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FOR > SEC Filings for FOR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FORESTAR GROUP INC.

Form 10-Q for FORESTAR GROUP INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of third quarter-end 2012, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.

Forward-Looking Statements

This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as "believe," "anticipate," "could," "estimate," "likely," "intend," "may," "plan," "expect," and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:

general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;

our ability to achieve some or all of our strategic initiatives;

the opportunities (or lack thereof) that may be presented to us and that we may pursue;

significant customer concentration;

future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;

obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments

accuracy of estimates and other assumptions related to investment in real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation and oil and natural gas reserves;

the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects and the regions in which they are located;

fluctuations in costs and expenses;

demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;

competitive actions by other companies;

changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;

our realization of the expected benefits of acquiring CREDO Petroleum Corporation;

risks associated with oil and gas drilling and production activities;

fluctuations in oil and natural gas commodity prices;

government regulation of exploration and production technology, including hydraulic fracturing;

the results of financing efforts, including our ability to obtain financing with favorable terms;


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our partners' ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;

the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;

inability to obtain permits for, or changes in laws, governmental policies or regulations effecting, water withdrawal or usage and

the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.

Other factors, including the risk factors described in Item 1A of our 2011 Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Strategy

Our strategy is:

Recognizing and responsibly delivering the greatest value from every acre; and

Growing through strategic and disciplined investments.

2012 Strategic Initiatives

In 2012, we announced Triple in FOR, new strategic initiatives designed to further enhance shareholder value by:

Accelerating value realization of our real estate and natural resources by increasing total residential lots sales, oil and gas production, and total segment earnings.

Optimizing transparency and disclosure by expanding reported oil and natural gas resources, providing additional information related to groundwater interests, and establishing a progress report on corporate responsibility efforts.

Raising our net asset value through strategic and disciplined investments by pursuing growth opportunities which help prove up our asset value and meet return expectations, developing a low-capital, high-return multifamily business, and accelerating investment in lower-risk oil and natural gas opportunities.

Strategic Acquisition

On September 28, 2012, pursuant to the terms of the previously announced Agreement and Plan of Merger dated June 3, 2012, we acquired 100 percent of the outstanding common stock of CREDO Petroleum Corporation (Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo's outstanding debt. Third quarter 2012 mineral resources segment earnings associated with this acquisition were not significant.


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Results of Operations

A summary of our consolidated results by business segment follows:




                                                    Third Quarter                 First Nine Months
                                                2012            2011            2012            2011
                                                                   (In thousands)
Revenues:
Real estate                                   $  27,115       $  19,060       $  71,684       $  59,814
Mineral resources                                10,479           5,871          27,053          17,784
Fiber resources                                   3,016           1,310           5,277           3,968

Total revenues                                $  40,610       $  26,241       $ 104,014       $  81,566

Segment earnings:
Real estate                                   $  12,688       $  (4,266 )     $  31,931       $    (684 )
Mineral resources                                 6,091           3,592          15,919          12,292
Fiber resources                                   1,798             446           2,782           1,790

Total segment earnings (loss)                    20,577            (228 )        50,632          13,398
Items not allocated to segments:
General and administrative expense               (8,000 )        (4,827 )       (19,482 )       (15,824 )
Share-based compensation income (expense)        (6,327 )         3,553         (11,491 )          (399 )
Gain on sale of assets                               16          61,784              16          61,784
Interest expense                                 (8,094 )        (4,271 )       (15,649 )       (12,933 )
Other corporate non-operating income and
expense                                              47              26             158              77

Income (loss) before taxes                       (1,781 )        56,037           4,184          46,103
Income tax benefit (expense)                      1,078         (19,609 )        (1,274 )       (16,069 )

Net income (loss) attributable to Forestar
Group Inc.                                    $    (703 )     $  36,428       $   2,910       $  30,034

Significant aspects of our results of operations follow:

Third Quarter and First Nine months 2012

Real estate segment earnings benefited primarily from a $10,180,000 gain resulting from the sale of Broadstone Memorial, a 401 unit multifamily project in Houston and increased residential and commercial sales activity. In first nine months 2012, real estate segment earnings benefited primarily from such gain and a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC, $3,401,000 gain from a consolidated venture's sale of 800 acres near Dallas, and increased residential and commercial sales activity.

Mineral resources segment earnings benefited from $3,543,000 in lease bonus revenues as a result of leasing over 3,100 net mineral acres and increased oil production volumes. These items were partially offset by increased cost of sales due to higher production volumes, lower prices and from additional oil and natural gas personnel and professional services associated with our water initiatives.

Fiber resources segment earnings increased principally as a result of higher levels of harvesting activity which was primarily driven by accelerated customer demand.

Third quarter and first nine months 2012 general and administrative expense includes $3,248,000 and $5,709,000 in transaction costs to outside advisors associated with our acquisition of Credo on September 28, 2012.

Share-based compensation expense increased as result of the increase in our stock price and the impact on cash-settled vested awards.

Interest expense includes a $4,448,000 loss on extinguishment of debt in connection with the amendment and restatement of our term loan on September 14, 2012.


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Third Quarter and First Nine months 2011

Real estate segment earnings were negatively impacted by lower undeveloped land sales volume and prices as a result of current market conditions. In addition, we recognized a $2,500,000 charge related to environmental remediation activities. These items were partially offset by increased residential sales activity.

Mineral resources segment earnings declined primarily due to lower lease bonus revenues and increased costs associated with developing our water resources initiatives. These items were partially offset by increased oil production volumes and higher oil prices.

Fiber resources segment earnings decreased principally due to reduction in volume as a result of selling about 30,000 acres of timberland in 2010 and postponing harvest plans on acres previously classified as held for sale.

Third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of terms available to us in the credit markets.

Share-based compensation decreased as a result of a decline in our stock price and its impact on vested cash-settled awards.

In third quarter 2011, gain on sale of assets represents the gain from selling 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000.

Current Market Conditions

Current U.S. single-family residential market conditions are showing signs of stability; however, high unemployment rates, depressed sales volumes and prices, difficult financing environment for purchasers and competition from foreclosure inventory continue to negatively influence housing markets. It is difficult to predict when and at what rate these broader negative conditions will improve. Declining finished lot inventories and lack of real estate development is increasing demand for our developed lots, principally in the Texas markets. Multifamily market conditions continue to be strong, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven primarily by limited new construction activity, reduced single-family mortgage credit availability, and the increased propensity to rent among the 18 to 34 year old demographic of the U.S. population.

Oil prices have weakened recently reflecting market concerns about world economies and oil demand. Natural gas prices have remained near low historical levels due to abundant supplies and high inventories. Shale resource drilling and production remains strong and working natural gas inventories are expected to remain relatively high. In the East Texas Basin, exploration and production companies continue to focus drilling on high liquid rich gas prospects due to relatively high condensate and natural gas liquid prices. In the Gulf Coast Basin, in Louisiana, activity has increased as operators have shifted exploration efforts to oil and high liquid natural gas plays. These conditions may impact the demand for new mineral leases, new exploration activity and the amount of royalty revenues we receive.

Pine sawtimber prices continue to be depressed due to weak demand driven by the overall slowdown in residential construction activity, while pine pulpwood demand remains steady and pricing is relatively flat.

Business Segments

We manage our operations through three business segments:

Real estate,

Mineral resources, and

Fiber resources.

We evaluate performance based on earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures', gain on sale of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.


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We operate in cyclical industries. Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, consumer and home builder sentiment, new housing starts, real estate values, employment levels, changes in the market prices for oil, natural gas, and timber, and the overall strength or weakness of the U.S. economy.

Real Estate

We own directly or through ventures about 143,000 acres of real estate located in nine states and 13 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own 103,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in regions across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential single-family lots and tracts, undeveloped land and commercial real estate and from the operation of commercial and income producing properties, primarily a hotel and our multifamily investments.

A summary of our real estate results follows:

                                                  Third Quarter                 First Nine Months
                                              2012            2011            2012            2011
                                                                 (In thousands)
Revenues                                    $  27,115       $  19,060       $  71,684       $  59,814
Cost of sales                                 (17,539 )       (12,367 )       (43,086 )       (32,894 )
Operating expenses                             (8,421 )       (10,717 )       (24,208 )       (27,064 )

                                                1,155          (4,024 )         4,390            (144 )
Interest income on loans secured by real
estate                                          1,066              -            2,159              -
Gain on sale of assets                         10,197              -           25,273              -
Equity in earnings (loss) of
unconsolidated ventures                           593             295           1,787             361
Less: Net (income) loss attributable to
noncontrolling interests                         (323 )          (537 )        (1,678 )          (901 )

Segment earnings                            $  12,688       $  (4,266 )     $  31,931       $    (684 )

Third quarter and first nine months 2012, segment earnings include $1,066,000 and $2,159,000 in interest income primarily related to a loan secured by a mixed-use community in Houston.

In third quarter and first nine months 2012, gain on sale of assets includes $10,180,000 resulting from the sale of Broadstone Memorial, a 401 unit multifamily project in Houston. In addition, first nine months 2012 includes a $3,401,000 gain from a consolidated venture's sale of 800 acres in Dallas and $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC for $32,095,000.

Revenues in our owned and consolidated ventures consist of:

                                                 Third Quarter           First Nine Months
                                               2012         2011         2012          2011
                                                              (In thousands)
Residential real estate                      $ 13,564     $ 10,276     $  36,892     $ 27,503
Commercial real estate                          2,405           -          4,170          736
Undeveloped land                                1,604        1,526         4,918       10,096
Commercial and income producing properties      8,805        6,653        23,381       20,400
Other                                             737          605         2,323        1,079

Total revenues                               $ 27,115     $ 19,060     $  71,684     $ 59,814


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Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In third quarter and first nine months 2012, residential real estate revenues increased principally as a result of increased lot sales volume due to demand for finished lot inventory by homebuilders in markets where supply has diminished. In first nine months 2012, we sold the remaining 109 fully developed lots from our River Plantation project located in Tampa for $2,145,000 or about $19,675 per lot, resulting in about $478,000 in segment earnings.

In third quarter 2012, commercial real estate revenues increased as result of selling approximately 18 commercial acres from projects located in Houston and Dallas for $2,405,000 generating combined segment earnings of $1,288,000. In addition, first nine months 2012 includes the sale of approximately 35 commercial acres from a project in Fort Worth for $1,295,000 which generated about $822,000 in segment earnings.

In first nine months 2012, undeveloped land sales decreased due to lower volume from our retail land sales program as a result of challenging market conditions including limited credit availability and alternate investment options to buyers in the marketplace.

In third quarter and first nine months 2012, commercial and income producing properties revenue increased as a result of rent growth from our 401 unit multifamily property located in Houston, which we sold in third quarter 2012.

In third quarter and first nine months 2012, other revenues include $564,000 and $1,611,000, as a result of selling four acres and eleven acres, respectively, of impervious cover entitlement credits to homebuilders. These sales generated segment earnings of approximately $496,000 in third quarter 2012 and $1,416,000 in first nine months 2012.

Units sold in our owned and consolidated ventures consist of:

                                        Third Quarter            First Nine Months
                                      2012          2011         2012         2011
         Residential real estate:
         Lots sold                        193          155          675           458
         Revenue per lot sold       $  54,206     $ 52,197     $ 49,925     $  55,277
         Commercial real estate:
         Acres sold                        18           -            56             4
         Revenue per acre sold      $ 133,882     $     -      $ 75,147     $ 185,344
         Undeveloped land:
         Acres sold                       564          548        1,817         3,938
         Revenue per acre sold      $   2,846     $  2,786     $  2,707     $   2,564

Operating expenses consist of:

                                             Third Quarter           First Nine Months
                                           2012         2011         2012          2011
                                                          (In thousands)
     Employee compensation and benefits   $ 2,530     $  1,893     $   6,584     $  5,730
     Property taxes                         1,964        2,023         6,305        6,484
     Professional services                    992        1,174         3,070        3,405
     Depreciation and amortization          1,101        1,344         3,251        3,938
     Environmental                             38        2,527           131        2,607
     Other                                  1,796        1,756         4,867        4,900

     Total operating expenses             $ 8,421     $ 10,717     $  24,208     $ 27,064

In third quarter 2011, environmental costs increased as a result of a $2,500,000 charge related to environmental remediation activities at our Antioch, California project.


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Information about our real estate projects and our real estate ventures follows:

                                                                      Third Quarter-End
                                                                     2012           2011
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects                                                       65              54
Residential lots remaining                                           20,019          18,679
Commercial acres remaining                                            2,067           1,808
Undeveloped land and land in the entitlement process
Number of projects                                                       16              16
Acres in entitlement process                                         27,580          27,590
Acres undeveloped                                                    95,357         110,115
Ventures accounted for using the equity method:
Ventures' lot sales (for first nine months)
Lots sold                                                               306             350
Average price per lot sold                                         $ 49,125       $  40,592
Ventures' entitled, developed and under development projects
Number of projects                                                        7              21
Residential lots remaining                                            3,845           9,295
Commercial acres sold (for first nine months)                            -               20
Average price per acre sold                                        $     -        $ 152,460
Commercial acres remaining                                              333             538
Ventures' undeveloped land and land in the entitlement process
Acres sold (for first nine months)                                      135              19
Average price per acre sold                                        $  2,600       $   3,000
Acres undeveloped                                                     5,655           5,712

In first quarter 2012, we acquired from CL Realty and Temco, 14 entitled, developed and under development projects and interests in three ventures accounted for using the equity method. The acquired assets represented approximately 1,130 fully developed lots, 4,900 planned lots, and over 460 commercial acres at time of acquisition, principally in the major markets of Texas.

We underwrite development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment charge for such project.

Our net investment in owned and consolidated real estate by geographic location follows:

                           Entitled,
                         Developed, and                       Commercial
                             Under                            and Income
                          Development        Undeveloped       Producing
          State             Projects             Land         Properties         Total
                                                 (In thousands)
          Texas           $     298,418        $   9,570       $  55,335       $ 363,323
          Georgia                22,125           58,592              -           80,717
          Colorado               21,475               -               -           21,475
          California              8,915           14,997              -           23,912
          Other                   6,740              847          11,589          19,176

          Total           $     357,673        $  84,006       $  66,924       $ 508,603


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Mineral Resources

We own directly or through ventures about 593,000 net acres of mineral interests. Our mineral resources segment revenues are principally derived from oil and natural gas royalties, non-operating working interests and other lease revenues from our mineral interests located principally in Texas, Louisiana, . . .

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