Forestar Group Inc. — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing was signed March 11, 2014. Forestar operates in real estate, oil and gas, and other natural resources.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $331.0 million | $172.6 million |
| Operating income | $46.6 million | $27.2 million |
| Net income attributable to Forestar | $29.3 million; diluted EPS $0.80 | $12.9 million; diluted EPS $0.36 |
| Operating margin | 14.1% | 15.7% |
| Net margin attributable to Forestar | 8.9% | 7.5% |
| Cash from operating activities | $88.8 million | $(22.2) million |
| Cash from investing activities | $(103.9) million | $(105.1) million |
| Cash from financing activities | $197.1 million | $119.4 million |
| Cash and cash equivalents at year-end | $192.3 million | $10.4 million |
| Debt at year-end | $357.4 million | $294.1 million |
Real estate supplied 75% of FY2013 revenue, oil and gas 22%, and other natural resources 3%. Real estate segment earnings were $68.5 million; oil and gas, $18.9 million; and other natural resources, $6.5 million. Forestar reported $164.7 million of net unused capacity under its senior credit facility and $353.5 million of available liquidity under its covenant calculation. Unconsolidated ventures had $71.5 million of debt, substantially all non-recourse to Forestar.
Material changes versus FY2012
- Revenue increased about 92%, while net income attributable to Forestar more than doubled. Operating margin declined from 15.7% to 14.1%.
- Real estate revenue more than doubled, and segment earnings rose to $68.5 million from $53.6 million. Results included the $41.0 million sale of the Promesa multifamily property, which generated $10.9 million in segment earnings, and higher lot and tract sales.
- Oil and gas revenue rose to $72.3 million from $44.2 million, reflecting a full year of Credo operations and higher working-interest production. Segment earnings fell to $18.9 million from $26.6 million, partly due to lower royalty production and lease-bonus receipts and higher dry-hole and seismic costs.
- Other natural resources segment earnings improved to $6.5 million from $0.03 million, including a $3.8 million gain from partial termination of a timber lease.
- Operating cash flow improved from an outflow to $88.8 million. Investing cash outflow remained substantial, including $96.1 million for oil and gas properties and equipment.
Outlook, risks and unusual items
- For 2014, management budgeted approximately $140 million for oil and gas drilling and completion, subject to commodity prices, operator plans, service availability, costs and drilling results. The budget included about $80 million for North Dakota, $30 million for Kansas and Nebraska, and $30 million for other areas.
- On February 13, 2014, Forestar announced “Growing FORward,” focused on growing segment earnings through disciplined investment, increasing returns and repositioning non-core assets. Management cited improving housing conditions and strong multifamily markets, while noting continuing mortgage qualification constraints.
- Forestar issued $125 million of 3.75% convertible senior notes and $150 million of tangible equity units in 2013. The equity units include stock purchase contracts that may result in 6.55 million to 7.86 million shares being issued at settlement. The company reported that its total leverage ratio exceeded 30%, restricting distributions until specified conditions are met. No cash dividends were anticipated in the foreseeable future.
- Key risks include cyclical housing and commodity markets, dependence on Texas and Georgia real estate activity, entitlement and development uncertainty, oil and gas price and operating risks, and restrictive debt covenants. Reimbursements from special improvement districts, including at Cibolo Canyons, depend on approvals and available tax or bond funding; timing and amounts remain uncertain.
- Environmental remediation at former industrial sites near Antioch, California had an estimated remaining cost of $1.0 million. The filing also describes venture-related completion and repayment guarantees, including guarantees for multifamily developments. Management said ordinary-course litigation was not expected to materially affect the company, but charges could be significant in an individual period.
- FY2013 income tax expense included a $6.3 million benefit from the lapse of a statute of limitations. Forestar recorded $1.8 million of real estate impairment charges and had no commodity derivative positions at year-end.
Important facts for investors to verify
- How much of reported growth and earnings reflects repeatable lot sales, oil and gas production, and multifamily activity versus property sales, lease-termination gains and tax benefits.
- Whether the $140 million 2014 oil and gas capital program can be funded while maintaining covenant compliance and sufficient liquidity.
- The terms, settlement dilution and future cash requirements of the convertible notes and tangible equity units.
- The timing and collectability of approved and pending special improvement district reimbursements, and exposure under venture guarantees.
- Real estate inventory valuations and impairment assumptions, oil and gas reserve estimates, and the impact of commodity prices and drilling results.