What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-23 compared with 2024-01-24 · 76 added, 48 removed, 179 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 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.

is a national, well-capitalized residential lot development company focused primarily on making investments in land acquisition and development to sell finished single-family residential lots to homebuilders.

Our common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol “FOR.” The terms “Forestar,” the “Company,” “we” and “our” used herein refer to Forestar Group Inc., a Delaware corporation, and its predecessors and subsidiaries.

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

As of December 31, 2023, D.R.

As of March 31, 2024, D.R.

Horton owned approximately 62% of the Company's outstanding common stock.

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We occasionally make short-term strategic investments in finished lots (lot banking) and undeveloped land (land banking) with the intent to sell these assets within a short time period to utilize available capital prior to its deployment into longer-term lot development projects.

For the six months ended March 31, 2024, we sold 6,439 lots with an average sales price of $97,400.

At March 31, 2024, our lot position consisted of 96,100 residential lots, of which approximately 57,400 were owned and 38,700 were controlled through purchase contracts.

Of our 57,400 owned lots, approximately 18,000 lots are under contract to be sold for an aggregate remaining sales price of approximately $1.6 billion.

We have expanded and diversified our lot development operations across 57 markets in 23 states by investing available capital into our existing markets and by entering new markets.

We believe our geographically diverse operations provide a strong platform for us to consolidate market share in the highly fragmented lot development industry.

We also believe our geographic diversification lowers our operational risks and enhances our earnings potential by mitigating the effects of local and regional economic cycles.

Our customers are primarily local, regional and national homebuilders.

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Entry-level and first-time move-up homebuyers are the largest segments of the new home market.

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

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.

Demand for residential lots, particularly at affordable price points, remained strong in the six months ended March 31, 2024, and our revenues increased 23% 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.

While the disruptions in the supply chain for

certain construction materials and tightness in the labor market have largely subsided, municipality delays are still extending development cycle times, and development costs remain elevated.

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

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, our geographically diverse lot portfolio that is focused on affordable price points and our strategic relationship with D.R.

We believe we are well-positioned to consolidate market share in the highly fragmented lot development industry because of our low net leverage and strong liquidity position, low overhead model, geographically diverse lot portfolio that is focused on affordable price points and 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 months ended December 31, 2023 and 2022.

The following tables and related discussion set forth key operating and financial data as of and for the three and six months ended March 31, 2024 and 2023.

Operating Results

Components of income before income taxes were as follows:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2024 2023 2024 2023

(In millions)

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Residential lots sold consisted of:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2024 2023 2024 2023

Development projects 3,280 2,979 6,430 5,242

Lot banking projects 9 — 9 —

3,289 2,979 6,439 5,242

Average sales price per lot (a)

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_______________

(a) Excludes lots sold from deferred development projects and any impact from change in contract liabilities.

(a) Excludes any impact from change in contract liabilities.

Revenues consisted of:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2024 2023 2024 2023

(In millions)

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Development projects $ 323.1 $ 252.2 $ 626.6 $ 456.1

Lot banking projects 0.7 — 0.7 —

Decrease in contract liabilities 2.1 0.7 2.8 3.4

325.9 252.9 630.1 459.5

Deferred development projects 1.7 7.5 3.0 14.3

327.6 260.4 633.1 473.8

Tract sales and other 6.2 41.1 6.6 44.4

Total revenues $ 333.8 $ 301.5 $ 639.7 $ 518.2

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 lots sold and residential lot sales revenues in the three and six months ended March 31, 2024 have increased compared to the prior year periods 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.

Horton and customers other than D.R.

Horton, excluding deferred development projects, consisted of:

Three Months Ended December 31,

Horton consisted of:

Three Months Ended March 31, Six Months Ended March 31,

2024 2023 2024 2023

Residential lots sold to D.R.

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Horton 184 313 500 482

3,289 2,979 6,439 5,242

Residential lot revenues from lot sales to D.R.

Horton and customers other than D.R.

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

Three Months Ended December 31,

Horton, before changes in contract liabilities, consisted of:

Three Months Ended March 31, Six Months Ended March 31,

2024 2023 2024 2023

(In millions)

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Lots sold to customers other than 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 in the six months ended March 31, 2024 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.

Lots sold to customers other than D.R.

Horton in the six months ended March 31, 2023 included 147 lots that were sold for $16.0 million to a lot banker who expects to sell those lots to D.R.

Horton at a future date.

Tract sales and other revenue in the three and six months ended March 31, 2023 primarily consisted of 34 tract acres sold to third parties for $8.0 million and 379 tract acres sold to D.R.

Horton for $32.5 million.

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

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.

Cost of sales in the three and six months ended March 31, 2024 increased compared to the prior year periods primarily due to the increase in the number of lots sold.

Cost of sales related to tract sales and other revenues was $25.5 million in both the three and six months ended March 31, 2023.

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, 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.

As a result of this process, no impairment charges were recorded in the three and six months ended March 31, 2024.

In the three and six months ended March 31, 2023, we recorded non-cash impairment charges of $19.4 million.

In the three and six months ended March 31, 2024, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $0.2 million and $0.4 million, respectively, compared to $0.9 million and $3.3 million in the prior year periods.

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.

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.

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 $16.3 million in the three and six months ended March 31, 2024 compared to $8.2 million and $16.4 million in the prior year periods.

Interest charged to cost of sales was 2.6% of total cost of sales (excluding impairments and land option charges) in both the three and six months ended March 31, 2024 compared to 2.3% and 2.6% in the prior year periods.

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

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%.

SG&A expense in the three and six months ended March 31, 2024 was $29.2 million and $57.2 million compared to $22.0 million and $44.9 million in the prior year periods.

SG&A expense as a percentage of revenues was 8.7% and 8.9% in the three and six months ended March 31, 2024 compared to 7.3% and 8.7% in the prior year periods.

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

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

Our business operations employed 340 and 271 employees at March 31, 2024 and 2023, 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 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.

Income tax expense for the three and six months ended March 31, 2024 was $13.9 million and $26.9 million compared to $9.0 million and $16.1 million in the prior year periods.

Our effective tax rate was 23.6% and 24.4% for the three and six months ended March 31, 2024 compared to 25.1% and 25.2% in the prior year periods.

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

The effective tax rate for the three and six months ended March 31, 2024 also included a benefit for stock-based compensation.

At March 31, 2024, we had deferred tax liabilities, net of deferred tax assets , of $50.0 million.

The deferred tax assets were partially offset by a valuation allowance of $0.8 million, resulting in a net deferred tax liability of $50.8 million.

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The deferred tax assets were partially offset by a valuation allowance of $0.9 million, resulting in a net deferred tax liability of $50.7 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 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.

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.

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Land and Lot Position

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

December 31, 2023 September 30, 2023

Our land and lot position at March 31, 2024 and September 30, 2023 is summarized as follows:

March 31, 2024 September 30, 2023

Lots owned 57,400 52,400

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Owned lots fully developed 6,300 6,400

Owned lots fully developed related to lot banking 300 —

Liquidity and Capital Resources

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.

At March 31, 2024, we had $416.2 million of cash and cash equivalents and $382.0 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 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.

At March 31, 2024, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 32.4% compared to 33.7% at September 30, 2023 and 36.2% at March 31, 2023.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 16.4% compared to 5.5% at September 30, 2023 and 25.2% at March 31, 2023.

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 are confident that 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.

We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs.

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

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.

At March 31, 2024, there were no borrowings outstanding and $28.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $382.0 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 December 31, 2023, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

At March 31, 2024, 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 December 31, 2023, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At March 31, 2024, 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 December 31, 2023.

All of the $30 million authorization was remaining at March 31, 2024.

Other Note Payable

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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 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.

In the three months ended March 31, 2024, we issued 546,174 shares of common stock under our at-the-market equity offering program for proceeds of $19.7 million, net of commissions and other issuance costs totaling $0.4 million.

At March 31, 2024, $728.1 million remained available for issuance under the shelf registration statement, of which $278.1 million was reserved for sales under our at-the-market equity offering program.

Operating Cash Flow Activities

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.

In the six months ended March 31, 2024, net cash used in operating activities was $215.9 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 six months ended March 31, 2023, net cash provided by operating activities was $21.3 million, which was primarily the result of our net income generated in the period adjusted for impairments and land option charges, partially offset by the decreases in accounts payable and other accrued liabilities and accrued development costs.

Investing Cash Flow Activities

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.

In the six months ended March 31, 2024, net cash used in investing activities was $0.8 million compared to $1.3 million of cash provided by investing activities in the prior year period.

Financing Cash Flow Activities

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.

In the six months ended March 31, 2024, net cash provided by financing activities was $16.9 million compared to $0.7 million net cash used in financing activities in the prior year period.

Cash provided by financing activities in the six months ended March 31, 2024 was primarily the result of the issuance of common stock under our at-the-market equity offering program for net proceeds of $19.7 million.

Critical Accounting Policies and Estimates

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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