Forestar Group Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018. Forestar develops residential lots and sells primarily to homebuilders. D.R. Horton owned approximately 65% of Forestar at quarter-end.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $247.2 million | $38.5 million |
| Income before taxes | $22.2 million | $4.9 million |
| Net income | $16.8 million | $3.9 million |
| Net income attributable to Forestar | $16.9 million | $3.3 million |
| Basic and diluted EPS | $0.35 | $0.08 |
| Cash used in operating activities | $11.6 million | $164.1 million |
- Revenue rose sharply as lot sales increased: 2,422 residential lots sold versus 518; average sales price was $90,300 versus $74,000. Residential lot sales revenue was $217.1 million, and residential tract sales added $30.0 million.
- Gross profit was $30.6 million, or approximately 12.4% of revenue, compared with $7.8 million, or approximately 20.3%, a year earlier. Cost of sales was $216.6 million. SG&A increased to $10.5 million from $5.7 million.
- At December 31, cash was $373.3 million and debt was $462.1 million; net debt was approximately $88.8 million. Total assets were $1.480 billion, including $1.067 billion of real estate. Stockholders’ equity was $825.5 million.
- Operating cash use improved substantially year over year, principally reflecting higher lot sales and income and a smaller increase in real estate assets. Real estate investment increased $38.2 million during the quarter.
- Interest incurred was $9.9 million and was fully capitalized because active real estate exceeded debt; $3.8 million of capitalized interest was charged to cost of sales.
Material changes and business developments
- Forestar owned or controlled approximately 44,500 residential lots at quarter-end, up from 38,300 at September 30, 2019. Approximately 32,200 were owned and 12,300 controlled through options.
- Sales were highly concentrated with D.R. Horton: it purchased 2,390 of the 2,422 residential lots sold, generating $215.6 million of lot-sale revenue. It also purchased residential tracts for $7.2 million. D.R. Horton had approximately 12,700 lots under contract to buy and a right of first offer on approximately 12,900 lots.
- The company adopted the new lease standard on October 1, 2019, recording right-of-use assets of $2.7 million and lease liabilities of $2.9 million; management said adoption had no material overall impact.
Liquidity, debt, outlook and risks
- The $380 million revolving credit facility had no borrowings and $351.3 million of available capacity after letters of credit at quarter-end. Its maturity was extended to October 2, 2022. Forestar reported compliance with facility and senior-note covenants.
- $118.9 million principal amount of 3.75% convertible notes was due in March 2020. Management intended to repay principal in cash, with any excess conversion value settled in shares, and believed cash and revolver capacity would cover near-term needs.
- The company also had $350 million principal amount of 8.0% senior notes due April 2024. The reported debt-to-total-capital ratio was 35.9%; net-debt-to-total-capital was 9.7%. Management’s stated long-term aim was to keep the latter at or below 40%.
- No specific earnings or sales guidance was provided. Management described a strategy of geographically diversified, phased residential development, with short-term lot-banking and undeveloped-land investments. It said achieving long-term growth depends in part on obtaining sufficient financing.
- Risks cited include housing demand and mortgage-credit conditions, land-development estimates and approvals, construction labor and material costs, financing and covenant compliance, availability and cost of surety bonds, and dependence on the D.R. Horton relationship. Outstanding surety bonds were $170.4 million and letters of credit were $28.7 million.
- Forestar reported ordinary-course litigation and said it did not expect proceedings to materially harm its financial position or long-term results, while noting charges could be significant in an individual period. The effective tax rate was 24%; a $3.3 million valuation allowance applied to deferred tax assets, and unrecognized tax benefits totaled $1.3 million.
Important facts for investors to verify
- Whether the March 2020 convertible-note principal was repaid or refinanced, and the resulting effect on liquidity and share dilution.
- The sustainability and profitability of the sharp increase in lot sales, including gross-margin trends and the contribution of lot-banking and tract sales.
- The extent of customer and related-party concentration with D.R. Horton, including the pace and terms of contracted lot purchases and the right-of-first-offer arrangements.
- Whether real estate investment, cash generation, debt levels and covenant headroom remain consistent with management’s growth and leverage objectives.
- Whether development obligations, surety bonds, litigation, tax asset realizability or other disclosed risks result in material costs or cash needs.