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FOR > SEC Filings for FOR > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for FORESTAR GROUP INC.

Form 10-Q for FORESTAR GROUP INC.


9-May-2014

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 2013 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of first quarter-end 2014, 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;

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 the 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 of acquiring 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 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


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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 our 2013 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
A summary of our consolidated results by business segment follows:
                                                    First Quarter
                                                  2014         2013
                                                   (In thousands)
Revenues:
Real estate                                    $ 65,480     $ 78,689
Oil and gas                                      17,554       15,504
Other natural resources                           1,571        3,278
Total revenues                                 $ 84,605     $ 97,471
Segment earnings (loss):
Real estate                                    $ 23,575     $ 19,446
Oil and gas                                         807        5,127
Other natural resources                            (528 )      1,252
Total segment earnings                           23,854       25,825
Items not allocated to segments:
General and administrative expense               (5,168 )     (4,958 )
Share-based compensation expense                   (313 )    (10,415 )
Interest expense                                 (5,503 )     (4,539 )
Other corporate non-operating income                122           31
Income before taxes                              12,992        5,944
Income tax expense                               (4,658 )     (1,993 )
Net income attributable to Forestar Group Inc. $  8,334     $  3,951


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Significant aspects of our results of operations follow:
First Quarter 2014

          Real estate segment earnings benefited from increased undeveloped land
           sales and residential lot sales activity.


          Oil and gas segment earnings decreased principally due to higher
           exploration, production and operating expenses which were partially
           offset by higher working interest production volumes compared with
           first quarter 2013. In addition, segment earnings were negatively
           impacted by lower production volumes and delay rental revenues
           associated with our owned mineral interests.


          Other natural resources segment earnings decreased primarily due to
           lower fiber volumes.


          First quarter 2014 share-based compensation expense decreased
           principally as result of a 16 percent decrease in our stock price
           since year-end 2013, compared with a 26 percent increase in our stock
           price in first quarter 2013 since year-end 2012, which impacted the
           value of vested cash-settled awards.


          First quarter 2014 net income increased principally due to the
           reduction in shared-based compensation expense compared with first
           quarter 2013.

First Quarter 2013
          Real estate segment earnings benefited from selling Promesa for
           $41,000,000, a 289-unit multifamily property we developed in Austin,
           generating approximately $10,881,000 in segment earnings. In addition,
           segment earnings also benefited from increased residential lot sales
           activity, undeveloped land sales from our retail program and
           commercial tract sales.


          Oil and gas segment earnings decreased principally due to lower oil
           and gas production volumes and average prices and lower delay rental
           payments received related to our owned mineral interests. This
           decrease was partially offset by higher working interest production
           volume and earnings attributable to our exploration and production
           operations as result of our acquisition of Credo in 2012.


          Other natural resources segment earnings benefited from higher levels
           of harvesting activity which was driven by customer demand and was
           partially offset by costs of our water resources initiatives.


          Share-based compensation expense increased principally as result of a
           26 percent increase in our stock price which impacted the value of
           vested cash-settled awards.

Current Market Conditions
U.S. single-family residential market conditions continued to improve in first quarter 2014, driven by a growing demand for homes and a tightening supply of homes available for sale. Housing demand has been fueled primarily by improved housing affordability, largely due to relatively low mortgage rates, and increased consumer confidence. Inventories of new homes are at historically low levels in many areas. In addition, declining finished lot inventories and supply of economically developable raw land is increasing demand for our developed lots. However, persistently high unemployment levels, national and global economic weakness and uncertainty, and a restrictive mortgage lending environment continue to threaten a robust recovery in the housing market. 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 several months and generally have been stronger over the last two years. Gas prices are up over 50 percent from year ago levels, but are significantly lower than realized prices over the last decade. Prolonged cold weather throughout the 2013 - 2014 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 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.


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We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales 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 expense, 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 119,000 acres of real estate located in ten 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 approximately 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:

                                                               First Quarter
                                                             2014         2013
                                                              (In thousands)
Revenues                                                  $ 65,480     $ 78,689
Cost of sales                                              (36,184 )    (53,046 )
Operating expenses                                          (8,075 )     (6,972 )
                                                            21,221       18,671
Interest income on loan secured by real estate               2,172        1,110
Equity in earnings of unconsolidated ventures                  855          756
Less: Net income attributable to noncontrolling interests     (673 )     (1,091 )
Segment earnings                                          $ 23,575     $ 19,446

First quarter 2014 revenues were principally driven by residential real estate and undeveloped land sales. In addition, first quarter 2014 revenues include construction revenues of $3,233,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor. We are reimbursed for costs paid to subcontractors plus we may 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 for first quarter 2013 were $6,146,000.
First quarter 2014 cost of sales includes $5,502,000 related to multifamily construction contract costs we incurred as general contractor and paid to subcontractors associated with our development of two multifamily venture properties, which includes a $2,269,000 charge absorbed by us reflecting estimated cost increases associated with our fixed fee contract as a general contractor for these two multifamily venture properties. Cost of sales associated with multifamily construction contracts for first quarter 2013 were $6,146,000. First quarter 2013 cost of sales also included $29,707,000 in carrying value related to Promesa, a 289-unit multifamily property we developed as a merchant builder and sold.
Interest income principally represents earnings from a loan we hold which is secured by a mixed-use real estate community in Houston.
In first quarter 2014, the decrease in net income attributable to noncontrolling interests compared with first quarter 2013 is principally due to the purchase of the 45 percent noncontrolling interests in all but one of the Lantana ventures for $7,971,000 on March 12, 2014.


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Revenues in our owned and consolidated ventures consist of:

                                               First Quarter
                                             2014        2013
                                              (In thousands)
Residential real estate                    $ 35,261    $ 19,102
Commercial real estate                          171       1,251
Undeveloped land                             19,713       2,709
Commercial and income producing properties    9,933      54,171
Other                                           402       1,456
                                           $ 65,480    $ 78,689

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. Revenues increased in first quarter 2014 compared with first quarter 2013 due to increased lot sales volume offset by lower average price per lot sold. In addition, in first quarter 2014, we sold 831 undeveloped residential tract acres for $1,512,000 which generated segment earnings of $524,000.
In first quarter 2014, undeveloped land sales increased as compared with first quarter 2013 due to sale of 9,329 acres for $19,713,000, or approximately $2,100 per acre, generating approximately $16,233,000 in segment earnings. In first quarter 2014, commercial and income producing properties revenue decreased compared with first quarter 2013 as a result of the first quarter 2013 sale of Promesa, a 289-unit multifamily property in Austin which we developed and sold as a merchant builder for $41,000,000 generating segment earnings of $10,881,000.
In first quarter 2014, revenues related to our 413 guest room hotel in Austin were up $456,000 when compared with first quarter 2013, primarily due to higher average room rates and food and beverage sales.
Units sold in our owned and consolidated ventures consist of:

                             First Quarter
                           2014         2013
Residential real estate:
Lots sold                     836          355
Revenue per lot sold     $ 40,161    $  52,460
Commercial real estate:
Acres sold                      -            3
Revenue per acre sold    $      -    $ 382,741
Undeveloped land:
Acres sold                  9,329          919
Revenue per acre sold    $  2,113    $   2,949

Operating expenses consist of:

                                      First Quarter
                                     2014        2013
                                      (In thousands)
Employee compensation and benefits $  2,858    $ 1,372
Property taxes                        1,586      1,996
Professional services                 1,139      1,170
Depreciation and amortization           648      1,029
Other                                 1,844      1,405
                                   $  8,075    $ 6,972


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

                                                                       First
                                                                    Quarter-End
                                                                 2014        2013
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects                                                   63          65
Residential lots remaining                                       15,715      19,938
Commercial acres remaining                                        1,832       2,048
Undeveloped land and land in the entitlement process
Number of projects                                                   12          14
Acres in entitlement process                                     25,390      25,980
Acres undeveloped                                                76,638      88,789
Ventures accounted for using the equity method:
Ventures' lot sales (for first quarter)
Lots sold                                                           138          91
Average price per lot sold                                     $ 57,410    $ 49,642
Ventures' entitled, developed and under development projects
Number of projects                                                    8           7
Residential lots remaining                                        3,077       3,625
Commercial acres sold (for first quarter)                             -           -
Average price per acre sold                                    $      -    $      -
Commercial acres remaining                                          240         321
Ventures' undeveloped land and land in the entitlement process
Acres sold (for first quarter)                                        -           -
Average price per acre sold                                    $      -    $      -
Acres undeveloped                                                 5,547       5,655

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,                              Commercial
                                        and Under          Undeveloped         and Income
                                       Development      Land and Land in       Producing
State                                   Projects       Entitlement Process     Properties        Total
                                                                (In thousands)
Texas                                $     297,001     $           6,797     $     50,851     $  354,649
Georgia                                     18,141                56,017                -         74,158
Colorado                                    21,368                     -           14,595         35,963
California                                   8,915                22,081                -         30,996
North Carolina                                   -                     -           13,468         13,468
Tennessee                                    8,599                   736                -          9,335
Other                                        7,954                   287                -          8,241
                                     $     361,978     $          85,918     $     78,914     $  526,810


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Oil and Gas
Our oil and gas segment is focused on the exploration, development and production of oil and gas on our mineral and leasehold interests. We are an independent oil and gas exploration, development and production company. We have approximately 273,000 net mineral acres leased from others principally located in Nebraska and Kansas primarily targeting the Lansing-Kansas City formation, in the Texas Panhandle primarily targeting the Tonkawa and Cleveland formations, and in North Dakota primarily targeting the Bakken and Three Forks formations. Our leasehold interests include 37,000 net acres held by production and 467 gross oil and gas wells with working interest ownership, of which 185 are operated by us. These leasehold interests include about 8,000 net mineral acres in North Dakota focused on the Bakken and Three Forks formations.
In addition, we lease portions of our 590,000 owned net mineral acres located principally in Texas, Louisiana, Georgia and Alabama to other oil and gas companies in return for a lease bonus, delay rentals and a royalty interest, and we may negotiate an option to participate in oil and gas exploration and development or we may elect to drill as an operator. At first quarter-end 2014, we have about 29,000 net acres leased to others, about 36,000 net acres leased to others that are held by production and 547 gross productive wells operated by others on our owned mineral acres. Most leases are for a three to five year term although all or a portion of a lease may be extended as long as actual production is occurring.
A summary of our oil and gas results follows:

                                                   First Quarter
                                                 2014         2013
                                                  (In thousands)
Revenues                                      $ 17,554     $ 15,504
Cost of oil and gas producing activities       (12,620 )     (7,834 )
Operating expenses                              (4,259 )     (2,690 )
                                                   675        4,980
Equity in earnings of unconsolidated ventures      132          147
Segment earnings                              $    807     $  5,127


Revenues consist of:
                       First Quarter
                     2014        2013
                      (In thousands)
Oil production (a) $ 14,994    $ 13,188
Gas production        1,941       1,729
Other                   619         587
                   $ 17,554    $ 15,504


 _________________________


(a) Oil production includes revenues from oil, condensate and natural gas liquids (NGLs).

In first quarter 2014, oil and gas production revenues increased principally as . . .

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