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FOR > SEC Filings for FOR > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for FORESTAR GROUP INC.

Form 10-K for FORESTAR GROUP INC.


11-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Caution Concerning Forward-Looking Statements This Annual Report on Form 10-K 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 risk 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;

our ability to hire and retain key personnel;

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 timing of such payments;

accuracy of estimates and other assumptions related to investment in and development of 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, oil and gas reserves, revenues, capital expenditures and lease operating expense accruals associated with our oil and gas working interests, and depletion of our oil and gas properties;

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;

demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions;

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 since our acquisition of CREDO Petroleum Corporation (Credo);

risks associated with oil and gas exploration, drilling and production activities;

fluctuations in oil and 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, or at all;

our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior secured credit facility, indentures and other debt agreements;

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 affecting, water withdrawal or usage;

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

our ability to execute our growth strategy and deliver acceptable returns from acquisitions and other investments.


Other factors, including the risk factors described in Item 1A of this 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.

2014 Strategic Initiatives
On February 13, 2014, we announced Growing FORward, new strategic initiatives designed to further enhance shareholder value by:
Growing segment earnings through strategic and disciplined investments,

Increasing returns, and

Repositioning non-core assets.

Results of Operations for the Years Ended 2013, 2012 and 2011 A summary of our consolidated results by business segment follows:

                                                            For the Year
                                                  2013          2012          2011
                                                           (In thousands)
Revenues:
Real estate                                    $ 248,011     $ 120,115     $ 106,168
Oil and gas                                       72,313        44,220        24,448
Other natural resources                           10,721         8,256         4,957
Total revenues                                 $ 331,045     $ 172,591     $ 135,573
Segment earnings (loss):
Real estate                                    $  68,454     $  53,582     $ (25,704 )
Oil and gas                                       18,859        26,608        19,783
Other natural resources                            6,507            29        (1,867 )
Total segment earnings (loss)                     93,820        80,219        (7,788 )
Items not allocated to segments:
General and administrative expense               (20,597 )     (25,176 )     (20,110 )
Share-based compensation expense                 (16,809 )     (14,929 )      (7,067 )
Gain on sale of assets                                 -            16        61,784
Interest expense                                 (20,004 )     (19,363 )     (17,012 )
Other corporate non-operating income                 119           191           368
Income before taxes                               36,529        20,958        10,175
Income tax expense                                (7,208 )      (8,016 )      (3,021 )
Net income attributable to Forestar Group Inc. $  29,321     $  12,942     $   7,154


In 2013, we essentially achieved our 2012 Triple in FOR strategic initiatives to triple total segment EBITDA, oil and gas production and total residential lot sales compared with our four-year average from 2008 to 2011. Significant aspects of our results of operations follow:

2013
         Real estate segment earnings benefited from the sale of Promesa, a
          289-unit multifamily property we developed in Austin, for $41,000,000,
          which generated approximately $10,881,000 in segment earnings. In
          addition, segment earnings also benefited from increased residential
          lot sales activity, residential and commercial tract sales and interest
          income associated with yield accretion from a loan we hold secured by a
          mixed-use community in Houston.


         Oil and gas segment earnings decreased principally due to lower oil and
          gas production volumes associated with royalties and due to reduced
          lease bonus and delay rental payments received from our owned mineral
          interests, which were partially offset by higher working interest
          production volumes and prices attributable to our exploration and
          production operations principally as result of our acquisition of Credo
          in third quarter 2012.


         Other natural resources segment earnings benefited from higher levels
          of timber harvesting activity driven by increased customer demand
          compared to 2012. In addition, segment earnings also benefited from a
          $3,828,000 gain from a partial termination of a timber lease related to
          land sold from a consolidated venture near Atlanta, Georgia.


         Share-based compensation increased principally as result of our higher
          stock price in 2013 and its impact on cash-settled awards.


2012
         Real estate segment earnings benefited from a $11,675,000 gain from the
          sale of our 25 percent ownership interest in Palisades West LLC, a
          $10,180,000 gain from the sale of Broadstone Memorial, a 401-unit
          multifamily investment property in Houston, $8,247,000 in earnings from
          an unconsolidated venture's sale of Las Brisas, a 414-unit multifamily
          property near Austin, a $3,401,000 gain from a consolidated venture's
          bulk sale of 800 acres near Dallas, and increased residential lot and
          commercial tract sales activity.


         Oil and gas segment earnings benefited from increased lease bonus
          revenues, higher production volume and earnings attributable to
          exploration and production operations from our acquisition of Credo in
          third quarter 2012, partially offset by lower oil and gas prices and
          increased depletion and production severance taxes due to higher
          production volumes.


         Other natural resources segment earnings increased principally as a
          result of higher levels of harvesting activity.


         General and administrative expense includes $6,323,000 in transaction
          costs paid to outside advisors associated with our acquisition of Credo
          in 2012.


         Share-based compensation increased principally as a result of our
          higher stock price in 2012 and its impact on cash-settled awards.


         Interest expense includes a $4,448,000 loss on extinguishment of debt
          in connection with amendment and extension of our term loan.


2011
         Real estate segment earnings were negatively impacted by $45,188,000 of
          non-cash impairment charges principally associated with residential
          development projects located near Atlanta, Denver, and the Texas gulf
          coast and with our decision to acquire certain assets from CL Realty
          and TEMCO, ventures in which we owned a 50 percent interest. Segment
          earnings were positively impacted by increased undeveloped land sales
          and higher residential lot and tract sales. In addition, segment
          earnings were positively impacted by $3,083,000 as result of settled
          litigation and reallocation from us to noncontrolling financial
          interests of a previously recognized loss related to foreclosure of a
          lien on a property owned by a consolidated venture.


         Oil and gas segment earnings declined primarily due to lower lease
          bonus revenues which was partially offset by increased oil production
          volumes and higher average oil prices.


         Other natural resources segment earnings decreased principally due to
          lower harvest volume as a result of selling over 217,000 acres of
          timberland since year-end 2008 and increased costs associated with
          developing our water resources initiatives.


         General and administrative expenses includes $3,187,000 in costs paid
          to outside advisors associated with proposed private debt offerings
          that we withdrew as a result of deterioration of terms available to us
          in the credit markets.


         Gain on sale of assets represents the sale of about 57,000 acres of
          timberland for $87,061,000 in accordance with our 2009 strategic
          initiatives which we completed in 2011.

Current Market Conditions
U.S. single-family residential market conditions continued to improve in 2013, driven by a growing demand for homes and a tightening supply of homes available for sale. Housing demand has been fueled primarily by job growth, high housing affordability largely due to relatively low mortgage rates, and increased consumer confidence. Inventories of unsold homes are at historically low levels in many areas. In addition, declining finished lot inventories and supply of developable raw land is increasing demand for our developed lots, principally in the major markets of Texas. However, challenging mortgage qualification requirements for purchasers continue to impact housing 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 housing inventory, 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 continued to strengthen over the last year and generally have been stronger over the last two and one-half years. Gas prices are up over 35 percent from year ago levels, but are significantly lower than realized prices over the last decade. Prolonged cold weather throughout the 2012 - 2013 heating season has taken working gas in storage below the midpoint of the five year average causing gas prices to recover from their lows of a year ago. Exploration and development activity continues to be oil focused due to the premium price of oil over gas when comparing energy equivalency and due to the U.S. being net importers of crude oil while current estimates of domestic gas producing supplies are believed to be sufficient.
Business Segments
We manage our operations through three business segments:
Real estate,

Oil and gas, and

Other natural resources.

We evaluate performance based on earnings before unallocated items and income taxes. Segment earnings consist of operating income, equity in earnings 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. 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, gas, and timber, and the overall strength or weakness of the U.S. economy.

Real Estate
We own directly or through ventures about 130,000 acres of real estate located in ten states and 14 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own about 95,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in our strategic growth corridors, 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 income producing properties, primarily a hotel and multifamily properties we may develop and sell as a merchant builder.


A summary of our real estate results follows:

                                                               For the Year
                                                    2013           2012           2011
                                                              (In thousands)
Revenues                                        $  248,011     $  120,115     $  106,168
Cost of sales                                     (156,794 )      (70,039 )      (62,975 )
Operating expenses                                 (31,952 )      (34,160 )      (36,184 )
                                                    59,265         15,916          7,009
Interest income on loan secured by real estate       6,840          3,430              -
Gain on sale of assets                                   -         25,273              -
Equity in earnings (loss) of unconsolidated
ventures                                             8,089         13,897        (30,626 )
Less: Net income attributable to noncontrolling
interests                                           (5,740 )       (4,934 )       (2,087 )
Segment earnings (loss)                         $   68,454     $   53,582     $  (25,704 )

In 2013, revenues include $41,000,000 from the sale of Promesa, a 289-unit multifamily property we developed in Austin, and $31,595,000 associated with our multifamily construction contracts we received as a general contractor associated with the development of two multifamily venture properties. We are reimbursed for costs paid to subcontractors plus earn a development and construction fee on certain projects, both of which are included in commercial and income producing properties revenue. Revenues associated with multifamily construction contracts were $10,977,000 in 2012.
In 2013, cost of sales include $32,149,000 related to multifamily construction contract costs we incurred as general contractor and paid to sub-contractors associated with our development of two multifamily venture properties, compared to $10,977,000 in 2012. In addition in 2013, cost of sales includes $29,707,000 in carrying value related to Promesa, a 289-unit multifamily property we developed as a merchant builder and sold and a $554,000 loss we incurred as general contractor for one of our multifamily construction projects. Cost of sales includes non-cash impairment charges of $1,790,000 in 2013 associated with a master-planned community and golf club near Dallas. We did not have any non-cash impairment charges in 2012. In 2011, we recorded non-cash impairment charges of $11,525,000 principally associated with owned and consolidated residential development projects near Denver and the Texas gulf coast. Interest income represents yield accreted from a loan we hold secured by a mixed-use community in Houston in which we have a first lien position. In 2012, gain on sale of assets principally includes a $11,675,000 gain from the sale of our 25 percent ownership interest in Palisades West LLC, a $10,180,000 gain from the sale of Broadstone Memorial, a 401-unit multifamily investment property in Houston, and a $3,401,000 gain from a consolidated venture's bulk sale of 800 acres in Dallas.
In 2012, segment results include $8,247,000 in earnings associated with an unconsolidated venture's sale of Las Brisas, a 414-unit multifamily property near Austin, for $40,400,000. Equity in earnings from unconsolidated ventures includes $11,013,000 in earnings related to this sale, of which ($2,766,000) was allocated to net income attributable to noncontrolling interests.
Equity in earnings (loss) of unconsolidated ventures include non-cash impairment charges of $33,663,000 in 2011 principally associated with our decision to acquire certain assets from our CL Realty and TEMCO ventures. In 2011, as a result of entering into the agreement with CL Realty to acquire certain assets, we offset $2,164,000 of deferred gains against our share of venture losses. Revenues in our owned and consolidated ventures consist of:

                                                       For the Year
                                              2013         2012         2011
                                                      (In thousands)
Residential real estate                    $ 107,858    $  51,369    $  36,586
Commercial real estate                        18,338        8,320          736
Undeveloped land                              22,757       18,924       40,517
Commercial and income producing properties    95,327       38,656       26,820
Other                                          3,731        2,846        1,509
Total revenues                             $ 248,011    $ 120,115    $ 106,168

Residential real estate revenues principally consist of the sale of single-family developed lots to national, regional and local homebuilders. In 2013 and 2012, residential real estate revenues increased principally as a result of higher lot sales volume due to increased demand for finished lot inventory by homebuilders in markets where supply has diminished.


In 2013 and 2012, commercial tract sales benefited from increased demand in our Texas markets as commercial credit became more readily available to third-party purchasers. In 2013, we sold 99 commercial acres for $17,398,000 or $176,000 per acre from our owned and consolidated projects located in San Antonio, Dallas, Austin and Houston, which generated combined segment earnings of $11,687,000. In 2012, we sold 83 commercial acres for $9,551,000 or $114,800 per acre from our owned and consolidated projects located in San Antonio, Houston, Dallas and Fort Worth, of which, $929,000 of profit was deferred as result of our continued involvement in post-closing construction obligations and will be recognized using the percentage of completion method. These sales generated combined segment earnings of $5,359,000.
Market conditions for undeveloped land sales remains challenging due to limited credit availability, low consumer confidence and alternate investment options to buyers in the marketplace. In 2013, undeveloped land sales generated $10,788,000 in segment earnings due to sale of 6,700 acres for $22,757,000, or approximately $3,400 per acre. In 2012, undeveloped land sales include the sale of 6,800 acres for $12,800,000 in three retail transactions resulting in combined segment earnings of $9,700,000. In 2011, undeveloped land sales include the bulk sale of 9,700 acres in Georgia for $17,980,000, resulting in segment earnings of $13,396,000.
In 2013, segment results benefited from the sale of Promesa, a 289-unit multifamily property in Austin which we developed as a merchant builder and operated until the sale. As a result, we recognized segment earnings of $10,881,000 related to its sale for $41,000,000. In addition, in 2013, income producing properties revenue increased primarily as a result of construction revenues of $31,595,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor compared to construction revenues of $10,977,000 in 2012.
In 2013, revenues related to our 413 guest room hotel in Austin were down $1,140,000 when compared with 2012, primarily from lower food and beverage revenues due to increased renovation activity.
Other revenues primarily result from sale of stream and impervious cover credits to homebuilders.
Units sold in our owned and consolidated ventures consist of:

                                        For the Year
                               2013         2012         2011
Residential real estate:
Lots sold                       1,469          926          567
Average price per lot sold  $  58,101    $  52,016    $  56,697
Commercial real estate:
Acres sold                         99           83            4
Average price per acre sold $ 175,972    $ 114,846    $ 185,344
Undeveloped land:
Acres sold                      6,703        9,190       17,130
Average price per acre sold $   3,395    $   2,059    $   2,365

Operating expenses consist of:

                                             For the Year
                                     2013        2012        2011
                                            (In thousands)
Employee compensation and benefits $  8,073    $ 10,261    $  7,798
Property taxes                        7,188       7,903       7,881
Professional services                 4,206       4,050       4,938
Depreciation and amortization         3,117       4,340       5,259
Other                                 9,368       7,606      10,308
Total operating expenses           $ 31,952    $ 34,160    $ 36,184

In 2013 and 2012, employee compensation and benefits increased when compared with 2011, primarily due to higher incentive compensation as a result of our improved operating results and value creation activities. In 2013, the increase in higher incentive compensation was somewhat offset by a decrease in other employee compensation and benefits expense primarily related to staffing changes.
Other operating expenses for 2013 includes a $776,000 loss on retirement of assets associated with capital improvements at our hotel and a $583,000 loss on sale of assets related to a project in Austin.


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

                                                                      Year-End
                                                                  2013         2012
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects                                                    67           67
Residential lots remaining                                        17,070       20,084
Commercial acres remaining                                         1,832        2,051
Undeveloped land and land in the entitlement process
Number of projects                                                    13           15
Acres in entitlement process                                      25,830       26,070
Acres undeveloped                                                 85,515       89,610
Ventures accounted for using the equity method:
Ventures' lot sales (for the year)
Lots sold                                                            414          439
Average price per lot sold                                     $  58,872    $  52,080
Ventures' entitled, developed and under development projects
Number of projects                                                     7            7
Residential lots remaining                                         3,291        3,716
Commercial acres sold (for the year)                                  72           12
Average price per acre sold                                    $ 226,206    $ 239,754
. . .
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