Forestar Group Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2011. Unless noted, amounts are in millions of dollars. Comparisons are with the corresponding 2010 periods; balance-sheet comparisons are with year-end 2010.
Business context
Forestar operates in real estate, mineral resources and fiber resources. Its 2009 strategic initiatives to sell higher- and better-use timberland and reduce debt were completed by quarter-end. The company sold 57,000 acres during Q3 and had sold 176,000 acres under the initiative overall.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Revenue | $26.2 | $24.0 | $81.6 | $78.5 |
| Operating income | $60.2 | $15.5 | $58.2 | $15.6 |
| Net income attributable to Forestar | $36.4 | $8.9 | $30.0 | $2.7 |
| Diluted EPS | $1.02 | $0.25 | $0.84 | $0.07 |
| Operating cash flow | Not separately provided for Q3 | $32.8 | $(13.7) |
- Reported earnings included a $61.8 million Q3 gain on timberland sales (versus $15.4 million in Q3 2010). Nine-month gain was also $61.8 million versus $15.4 million. The large earnings increase therefore substantially reflects asset-sale gains, rather than recurring operating performance.
- Real estate revenue rose, particularly from residential lot sales and income-producing properties; mineral and fiber revenue declined. Segment earnings for the first nine months fell in all three segments versus 2010.
- Cash and equivalents were $29.1 million, total debt $223.7 million, total assets $846.7 million and shareholders’ equity $544.7 million at quarter-end. Debt was $221.6 million at year-end 2010.
- Operating cash flow of $32.8 million included net proceeds from the timberland sales; it also reflected real estate development and acquisition spending and a $21.1 million purchase of a non-performing loan. Investing cash flow was $(5.1) million and financing cash flow $(3.9) million.
- The amended senior secured facility had $176.3 million of net unused borrowing capacity; reported available liquidity, including cash, was $203.9 million. The company reported compliance with debt covenants.
- Variable-rate debt was $193.8 million. Management estimated that a sustained 1 percentage-point rate increase would reduce pretax income over the next 12 months by approximately $1.9 million.
Material changes, outlook and risks
- The Q3 timberland sales generated $86.0 million of net proceeds, used principally to reduce debt. Since the initiative began, timberland sales generated $277.9 million of net proceeds and $194.4 million of gains; debt had been reduced by $152.0 million, excluding $26.5 million of non-recourse property debt.
- Residential markets remained difficult, with weak confidence, limited credit availability, depressed home sales and foreclosure competition. Management described multifamily conditions as improving, with healthy occupancy and positive rent growth in many markets. No specific earnings or revenue guidance was provided.
- Mineral segment results were pressured by lower lease bonuses and higher water-resource development costs, partly offset by higher oil prices and production. Soft natural-gas prices and high inventories could affect leasing and royalties. Timber demand and prices were depressed, and management expected lower future fiber revenues and earnings following land sales.
- Environmental remediation at the Antioch, California site prompted a $2.5 million reserve increase in Q3. Estimated remaining remediation costs were approximately $3.5 million; further work may be required, but its scope and timing were unclear.
- A $20.7 million carrying-value non-performing loan is secured by 900 acres near Houston. The borrower is in bankruptcy; Forestar was not accruing interest and said it could not estimate future cash flows.
- Three equity-method partnerships had $67.6 million of borrowings classified as current maturities, with refinancing uncertain. Forestar estimated maximum exposure to loss of $36.0 million, although its investment in the partnerships was $2.4 million. The company said it did not expect resolution to significantly affect its financial position or earnings.
- Other notable exposures include $36.6 million of approved and pending Cibolo Canyons infrastructure reimbursements, whose timing depends on the district’s funding, and $21.1 million of estimated remaining construction costs for an Austin multifamily project.
- Legal proceedings were described as ordinary-course matters with adequate reserves for probable losses, but additional charges could be significant in a single period. The filing identified risks relating to timber sales to Temple-Inland’s Rome, Georgia mill, timber availability and harvesting constraints.
Important facts for investors to verify
- How much of reported profit and operating cash flow reflects timberland dispositions, and what recurring earnings and cash generation look like after the completed sales.
- Debt repayment, borrowing-base availability, covenant headroom and refinancing needs, including the maturity exposure within the unconsolidated partnerships.
- Recoverability and timing of the non-performing loan and Cibolo Canyons reimbursements, plus potential additional funding obligations for ventures.
- Whether the $3.5 million remediation estimate proves sufficient and whether housing, oil and gas, or timber-market conditions materially change.