Forestar Group Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2022 (fiscal year ending September 30). Forestar develops residential lots and operates in 52 markets across 22 states. D.R. Horton owned approximately 63% of Forestar and is a significant customer and related party.
Financial performance
| Metric | Three months ended June 30, 2022 | Prior year | Nine months ended June 30, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $308.5 million | $312.9 million | $1,137.7 million | $907.1 million |
| Income before taxes | $52.7 million | $21.1 million | $169.4 million | $87.9 million |
| Net income attributable to Forestar | $39.7 million | $15.8 million | $128.0 million | $66.2 million |
| Diluted EPS | $0.80 | $0.32 | $2.57 | $1.36 |
| Gross margin, calculated | 24.0% | 17.8% | 20.6% | 16.9% |
- Quarterly revenue declined about 1%, while nine-month revenue increased about 25%. Quarterly lot sales were 3,473 versus 3,858; nine-month lot sales rose to 13,777 from 11,013. Average sales price per lot, excluding deferred-development lots and contract-liability effects, was $86,500 for the quarter and $85,600 for the nine months.
- Quarterly SG&A was $24.1 million, or 7.8% of revenue, versus $16.9 million, or 5.4%. Nine-month SG&A was $69.9 million, or 6.1% of revenue, versus $48.7 million, or 5.4%.
- Net cash used in operating activities for the nine months was $10.2 million, compared with $340.6 million used in the prior-year period. Real estate investment remained a significant cash use. Cash and cash equivalents were $146.3 million at June 30, down from $153.6 million at September 30, 2021.
- Total assets were $2.268 billion, including $2.054 billion in real estate. Total debt was $705.6 million; stockholders’ equity was $1.147 billion. Debt-to-total-capital was 38.1% and net debt-to-total-capital was 32.8%, compared with 41.0% and 35.2%, respectively, at September 30, 2021.
Material changes and notable items
- Quarterly revenue and lot sales fell primarily because the company sold no lots from lot-banking projects in the quarter, versus 528 in the prior-year quarter. Nine-month growth reflected higher development-project sales and increased sales to D.R. Horton and other customers.
- Nine-month cost of sales included a $3.8 million non-cash real estate impairment charge. Earnest-money and pre-acquisition write-offs on terminated or expected-to-be-terminated land contracts were $3.2 million for the nine months.
- Quarterly results included a $2.7 million gain associated with refinancing Cibolo Canyons Special Improvement District bonds; the nine-month period also included a $0.5 million gain on an investment sale. The prior-year periods included an $18.1 million loss on extinguishment of debt, contributing to the year-over-year increase in reported income.
- Forestar sold 854 undeveloped or partially developed lots to customers other than D.R. Horton in the nine-month period for a cumulative transaction price of $64.1 million. Development obligations remain; $20.4 million of related revenue had been recognized by June 30, and $13.2 million of remaining unsatisfied performance obligations was included in contract liabilities.
Liquidity, outlook and risks
- At June 30, the company had $354.0 million of available capacity under its $410 million revolving facility, with no borrowings outstanding and $56.0 million of letters of credit issued. It reported compliance with debt covenants. Senior notes have principal amounts of $400 million due 2026 and $300 million due 2028; no senior-note maturities are due before fiscal 2026. An additional $12.5 million non-recourse note is due October 2023.
- Management reported strong lot demand through the nine-month period but said municipality delays, supply-chain disruptions and labor tightness lengthened development cycles in some markets. It expects demand to moderate as mortgage rates have risen substantially and inflation remains elevated. Management cited low net leverage, liquidity, a low-overhead model and the D.R. Horton relationship as support for navigating changing conditions.
- No numerical earnings or revenue guidance was provided. Management said near-term working-capital needs should be funded by existing cash and the revolver; longer-term growth depends substantially on access to financing.
- Key risks include housing-market cyclicality, higher interest rates and inflation, land and construction-material availability, labor constraints, capital-market access, dependence on homebuilder relationships, and D.R. Horton’s control and influence. Surety bonds of $596.6 million and letters of credit of $56.0 million support development obligations. The company said litigation is not expected to have a significant adverse long-term effect, while noting charges could be significant in an individual period.
Important facts for investors to verify
- Whether higher mortgage rates and economic conditions result in the demand moderation management anticipates, and how that affects lot sales, pricing and margins.
- Whether development-cycle delays, labor and supply constraints, and land-contract cancellations lead to further costs, impairments or cash-flow pressure.
- The sustainability and quality of reported earnings, including the impact of the debt-extinguishment loss in the prior-year comparison, asset-sale gains and capitalized interest.
- Exposure to D.R. Horton: its ownership, share of Forestar lot sales, related-party arrangements, and the lots under contract or subject to its right of first offer.
- Availability of liquidity and financing, compliance with debt covenants, and the completion and release of obligations secured by letters of credit and surety bonds.