FORESTAR GROUP INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended
September 30, 2021. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the "Forward-Looking Statements" section following this discussion.
We are a residential lot development company with operations in 55 markets in 23 states as of
December 31, 2021. In October 2017, we became a majority-owned subsidiary of D.R. Horton. Through our alignment with and support from D.R. Horton, we have grown our business into a national, well-capitalized residential lot developer selling lots to D.R. Horton and other homebuilders. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business across a geographically diversified national platform and consolidating market share in the fragmented U.S.lot development industry. We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders. This strategy is a unique, lower-risk business model that we expect will produce more consistent returns than other public and private land developers. We also make strategic short-term investments in finished lots (lot banking) and undeveloped land with the intent to sell these assets within a short time period, primarily to D.R. Horton, utilizing available capital prior to its deployment into longer term lot development projects. COVID-19 During 2020, the impacts of the COVID-19 pandemic significantly disrupted economic activity and temporarily affected our business operations and the demand for our residential lots. As economic activity resumed, housing market conditions and demand for residential lots improved and has remained strong throughout fiscal 2021 and into fiscal 2022. However, multiple disruptions in the supply chain, combined with the strong demand for residential lots, have resulted in shortages in certain construction materials, which, together with tightness in the labor market, has caused our development cycles to lengthen in certain markets. We believe we are well-positioned to effectively operate through changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R. Horton. Business Segment We manage our operations through our real estate segment, which is our core business and generates substantially all of our revenues. The real estate segment primarily acquires land and develops infrastructure for single-family residential communities and generates revenues from sales of residential single-family finished lots to local, regional and national homebuilders. We have other business activities for which the related assets and operating results are immaterial, and therefore, are included in our real estate segment. 15 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following tables and related discussion show selected operational and financial data as at and for the three months ended
The components of profit before income taxes were as follows:
Three months completed
2021 2020 (In millions) Revenues $ 407.6
$ 307.1Cost of sales 334.2 262.9 Selling, general and administrative expense 21.5 15.5 Equity in earnings of unconsolidated ventures (1.1) (0.2) Gain on sale of assets (0.5) - Interest and other income - (0.3) Income before income taxes $ 53.5 $ 29.2Lot Sales
The residential lots sold consist of:
Three Months Ended December 31, 2021 2020 Development projects 4,381 3,102 Lot banking projects 135 465 4,516 3,567 Average sales price per lot (a) $ 89,000 $
(a) Excluding the impact of the change in contractual liabilities.
Revenues Revenues consist of: Three Months Ended December 31, 2021 2020 (In millions) Residential lot sales: Development projects $ 393.0
$ 271.1Lot banking projects 9.0 35.7 Decrease in contract liabilities 2.1 0.2 404.1 307.0 Tract sales and other 3.5 0.1 Total revenues $ 407.6 $ 307.116
-------------------------------------------------------------------------------- Table of Contents Residential lots sold and residential lot sales revenues have increased as we have grown our business primarily through our strategic relationship with D.R. Horton. In the three months ended
December 31, 2021, we sold 4,014 residential lots to D.R. Horton for $328.0 millioncompared to 3,389 residential lots sold to D.R. Horton for $294.0 millionin the prior year period. In the three months ended December 31, 2021, we sold 502 residential lots to customers other than D.R. Horton for $74.0 millioncompared to 178 residential lots sold to customers other than D.R. Horton for $12.8 millionin the prior year period.
Sales of plots and other income during the three months ended
consisted primarily of 38 acres of parcels sold to third parties for
Cost of sales in the three months ended
December 31, 2021increased as compared to the prior year period primarily due to the increase in the number of lots sold. Cost of sales related to tract sales and other revenues in the three months ended December 31, 2021was $2.7 million.
Selling, general and administrative (SG&A) and other income statement items
SG&A expense in the three months ended
December 31, 2021was $21.5 millioncompared to $15.5 millionin the prior year period. SG&A expense as a percentage of revenues was 5.3% and 5.0% in the three months ended December 31, 2021and 2020, respectively. Our SG&A expense primarily consists of employee compensation and related costs. Our business operations employed 271 and 179 employees at December 31, 2021and 2020, respectively.
Equity in earnings of unconsolidated joint ventures in both periods reflects our share of earnings in joint ventures which we account for using the equity method.
Gain on sale of assets during the three months ended
Interest and other income primarily represents interest earned on our cash deposits.
Our income tax expense for the three months ended
December 31, 2021and 2020 was $13.0 millionand $7.1 million, respectively, and our effective tax rate was 24.3% in both periods. Our effective tax rate for both periods includes an expense for state income taxes and nondeductible expenses and a benefit related to noncontrolling interests. At December 31, 2021, we had deferred tax liabilities, net of deferred tax assets, of $23.0 million. The deferred tax assets were partially offset by a valuation allowance of $1.2 million, resulting in a net deferred tax liability of $24.2 million. At September 30, 2021, deferred tax liabilities, net of deferred tax assets, were $23.2 million. The deferred tax assets were partially offset by a valuation allowance of $1.2 million, resulting in a net deferred tax liability of $24.4 million. The valuation allowance for both periods was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets. Any reversal of the valuation allowance in future periods will impact our effective tax rate. 17 -------------------------------------------------------------------------------- Table of Contents Land and Lot Position
Our position on the lands and lots at
December 31, September 30, 2021 2021 Lots owned 65,700 64,400 Lots controlled through land and lot purchase contracts 37,600 32,600 Total lots owned and controlled 103,300 97,000 At
December 31, 2021, our lot position consisted of 103,300 residential lots, of which approximately 65,700 were owned and 37,600 were controlled through purchase contracts. Of our total owned residential lots, approximately 20,000 were under contract to sell to D.R. Horton. Additionally, D.R. Horton has the right of first offer on approximately 18,300 of our owned residential lots based on executed purchase and sale agreements. At December 31, 2021, our lots owned included approximately 4,900 lots that were fully developed, of which approximately 200 are related to lot banking. At December 31, 2021, we had approximately 1,000 lots under contract to sell to customers other than D.R. Horton.
Cash and capital resources
December 31, 2021, we had $162.5 millionof cash and cash equivalents and $343.7 millionof available borrowing capacity on our revolving credit facility. We have no senior note maturities until fiscal 2026. We believe we are well-positioned to effectively operate through changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R. Horton. At December 31, 2021, our ratio of debt to total capital (debt divided by stockholders' equity plus debt) was 40.0% compared to 41.0% at September 30, 2021and 42.3% at December 31, 2020. Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders' equity plus debt net of unrestricted cash) was 33.9% compared to 35.2% at September 30, 2021and 31.8% at December 31, 2020. Over the long term, we intend to maintain our ratio of net debt to total capital at approximately 40% or less. We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations. We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs. Our ability to achieve our long-term growth objectives will depend on our ability to obtain financing in sufficient amounts. We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. Subject to market conditions we may, at any time, be considering or preparing for the purchase or sale of our debt securities, the sale of our common stock or a combination thereof.
Bank credit facility
We have a
$410 millionsenior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $600 million, subject to certain conditions and availability of additional bank commitments. The maturity date of the facility is April 16, 2025. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 millionand 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of our real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. There were no borrowings or repayments under the facility in the three months ended December 31, 2021. At December 31, 2021, there were no borrowings outstanding and $66.3 millionof letters of credit issued under the revolving credit facility, resulting in available capacity of $343.7 million. The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require a minimum level of tangible net worth, a minimum level of liquidity, and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At December 31, 2021, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility. 18 -------------------------------------------------------------------------------- Table of Contents Senior Notes We have outstanding senior notes as described below that were issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness and may be redeemed prior to maturity, subject to certain limitations and premiums defined in the respective indenture. The notes are guaranteed by each of our subsidiaries to the extent such subsidiaries guarantee our revolving credit facility. Our $400 millionprincipal amount of 3.85% senior notes (the "2026 notes") mature May 15, 2026with interest payable semi-annually. On or after May 15, 2023, the 2026 notes may be redeemed at 101.925% of their principal amount plus any accrued and unpaid interest. In accordance with the indenture, the redemption price decreases annually thereafter and the 2026 notes can be redeemed at par on or after May 15, 2025through maturity. The annual effective interest rate of the 2026 notes after giving effect to the amortization of financing costs is 4.1%. We also have outstanding $300 millionprincipal amount of 5.0% senior notes (the "2028 notes"), which mature March 1, 2028with interest payable semi-annually. On or after March 1, 2023, the 2028 notes may be redeemed at 102.5% of their principal amount plus any accrued and unpaid interest. In accordance with the indenture, the redemption price decreases annually thereafter and the 2028 notes can be redeemed at par on or after March 1, 2026through maturity. The annual effective interest rate of the 2028 notes after giving effect to the amortization of financing costs is 5.2%. The indentures governing the senior notes require that, upon the occurrence of both a change of control and a rating decline (each as defined in the respective indenture), we offer to purchase the notes at 101% of their principal amount. If we or our restricted subsidiaries dispose of assets, under certain circumstances, we will be required to either invest the net cash proceeds from such asset sales in our business within a specified period of time, repay certain senior secured debt or debt of our non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash proceeds at a purchase price of 100% of their principal amount. The indentures contain covenants that, among other things, restrict our ability and the ability of our restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments; incur additional debt or issue mandatorily redeemable equity; incur liens on assets; merge or consolidate with another company or sell or otherwise dispose of all or substantially all of our assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments. At December 31, 2021, we were in compliance with all of the limitations and restrictions associated with our senior note obligations. Effective April 30, 2020, our Board of Directors authorized the repurchase of up to $30 millionof our debt securities. The authorization has no expiration date. All of the $30 millionauthorization was remaining at December 31, 2021.
Other note payable
Our other note payable of
$12.5 millionwas issued as part of a transaction to acquire real estate for development. The note is non-recourse and is secured by the underlying real estate, accrues interest at 4.0% per annum and matures in October 2023. Issuance of Common Stock We have an effective shelf registration statement, filed with the Securities and Exchange Commissionin October 2021, registering $750 millionof equity securities, of which $300 millionwas reserved for sales under our at-the-market equity offering program that became effective in November 2021. In the three months ended December 31, 2021, we issued 84,547 shares of common stock under our at-the-market equity offering program for proceeds of $1.7 million, net of commissions and other issuance costs totaling $0.1 million. At December 31, 2021, $748.2 millionremained available for issuance under the shelf registration statement, of which $298.2 millionwas reserved for sales under the at-the-market equity offering program. 19 -------------------------------------------------------------------------------- Table of Contents Operating Cash Flow Activities In the three months ended December 31, 2021, net cash provided by operating activities was $5.8 millioncompared to $158.7 millionof cash used in operating activities in the three months ended December 31, 2020. The cash provided by operating activities in the current period was primarily the result of the net income generated in the period and increases in liabilities and other accrued expenses, partially offset by the increase in our real estate. The cash used in operating activities in the prior year period was primarily due to the increase in real estate.
Investing Cash Flow Activities
In the three months ended
December 31, 2021, net cash provided by investing activities was $3.2 millioncompared to $2.0 millionin the three months ended December 31, 2020. The cash provided by investing activities in the current period consists primarily of cash received from the sale of an investment. Additionally, cash provided by investing activities in both periods includes distributions received from our unconsolidated ventures.
Financing of treasury activities
Within three months
Contractual obligations and off-balance sheet arrangements
In support of our residential lot development business, we issue letters of credit under our revolving credit facility and we have a surety bond program that provides financial assurance to beneficiaries related to the execution and performance of certain development obligations. At
December 31, 2021, we had outstanding letters of credit of $66.3 millionunder the revolving credit facility and surety bonds of $528.2 million, issued by third parties to secure performance under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees.
Significant Accounting Policies and Estimates
There have been no material changes in our critical accounting policies or estimates from those disclosed in our 2021 Annual Report on Form 10-K.
New and pending accounting pronouncements
Please read Note 1-Basis of Presentation of the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
20 -------------------------------------------------------------------------------- Table of Contents Forward-Looking Statements This Quarterly Report on Form 10-Q and other materials we have filed or may file with the
Securities and Exchange Commissioncontain "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: •the effect of D.R. Horton's controlling level of ownership on us and the holders of our securities; •our ability to realize the potential benefits of the strategic relationship with D.R. Horton; •the effect of our strategic relationship with D.R. Horton on our ability to maintain relationships with our customers; •the impact of COVID-19 on the economy and our business; •the cyclical nature of the homebuilding and lot development industries and changes in economic, real estate and other conditions; •the impacts of weather conditions and natural disasters; •health and safety incidents relating to our operations; •supply shortages and other risks of acquiring land, construction materials and skilled labor; •competitive conditions in our industry; •our ability to achieve our strategic initiatives; •continuing liabilities related to assets that have been sold; •the impact of governmental policies, laws or regulations and actions or restrictions of regulatory agencies; •the cost and availability of property suitable for residential lot development; •general economic, market or business conditions where our real estate activities are concentrated; •our dependence on relationships with national, regional and local homebuilders; •our ability to obtain or the availability of surety bonds to secure our performance related to construction and development activities and the pricing of bonds; •obtaining reimbursements and other payments from governmental districts and other agencies and timing of such payments; •our ability to succeed in new markets; •the conditions of the capital markets and our ability to raise capital to fund expected growth; •our ability to manage and service our debt and comply with our debt covenants, restrictions and limitations; •the volatility of the market price and trading volume of our common stock; •our ability to hire and retain key personnel; •the impact of significant inflation, higher interest rates or deflation; and •the strength of our information technology systems and the risk of cybersecurity breaches and our ability to satisfy privacy and data protection laws and regulations. Other factors, including the risk factors described in Item 1A of our 2021 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. 21 -------------------------------------------------------------------------------- Table of Contents 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. 22
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