FOR-9.30.2013-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33662
_________________________________________________________
FORESTAR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________________________________
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| | |
Delaware | | 26-1336998 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)
(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)
_________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ¨ | | Accelerated filer | x |
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Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Title of Each Class | | Number of Shares Outstanding as of November 4, 2013 |
Common Stock, par value $1.00 per share | | 34,748,426 |
FORESTAR GROUP INC.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
|
| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
ASSETS | |
Cash and cash equivalents | $ | 54,769 |
| | $ | 10,361 |
|
Real estate, net | 509,467 |
| | 517,150 |
|
Oil and gas properties and equipment, net | 207,832 |
| | 158,427 |
|
Investment in unconsolidated ventures | 46,691 |
| | 41,546 |
|
Timber | 11,324 |
| | 12,293 |
|
Receivables, net | 34,770 |
| | 33,623 |
|
Prepaid expenses | 5,836 |
| | 6,455 |
|
Income taxes receivable | 1,569 |
| | — |
|
Property and equipment, net | 5,905 |
| | 4,859 |
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Deferred tax asset, net | 41,832 |
| | 54,748 |
|
Goodwill and other intangible assets | 66,656 |
| | 63,868 |
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Other assets | 16,836 |
| | 15,104 |
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TOTAL ASSETS | $ | 1,003,487 |
| | $ | 918,434 |
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LIABILITIES AND EQUITY | | | |
Accounts payable | $ | 13,921 |
| | $ | 18,320 |
|
Accrued employee compensation and benefits | 3,350 |
| | 5,667 |
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Accrued property taxes | 6,643 |
| | 4,231 |
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Accrued interest | 1,270 |
| | 1,168 |
|
Income taxes payable | — |
| | 587 |
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Other accrued expenses | 34,843 |
| | 22,648 |
|
Other liabilities | 28,138 |
| | 38,203 |
|
Debt | 335,171 |
| | 294,063 |
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TOTAL LIABILITIES | 423,336 |
| | 384,887 |
|
COMMITMENTS AND CONTINGENCIES |
| |
|
EQUITY | | | |
Forestar Group Inc. shareholders’ equity: | | | |
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at third quarter-end 2013 and year-end 2012 | 36,947 |
| | 36,947 |
|
Additional paid-in capital | 434,960 |
| | 407,206 |
|
Retained earnings | 137,419 |
| | 121,097 |
|
Treasury stock, at cost, 2,209,151 shares at third quarter-end 2013 and 2,327,623 shares at year-end 2012 | (34,488 | ) | | (35,762 | ) |
Total Forestar Group Inc. shareholders’ equity | 574,838 |
| | 529,488 |
|
Noncontrolling interests | 5,313 |
| | 4,059 |
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TOTAL EQUITY | 580,151 |
| | 533,547 |
|
TOTAL LIABILITIES AND EQUITY | $ | 1,003,487 |
| | $ | 918,434 |
|
Please read the notes to consolidated financial statements.
FORESTAR GROUP INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
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| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands, except per share amounts) |
REVENUES | | | | | | | |
Real estate sales and other | $ | 37,001 |
| | $ | 18,310 |
| | $ | 84,877 |
| | $ | 48,303 |
|
Commercial and income producing properties | 13,355 |
| | 8,805 |
| | 85,387 |
| | 23,381 |
|
Real estate | 50,356 |
| | 27,115 |
| | 170,264 |
| | 71,684 |
|
Oil and gas | 22,095 |
| | 10,479 |
| | 53,430 |
| | 27,053 |
|
Other natural resources | 2,656 |
| | 3,016 |
| | 8,963 |
| | 5,277 |
|
| 75,107 |
| | 40,610 |
| | 232,657 |
| | 104,014 |
|
COSTS AND EXPENSES | | | | | | | |
Cost of real estate sales and other | (18,603 | ) | | (10,806 | ) | | (43,112 | ) | | (27,158 | ) |
Cost of commercial and income producing properties | (13,352 | ) | | (6,733 | ) | | (70,151 | ) | | (15,928 | ) |
Cost of oil and gas producing activities | (10,090 | ) | | (1,392 | ) | | (26,762 | ) | | (3,117 | ) |
Cost of other natural resources | (454 | ) | | (1,043 | ) | | (1,662 | ) | | (2,169 | ) |
Other operating | (16,051 | ) | | (14,691 | ) | | (45,039 | ) | | (39,116 | ) |
General and administrative | (5,945 | ) | | (11,298 | ) | | (22,245 | ) | | (25,010 | ) |
| (64,495 | ) | | (45,963 | ) | | (208,971 | ) | | (112,498 | ) |
GAIN ON SALE OF ASSETS | — |
| | 10,196 |
| | — |
| | 25,506 |
|
OPERATING INCOME | 10,612 |
| | 4,843 |
| | 23,686 |
| | 17,022 |
|
Equity in earnings of unconsolidated ventures | 3,125 |
| | 680 |
| | 6,604 |
| | 2,172 |
|
Interest expense | (5,231 | ) | | (8,094 | ) | | (14,892 | ) | | (15,649 | ) |
Other non-operating income | 1,459 |
| | 1,113 |
| | 3,711 |
| | 2,317 |
|
INCOME (LOSS) BEFORE TAXES | 9,965 |
| | (1,458 | ) | | 19,109 |
| | 5,862 |
|
Income tax benefit (expense) | 2,932 |
| | 1,078 |
| | 28 |
| | (1,274 | ) |
CONSOLIDATED NET INCOME (LOSS) | 12,897 |
| | (380 | ) | | 19,137 |
| | 4,588 |
|
Less: Net income attributable to noncontrolling interests | (1,067 | ) | | (323 | ) | | (2,815 | ) | | (1,678 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC. | $ | 11,830 |
| | $ | (703 | ) | | $ | 16,322 |
| | $ | 2,910 |
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | | | | | |
Basic | 35,410 |
| | 35,233 |
| | 35,341 |
| | 35,204 |
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Diluted | 36,072 |
| | 35,233 |
| | 35,949 |
| | 35,437 |
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NET INCOME (LOSS) PER COMMON SHARE | | | | | | | |
Basic | $ | 0.33 |
| | $ | (0.02 | ) | | $ | 0.46 |
| | $ | 0.08 |
|
Diluted | $ | 0.33 |
| | $ | (0.02 | ) | | $ | 0.45 |
| | $ | 0.08 |
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TOTAL COMPREHENSIVE INCOME (LOSS) | $ | 11,830 |
| | $ | (703 | ) | | $ | 16,322 |
| | $ | 2,910 |
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Please read the notes to consolidated financial statements.
FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) |
| | | | | | | |
| First Nine Months |
| 2013 | | 2012 |
| (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Consolidated net income | $ | 19,137 |
| | $ | 4,588 |
|
Adjustments: | | | |
Depreciation, depletion and amortization | 21,698 |
| | 12,952 |
|
Change in deferred income taxes | 3,535 |
| | (2,971 | ) |
Change in unrecognized tax benefits | (6,251 | ) | | 114 |
|
Equity in earnings of unconsolidated ventures | (6,604 | ) | | (2,172 | ) |
Distributions of earnings of unconsolidated ventures | 869 |
| | 516 |
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Proceeds from consolidated venture's sale of assets, net | — |
| | 24,294 |
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Share-based compensation | 15,367 |
| | 11,491 |
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Real estate cost of sales | 71,324 |
| | 25,998 |
|
Dry hole exploration costs | 2,206 |
| | — |
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Real estate development and acquisition expenditures, net | (65,762 | ) | | (67,127 | ) |
Reimbursements from utility and improvement districts | 4,540 |
| | 2,922 |
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Other changes in real estate | 1,440 |
| | 835 |
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Changes in deferred income | (2,229 | ) | | 927 |
|
Gain on sale of assets | — |
| | (25,506 | ) |
Other | 154 |
| | (35 | ) |
Changes in: | | | |
Notes and accounts receivable | (544 | ) | | (645 | ) |
Prepaid expenses and other | (373 | ) | | 1,300 |
|
Accounts payable and other accrued liabilities | (11,268 | ) | | 452 |
|
Income taxes | (2,156 | ) | | (7,283 | ) |
Net cash provided by (used for) operating activities | 45,083 |
| | (19,350 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Property, equipment, software and reforestation and other | (6,241 | ) | | (1,577 | ) |
Oil and gas properties and equipment | (56,482 | ) | | (2,794 | ) |
Investment in unconsolidated ventures | (819 | ) | | (1,684 | ) |
Return of investment in unconsolidated ventures | 1,271 |
| | 985 |
|
Proceeds from sale of multifamily property | — |
| | 29,474 |
|
Business acquisition, net of cash acquired | — |
| | (152,073 | ) |
Proceeds from sale of venture interest | — |
| | 32,095 |
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Other | (45 | ) | | — |
|
Net cash (used for) investing activities | (62,316 | ) | | (95,574 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from issuance of convertible senior notes, net | 121,250 |
| | — |
|
Payments of debt | (96,915 | ) | | (46,374 | ) |
Additions to debt | 38,901 |
| | 158,929 |
|
Deferred financing fees | (808 | ) | | (5,209 | ) |
Distributions to noncontrolling interests, net | (1,561 | ) | | (897 | ) |
Exercise of stock options | 1,812 |
| | 1,269 |
|
Payroll taxes on restricted stock and stock options | (1,128 | ) | | (1,171 | ) |
Excess income tax benefit from share-based compensation | 90 |
| | 373 |
|
Net cash provided by financing activities | 61,641 |
| | 106,920 |
|
| | | |
Net increase (decrease) in cash and cash equivalents | 44,408 |
| | (8,004 | ) |
Cash and cash equivalents at beginning of period | 10,361 |
| | 18,283 |
|
Cash and cash equivalents at end of period | $ | 54,769 |
| | $ | 10,279 |
|
Please read the notes to consolidated financial statements.
FORESTAR GROUP INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1—Basis of Presentation
Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest and variable interest entities of which we are the primary beneficiary. We eliminate all material intercompany accounts and transactions. In our consolidated balance sheets we have reclassified prior years' other accrued expenses that were included in accounts payable to conform to the current year presentation. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any preferential returns and treat distributions as a reduction of our investment). We account for our investment in other entities in which we do not have significant influence over operations and financial policies using the cost method (we recognize as income distributions of accumulated earnings).
We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those principally related to allocating cost of sales to real estate, measuring long-lived assets for impairment, oil and gas revenue accruals, capital expenditure and lease operating expense accruals associated with our oil and gas production activities, oil and gas reserves and depletion of our oil and gas properties. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2012 Annual Report on Form 10-K.
In first quarter 2013, we strategically changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations, real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results to other natural resources. All prior period segment information has been reclassified to conform to the current year presentation. These changes did not impact our consolidated net income or cash flows.
Note 2—New and Pending Accounting Pronouncements
Accounting Standards Adopted in 2013
In first nine months 2013, we adopted Accounting Standards Update (ASU) ASU 2013-11— Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, ASU 2011-10 — Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate, ASU 2012-02 — Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and ASU No. 2013-01 — Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Adoption of these pronouncements did not have a significant effect on our earnings or financial position.
Pending Accounting Standards
ASU 2013-04 — Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date will be effective in first quarter 2014. This ASU requires an entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. We are evaluating the impact adoption of this ASU will have on our earnings, financial position and disclosures.
Note 3—Real Estate
Real estate consists of:
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| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
Entitled, developed and under development projects | $ | 369,084 |
| | $ | 361,827 |
|
Undeveloped land (includes land in entitlement) | 87,489 |
| | 82,688 |
|
Commercial and income producing properties | | | |
Carrying value | 80,381 |
| | 100,855 |
|
Less: accumulated depreciation | (27,487 | ) | | (28,220 | ) |
Net carrying value | 52,894 |
| | 72,635 |
|
| $ | 509,467 |
| | $ | 517,150 |
|
Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $63,795,000 at third quarter-end 2013 and $50,476,000 at year-end 2012, including $41,795,000 at third quarter-end 2013 and $34,252,000 at year-end 2012 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval and reimbursement. We submitted for reimbursement to these districts $15,713,000 in first nine months 2013 and $4,345,000 in first nine months 2012. We collected reimbursements of $1,840,000 from these districts in first nine months 2013 and $972,000 in first nine months 2012. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.
Also included in entitled, developed and under development projects is our investment in the resort development owned by third parties at our Cibolo Canyons project. We received $2,700,000 in payments from the special improvement district in first nine months 2013 and $1,950,000 in first nine months 2012. At third quarter-end 2013, we have $29,818,000 invested in the resort development.
In first nine months 2013, commercial and income producing properties decreased by $29,707,000 as result of selling Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000. We received $21,522,000 in net proceeds, reduced our outstanding debt by $18,902,000 and recognized $10,881,000 in segment earnings. At third quarter-end 2013, commercial and income producing properties primarily represents our investment in a 413 guest room hotel in Austin with a carrying value of $20,881,000 and our investment in multifamily development sites located in Charlotte, Nashville and Dallas with a combined carrying value of $30,367,000.
Depreciation expense, primarily related to commercial and income producing properties, was $1,927,000 in first nine months 2013 and $2,736,000 in first nine months 2012 and is included in other operating expenses.
Note 4—Oil and Gas Properties
Net capitalized costs, utilizing the successful efforts method of accounting, related to our oil and gas producing activities follows:
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| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
Unproved oil and gas properties | $ | 92,317 |
| | $ | 81,672 |
|
Proved oil and gas properties | 133,017 |
| | 81,412 |
|
Less: accumulated depreciation, depletion and amortization | (17,502 | ) | | (4,657 | ) |
Net carrying value of proved oil and gas properties | 115,515 |
| | 76,755 |
|
| $ | 207,832 |
| | $ | 158,427 |
|
Note 5—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
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| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
Goodwill | $ | 64,493 |
| | $ | 61,680 |
|
Identified intangibles, net | 2,163 |
| | 2,188 |
|
| $ | 66,656 |
| | $ | 63,868 |
|
Goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets of $60,619,000 associated with acquisition of Credo in third quarter 2012 and $3,874,000 associated with a water resources company acquired in 2010.
The final purchase price allocation related to the Credo acquisition based on additional information obtained during the acquisition measurement period, in particular, allocation of the estimated values assigned to oil and gas properties and equipment, goodwill and deferred tax liability, is as follows:
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| | | | | | | | | | | | | |
| | Purchase Price Allocation |
| | Year-End | | | | Third Quarter-End |
| | 2012 | | Adjustments | | 2013 |
| | (In thousands) |
Cash and short-term investments | | $ | 2,300 |
| | $ | — |
| | | $ | 2,300 |
|
Receivables | | 9,144 |
| | 1,003 |
| (a) | | 10,147 |
|
Oil and gas properties and equipment | | 140,514 |
| | (4,712 | ) | (b) | | 135,802 |
|
Other properties and equipment | | 67 |
| | — |
| | | 67 |
|
Goodwill and other intangible assets | | 58,396 |
| | 2,813 |
| (c) | | 61,209 |
|
Other | | 676 |
| | — |
| | | 676 |
|
Total assets acquired | | 211,097 |
| | (896 | ) | | | 210,201 |
|
| | | | | | | |
Accounts payable and accrued liabilities | | 29,927 |
| | 13 |
| (d) | | 29,940 |
|
Deferred tax liability | | 24,700 |
| | (909 | ) | (e) | | 23,791 |
|
Other liabilities | | 1,255 |
| | — |
| | | 1,255 |
|
Total liabilities assumed | | 55,882 |
| | (896 | ) | | | 54,986 |
|
| | | | | | | |
Estimated fair value of net assets acquired | | $ | 155,215 |
| | $ | — |
| | | $ | 155,215 |
|
_____________________
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(a) | Primarily related to unrecorded seismic and leasehold costs due from partners. |
| |
(b) | Fair value adjustments allocated to near-term expiring leasehold acreage. |
| |
(c) | Goodwill adjustments associated with fair value adjustments for oil and gas properties, net of deferred taxes and working capital adjustments. |
| |
(d) | Primarily related to current income taxes payable. |
| |
(e) | Primarily related to deferred taxes on fair value adjustments of near-term expiring leasehold acreage. |
Identified intangibles include $1,667,000 in indefinite lived groundwater leases associated with a water resources company acquired in 2010. In addition, identified intangibles includes $590,000 related to patents with definite lives associated with the Calliope Gas Recovery System associated with our acquisition of Credo and is being amortized over the average remaining useful life of the patents. The net carrying value at third quarter-end 2013 is $496,000.
Note 6—Equity
A reconciliation of changes in equity at third quarter-end 2013 follows:
|
| | | | | | | | | | | |
| Forestar Group Inc. | | Noncontrolling Interests | | Total |
| (In thousands) |
Balance at year-end 2012 | $ | 529,488 |
| | $ | 4,059 |
| | $ | 533,547 |
|
Net income | 16,322 |
| | 2,815 |
| | $ | 19,137 |
|
Distributions to noncontrolling interests | — |
| | (1,663 | ) | | $ | (1,663 | ) |
Contributions from noncontrolling interests | — |
| | 102 |
| | $ | 102 |
|
Convertible senior notes | 17,058 |
| | — |
| | $ | 17,058 |
|
Other (primarily share-based compensation) | 11,970 |
| | — |
| | $ | 11,970 |
|
Balance at third quarter-end 2013 | $ | 574,838 |
| | $ | 5,313 |
| | $ | 580,151 |
|
Note 7—Investment in Unconsolidated Ventures
At third quarter-end 2013, we had ownership interests generally ranging from 25 to 50 percent in 13 ventures that we account for using the equity method. We have no ventures that are accounted for using the cost method.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Venture Assets | | Venture Borrowings(a) | | Venture Equity | | Our Investment |
| Third Quarter-End | | Year-End | | Third Quarter-End | | Year-End | | Third Quarter-End | | Year-End | | Third Quarter-End | | Year-End |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
242, LLC (b) | $ | 22,505 |
| | $ | 21,408 |
| | $ | — |
| | $ | 810 |
| | $ | 20,394 |
| | $ | 19,576 |
| | $ | 9,342 |
| | $ | 8,903 |
|
CJUF III, RH Holdings | 33,134 |
| | 15,970 |
| | 14,800 |
| | 1 |
| | 15,710 |
| | 13,701 |
| | 3,529 |
| | 3,836 |
|
CL Ashton Woods (c) | 16,536 |
| | 15,701 |
| | — |
| | — |
| | 15,071 |
| | 15,044 |
| | 6,792 |
| | 5,775 |
|
CL Realty | 8,049 |
| | 8,245 |
| | — |
| | — |
| | 7,844 |
| | 7,842 |
| | 3,922 |
| | 3,921 |
|
FMF Peakview | 28,772 |
| | 16,859 |
| | 9,567 |
| | — |
| | 16,736 |
| | 13,331 |
| | 3,429 |
| | 2,666 |
|
HM Stonewall Estates (c) | 4,585 |
| | 5,184 |
| | — |
| | 104 |
| | 4,585 |
| | 5,080 |
| | 2,246 |
| | 2,470 |
|
LM Land Holdings (c) | 26,051 |
| | 21,094 |
| | 4,937 |
| | 3,086 |
| | 19,600 |
| | 13,128 |
| | 10,042 |
| | 6,045 |
|
Temco | 13,422 |
| | 13,255 |
| | — |
| | — |
| | 13,114 |
| | 13,066 |
| | 6,557 |
| | 6,533 |
|
Other ventures (5) (d) | 12,510 |
| | 17,129 |
| | 30,361 |
| | 34,357 |
| | (32,230 | ) | | (31,275 | ) | | 832 |
| | 1,397 |
|
| $ | 165,564 |
| | $ | 134,845 |
| | $ | 59,665 |
| | $ | 38,358 |
| | $ | 80,824 |
| | $ | 69,493 |
| | $ | 46,691 |
| | $ | 41,546 |
|
Combined summarized income statement information for our ventures accounted for using the equity method follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Venture Revenues | | Venture Earnings (Loss) | | Our Share of Earnings (Loss) |
| Third Quarter | | First Nine Months | | Third Quarter | | First Nine Months | | Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
242, LLC (b) | $ | 37 |
| | $ | 1,072 |
| | $ | 3,168 |
| | $ | 2,925 |
| | $ | (20 | ) | | $ | 163 |
| | $ | 817 |
| | $ | 352 |
| | $ | (10 | ) | | $ | 93 |
| | $ | 438 |
| | $ | 208 |
|
CJUF III, RH Holdings | 4 |
| | — |
| | 7 |
| | — |
| | (133 | ) | | — |
| | (357 | ) | | — |
| | (133 | ) | | — |
| | (357 | ) | | — |
|
CL Ashton Woods (c) | 1,355 |
| | 740 |
| | 4,246 |
| | 2,089 |
| | 477 |
| | 197 |
| | 1,027 |
| | 458 |
| | 677 |
| | 350 |
| | 1,817 |
| | 874 |
|
CL Realty | 445 |
| | 298 |
| | 1,246 |
| | 2,294 |
| | 350 |
| | 104 |
| | 802 |
| | 840 |
| | 175 |
| | 52 |
| | 401 |
| | 420 |
|
FMF Peakview | 200 |
| | — |
| | 200 |
| | — |
| | (98 | ) | | — |
| | (137 | ) | | — |
| | (19 | ) | | — |
| | (27 | ) | | — |
|
HM Stonewall Estates (c) | 696 |
| | 526 |
| | 1,794 |
| | 1,696 |
| | 255 |
| | 146 |
| | 655 |
| | 543 |
| | 100 |
| | 57 |
| | 276 |
| | 216 |
|
LM Land Holdings (c) | 9,387 |
| | 1,700 |
| | 14,651 |
| | 4,970 |
| | 5,515 |
| | 340 |
| | 9,274 |
| | 1,207 |
| | 2,344 |
| | (16 | ) | | 3,998 |
| | 151 |
|
Temco | 162 |
| | 60 |
| | 437 |
| | 560 |
| | 42 |
| | (18 | ) | | 48 |
| | (142 | ) | | 21 |
| | (9 | ) | | 24 |
| | (71 | ) |
Other ventures (5) | 21 |
| | 1,646 |
| | 5,171 |
| | 4,525 |
| | (120 | ) | | (174 | ) | | (642 | ) | | (579 | ) | | (30 | ) | | 153 |
| | 34 |
| | 374 |
|
| $ | 12,307 |
| | $ | 6,042 |
| | $ | 30,920 |
| | $ | 19,059 |
| | $ | 6,268 |
| | $ | 758 |
| | $ | 11,487 |
| | $ | 2,679 |
| | $ | 3,125 |
| | $ | 680 |
| | $ | 6,604 |
| | $ | 2,172 |
|
_____________________
| |
(a) | Total includes current maturities of $28,034,000 at third quarter-end 2013, of which $27,892,000 is non-recourse to us, and $32,323,000 at year-end 2012, of which $32,083,000 is non-recourse to us. |
| |
(b) | Includes unamortized deferred gains on real estate contributed by us to ventures. We recognize deferred gains as income as real estate is sold to third parties. Deferred gains of $855,000 are reflected as a reduction to our investment in unconsolidated ventures at third quarter-end 2013. |
| |
(c) | We acquired these equity investments from CL Realty in 2012 at estimated fair value. The difference between estimated fair value of the equity investment and our capital account within the respective ventures at closing (basis difference) will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures. Unrecognized basis difference of $2,359,000 is reflected as a reduction of our investment in unconsolidated ventures at third quarter-end 2013. |
| |
(d) | Our investment in other ventures reflects our ownership interests generally ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 16 — Variable Interest Entities for additional information. |
In first nine months 2013, we invested $819,000 in these ventures and received $2,140,000 in distributions, and in first nine months 2012, we invested $1,684,000 in these ventures and received $1,501,000 in distributions. Distributions include both return of investments and distributions of earnings.
We have provided performance bonds and letters of credit on behalf of certain ventures that could be drawn on due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance with local codes and ordinances. At third quarter-end 2013, we have $26,630,000 outstanding, of which $26,577,000 is related to development and construction of a 257-unit multifamily property in Austin estimated to be completed in May 2014.
Note 8—Receivables
Receivables consist of:
|
| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
Loan secured by real estate | $ | 17,382 |
| | $ | 18,507 |
|
Notes receivable, average interest rates of 5.22% at third quarter-end 2013 and 6.24% at year-end 2012 | 1,989 |
| | 1,875 |
|
Receivables and accrued interest | 15,424 |
| | 13,303 |
|
| 34,795 |
| | 33,685 |
|
Allowance for bad debts | (25 | ) | | (62 | ) |
| $ | 34,770 |
| | $ | 33,623 |
|
At third quarter-end 2013, we have $17,382,000 invested in a loan which was acquired from a financial institution in 2011 when it was non-performing and is secured by a lien on developed and undeveloped real estate located near Houston designated for single-family residential and commercial development. Interest accrues at nine percent the first three years escalating to ten percent in year four and 12 percent in year five, with interest above 6.25 percent to be forgiven if the loan is prepaid by certain dates. In first nine months 2013, we received principal payments of $3,074,000 and cash interest payments of $1,341,000. At third quarter-end 2013, the outstanding principal balance was $26,940,000.
Estimated accretable yield follows:
|
| | | |
| Third Quarter-End |
| 2013 |
| (In thousands) |
Beginning of period (year-end 2012) | $ | 25,149 |
|
Change in accretable yield due to change in timing of estimated cash flows | (1,661 | ) |
Interest income recognized (in first nine months 2013) | (3,290 | ) |
End of period | $ | 20,198 |
|
Notes receivable generally are secured by a deed of trust and generally due within three years.
Receivables and accrued interest principally includes oil and gas related revenue accruals, joint interest billing receivables and other miscellaneous operating receivables arising in the normal course of business.
Note 9—Debt
Debt consists of:
|
| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
Senior secured credit facility | | | |
Term loan facility — average interest rate of 4.18% at third quarter-end 2013 and 4.21% at year-end 2012 | $ | 200,000 |
| | $ | 200,000 |
|
Revolving line of credit — average interest rate of 4.75% at year-end 2012 | — |
| | 44,000 |
|
3.75% convertible senior notes due 2020, net of discount | 99,122 |
| | — |
|
Secured promissory notes — average interest rate of 3.18% at third quarter-end 2013 and 2.80% at year-end 2012 | 15,400 |
| | 34,171 |
|
Other indebtedness due through 2017 at variable and fixed interest rates ranging from 0.24% to 5.50% | 20,649 |
| | 15,892 |
|
| $ | 335,171 |
| | $ | 294,063 |
|
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2013, we were in compliance with the financial covenants of these agreements.
At third quarter-end 2013, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017 and a $200,000,000 revolving line of credit maturing September 14, 2015 (with one-year extension option). The term loan and the revolving line of credit may be prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $3,663,000 is outstanding at third quarter-end 2013. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At third quarter-end 2013, we had $196,337,000 in net unused borrowing capacity under our senior secured credit facility.
Under the terms of our senior secured credit facility, at our option we can borrow at LIBOR plus 4.0 percent or at the alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate, (ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR plus 1 percent. Borrowings under the senior secured credit facility are or may be secured by (a) mortgages on the timberland, high value timberland and portions of raw entitled land, as well as pledges of other rights including certain oil and gas operating properties, (b) assignments of current and future
leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries or majority-owned joint venture interest, or if such pledge is not permitted, a pledge of the right to distributions from such entities, (e) a pledge of reimbursements, hotel occupancy and other revenues payable to us from special improvement district tax collections in connection with our Cibolo Canyons project, and (f) a negative pledge (without a mortgage) on other assets. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
On February 26, 2013, we issued $125,000,000 aggregate principal amount of 3.75% convertible senior notes due 2020 (Notes). Interest on the Notes is payable semiannually at a rate of 3.75 percent per annum and they mature on March 1, 2020. The Notes have an initial conversion rate of 40.8351 per $1,000 principal amount. The initial conversion rate is subject to adjustment upon the occurrence of certain events. Prior to November 1, 2019, the Notes are convertible only upon certain circumstances, and thereafter are convertible at any time prior to the close of business on the second scheduled trading day prior to maturity. If converted, holders will receive cash, shares of our common stock or a combination thereof at our election. We intend to settle the principal amount of the convertible senior notes (Notes) in cash upon conversion, with any excess conversion value to be settled in shares of our common stock. Net proceeds from the offering were used to repay $68,000,000 under our revolving line of credit, and we intend to use the remaining net proceeds for general corporate purposes, including investments in oil and gas exploration and drilling and real estate acquisition and development.
We separately account for the liability and equity conversion components of the Notes due to our option to settle the conversion obligation in cash, shares or a combination thereof at our election. The fair value of the Notes excluding the conversion feature at the date of issuance was estimated to be approximately $97,309,000 and was calculated based on the fair value of similar non-convertible debt instruments. The resulting value of the conversion option of $27,691,000 was recognized as debt discount and recorded as additional paid-in capital on our consolidated balance sheet. The effective interest rate to calculate the accretion of the bond discount is eight percent and is based on our estimated (non-convertible) borrowing rate on long-term debt with a similar maturity at the time the Notes were issued. Interest expense includes the cash coupon rate on the Notes plus the non-cash accretion of the debt discount, which is based on the difference between the effective interest rate and the cash coupon rate. Amortization of debt discount was $1,813,000 in first nine months 2013 and is included in interest expense. At third quarter-end 2013, unamortized debt discount of our Notes was $25,878,000. Total debt issuance costs were $4,205,000 (including underwriters discount of $3,750,000), of which $3,273,000 was allocated to the liability component and $932,000 to the equity component of the Notes. The portion of the issuance costs allocated to the debt component of the Notes is being amortized over the term of the Notes.
At third quarter-end 2013, secured promissory notes represent a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $20,881,000. In first nine months 2013, secured promissory notes decreased by $18,902,000 as result of selling of Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000. We received $21,522,000 in net proceeds and we recognized $10,881,000 in segment earnings.
At third quarter-end 2013, other indebtedness, principally non-recourse, is collateralized by entitled, developed and under development projects with a carrying value of $60,453,000.
At third quarter-end 2013 and year-end 2012, we have $7,770,000 and $6,508,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $2,282,000 in first nine months 2013 and $2,290,000 in first nine months 2012 and is included in interest expense.
Note 10—Fair Value
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, oil and gas properties, assets held for sale, goodwill and other intangible assets, which are measured for impairment. In third quarter 2013 and 2012, no non-financial assets were remeasured at fair value.
We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
|
| | | | | | | | | | | | | | | | | |
| Third Quarter-End 2013 | | Year-End 2012 | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Valuation Technique |
| (In thousands) | | |
Loan secured by real estate | $ | 17,382 |
| | $ | 31,032 |
| | $ | 18,507 |
| | $ | 35,824 |
| | Level 2 |
Fixed rate debt (a) | (103,302 | ) | | (91,470 | ) | | (3,989 | ) | | (4,070 | ) | | Level 2 |
_____________________
| |
(a) | Third quarter-end 2013 includes our 3.75% convertible senior notes due 2020, issued February 26, 2013. |
Note 11—Capital Stock
Pursuant to our stockholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our stockholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.
Please read Note 17 — Share-Based Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At third quarter-end 2013, personnel of former affiliates held options to purchase 799,000 shares of our common stock. The options have a weighted average exercise price of $24.86 and a weighted average remaining contractual term of two years. At third quarter-end 2013, the options have an aggregate intrinsic value of $910,000.
Note 12—Net Income per Share
Earnings attributable to common shareholders and weighted average common shares outstanding used to compute earnings per share were:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Earnings available to common shareholders: | | | | | | | |
Consolidated net income (loss) | $ | 12,897 |
| | $ | (380 | ) | | $ | 19,137 |
| | $ | 4,588 |
|
Less: Net income attributable to noncontrolling interest | (1,067 | ) | | (323 | ) | | (2,815 | ) | | (1,678 | ) |
Net income (loss) attributable to Forestar Group Inc. | $ | 11,830 |
| | $ | (703 | ) | | $ | 16,322 |
| | $ | 2,910 |
|
Weighted average common shares outstanding — basic | 35,410 |
| | 35,233 |
| | 35,341 |
| | 35,204 |
|
Dilutive effect of stock options, restricted stock and equity-settled awards | 662 |
| | — |
| | 608 |
| | 233 |
|
Weighted average common shares outstanding — diluted | 36,072 |
| | 35,233 |
| | 35,949 |
| | 35,437 |
|
Anti-dilutive awards excluded from diluted weighted average shares | 1,764 |
| | 2,661 |
| | 2,022 |
| | 2,582 |
|
We intend to settle the principal amount of the convertible senior notes (Notes) in cash upon conversion, with any excess conversion value to be settled in shares of our common stock. Therefore, only the amount in excess of the par value of the Notes will be included in our calculation of diluted net income per share using the treasury stock method. As such, the Notes have no impact on diluted net income per share until the price of our common stock exceeds the conversion price of the Notes of $24.49. The average price of our common stock in third quarter and first nine months 2013 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our effective tax rate was a 29 percent benefit in third quarter 2013 and less than one percent benefit in first nine months 2013, which includes a four percent benefit for noncontrolling interests. Our third quarter and first nine months 2013 effective tax rates include a benefit from recognition of $6,326,000 of previously unrecognized tax benefits upon lapse of the statute of limitations for a previously reserved tax position. Our effective tax rates in third quarter and first nine months 2013 would have
been 33 percent excluding the impact of the foregoing tax benefits. At third quarter-end 2013, we had no unrecognized tax benefits.
Our effective tax rate was a 74 percent benefit in third quarter 2012 and 22 percent expense in first nine months 2012, which included a ten percent benefit for noncontrolling interests. In addition, our third quarter and first nine months 2012 effective tax rates included a non-cash benefit of 38 percent and nine percent associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states.
Our 2013 and 2012 effective tax rates also include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We have not provided a valuation allowance for our federal deferred tax asset because we believe it is likely it will be recoverable in future periods.
Note 14—Commitments and Contingencies
Litigation
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash flows. However, it is possible that charges related to these matters could be significant to our results or cash flows in any one accounting period.
Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that we can reasonably estimate. We own 288 acres near Antioch, California, portions of which were sites of a former Temple-Inland paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. We estimate the remaining cost to complete remediation activities will be approximately $1,230,000, which is included in other accrued expenses. It is possible that remediation or monitoring activities could be required in addition to those included within our estimate, but we are unable to determine the scope, timing or extent of such activities.
We have asset retirement obligations related to the abandonment and site restoration requirements that result from the acquisition, construction and development of oil and gas properties. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset retirement cost is included in cost of oil and gas producing activities on our consolidated statements of income and comprehensive income. At third quarter-end 2013, our asset retirement obligation was $1,573,000, which is included in other liabilities.
Note 15—Segment Information
In first quarter 2013, we changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations, real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results in other natural resources. All prior period segment information has been reclassified to conform to the current year presentation.
We manage our operations through three segments: real estate, oil and gas and other natural resources. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land, commercial and income producing properties, primarily a hotel and our multifamily investments. Oil and gas manages our owned mineral interests and interests leased from others and is an independent oil and gas exploration, development and production operation. Other natural resources manages our timber, recreational leases and water resource initiatives.
Assets allocated by segment are as follows:
|
| | | | | | | |
| Third Quarter-End | | Year-End |
| 2013 | | 2012 |
| (In thousands) |
Real estate | $ | 581,725 |
| | $ | 588,137 |
|
Oil and gas | 284,091 |
| | 227,061 |
|
Other natural resources | 23,272 |
| | 24,066 |
|
Assets not allocated to segments (a) | 114,399 |
| | 79,170 |
|
Total assets | $ | 1,003,487 |
| | $ | 918,434 |
|
_________________________
| |
(a) | Assets not allocated to segments at third quarter-end 2013 principally consist of cash and cash equivalents of $54,769,000 and a net deferred tax asset of $41,832,000. Assets not allocated to segments at year-end 2012 principally consist of a net deferred tax asset of $54,748,000 and cash and cash equivalents of $10,361,000. |
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 Note 1 — Basis of Presentation. Our revenues are derived from U.S. operations and all of our assets are located in the U.S. In third quarter 2013, no single customer accounted for more than 10 percent of our total revenues.
Segment revenues and earnings are as follows:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Revenues: | | | | | | | |
Real estate | $ | 50,356 |
| | $ | 27,115 |
| | $ | 170,264 |
| | $ | 71,684 |
|
Oil and gas | 22,095 |
| | 10,479 |
| | 53,430 |
| | 27,053 |
|
Other natural resources | 2,656 |
| | 3,016 |
| | 8,963 |
| | 5,277 |
|
Total revenues | $ | 75,107 |
| | $ | 40,610 |
| | $ | 232,657 |
| | $ | 104,014 |
|
Segment earnings: | | | | | | | |
Real estate | $ | 13,197 |
| | $ | 12,688 |
| | $ | 40,747 |
| | $ | 31,931 |
|
Oil and gas | 8,499 |
| | 7,337 |
| | 17,869 |
| | 19,470 |
|
Other natural resources | 549 |
| | 552 |
| | 2,792 |
| | (769 | ) |
Total segment earnings | 22,245 |
| | 20,577 |
| | 61,408 |
| | 50,632 |
|
Items not allocated to segments (a) | (13,347 | ) | | (22,358 | ) | | (45,114 | ) | | (46,448 | ) |
Income (loss) before taxes attributable to Forestar Group Inc. | $ | 8,898 |
| | $ | (1,781 | ) | | $ | 16,294 |
| | $ | 4,184 |
|
_________________________
| |
(a) | Items not allocated to segments consist of: |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
General and administrative expense | $ | (4,648 | ) | | $ | (8,000 | ) | | $ | (14,935 | ) | | $ | (19,482 | ) |
Shared-based compensation expense | (3,492 | ) | | (6,327 | ) | | (15,367 | ) | | (11,491 | ) |
Interest expense | (5,231 | ) | | (8,094 | ) | | (14,892 | ) | | (15,649 | ) |
Other corporate non-operating income | 24 |
| | 63 |
| | 80 |
| | 174 |
|
| $ | (13,347 | ) | | $ | (22,358 | ) | | $ | (45,114 | ) | | $ | (46,448 | ) |
Note 16—Variable Interest Entities
At third quarter-end 2013, we are the primary beneficiary of one variable interest entity (VIE) that we consolidate. At third quarter-end 2013, our consolidated balance sheet includes no assets and $1,342,000 in liabilities related to this VIE. In first nine months 2013, there were no contributions to this VIE.
Also at third quarter-end 2013, we are not the primary beneficiary of three VIEs that we account for using the equity method. The unrelated managing partners oversee day-to-day operations and guarantee some of the debt of the VIEs, and while we have certain rights regarding major decisions, we do not have the power to direct the activities that are most significant to the economic performance of the entities. Although some of the debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At third quarter-end 2013, these three VIEs have total assets of $11,079,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of $44,541,000, which includes $27,902,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method in Note 7 — Investment in Unconsolidated Ventures. At third quarter-end 2013, our investment in these VIEs is $18,000 and is included in investment in unconsolidated ventures. In first nine months 2013, we contributed $111,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at $3,730,000, which exceeds our investment as we have a nominal general partner interest in all of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.
Note 17—Share-Based Compensation
Share-based compensation expense consists of:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Cash-settled awards | $ | 1,823 |
| | $ | 4,547 |
| | $ | 7,498 |
| | $ | 4,829 |
|
Equity-settled awards | 899 |
| | 609 |
| | 3,565 |
| | 2,438 |
|
Restricted stock | 85 |
| | 514 |
| | 541 |
| | 1,636 |
|
Stock options | 685 |
| | 657 |
| | 3,763 |
| | 2,588 |
|
| $ | 3,492 |
| | $ | 6,327 |
| | $ | 15,367 |
| | $ | 11,491 |
|
Share-based compensation expense is included in:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
General and administrative expense | $ | 1,297 |
| | $ | 3,298 |
| | $ | 7,310 |
| | $ | 5,528 |
|
Other operating expense | 2,195 |
| | 3,029 |
| | 8,057 |
| | 5,963 |
|
| $ | 3,492 |
| | $ | 6,327 |
| | $ | 15,367 |
| | $ | 11,491 |
|
In first nine months 2013, share-based compensation expense increased principally as result of a 24 percent increase in our stock price since year-end 2012, compared with a 10 percent increase in our stock price in first nine months 2012 since year-end 2011, which impacted the value of vested cash-settled awards.
The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $590,000 in first nine months 2013 and $595,000 in first nine months 2012. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $9,325,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first nine months 2013 or 2012.
In first nine months 2013, we withheld 59,172 shares having a value of $1,128,000 for payroll taxes in connection with vesting of restricted stock awards and exercises of stock options. In first nine months 2012, we withheld 72,199 shares having a value of $1,171,000 for payroll taxes in connection with vesting of restricted stock awards and exercises of stock options.
A summary of awards granted under our 2007 Stock Incentive Plan follows:
Cash-settled awards
Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally vest over three to four years from the date of grant and generally provide for accelerated vesting upon retirement, death, disability or if there is a change in control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.
The following table summarizes the activity of cash-settled restricted stock unit awards in first nine months 2013:
|
| | | | | | |
| Equivalent Units | | Weighted Average Grant Date Fair Value |
| (In thousands) | | (Per unit) |
Non-vested at beginning of period | 350 |
| | $ | 17.03 |
|
Granted | 89 |
| | 18.70 |
|
Vested | (199 | ) | | 17.62 |
|
Forfeited | (3 | ) | | 17.42 |
|
Non-vested at end of period | 237 |
| | 17.90 |
|
The following table summarizes the activity of cash-settled stock appreciation rights in first nine months 2013:
|
| | | | | | | | | | | | |
| Rights Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (Current Value Less Exercise Price) |
| (In thousands) | | (Per share) | | (In years) | | (In thousands) |
Balance at beginning of period | 866 |
| | $ | 11.38 |
| | 6 | | $ | 5,256 |
|
Granted | — |
| | — |
| | | | |
Exercised | (265 | ) | | 10.23 |
| | | | |
Forfeited | — |
| | — |
| | | | |
Balance at end of period | 601 |
| | 11.88 |
| | 6 | | 5,797 |
|
Exercisable at end of period | 554 |
| | 11.38 |
| | 6 | | 5,623 |
|
The fair value of awards settled in cash was $6,947,000 in first nine months 2013 and $5,254,000 in first nine months 2012. At third quarter-end 2013, the fair value of vested cash-settled awards is $16,751,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $5,281,000 at third quarter-end 2013 based on a quarter-end stock price of $21.53.
Equity-settled awards
Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, market-leveraged stock units (MSU), which vest after three years from date of grant and performance stock units (PSU), which vest after approximately three years from date of grant if certain performance goals are met. Equity settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and issued upon retirement. The following table summarizes the activity of equity-settled awards in first nine months 2013:
|
| | | | | | |
| Equivalent Units | | Weighted Average Grant Date Fair Value |
| (In thousands) | | (Per share) |
Non-vested at beginning of period | 409 |
| | $ | 18.99 |
|
Granted | 264 |
| | 19.42 |
|
Vested | (77 | ) | | 16.95 |
|
Forfeited | (8 | ) | | 17.34 |
|
Non-vested at end of period | 588 |
| | 19.47 |
|
In first nine months 2013, we granted 136,000 MSU awards. These awards will be settled in common stock based upon our total shareholder return over three years from the date of grant. The number of shares to be issued could range from a high of 204,000 shares if our stock price increases by 50 percent or more, to a low of 68,000 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.
Unrecognized share-based compensation expense related to non-vested equity-settled awards is $5,084,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Restricted stock
Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first nine months 2013:
|
| | | | | | |
| Restricted Shares | | Weighted Average Grant Date Fair Value |
| (In thousands) | | (Per share) |
Non-vested at beginning of period | 211 |
| | $ | 16.95 |
|
Granted | 8 |
| | 20.55 |
|
Vested | (162 | ) | | 17.80 |
|
Forfeited | — |
| | — |
|
Non-vested at end of period | 57 |
| | 15.00 |
|
Unrecognized share-based compensation expense related to non-vested restricted stock awards is $247,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Stock options
Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option awards in first nine months 2013:
|
| | | | | | | | | | | | |
| Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (Current Value Less Exercise Price) |
| (In thousands) | | (Per share) | | (In years) | | (In thousands) |
Balance at beginning of period | 1,756 |
| | $ | 20.53 |
| | 7 | | $ | 1,956 |
|
Granted | 373 |
| | 18.70 |
| | | | |
Exercised | (85 | ) | | 16.25 |
| | | | |
Forfeited | (29 | ) | | 26.62 |
| | | | |
Balance at end of period | 2,015 |
| | 20.28 |
| | 7 | | 6,838 |
|
Exercisable at end of period | 1,133 |
| | 22.35 |
| | 6 | | 3,392 |
|
We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions: |
| | | | | | | |
| First Nine Months |
| 2013 | | 2012 |
Expected dividend yield | — | % | | — | % |
Expected stock price volatility | 66.8 | % | | 60.2 | % |
Risk-free interest rate | 1.4 | % | | 1.3 | % |
Expected life of options (years) | 6 |
| | 6 |
|
Weighted average estimated fair value of options granted | $ | 11.47 |
| | $ | 9.22 |
|
We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. Our expected stock price volatility is based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.
Unrecognized share-based compensation expense related to non-vested stock options is $3,994,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Pre-Spin Awards
Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.
Pre-spin stock option awards to our employees to purchase our common stock have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. At third quarter-end 2013, there were 57,000 awards outstanding and exercisable on our stock with a weighted average exercise price of $26.68, weighted average remaining term of two years and aggregate intrinsic value of $26,000.
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 2012 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of third quarter-end 2013, 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 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, revenue, capital expenditure 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; |
| |
• | competitive actions by other companies; |
| |
• | changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies; |
| |
• | our realization of the expected benefits of acquiring CREDO Petroleum Corporation (Credo); |
| |
• | risks associated with oil and gas 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, indenture 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 effecting, 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. |
Other factors, including the risk factors described in Item 1A of our 2012 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. |
2012 Strategic Initiatives
In 2012, we announced Triple in FOR strategic initiatives designed to further enhance shareholder value by:
| |
• | Accelerating value realization of our real estate and natural resources by increasing total residential lot sales, oil and gas production, and total segment EBITDA. |
| |
• | Optimizing transparency and disclosure by expanding reported oil and gas resources, providing additional information related to groundwater interests, and establishing a progress report on corporate responsibility efforts. |
| |
• | Raising our net asset value through strategic and disciplined investments by pursuing growth opportunities which help prove up our asset value and meet return expectations, developing a low-capital, high-return multifamily business, and accelerating investment in lower-risk oil and gas opportunities. |
Segment Reporting Change
In first quarter 2013, we strategically changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations, real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results in other natural resources. All prior period segment information has been reclassified to conform to the current period presentation.
Results of Operations
A summary of our consolidated results by business segment follows:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Revenues: | | | | | | | |
Real estate | $ | 50,356 |
| | $ | 27,115 |
| | $ | 170,264 |
| | $ | 71,684 |
|
Oil and gas | 22,095 |
| | 10,479 |
| | 53,430 |
| | 27,053 |
|
Other natural resources | 2,656 |
| | 3,016 |
| | 8,963 |
| | 5,277 |
|
Total revenues | $ | 75,107 |
| | $ | 40,610 |
| | $ | 232,657 |
| | $ | 104,014 |
|
Segment earnings: | | | | | | | |
Real estate | $ | 13,197 |
| | $ | 12,688 |
| | $ | 40,747 |
| | $ | 31,931 |
|
Oil and gas | 8,499 |
| | 7,337 |
| | 17,869 |
| | 19,470 |
|
Other natural resources | 549 |
| | 552 |
| | 2,792 |
| | (769 | ) |
Total segment earnings | 22,245 |
| | 20,577 |
| | 61,408 |
| | 50,632 |
|
Items not allocated to segments: | | | | | | | |
General and administrative expense | (4,648 | ) | | (8,000 | ) | | (14,935 | ) | | (19,482 | ) |
Share-based compensation expense | (3,492 | ) | | (6,327 | ) | | (15,367 | ) | | (11,491 | ) |
Gain on sale of assets | — |
| | 16 |
| | — |
| | 16 |
|
Interest expense | (5,231 | ) | | (8,094 | ) | | (14,892 | ) | | (15,649 | ) |
Other corporate non-operating income | 24 |
| | 47 |
| | 80 |
| | 158 |
|
Income (loss) before taxes | 8,898 |
| | (1,781 | ) | | 16,294 |
| | 4,184 |
|
Income tax benefit (expense) | 2,932 |
| | 1,078 |
| | 28 |
| | (1,274 | ) |
Net income (loss) attributable to Forestar Group Inc. | $ | 11,830 |
| | $ | (703 | ) | | $ | 16,322 |
| | $ | 2,910 |
|
Significant aspects of our results of operations follow:
Third Quarter and First Nine Months 2013
| |
• | Third quarter and first nine months 2013 real estate segment earnings increased due to higher average prices for lots and commercial acres sold, higher lot sales volume and higher undeveloped land sales from our retail land sales program offset partially by lower commercial acres sold as compared with third quarter 2012. First nine months 2013 real estate segment earnings benefited from sale of Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000, which generated approximately $10,881,000 in segment earnings. In addition, first nine 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 for the third quarter and first nine months 2013, increased principally due to higher working interest production volume and earnings attributable to our exploration and production operations on leased mineral interests as result of our acquisition of Credo in third quarter 2012 and higher average oil and natural gas prices, partially offset by lower oil and gas production volumes and reduced lease bonus and delay rental payments received related to our owned mineral interests. |
| |
• | Third quarter 2013 other natural resources segment earnings remained flat. Higher average fiber prices were offset by lower volumes primarily due to scheduled maintenance outages taken by our customers in the quarter. First nine months 2013 other natural resources segment earnings benefited from higher levels of timber harvesting activity driven by increased customer demand compared to first nine months 2012. |
| |
• | Share-based compensation expense fluctuations are primarily driven by changes in our stock price. First nine month 2013 share-based compensation expense increased principally as result of a 24 percent increase in our stock price since year-end 2012, compared with a 10 percent increase in our stock price in first nine months 2012 since year-end 2011, which impacted the value of vested cash-settled awards. |
Third Quarter and First Nine Months 2012
| |
• | Third quarter and first nine months 2012 real estate segment earnings benefited primarily from a $10,180,000 gain resulting from the sale of Broadstone Memorial, a 401 unit multifamily project in Houston, and increased residential and commercial sales activity. First nine months 2012 real estate segment earnings also benefited from a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC, a $3,401,000 gain from a consolidated venture’s sale of 800 acres near Dallas, and increased residential and commercial sales activity. |
| |
• | Oil and gas segment earnings benefited from $3,543,000 in lease bonus revenues as a result of leasing over 3,100 net mineral acres and increased oil production volumes. These items were partially offset by increased cost of sales due to higher production volumes, lower prices and from additional oil and natural gas personnel. |
| |
• | Third quarter and first nine months 2012 general and administrative expense includes $3,248,000 and $5,709,000 in transaction costs to outside advisors associated with our acquisition of Credo on September 28, 2012. |
| |
• | Share-based compensation expense increased as result of the increase in our stock price and the impact on cash-settled vested awards. |
| |
• | Interest expense includes a $4,448,000 loss on extinguishment of debt in connection with amendment and extension of our term loan on September 14, 2012. |
Current Market Conditions
U.S. single-family residential market conditions continued to improve in first nine months 2013, driven by a growing demand for homes and a tightening supply of homes available for sale. Housing demand has been fueled primarily by high housing affordability, largely due to relatively low mortgage rates, and increased consumer confidence. Inventories of unsold homes are at historically low levels in many areas. In addition, declining finished lot inventories and supply of developable raw land is increasing demand for our developed lots, principally in the major markets of Texas. However, persistently high unemployment levels, national and global economic weakness and uncertainty, and a restrictive mortgage lending environment continue to threaten a robust recovery in the housing market. Multifamily market conditions continue to be strong, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven primarily by limited housing inventory, reduced single-family mortgage credit availability, and the increased propensity to rent among the 18 to 34 year old demographic of the U.S. population.
Oil prices have continued to strengthen over the last several months and generally have been stronger over the last two and one-half years. Natural gas prices are up over 50 percent from year ago levels, but are significantly lower than realized prices over the last decade. Prolonged cold weather throughout the 2012 - 2013 heating season has taken working gas in storage below the midpoint of the five year average causing natural 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 natural gas when comparing energy equivalency and due to the U.S. being net importers of crude oil while current estimates of domestic natural gas producing supplies are believed to be sufficient.
Business Segments
We manage our operations through three business segments:
| |
• | 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, natural gas, and timber, and the overall strength or weakness of the U.S. economy.
Real Estate
We own directly or through ventures 132,000 acres of real estate located in ten states and 14 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 100,000 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 commercial and income producing properties, primarily a hotel at third quarter-end 2013, and multifamily properties we may develop and sell as a merchant builder.
A summary of our real estate results follows:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Revenues | $ | 50,356 |
| | $ | 27,115 |
| | $ | 170,264 |
| | $ | 71,684 |
|
Cost of sales | (31,955 | ) | | (17,539 | ) | | (113,263 | ) | | (43,086 | ) |
Operating expenses | (8,498 | ) | | (8,421 | ) | | (23,179 | ) | | (24,208 | ) |
| 9,903 |
| | 1,155 |
| | 33,822 |
| | 4,390 |
|
Interest income primarily from loan secured by real estate | 1,435 |
| | 1,066 |
| | 3,631 |
| | 2,159 |
|
Gain on sale of assets | — |
| | 10,197 |
| | — |
| | 25,273 |
|
Equity in earnings of unconsolidated ventures | 2,926 |
| | 593 |
| | 6,109 |
| | 1,787 |
|
Less: Net income attributable to noncontrolling interests | (1,067 | ) | | (323 | ) | | (2,815 | ) | | (1,678 | ) |
Segment earnings | $ | 13,197 |
| | $ | 12,688 |
| | $ | 40,747 |
| | $ | 31,931 |
|
Third quarter and first nine months 2013 revenues include construction revenues of $9,029,000 and $26,635,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor. We are reimbursed for costs paid to subcontractors plus 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 third quarter and first nine months 2012 were $2,099,000 and $2,158,000.
Third quarter and first nine months 2013, cost of sales include $9,583,000 and $27,189,000 related to multifamily construction contract costs we incurred as general contractor and paid to subcontractors associated with our development of two multifamily venture properties, as well as an estimated loss of $554,000 associated with our fixed fee contract as a general contractor related to one of our venture multifamily properties. Cost of sales associated with multifamily construction contracts for third quarter and first nine months 2012 were $2,099,000 and $2,158,000.
In addition, first nine months 2013, cost of sales includes $29,707,000 in carrying value related to Promesa, a 289-unit multifamily property we developed as a merchant builder and sold.
Third quarter and first nine months 2013 interest income principally represents earnings from a loan we hold which is secured by a mixed-use real estate community in Houston.
In third quarter and first nine months 2012, gain on sale of assets includes $10,180,000 resulting from the sale of Broadstone Memorial, a 401-unit multifamily project in Houston. In addition, first nine months 2012 includes a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC for $32,095,000 and a $3,401,000 gain from a consolidated venture’s sale of 800 acres in Dallas.
In third quarter and first nine months 2013, the increase in equity earnings of unconsolidated ventures compared to third quarter 2012 is primarily due to higher average residential lot prices and lot sales volume and increase in commercial tract sales.
Revenues in our owned and consolidated ventures consist of:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Residential real estate | $ | 28,298 |
| | $ | 13,564 |
| | $ | 65,748 |
| | $ | 36,892 |
|
Commercial real estate | 1,083 |
| | 2,405 |
| | 4,521 |
| | 4,170 |
|
Undeveloped land | 6,571 |
| | 1,604 |
| | 11,858 |
| | 4,918 |
|
Commercial and income producing properties | 13,355 |
| | 8,805 |
| | 85,387 |
| | 23,381 |
|
Other | 1,049 |
| | 737 |
| | 2,750 |
| | 2,323 |
|
Total revenues | $ | 50,356 |
| | $ | 27,115 |
| | $ | 170,264 |
| | $ | 71,684 |
|
Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. Revenues increased in third quarter 2013 compared with third quarter 2012 due to both higher average price per lot sold and increased lot sales volume. In addition, in third quarter 2013, we sold about 46 undeveloped residential tract acres for $4,964,000 which generated segment earnings of $2,214,000. In first nine months 2013, residential real estate revenues increased principally as a result of increased lot sales volume due to demand for finished lot inventory by homebuilders in markets where supply has diminished. In addition, in first nine months 2013, we sold 486 undeveloped residential tract acres of which 440 were the remaining undeveloped residential tract acres from a project in Florida for $3,536,000.
Undeveloped land sales increased in third quarter 2013 as compared with third quarter 2012 due to sale of 1,314 undeveloped acres for $6,571,000 which generated segment earnings of $3,769,000. In first nine months 2013, undeveloped land sales increased as compared to first nine months 2012 due to sale of 3,233 acres for $11,858,000, or approximately $3,700 per acre, generating approximately $7,887,000 in segment earnings.
In first nine months 2013, commercial and income producing properties revenue increased primarily as result of selling Promesa, a 289-unit multifamily property in Austin which we developed as a merchant builder and operated until the sale. As a result, we recognized segment earnings of $10,881,000 related to its sale, for $41,000,000. In addition, income producing properties revenue increased in third quarter and first nine months 2013 as a result of construction revenues of $9,029,000 and $26,635,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor.
In first nine months 2013, we entered into a $27,900,000 maximum price construction contract with a third-party general contractor for construction of a 354-unit multifamily property near Dallas. Construction on this multifamily development site began in June 2013. In third quarter 2013, we obtained a senior secured construction loan in the amount of $24,357,000 to finance approximately 70 percent of the total development cost, with no loan balance outstanding at third quarter-end 2013.
Third quarter 2013 revenues related to our 413 guest room hotel in Austin were down $893,000 when compared with third quarter 2012, primarily due to lower occupancy from increased renovation activity. In addition, third quarter 2013 real estate segment operating expenses includes a $776,000 loss on retirement of assets associated with the capital improvement project at the hotel.
Units sold in our owned and consolidated ventures consist of: