Forestar Group Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2020; unaudited. Forestar develops residential lots in 51 markets across 22 states. D.R. Horton owned approximately 65% of Forestar and is a major customer and related party.
Financial performance
| Metric | Three months ended June 30, 2020 | Prior-year quarter | Nine months ended June 30, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $177.9 million | $88.2 million | $584.3 million | $192.0 million |
| Income before taxes | $10.3 million | $8.4 million | $46.1 million | $29.6 million |
| Net income attributable to Forestar | $10.1 million | $6.9 million | $36.5 million | $20.3 million |
| Diluted EPS | $0.21 | $0.16 | $0.76 | $0.48 |
- Residential lot sales drove growth: 2,023 lots sold in the quarter versus 1,158; 6,396 in the nine-month period versus 2,224. Average sales price per lot was $79,900 and $83,800, respectively, compared with $77,400 and $78,800 a year earlier.
- Gross margin, calculated from reported revenue less cost of sales, was approximately 11.7% for the quarter versus 14.6%; for nine months it was approximately 12.7% versus 22.1%. Cost of sales increased mainly with higher lot volumes.
- Cash and cash equivalents were $355.6 million at June 30, 2020, down from $382.8 million at September 30, 2019. Operating cash flow was negative $205.7 million for nine months, primarily reflecting a $258.8 million increase in real estate investment.
- Debt was $640.6 million, up from $460.5 million at September 30, 2019; net debt was approximately $285.0 million. The company-reported debt-to-total-capital ratio was 43.1% and net-debt-to-total-capital ratio was 25.2%, versus 36.3% and 8.8% at fiscal year-end.
- Liquidity included $348.4 million of available revolving-credit capacity, with no revolver borrowings. Total assets were $1.685 billion and total equity was $846.9 million at quarter-end.
Changes, outlook and risks
- Revenue increased substantially year over year with higher lot sales. The company attributed its growth primarily to its strategic relationship with D.R. Horton. D.R. Horton purchased 1,991 of the 2,023 lots sold in the quarter and generated $159.3 million of quarterly residential lot revenue.
- COVID-19 slowed homebuilders’ lot purchases in late March and April; sales pace improved later in the quarter. Management cited uncertainty about the pandemic’s duration and effects on housing demand, customers, trade partners, employees and capital markets. Prolonged weakness could lead to contract changes, liquidity pressure or significant real estate impairment charges; no real estate impairment was recorded in the periods presented.
- No specific financial guidance was provided. Management said cash resources and the revolver should meet near-term working-capital needs and debt obligations, and cited low net leverage, a low-overhead model and D.R. Horton’s support. Longer-term growth depends partly on access to financing, which could become limited or more costly.
- In February 2020, Forestar issued $300 million of 5.0% senior notes due 2028; in March it repaid $118.9 million of 3.75% convertible notes at maturity. It also had $350 million of 8.0% senior notes due 2024. The company was in compliance with debt covenants. A $30 million debt-repurchase authorization remained unused at June 30.
- The nine-month tax rate included a $2.3 million benefit under the CARES Act NOL carryback provisions; the quarterly effective tax rate was 1.9%. All interest incurred in the first nine months was capitalized to real estate, rather than expensed, because active real estate exceeded debt.
- Off-balance-sheet performance support included $31.6 million of letters of credit and $206.2 million of surety bonds. Forestar reported ordinary-course legal proceedings and said outcomes were not expected to materially affect its long-term results, while noting charges could be significant in a single period.
Important facts for investors to verify
- Whether improved lot sales pace persisted after quarter-end and how COVID-19 affected subsequent demand and customer purchasing.
- Forestar’s exposure to D.R. Horton, including the concentration of lot sales, outstanding contracts, rights of first offer and related-party payments.
- Project-level returns and sales mix behind lower gross margins, along with the carrying value and impairment sensitivity of the expanding real estate portfolio.
- Cash needs for land acquisition and development, debt maturities and covenant headroom if operating cash flow remains negative or capital markets become less accessible.
- The sustainability of earnings excluding the CARES Act tax benefit and the effect of capitalized interest on reported margins when related lots are sold.