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FOR > SEC Filings for FOR > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for FORESTAR GROUP INC.

Form 10-Q for FORESTAR GROUP INC.


8-Aug-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 second 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;


          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


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


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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:
                                                   Second Quarter            First Six Months
                                                  2014         2013         2014          2013
                                                                 (In thousands)
Revenues:
Real estate                                    $ 55,173     $ 41,219     $ 120,653     $ 119,908
Oil and gas                                      24,377       15,831        41,931        31,335
Other natural resources                           3,463        3,029         5,034         6,307
Total revenues                                 $ 83,013     $ 60,079     $ 167,618     $ 157,550
Segment earnings:
Real estate                                    $ 27,297     $  8,104     $  50,872     $  27,550
Oil and gas                                       9,522        4,243        10,329         9,370
Other natural resources                           2,079          991         1,551         2,243
Total segment earnings                           38,898       13,338        62,752        39,163
Items not allocated to segments:
General and administrative expense               (5,566 )     (5,329 )     (10,734 )     (10,287 )
Share-based compensation expense                 (3,219 )     (1,460 )      (3,532 )     (11,875 )
Interest expense                                 (7,370 )     (5,122 )     (12,873 )      (9,661 )
Other corporate non-operating income                130           25           252            56
Income before taxes                              22,873        1,452        35,865         7,396
Income tax expense                               (8,051 )       (911 )     (12,709 )      (2,904 )
Net income attributable to Forestar Group Inc. $ 14,822     $    541     $  23,156     $   4,492


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Significant aspects of our results of operations follow:
Second Quarter and First Six Months 2014

          Second quarter and first six months 2014 real estate segment earnings
           benefited from increased undeveloped land sales and residential lot
           sales activity. In addition, second quarter 2014 real estate segment
           earnings included a $10,476,000 gain associated with a non-monetary
           exchange of leasehold timber rights for 5,400 acres of undeveloped
           land with a partner in a consolidated venture.


          Oil and gas segment earnings increased principally due to gain of
           $5,706,000 related to the sale of oil and gas properties in Oklahoma
           and North Dakota. Segment earnings also benefited from higher working
           interest production volumes compared with second quarter and first six
           months 2013, offset partially by higher exploration, production and
           operating expenses. In addition, segment earnings were negatively
           impacted by lower production volumes and delay rental revenues
           associated with our owned mineral interests.


          Second quarter 2014 other natural resources segment earnings increased
           compared with second quarter 2013 principally due to a groundwater
           reservation agreement which generated $698,000 in segment earnings and
           a $685,000 gain from a partial termination of a timber lease. Second
           quarter and first six months 2014 segment earnings were impacted by
           lower fiber volumes compared with second quarter and first six months
           2013.


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


          Second quarter and first six months 2014 interest expense increased
           primarily due to higher average borrowing rates and debt outstanding.

Second Quarter and First Six Months 2013

          Second quarter 2013 real estate segment earnings increased primarily
           due to higher average prices for lots and commercial acres sold offset
           by lower lot sales volume and commercial acres sold in second quarter
           2013 as compared with second quarter 2012. In addition, second quarter
           2013 real estate segment earnings increased primarily due to sale of
           the remaining 440 undeveloped residential acres from a project in
           Florida for$3,536,000, which generated approximately $687,000 in
           segment earnings. First six months 2013 real estate segment earnings
           benefited from sale of Promesa, a 289-unit multifamily property we
           developed and sold in Austin, for $41,000,000, which generated
           approximately $10,881,000 in segment earnings. In addition, first six
           months 2013 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 lower average oil prices and reduced
           delay rental payments received related to royalties from 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 third quarter 2012.


          Other natural resources segment earnings benefited from higher levels
           of timber harvesting activity which was driven by increased customer
           demand.


          Share-based compensation expense increased principally as result of a
           16 percent increase in our stock price since year-end 2012, compared
           to a 15 percent decrease in our stock price in first six months 2012,
           which impacted the value of vested cash-settled awards.

Current Market Conditions
U.S. single-family residential market conditions continued to improve in first six months 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, 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 remained strong over the last several months and generally have been stronger over the last two years. Gas prices are up nearly 40 percent from year ago levels, but are significantly lower than realized prices over the last decade.


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Prolonged cold weather throughout the 2013 - 2014 heating season has taken working gas in storage below the previous five year average (2009 - 2013) 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.

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 approximately 121,000 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 98,000 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:

                                                 Second Quarter            First Six Months
                                                2014         2013         2014          2013
                                                               (In thousands)
Revenues                                     $ 55,173     $ 41,219     $ 120,653     $ 119,908
Cost of sales                                 (32,025 )    (28,262 )     (68,209 )     (81,308 )
Operating expenses                             (9,315 )     (7,709 )     (17,390 )     (14,681 )
                                               13,833        5,248        35,054        23,919
Interest income on loan secured by real
estate                                          2,139        1,086         4,311         2,196
Gain on non-monetary exchange                  10,476            -        10,476             -
Equity in earnings of unconsolidated
ventures                                          775        2,427         1,630         3,183
Less: Net income attributable to
noncontrolling interests                           74         (657 )        (599 )      (1,748 )
Segment earnings                             $ 27,297     $  8,104     $  50,872     $  27,550

In first six months 2014, revenues were principally driven by increased residential real estate and undeveloped land sales.
In second quarter and first six months 2014, cost of sales includes $3,539,000 and $9,041,000 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 in first quarter 2014 and $78,000 charge in second quarter 2014 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 second quarter and first six months 2013 were $11,460,000 and $17,606,000. First six months 2013 cost of sales also included


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$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 second quarter and first six months 2014, we recorded a $10,476,000 gain associated with a non-monetary exchange of leasehold timber rights on approximately 10,300 acres for 5,400 acres of undeveloped land with a partner in a consolidated venture.
In first six months 2014, the decrease in net income attributable to noncontrolling interests compared with first six months 2013 is principally due to the purchase of noncontrolling interests in the Lantana ventures for $7,971,000 in March 2014.
Revenues in our owned and consolidated ventures consist of:

                                              Second Quarter          First Six Months
                                             2014        2013         2014         2013
                                                           (In thousands)
Residential real estate                    $ 33,901    $ 18,348    $  69,162    $  37,450
Commercial real estate                          609       2,187          780        3,438
Undeveloped land                              7,297       2,578       27,010        5,287
Commercial and income producing properties   11,050      17,861       20,983       72,032
Other                                         2,316         245        2,718        1,701
                                           $ 55,173    $ 41,219    $ 120,653    $ 119,908

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. Revenues increased in second quarter and first six months 2014 compared with second quarter and first six months 2013 due to increased lot sales volume offset by lower average price per lot sold and higher undeveloped land sales. In addition, in first six months 2014, we sold 910 undeveloped residential tract acres for $6,567,000 which generated segment earnings of $2,698,000, compared with sale of the remaining 440 undeveloped residential acres from a project in Florida for $3,536,000, which generated approximately $687,000 in segment earnings in first six months 2013.
In first six months 2014, undeveloped land sales increased as compared with first six months 2013 principally due to first quarter sale of 9,329 acres for $19,713,000, or approximately $2,100 per acre, generating approximately $16,233,000 in segment earnings.
In addition, second quarter and first six months 2014 commercial and income producing properties revenues include construction revenues of $3,461,000 and $6,694,000 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 second quarter and first six months 2013 were $11,460,000 and $17,606,000. In first six months 2014, commercial and income producing properties revenue decreased compared with first six months 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 six months 2014, revenues related to our 413 guest room hotel in Austin were up $1,187,000 when compared with first six months 2013, primarily due to higher average room rates and food and beverage sales.


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Units sold in our owned and consolidated ventures consist of:

                            Second Quarter          First Six Months
                           2014        2013        2014         2013
Residential real estate:
Lots sold                     481         259       1,317          614
Revenue per lot sold     $ 60,651    $ 57,154    $ 47,644    $  54,440
Commercial real estate:
Acres sold                      3          32           3           35
Revenue per acre sold    $ 96,774    $ 74,166    $ 96,774    $ 100,311
Undeveloped land:
Acres sold                  2,950       1,000      12,279        1,919
Revenue per acre sold    $  2,473    $  2,576    $  2,200    $   2,755

Operating expenses consist of:

                                      Second Quarter         First Six Months
                                     2014        2013        2014        2013
                                                  (In thousands)
Employee compensation and benefits $  2,655    $ 1,902    $   5,513    $  3,274
Property taxes                        1,899      2,049        3,485       4,045
Professional services                 2,272        956        3,411       2,126
Depreciation and amortization           695        713        1,343       1,742
Other                                 1,794      2,089        3,638       3,494
                                   $  9,315    $ 7,709    $  17,390    $ 14,681

The increase in employee compensation and benefits in second quarter and first six months 2014 is principally related to increase in staffing and incentive compensation. The increase in professional services in second quarter and first six months 2014 is primarily associated with conveyance of land in payment of management fees in a consolidated venture associated with non-monetary exchange of leasehold timber rights for undeveloped land.
Information about our real estate projects and our real estate ventures follows:

                                                                       Second
                                                                    Quarter-End
                                                                 2014         2013
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects                                                   65           65
Residential lots remaining                                       15,077       19,681
Commercial acres remaining                                        1,718        2,019
Undeveloped land and land in the entitlement process
Number of projects                                                   11           14
Acres in entitlement process                                     24,430       25,980
Acres undeveloped                                                79,563       87,714
Ventures accounted for using the equity method:
Ventures' lot sales (for first six months)
Lots sold                                                           194          192
Average price per lot sold                                     $ 67,772    $  54,407
Ventures' entitled, developed and under development projects
Number of projects                                                    8            7
Residential lots remaining                                        3,021        3,495
Commercial acres sold (for first six months)                          -            2
Average price per acre sold                                    $      -    $ 652,886
Commercial acres remaining                                          240          306
Ventures' undeveloped land and land in the entitlement process
Acres sold (for first six months)                                   258           42
Average price per acre sold                                    $  2,306    $   2,650
Acres undeveloped                                                 5,073        5,613


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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: . . .

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