What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-01-24 compared with 2023-07-21 · 47 added, 80 removed, 180 unchanged (41% of the section changed)

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Forestar Group Inc.

is a national, well-capitalized residential lot development company with operations in 52 markets in 20 states as of June 30, 2023.

is a national, well-capitalized residential lot development company with operations in 57 markets in 23 states as of December 31, 2023.

We are focused primarily on making investments in land acquisition and development to sell finished single-family residential lots to homebuilders.

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Horton owned 75% of the Company's outstanding common stock.

As of June 30, 2023, D.R.

As of December 31, 2023, D.R.

Horton owned approximately 63% of the Company's outstanding common stock.

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We also market some of our communities towards build-to-rent operators.

Throughout the majority of fiscal 2022, demand for our residential lots remained strong.

In the fourth quarter of fiscal 2022, we began to see weakening demand that persisted through the end of the second quarter of fiscal 2023 as mortgage interest rates increased substantially and inflationary pressures remained elevated.

In the three months ended June 30, 2023, demand for finished lots improved as homebuilders increased their pace of new home starts to better match the stronger demand for new homes, particularly at affordable price points.

Demand for residential lots, particularly at affordable price points, remained strong in the three months ended December 31, 2023, and our lot sales increased 39% from the prior year period.

The supply of new and existing homes at affordable price points remains limited, and low resale supply continues to support the demand for new construction.

Demographics supporting housing demand remain favorable despite higher mortgage rates and inflationary pressures, and homebuilders have continued to adjust to current market conditions by using incentives and price adjustments accordingly.

While the disruptions in the supply chain for certain construction materials and tightness in the labor market have improved, municipality delays are still extending development cycle times, and development costs remain elevated.

We increase our land and lot sales prices when market conditions permit, and we attempt to offset cost increases in one component with savings in another.

However, if market conditions are challenging, we may have to reduce selling prices or may not be able to offset cost increases with higher selling prices.

We believe we are well-positioned to operate effectively 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.

We plan to remain disciplined when investing in land opportunities and to remain focused on managing our lot sales pace and lot pricing at each community to optimize the return on our investments.

Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the three and nine months ended June 30, 2023 and 2022.

The following tables and related discussion set forth key operating and financial data as of and for the three months ended December 31, 2023 and 2022.

Operating Results

Components of income before income taxes were as follows:

Three Months Ended June 30, Nine Months Ended June 30,

2023 2022 2023 2022

Three Months Ended December 31,

(In millions)

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Selling, general and administrative expense 28.0 22.9

Equity in earnings of unconsolidated ventures — — — (1.1)

Gain on sale of assets — (1.6)

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Residential lots sold consisted of:

Three Months Ended June 30, Nine Months Ended June 30,

2023 2022 2023 2022

Three Months Ended December 31,

Development projects 3,150 2,263

Lot banking projects — — — 330

3,812 3,406 9,054 12,923

Deferred development projects — 67 — 854

3,812 3,473 9,054 13,777

Average sales price per lot (a)

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Revenues consisted of:

Three Months Ended June 30, Nine Months Ended June 30,

2023 2022 2023 2022

Three Months Ended December 31,

(In millions)

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Development projects $ 303.5 $ 204.0

Lot banking projects — — — 27.3

Decrease in contract liabilities 0.7 2.7

334.8 295.1 794.3 1,108.2

Deferred development projects 1.3 6.7

345.1 303.0 818.9 1,128.6

Tract sales and other 0.4 3.3

Total revenues $ 305.9 $ 216.7

Residential lots sold and residential lot sales revenues in the three months ended June 30, 2023 have increased compared to the prior year primarily as a result of improved demand for finished lots as homebuilders have increased their pace of new home starts to better match the stronger demand for new homes, particularly at affordable price points.

Residential lots sold and residential lot sales revenues in the nine months ended June 30, 2023 have decreased compared to the prior year period primarily as a result of the moderation in demand for finished lots that persisted throughout the first six months of the current fiscal year as homebuilders had reduced their pace of new home starts to better match the moderation of housing demand caused by increases in mortgage rates and elevated inflationary pressures.

Residential lots sold and residential lot sales revenues in the three months ended December 31, 2023 increased compared to the prior year primarily as a result of improved demand for finished lots as homebuilders have increased their pace of new home starts to better match the stronger demand for new homes, particularly at affordable price points.

Residential lot sales to D.R.

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Horton, excluding deferred development projects, consisted of:

Three Months Ended June 30, Nine Months Ended June 30,

2023 2022 2023 2022

Three Months Ended December 31,

Residential lots sold to D.R.

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Horton 316 169

3,812 3,406 9,054 12,923

Residential lot revenues from lot sales to D.R.

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Horton, before deferred development projects and changes in contract liabilities, consisted of:

Three Months Ended June 30, Nine Months Ended June 30,

2023 2022 2023 2022

Three Months Ended December 31,

(In millions)

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Lots sold to customers other than D.R.

Horton in the three and nine months ended June 30, 2023 included 105 and 252 lots that were sold for $12.2 million and $28.2 million to a lot banker who expects to sell those lots to D.R.

Horton at a future date.

Lots sold to customers other than D.R.

Horton in the nine months ended June 30, 2022 included 358 lots that were sold for $63.0 million to a lot banker who expects to sell those lots to D.R.

Horton in the three months ended December 31, 2023 included 124 lots that were sold for $15.1 million to a lot banker who expects to sell those lots to D.R.

Horton at a future date.

In the three and nine months ended June 30, 2022 we sold 67 and 854 deferred development lots to a customer other than D.R.

Horton for a total transaction price of $9.4 million and $64.1 million, respectively.

In the three and nine months ended June 30, 2023, we recognized $10.3 million and $24.6 million of revenues as a result of our progress towards completion of our remaining unsatisfied performance obligations on deferred development projects, compared to $7.9 million and $20.4 million in the prior year periods.

Tract sales and other revenue in the three months ended June 30, 2023 primarily consisted of 45 tract acres sold to D.R.

Horton for $22.8 million compared to 12 tract acres sold to a customer other than D.R.

Horton for $5.1 million in the prior year period.

In the nine months ended June 30, 2023, tract sales and other revenue primarily consisted of 424 tract acres sold to D.R.

Horton for $55.3 million and 34 tract acres sold to a customer other than D.R.

Horton for $8.0 million compared to 50 tract acres sold to customers other than D.R.

Horton for $8.5 million in the prior year period.

Cost of Sales, Real Estate Impairment and Land Option Charges and Interest Incurred

Cost of sales in the three months ended June 30, 2023 increased compared to the prior year period primarily due to the increase in the number of lots sold.

Cost of sales in the nine months ended June 30, 2023 decreased compared to the prior year period primarily due to the decrease in the number of lots sold.

Cost of sales related to tract sales and other revenues in the three and nine months ended June 30, 2023 was $17.5 million and $43.0 million compared to $3.8 million and $6.5 million in the prior year periods.

Cost of sales in the three months ended December 31, 2023 increased compared to the prior year period primarily due to the increase in the number of lots sold.

Each quarter, we review the performance and outlook for all of our real estate for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary.

As a result of this process, no impairment charges were recorded during the three months ended June 30, 2023.

In the nine months ended June 30, 2023 and 2022, we recorded non-cash impairment charges of $19.4 million and $3.8 million.

In the three and nine months ended June 30, 2023, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that the we have terminated or expect to terminate were $0.9 million and $4.2 million, respectively, compared to $1.0 million and $3.2 million in the prior year periods.

As a result of this process, there were no impairment charges recorded for the three months ended December 31, 2023 and 2022.

In the three months ended December 31, 2023, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that the we have terminated or expect to terminate were $0.2 million compared to $2.4 million in the prior year period.

We capitalize interest costs throughout the development period (active real estate).

Capitalized interest is charged to cost of sales as the related real estate is sold to the buyer.

Interest incurred was $8.2 million and $24.6 million in the three and nine months ended June 30, 2023 compared to $8.3 million and $24.7 million in the prior year periods.

Interest charged to cost of sales was 2.3% and 2.5% of total cost of sales (excluding impairments and land option charges) in the three and nine months ended June 30, 2023 compared to 3.1% and 3.0% in the prior year periods.

Capitalized interest is charged to cost of sales as the related real estate is sold.

Interest incurred was $8.1 million in the three months ended December 31, 2023 compared to $8.2 million in the prior year period.

Interest charged to cost of sales was 2.6% of total cost of sales (excluding impairments and land option charges) in the three months ended December 31, 2023 compared to 3.0% in the prior year period.

Selling, General and Administrative (SG&A) Expense and Other Income Statement Items

SG&A expense in the three and nine months ended June 30, 2023 was $26.4 million and $71.3 million compared to $24.1 million and $69.9 million in the prior year periods.

SG&A expense as a percentage of revenues was 7.2% and 8.0% in the three and nine months ended June 30, 2023 compared to 7.8% and 6.1% in the prior year periods.

SG&A expense in the three months ended December 31, 2023 was $28.0 million compared to $22.9 million in the prior year period and as a percentage of revenues was 9.2% compared to 10.6%.

Our SG&A expense primarily consisted of employee compensation and related costs.

Our business operations employed 282 and 312 employees at June 30, 2023 and 2022, respectively.

Our business operations employed 329 and 277 employees at December 31, 2023 and 2022, respectively.

We attempt to control our SG&A costs while ensuring that our infrastructure supports our operations;

however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.

Our income tax expense for the three and nine months ended June 30, 2023 was $15.6 million and $31.7 million compared to $13.0 million and $41.4 million in the prior year periods.

Our effective tax rate was 25.0% and 25.1% for the three and nine months ended June 30, 2023 compared to 24.7% and 24.4% in the prior year periods.

Our effective tax rate for all periods included an expense for state income taxes and nondeductible expenses.

At June 30, 2023, we had deferred tax liabilities, net of deferred tax assets, of $33.2 million.

Our income tax expense for the three months ended December 31, 2023 was $13.0 million compared to $7.1 million in the prior year period.

Our effective tax rate for both periods was 25.4% and included an expense for state income taxes and nondeductible expenses.

At December 31, 2023, we had deferred tax liabilities, net of deferred tax assets , of $49.3 million.

The deferred tax assets were partially offset by a valuation allowance of $0.9 million, resulting in a net deferred tax liability of $50.2 million.

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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 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.

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.

Land and Lot Position

Our land and lot position at June 30, 2023 and September 30, 2022 is summarized as follows:

June 30, 2023 September 30, 2022

Our land and lot position at December 31, 2023 and September 30, 2023 is summarized as follows:

December 31, 2023 September 30, 2023

Lots owned 55,400 52,400

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Liquidity and Capital Resources

At June 30, 2023, we had $401.0 million of cash and cash equivalents and $380.2 million of available borrowing capacity on our revolving credit facility.

At December 31, 2023, we had $458.9 million of cash and cash equivalents and $385.7 million of available borrowing capacity on our revolving credit facility.

We have no senior note maturities until fiscal 2026.

We believe we are well-positioned to operate effectively during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R.

At June 30, 2023, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 35.3% compared to 37.1% at September 30, 2022 and 38.1% at June 30, 2022.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 19.1% compared to 26.9% at September 30, 2022 and 32.8% at June 30, 2022.

At December 31, 2023, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 33.4% compared to 33.7% at September 30, 2023 and 36.7% at December 31, 2022.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 14.9% compared to 5.5% at September 30, 2023 and 28.7% at December 31, 2022.

Over the long term, we intend to maintain our ratio of net debt to total capital at approximately 40% or less.

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The maturity date of the facility is October 28, 2026.

At June 30, 2023, there were no borrowings outstanding and $29.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $380.2 million.

At December 31, 2023, there were no borrowings outstanding and $24.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $385.7 million.

The revolving credit facility is guaranteed by our wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

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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 June 30, 2023, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

At December 31, 2023, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

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.

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and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments.

At June 30, 2023, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At December 31, 2023, 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 million of our debt securities.

The authorization has no expiration date.

All of the $30 million authorization was remaining at June 30, 2023.

All of the $30 million authorization was remaining at December 31, 2023.

Other Note Payable

We also have a note payable of $12.5 million that was issued as part of a transaction to acquire real estate for development.

The note is non-recourse, is secured by the underlying real estate, accrues interest at 4.0% per annum and matures in October 2023.

In December 2023, we issued a note payable of $9.9 million 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 December 2025.

Issuance of Common Stock

We have an effective shelf registration statement filed with the Securities and Exchange Commission in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under our at-the-market equity offering program that became effective November 2021.

In the nine months ended June 30, 2023, we issued no shares of common stock under our at-the-market equity offering program.

At June 30, 2023, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 million was reserved for sales under our at-the-market equity offering program.

In the three months ended December 31, 2023, there were no shares of common stock issued under our at-the-market equity offering program.

At December 31, 2023, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 million was reserved for sales under our at-the-market equity offering program.

Operating Cash Flow Activities

In the nine months ended June 30, 2023, net cash provided by operating activities was $136.2 million, which was primarily the result of our net income generated in the period adjusted for impairments and land option charges and the decrease in real estate, partially offset by the decreases in accounts payable and other accrued liabilities and accrued development costs.

In the nine months ended June 30, 2022, net cash used in operating activities was $10.2 million, which was primarily the result of the increase in real estate, partially offset by net income generated in the period.

In the three months ended December 31, 2023, net cash used in operating activities was $156.7 million, which was primarily the result of the increase in real estate, partially offset by net income generated in the period and the increase in earnest money on sales contracts.

In the three months ended December 31, 2022, net cash used in operating activities was $49.8 million, which was primarily the result of the increase in real estate, partially offset by net income generated in the period.

Investing Cash Flow Activities

In the nine months ended June 30, 2023, net cash provided by investing activities was $0.8 million compared to $1.6 million in the nine months ended June 30, 2022.

The cash provided by investing activities in both periods consisted primarily of cash received from the sale of assets.

In the three months ended December 31, 2023, net cash used in investing activities was $0.2 million compared to $1.5 million of cash provided by investing activities in the prior year period.

Financing Cash Flow Activities

In the nine months ended June 30, 2023, net cash used in financing activities was $0.8 million compared to $1.3 million of cash provided by financing activities in the prior year period.

In the three months ended December 31, 2023, net cash used in financing activities was $0.2 million compared to $0.1 million in the prior year period.

Critical Accounting Policies and Estimates

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• supply shortages and other risks of acquiring land, construction materials and skilled labor;

• the effects of public health issues such as a major epidemic or pandemic, including the impact of COVID-19 on the economy and our business;

• the effects of public health issues such as a major epidemic or pandemic on the economy and our business;

• the impacts of weather conditions and natural disasters;

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• 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;

• 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;

• the impact of governmental policies, laws or regulations and actions or restrictions of regulatory agencies;

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• our ability to hire and retain key personnel.

• 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 2023 Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis