration, phased developments and short-term lot-banking investments.
Financial performance and key metrics
- Revenue: $931.8 million, up from $428.3 million in FY2019. Residential lot sales were $880.3 million versus $351.7 million.
- Lot activity: 10,373 residential lots sold, compared with 4,132; average sales price was $84,600 versus $84,200. Forestar sold 10,164 lots to D.R. Horton.
- Profit: Income before tax was $78.1 million versus $45.7 million. Net income attributable to Forestar was $60.8 million, or $1.26 per diluted share, versus $33.0 million, or $0.79 per share.
- Margins: Cost of sales was $813.7 million. Subtracting cost of sales from revenue implies gross profit of approximately $118.1 million and a gross margin of 12.7%, compared with approximately $65.6 million and 15.3% in FY2019. SG&A was 4.9% of revenue, down from 6.7%.
- Fourth quarter: Revenue was $347.6 million and net income attributable to Forestar was $24.2 million, versus $236.3 million and $12.7 million, respectively, in the prior-year quarter.
- Cash flow: Operating activities used $168.4 million, versus $391.2 million used in FY2019, primarily reflecting investment to grow land development operations. Investing activities provided $5.0 million; financing activities provided $174.9 million. Cash increased $11.5 million to $394.3 million.
- Debt and liquidity: Debt carrying value was $641.1 million (aggregate note principal of $650 million). Cash was $394.3 million, with $344.0 million available under the $380 million revolving facility and no revolver borrowings. Net debt to total capital was 22.1%, up from 8.8%; debt to total capital was 42.4%, up from 36.3%. Management’s long-term target is net debt to total capital at or below 40%.
- Other balance-sheet measures: Real estate inventory was $1.31 billion, versus $1.03 billion; total assets were $1.74 billion, versus $1.46 billion. No real estate impairment charges were recorded in FY2020.
Material changes versus FY2019
- Revenue more than doubled as lot sales rose substantially, reflecting business growth and the D.R. Horton relationship. Sales to D.R. Horton of lots and land totaled $887.6 million, compared with $326.6 million. This represents a significant customer concentration.
- Forestar issued $300 million of 5.0% senior notes due 2028 and repaid $118.9 million of 3.75% convertible notes at maturity. It also had $350 million of 8.0% senior notes due 2024.
- Real estate investment expanded: FY2020 acquisition spending was $550.8 million and development spending was $503.0 million.
- Employees increased to 143 from 78. The company’s fiscal year ends September 30; comparisons here are FY2020 and FY2019.
Outlook, risks and unusual items
- Management said lot sales slowed in late March and April as builders adjusted to pandemic uncertainty, then improved in the second half of FY2020. It remained cautious about COVID-19’s duration and effects, and warned prolonged weakness could lead to significant real estate impairment charges.
- Management described liquidity and the D.R. Horton relationship as supporting operations, but stated that long-term growth depends on access to financing. No quantified revenue or earnings guidance was provided.
- Major risks include housing-market cyclicality, local economic conditions, permitting and development delays, land and labor costs, weather and natural disasters, and the ability of builders to purchase contracted lots.
- D.R. Horton’s control may create conflicts with other shareholders or customers. It has rights under the Master Supply Agreement, including rights of first offer on certain lots, and can influence governance and specified corporate decisions.
- Debt agreements impose financial and operating covenants. Forestar reported compliance at year-end; the revolving facility matures October 2022, with extension options subject to lender approval. Outstanding surety bonds totaled $236.9 million; the company also had $36.0 million of letters of credit.
- Ordinary-course legal proceedings were not expected by management to materially affect financial position or long-term results, though charges in a single period could be significant. The CARES Act NOL carryback produced a $2.3 million tax benefit in FY2020.
Important facts for investors to verify
- Whether the sharp growth in lot sales and revenue is sustainable, and how margins develop as inventory is sold.
- Forestar’s continuing reliance on D.R. Horton: customer sales, lot purchase commitments, related-party charges and governance rights.
- Liquidity, leverage and covenant headroom under the revolving facility, as well as refinancing and interest costs on the 2024 and 2028 notes.
- COVID-19 and housing-market developments, including lot absorption, contract cancellations, development costs and any resulting inventory impairments.
- Timing and collectability of district reimbursements, and the release or potential claims on letters of credit and surety bonds.