Document
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 June 30, 2016
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 August 3, 2016 |
Common Stock, par value $1.00 per share | | 33,624,026 |
FORESTAR GROUP INC.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
|
| | | | | | | |
| Second Quarter-End | | Year-End |
| 2016 | | 2015 |
| (In thousands, except share data) |
ASSETS | |
Cash and cash equivalents | $ | 107,421 |
| | $ | 96,442 |
|
Real estate, net | 419,060 |
| | 586,715 |
|
Assets of discontinued operations | 1,845 |
| | 104,967 |
|
Investment in unconsolidated ventures | 79,730 |
| | 82,453 |
|
Timber | 7,183 |
| | 7,683 |
|
Receivables, net | 3,473 |
| | 19,025 |
|
Income taxes receivable | 3,228 |
| | 12,056 |
|
Prepaid expenses | 2,070 |
| | 3,116 |
|
Property and equipment, net | 10,003 |
| | 10,732 |
|
Goodwill and other intangible assets | 43,455 |
| | 43,455 |
|
Other assets | 4,365 |
| | 5,602 |
|
TOTAL ASSETS | $ | 681,833 |
| | $ | 972,246 |
|
LIABILITIES AND EQUITY | | | |
Accounts payable | $ | 7,208 |
| | $ | 11,617 |
|
Accrued employee compensation and benefits | 2,918 |
| | 5,547 |
|
Accrued property taxes | 3,406 |
| | 4,529 |
|
Accrued interest | 1,585 |
| | 3,267 |
|
Deferred tax liability, net | 992 |
| | 1,037 |
|
Earnest money deposits | 8,266 |
| | 10,214 |
|
Other accrued expenses | 10,980 |
| | 14,556 |
|
Liabilities of discontinued operations | 3,116 |
| | 11,192 |
|
Other liabilities | 22,147 |
| | 24,657 |
|
Debt, net | 114,185 |
| | 381,515 |
|
TOTAL LIABILITIES | 174,803 |
| | 468,131 |
|
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 second quarter-end 2016 and year-end 2015 | 36,947 |
| | 36,947 |
|
Additional paid-in capital | 560,641 |
| | 561,850 |
|
Accumulated deficit | (40,808 | ) | | (46,046 | ) |
Treasury stock, at cost, 3,322,577 shares at second quarter-end 2016 and 3,203,768 shares at year-end 2015 | (51,877 | ) | | (51,151 | ) |
Total Forestar Group Inc. shareholders’ equity | 504,903 |
| | 501,600 |
|
Noncontrolling interests | 2,127 |
| | 2,515 |
|
TOTAL EQUITY | 507,030 |
| | 504,115 |
|
TOTAL LIABILITIES AND EQUITY | $ | 681,833 |
| | $ | 972,246 |
|
Please read the notes to consolidated financial statements.
FORESTAR GROUP INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands, except per share amounts) |
REVENUES | | | | | | | |
Real estate sales and other | $ | 43,018 |
| | $ | 28,300 |
| | $ | 69,426 |
| | $ | 50,261 |
|
Commercial and income producing properties | 3,363 |
| | 11,109 |
| | 13,053 |
| | 21,978 |
|
Real estate | 46,381 |
| | 39,409 |
| | 82,479 |
| | 72,239 |
|
Mineral resources | 1,337 |
| | 2,360 |
| | 2,419 |
| | 5,114 |
|
Other | 274 |
| | 1,856 |
| | 712 |
| | 3,646 |
|
| 47,992 |
| | 43,625 |
| | 85,610 |
| | 80,999 |
|
COSTS AND EXPENSES | | | | | | | |
Cost of real estate sales and other | (66,877 | ) | | (13,890 | ) | | (80,139 | ) | | (24,252 | ) |
Cost of commercial and income producing properties | (5,789 | ) | | (7,548 | ) | | (10,951 | ) | | (15,240 | ) |
Cost of mineral resources | (160 | ) | | (267 | ) | | (390 | ) | | (655 | ) |
Cost of other | (119 | ) | | (860 | ) | | (504 | ) | | (1,780 | ) |
Other operating expenses | (8,317 | ) | | (11,400 | ) | | (20,408 | ) | | (24,694 | ) |
General and administrative | (4,852 | ) | | (4,901 | ) | | (11,331 | ) | | (13,043 | ) |
| (86,114 | ) | | (38,866 | ) | | (123,723 | ) | | (79,664 | ) |
GAIN ON SALE OF ASSETS | 107,650 |
| | 1,160 |
| | 121,231 |
| | 1,160 |
|
OPERATING INCOME | 69,528 |
| | 5,919 |
| | 83,118 |
| | 2,495 |
|
Equity in earnings of unconsolidated ventures | 188 |
| | 5,584 |
| | 235 |
| | 8,629 |
|
Interest expense | (6,918 | ) | | (8,715 | ) | | (14,557 | ) | | (17,536 | ) |
Loss on extinguishment of debt, net | (35,766 | ) | | — |
| | (35,864 | ) | | — |
|
Other non-operating income | 199 |
| | 783 |
| | 371 |
| | 1,700 |
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES | 27,231 |
| | 3,571 |
| | 33,303 |
| | (4,712 | ) |
Income tax benefit (expense) | (14,929 | ) | | (897 | ) | | (17,081 | ) | | 1,869 |
|
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | 12,302 |
| | 2,674 |
| | 16,222 |
| | (2,843 | ) |
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES | (2,048 | ) | | (36,992 | ) | | (10,264 | ) | | (39,712 | ) |
CONSOLIDATED NET INCOME (LOSS) | 10,254 |
| | (34,318 | ) | | 5,958 |
| | (42,555 | ) |
Less: Net income attributable to noncontrolling interests | (640 | ) | | (189 | ) | | (720 | ) | | (110 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC. | $ | 9,614 |
| | $ | (34,507 | ) | | $ | 5,238 |
| | $ | (42,665 | ) |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | | | | | |
Basic | 34,302 |
| | 34,278 |
| | 34,302 |
| | 34,223 |
|
Diluted | 42,423 |
| | 42,328 |
| | 42,372 |
| | 34,223 |
|
NET INCOME (LOSS) PER BASIC SHARE | | | | | | | |
Continuing operations | $ | 0.28 |
| | $ | 0.07 |
| | $ | 0.37 |
| | $ | (0.09 | ) |
Discontinued operations | (0.05 | ) | | (1.08 | ) | | (0.24 | ) | | (1.16 | ) |
NET INCOME (LOSS) PER BASIC SHARE | $ | 0.23 |
| | $ | (1.01 | ) | | $ | 0.13 |
| | $ | (1.25 | ) |
NET INCOME (LOSS) PER DILUTED SHARE | | | | | | | |
Continuing operations | 0.28 |
| | 0.06 |
| | 0.37 |
| | (0.09 | ) |
Discontinued operations | (0.05 | ) | | (0.87 | ) | | (0.24 | ) | | (1.16 | ) |
NET INCOME (LOSS) PER DILUTED SHARE | 0.23 |
| | (0.81 | ) | | 0.13 |
| | (1.25 | ) |
TOTAL COMPREHENSIVE INCOME (LOSS) | $ | 9,614 |
| | $ | (34,507 | ) | | $ | 5,238 |
| | $ | (42,665 | ) |
Please read the notes to consolidated financial statements.
FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) |
| | | | | | | |
| First Six Months |
| 2016 | | 2015 |
| (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Consolidated net income (loss) | $ | 5,958 |
| | $ | (42,555 | ) |
Adjustments: | | | |
Depreciation, depletion and amortization | 7,268 |
| | 23,360 |
|
Change in deferred income taxes | (45 | ) | | (25,103 | ) |
Equity in earnings of unconsolidated ventures | (235 | ) | | (8,629 | ) |
Distributions of earnings of unconsolidated ventures | 2,067 |
| | 5,089 |
|
Share-based compensation | 1,716 |
| | 3,327 |
|
Real estate cost of sales | 33,836 |
| | 24,151 |
|
Dry hole and unproved leasehold impairment charges | — |
| | 30,663 |
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Real estate development and acquisition expenditures, net | (33,066 | ) | | (57,353 | ) |
Reimbursements from utility and improvement districts | 306 |
| | 7,154 |
|
Asset impairments | 49,438 |
| | 25,764 |
|
Loss on debt extinguishment, net | 35,864 |
| | — |
|
Gain on sale of assets | (106,658 | ) | | (2,014 | ) |
Other | 3,402 |
| | 2,333 |
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Changes in: | | | |
Notes and accounts receivable | 18,849 |
| | 8,144 |
|
Prepaid expenses and other | 1,080 |
| | 2,502 |
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Accounts payable and other accrued liabilities | (16,069 | ) | | (17,919 | ) |
Income taxes | 8,828 |
| | 3,573 |
|
Net cash provided by (used for) operating activities | 12,539 |
| | (17,513 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Property, equipment, software, reforestation and other | (5,639 | ) | | (6,971 | ) |
Oil and gas properties and equipment | (567 | ) | | (40,286 | ) |
Investment in unconsolidated ventures | (4,658 | ) | | (10,136 | ) |
Proceeds from sales of assets | 318,480 |
| | 2,984 |
|
Return of investment in unconsolidated ventures | 1,914 |
| | 1,960 |
|
Net cash provided by (used for) investing activities | 309,530 |
| | (52,449 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Payments of debt | (307,491 | ) | | (4,925 | ) |
Additions to debt | 1,462 |
| | 5,016 |
|
Deferred financing fees | — |
| | (100 | ) |
Distributions to noncontrolling interests, net | (1,108 | ) | | (687 | ) |
Repurchases of common stock | (3,537 | ) | | — |
|
Payroll taxes on issuance of stock-based awards | (205 | ) | | (723 | ) |
Other | (211 | ) | | 15 |
|
Net cash used for financing activities | (311,090 | ) | | (1,404 | ) |
| | | |
Net increase (decrease) in cash and cash equivalents | 10,979 |
| | (71,366 | ) |
Cash and cash equivalents at beginning of period | 96,442 |
| | 170,127 |
|
Cash and cash equivalents at end of period | $ | 107,421 |
| | $ | 98,761 |
|
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. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.
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 costs 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 2015 Annual Report on Form 10-K.
At second quarter-end 2016, we have exited substantially all of our oil and gas working interest properties with the sale of the remaining Bakken/Three Forks properties in North Dakota which closed in second quarter 2016. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within the consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests. We also changed the name of the other natural resources segment to other.
Note 2—New and Pending Accounting Pronouncements
Adoption of New Accounting Standards
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which allows an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The updated standards are effective for financial statements issued for annual and interim periods beginning after December 15, 2015. We adopted ASU 2015-03 in first quarter 2016 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $8,267,000 of debt issuance costs were reclassified in the consolidated balance sheet from other assets to debt. The adoption did not impact our consolidated financial position, results of operations or cash flows. As permitted under this guidance, we will continue to present debt issuance costs associated with revolving-debt agreements as other assets.
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (Topic 810), requiring entities to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The revised consolidation model: (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved with VIEs, and (4) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. The updated standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. The adoption of this guidance, which was applied retrospectively, had no impact to the consolidated financial statements.
Pending Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB decided to defer the effective date of the new standard by one year, to December 15, 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to provide increased transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 31, 2020 with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as part of its Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The updated standard becomes effective for annual and interim periods beginning after December 31, 2016. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
Note 3—Real Estate
Real estate consists of:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter-End 2016 | | Year-End 2015 |
| Carrying Value | | Accumulated Depreciation | | Net Carrying Value | | Carrying Value | | Accumulated Depreciation | | Net Carrying Value |
| (In thousands) |
Entitled, developed and under development projects | $ | 312,749 |
| | $ | — |
| | $ | 312,749 |
| | $ | 352,141 |
| | $ | — |
| | $ | 352,141 |
|
Timberland and undeveloped land (includes land in entitlement) | 87,885 |
| | — |
| | 87,885 |
| | 98,181 |
| | — |
| | 98,181 |
|
Commercial | | | | |
| | | | | | |
Radisson Hotel & Suites (a) | — |
| | — |
| | — |
| | 62,889 |
| | (29,268 | ) | | 33,621 |
|
Income producing properties | | | | | | | | | | | |
Eleven (a) | — |
| | — |
| | — |
| | 53,896 |
| | (2,861 | ) | | 51,035 |
|
Dillon (a) | — |
| | — |
| | — |
| | 19,987 |
| | — |
| | 19,987 |
|
Music Row (a) | — |
| | — |
| | — |
| | 9,947 |
| | — |
| | 9,947 |
|
Downtown Edge multifamily site | 12,988 |
| | — |
| | 12,988 |
| | 12,706 |
| | — |
| | 12,706 |
|
West Austin multifamily site | 5,438 |
| | — |
| | 5,438 |
| | 9,097 |
| | — |
| | 9,097 |
|
| $ | 419,060 |
| | $ | — |
| | $ | 419,060 |
| | $ | 618,844 |
| | $ | (32,129 | ) | | $ | 586,715 |
|
___________________
In second quarter 2016, we sold the Radisson Hotel & Suites, a 413 room hotel in Austin, for $130,000,000, generating$128,764,000 in net proceeds before paying in full the associated debt of $15,400,000 and recognized a gain on sale of $95,336,000. We also sold Eleven, a wholly-owned 257-unit multifamily property in Austin, for $60,150,000, generating $59,719,000 in net proceeds before paying in full the associated debt of $23,936,000 and recognized a gain on sale of $9,116,000. In addition, we sold Dillon, a planned 379-unit multifamily property that was under construction in Charlotte, for $25,979,000, generating $25,433,000 in net proceeds and recognized a gain on sale of $1,229,000.
In first quarter 2016, we sold Music Row, a planned 230-unit multifamily property that was under construction in Nashville, for $15,025,000, generating $14,703,000 in net proceeds and recognized a gain on sale of $3,968,000.
In second quarter 2016, we recognized non-cash impairment charges of $48,826,000 related to five non-core community development projects and one multifamily site. These impairments were a result of our key initiative to review our entire
portfolio of assets which resulted in business plan changes, inclusive of cash tax savings considerations, to market these properties for sale, which resulted in adjustment of the carrying value to fair value.
Our estimated costs of assets for which we expect to be reimbursed by utility and improvement districts were $69,675,000 at second quarter-end 2016 and $67,554,000 at year-end 2015, including $23,062,000 at second quarter-end 2016 and $22,302,000 at year-end 2015 related to our Cibolo Canyons project near San Antonio, Texas. In first six months 2016, we have collected $306,000 in reimbursements that were previously submitted to these districts. At second quarter-end 2016, our inception-to-date submitted and approved reimbursements for the Cibolo Canyons project were $54,376,000 of which we have collected $34,703,000. These costs are principally for water, sewer and other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.
Note 4—Discontinued Operations
At second quarter-end 2016, we have exited substantially all of our oil and gas working interest properties with the sale of the remaining Bakken/Three Forks properties which closed in second quarter 2016. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within the consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests.
Summarized results from discontinued operations were as follows:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
Revenues | $ | 1,377 |
| | $ | 13,805 |
| | $ | 5,647 |
| | $ | 24,236 |
|
Cost of sales | (1,521 | ) | | (69,874 | ) | | (6,485 | ) | | (81,028 | ) |
Other operating expenses | (1,066 | ) | | (2,242 | ) | | (2,389 | ) | | (7,008 | ) |
Loss from discontinued operations before income taxes | $ | (1,210 | ) | | $ | (58,311 | ) | | $ | (3,227 | ) | | $ | (63,800 | ) |
Gain (loss) on disposal before income taxes | (3,596 | ) | | (322 | ) | | (14,573 | ) | | 854 |
|
Income tax benefit (expense) | 2,758 |
| | 21,641 |
| | 7,536 |
| | 23,234 |
|
Loss from discontinued operations, net of taxes | $ | (2,048 | ) | | $ | (36,992 | ) | | $ | (10,264 | ) | | $ | (39,712 | ) |
In first quarter 2016, we recorded a net loss of $10,977,000 on the sale of 190,960 net mineral acres leased from others and 185 gross (66 net) producing oil and gas working interest wells in Nebraska, Kansas, Oklahoma and North Dakota for total proceeds of $32,227,000, which includes $3,269,000 in reimbursement of capital costs incurred on in-progress wells that were assumed by the buyer.
In second quarter 2016, we recorded a net loss of $3,596,000 on the sale of nearly 8,100 net mineral acres leased from others and 175 gross (16 net) producing oil and gas working interest wells principally in North Dakota for total sales proceeds of $46,986,000.
The major classes of assets and liabilities of discontinued operations held for sale at second quarter-end 2016 and year-end 2015 are as follows:
|
| | | | | | | |
| Second Quarter-End | | Year-End
|
| 2016 | | 2015 |
| (In thousands) |
Assets of Discontinued Operations: | | | |
Receivables, net of allowance for bad debt | $ | 1,276 |
| | $ | 4,632 |
|
Oil and gas properties and equipment, net | 438 |
| | 79,733 |
|
Goodwill and other intangible assets | — |
| | 19,673 |
|
Prepaid expenses | 31 |
| | 96 |
|
Other assets | 100 |
| | 833 |
|
| $ | 1,845 |
| | $ | 104,967 |
|
| | | |
Liabilities of Discontinued Operations: | | | |
Accounts payable | $ | 751 |
| | $ | 342 |
|
Accrued property taxes | — |
| | 259 |
|
Other accrued expenses | 1,979 |
| | 8,924 |
|
Other liabilities | 386 |
| | 1,667 |
|
| $ | 3,116 |
| | $ | 11,192 |
|
Significant operating activities and investing activities of discontinued operations are as follows:
|
| | | | | | | |
| First Six Months |
| 2016 | | 2015 |
| (In thousands) |
Operating activities: | | | |
Asset impairments | $ | 612 |
| | $ | 25,035 |
|
Dry hole and unproved leasehold impairment charges | — |
| | 30,663 |
|
Loss (gain) on sale of assets | 14,573 |
| | (854 | ) |
Depreciation, depletion and amortization | 2,147 |
| | 15,157 |
|
| $ | 17,332 |
| | $ | 70,001 |
|
| | | |
Investing activities: | | | |
Oil and gas properties and equipment | $ | (567 | ) | | $ | (40,286 | ) |
Proceeds from sales of assets | 75,944 |
| | 2,524 |
|
| $ | 75,377 |
| | $ | (37,762 | ) |
Note 5—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
|
| | | | | | | |
| Second Quarter-End | | Year-End |
| 2016 | | 2015 |
| (In thousands) |
Goodwill | $ | 41,774 |
| | $ | 41,774 |
|
Identified intangibles | 1,681 |
| | 1,681 |
|
| $ | 43,455 |
| | $ | 43,455 |
|
Goodwill related to our mineral interests was $37,900,000 at second quarter-end 2016 and year-end 2015. Goodwill associated with our water resources initiatives was $3,874,000 at second quarter-end 2016 and year-end 2015.
Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with our water resources initiatives.
Note 6—Equity
A reconciliation of changes in equity through second quarter-end 2016 follows:
|
| | | | | | | | | | | |
| Forestar Group Inc. | | Noncontrolling Interests | | Total |
| (In thousands) |
Balance at year-end 2015 | $ | 501,600 |
| | $ | 2,515 |
| | $ | 504,115 |
|
Net income (loss) | 5,238 |
| | 720 |
| | 5,958 |
|
Distributions to noncontrolling interests | — |
| | (1,108 | ) | | (1,108 | ) |
Repurchase of common shares | (3,537 | ) | | — |
| | (3,537 | ) |
Other (primarily share-based compensation) | 1,602 |
| | — |
| | 1,602 |
|
| $ | 504,903 |
| | $ | 2,127 |
| | $ | 507,030 |
|
In second quarter 2016, we repurchased 283,976 shares of our common stock at an average price of $12.45 per share.
Note 7—Investment in Unconsolidated Ventures
At second quarter-end 2016, we had ownership interests in 18 ventures that we accounted for using the equity method.
In first quarter 2016, we sold our interest in FMF Peakview LLC (3600), a 304-unit multifamily joint venture near Denver, and recognized a gain of $9,613,000 which is included in gain on sale of assets.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Venture Assets | | Venture Borrowings(a) | | Venture Equity | | Our Investment |
| Second Quarter-End | | Year-End | | Second Quarter-End | | Year-End | | Second Quarter-End | | Year-End | | Second Quarter-End | | Year-End |
| 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
242, LLC (b) | $ | 28,221 |
| | $ | 26,687 |
| | $ | 1,649 |
| | $ | — |
| | $ | 24,413 |
| | $ | 24,877 |
| | $ | 11,535 |
| | $ | 11,766 |
|
CL Ashton Woods, LP (c) | 4,445 |
| | 7,654 |
| | — |
| | — |
| | 3,602 |
| | 6,084 |
| | 1,978 |
| | 3,615 |
|
CL Realty, LLC | 7,829 |
| | 7,872 |
| | — |
| | — |
| | 7,726 |
| | 7,662 |
| | 3,863 |
| | 3,831 |
|
CREA FMF Nashville LLC (b) | 56,165 |
| | 57,820 |
| | 36,945 |
| | 50,845 |
| | 17,441 |
| | 4,291 |
| | 3,500 |
| | 3,820 |
|
Elan 99, LLC | 48,248 |
| | 34,192 |
| | 29,788 |
| | 14,587 |
| | 14,494 |
| | 15,838 |
| | 13,045 |
| | 14,255 |
|
FOR/SR Forsyth LLC | 8,249 |
| | 6,500 |
| | — |
| | — |
| | 8,233 |
| | 6,500 |
| | 7,410 |
| | 5,850 |
|
FMF Littleton LLC | 68,528 |
| | 52,376 |
| | 37,328 |
| | 22,347 |
| | 24,022 |
| | 24,370 |
| | 6,184 |
| | 6,270 |
|
FMF Peakview LLC | — |
| | 48,869 |
| | — |
| | 30,485 |
| | — |
| | 16,828 |
| | — |
| | 3,447 |
|
HM Stonewall Estates, Ltd (c) | 1,660 |
| | 2,842 |
| | — |
| | — |
| | 1,660 |
| | 2,842 |
| | 693 |
| | 1,294 |
|
LM Land Holdings, LP (c) | 27,009 |
| | 31,984 |
| | 4,983 |
| | 7,728 |
| | 21,388 |
| | 22,751 |
| | 9,934 |
| | 9,664 |
|
MRECV DT Holdings LLC | 4,287 |
| | 4,215 |
| | — |
| | — |
| | 4,287 |
| | 4,215 |
| | 3,629 |
| | 3,807 |
|
MRECV Edelweiss LLC | 2,472 |
| | 2,237 |
| | — |
| | — |
| | 2,466 |
| | 2,237 |
| | 2,471 |
| | 2,029 |
|
MRECV Juniper Ridge LLC | 4,179 |
| | 3,006 |
| | — |
| | — |
| | 4,179 |
| | 3,006 |
| | 3,827 |
| | 2,730 |
|
MRECV Meadow Crossing II LLC | 2,224 |
| | 728 |
| | — |
| | — |
| | 2,224 |
| | 728 |
| | 2,028 |
| | 655 |
|
Miramonte Boulder Pass, LLC | 13,063 |
| | 12,627 |
| | 6,973 |
| | 5,869 |
| | 5,506 |
| | 5,474 |
| | 5,450 |
| | 5,349 |
|
Temco Associates, LLC | 5,312 |
| | 5,284 |
| | — |
| | — |
| | 5,192 |
| | 5,113 |
| | 2,596 |
| | 2,557 |
|
Other ventures (d) | 4,161 |
| | 4,174 |
| | 2,157 |
| | 2,242 |
| | 1,998 |
| | 1,922 |
| | 1,587 |
| | 1,514 |
|
| $ | 286,052 |
| | $ | 309,067 |
| | $ | 119,823 |
| | $ | 134,103 |
| | $ | 148,831 |
| | $ | 154,738 |
| | $ | 79,730 |
| | $ | 82,453 |
|
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) |
| Second Quarter | | First Six Months | | Second Quarter | | First Six Months | | Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
242, LLC (b) | $ | — |
| | $ | 12,368 |
| | $ | — |
| | $ | 17,699 |
| | $ | (164 | ) | | $ | 4,409 |
| | $ | (464 | ) | | $ | 7,873 |
| | $ | (82 | ) | | $ | 2,279 |
| | $ | (232 | ) | | $ | 4,045 |
|
CL Ashton Woods, LP (c) | 993 |
| | 1,061 |
| | 1,689 |
| | 2,411 |
| | 151 |
| | 851 |
| | 518 |
| | 1,378 |
| | 324 |
| | 878 |
| | 763 |
| | 1,556 |
|
CL Realty, LLC | 113 |
| | 190 |
| | 246 |
| | 469 |
| | 17 |
| | 83 |
| | 64 |
| | 243 |
| | 8 |
| | 42 |
| | 31 |
| | 122 |
|
CREA FMF Nashville LLC (b) | 1,081 |
| | 29 |
| | 1,982 |
| | 35 |
| | (498 | ) | | (103 | ) | | (1,069 | ) | | (216 | ) | | (149 | ) | | (103 | ) | | (320 | ) | | (216 | ) |
Elan 99, LLC | 147 |
| | — |
| | 167 |
| | — |
| | (934 | ) | | — |
| | (1,344 | ) | | (2 | ) | | (841 | ) | | — |
| | (1,210 | ) | | (2 | ) |
FMF Littleton LLC | 526 |
| | — |
| | 847 |
| | — |
| | (178 | ) | | — |
| | (348 | ) | | — |
| | (44 | ) | | — |
| | (86 | ) | | — |
|
FMF Peakview LLC | — |
| | 466 |
| | 939 |
| | 652 |
| | — |
| | (252 | ) | | (248 | ) | | (734 | ) | | — |
| | (50 | ) | | (50 | ) | | (146 | ) |
FOR/SR Forsyth LLC | — |
| | — |
| | — |
| | — |
| | (17 | ) | | — |
| | (17 | ) | | — |
| | (15 | ) | | — |
| | (15 | ) | | — |
|
HM Stonewall Estates, Ltd (c) | 580 |
| | 611 |
| | 1,126 |
| | 1,669 |
| | 294 |
| | 297 |
| | 514 |
| | 812 |
| | 124 |
| | 343 |
| | 227 |
| | 573 |
|
LM Land Holdings, LP (c) | 2,026 |
| | 4,321 |
| | 3,026 |
| | 6,297 |
| | 1,415 |
| | 2,538 |
| | 2,055 |
| | 3,788 |
| | 501 |
| | 923 |
| | 645 |
| | 1,287 |
|
MRECV DT Holdings LLC | 119 |
| | — |
| | 217 |
| | — |
| | 117 |
| | — |
| | 215 |
| | — |
| | 105 |
| | — |
| | 193 |
| | — |
|
MRECV Edelweiss LLC | 94 |
| | — |
| | 181 |
| | — |
| | 87 |
| | — |
| | 174 |
| | — |
| | 78 |
| | — |
| | 156 |
| | — |
|
MRECV Juniper Ridge LLC | 202 |
| | — |
| | 205 |
| | — |
| | 203 |
| | — |
| | 206 |
| | — |
| | 183 |
| | — |
| | 186 |
| | — |
|
MRECV Meadow Crossing II LLC | 29 |
| | — |
| | 29 |
| | — |
| | 16 |
| | — |
| | (18 | ) | | — |
| | 14 |
| | — |
| | (17 | ) | | — |
|
Miramonte Boulder Pass, LLC | 663 |
| | — |
| | 663 |
| | — |
| | (34 | ) | | (49 | ) | | (159 | ) | | (49 | ) | | (17 | ) | | (25 | ) | | (79 | ) | | (25 | ) |
PSW Communities, LP | — |
| | 13,642 |
| | — |
| | 16,069 |
| | — |
| | 2,333 |
| | — |
| | 2,528 |
| | — |
| | 788 |
| | — |
| | 961 |
|
Temco Associates, LLC | 48 |
| | 1,086 |
| | 147 |
| | 1,144 |
| | 12 |
| | 460 |
| | 79 |
| | 459 |
| | 6 |
| | 230 |
| | 40 |
| | 230 |
|
Other ventures (d) | — |
| | — |
| | — |
| | 3,701 |
| | (83 | ) | | (55 | ) | | (57 | ) | | (258 | ) | | (7 | ) | | 279 |
| | 3 |
| | 244 |
|
| $ | 6,621 |
| | $ | 33,774 |
| | $ | 11,464 |
| | $ | 50,146 |
| | $ | 404 |
| | $ | 10,512 |
| | $ | 101 |
| | $ | 15,822 |
| | $ | 188 |
| | $ | 5,584 |
| | $ | 235 |
| | $ | 8,629 |
|
_____________________
| |
(a) | Total includes current maturities of $4,412,000 at second quarter-end 2016, of which $4,412,000 is non-recourse to us, and $39,590,000 at year-end 2015, of which $6,798,000 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 $1,496,000 are reflected as a reduction to our investment in unconsolidated ventures at second quarter-end 2016. |
| |
(c) | Includes unrecognized basis difference of $181,000 which is reflected as a reduction of our investment in unconsolidated ventures at second quarter-end 2016. The 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. |
| |
(d) | Our investment in other ventures reflects our ownership interests, 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 six months 2016, we invested $4,658,000 in these ventures and received $3,981,000 in distributions. In first six months 2015, we invested $10,136,000 in these ventures and received $7,049,000 in distributions. Distributions include both return of investments and distribution of earnings.
Note 8—Receivables
Receivables consist of:
|
| | | | | | | |
| Second Quarter-End | | Year-End |
| 2016 | | 2015 |
| (In thousands) |
Funds held by qualified intermediary for potential 1031 like-kind exchange | $ | — |
| | $ | 14,703 |
|
Other receivables and accrued interest | 1,753 |
| | 2,218 |
|
Other loans secured by real estate, average interest rates of 12.85% at second quarter-end 2016 and 11.31% at year-end 2015 | 1,746 |
| | 2,130 |
|
| 3,499 |
| | 19,051 |
|
Allowance for bad debts | (26 | ) | | (26 | ) |
| $ | 3,473 |
| | $ | 19,025 |
|
In first quarter 2016, we received funds previously held by a qualified intermediary because we did not complete an intended like-kind exchange related to a 2015 sale of 6,915 acres of undeveloped land.
Other loans secured by real estate generally are secured by a deed of trust and due within three years.
Note 9—Debt, net
Debt (a) consists of:
|
| | | | | | | |
| Second Quarter-End | | Year-End |
| 2016 | | 2015 |
| (In thousands) |
8.50% senior secured notes due 2022 | $ | 5,189 |
| | $ | 224,647 |
|
3.75% convertible senior notes due 2020, net of discount | 102,602 |
| | 104,719 |
|
6.00% tangible equity unit notes, net of discount | 4,403 |
| | 8,666 |
|
Secured promissory note — average interest rates of 3.43% at first quarter-end 2016 and 3.42% at year-end 2015 | — |
| | 15,400 |
|
Other indebtedness — interest rates ranging from 5.0% to 5.50% | 1,991 |
| | 28,083 |
|
| $ | 114,185 |
| | $ | 381,515 |
|
___________________
| |
(a) | At second quarter-end 2016 and year-end 2015, $1,907,000 and $8,267,000 of unamortized deferred financing fees are deducted from our outstanding debt. |
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At second quarter-end 2016, we were in compliance with the financial covenants of these agreements.
At second quarter-end 2016, our senior secured credit facility provided for a $300,000,000 revolving line of credit maturing May 15, 2017 (with two one-year extension options). 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 $15,321,000 was outstanding at second quarter-end 2016. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At second quarter-end 2016, we had $216,187,000 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 and most of our majority-owned joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) a pledge of certain reimbursements payable to us from special improvement district tax collections in connection with our Cibolo Canyons project. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At second quarter-end 2016, our tangible net worth requirement was $379,044,000 plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis since third quarter-end 2015. The tangible net worth requirement is recalculated on a quarterly basis.
We may elect to make distributions to stockholders so long as the total leverage ratio is less than 40 percent, the interest coverage ratio is greater than 3.0:1.0 and available liquidity is not less than $125,000,000, all of which were satisfied at second quarter-end 2016. Regardless of whether the foregoing conditions are satisfied, we may make distributions in an aggregate amount not to exceed $50,000,000 to be funded from up to 65% of the net proceeds from sales of multifamily properties and non-core assets, such as the Radisson Hotel & Suites in Austin, and any oil and gas properties.
On June 21, 2016, we completed a cash tender offer for our 8.50% Senior Secured Notes due 2022 (Notes), pursuant to which we purchased $215,495,000 principal amount (representing approximately 97.6% outstanding) of the Notes. Total consideration paid was $245,604,000, which included $29,091,000 in premium at 113.5% and $1,018,000 in accrued and unpaid interest. In addition, we received consent from holders of the Notes to eliminate or modify certain covenants, events of default and other provisions contained in the indenture governing the Notes, and to release the subsidiary guarantees and collateral securing the Notes. We also purchased $1,150,000 principal amount of Notes at 99.95% of face value in open market transactions. The second quarter 2016 tender offer and open market purchases resulted in a $35,583,000 loss on extinguishment of debt, which includes the premium paid to repurchase the Notes, write-off of unamortized debt issuance costs of $5,191,000 and $1,301,000 in other costs related to tender offer advisory services. In first quarter 2016, we purchased $8,600,000 principal amount of Notes at 99% of face value in the open market transactions, resulting in a $127,000 gain on the early extinguishment of the Notes offset by the write-off of unamortized debt issuance costs of $225,000.
In second quarter 2016, we purchased $5,000,000 of 3.75% Convertible Senior Notes at 93.25% of face value in open market transactions for $4,662,500 and we allocated $4,452,000 to extinguish the debt and $211,000 to reacquire the equity component within the convertible notes based on the fair value of the debt component. We recognized a $110,000 loss on extinguishment of debt based on the difference between the fair value of the debt component prior to conversion and the carrying value of the debt component. Total loss on extinguishment of debt including write-off of debt issuance costs allocated to the repurchased notes was $183,000.
In second quarter 2016, a secured promissory note of $15,400,000 was paid in full in connection with sale of the Radisson Hotel & Suites, a 413 guest room hotel located in Austin, for $130,000,000.
In second quarter 2016, other indebtedness decreased principally as result of selling Eleven, a 257-unit multifamily project in Austin, for $60,150,000 and paying in full the associated debt of $23,936,000.
At second quarter-end 2016 and year-end 2015, we had $1,907,000 and $8,267,000 in unamortized deferred financing fees which were deducted from our debt. In addition, at second quarter-end 2016 and year-end 2015, unamortized deferred financing fees related to our senior secured credit facility included in other assets were $1,761,000 and $2,768,000. Amortization of deferred financing fees were $1,877,000 and $2,016,000 in first six months 2016 and 2015 and were included in interest expense.
Note 10—Fair Value
Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
| |
• | Level 1 — Quoted prices in active markets for identical assets or liabilities; |
| |
• | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
| |
• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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 second quarter 2016, we recognized non-cash impairment charges of $48,826,000 related to five non-core community development projects and one multifamily site as a result of the review of our entire portfolio of assets and marketing these
properties for sale. We based our valuations primarily on third party broker price opinions and current negotiations and letters of intent with expected buyers. In second quarter 2016, we recognized non-cash impairment charges of $612,000 related to oil and gas working interests properties which are classified as discontinued operations.
Non-financial assets measured at fair value on a non-recurring basis are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter-End 2016 | | Year-End 2015 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Non-Financial Assets and Liabilities: | | | | | | | | | | | | | | | |
Real estate | $ | — |
| | $ | — |
| | $ | 28,476 |
| | $ | 28,476 |
| | $ | — |
| | $ | — |
| | $ | 641 |
| | $ | 641 |
|
Assets of discontinued operations | $ | — |
| | $ | — |
| | $ | 538 |
| | $ | 538 |
| | $ | — |
| | $ | — |
| | $ | 57,219 |
| | $ | 57,219 |
|
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:
|
| | | | | | | | | | | | | | | | | |
| Second Quarter-End 2016 | | Year-End 2015 | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Valuation Technique |
| (In thousands) | | |
Fixed rate debt | $ | (114,089 | ) | | $ | (112,826 | ) | | $ | (346,090 | ) | | $ | (321,653 | ) | | Level 2 |
Note 11—Capital Stock
Please read Note 17—Share-Based and Long-Term Incentive Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At second quarter-end 2016, personnel of former affiliates held options to purchase 241,000 shares of our common stock. The options have a weighted average exercise price of $30.30 and a weighted average remaining contractual term of less than one year. At second quarter-end 2016, the options had an aggregate intrinsic value of $0.
Note 12—Net Income (Loss) per Share
Basic and diluted earnings per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security. We have determined that our 6.00% tangible equity units are participating securities. Per share amounts are computed by dividing earnings available to common shareholders by the weighted average shares outstanding during each period. In periods with a net loss, no such adjustment is made to earnings as the holders of the participating securities have no obligation to fund losses.
Due to a net loss from continuing operations in first six months 2015, as the effect of potentially dilutive securities would be anti-dilutive, basic and diluted loss per share are the same. The computations of basic and diluted earnings per share are as follows: |
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
Numerator: | | | | | | | |
Continuing operations | | | | | | | |
Net income (loss) from continuing operations | $ | 12,302 |
| | $ | 2,674 |
| | $ | 16,222 |
| | $ | (2,843 | ) |
Less: Net (income) loss attributable to noncontrolling interest | (640 | ) | | (189 | ) | | (720 | ) | | (110 | ) |
Earnings (loss) available for diluted earnings per share | $ | 11,662 |
| | $ | 2,485 |
| | $ | 15,502 |
| | $ | (2,953 | ) |
Less: Undistributed net income from continuing operations allocated to participating securities | (2,173 | ) | | — |
| | (2,889 | ) | | — |
|
Earnings (loss) from continuing operations available to common shareholders for basic earnings per share | $ | 9,489 |
| | $ | 2,485 |
| | $ | 12,613 |
| | $ | (2,953 | ) |
| | | | | | | |
Discontinued operations | | | | | | | |
Net income (loss) from discontinued operations available for diluted earnings per share | $ | (2,048 | ) | | $ | (36,992 | ) | | $ | (10,264 | ) | | $ | (39,712 | ) |
Less: Undistributed net income from discontinued operations allocated to participating securities | 382 |
| | — |
| | 1,913 |
| | — |
|
Earnings (loss) from discontinued operations available to common shareholders for basic earnings per share | $ | (1,666 | ) | | $ | (36,992 | ) | | $ | (8,351 | ) | | $ | (39,712 | ) |
Denominator: | | | | | | | |
Weighted average common shares outstanding — basic | 34,302 |
| | 34,278 |
| | 34,302 |
| | 34,223 |
|
Weighted average common shares upon conversion of participating securities | 7,857 |
| | 7,857 |
| | 7,857 |
| | — |
|
Dilutive effect of stock options, restricted stock and equity-settled awards | 264 |
| | 193 |
| | 213 |
| | — |
|
Total weighted average shares outstanding — diluted | 42,423 |
| | 42,328 |
| | 42,372 |
| | 34,223 |
|
Anti-dilutive awards excluded from diluted weighted average shares | 1,987 |
| | 2,779 |
| | 2,218 |
| | 10,786 |
|
The actual number of shares we may issue upon settlement of the stock purchase contract related to the 6.00% tangible equity units will be between 6,547,800 shares (the minimum settlement rate) and 7,857,000 shares (the maximum settlement rate) based on the applicable market value, as defined in the purchase contract agreement associated with issuance of the Units.
We intend to settle the principal amount of our 3.75% convertible senior notes (Convertible Notes) in cash upon conversion with only the amount in excess of par value of the Convertible Notes to be settled in shares of our common stock. Therefore, our calculation of diluted net income per share includes only the amount, if any, in excess of par value of the Convertible Notes. As such, the Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the $24.49 conversion price of the Convertible Notes. The average price of our common stock in second quarter 2016 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our effective tax rate from continuing operations was 55 percent in second quarter 2016 and 51 percent for the first six months 2016, which includes an 18 percent detriment for an increase in our valuation allowance which was recorded to offset current year increases in our deferred tax asset. Our effective tax rate from continuing operations was 25 percent in second quarter 2015 and 40 percent in first six months 2015, which included a four percent benefit for noncontrolling interests and a seven percent detriment for share-based compensation benefits that will not be realized. In addition, 2016 and 2015 effective tax rates from continuing operations include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
At second quarter-end 2016 and year-end 2015, we had a valuation allowance for our deferred tax assets of $97,041,000 and $97,068,000 for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable.
In determining our valuation allowance, we assessed available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax asset. A significant piece of objective evidence evaluated was the cumulative loss incurred over the three-year period ended June 30, 2016, principally driven by impairments of oil and gas properties in 2015. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.
The amount of the deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.
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.
On October 4, 2014, James Huffman, a former director and CEO of CREDO Petroleum Corporation (Credo), which we acquired in 2012 and is now known as Forestar Petroleum Corporation, filed Huffman vs. Forestar Petroleum Corporation, Case Number 14CV33811, Civil Division, District Court for the City and County of Denver, Colorado. Prior to his retirement from Credo, Huffman participated in an employee compensation program under which he received overriding royalty interests (ORRI) in certain leases or wells in which Credo had an interest. Huffman claims entitlement to ORRI on nearly all North Dakota leases, none of which were assigned by Credo to Huffman prior to his retirement, and to ORRI on several Kansas and Nebraska leases. We believe Huffman’s claims are without merit and are vigorously defending the case. We are unable to estimate a possible loss or range of possible loss for this matter because of, among other factors, (i) significant unresolved questions of fact, including the time period covered by Huffman’s claims, (ii) discovery remaining to be conducted by both parties; (iii) impact of our counterclaims against Huffman, and (iv) any other factors that may have a material effect on the litigation.
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 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. In first six months 2016, we increased our reserves for environmental remediation by $117,000 due to additional testing and remediation requirements by state regulatory agencies. We estimate the remaining cost to complete remediation activities will be $651,000, 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 of discontinued operations. At second quarter-end 2016 and year-end 2015, our asset retirement obligation was $486,000 and $1,758,000, of which $386,000 and $1,667,000 is included in liabilities of discontinued operations and the remaining balance in other liabilities.
Non-Core Assets Restructuring Costs
In connection with key initiatives to reduce costs across our entire organization and exit non-core assets, in first six months 2016, we incurred and paid severance costs related to workforce reductions of $1,422,000 in our real estate segment, $164,000 in our other segment and $486,000 in unallocated general and administrative expense. In addition, we offered retention bonuses to certain key personnel provided they remained our employees through completion of sale transactions. We are expensing retention bonus costs over the estimated retention period. These restructuring costs are included in other operating expense.
The following table summarizes activity related to liabilities associated with our restructuring activities for first six months 2016:
|
| | | | | | | | | | | |
| Severance Costs | | Retention Bonuses | | Total |
| (In thousands) |
Balance at year-end 2015 | $ | (1,049 | ) | | $ | — |
| | $ | (1,049 | ) |
Additions | (2,072 | ) | | (796 | ) | | (2,868 | ) |
Payments | 3,121 |
| | 620 |
| | 3,741 |
|
Balance at second quarter-end 2016 | $ | — |
| | $ | (176 | ) | | $ | (176 | ) |
Note 15—Segment Information
We manage our operations through three segments: real estate, mineral resources and other. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land and commercial and income producing properties, which consist of three projects and two multifamily sites. Mineral resources manages our owned mineral interests. Other manages our timber, recreational leases and water resource initiatives.
In second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests. We also changed the name of the other natural resources to other.
Total assets allocated by segment are as follows:
|
| | | | | | | |
| Second Quarter-End | | Year-End |
| 2016 | | 2015 |
| (In thousands) |
Real estate | $ | 504,552 |
| | $ | 691,238 |
|
Mineral resources | 39,182 |
| | 39,469 |
|
Other | 18,483 |
| | 19,106 |
|
Assets of discontinued operations | 1,845 |
| | 104,967 |
|
Assets not allocated to segments (a) | 117,771 |
| | 117,466 |
|
| $ | 681,833 |
| | $ | 972,246 |
|
_________________________
| |
(a) | Assets not allocated to segments at second quarter-end 2016 principally consist of cash and cash equivalents of $107,421,000 and an income tax receivable of $3,228,000. Assets not allocated to segments at year-end 2015 principally consist of cash and cash equivalents of $96,442,000 and an income tax receivable of $12,056,000. Assets of discontinued operations represent oil and gas working interest assets we have or will be exiting. |
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 and long-term incentive compensation, gain on sale of strategic timberland, interest expense, loss on extinguishment of debt 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 second quarter 2016, no single customer accounted for more than ten percent of our total revenues.
Segment revenues and earnings are as follows:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
Revenues: | | | | | | | |
Real estate | $ | 46,381 |
| | $ | 39,409 |
| | $ | 82,479 |
| | $ | 72,239 |
|
Mineral resources | 1,337 |
| | 2,360 |
| | 2,419 |
| | 5,114 |
|
Other | 274 |
| | 1,856 |
| | 712 |
| | 3,646 |
|
Total revenues | $ | 47,992 |
| | $ | 43,625 |
| | $ | 85,610 |
| | $ | 80,999 |
|
Segment earnings (loss): | | | | |
| |
|
Real estate | $ | 73,290 |
| | $ | 15,527 |
| | $ | 93,514 |
| | $ | 24,593 |
|
Mineral resources | 933 |
| | 1,766 |
| | 1,486 |
| | 3,138 |
|
Other | (197 | ) | | (43 | ) | | (778 | ) | | (434 | ) |
Total segment earnings | 74,026 |
| | 17,250 |
| | 94,222 |
| | 27,297 |
|
Items not allocated to segments (a) | (47,435 | ) | | (13,868 | ) | | (61,639 | ) | | (32,119 | ) |
Income (loss) from continuing operations before taxes attributable to Forestar Group Inc. | $ | 26,591 |
| | $ | 3,382 |
| | $ | 32,583 |
| | $ | (4,822 | ) |
_________________________
| |
(a) | Items not allocated to segments consist of: |
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
General and administrative expense | $ | (4,514 | ) | | $ | (5,177 | ) | | $ | (9,487 | ) | | $ | (11,197 | ) |
Shared-based and long-term incentive compensation expense | (412 | ) | | (23 | ) | | (1,956 | ) | | (3,481 | ) |
Interest expense | (6,918 | ) | | (8,715 | ) | | (14,557 | ) | | (17,536 | ) |
Loss on extinguishment of debt, net | (35,766 | ) | | — |
| | (35,864 | ) | | — |
|
Other corporate non-operating income | 175 |
| | 47 |
| | 225 |
| | 95 |
|
| $ | (47,435 | ) | | $ | (13,868 | ) | | $ | (61,639 | ) | | $ | (32,119 | ) |
Note 16—Variable Interest Entities
We participate in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use communities in which we may or may not have a controlling financial interest. Generally accepted accounting principles require consolidation of Variable Interest Entities (VIEs) in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether we are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture agreements and continuously reassess to see if we are the primary beneficiary of a VIE.
At second quarter-end 2016, we have one VIE. We account for this VIE using the equity method since we are not the primary beneficiary. Although 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 VIE. At second quarter-end 2016, the VIE has total assets of $4,157,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of $2,163,000, which includes $0 of borrowings classified as current maturities. These amounts are included in the summarized balance sheet information for ventures accounted for using the equity method in Note 7—Investment in Unconsolidated Ventures. At second quarter-end 2016, our investment in the VIE is $1,584,000 and is included in investment in unconsolidated ventures. In first six months 2016, we contributed $78,000 to this VIE. Our maximum exposure to loss related to the VIE is $3,747,000, which exceeds our investment as we have a nominal general partner interest and could be held responsible for its 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 and Long-Term Incentive Compensation
Share-based and long-term incentive compensation expense consists of:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
Cash-settled awards | $ | (494 | ) | | $ | (1,447 | ) | | $ | 125 |
| | $ | (1,151 | ) |
Equity-settled awards | 625 |
| | 918 |
| | 1,104 |
| | 2,915 |
|
Restricted stock | 6 |
| | (20 | ) | | 12 |
| | (3 | ) |
Stock options | 199 |
| | 534 |
| | 475 |
| | 1,566 |
|
Total share-based compensation | 336 |
| | (15 | ) | | 1,716 |
| | 3,327 |
|
Deferred cash | 76 |
| | 38 |
| | 240 |
| | 154 |
|
| $ | 412 |
| | $ | 23 |
| | $ | 1,956 |
| | $ | 3,481 |
|
Share-based and long-term incentive compensation expense is included in:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In thousands) |
General and administrative expense | $ | 338 |
| | $ | (276 | ) | | $ | 1,844 |
| | $ | 1,846 |
|
Other operating expense | 74 |
| | 299 |
| | 112 |
| | 1,635 |
|
| $ | 412 |
| | $ | 23 |
| | $ | 1,956 |
| | $ | 3,481 |
|
Share-Based Compensation
In first six months 2016, we granted 174,419 equity-settled awards to employees in the form of restricted stock units which vest ratably over three years and provide for accelerated vesting upon retirement, disability, death, or if there is a change in control. In addition, in first six months 2016, we granted 69,760 restricted stock units to our board of directors which vest 25 percent at grant date and 25 percent at each subsequent quarterly board meeting and a stock option grant to acquire 20,000 shares of common stock for each of two new directors, of which 6,500 shares vest on the first and second anniversary of the date of grant and the remaining 7,000 shares vest on the third anniversary of the date of grant. The option term is ten years. Expense associated with annual restricted stock units and non-qualified stock options to our board of directors is included in share-based compensation expense.
Excluded from share-based compensation expense in the table above are fees earned by our board of directors in the amount of $163,000 and $229,000 in second quarter of 2016 and 2015 and $428,000 and $514,000 in first six months 2016 and 2015 for which they elected to defer payment until retirement in the form of share-settled units. These expenses are included in general and administrative expense.
The fair value of awards granted to retirement eligible employees expensed at the date of grant was $600,000 and $517,000 in first six months 2016 and 2015. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $3,178,113 at second quarter-end 2016.
In first six months 2016 and 2015, we issued 165,167 and 157,201 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of 23,691 and 48,636 shares withheld having a value of $205,000 and $723,000 for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.
Long-Term Incentive Compensation
In first six months 2016 and 2015, we granted $620,000 and $587,000 of long-term incentive compensation in the form of deferred cash compensation. The 2016 deferred cash awards vest annually over two years, and the 2015 deferred cash awards vest after three years. Both awards provide for accelerated vesting upon retirement, disability, death, or if there is a change in control. Expense associated with deferred cash awards is recognized ratably over the vesting period. The accrued liability was $395,000 and $225,000 at second quarter-end 2016 and year-end 2015 and is included in other liabilities.
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 2015 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of second quarter-end 2016, 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, or on a national or global scale; |
| |
• | our ability to achieve some or all of our key 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; |
| |
• | future residential or commercial entitlements, development approvals and the ability to obtain such approvals; |
| |
• | obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments; |
| |
• | accuracy of estimates and other assumptions related to investment in and development of real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation; |
| |
• | the levels of resale housing inventory in our mixed-use development projects and the regions in which they are located; |
| |
• | fluctuations in costs and expenses, including impacts from shortages in materials or labor; |
| |
• | demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in commodity prices; |
| |
• | demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions; |
| |
• | competitive actions by other companies; |
| |
• | changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies; |