10-Q 1 d406766d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

or

 

¨ 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)

 

 

 

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):

 

Large accelerated filer   ¨    Accelerated filer   x
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.

 

Title of Each Class

 

Number of Shares Outstanding as of

November 5, 2012

Common Stock, par value $1.00 per share   34,692,106

 

 

 


Table of Contents

FORESTAR GROUP INC.

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

Consolidated Balance Sheets

     3   

Consolidated Statements of Income

     4   

Consolidated Statements of Cash Flows

     5   

Notes to Consolidated Financial Statements

     6   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4. Controls and Procedures

     41   

PART II — OTHER INFORMATION

     41   

Item 1. Legal Proceedings

     41   

Item 1A. Risk Factors

     42   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 3. Defaults Upon Senior Securities

     43   

Item 4. Mine Safety Disclosures

     43   

Item 5. Other Information

     43   

Item 6. Exhibits

     44   

SIGNATURES

     45   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FORESTAR GROUP INC.

Consolidated Balance Sheets

(Unaudited)

 

     Third
Quarter-End
2012
  Year-End
2011
     (In thousands)

ASSETS

        

Cash and cash equivalents

     $ 10,279       $ 18,283  

Real estate

       508,603         565,367  

Investment in unconsolidated ventures

       43,041         64,223  

Timber

       13,303         14,240  

Receivables, net

       33,205         23,281  

Prepaid expenses

       3,009         2,931  

Property and equipment, net

       4,777         5,178  

Oil and natural gas properties and equipment, net

       147,268         4,561  

Deferred tax asset, net

       49,637         72,942  

Goodwill and other intangible assets

       61,406         5,451  

Other assets

       15,411         18,400  
    

 

 

     

 

 

 

TOTAL ASSETS

     $ 889,939       $ 794,857  
    

 

 

     

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Accounts payable

     $ 29,863       $ 5,044  

Accrued employee compensation and benefits

       2,955         1,421  

Accrued property taxes

       6,215         4,986  

Accrued interest

       845         1,086  

Income taxes payable

       1,323         8,501  

Other accrued expenses

       15,835         7,716  

Other liabilities

       34,991         33,304  

Debt

       276,651         221,587  
    

 

 

     

 

 

 

TOTAL LIABILITIES

       368,678         283,645  

COMMITMENTS AND CONTINGENCIES

        

SHAREHOLDERS’ 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 2012 and 36,835,732 issued at year-end 2011

       36,947         36,836  

Additional paid-in capital

       405,692         398,517  

Retained earnings

       111,065         108,155  

Treasury stock, at cost, 2,257,427 shares at third quarter-end 2012 and 2,212,876 shares at year-end 2011

       (34,728 )       (33,982 )
    

 

 

     

 

 

 

Total Forestar Group Inc. shareholders’ equity

       518,976         509,526  

Noncontrolling interests

       2,285         1,686  
    

 

 

     

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

       521,261         511,212  
    

 

 

     

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     $ 889,939       $ 794,857  
    

 

 

     

 

 

 

Please read the Notes to Consolidated Financial Statements.

 

3


Table of Contents

FORESTAR GROUP INC.

Consolidated Statements of Income

(Unaudited)

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands, except per share amounts)  

REVENUES

        

Real estate sales and other

   $ 18,310     $ 12,407     $ 48,303     $ 39,414  

Commercial and income producing properties

     8,805       6,653       23,381       20,400  
  

 

 

   

 

 

   

 

 

   

 

 

 

Real estate

     27,115       19,060       71,684       59,814  

Mineral resources

     10,479       5,871       27,053       17,784  

Fiber resources and other

     3,016       1,310       5,277       3,968  
  

 

 

   

 

 

   

 

 

   

 

 

 
     40,610       26,241       104,014       81,566  

COSTS AND EXPENSES

        

Cost of real estate sales and other

     (10,806     (7,760     (27,158     (19,409

Cost of commercial and income producing properties

     (6,733     (4,607     (15,928     (13,485

Cost of mineral resources

     (1,865     (597     (4,218     (1,829

Cost of fiber resources and other

     (570     (349     (1,068     (881

Other operating

     (14,691     (11,771     (39,116     (34,109

General and administrative

     (11,298     (2,770     (25,010     (15,590
  

 

 

   

 

 

   

 

 

   

 

 

 
     (45,963     (27,854     (112,498     (85,303

GAIN ON SALE OF ASSETS

     10,196       61,784       25,506       61,965  

OPERATING INCOME

     4,843       60,171       17,022       58,228  

Equity in earnings of unconsolidated ventures

     680       648       2,172       1,632  

Interest expense

     (8,094     (4,271     (15,649     (12,933

Other non-operating income

     1,113       26       2,317       77  
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE TAXES

     (1,458     56,574       5,862       47,004  

Income tax (expense) benefit

     1,078       (19,609     (1,274     (16,069
  

 

 

   

 

 

   

 

 

   

 

 

 

CONSOLIDATED NET INCOME (LOSS)

     (380     36,965       4,588       30,935  

Less: Net (income) attributable to noncontrolling interests

     (323     (537     (1,678     (901
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.

   $ (703   $ 36,428     $ 2,910     $ 30,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

        

Basic

     35,233       35,514       35,204       35,482  

Diluted

     35,233       35,796       35,437       35,877  

NET INCOME (LOSS) PER COMMON SHARE

        

Basic

   $ (0.02   $ 1.03     $ 0.08     $ 0.85  

Diluted

   $ (0.02   $ 1.02     $ 0.08     $ 0.84  

COMPREHENSIVE INCOME (LOSS)

   $ (703   $ 36,428     $ 2,910     $ 30,034  

Please read the Notes to Consolidated Financial Statements.

 

4


Table of Contents

FORESTAR GROUP INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

     First Nine Months  
     2012     2011  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Consolidated net income

   $ 4,588     $ 30,935  

Adjustments:

    

Depreciation and amortization

     12,084       7,335  

Deferred income taxes

     (2,971     (11,013

Tax benefits not recognized for book purposes

     114       144  

Equity in (earnings) of unconsolidated ventures

     (2,172     (1,632

Distributions of earnings of unconsolidated ventures

     516       5,307  

Distributions of earnings to noncontrolling interests

     (1,434     (2,899

Proceeds from consolidated ventures’ sale of assets, net

     24,294       —     

Non-cash share-based compensation

     11,491       399  

Non-cash real estate cost of sales

     25,998       17,149  

Non-cash cost of assets sold

     —          24,931  

Real estate development and acquisition expenditures, net

     (67,127     (49,530

Acquisition of loan secured by real estate

     —          (21,137

Reimbursements from utility and improvement districts

     2,922       2,270  

Other changes in real estate

     835       (237

Cost of timber cut

     868       856  

Deferred income

     927       345  

Asset impairments

     —          450  

Gain on sale of assets

     (25,506     (181

Other

     (35     115  

Changes in:

    

Notes and accounts receivable

     (645     (464

Prepaid expenses and other

     1,300       581  

Accounts payable and other accrued liabilities

     452       9,962  

Income taxes

     (7,283     19,130  
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (20,784     32,816  

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Property, equipment, software and reforestation

     (1,577     (1,466

Oil and natural gas properties and equipment

     (2,794     (3,414

Investment in unconsolidated ventures

     (1,684     (1,350

Return of investment in unconsolidated ventures

     985       688  

Proceeds from termination of timber lease

     —          290  

Proceeds from sale of multifamily property

     29,474       —     

Proceeds from sale of property and equipment

     —          103  

Business acquisition, net of cash acquired

     (152,073     —     

Proceeds from sale of venture interest

     32,095       —     
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (95,574     (5,149

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payments of debt

     (46,374     (104,750

Additions to debt

     158,929       106,858  

Deferred financing fees

     (5,209     (3,746

Return of investment to noncontrolling interest

     (69     (2

Exercise of stock options

     1,269       1,171  

Repurchases of common stock

     —          (2,126

Payroll taxes on restricted stock and stock options

     (1,171     (1,290

Tax benefit from share-based compensation

     373       (110

Other

     606       83  
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     108,354       (3,912
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (8,004     23,755  

Cash and cash equivalents at beginning of period

     18,283       5,366  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 10,279     $ 29,121  
  

 

 

   

 

 

 

Please read the Notes to Consolidated Financial Statements.

 

5


Table of Contents

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. 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 related to allocating cost of sales to real estate, minerals and fiber and measuring assets for impairment. 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 2011 Annual Report on Form 10-K.

Note 2 — New and Pending Accounting Pronouncements

Accounting Standards Adopted in 2012

In first quarter 2012, we adopted Accounting Standards Update (ASU) 2011-04 - Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and ASU
2011-05 - Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Adoption of these pronouncements did not affect our earnings or financial position.

Pending Accounting Standards

ASU 2011-10 – Property, Plant, and Equipment: Derecognition of in Substance Real Estate will be effective first quarter 2013. Under ASU 2011-10, when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity would continue to include the real estate, debt and results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendment should be applied prospectively to deconsolidation events occurring after the effective date. Adoption is not anticipated to have a significant effect on our earnings or financial position but may result in certain additional disclosures.

ASU 2012-02– Intangibles-Goodwill and Other will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The amendment provides entities with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test, which is equivalent to the impairment testing requirements for other long-lived assets. Adoption is not anticipated to have a significant effect on our earnings or financial position.

Note 3 — Business Acquisitions

On September 28, 2012, pursuant to the terms of the previously announced Agreement and Plan of Merger dated June 3, 2012, we acquired 100 percent of the outstanding common stock of CREDO Petroleum Corporation (Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. In first nine months 2012, we have incurred approximately $5,709,000 in costs to outside advisors related to this transaction, which are included in general and administrative expenses. Third quarter 2012 mineral resource segment earnings associated with this acquisition were not significant.

The following summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of September 28, 2012. Due to closing the transaction on the last business day of the quarterly reporting period, the preliminary allocation is subject to change as we obtain additional information during the acquisition measurement period, in particular, the estimated value assigned to oil and natural gas properties and equipment, goodwill and deferred tax liability.

 

6


Table of Contents
     Preliminary Purchase  Price
Allocation
     (In thousands)

Cash and short-term investments

     $ 2,300  

Receivables

       9,213  

Oil and natural gas properties and equipment

       139,907  

Other properties and equipment

       1,375  

Goodwill and other intangible assets

       55,954  

Other

       676  
    

 

 

 

Total assets acquired

       209,425  
    

 

 

 

Accounts payable and accrued liabilities

       26,626  

Deferred tax liability

       26,276  

Other liabilities

       1,308  
    

 

 

 

Total liabilities assumed

       54,210  
    

 

 

 

Estimated fair value of net assets acquired

     $ 155,215  
    

 

 

 

The following unaudited pro forma information for the third quarter and first nine months ended 2012 and 2011 represents the results of our consolidated operations as if the acquisition of Credo had occurred on January 1, 2011. This information is based on historical results of operations, adjusted for certain estimated accounting adjustments and does not purport to represent our actual results of operations if the transaction would have occurred on January 1, 2011, nor is it necessarily indicative of future results.

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Revenues

   $ 46,972       $ 30,729       $ 122,057       $ 93,372   

Net income (loss)

     5,508         36,495         11,571         20,132   

In first quarter 2012, we acquired from CL Realty, L.L.C. and Temco Associates, LLC, the ventures’ interest in 17 residential and mixed-use real estate projects for $47,000,000. Subsequent to closing of these acquisitions, we received $23,370,000 from the ventures, representing our pro-rata share of distributable cash. The purchase price was allocated to the acquired assets and liabilities based on their estimated fair value: $31,891,000 to real estate; $14,236,000 to investment in unconsolidated ventures; $1,385,000 to other assets; and $512,000 to liabilities directly related to the real estate acquired. Transaction costs of about $463,000 are included in other operating expense in first nine months 2012.

The acquired assets and operating results are included within our real estate segment and represented approximately 1,130 fully developed lots, 4,900 planned lots and over 460 commercial acres on the date of acquisition, principally in the major markets of Texas. Pro forma consolidated operating income (loss) assuming these acquisitions had occurred at the beginning of 2011 would not be significantly different than reported.

 

7


Table of Contents

Note 4 — Real Estate

Real estate consists of:

 

     Third
Quarter-End
2012
  Year-End
2011
     (In thousands)

Entitled, developed and under development projects

     $ 357,673       $ 383,026  

Undeveloped land

       84,006         80,076  

Commercial and income producing properties

        

Carrying value

       94,239         129,220  

Accumulated depreciation

       (27,315 )       (26,955 )
    

 

 

     

 

 

 

Net carrying value

       66,924         102,265  
    

 

 

     

 

 

 
     $ 508,603       $ 565,367  
    

 

 

     

 

 

 

Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $53,834,000 at third quarter-end 2012 and $61,526,000 at year-end 2011, including $34,252,000 at third quarter-end 2012 and $34,802,000 at year-end 2011 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. In second quarter 2012, these costs decreased by $11,065,000 as result of a consolidated venture’s sale of approximately 800 acres near Dallas. We submitted for reimbursement to these districts $4,345,000 in first nine months 2012 and $2,336,000 in first nine months 2011. We received $972,000 from these districts in first nine months 2012 and $187,000 in first nine months 2011. We expect to collect the remaining amounts billed as 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 $1,950,000 in first nine months 2012 and $2,083,000 in first nine months 2011 from the Special Improvement District (SID) related to hotel occupancy revenues and other revenues from resort sales collected as taxes by the SID. We currently account for these receipts as a reduction of our investment. At third-quarter-end 2012, we have $33,418,000 invested in the resort development.

In first quarter 2012, entitled, developed and under development projects increased by $31,891,000 as a result of our acquisition of certain residential and mixed-use projects from CL Realty and Temco. Please read Note 3 for additional information. In second quarter 2012, entitled, developed and under development projects decreased by $51,493,000 as result of a consolidated venture’s sale of approximately 800 acres (Light Farms Project) near Dallas. We received $24,294,000 in net proceeds, the buyer assumed the outstanding debt of $30,991,000 and we recognized a gain on sale of $3,401,000.

In third quarter 2012, commercial and income producing properties decreased by $45,794,000 as result of selling Broadstone Memorial, a 401 unit multifamily project in Houston for $56,400,000. We received $29,474,000 in net proceeds, the buyer assumed outstanding debt of $26,500,000, and we recognized a gain on sale of $10,180,000. At third quarter-end 2012, commercial and income producing properties primarily represents our investment in a 413 room hotel in Austin with a carrying value of $20,098,000 and a 289 unit multifamily project in Austin, currently under construction, with a carrying value of $30,014,000. In first nine months 2012, we invested $16,809,000 in construction costs associated with this multifamily property and the estimated cost to complete construction is approximately $1,643,000.

Depreciation expense, primarily related to commercial and income producing properties, was $2,736,000 in first nine months 2012 and $2,650,000 in first nine months 2011 and is included in other operating expenses.

Note 5 — Timber

We own directly or through ventures about 129,000 acres of timber, primarily in Georgia, and about 17,000 acres of timber under lease. The non-cash cost of timber cut and sold was $868,000 in first nine months 2012 and $856,000 in first nine months 2011.

 

8


Table of Contents

Note 6 — Shareholders’ Equity

A reconciliation of changes in shareholders’ equity at third quarter-end 2012 follows:

 

     Forestar
Group Inc.
     Noncontrolling
Interests
    Total  
     (In thousands)  

Balance at year-end 2011

   $ 509,526      $ 1,686     $ 511,212  

Net income

     2,910        1,678       4,588  

Distributions to noncontrolling interests

     —           (1,504     (1,504

Contributions from noncontrolling interests

     —           779       779  

Other (primarily share-based compensation)

     6,540        (354 )     6,186  
  

 

 

    

 

 

   

 

 

 

Balance at third quarter-end 2012

   $ 518,976      $ 2,285     $ 521,261  
  

 

 

    

 

 

   

 

 

 

In first nine months 2012, we issued 66,320 shares of our common stock as a result of stock option exercises and vesting of equity-settled restricted stock units, net of shares withheld for taxes.

Note 7 — Investment in Unconsolidated Ventures

At third quarter-end 2012, we had ownership interests in 13 ventures that we account for using the equity method. We have no real estate ventures that are accounted for using the cost method.

In second quarter 2012, we formed two new unconsolidated ventures:

• CJUF III, RH Holdings, LP was formed with Canyon-Johnson Urban Funds (CJUF) to develop a 257 unit multifamily property overlooking downtown Austin. We own a 25 percent interest and CJUF owns the remaining 75 percent interest. We contributed land and pre-development costs to the venture and received reimbursements of $3,718,000 from the venture. The venture obtained a senior secured construction loan in the amount of $23,936,000 that bears interest at LIBOR plus 2 percent with no significant balance outstanding at third quarter-end 2012. The loan has an initial term of 36 months and may be extended for two additional 12-month periods if certain conditions are met. We have a guaranty of completion of the improvements, a repayment guarantee for 20 percent of principal balance and unpaid accrued interest and a standard non-recourse carve-out guaranty. The repayment guarantee will reduce from 20 percent to 0 percent upon achievement of certain conditions. At third quarter-end 2012, our investment in this venture is $4,077,000.

• FMF Peakview, LLC was formed with Guggenheim Real Estate, LLC (Guggenheim) to develop a 304 unit multifamily property in Denver. We own a 20 percent interest and Guggenheim owns the remaining 80 percent interest. We contributed land and pre-development costs to the venture and received reimbursements of $7,243,000 from the venture. The venture obtained a senior secured construction loan in the amount of $31,550,000 that bears interest at LIBOR plus 2.25 percent with no balance outstanding at third quarter-end 2012. The loan has an initial term of 36 months and may be extended for two additional 12-month periods if certain conditions are met. We have a guaranty of completion of the improvements, a repayment guarantee for 25 percent of principal and unpaid accrued interest and a standard non-recourse carve-out guaranty. At third quarter-end 2012, our investment in this venture is $2,143,000.

In first quarter 2012, we acquired from CL Realty and Temco their interest in 17 residential and mixed-use projects for $47,000,000, principally representing $31,891,000 in real estate and $14,236,000 in investment in unconsolidated ventures. Please read Note 3 for additional information. Also in first quarter 2012, we sold our 25 percent interest in Palisades West LLC, which owns two office buildings and an accompanying parking garage in Austin for $32,095,000, resulting in a gain on sale of $11,675,000.

 

9


Table of Contents

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
2012
     Year-End
2011
     Third
Quarter-

End
2012
     Year-End
2011
    Third
Quarter-
End
2012
    Year-End
2011
    Third
Quarter-End
2012
    Year-End
2011
 
     (In thousands)  

242, LLC (b)

   $ 21,356      $ 23,688      $ 1,512      $ 4,429       $ 18,888     $ 18,536     $ 8,540     $ 8,332  

CJUF III, RH Holdings

     11,336        —           1        —          10,175       —          4,077       —     

CL Ashton Woods (c)

     17,530        —           —           —          17,030       —          7,024       —     

CL Realty

     7,970        51,096        —           1,056         7,624       48,608       3,812       24,304  

FMF Peakview

     10,883        —           —           —          10,716       —          2,143       —     

HM Stonewall Estates (c)

     5,243        —           316        —          4,932       —          2,354       —     

LM Land Holdings (c)

     18,645        —           2,668        —          12,943       —          5,938       —     

Palisades West

     —           124,588        —           —          —          81,635       —          20,412  

Round Rock Luxury Apartments

     33,247        34,434        28,301        28,544         4,207       4,865       2,856       3,312  

Temco

     13,250        18,922        —           2,787         12,902       15,896       6,451       7,948  

Other ventures (4) (b) (d)

     17,278        16,938        37,923        38,002         (34,090     (34,045     (154     (85
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 156,738      $ 269,666      $ 70,721      $ 74,818       $ 65,327     $ 135,495     $ 43,041     $ 64,223  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined summarized income statement information for our ventures accounted for using the equity method follows:

 

     Revenues      Earnings (Loss)     Our share of earnings (loss)  
     Third Quarter      First Nine Months      Third Quarter     First Nine Months     Third Quarter     First Nine Months  
     2012      2011      2012      2011      2012     2011     2012     2011     2012     2011     2012     2011  
     (In thousands)  

242, LLC (b)

   $ 1,072      $ 957      $ 2,925      $ 1,420      $ 163     $ 128     $ 352     $ 124     $ 93     $ 64     $ 208     $ 62  

CJUF III, RH Holdings

     —           —           —           —           —          —          —          —          —          —          —          —     

CL Ashton Woods (c)

     740        —           2,089        —           197       —          458         350       —          874       —     

CL Realty

     298        2,290        2,294        5,808        104       1,091       840       2,481       52       571       420       1,266  

FMF Peakview

     —           —           —           —           —          —          —          —          —          —          —          —     

HM Stonewall Estates (c)

     526        —           1,696        —           146       —          543       —          57       —          216       —     

LM Land Holdings (c)

     1,700        —           4,970        —           340       —          1,207       —          (16     —          151       —     

Palisades West

     —           4,142        —           12,256        —          1,461       —          4,372       —          365       —          1,093  

Round Rock Luxury Apartments

     1,179        1,420        3,461        3,388        50       (157     82       (367     25       (90     57       (209

Temco

     60        89        560        435        (18     (366     (142     (782     (9     (183     (71     (391

Other ventures (4)

     467        301        1,064        3,535        (224     (583     (661     (2,501     128       (79     317       (189
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,042      $ 9,199      $ 19,059      $ 26,842      $ 758     $ 1,574     $ 2,679     $ 3,327     $ 680     $ 648     $ 2,172     $ 1,632  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Total includes current maturities of $65,665,000 at third quarter-end 2012, of which $36,914,000 is non-recourse to us, and $71,816,000 at year-end 2011, of which $43,144,000 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 $904,000 are reflected as a reduction to our investment in unconsolidated ventures at third quarter-end 2012.

(c) 

In first quarter 2012, we acquired CL Realty’s equity investment in these residential and mixed-use ventures 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 equity in earnings (loss) of unconsolidated ventures. Unrecognized basis difference of $3,240,000 is reflected as a reduction of our investment in unconsolidated ventures at third quarter-end 2012.

(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 for additional information.

 

10


Table of Contents

In first nine months 2012, we invested $1,684,000 in these ventures and received $1,501,000 in distributions; in first nine months 2011, we invested $1,350,000 in these ventures and received $5,995,000 in distributions. Distributions include both return of investments and distributions of earnings.

We may provide performance bonds and letters of credit on behalf of certain ventures that would 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 2012, we have $26,888,000 outstanding, of which $26,577,000 is related to the development and construction of a 257 unit multifamily property in Austin.

Note 8 — Receivables

Receivables consists of:

 

      Third
Quarter-End
2012
  Year-End
2011
     (In thousands)

Loan secured by real estate

     $ 19,063       $ 20,666  

Notes receivable, average interest rates of 5.65% at third quarter-end 2012 and 7.16% at year-end 2011

       668         1,817  

Receivables and accrued interest

       13,536         860  
    

 

 

     

 

 

 
       33,267         23,343  

Allowance for bad debts

       (62 )       (62 )
    

 

 

     

 

 

 
     $ 33,205       $ 23,281  
    

 

 

     

 

 

 

At third quarter-end 2012, we have $19,063,000 invested in a loan secured by real estate. The loan 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. In second quarter 2012, an approved bankruptcy plan of reorganization of the borrower became effective establishing a principal amount of $33,900,000 maturing in April 2017. Per the terms of the agreement, interest accrues at 9 percent the first three years escalating to 10 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. Commencing with the reorganization, we estimate future cash flows and calculate accretable yield to be recognized over the term of the loan, which is included in other non-operating income. In first nine months 2012, we received principal payments of $2,704,000 and interest payments of $1,148,000. At third quarter-end 2012, the outstanding principal balance was $31,196,000.

Estimated accretable yield at third quarter-end 2012 follows:

 

     (In thousands)  

Beginning of period (Second Quarter-End 2012)

   $ 27,833  

Interest income recognized

     (1,056
  

 

 

 

End of period

   $ 26,777  
  

 

 

 

Notes receivable generally are secured by a deed of trust and generally due within three years.

Receivables and accrued interest principally include miscellaneous operating receivables arising in the normal course of business. In third quarter 2012, receivables increased by approximately $9,213,000 as a result of our acquisition of Credo.

 

11


Table of Contents

Note 9 — Debt

Debt consists of:

 

     Third
Quarter-End
2012
   Year-End
2011
     (In thousands)

Senior secured credit facility

         

Term loan facility — average interest rate of 4.22% at third quarter-end 2012 and 6.50% at year-end 2011

     $ 200,000        $ 130,000  

Revolving line of credit — average interest rate of 6.25% at third quarter-end 2012

       27,000          —    

Secured promissory notes — average interest rate of 2.85% at third quarter-end 2012 and 4.34% at year-end 2011

       31,390          41,900  

Other indebtedness due through 2017 at variable and fixed interest rates ranging from 5.00% to 8.00%

       18,261          49,687  
    

 

 

      

 

 

 
     $ 276,651        $ 221,587  
    

 

 

      

 

 

 

Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2012, we were in compliance with the financial covenants of these agreements.

On September 14, 2012, we entered into a Second Amended and Restated Revolving and Term Credit Agreement in order to consolidate previous amendments and to effect the following principal amendments to: increase the term loan commitment from $130,000,000 to $200,000,000; extend the maturity date of the revolving loan to September 14, 2015 (with a one-year extension option) and of the term loan to September 14, 2017; reduce the interest rate spread over LIBOR from 4.5 percent to 4.0 percent, and eliminate the LIBOR rate floor of 2 percent; increase the minimum interest coverage ratio from 1.05x to 1.50x; reduce the unused fee rate from 0.45 percent per annum to 0.25 percent – 0.35 percent per annum based on usage; and eliminate the minimum value to commitment ratio covenant and replace it with a reduction to the borrowing base to the extent the ratio of the value of assets in the borrowing base to the aggregate commitments under the facility is less than 1.50x.We incurred fees of $5,059,000 related to this amendment. The amendment and restatement of the term loan was an extinguishment of debt under the accounting guidance and, as result, we recognized a $4,448,000 loss in third quarter 2012 which is included in interest expense.

On September 28, 2012 we acquired 100 percent of the outstanding stock of Credo in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. This transaction was funded with approximately $70,000,000 in borrowings from our term loan, $35,000,000 in borrowings from our revolving line of credit, and the remaining paid from our existing balance of cash and short-term investments.

At third quarter-end 2012, our senior secured credit facility provides for a $200,000,000 term loan and a $200,000,000 revolving line of credit. The revolving line of credit may be prepaid at any time without penalty. The term loan includes a prepayment fee of one percent if prepaid prior to March 14, 2013. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $2,604,000 is outstanding at third quarter-end 2012. 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 2012, we had $170,396,000 in net unused borrowing capacity under our senior secured credit facility.

Under the terms of the amended and restated credit agreement, 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 raw entitled land, as well as pledges of other rights including certain oil and gas 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 interests, 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 provided that borrowing base compliance is maintained.

At third quarter-end 2012, secured promissory notes includes a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $20,098,000 and a $15,990,000 construction loan collateralized by a 289 unit multifamily project (currently under construction) located in Austin with a carrying value of $30,014,000. This loan will provide up to $19,550,000 in construction financing for this project.

 

12


Table of Contents

At third quarter-end 2012, other indebtedness, principally non-recourse, is collateralized by entitled, developed and under development projects with a carrying value of $64,781,000. In third quarter 2012, other indebtedness decreased by $26,500,000 as result of selling of Broadstone Memorial, a 401 unit multifamily project in Houston. We received $29,474,000 in net proceeds, the buyer assumed the outstanding debt, and we recognized a gain on sale of $10,180,000. In second quarter 2012, other indebtedness decreased by $30,991,000 as result of a consolidated venture’s sale of approximately 800 acres (Light Farms Project) near Dallas. We received $24,294,000 in net proceeds; the buyer assumed the outstanding debt and we recognized a gain on sale of $3,401,000.

At third quarter-end 2012, we have $6,471,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees, excluding loss on extinguishment of debt, was $2,290,000 in first nine months 2012 and $2,161,000 in first nine months 2011 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, assets held for sale, goodwill and other intangible assets, which are measured for impairment. In third quarter 2012 and 2011, 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 2012     Year-End 2011        
     Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
    Valuation
Technique
 
     (In thousands)        

Loan secured by real estate

   $ 19,063     $ 37,713     $ 20,666     $ —   (a)      Level 2   

Fixed rate debt

   $ (3,431   $ (3,557   $ (29,931   $ (32,478     Level 2   

 

(a) At year-end 2011 not applicable due to its non-performing status.

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 for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.

As a result of the 2007 spin-offs from Temple-Inland, at third quarter-end 2012, personnel of Temple-Inland and the other spin-off entity held options to purchase 969,000 shares of our common stock. The options have a weighted average exercise price of $22.59 per share and a weighted average remaining contractual term of three years. At third quarter-end 2012, the options have an aggregate intrinsic value of $1,042,000.

 

13


Table of Contents

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  
     2012     2011     2012     2011  
     (In thousands)  

Earnings (loss) available to common shareholders:

        

Consolidated net income (loss)

   $ (380   $ 36,965     $ 4,588     $ 30,935  

Less: Net (income) loss attributable to noncontrolling interest

     (323     (537     (1,678     (901
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Forestar Group Inc.

   $ (703   $ 36,428     $ 2,910     $ 30,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding — basic

     35,233       35,514       35,204       35,482  

Dilutive effect of stock options, restricted stock and equity-settled awards

     —          282       233       395  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding — diluted

     35,233       35,796       35,437       35,877  
  

 

 

   

 

 

   

 

 

   

 

 

 

Anti-dilutive awards excluded from diluted weighted average shares outstanding

     2,661       2,250       2,582       1,998  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 13 — Income Taxes

Our effective tax rate was a 74 percent benefit in third quarter 2012 and 22 percent expense in first nine months 2012, which includes a 10 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 respectively associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states. Our effective tax rate was 35 percent in third quarter 2011 and 34 percent in first nine months 2011, which includes a one percent benefit for noncontrolling interests and one percent non-cash charge for share-based compensation. In addition, 2012 and 2011 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage depletion while the 2011 effective tax rate also includes the benefits of charitable contributions related to timberlands.

We acquired Credo in third quarter 2012 and as a result, we recorded an estimated deferred tax liability of $26,276,000 principally representing the excess of the fair value allocated to oil and gas properties at closing over the carry-over tax basis received at our estimated effective tax rate. Goodwill associated with our acquisition of Credo is not deductible for income tax purposes.

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.

At third quarter-end 2012, our unrecognized tax benefits totaled $6,213,000, all of which would affect our effective tax rate if recognized.

Note 14 — Commitments and Contingencies

Litigation

In connection with our definitive agreement to acquire Credo, four purported class action lawsuits and one lawsuit that seeks certification as a class action have been filed against Credo, its board of directors and us. These actions generally allege that Credo and its board of directors breached fiduciary duties to Credo stockholders with respect to the transaction. The five actions also allege that we aided and abetted the alleged breaches. The plaintiffs’ allegations include that the consideration paid to acquire Credo is inadequate. Two of the five cases were voluntarily dismissed. On September 14, 2012, parties to the Delaware actions entered into a memorandum of understanding (MOU) to settle those actions. The MOU is contingent on confirmatory discovery and court approval of the settlement. The MOU provides that in consideration of supplemental disclosures filed by Credo with the SEC on September 14, 2012, the final settlement will include a release of all asserted claims. The MOU does not include one case pending in Colorado, but the settlement, if approved by the Delaware Court of Chancery, would release the claims asserted in the Colorado action. We believe that the claims in all cases are without merit and intend to defend the actions vigorously.

Credo has filed a lawsuit for declaratory judgment regarding its contract rights under two agreements with a third party that in the aggregate involve five to ten percent of Credo’s participating interest in most of its leases in North Dakota. The third party has asserted certain counterclaims. We believe that the counterclaims are without merit and intend to defend them vigorously.

 

14


Table of Contents

We are involved in various other 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. It is possible, however, 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 cost to complete remediation activities will be approximately $2,199,000, 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.

Note 15 — Segment Information

We manage our operations through three business segments: real estate, mineral resources and fiber 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. Mineral resources manages our oil, natural gas and water interests. Fiber resources manages our timber and recreational leases.

Assets allocated by segment are as follows:

 

     Third
Quarter-End
2012
   Year-End
2011
     (In thousands)

Real estate

     $ 578,231        $ 655,592  

Mineral resources

       226,213          18,902  

Fiber resources

       13,323          14,444  

Assets not allocated to segments

       72,172          105,919  
    

 

 

      

 

 

 

Total assets

     $ 889,939        $ 794,857  
    

 

 

      

 

 

 

On September 28, 2012, we acquired Credo and as a result, we allocated approximately $209,425,000 in assets to our mineral resources segment related to this transaction. Third quarter 2012 mineral resources segment earnings associated with this acquisition were not significant.

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 sale 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. Our revenues are derived from our U.S. operations and all of our assets are located in the U.S. In third quarter 2012, no single customer accounted for more than 10 percent of our total revenues.

 

15


Table of Contents

Segment revenues and earnings are as follows:

 

                                                       
     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands)  

Revenues:

        

Real estate

   $ 27,115     $ 19,060     $ 71,684     $ 59,814  

Mineral resources

     10,479       5,871       27,053       17,784  

Fiber resources

     3,016       1,310       5,277       3,968  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 40,610     $ 26,241     $ 104,014     $ 81,566  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment earnings:

        

Real estate

   $ 12,688     $ (4,266   $ 31,931     $ (684

Mineral resources

     6,091       3,592       15,919       12,292  

Fiber resources

     1,798       446       2,782       1,790  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment earnings

     20,577       (228     50,632       13,398  

Items not allocated to segments (a)

     (22,358     56,265       (46,448     32,705  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes attributable to Forestar Group Inc.

   $ (1,781   $ 56,037     $ 4,184     $ 46,103  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Items not allocated to segments consist of:

 

                                                       
     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands)  

General and administrative expense

   $ (8,000   $ (4,827   $ (19,482   $ (15,824

Shared-based compensation expense

     (6,327     3,553       (11,491     (399

Gain on sale of assets

     16       61,784       16       61,784  

Interest expense

     (8,094     (4,271     (15,649     (12,933

Other corporate non-operating income and expense

     47       26       158       77  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (22,358   $ 56,265     $ (46,448   $ 32,705  
  

 

 

   

 

 

   

 

 

   

 

 

 

In third quarter and first nine months 2012, general and administrative expense includes $3,248,000 and $5,709,000 in transaction costs associated with our September 28, 2012 acquisition of Credo. In third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of the terms available to us in the capital markets.

Third quarter and first nine months 2012 share-based compensation expense increased as a result of increase in our stock price and the impact on cash-settled awards.

In third quarter 2011, gain on sale of assets represents the gain from selling 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000.

In third quarter 2012, interest expense includes a $4,448,000 loss on extinguishment of debt associated with the amendment and restatement of our term loan on September 14, 2012.

Note 16 — Variable Interest Entities

At third quarter 2012, we are the primary beneficiary of one VIE that we consolidate. We have provided the majority of equity to this VIE, which absent our contributions or advances does not have sufficient equity to fund its operations. We have the authority to approve project budgets and the issuance of additional debt. At third quarter-end 2012, our consolidated balance sheet includes $1,342,000 in liabilities related to this VIE. In first nine months 2012, we contributed or advanced $1,000 to this VIE.

 

16


Table of Contents

Also at third quarter-end 2012, 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 while we have the authority to approve project budgets and the issuance of additional debt. 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 2012, these three VIEs have total assets of $48,849,000, substantially all of which represent developed and undeveloped real estate and total liabilities of $80,283,000, which includes $63,624,000 of borrowings classified as current maturities. These amounts are included in unconsolidated ventures in the combined summarized balance sheet information accounted for using the equity method in Note 7. At third quarter-end 2012, our investment in these three VIEs is $1,497,000 and is included in investment in unconsolidated ventures. In first nine months 2012, we contributed or advanced $111,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at $34,400,000, which exceeds our investment as we have a nominal general partner interest in two 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 (income) consists of:

 

                                               
     Third Quarter     First Nine Months  
     2012      2011     2012      2011  
     (In thousands)  

Cash-settled awards

   $ 4,547      $ (4,893   $ 4,829      $ (4,212

Equity-settled awards

     609        265       2,438        676  

Restricted stock

     514        612       1,636        1,882  

Stock options

     657        463       2,588        2,053  
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 6,327      $ (3,553   $ 11,491      $ 399  
  

 

 

    

 

 

   

 

 

    

 

 

 

Third quarter and first nine months 2012 share-based compensation expense increased principally as a result of an increase in our stock price and the impact on cash-settled vested awards.

Share-based compensation expense (income) is included in:

 

                                               
     Third Quarter     First Nine Months  
     2012      2011     2012      2011  
     (In thousands)  

General and administrative expense

   $ 3,298      $ (2,057   $ 5,528      $ (234

Other operating expense

     3,029        (1,496     5,963        633  
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 6,327      $ (3,553   $ 11,491      $ 399  
  

 

 

    

 

 

   

 

 

    

 

 

 

The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $595,000 in first nine months 2012 and $654,000 in first nine months 2011. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $9,530,000 at third quarter-end 2012. 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 2012 or 2011.

In first nine months 2012, we withheld 72,199 shares having a value of $1,171,000 in connection with vesting of restricted stock awards and exercises of stock options. In first nine months 2011, we withheld 70,539 shares having a value of $1,290,000 in connection with vesting of restricted stock awards and exercises of stock options. These shares are included in treasury stock and are reflected in financing activities in our consolidated statement of cash flows.

 

17


Table of Contents

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 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.

Cash-settled awards granted to our directors in the form of restricted stock units are fully vested at the time of grant and payable upon retirement.

The following table summarizes the activity of cash-settled restricted stock unit awards in first nine months 2012:

 

     Equivalent
Units
    Weighted
Average Grant
Date Fair Value
 
     (In thousands)     (Per unit)  

Non-vested at beginning of year

     449     $ 13.13  

Granted

     187       16.11  

Vested

     (286     10.32  

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested at end of period

     350     $ 17.03  
  

 

 

   

 

 

 

The following table summarizes the activity of cash-settled stock appreciation rights in first nine months 2012:

 

     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 year

     895     $ 11.31        7      $ 3,986  

Granted

     —          —           

Exercised

     (22     9.29        

Forfeited

     —          —           
  

 

 

   

 

 

       

Balance at end of period

     873     $ 11.36        7      $ 4,870  

Exercisable at end of period

     625     $ 10.88        7      $ 3,744  

The fair value of awards settled in cash was $5,254,000 in first nine months 2012 and $184,000 in first nine months 2011. At third quarter-end 2012, the fair value of vested cash-settled awards is $17,239,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $9,559,000 at third quarter-end 2012 based on a quarter-end stock price of $16.66.

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, and market-leveraged stock units (MSU), which vest after three years. Equity settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and payable upon retirement. The following table summarizes the activity of equity-settled awards in first nine months 2012:

 

     Equivalent
Units
    Weighted
Average Grant
Date Fair Value
 
     (In thousands)     (Per share)  

Non-vested at beginning of year

     159     $ 20.74  

Granted

     311       17.13  

Vested

     (102     15.26  

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested at end of period

     368     $ 19.20  
  

 

 

   

 

 

 

 

18


Table of Contents

In first quarter 2012, we granted 154,900 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of 232,370 shares if our stock price increases by 50 percent or more, to a low of 77,460 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 $4,272,000 at third quarter-end 2012. 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 2012:

 

     Restricted
Shares
    Weighted
Average Grant
Date Fair Value
 
     (In thousands)     (Per share)  

Non-vested at beginning of year

     399     $ 15.02  

Granted

     —          —     

Vested

     (183     12.65  

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested at end of period

     216     $ 17.03  
  

 

 

   

 

 

 

Unrecognized share-based compensation expense related to non-vested restricted stock awards is $952,000 at third quarter-end 2012. The weighted average period over which this amount will be recognized is estimated to be one year.

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 2012:

 

     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 year

     1,284     $ 22.22           7      $ 944  

Granted

     473       15.94           

Exercised

     —          —              

Forfeited

     (1     16.89           
  

 

 

   

 

 

          

Balance at end of period

     1,756     $ 20.53           7      $ 1,532  

Exercisable at end of period

     975     $ 23.66           6      $ 974  

 

19


Table of Contents

We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:

 

     First Nine Months  
     2012     2011  

Expected dividend yield

     —       —  

Expected stock price volatility

     60.2     56.2

Risk-free interest rate

     1.3     2.4

Expected life of options (years)

     6       6  

Weighted average estimated fair value of options granted

   $ 9.22     $ 10.11  

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 $4,306,000 at third quarter-end 2012. 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. As result of Temple-Inland’s merger with International Paper in first quarter 2012, all outstanding awards on Temple-Inland stock were settled with an intrinsic value of $1,132,000.

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 2012, there were 65,000 pre-spin awards outstanding and exercisable on our stock with a weighted average exercise price of $24.10, weighted average remaining term of three years and aggregate intrinsic value of $56,000.

 

20


Table of Contents

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 2011 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of third quarter-end 2012, 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;

 

   

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 and oil and natural gas reserves;

 

   

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;

 

   

risks associated with oil and gas drilling and production activities;

 

   

fluctuations in oil and natural 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;

 

21


Table of Contents
   

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 and

 

   

the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.

Other factors, including the risk factors described in Item 1A of our 2011 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, new strategic initiatives designed to further enhance shareholder value by:

 

   

Accelerating value realization of our real estate and natural resources by increasing total residential lots sales, oil and gas production, and total segment earnings.

 

   

Optimizing transparency and disclosure by expanding reported oil and natural 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 natural gas opportunities.

Strategic Acquisition

On September 28, 2012, pursuant to the terms of the previously announced Agreement and Plan of Merger dated June 3, 2012, we acquired 100 percent of the outstanding common stock of CREDO Petroleum Corporation (Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. Third quarter 2012 mineral resources segment earnings associated with this acquisition were not significant.

 

22


Table of Contents

Results of Operations

A summary of our consolidated results by business segment follows:

 

                                                       
     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands)  

Revenues:

        

Real estate

   $ 27,115     $ 19,060     $ 71,684     $ 59,814  

Mineral resources

     10,479       5,871       27,053       17,784  

Fiber resources

     3,016       1,310       5,277       3,968  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 40,610     $ 26,241     $ 104,014     $ 81,566  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment earnings:

        

Real estate

   $ 12,688     $ (4,266   $ 31,931     $ (684

Mineral resources

     6,091       3,592       15,919       12,292  

Fiber resources

     1,798       446       2,782       1,790  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment earnings (loss)

     20,577       (228     50,632       13,398  

Items not allocated to segments:

        

General and administrative expense

     (8,000     (4,827     (19,482     (15,824

Share-based compensation income (expense)

     (6,327     3,553       (11,491     (399

Gain on sale of assets

     16       61,784       16       61,784  

Interest expense

     (8,094     (4,271     (15,649     (12,933

Other corporate non-operating income and expense

     47       26       158       77  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (1,781     56,037       4,184       46,103  

Income tax benefit (expense)

     1,078       (19,609     (1,274     (16,069
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Forestar Group Inc.

   $ (703   $ 36,428     $ 2,910     $ 30,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Significant aspects of our results of operations follow:

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. In first nine months 2012, real estate segment earnings benefited primarily from such gain and a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC, $3,401,000 gain from a consolidated venture’s sale of 800 acres near Dallas, and increased residential and commercial sales activity.

 

   

Mineral resources 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 and professional services associated with our water initiatives.

 

   

Fiber resources segment earnings increased principally as a result of higher levels of harvesting activity which was primarily driven by accelerated customer demand.

 

   

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 the amendment and restatement of our term loan on September 14, 2012.

 

23


Table of Contents

Third Quarter and First Nine months 2011

 

   

Real estate segment earnings were negatively impacted by lower undeveloped land sales volume and prices as a result of current market conditions. In addition, we recognized a $2,500,000 charge related to environmental remediation activities. These items were partially offset by increased residential sales activity.

 

   

Mineral resources segment earnings declined primarily due to lower lease bonus revenues and increased costs associated with developing our water resources initiatives. These items were partially offset by increased oil production volumes and higher oil prices.

 

   

Fiber resources segment earnings decreased principally due to reduction in volume as a result of selling about 30,000 acres of timberland in 2010 and postponing harvest plans on acres previously classified as held for sale.

 

   

Third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of terms available to us in the credit markets.

 

   

Share-based compensation decreased as a result of a decline in our stock price and its impact on vested cash-settled awards.

 

   

In third quarter 2011, gain on sale of assets represents the gain from selling 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000.

Current Market Conditions

Current U.S. single-family residential market conditions are showing signs of stability; however, high unemployment rates, depressed sales volumes and prices, difficult financing environment for purchasers and competition from foreclosure inventory continue to negatively influence housing markets. It is difficult to predict when and at what rate these broader negative conditions will improve. Declining finished lot inventories and lack of real estate development is increasing demand for our developed lots, principally in the Texas markets. 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 new construction activity, 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 weakened recently reflecting market concerns about world economies and oil demand. Natural gas prices have remained near low historical levels due to abundant supplies and high inventories. Shale resource drilling and production remains strong and working natural gas inventories are expected to remain relatively high. In the East Texas Basin, exploration and production companies continue to focus drilling on high liquid rich gas prospects due to relatively high condensate and natural gas liquid prices. In the Gulf Coast Basin, in Louisiana, activity has increased as operators have shifted exploration efforts to oil and high liquid natural gas plays. These conditions may impact the demand for new mineral leases, new exploration activity and the amount of royalty revenues we receive.

Pine sawtimber prices continue to be depressed due to weak demand driven by the overall slowdown in residential construction activity, while pine pulpwood demand remains steady and pricing is relatively flat.

Business Segments

We manage our operations through three business segments:

 

   

Real estate,

 

   

Mineral resources, and

 

   

Fiber resources.

We evaluate performance based on earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures’, gain on sale 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 expenses, 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.

 

24


Table of Contents

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 about 143,000 acres of real estate located in nine states and 13 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own 103,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in 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 and our multifamily investments.

A summary of our real estate results follows:

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands)  

Revenues

   $ 27,115     $ 19,060     $ 71,684     $ 59,814  

Cost of sales

     (17,539     (12,367     (43,086     (32,894

Operating expenses

     (8,421     (10,717     (24,208     (27,064
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,155       (4,024     4,390       (144

Interest income on loans secured by real estate

     1,066       —          2,159       —     

Gain on sale of assets

     10,197       —          25,273       —     

Equity in earnings (loss) of unconsolidated ventures

     593       295       1,787       361  

Less: Net (income) loss attributable to noncontrolling interests

     (323     (537     (1,678     (901
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment earnings

   $ 12,688     $ (4,266   $ 31,931     $ (684
  

 

 

   

 

 

   

 

 

   

 

 

 

Third quarter and first nine months 2012, segment earnings include $1,066,000 and $2,159,000 in interest income primarily related to a loan secured by a mixed-use 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 $3,401,000 gain from a consolidated venture’s sale of 800 acres in Dallas and $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC for $32,095,000.

Revenues in our owned and consolidated ventures consist of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Residential real estate

   $ 13,564      $ 10,276      $ 36,892      $ 27,503  

Commercial real estate

     2,405        —           4,170        736  

Undeveloped land

     1,604        1,526        4,918        10,096  

Commercial and income producing properties

     8,805        6,653        23,381        20,400  

Other

     737        605        2,323        1,079  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 27,115      $ 19,060      $ 71,684      $ 59,814  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In third quarter and first nine months 2012, 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 first nine months 2012, we sold the remaining 109 fully developed lots from our River Plantation project located in Tampa for $2,145,000 or about $19,675 per lot, resulting in about $478,000 in segment earnings.

In third quarter 2012, commercial real estate revenues increased as result of selling approximately 18 commercial acres from projects located in Houston and Dallas for $2,405,000 generating combined segment earnings of $1,288,000. In addition, first nine months 2012 includes the sale of approximately 35 commercial acres from a project in Fort Worth for $1,295,000 which generated about $822,000 in segment earnings.

In first nine months 2012, undeveloped land sales decreased due to lower volume from our retail land sales program as a result of challenging market conditions including limited credit availability and alternate investment options to buyers in the marketplace.

In third quarter and first nine months 2012, commercial and income producing properties revenue increased as a result of rent growth from our 401 unit multifamily property located in Houston, which we sold in third quarter 2012.

In third quarter and first nine months 2012, other revenues include $564,000 and $1,611,000, as a result of selling four acres and eleven acres, respectively, of impervious cover entitlement credits to homebuilders. These sales generated segment earnings of approximately $496,000 in third quarter 2012 and $1,416,000 in first nine months 2012.

Units sold in our owned and consolidated ventures consist of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Residential real estate:

           

Lots sold

     193        155        675        458  

Revenue per lot sold

   $ 54,206      $ 52,197      $ 49,925      $ 55,277  

Commercial real estate:

           

Acres sold

     18        —           56        4  

Revenue per acre sold

   $ 133,882      $ —         $ 75,147      $ 185,344  

Undeveloped land:

           

Acres sold

     564        548        1,817        3,938  

Revenue per acre sold

   $ 2,846      $ 2,786      $ 2,707      $ 2,564  

Operating expenses consist of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Employee compensation and benefits

   $ 2,530      $ 1,893      $ 6,584      $ 5,730  

Property taxes

     1,964        2,023        6,305        6,484  

Professional services

     992        1,174        3,070        3,405  

Depreciation and amortization

     1,101        1,344        3,251        3,938  

Environmental

     38        2,527        131        2,607  

Other

     1,796        1,756        4,867        4,900  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 8,421      $ 10,717      $ 24,208      $ 27,064  
  

 

 

    

 

 

    

 

 

    

 

 

 

In third quarter 2011, environmental costs increased as a result of a $2,500,000 charge related to environmental remediation activities at our Antioch, California project.

 

26


Table of Contents

Information about our real estate projects and our real estate ventures follows:

 

     Third Quarter-End  
     2012      2011  

Owned and consolidated ventures:

     

Entitled, developed and under development projects

     

Number of projects

     65        54  

Residential lots remaining

     20,019        18,679  

Commercial acres remaining

     2,067        1,808  

Undeveloped land and land in the entitlement process

     

Number of projects

     16        16  

Acres in entitlement process

     27,580        27,590  

Acres undeveloped

     95,357        110,115  

Ventures accounted for using the equity method:

     

Ventures’ lot sales (for first nine months)

     

Lots sold

     306        350  

Average price per lot sold

   $ 49,125      $ 40,592  

Ventures’ entitled, developed and under development projects

     

Number of projects

     7        21  

Residential lots remaining

     3,845        9,295  

Commercial acres sold (for first nine months)

     —           20  

Average price per acre sold

   $ —         $ 152,460  

Commercial acres remaining

     333        538  

Ventures’ undeveloped land and land in the entitlement process

     

Acres sold (for first nine months)

     135        19  

Average price per acre sold

   $ 2,600      $ 3,000  

Acres undeveloped

     5,655        5,712  

In first quarter 2012, we acquired from CL Realty and Temco, 14 entitled, developed and under development projects and interests in three ventures accounted for using the equity method. The acquired assets represented approximately 1,130 fully developed lots, 4,900 planned lots, and over 460 commercial acres at time of acquisition, principally in the major markets of Texas.

We underwrite development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment charge for such project.

Our net investment in owned and consolidated real estate by geographic location follows:

 

State

   Entitled,
Developed, and
Under
Development
Projects
   Undeveloped
Land
   Commercial
and Income
Producing
Properties
   Total
     (In thousands)

Texas

     $ 298,418        $ 9,570        $ 55,335        $ 363,323  

Georgia

       22,125          58,592          —            80,717  

Colorado

       21,475          —            —            21,475  

California

       8,915          14,997          —            23,912  

Other

       6,740          847          11,589          19,176  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 357,673        $   84,006        $   66,924        $ 508,603  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

27


Table of Contents

Mineral Resources

We own directly or through ventures about 593,000 net acres of mineral interests. Our mineral resources segment revenues are principally derived from oil and natural gas royalties, non-operating working interests and other lease revenues from our mineral interests located principally in Texas, Louisiana, Georgia and Alabama. At third quarter-end 2012, we have about 37,000 net acres under lease and about 38,000 net acres held by production.

On September 28, 2012, we acquired 100 percent of the outstanding common stock of Credo in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full approximately $8,770,000 of Credo’s outstanding debt. The acquired assets represent approximately 142,000 net mineral acres leased from others, of which over 36,000 are held by production at third quarter-end 2012. The principal areas of operations are in Oklahoma, Kansas, Nebraska, North Dakota and Texas and includes 382 gross oil and natural gas wells with working interest ownership of which 132 are operated by the Company, and nearly 1,200 wells with overriding royalty interests. Third quarter 2012 mineral resources segment earnings associated with this acquisition were not significant.

A summary of our mineral resources results follows:

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands)  

Revenues

   $ 10,479     $ 5,871     $ 27,053     $ 17,784  

Cost of sales

     (1,865     (597     (4,218     (1,829

Operating expenses

     (2,604     (2,030     (7,285     (4,918
  

 

 

   

 

 

   

 

 

   

 

 

 
     6,010       3,244       15,550       11,037  

Equity in earnings of unconsolidated ventures

     81       348       369       1,255  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment earnings

   $ 6,091     $ 3,592     $ 15,919     $ 12,292  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales represents our share of oil and natural gas production severance taxes, which are calculated based on a percentage of oil and natural gas produced, costs related to our oil and natural gas non-operating working interests, geological and geophysical costs and delay rental payments related to ground water leases in central Texas. In third quarter and first nine months 2012, cost of sales increased primarily due to higher depletion costs related to working interest wells that began producing in late 2011 and early 2012, exploration costs and higher production severance taxes as a result of increased oil production.

Equity in earnings of unconsolidated ventures includes our share of royalty revenue from 23 producing wells in the Barnett Shale natural gas formation.

Revenues consist of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Royalties

   $ 5,435      $ 5,325      $ 18,503      $ 12,699  

Working interests

     604        99        2,112        357  

Other revenues

     4,440        447        6,438        4,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 10,479      $ 5,871      $ 27,053      $ 17,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

In third quarter 2012, royalty revenues increased principally as result of increased oil production partially offset by decreased oil prices in our owned and consolidated properties and decreased natural gas prices. Increased oil production contributed about $2,612,000 which was offset by $1,520,000 from decreased oil prices as compared with third quarter 2011. Increased natural gas production contributed about $241,000 which was offset by $717,000 from decreased natural gas prices as compared with third quarter 2011. In first nine months 2012, royalty revenues increased principally as result of increased oil production in our owned and consolidated properties. Increased oil production contributed about $9,195,000 as compared with first nine months 2011.

 

28


Table of Contents

In third quarter and first nine months 2012, working interest revenues increased principally as result of our investment in new producing wells within the West Gordon field located in Beauregard Parish, Louisiana.

In third quarter 2012, other revenues include $3,543,000 in lease bonuses received from leasing approximately 3,124 net mineral acres owned in Texas and Louisiana for over $1,100 average per acre and $593,000 in delay rentals received on approximately 9,500 net mineral acres owned in Louisiana. In third quarter 2011, other revenues principally includes $100,000 in lease bonuses received from leasing about 380 net mineral acres owned for an average of $266 per acre and $253,000 related to delay rental payments received on approximately 8,600 net mineral acres owned.

In first nine months 2012, other revenues include $2,155,000 in delay rentals received on approximately 15,100 net mineral acres in Louisiana and $3,830,000 in lease bonuses received from leasing approximately 3,900 net mineral acres owned in Texas and Louisiana for an average of about $975 per acre. In first nine months 2011, other revenues include $2,232,000 in lease bonuses received from leasing over 7,700 net mineral acres owned for an average of $288 per acre, $1,555,000 related to mineral seismic exploration agreement associated with 31,100 acres in Louisiana and $479,000 related to delay rental payments received on approximately 9,200 net mineral acres owned.

Oil and natural gas produced and average unit prices related to our royalty and working interests follows:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Consolidated entities:

           

Oil production (barrels)

     69,000        42,300        199,800        102,200  

Average price per barrel

   $ 75.81      $ 97.83      $ 89.15      $ 94.23  

Natural gas production (millions of cubic feet)

     351.5        295.9        1,052.0        850.1  

Average price per thousand cubic feet

   $ 2.29      $ 4.33      $ 2.66      $ 4.03  

Our share of ventures accounted for using the equity method:

           

Natural gas production (millions of cubic feet)

     74.9        112.1        247.1        398.3  

Average price per thousand cubic feet

   $ 1.99      $ 4.10      $ 2.36      $ 3.80  

Total consolidated and our share of equity method ventures:

           

Oil production (barrels)

     69,000        42,300        199,800        102,200  

Average price per barrel

   $ 75.81      $ 97.83      $ 89.15      $ 94.23  

Natural gas production (millions of cubic feet)

     426.4        408        1,299.1        1,248.4  

Average price per thousand cubic feet

   $ 2.24      $ 4.27      $ 2.61      $ 3.96  

Total BOE

     140,105        110,346        416,302        310,268  

Average price per barrel equivalent

   $ 44.17      $ 53.31      $ 50.92      $ 46.96  

At third quarter-end 2012, there were 542 gross productive wells operated by others on our leased owned mineral acres compared to 510 gross productive wells at third quarter-end 2011. The above production and well information excludes any results associated with our September 28, 2012 acquisition of Credo.

Operating expenses consist of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Professional and consulting services

   $ 801      $ 792      $ 2,330      $ 2,086  

Employee compensation and benefits

     1,173        614        3,184        1,495  

Property taxes

     89        78        239        228  

Other

     541        546        1,532        1,109  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 2,604      $ 2,030      $ 7,285      $ 4,918  
  

 

 

    

 

 

    

 

 

    

 

 

 

Professional and consulting services include $429,000 in third quarter 2012 and 2011 and $1,286,000 in first nine months 2012 and 2011 due to non-cash amortization of contingent consideration paid to the seller of a water resources company acquired in 2010. These costs are being amortized ratably over the performance period assuming certain milestones are achieved by July 2014. In third quarter and first nine months 2012, employee compensation and benefits increased principally as result of incremental staffing to support our oil, natural gas and water interests.

 

29


Table of Contents

In addition, we have water interests in 1,550,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1,400,000 acres in Texas, Louisiana, Georgia and Alabama and 17,800 acres of ground water leases in central Texas. We have not received significant revenue or earnings from these interests.

Fiber Resources

Our fiber resources segment focuses principally on the management of our timber holdings and recreational leases. We have about 129,000 acres of timber we own directly or through ventures, primarily in Georgia, and about 17,000 acres of timber under lease. Our fiber resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses.

A summary of our fiber resources results follows:

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  
     (In thousands)  

Revenues

   $ 3,016     $ 1,310     $ 5,277     $ 3,968  

Cost of sales

     (570     (349     (1,068     (881

Operating expenses

     (637     (520     (1,660     (1,494
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,809       441       2,549       1,593  

Gain on sale of assets

     (17     —          217       181  

Equity in earnings of unconsolidated ventures

     6       5       16       16  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment earnings

   $ 1,798     $ 446     $ 2,782     $ 1,790  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fiber resources segment earnings increased principally as a result of higher levels of harvesting activity which was primarily driven by accelerated customer demand.

Revenues consist of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Fiber

   $ 2,282      $ 978      $ 3,848      $ 2,695  

Recreational leases and other

     734        332        1,429        1,273  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 3,016      $ 1,310      $ 5,277      $ 3,968  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fiber sold consists of:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Pulpwood tons sold

     160,000        85,800        265,200        222,100  

Average pulpwood price per ton

   $ 9.54      $ 7.57      $ 9.51      $ 8.57  

Sawtimber tons sold

     37,400        22,900        66,700        51,200  

Average sawtimber price per ton

   $ 20.21      $ 14.33      $ 19.88      $ 15.47  

Total tons sold

     197,400        108,700        331,900        273,300  

Average price per ton

   $ 11.56      $ 8.99      $ 11.59      $ 9.86  

In third quarter 2012, total fiber tons sold increased principally as a result of accelerated harvesting levels to meet customer demand, primarily International Paper’s Rome, Georgia mill. The majority of our fiber sales were to International Paper at market prices.

 

30


Table of Contents

Information about our recreational leases follows:

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Average recreational acres leased

     129,200        164,600        130,500           185,300  

Average price per leased acre

   $ 8.84      $ 8.28      $ 8.84         $ 8.84  

Operating expenses consist of:

 

                                       
     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Employee compensation and benefits

   $ 266      $ 229      $ 783      $ 696  

Facility and long-term timber lease costs

     117        109        354        337  

Other

     254        182        523        461  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 637      $ 520      $ 1,660      $ 1,494  
  

 

 

    

 

 

    

 

 

    

 

 

 

Items Not Allocated to Segments

Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. General and administrative expenses principally consist of accounting and finance, tax, legal, human resources, internal audit, information technology and our board of directors. These functions support all of our business segments and are not allocated.

General and administrative expenses consist of:

 

                                               
     Third Quarter      First Nine Months  
     2012      2011      2012      2011  
     (In thousands)  

Professional services

   $ 4,020      $ 1,600      $ 7,985      $ 6,025  

Employee compensation and benefits

     1,986        1,394        5,332        4,221  

Depreciation and amortization

     268        347        841        1,050  

Insurance costs

     238        276        749        809  

Facility costs

     195        210        573        594  

Other

     1,293        1,000        4,002        3,125  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total general and administrative expenses

   $ 8,000      $ 4,827      $ 19,482      $ 15,824  
  

 

 

    

 

 

    

 

 

    

 

 

 

In third quarter and first nine months 2012 professional services expense includes $3,248,000 and $5,709,000 in transaction costs to outside advisors associated with our acquisition of Credo.

In third quarter and first nine months 2011, professional services includes $459,000 and $3,187,000 of expenses associated with proposed private debt offerings that we withdrew as a result of deterioration in terms available to us in the capital markets.

Income Taxes

Our effective tax rate was a 74 percent benefit in third quarter 2012 and 22 percent expense in first nine months 2012, which includes a 10 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 respectively associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states. Our effective tax rate was 35 percent in third quarter 2011 and 34 percent in first nine months 2011, which includes a one percent benefit for noncontrolling interests and one percent non-cash charge for share-based compensation. In addition, 2012 and 2011 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage depletion while the 2011 effective tax rate includes the benefits of charitable contributions related to timberlands.

 

31


Table of Contents

We acquired Credo on September 28, 2012, and as a result, we recorded an estimated deferred tax liability of $26,276,000 principally representing the excess of the fair value allocated to oil and gas properties at closing over the carry-over tax basis received at our estimated effective tax rate.

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 based on considerations including taxable income in prior carryback years, future reversals of existing temporary differences, tax planning strategies and future taxable income. If these sources of income are not sufficient in future periods, we may be required to provide a valuation allowance for our federal deferred tax asset.

Capital Resources and Liquidity

Sources and Uses of Cash

We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal operating cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, taxes, interest and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from minerals and income producing properties, borrowings, and reimbursements from utility and improvement districts. Operating cash flows are affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements and availability of utilities, and by the timing of oil and natural gas leasing and production activities. Working capital is subject to operating needs, the timing of sales of real estate and timber, the timing of collection of mineral royalties or mineral lease payments, collection of receivables, reimbursement from utility and improvement districts and the payment of payables and expenses.

Cash Flows from Operating Activities

Cash flows from our real estate development activities, undeveloped land sales, commercial and income producing properties, timber sales, mineral and recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.

In first nine months 2012, net cash (used for) operating activities was ($20,784,000) as expenditures for real estate development and acquisitions significantly exceeded non-cash real estate cost of sales, principally as result of acquiring real estate assets from CL Realty and Temco for $47,000,000. Subsequent to closing of this acquisition, we received $23,370,000 from the ventures, representing our pro-rata share of distributable cash. Also, we invested $14,341,000 in a 289 unit multifamily property currently under construction in Austin, acquired a multifamily development site in Nashville for $11,081,000 and we paid $11,041,000 in federal and state taxes, net of refunds. We received $24,294,000 in net proceeds from a consolidated venture’s sale of 800 acres in Dallas and $10,934,000 in reimbursements from two new multifamily ventures which represents our venture partners’ pro-rata share of the costs. In first nine months 2011, net cash provided by operating activities was $32,816,000 as proceeds from the sale of 57,000 acres of timberland in accordance with our strategic initiatives generated net proceeds of $86,018,000. Expenditures for development and acquisitions exceeded non-cash real estate cost of sales principally due to our acquisition of a non-performing loan secured by a lien on 900 acres of developed and undeveloped land near Houston, Texas for $21,137,000, $25,481,000 in four real estate acquisitions located in various Texas markets and payment of $7,956,000 in federal and state income taxes, net of refunds.

Cash Flows from Investing Activities

Capital contributions to and capital distributions from unconsolidated ventures, business acquisitions and investment in oil and natural gas properties and equipment are classified as investing activities. In addition, proceeds from the sale of property and equipment, software costs and expenditures related to reforestation activities are also classified as investing activities.

In first nine months 2012, net cash (used for) investing activities was ($95,574,000) principally due to our acquisition of Credo for ($152,073,000) purchase price, net of cash acquired. Partially offsetting our investment in Credo were proceeds received from the sale of our 25 percent interest in Palisades West LLC for $32,095,000 and $29,474,000 in net proceeds from the sale of Broadstone Memorial, a 401unit multifamily project in Houston. In addition, we invested $2,794,000 in oil and natural gas properties and equipment associated with our non-operating working interests and $1,577,000 in property and equipment, software and reforestation and $699,000 in net contributions to unconsolidated ventures. In first nine months 2011, net cash (used for) investing activities was ($5,149,000) and is principally related to $3,414,000 invested in oil and gas properties as non-operating working interests, $662,000 in net contributions to unconsolidated ventures and $1,466,000 in property, equipment, software and reforestation.

Cash Flows from Financing Activities

In first nine months 2012, net cash provided by financing activities was $108,354,000. Our net increase in borrowings of $112,555,000 was principally used to fund our acquisition of Credo and our real estate development and acquisition expenditures. We paid $5,209,000 in financing fees primarily related to the amendment and restatement of our senior secured credit facility in third quarter 2012. Also, in third quarter 2012, our outstanding debt decreased by $26,500,000 as a result of selling Broadstone Memorial, a 401 unit multifamily property in Houston and the buyer’s assumption of the debt. In second quarter 2012, our outstanding debt decreased by $30,991,000 as a result of a consolidated venture’s sale of 800 acres in Dallas and the buyer’s assumption of the debt.

 

32


Table of Contents

Also, in second quarter 2012, we secured project level financing on a 289 unit multifamily property in Austin with $15,990,000 outstanding at third quarter-end 2012. In first nine months 2011, net cash (used for) financing activities was ($3,912,000) and is principally related to the payment of $3,746,000 in deferred financing fees primarily related to supplementing and amending our senior secured credit facility and $2,126,000 related to repurchasing 172,435 shares of our common stock. This was partially offset by a net increase in our debt of $2,108,000.

Liquidity

On September 14, 2012, we entered into a Second Amended and Restated Revolving and Term Credit Agreement in order to consolidate previous amendments and to effect the following principal amendments to: increase the term loan commitment from $130,000,000 to $200,000,000; extend the maturity date of the revolving loan to September 14, 2015 (with a one-year extension option) and of the term loan to September 14, 2017; reduce the interest rate spread over LIBOR from 4.5 percent to 4.0 percent, and eliminate the LIBOR rate floor of 2 percent; increase the minimum interest coverage ratio from 1.05x to 1.50x; reduce the unused fee rate from 0.45 percent per annum to 0.25 percent – 0.35 percent per annum based on usage; and eliminate the minimum value to commitment ratio covenant and replace it with a reduction to the borrowing base to the extent the ratio of the value of assets in the borrowing base to the aggregate commitments under the facility is less than 1.50x.We incurred fees of $5,059,000 related to this amendment. The amendment and restatement of the term loan was an extinguishment of debt under the accounting guidance and as result, we recognized a $4,448,000 loss in third quarter 2012 which is included in interest expense.

On September 28, 2012 we acquired 100 percent of outstanding stock of Credo in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. This transaction was funded with approximately $70,000,000 in borrowings from our term loan, $35,000,000 in borrowings from our revolving line of credit, the balance of which was paid from cash and short-term investments.

At third quarter-end 2012, our senior secured credit facility provides for a $200,000,000 term loan and a $200,000,000 revolving line of credit. The revolving line of credit may be prepaid at any time without penalty. The term loan includes a prepayment fee of one percent if prepaid prior to March 14, 2013. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $2,604,000 is outstanding at third quarter-end 2012. 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 2012, net unused borrowing capacity under our senior secured credit facility is calculated as follows:

 

     (In thousands)  

Borrowing base availability

   $ 400,000  

Less: borrowings

     (227,000

Less: letters of credit

     (2,604
  

 

 

 

Unused borrowing capacity

   $ 170,396  
  

 

 

 

Our unused borrowing capacity in third quarter 2012 ranged from a high of $170,396,000 to a low of $146,389,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential real estate sales, undeveloped land sales, mineral lease bonus payments, timber sales, payment of payables and expenses and capital expenditures.

Our senior secured credit facility and other debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2012, we were in compliance with the financial covenants of these agreements.

The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:

 

     Requirement     Third
Quarter-End
2012
 
       

Financial Covenant

    

Interest Coverage Ratio (a)

     > 1.50:1.0        4.50:1.0   

Revenues/Capital Expenditures Ratio (b)

     > 1.00:1.0        1.76:1.0   

Total Leverage Ratio (c )

     £ 40     29

Net Worth (d)

   > $ 441 million      $ 509 million   

Collateral Value to Loan Commitment Ratio (e )

     > 1.50:1.0        1.90:1.0   

 

33


Table of Contents

 

(a) 

Calculated as EBITDA (earnings before interest, taxes, depreciation and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is applied at the end of each quarter on a rolling four quarter basis.

(b) 

Calculated as total gross revenues, plus our pro rata share of the operating revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures. This covenant is applied at the end of each quarter on a rolling four quarter basis.

(c) 

Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities and reimbursement obligations with respect to letters of credit or similar instruments. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business, other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.

(d) 

Calculated as the amount by which consolidated total assets (excluding Credo acquisition goodwill over $50,000,000) exceeds consolidated total liabilities. At third quarter-end 2012, the requirement is $441,000,000, computed as: $441,000,000, 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. This covenant is applied at the end of each quarter.

(e) 

Calculated as the total collateral value of timberland, high value timberland and our minerals business, divided by total aggregate loan commitment. This covenant is applied at the end of each quarter.

To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to 10% of the aggregate commitments in place. At third quarter-end 2012, the minimum liquidity requirement was $40,000,000, compared with $176,170,000 in actual available liquidity based on the unused borrowing capacity under our senior secured credit facility plus unrestricted cash and cash equivalents. As of third quarter 2012, we were in compliance with these requirements. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility. In addition, we may elect to make distributions so long as the total leverage ratio is less than 30%, the interest coverage is greater than 3.0:1.0, the revenues / capital expenditures ratio exceeds 3.0:1.0, and available liquidity is not less than $125,000,000.

In second quarter 2012, we obtained a loan for construction of a 289 unit multifamily project located in Austin which provides up to $19,550,000 in financing. The interest rate on the loan is equal to the highest of (i) the lender’s prime rate, (ii) the Federal Funds Open Rate plus 50 basis points, and (iii) the Daily LIBOR Rate plus 100 basis points. The loan has an initial term of 36 months and may be extended for two additional 12-month periods based on certain specified conditions. At third quarter-end 2012, we have $15,990,000 outstanding on this loan.

Contractual Obligations and Off-Balance Sheet Arrangements

In 2011, we began construction on a 289 unit multifamily project in Austin, Texas in which the estimated cost at completion, including land, is approximately $31,657,000. At third-quarter end 2012, our investment in this project including land and construction in progress is $30,014,000 with an estimated cost to complete construction of $1,643,000.

In second quarter 2012, CJUF III RH Holdings, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $23,936,000 to develop a 257 unit multifamily property in downtown Austin. There is no significant balance outstanding at third quarter-end 2012. We have a construction completion guaranty, a repayment guaranty for 20 percent of the principal balance and unpaid accrued interest, and a standard non-recourse carve-out guaranty. The repayment guaranty will reduce from 20 percent to 0 percent upon achievement of certain conditions.

In second quarter 2012, FMF Peakview, an equity method venture in which we own a 20 percent interest, obtained a senior secured construction loan in the amount of $31,550,000 to develop a 304 unit multifamily property in Denver. There is no balance outstanding at third quarter-end 2012. We have a construction completion guaranty, a repayment guaranty for 25 percent of the principal and unpaid accrued interest, and a standard non-recourse carve-out guaranty.

At third quarter-end 2012, we participate in three partnerships that have total assets of $48,849,000 and total liabilities of $80,283,000, which includes $63,624,000 of borrowings classified as current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings are guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is $1,497,000 at third quarter-end 2012. These three partnerships are variable interest entities.

 

34


Table of Contents

Cibolo Canyons — San Antonio, Texas

Cibolo Canyons consists of the JW Marriott ® San Antonio Hill Country Resort & Spa development owned by third parties and a mixed-use development we own. We have $79,557,000 invested in Cibolo Canyons at third quarter-end 2012.

Resort Hotel, Spa and Golf Development

In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott ® San Antonio Hill Country Resort & Spa, which includes a 1,002 room destination resort and two PGA Tour ® Tournament Players Club ® (TPC) golf courses. Under these agreements, we agreed to transfer to third party owners 700 acres of undeveloped land, to provide $30,000,000 cash and to provide $12,700,000 of other consideration principally consisting of golf course construction materials, substantially all of which has been provided.

In exchange for our commitment to the resort, the third party owners assigned to us certain rights under an agreement between the third party owners and a legislatively created Special Improvement District (SID). This agreement includes the right to receive from the SID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by the SID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by the SID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service, if any, on bonds issued by the SID collateralized by hotel occupancy tax and other resort sales tax through 2034.

The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the resort and the amount of any applicable debt service incurred by the SID. As a result, there is significant uncertainty as to the amount and timing of collections under this agreement. Until these uncertainties are clarified, amounts collected under the agreement will be accounted for as a reduction of our investment in the resort development. The resort began operations on January 22, 2010.

In first nine months 2012, we received $1,950,000 in reimbursements from the SID. Since inception, we have received $9,856,000 in reimbursements and have accounted for this as a reduction of our investment. At third quarter-end 2012, we have $33,418,000 invested in the resort development.

Mixed-Use Development

The mixed-use development we own consists of 2,100 acres planned to include approximately 1,475 residential lots and 150 commercial acres designated for multifamily and retail uses, of which 713 lots and 68 commercial acres have been sold through third quarter-end 2012.

In 2007, we entered into an agreement with the SID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by the SID and unreimbursed amounts accrue interest at 9.75 percent. The SID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses. Through third quarter-end 2012, we have submitted and received approval for reimbursement of approximately $57,322,000 of infrastructure costs and have received reimbursements totaling $23,070,000. In first nine months 2012, we received $550,000 in reimbursements from the SID. At third quarter-end 2012, we have $34,252,000 in approved and pending reimbursements, excluding interest.

Since the amount of each reimbursement is dependent on several factors, including timing of SID approval and the SID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.

At third quarter-end 2012, we have $46,139,000 invested in the mixed-use development.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2011 Annual Report on Form 10-K.

Recent Accounting Standards

Please read Note 2 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

 

35


Table of Contents

Statistical and Other Data

A summary of our real estate projects in the entitlement process (a) at third quarter-end 2012 follows:

 

Project

   County    Market    Project
Acres (b)
 

California

        

Hidden Creek Estates

   Los Angeles    Los Angeles      700   

Terrace at Hidden Hills

   Los Angeles    Los Angeles      30   

Georgia

        

Ball Ground

   Cherokee    Atlanta      500   

Crossing

   Coweta    Atlanta      230   

Fincher Road

   Cherokee    Atlanta      3,890   

Fox Hall

   Coweta    Atlanta      960   

Garland Mountain

   Cherokee/Bartow    Atlanta      350   

Home Place

   Coweta    Atlanta      1,510   

Martin’s Bridge

   Banks    Atlanta      970   

Mill Creek

   Coweta    Atlanta      770   

Serenity

   Carroll    Atlanta      440   

Waleska

   Cherokee    Atlanta      90   

Wolf Creek

   Carroll/Douglas    Atlanta      12,230   

Yellow Creek

   Cherokee    Atlanta      1,060   

Texas

        

Lake Houston

   Harris/Liberty    Houston      3,700   

San Jacinto

   Montgomery    Houston      150   
        

 

 

 

Total

           27,580   
        

 

 

 

 

(a) 

A project is deemed to be in the entitlement process when customary steps necessary for the preparation of an application for governmental land-use approvals, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.

(b) 

Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.

 

36


Table of Contents

A summary of activity within our projects in the development process, which includes entitled (a), developed and under development real estate projects, at third quarter-end 2012 follows:

 

                     Residential Lots (c)     Commercial Acres (d)  

Project

   County    Market    Interest
Owned  (b)
    Lots Sold
Since
Inception
     Lots
Remaining
    Acres Sold
Since
Inception
     Acres
Remaining  (f)
 

Projects we own

                  

California

                  

San Joaquin River

   Contra Costa/Sacramento    Oakland      100     —           —          —           288   

Colorado

                  

Buffalo Highlands

   Weld    Denver      100     —           164        —           —     

Johnstown Farms

   Weld    Denver      100     162        451        2        7   

Pinery West

   Douglas    Denver      100     —           —          —           111   

Stonebraker

   Weld    Denver      100     —           603        —           —     

Texas

                  

Arrowhead Ranch

   Hays    Austin      100     —           259        —           6   

Bar C Ranch

   Tarrant    Dallas/Fort Worth      100     292        907        —           —     

Barrington Kingwood

   Harris    Houston      100     35        145        —           —     

Cibolo Canyons

   Bexar    San Antonio      100     713        762        68        82   

Harbor Lakes

   Hood    Dallas/Fort Worth      100     203        246        2        19   

Hunter’s Crossing

   Bastrop    Austin      100     390        100        38        71   

La Conterra

   Williamson    Austin      100     103        397        —           58   

Maxwell Creek

   Collin    Dallas/Fort Worth      100     781        218        10        —     

Oak Creek Estates

   Comal    San Antonio      100     131        516        13        —     

Stoney Creek

   Dallas    Dallas/Fort Worth      100     141        613        —           —     

Summer Creek Ranch

   Tarrant    Dallas/Fort Worth      100     819        455        35        44   

Summer Lakes

   Fort Bend    Houston      100     462        668        56        —     

Summer Park (g)

   Fort Bend    Houston      100     —           210        27        63   

The Colony

   Bastrop    Austin      100     432        717        22        31   

The Preserve at Pecan Creek

   Denton    Dallas/Fort Worth      100     356        438        —           7   

Village Park

   Collin    Dallas/Fort Worth      100     408        163        3        2   

Village Park North

   Collin    Dallas/Fort Worth      100     75        114        —           —     

Westside at Buttercup Creek

   Williamson    Austin      100     1,398        98        66        —     

Other projects (10)

   Various    Various      100     2,493        171        211        19   

Georgia

                  

Seven Hills

   Paulding    Atlanta      100     646        441        26        113   

The Villages at Burt Creek

   Dawson    Atlanta      100     —           1,715        —           57   

Towne West

   Bartow    Atlanta      100     —           2,674        —           121   

Other projects (17)

   Various    Atlanta      100     1,724        2,970        3        705   

Florida

                  

Other projects (3)

   Various    Tampa      100     708        137        —           —     

Missouri and Utah

                  

Other projects (2)

   Various    Various      100     477        77        —           —     
          

 

 

    

 

 

   

 

 

    

 

 

 
             12,949        16,429        582        1,804   
          

 

 

    

 

 

   

 

 

    

 

 

 

 

37


Table of Contents

Projects in entities we consolidate

                  

Texas

                  

City Park

   Harris    Houston      75 %       1,201        110        50        115    

Lantana

   Denton    Dallas/Fort Worth      55 %(e)      911        1,381        —           —     

Timber Creek

   Collin    Dallas/Fort Worth      88 %       —           614        —           —     

Willow Creek

   Walter/Fort Bend    Houston      90 %       —           231        —           —     

Other projects (3)

   Various    Various      Various        7        202        16        148   

Georgia

                  

The Georgian

   Paulding    Atlanta      75 %       289        1,052        —           —     
          

 

 

    

 

 

   

 

 

    

 

 

 
             2,408        3,590        66        263   
          

 

 

    

 

 

   

 

 

    

 

 

 

Total owned and consolidated

             15,357        20,019        648        2,067   

Projects in ventures that we account for using the equity method

                  

Texas

                  

Entrada

   Travis    Austin      50 %       —           821        —           —     

Fannin Farms West

   Tarrant    Dallas/Fort Worth      50 %