10-K 1 for1231201310-k.htm FORM 10-K FOR 12.31.2013 10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
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 78746-5149
(Address of Principal Executive Offices, including Zip Code)
Registrant’s telephone number, including area code: (512) 433-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange On Which Registered
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
 
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes  ¨    No  þ
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.     Yes  þ    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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ
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.
Large accelerated filer o
 
Accelerated filer þ
  
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a 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  ¨    No  þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing sales price of the Common Stock on the New York Stock Exchange on June 30, 2013, was approximately $662 million. For purposes of this computation, all officers, directors, and ten percent beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or ten percent beneficial owners are, in fact, affiliates of the registrant.
As of March 5, 2014, there were 34,914,560 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Company’s definitive proxy statement for the 2014 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
 




TABLE OF CONTENTS
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
 
 
 

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PART I
 
Item 1.
Business
Overview
Forestar Group Inc. is a real estate and oil and gas company. We own directly or through ventures 130,000 acres of real estate located in ten states and 14 markets. We have 837,000 net acres of oil and gas mineral interests, consisting of fee ownership and leasehold interests located in 14 states in the continental U.S. Our real estate acres include about 117,000 with timber, primarily in Georgia, and about 14,000 acres of timber under lease. In 2013, we had revenues of $331 million and net income of $29 million. Unless the context otherwise requires, references to “we,” “us,” “our” and “Forestar” mean Forestar Group Inc. and its consolidated subsidiaries. Unless otherwise indicated, information is presented as of December 31, 2013, and references to acreage owned include all acres owned by ventures regardless of our ownership interest in a venture.
Business Segments
In first quarter 2013, we strategically changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations: real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results in other natural resources. All prior period segment information has been reclassified to conform to the current period presentation.
We manage our operations through three business segments:
Real estate,
Oil and gas, and
Other natural resources.
A summary of significant business segment assets at year-end 2013 follows:
Our real estate segment provided 75% percent of our 2013 consolidated revenues. We secure entitlements and develop infrastructure, primarily for single-family residential and mixed-use communities. We own about 95,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We invest in projects principally in our strategic growth corridors, regions across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment. We also develop and own directly or through ventures,

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multifamily communities as income producing properties, primarily in our target markets. Once these multifamily communities reach stabilization, we expect to market the properties for sale.
We have 13 real estate projects representing about 26,000 acres in the entitlement process, principally in Georgia. We also have about 74 entitled, developed or under development projects in eight states and 12 markets encompassing almost 13,000 remaining acres, comprised of land planned for about 20,000 residential lots and about 2,100 commercial acres. We own and manage projects both directly and through ventures. We sell land at any point within the value chain when additional time required for entitlement or investment in development will not meet our return criteria. In 2013, we sold 6,811 acres of undeveloped land at an average price of about $3,400 per acre.
Our oil and gas segment provided 22% percent of our 2013 consolidated revenues. We promote the exploitation, exploration and development of oil and gas on our 590,000 owned mineral acres and may participate in working interests or drill as an operator. The four principal areas for our owned mineral acres are Texas, Louisiana, Alabama and Georgia. Our oil and gas royalty revenues from our owned mineral interests are from 547 gross productive wells operated by third parties, primarily in Texas and Louisiana, and lease bonus payments received. Historically, these operations require low capital investment and are low risk. In addition, we have approximately 247,000 net mineral acres leased from others principally associated with our 2012 acquisition of CREDO Petroleum Corporation (Credo), of which 37,000 acres are held by production at year-end 2013. The principal areas of operations of our leasehold interests are in Nebraska, Kansas, Oklahoma, North Dakota and Texas and include 464 gross oil and gas wells with working interest ownership of which we operate approximately 182 wells.
Our other natural resources segment provided 3% percent of our 2013 consolidated revenues. We sell wood fiber from our land, primarily in Georgia, and lease land for recreational uses. We have about 117,000 real estate acres with timber we own directly or through ventures and about 14,000 acres of timber under lease. In addition, we have water interests in about 1.5 million acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 20,000 acres of groundwater leases in central Texas. We have not received significant revenue or earnings from these water interests.
Our real estate origins date back to the 1955 incorporation of Lumbermen’s Investment Corporation, which in 2006 changed its name to Forestar (USA) Real Estate Group Inc. We have a decades-long legacy of residential and commercial real estate development operations, primarily in Texas. Our oil and gas origins date back to the mid-1940s when we started leasing our oil and gas mineral interests to third-party exploration and production companies. In 2007, Temple-Inland distributed all of the issued and outstanding shares of our common stock to its stockholders, which we will refer to as the “spin-off”.
Our results of operations, including information regarding our business segments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8, Financial Statements and Supplementary Data.
Strategy
Our strategy is:
Recognizing and responsibly delivering the greatest value from every acre; and
Growing through strategic and disciplined investments.
We are focused on delivering the greatest real estate value from every acre through the entitlement and development of strategically-located residential and mixed-use communities. We secure entitlements by delivering thoughtful plans and balanced solutions that meet the needs of the communities where we operate. Moving land through the entitlement and development process creates significant real estate value. Residential development activities target lot sales to local, regional and national home builders who build quality products and have strong and effective marketing and sales programs. The lots we deliver in the majority of our communities are for mid-priced homes, predominantly in the first and second move-up categories. We also actively market and sell undeveloped land through our retail sales program. We develop multifamily commercial tracts ourselves as a merchant builder or we may venture with capital partners for the construction, operation, and sale of income producing properties.
We also seek to maximize value from our owned oil and gas mineral interests through promoting leasing, exploration and production activity by increasing the acreage leased, lease rates, royalty interests, negotiating additional interests in production and by entering into seismic exploration agreements and joint ventures. In addition, we lease mineral interests for oil and gas exploration and production and participate in working interests or drill as an operator on both our owned and leased mineral interests. We realize value from our undeveloped land by selling fiber and by managing it for future real estate development and conservation uses. We also generate cash flow and earnings through recreational leases.

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We are committed to disciplined investment in our business. A majority of our real estate projects were acquired in the open market, with the remainder coming from entitlement efforts associated with our low basis lands principally located in and around Atlanta, Georgia. Our mineral interest investments are typically in conventional and unconventional oil and liquid-rich formations.
Our portfolio of assets in combination with our strategy, management expertise, stewardship and reinvestment in our business, position Forestar to maximize and grow long-term value for shareholders.
2014 Strategic Initiatives
On February 13, 2014, we announced Growing FORward, new strategic initiatives designed to further enhance shareholder value by:
Growing segment earnings through strategic and disciplined investments,
Increasing returns, and
Repositioning non-core assets.
2013 Highlights
In 2013, we essentially achieved our 2012 Triple in FOR strategic initiatives to triple total segment EBITDA, oil and gas production and total residential lot sales compared with our four-year average from 2008 to 2011.
Real Estate
Sold 1,883 developed residential lots, with margins up 28% compared with 2012
Sold 6,811 acres of undeveloped land for about $3,400 per acre
Sold 171 commercial acres for over $197,000 per acre
Sold 1,617 acres of residential tracts for nearly $14,200 per acre
Sold Promesa, a stabilized multifamily community for $41.0 million, generating earnings of $10.9 million
Oil and Gas
Oil production up nearly 88% compared with 2012, primarily due to the acquisition of Credo and additional investments in leases obtained through acquisition of Credo principally targeting the Bakken/Three Forks and Lansing-Kansas City formations
Estimated proved reserves increased 52% to 8.5 million barrel of oil equivalent (BOE) as of year-end 2013 from 5.6 million BOE at year-end 2012
83 new productive gross oil and gas wells and 18 wells drilling and/or waiting on completion at year-end 2013
Leased nearly 9,200 net mineral acres to third parties principally in Texas for nearly $2.5 million
Other Natural Resources
Sold over 609,500 tons of fiber for $15.88 per ton
Real Estate
In our real estate segment, we conduct a wide array of project planning and management activities related to the acquisition, entitlement, development and sale of real estate, primarily residential and mixed-use communities. We own and manage our projects either directly or through ventures, which we use to achieve a variety of business objectives, including more effective capital deployment, risk management, and leveraging a partner’s local market contacts and expertise.
We have real estate in ten states and 14 markets encompassing almost 130,000 acres, including about 95,000 acres located in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. Our development projects are principally located in the major markets of Texas.

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Our strategy for creating value in our real estate segment is to move acres up the value chain by moving land located in growth corridors but not yet entitled, through the entitlement process, and into development. The chart below depicts our real estate value chain at year-end 2013:
We have approximately 91,000 undeveloped acres located in the path of population growth. As markets grow and mature, we intend to secure the necessary entitlements, the timing for which varies depending upon the size, location, use and complexity of a project. We have 26,000 acres in the entitlement process, which includes obtaining zoning and access to water, sewer and roads. Additional entitlements, such as flexible land use provisions, annexation, and the creation of local financing districts generate additional value for our business and may provide us the right to reimbursement of major infrastructure costs. We have almost 13,000 acres entitled, developed and under development, comprised of land planned for about 20,000 residential lots and about 2,100 commercial acres. We use return criteria, which include return on cost, internal rate of return, and cash multiples, when determining whether to invest initially or make additional investment in a project. When investment in development meets our return criteria, we will initiate the development process with subsequent sale of lots to homebuilders or for commercial tracts, internal development, sale to or venture with third parties. We sell land at any point within the value chain when additional time required for entitlement or investment in development will not meet our return criteria. In 2013, we sold 6,811 acres of undeveloped land at an average price of about $3,400 per acre.

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A summary of our real estate projects in the entitlement process(a) at year-end 2013 follows:
Project
 
County
 
Project
Acres(b)
California
 
 
 
 
Hidden Creek Estates
 
Los Angeles
 
700

Terrace at Hidden Hills
 
Los Angeles
 
30

Georgia
 
 
 
 
Ball Ground
 
Cherokee
 
500

Crossing
 
Coweta
 
230

Fincher Road
 
Cherokee
 
3,890

Fox Hall
 
Coweta
 
960

Garland Mountain
 
Cherokee/Bartow
 
350

Martin’s Bridge
 
Banks
 
970

Mill Creek
 
Coweta
 
770

Serenity
 
Carroll
 
440

Wolf Creek
 
Carroll/Douglas
 
12,230

Yellow Creek
 
Cherokee
 
1,060

Texas
 
 
 
 
Lake Houston
 
Harris/Liberty
 
3,700

Total
 
 
 
25,830

 _____________________
(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.
Products
The majority of our projects are single-family residential and mixed-use communities. In some cases, commercial land uses within a project enhance the desirability of the community by providing convenient locations for resident support services. We sometimes undertake projects consisting exclusively of commercial tracts and, on occasion, we invest in a venture to develop a single commercial project.
We develop lots for single-family homes and develop multifamily properties as a merchant builder on our commercial tracts or other developed sites we may purchase. In addition, we sell commercial tracts that are substantially ready for construction of buildings for retail, office, industrial or other commercial uses. We sell residential lots primarily to local, regional and national homebuilders. We have 74 entitled, developed or under development projects in eight states and 12 markets, principally in the major markets of Texas, encompassing almost 13,000 remaining acres, comprised of land planned for about 20,000 residential lots and about 2,100 commercial acres. We generally focus our lot sales on the first and second move-up primary housing categories. First and second move-up segments are homes priced above entry-level products yet below the high-end and custom home segments. As a multifamily merchant builder, we develop and own directly, or through ventures, multifamily communities as income producing properties, primarily in our target markets. Once these multifamily communities reach stabilization, we expect to market the properties for sale. We also actively market and sell undeveloped land through our retail sales program.
Commercial tracts are developed internally or sold to or ventured with commercial developers that specialize in the construction and operation of income producing properties, such as apartments, retail centers, or office buildings. We also sell land designated for commercial use to regional and local commercial developers. We have about 2,100 acres of entitled land designated for commercial use.
Cibolo Canyons is a significant mixed-use project in the San Antonio market area. Cibolo Canyons includes 2,100 acres planned to include approximately 1,566 residential lots, of which 810 have been sold as of year-end 2013 at an average price of $69,000 per lot. The residential component includes not only traditional single-family homes but also an active adult section, and is planned to include condominiums. The commercial component includes about 150 acres designated for multifamily and retail uses, of which 130 acres have been sold as of year-end 2013. Located at Cibolo Canyons is the JW Marriott® San Antonio Hill Country Resort & Spa, a 1,002 room destination resort and two PGA Tour® Tournament Players Club® (TPC) golf courses

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designed by Pete Dye and Greg Norman. The resort hotel began operations in January 2010. We have the right to receive from a legislatively created special improvement district (SID) nine percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by the SID through 2034 and reimbursement of certain infrastructure costs related to the mixed-use development.
A summary of activity within our projects in the development process, which includes entitled(a), developed and under development single-family and mixed-use projects, at year-end 2013 follows:
 
 
 
 
 
 
Residential Lots(c)
 
Commercial Acres(d)
Project
 
County
 
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
 
100
%
 

 

 

 
288

Colorado
 
 
 
 
 
 
 
 
 
 
 
 
Buffalo Highlands
 
Weld
 
100
%
 

 
164

 

 

Johnstown Farms
 
Weld
 
100
%
 
262

 
350

 
2

 
7

Pinery West
 
Douglas
 
100
%
 

 
86

 
20

 
94

Stonebraker
 
Weld
 
100
%
 

 
603

 

 

Tennessee
 
 
 
 
 
 
 
 
 
 
 
 
Morgan Farms
 
Williamson
 
100
%
 
20

 
153

 

 

Texas
 
 
 
 
 
 
 
 
 
 
 
 
Arrowhead Ranch
 
Hays
 
100
%
 

 
387

 

 
6

Bar C Ranch
 
Tarrant
 
100
%
 
292

 
813

 

 

Barrington Kingwood
 
Harris
 
100
%
 
107

 
73

 

 

Cibolo Canyons
 
Bexar
 
100
%
 
810

 
756

 
130

 
20

Harbor Lakes
 
Hood
 
100
%
 
211

 
238

 
2

 
19

Hunter’s Crossing
 
Bastrop
 
100
%
 
438

 
72

 
38

 
65

La Conterra
 
Williamson
 
100
%
 
167

 
163

 

 
58

Lakes of Prosper
 
Collin
 
100
%
 
41

 
244

 

 

Maxwell Creek
 
Collin
 
100
%
 
876

 
123

 
10

 

Oak Creek Estates
 
Comal
 
100
%
 
164

 
483

 
13

 

Park Place
 
Collin
 
100
%
 

 
200

 

 

Stoney Creek
 
Dallas
 
100
%
 
155

 
599

 

 

Summer Creek Ranch
 
Tarrant
 
100
%
 
878

 
396

 
35

 
44

Summer Lakes
 
Fort Bend
 
100
%
 
500

 
630

 
56

 

Summer Park
 
Fort Bend
 
100
%
 
17

 
181

 
28

 
62

The Colony
 
Bastrop
 
100
%
 
445

 
704

 
22

 
31

The Preserve at Pecan Creek
 
Denton
 
100
%
 
478

 
316

 

 
7

Village Park
 
Collin
 
100
%
 
664

 
92

 
3

 
2

Westside at Buttercup Creek
 
Williamson
 
100
%
 
1,468

 
27

 
66

 

Other projects (10)
 
Various
 
100
%
 
2,110

 
147

 
247

 
7

Georgia
 
 
 
 
 
 
 
 
 
 
 
 
Seven Hills
 
Paulding
 
100
%
 
711

 
379

 
26

 
113

The Villages at Burt Creek
 
Dawson
 
100
%
 

 
1,715

 

 
57

Other projects (18)
 
Various
 
100
%
 
95

 
2,998

 

 
705

Florida
 
 
 
 
 
 
 
 
 
 
 
 
Other projects (2)
 
Various
 
100
%
 
301

 

 

 

Other
 
 
 
 
 
 
 
 
 
 
 
 
Other projects (3)
 
Various
 
100
%
 
500

 
453

 

 

 
 
 
 
 
 
11,710

 
13,545

 
698

 
1,585

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

8



 
 
 
 
 
 
Residential Lots(c)
 
Commercial Acres(d)
Project
 
County
 
Interest
   Owned(b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres
Sold
Since
Inception
 
Acres
   Remaining(f)
Projects in entities we consolidate
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
 
 
 
 
 
 
 
 
 
 
 
City Park
 
Harris
 
75
%
 
1,287

 
482

 
50

 
115

Lantana(e)
 
Denton
 
55
%
 
917

 
864

 
9

 
3

Timber Creek
 
Collin
 
88
%
 

 
614

 

 

Willow Creek Farms II
 
Waller/Fort Bend
 
90
%
 
90

 
315

 

 

Other projects (2)
 
Various
 
Various

 
9

 
198

 

 
129

Georgia
 
 
 
 
 
 
 
 
 
 
 
 
The Georgian
 
Paulding
 
75
%
 
289

 
1,052

 

 

 
 
 
 
 
 
2,592

 
3,525

 
59

 
247

Total owned and consolidated
 
 
 
 
 
14,302

 
17,070

 
757

 
1,832

Projects in ventures that we account for using the equity method
 
 
 
 
 
 
 
 
 
 
Texas
 
 
 
 
 
 
 
 
 
 
 
 
Entrada
 
Travis
 
50
%
 

 
821

 

 

Fannin Farms West
 
Tarrant
 
50
%
 
324

 
24

 

 
12

Harper’s Preserve
 
Montgomery
 
50
%
 
284

 
1,409

 
8

 
51

Lantana(e)
 
Denton
 
Various

 
1,163

 
80

 
16

 
42

Long Meadow Farms
 
Fort Bend
 
38
%
 
1,167

 
635

 
183

 
116

Southern Trails
 
Brazoria
 
80
%
 
725

 
266

 

 

Stonewall Estates
 
Bexar
 
50
%
 
330

 
56

 

 

Other projects (1)
 
Nueces
 
50
%
 

 

 

 
15

Total in ventures
 
 
 
 
 
3,993

 
3,291

 
207

 
236

Combined Total
 
 
 
 
 
18,295

 
20,361

 
964

 
2,068

 _____________________
(a) 
A project is deemed entitled when all major discretionary governmental land-use approvals have been received. Some projects may require additional permits and/or non-governmental authorizations for development.
(b) 
Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated or accounted for using the equity method.
(c) 
Lots are for the total project, regardless of our ownership interest. Lots remaining represent vacant developed lots, lots under development and future planned lots and are subject to change based on business plan revisions.
(d) 
Commercial acres are for the total project, regardless of our ownership interest, and are net developable acres, which may be fewer than the gross acres available in the project.
(e) 
The Lantana project consists of a series of 24 partnerships in which our interests range from 25 percent percent to 55 percent. We account for two of these partnerships using the equity method and we consolidate the remaining partnerships.
(f) 
Excludes acres associated with commercial and income producing properties.
A summary of our significant commercial and income producing properties at year-end 2013 follows:
Project
 
Market
 
Interest
   Owned(a)
 
Type
 
Acres
 
Description
Radisson Hotel
 
Austin
 
100
%
 
Hotel
 
2

 
413 guest rooms and suites
Eleven(b)
 
Austin
 
25
%
 
Multifamily
 
3

 
257-unit luxury apartment
360°(b)
 
Denver
 
20
%
 
Multifamily
 
4

 
304-unit luxury apartment
Midtown Cedar Hill(b)
 
Dallas
 
100
%
 
Multifamily
 
13

 
354-unit luxury apartment
_____________________
(a) 
Interest owned reflects our net equity interest in the project, whether owned directly or indirectly.
(b) 
Construction in progress.

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Our net investment in owned and consolidated real estate by geographic location at year-end 2013 follows:
State
 
Entitled,
Developed,
and Under
Development
Projects
 
Undeveloped
Land and
Land in
Entitlement
 
Income
Producing
Properties
 
Total
 
 
(In thousands)
Texas
 
$
291,287

 
$
8,456

 
$
32,868

 
$
332,611

Georgia
 
22,503

 
56,181

 

 
78,684

Colorado
 
21,959

 

 
14,272

 
36,231

California
 
8,915

 
21,322

 

 
30,237

Tennessee
 
9,230

 
130

 
12,471

 
21,831

North Carolina
 

 

 
11,799

 
11,799

Other
 
7,793

 
278

 

 
8,071

Total
 
$
361,687

 
$
86,367

 
$
71,410

 
$
519,464

Approximately 64 percent of our net investment in real estate is in the major markets of Texas.
Markets
Current U.S. single-family residential market conditions are showing signs of stability with improvement in various markets; however, more challenging mortgage qualification requirements for purchasers continue to impact housing markets. Declining finished lot inventories and lack of real estate development during the housing downturn 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. These improvements have 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.
We target investments primarily in markets within our strategic growth corridors, which we define as areas possessing favorable growth characteristics for population, employment and household formation. These markets are generally located across the southern half of the U.S., and we believe they represent attractive long-term real estate investment opportunities. Demand for residential lots, single-family housing, and commercial land is substantially influenced by these growth characteristics, as well as by immigration and in-migration. Currently, most of our development projects are located within the major markets of Texas.
Our ten strategic growth corridors encompass 164,000 square miles, or approximately 4.6 percent of the total land area in the U.S. According to 2010 census data, 91.7 million people, 30 percent of the U.S. total, reside in these corridors. The population density in these growth corridors is over six times the national average and is projected to grow to over 10 times the national average between 2010 and 2040. During that time, the corridors are projected to garner approximately 49 percent of the nation’s population growth and 40 percent of total employment growth. Estimated housing demand from these ten growth corridors from 2010 to 2040 exceeds 24 million new homes.
Forestar Strategic Growth Corridors
Our value creation strategy includes not only entitlement and development on our own lands but also growth through strategic and disciplined investment in acquisitions that meet our investment criteria. We continually monitor the markets in our strategic growth corridors for opportunities to acquire developed lots and land at prices that meet our return criteria.

10



 Competition
We face significant competition for the acquisition, entitlement, development and sale of real estate in our markets. Our major competitors include other landowners who market and sell undeveloped land and numerous national, regional and local developers. In addition, our projects compete with other development projects offering similar amenities, products and/or locations. Competition also exists for investment opportunities, financing, available land, raw materials and labor, with entities that may possess greater financial, marketing and other resources than us. The presence of competition may increase the bargaining power of property owners seeking to sell. These competitive market pressures sometimes make it difficult to acquire, entitle, develop or sell land at prices that meet our return criteria. Some of our real estate competitors are well established and financially strong, may have greater financial resources than we do, or may be larger than us and/or have lower cost of capital and operating costs than we have and expect to have.
The land acquisition and development business is highly fragmented, and we are unaware of any meaningful concentration of market share by any one competitor. Enterprises of varying sizes, from individuals or small companies to large corporations, actively engage in the real estate development business. Many competitors are local, privately-owned companies. We have a few regional competitors and virtually no national competitors other than national homebuilders that, depending on business cycles and market conditions, may enter or exit the real estate development business in some locations to develop lots on which they construct and sell homes. During periods when access to capital is restricted, participants with weaker financial conditions tend to be less active.
Oil and Gas
Our oil and gas segment is focused on the exploration, development and production of oil and gas on our owned and leasehold mineral interests.
We typically lease our owned mineral interests to third parties for the exploration and production of oil and gas. When we lease our mineral interests, we may negotiate a lease bonus payment and retain a royalty interest and may take an additional participation in production, including a working interest. Working interests refer to well interests in which we pay a share of the costs to drill, complete and operate a well and receive a proportionate share of the production revenues.
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 $146.4 million. In addition, we paid in full $8.8 million of Credo’s outstanding debt. Credo was an independent oil and gas exploration, development and production company

11



based in Denver, Colorado. The acquired assets included leasehold interests in the Bakken and Three Forks formations of North Dakota, the Lansing – Kansas City formation in Kansas and Nebraska, and the Tonkawa and Cleveland formations in Texas.
Our strategy for maximizing value from our owned and leased mineral interests is to move acres up the minerals value chain by participating in working interests in the drilling, completion and production of oil and gas, increasing the net acreage leased of our owned interests, the lease bonus amount per acre and the size of retained royalty interests. The chart below depicts our minerals interests value chain:
Owned Mineral Interests
We own mineral interests beneath approximately 590,000 net acres located in the United States, principally in Texas, Louisiana, Georgia and Alabama. Our revenue from our owned mineral interests is primarily from oil and gas royalty interests, lease bonus payments and delay rentals received and other related activities. We engage in leasing certain portions of these mineral interests to third parties for the exploration and production of oil and gas, and we are increasingly leveraging our mineral interests to participate in wells drilled on or near our acreage.
At year-end 2013, of our 590,000 net acres of owned mineral interests, about 524,000 net acres are available for lease. We have about 66,000 net acres leased for oil and gas exploration activities, of which about 36,000 net acres are held by production from over 547 gross oil and gas royalty wells that are operated by others, in which we have working interest ownership in nine of these wells.
A summary of our owned mineral acres(a) at year-end 2013 follows:
State
 
Unleased
 
Leased(b)
 
Held By
Production(c)
 
Total(d)
Texas
 
205,000

 
20,000

 
27,000

 
252,000

Louisiana
 
125,000

 
10,000

 
9,000

 
144,000

Georgia
 
152,000

 

 

 
152,000

Alabama
 
40,000

 

 

 
40,000

California
 
1,000

 

 

 
1,000

Indiana
 
1,000

 

 

 
1,000

 
 
524,000

 
30,000

 
36,000

 
590,000

 _____________________
(a)
Includes ventures.

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(b)
Includes leases in primary lease term or for which a delayed rental payment has been received. In the ordinary course of business, leases covering a significant portion of leased net mineral acres may expire from time to time in a single reporting period.
(c)
Acres being held by production are producing oil or gas in paying quantities.
(d)
Texas, Louisiana, California and Indiana net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling.
A summary of our Texas and Louisiana owned mineral acres(a) primarily in East Texas and Gulf Coast Basins by county or parish at year-end 2013 follows:
Texas
 
Louisiana(b)
County
 
Net Acres
 
Parish
 
Net Acres
Trinity
 
46,000

 
Beauregard
 
79,000

Angelina
 
42,000

 
Vernon
 
39,000

Houston
 
29,000

 
Calcasieu
 
17,000

Anderson
 
25,000

 
Allen
 
7,000

Cherokee
 
24,000

 
Rapides
 
1,000

Sabine
 
23,000

 
Other
 
1,000

Red River
 
14,000

 
 
 
144,000

Newton
 
13,000

 
 
 
 
San Augustine
 
13,000

 
 
 
 
Jasper
 
12,000

 
 
 
 
Other
 
11,000

 
 
 
 
 
 
252,000

 
 
 
 
 _____________________
(a)
Includes ventures. These owned mineral acre interests contain numerous oil and gas producing formations consisting of conventional, unconventional, and tight sand reservoirs. Of these reservoirs, we have mineral interests in and around production trends in the Wilcox, Frio, Cockfield, James Lime, Pettet, Travis Peak, Cotton Valley, Austin Chalk, Haynesville Shale, Barnett Shale and Bossier formations.
(b)
A significant portion of our Louisiana net mineral acres were severed from the surface estate shortly before our 2007 spin-off. Under Louisiana law, a mineral servitude that is not producing minerals or which has not been the subject of good-faith drilling operations will cease to burden the property upon the tenth anniversary of the date of its creation.
We engage in leasing certain portions of our owned mineral interests to third parties for the exploration and production of oil and gas. Leasing mineral acres for exploration and production can create significant value because we may negotiate a lease bonus payment and retain a royalty interest in all revenues generated by the lessee from oil and gas production. The significant terms of these arrangements include granting the exploration company the rights to oil or gas it may find and requiring that drilling be commenced within a specified period. In return, we may receive an initial payment (bonus), subsequent payments if drilling has not started within the specified period (delay rentals), and a percentage interest in the value of any oil or gas produced (royalties). If no oil or gas is produced during the required period, all rights are returned to us. Historically, our capital requirements for our owned mineral acres have been minimal and primarily consist of acquisition costs allocated to mineral interests and administrative costs.
Our royalty revenues are contractually defined and based on a percentage of production and are received in cash. Our royalty revenues fluctuate based on changes in the market prices for oil and gas, the inevitable decline in production in existing wells, and other factors affecting the third-party oil and gas exploration and production companies that operate wells on our minerals including the cost of development and production.
Most leases are for a three to five year term although a portion or all of a lease may be extended by the lessee as long as actual production is occurring. Financial terms vary based on a number of market factors including the location of the mineral interest, the number of acres subject to the agreement, our mineral interest, proximity to transportation facilities such as pipelines, depth of formations to be drilled and risk.
Mineral Interests Leased
With the acquisition of Credo, we became an independent oil and gas exploration, development and production company. As of year-end 2013, our leasehold interests include 247,000 net mineral acres leased from others principally located in Nebraska and Kansas primarily targeting the Lansing – Kansas City formation, in the Texas Panhandle primarily targeting the

13



Tonkawa and Cleveland formations, and in North Dakota primarily targeting the Bakken and Three Forks formations. Our leasehold interests include approximately 7,000 net mineral acres in the Bakken and Three Forks formations. We have 37,000 net acres held by production and 464 gross oil and gas wells with working interest ownership, of which 182 are operated by us.
A summary of our net mineral acres leased from others principally as a result of our acquisition of Credo as of year-end 2013 follows:
State
 
Undeveloped
 
Held By
Production
 
Total
Nebraska
 
138,000

 
5,000

 
143,000

Kansas
 
24,000

 
5,000

 
29,000

Oklahoma
 
15,000

 
17,000

 
32,000

Texas
 
11,000

 
2,000

 
13,000

North Dakota
 
3,000

 
4,000

 
7,000

Other(a) 
 
19,000

 
4,000

 
23,000

 
 
210,000

 
37,000

 
247,000

 __________________
(a)
Excludes approximately 8,000 net acres of overriding royalty interests
Nebraska and Kansas
We have about 172,000 net mineral acres primarily located on or near the Central Kansas Uplift and in the western Kansas counties of Logan, Lane, Thomas and Gove. The Nebraska acreage is located in the southwest portion of Nebraska in the counties of Dundy, Red Willow and Hitchcock. At year-end 2013, we own working interests in over 100 gross producing wells with an average working interest of approximately 51 percent.
Oklahoma
We have about 32,000 net mineral acres primarily located on the northern shelf of the Anadarko Basin of Oklahoma, where we own working interests in approximately 170 gross producing wells with an average working interest of approximately 32 percent.
Texas
We have about 13,000 net mineral acres primarily in Sabine, San Augustine, Hemphill, Tyler and Fayette counties. We own working interests in over 30 gross producing wells. These wells have an average working interest of approximately 30 percent.
North Dakota
We have about 7,000 net acres in or near the core of the Bakken and Three Forks play. Most of the acreage is located on the Fort Berthold Indian Reservation, south and west of the Parshall Field. We own working interests in over 80 gross producing oil wells with an average working interest of approximately 7 percent. Where a well has been drilled on a spacing unit, in many cases we expect additional development wells to be drilled on those spacing units in the future.
Most leases are for a three to five year term although a portion or all of a lease may be extended as long as production is occurring. Financial terms vary based on a number of factors including the location of the leasehold interest, the number of acres subject to the agreement, proximity to transportation facilities such as pipelines, depth of formations to be drilled and risk.
Estimated Proved Reserves
Our net estimated proved oil and gas reserves, all of which are located in the United States, as of year-end 2013, 2012 and 2011 are set forth in the table below, and are based on the estimates prepared by Netherland, Sewell & Associates, Inc. (NSAI), an independent petroleum engineering firm, in accordance with the definitions and guidelines of the Securities and Exchange Commission (SEC).

14



Net quantities of proved oil and gas reserves related to our working and royalty interests follow (excludes Credo reserves for year-end 2011):
 
Estimated Reserves
 
Oil
(Barrels)
 
Gas
(Mcf)
 
(In thousands)
Consolidated entities:
 
 
 
Proved developed
3,893

 
11,385

Proved undeveloped
1,931

 
2,245

Total proved reserves 2013
5,824

 
13,630

Proved developed
2,416

 
10,448

Proved undeveloped
804

 
1,274

Total proved reserves 2012
3,220

 
11,722

Total proved reserves 2011(a)
1,064

 
8,203

Our share of ventures accounted for using the equity method:
 
 
 
Proved developed

 
2,332

Proved undeveloped

 

Total proved reserves 2013

 
2,332

Proved developed

 
2,572

Proved undeveloped

 

Total proved reserves 2012

 
2,572

Total proved reserves 2011(a)

 
3,283

Total consolidated and our share of equity method ventures:
 
 
 
Proved developed
3,893

 
13,717

Proved undeveloped
1,931

 
2,245

Total proved reserves 2013
5,824

 
15,962

Proved developed
2,416

 
13,020

Proved undeveloped
804

 
1,274

Total proved reserves 2012
3,220

 
14,294

Total proved reserves 2011(a)
1,064

 
11,486

 _____________________
(a) 
We did not have any proved undeveloped reserves prior to our acquisition of Credo in third quarter 2012.
The following summarizes the changes in proved reserves for 2013:
 
Estimated Reserves
 
Oil
(Barrels)
 
Gas
(Mcf)
 
(In thousands)
Consolidated entities:
 
 
 
Year-end 2012
3,220

 
11,722

Revisions of previous estimates
182

 
1,243

Extensions and discoveries
3,085

 
2,046

Acquisitions
35

 
531

Production
(698
)
 
(1,912
)
Year-end 2013
5,824

 
13,630

Our share of ventures accounted for using the equity method:
 
 
 
Year-end 2012

 
2,572

Revisions of previous estimates

 
7

Extensions and discoveries

 

Production

 
(247
)
Year-end 2013

 
2,332

Total consolidated and our share of equity method ventures:
 
 
 
Year-end 2013
5,824

 
15,962


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We do not have any estimated reserves of synthetic oil, synthetic gas or products of other non-renewable natural resources that are intended to be upgraded into synthetic oil and gas.
Reserve estimates were based on the economic and operating conditions existing at year-end 2013, 2012 and 2011. Oil and gas prices are based on the twelve month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December. For 2013, 2012 and 2011, prices used for reserve estimates were $96.91, $94.71 and $92.71 per barrel of West Texas Intermediate Crude Oil and gas prices of $3.67, $2.76 and $4.12 per MMBTU per the Henry Hub spot market. All prices were adjusted for quality, transportation fees and regional price differentials. Since the determination and valuation of proved reserves is a function of the interpretation of engineering and geologic data and prices for oil and gas and the cost to produce these reserves, the reserves presented should be expected to change as future information becomes available. For an estimate of the standardized measure of discounted future net cash flows from proved oil and gas reserves, please read Note 18  — Supplemental Oil and Gas Disclosures (Unaudited) to our consolidated financial statements included Part II, Item 8 of this Annual Report on Form 10-K.
The process of estimating oil and gas reserves is complex, involving decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices, capital costs, operating costs, revenues, taxes and quantities of recoverable oil and gas reserves might vary from those estimated. Any variance could materially affect the estimated quantities and present value of proved reserves. In addition, estimates of proved reserves may be adjusted to reflect production history, development, prevailing oil and gas prices and other factors, many of which are beyond our control.
The primary internal technical person in charge of overseeing our reserves estimates has a Bachelor of Science in Physics and Mathematics and a Masters of Science in Civil Engineering. He has over 40 years of domestic and international experience in the exploration and production business including 38 years of reserve evaluations. He has been a registered Professional Engineer for over 25 years.
As part of our internal control over financial reporting, we have a process for reviewing well production data and division of interest percentages prior to submitting well level data to NSAI to prepare reserve estimates on our behalf. Our primary internal technical person and other members of management review the reserve estimates prepared by NSAI, including the underlying assumptions and estimates upon which they are based, for accuracy and reasonableness.
Production
Oil and gas produced and average unit prices related to our royalty and working interests follows:
 
For the Year
 
2013
 
2012
 
2011
Consolidated entities:
 
 
 
 
 
Oil production (barrels)(a)
697,700

 
371,300

 
151,900

Average price per barrel
$
89.40

 
$
85.09

 
$
96.84

Gas production (millions of cubic feet)
1,912.0

 
1,667.7

 
1,128.6

Average price per thousand cubic feet
$
3.48

 
$
2.76

 
$
4.01

Our share of ventures accounted for using the equity method:
 
 
 
 
 
Gas production (millions of cubic feet)
246.5

 
321.3

 
493.4

Average price per thousand cubic feet
$
3.25

 
$
2.40

 
$
3.81

Total consolidated and our share of equity method ventures:
 
 
 
 
 
Oil production (barrels)(a)
697,700

 
371,300

 
151,900

Average price per barrel
$
89.40

 
$
85.09

 
$
96.84

Gas production (millions of cubic feet)
2,158.5

 
1,989.0

 
1,622.0

Average price per thousand cubic feet
$
3.46

 
$
2.71

 
$
3.95

Total BOE (barrel of oil equivalent)(b)
1,057,500

 
702,800

 
422,200

Average price per barrel of oil equivalent
$
66.04

 
$
52.61

 
$
50.02

 _____________________
(a) 
Oil production includes natural gas liquids (NGLs).
(b) 
Gas is converted to barrels of oil equivalent (BOE) using the conversion of six Mcf to one barrel of oil.
In 2013, operations acquired from Credo and subsequent working interests investments produced approximately 526,400 barrels of oil at an average price of $90.66 per barrel and 856 MMcf of gas at an average price of $3.70 per Mcf.
In fourth quarter 2012, operations acquired from Credo produced approximately 116,600 barrels of oil at an average price of $79.94 per barrel and 225 MMcf of gas at an average price of $3.64 per Mcf.

16



In 2013, 2012 and 2011, production lifting costs, which exclude ad valorem and severance taxes, were $10.35, $7.47 and $8.88 per BOE related to 473, 403 and seven gross wells in which we have a working interest.
Drilling and Other Exploratory and Development Activities
The following tables set forth the number of gross and net oil and gas wells in which we participated:
Year
 
Gross Wells
 
 
 
 
Exploratory
 
Development
 
 
Total
 
Oil
 
Gas
 
Dry
 
Oil
 
Gas
 
Dry
2013(a)
 
120

 
10

 

 
30

 
71

 

 
9

2012
 
40

 
8

 
1

 
9

 
16

 
2

 
4

2011
 
38

 
1

 
7

 
2

 
10

 
18

 

 _____________________
(a) 
Of the gross wells drilled in 2013, we operated 55 or 46 percent. The remaining wells represent our participations in wells operated by others. Dry holes were principally located in Kansas and Nebraska.
Year
 
Net Wells
 
 
 
 
Exploratory
 
Development
 
 
Total
 
Oil
 
Gas
 
Dry
 
Oil
 
Gas
 
Dry
2013
 
46.7

 
6.0

 

 
18.2

 
16.8

 

 
5.7

2012
 
13.0

 
3.0

 

 
4.9

 
2.6

 
0.2

 
2.3

2011
 
4.6

 
0.2

 
0.4

 
0.4

 
2.4

 
1.2

 

Present Activities
At year-end 2013, there were eight gross wells being drilled in North Dakota, Kansas and Texas and there were ten gross wells in North Dakota in some stage of the completion process requiring additional activities prior to generating sales. We conducted exploratory activities related to unproven properties principally in Oklahoma, Kansas and Nebraska by acquiring leases and seismic data, and evaluating leasehold and existing mineral acreage for potential exploratory drilling.
Delivery Commitments
We have no oil or gas delivery commitments.
Wells and Acreage
The number of productive wells as of year-end 2013 follows:
 
Productive Wells (a)
 
Gross
 
Net
Consolidated entities:

 
 
Oil
589

 
104.4

Gas
393

 
66.3

Total
982

 
170.7

Ventures accounted for using the equity method:
 
 
 
Oil

 

Gas
29

 
1.9

Total
29

 
1.9

Total consolidated and equity method ventures:
 
 
 
Oil
589

 
104.4

Gas
422

 
68.2

Total
1,011

 
172.6

 _____________________
(a) 
Excludes approximately 1,200 overriding royalty interest wells.
As year-end 2013, 2012 and 2011, we have royalty interests in 547, 542 and 530 gross wells. In addition, at year-end 2013, 2012 and 2011, we have working interests in 473, 403 and eight gross wells.

17



We did not have any wells with production of synthetic oil, synthetic gas or products of other non-renewable natural resources that are intended to be upgraded into synthetic oil and gas as of year-end 2013, 2012 or 2011. Our plugging liabilities are accrued on the balance sheet based on the present value of our estimated future obligation.
At year-end 2013, our working interests represent approximately 103,000 gross developed acres and 37,000 net developed acres leased from others that are held by production. We had approximately 540,000 gross undeveloped acres and 210,000 net undeveloped acres at year-end 2013. We have approximately 48,000 gross and 28,000 net undeveloped acres scheduled to expire in 2014, some of which we are currently evaluating for lease extension.
Capital Expenditure Budget
Our planned 2014 oil and gas capital expenditure budget for drilling and completion is approximately $140 million, of which we expect to allocate about $80 million to the Williston Basin of North Dakota to participate as a non-operator in an estimated 85 gross wells in the Bakken and Three Forks formations. Our average working interest in these wells is expected to be approximately nine percent. We expect to allocate about $30 million for an estimated 130 gross wells in the Lansing – Kansas City formation of Kansas and Nebraska through a combination of operated and non-operated working interests with the remaining $30 million allocated to approximately 20 operated and non-operated gross wells across a number of formations principally in Texas, Louisiana and Oklahoma.
Our 2014 capital expenditure budget is subject to various conditions, including third-party operator drilling plans, oilfield services and equipment availability, commodity prices and drilling results. Although a portion of our capital expenditure budget is allocated to acquiring additional leasehold interests, if we decide to pursue incremental leasehold acquisitions, it would require us to adjust our budget. Other factors that could cause us to adjust our budget include commodity prices, service or material costs, or the performance of wells.
Markets
Oil and gas revenues are influenced by prices of, and supply and demand for, oil and gas. These commodities as determined by both regional and global markets depend on numerous factors beyond our control, including seasonality, the condition of the domestic and global economies, political conditions in other oil and gas producing countries, the extent of domestic production and imports of oil and gas, the proximity and capacity of gas pipelines and other transportation facilities, supply and demand for oil and gas and the effects of federal, state and local regulation. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. Mineral leasing activity is influenced by the location of our owned mineral interests relative to existing or projected oil and gas reserves and by the proximity of successful production efforts to our mineral interests and by the evolution of new plays and improvements in drilling and extraction technology.
Competition
The oil and gas industry is highly competitive, and we compete for prospective properties, producing properties, personnel and services with a substantial number of other companies that may have greater resources. Many of these companies explore for, produce and market oil and gas, carry on refining operations and market the end products on a worldwide basis. The primary areas in which we encounter substantial competition are in locating and acquiring desirable leasehold acreage for our drilling and development operations, locating and acquiring attractive producing oil and gas properties, attracting highly-skilled personnel and obtaining purchasers and transporters of the oil and gas we produce. We also face competition from alternative fuel sources, including coal, heating oil, imported LNG, nuclear and other nonrenewable fuel sources, and renewable fuel sources such as wind, solar, geothermal, hydropower and biomass. Competitive conditions may also be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the United States government. It is not possible to predict whether such legislation or regulation may ultimately be adopted or its precise effects upon our future operations. Such laws and regulations may, however, substantially increase the costs of exploring for, developing or producing oil and gas and may prevent or delay the commencement or continuation of our operations.
In locations where our owned mineral interests are close to producing wells and proven reserves, we may have multiple parties interested in leasing our minerals. Conversely, where our mineral interests are in or near areas where reserves have not been discovered, we may receive nominal interest in leasing our minerals. Portions of our Texas and Louisiana minerals are in close proximity to producing wells and proven reserves. Interest in leasing our minerals is correlated with the economics of production which are substantially influenced by current oil and gas prices.

18



Other Natural Resources
We sell wood fiber from portions of our land, primarily in Georgia, and lease land for recreational uses. We have about 117,000 acres of timber we own directly or through ventures and about 14,000 acres of timber under lease. We manage our timberland in accordance with the Sustainable Forestry Initiative® program of Sustainable Forestry Initiative, Inc. At year-end 2013, approximately 99 percent of available acres of our land including ventures, primarily in Georgia, are leased for recreational purposes. Most recreational leases are for a one-year term but may be terminated by us on 30 days’ notice to the lessee. These leases do not inhibit our ability to harvest timber.
Information about our principal timber products follows:
 
For the Year
 
2013
 
2012
 
2011
Pulpwood tons sold
375,200

 
370,200

 
266,200

Average pulpwood price per ton
$
11.86

 
$
9.83

 
$
8.69

Sawtimber tons sold
234,300

 
123,700

 
56,800

Average sawtimber price per ton
$
22.31

 
$
21.77

 
$
16.13

Total tons sold
609,500

 
493,900

 
323,000

Average price per ton
$
15.88

 
$
12.82

 
$
10.00

Information about our recreational leases follows:
 
For the Year
 
2013
 
2012
 
2011
Average recreational acres leased
120,400

 
129,800

 
174,500

Average price per leased acre
$
9.08

 
$
8.73

 
$
8.80

The majority of our fiber sales were to International Paper at market prices.
Competition
We face significant competition from other landowners for the sale of our wood fiber. Some of these competitors own similar timber assets that are located in the same or nearby markets. However, due to its weight, the cost for transporting wood fiber long distances is significant, resulting in a competitive advantage for timber that is located reasonably close to paper and building products manufacturing facilities. A significant portion of our wood fiber is reasonably close to such facilities so we expect continued demand for our wood fiber.
Water Interests
We have water interests in about 1.5 million acres which includes a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama, and about 20,000 acres of groundwater leases in central Texas. We have not received significant revenues or earnings from these interests.
Employees
We have approximately 145 employees. None of our employees participate in collective bargaining arrangements. We believe we have a good relationship with our employees.
Environmental Regulations
Our operations are subject to federal, state and local laws, regulations and ordinances relating to protection of public health and the environment. Changes to laws and regulations may adversely affect our ability to drill for and produce oil and gas, develop real estate, harvest and sell timber, withdraw groundwater, or may require us to investigate and remediate contaminated properties. These laws and regulations may relate to, among other things, hydrocarbon drilling, hydraulic fracturing practices, protection of timberlands, endangered species, timber harvesting practices, protection and restoration of natural resources, air and water quality, and remedial standards for contaminated property and groundwater. Additionally, these laws may impose liability on property owners or operators for the costs of removal or remediation of hazardous or toxic substances on real property, without regard to whether the owner or operator knew, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may adversely affect the value of a property, as well as our ability to sell the property or to borrow funds using that property as collateral or the ability to produce oil and gas from that property. Environmental claims generally would not be covered by our insurance programs.

19



The particular environmental laws that apply to any given site vary according to the site’s location, its environmental condition, and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance or other costs and can prohibit or severely restrict development activity or mineral production in environmentally sensitive regions or areas, which could negatively affect our results of operations.
We own approximately 288 acres in several parcels in or near Antioch, California, portions of which were sites of a paper manufacturing operation that are in remediation. The remediation is being conducted voluntarily with oversight by the California Department of Toxic Substances Control, or DTSC. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. We estimate the remaining cost to complete remediation activities is about $1,000,000 as of year-end 2013.
Oil and gas operations are subject to numerous federal, state and local laws and regulations controlling the generation, use, processing, storage, transportation, disposal and discharge of materials into the environment or otherwise relating to the protection of the environment. These laws and regulations affect our operations and costs as a result of their impact on crude oil and gas exploration, development and production operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, including the assessment of monetary penalties, the imposition of investigatory and remedial obligations, the suspension or revocation of necessary permits, licenses and authorizations, the requirement that additional pollution controls be installed and the issuance of orders enjoining future operations or imposing additional compliance requirements.
Compliance with environmental laws and regulations increases our overall cost of business, but has not had, to date, a material adverse effect on our operations, financial condition or results of operations. It is not anticipated, based on current laws and regulations, that we will be required in the near future to expend amounts (whether for environmental control equipment, modification of facilities or otherwise) that are material in relation to our total exploration and development expenditure program in order to comply with such laws and regulations. However, given that such laws and regulations are subject to change, we are unable to predict the ultimate cost of compliance or the ultimate effect on our operations, financial condition and results of operations.
Legal Structure
Forestar Group Inc. is a Delaware corporation. The following chart presents the ownership structure for our significant subsidiaries. It does not contain all our subsidiaries and ventures, some of which are immaterial entities.
 
 
 
Forestar Group Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forestar (USA) Real Estate Group Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forestar Petroleum Corporation
 
Forestar Minerals LP
 
Forestar Oil & Gas LLC
Our principal executive offices are located at 6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746-5149. Our telephone number is (512) 433-5200.
Available Information
From our Internet website, http://www.forestargroup.com, you may obtain additional information about us including:
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including amendments to these reports, and other documents as soon as reasonably practicable after we file them with the Securities and Exchange Commission;
beneficial ownership reports filed by officers, directors, and principal security holders under Section 16(a) of the Securities Exchange Act of 1934, as amended (or the “Exchange Act”); and
corporate governance information that includes our:
corporate governance guidelines,
audit committee charter
management development and executive compensation committee charter,
nominating and governance committee charter,
standards of business conduct and ethics,

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code of ethics for senior financial officers, and
information on how to communicate directly with our board of directors.
We will also provide printed copies of any of these documents to any stockholder free of charge upon request. In addition, the materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information about the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information that is filed electronically with the SEC.
Executive Officers
The names, ages and titles of our executive officers are:
Name
 
Age
 
Position
James M. DeCosmo
 
55
 
President and Chief Executive Officer
Bruce F. Dickson
 
60
 
Chief Real Estate Officer
David M. Grimm
 
53
 
Chief Administrative Officer, Executive Vice President, General Counsel and Secretary
Christopher L. Nines
 
42
 
Chief Financial Officer and Treasurer
Flavious J. Smith, Jr.
 
55
 
Chief Oil and Gas Officer
Phillip J. Weber
 
53
 
Executive Vice President - Water Resources
James M. DeCosmo has served as our President and Chief Executive Officer since 2006. He served as Group Vice President of Temple-Inland Inc. from 2005 to 2007, and previously served as Vice President, Forest from 2000 to 2005 and as Director of Forest Management from 1999 to 2000. Prior to joining Temple-Inland, he held various land management positions throughout the southeastern United States. Mr. DeCosmo also serves on the Policy Advisory Board of the Harvard Housing Institute.
Bruce F. Dickson has served as our Chief Real Estate Officer since March 2011. From 2009 through March 2011, he was the owner of Fairchild Investments LLC, a real estate investment firm. He served Standard Pacific Corp. as Southeast Region President from 2004 to 2009 and as Austin Division President from 2002 to 2004. From 1991 to 2001, he held region or division president positions with D.R. Horton, Inc., Milburn Homes and Continental Homes. His prior experience includes investment banking and financial services.
David M. Grimm has served as our Chief Administrative Officer since 2007, in addition to holding the offices of General Counsel and Secretary since 2006. Mr. Grimm served Temple-Inland Inc. as Group General Counsel from 2005 to 2006, Associate General Counsel from 2003 to 2005, and held various other legal positions from 1992 to 2003. Prior to joining Temple-Inland Inc., he was an attorney in private practice in Dallas, Texas. Mr. Grimm is also a Certified Public Accountant.
Christopher L. Nines has served as our Chief Financial Officer since 2007. He served Temple-Inland Inc. as Director of Investor Relations from 2003 to 2007 and as Corporate Finance Director from 2001 to 2003. He was Senior Vice President of Finance for ConnectSouth Communications, Inc. from 2000 to 2001.
Flavious J. Smith, Jr. has served as our Chief Oil and Gas Officer since September 2012 and previously served as Executive Vice President - Mineral Resources from 2008 to September 2012. He served as Division Land Manager for EOG Resources, Inc. from 2005 to 2008. He owned and operated Flavious Smith Petroleum Properties, an independent oil and natural gas operator, from 1989 to 2005, and previously held various leadership positions with several oil and gas and energy-related companies.
Phillip J. Weber has served as our Executive Vice President - Water Resources since May 2013 and previously served as Executive Vice President - Real Estate from 2009 to May 2013. He served the Federal National Mortgage Association (Fannie Mae) as Senior Vice President - Multifamily from 2006 to October 2009, as Chief of Staff to the CEO from 2004 to 2006, as Chief of Staff to non-Executive Chairman of the Board and Corporate Secretary from 2005 to 2006, and as Senior Vice President, Corporate Development in 2005.


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Item 1A.
Risk Factors.
General Risks Related to our Operations
Both our real estate and oil and gas businesses are cyclical in nature.
The operating results of our business segments reflect the general cyclical pattern of each segment. While the cycles of each industry do not necessarily coincide, demand and prices in each may drop substantially in an economic downturn. Real estate development of residential lots is further influenced by new home construction activity, which has been volatile in recent years. Oil and gas may be further influenced by national and international commodity prices, principally for oil and gas. Cyclical downturns may materially and adversely affect our business, liquidity, financial condition and results of operations.
The real estate, oil and gas and natural resource industries are highly competitive and a number of entities with which we compete are larger and have greater resources, and competitive conditions may adversely affect our results of operations.
The real estate, oil and gas, and natural resources industries in which we operate are highly competitive and are affected to varying degrees by supply and demand factors and economic conditions, including changes in interest rates, new housing starts, home repair and remodeling activities, credit availability, consumer confidence, unemployment, housing affordability, changes in oil and gas prices, and federal energy policies.
The competitive conditions in the real estate industry may result in difficulties acquiring suitable land at acceptable prices, lower sales volumes and prices, increased development or construction costs and delays in construction and leasing. We compete with numerous regional and local developers for the acquisition, entitlement, and development of land suitable for development. We also compete with national, regional and local home builders who develop real estate for their own use in homebuilding operations, many of which are larger and have greater resources, including greater marketing and technology budgets. Any improvement in the cost structure or service of our competitors will increase the competition we face.
We face intense competition from both major and independent oil and gas companies in seeking to acquire desirable producing properties, seeking new properties for future exploration and seeking the human resource expertise necessary to effectively develop properties. Many of our competitors have financial and other resources substantially greater than ours, and some of them are fully integrated oil and gas companies. These companies may be able to pay more for development prospects and productive oil and gas properties and are able to define, evaluate, bid for, purchase and subsequently drill a greater number of properties and prospects than our financial or human resources permit, effectively reducing our ability to participate in drilling on certain of our acreage as a working interest owner or drill on properties we operate. Our ability to develop and exploit our oil and gas properties and to acquire additional quality properties in the future will depend upon our ability to successfully evaluate, select and acquire suitable properties and join in drilling with reputable operators in this highly competitive environment.
Our business, financial condition and results of operations may be negatively affected by any of these factors.
Our activities are subject to environmental regulations and liabilities that could have a negative effect on our operating results.
Our operations are subject to federal, state and local laws and regulations related to the protection of the environment. Compliance with these provisions or the promulgation of new environmental laws and regulations may result in delays, may cause us to invest substantial funds to ensure compliance with applicable environmental regulations and can prohibit or severely restrict timber harvesting, real estate development or mineral production activity in environmentally sensitive regions or areas.
Significant reductions in cash flow from slowing real estate, oil and gas or other natural resources market conditions could lead to higher levels of indebtedness, limiting our financial and operating flexibility.
We must comply with various covenants contained in our senior secured credit facility, the indenture governing our 3.75% convertible senior notes due 2020 (Convertible Notes), the indenture governing our 4.50% senior amortizing notes due 2016 (Senior Amortizing Notes), and any other existing or future debt arrangements. Significant reductions in cash flow from slowing real estate, oil and gas or other natural resources market conditions could require us to increase borrowing levels under our senior secured credit facility or to borrow under other debt arrangements and lead to higher levels of indebtedness, limiting our financial and operating flexibility, and ultimately limiting our ability to comply with our debt covenants, including the maintenance covenants under our senior secured credit facility. Realization of any of these factors could adversely affect our financial condition and results of operations.

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Restrictive covenants under our senior secured credit facility and indentures governing our 3.75% convertible senior notes and 4.50% senior amortizing notes may limit the manner in which we operate.
Our senior secured credit facility and indentures covering our Convertible Notes and Senior Amortizing Notes contain various covenants and conditions that limit our ability to, among other things:
incur or guarantee additional debt;
pay dividends or make distributions to our stockholders;
repurchase or redeem capital stock or subordinated indebtedness;
make loans, investments or acquisitions;
incur restrictions on the ability of certain of our subsidiaries to pay dividends or to make other payments to us;
enter into transactions with affiliates;
create liens;
merge or consolidate with other companies or transfer all or substantially all of our assets; and
transfer or sell assets, including capital stock of subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs.
Debt within some of our ventures may not be renewed or may be difficult or more expensive to replace.
As of December 31, 2013, our unconsolidated joint ventures had approximately $71.5 million of debt, substantially all of which was non-recourse to us. Many lenders have substantially curtailed or ceased making real estate acquisition and development loans. When debt within our ventures matures, some of our ventures may be unable to renew existing loans or secure replacement financing, or replacement financing may be more expensive. If our ventures are unable to renew existing loans or secure replacement financing, we may be required to contribute additional equity to our ventures which could increase our risk or increase our borrowings under our senior secured credit facility, or both. If our ventures secure replacement financing that is more expensive, our profits may be reduced.
We may not be able to generate sufficient cash flow to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
As of December 31, 2013, we had approximately $357 million of consolidated debt outstanding. Our ability to make scheduled payments or to refinance current or future debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We cannot be certain that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations.
Despite current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.
Our business may suffer if we lose key personnel.
We depend to a large extent on the services of certain key management personnel. These individuals have extensive experience and expertise in our business segments in which they work. The loss of any of these individuals could have a material adverse effect on our operations. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to employ and retain skilled personnel in each of our business segments.

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Risks Related to our Real Estate Operations
Reduced demand for new housing or commercial tracts in the markets where we operate could adversely impact our profitability.
The residential development industry is cyclical and is significantly affected by changes in general and local economic conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence and housing demand. Adverse changes in these conditions generally, or in the markets where we operate, could decrease demand for lots for new homes in these areas. Current mortgage credit standards continue to limit the availability of mortgage loans to acquire new and existing homes, and interest rates are rising. Decline in housing demand could negatively affect our real estate development activities, which could result in a decrease in our revenues and earnings.
Furthermore, the market value of undeveloped land and lots held by us, including commercial tracts, can fluctuate significantly as a result of changing economic and real estate market conditions. If there are significant adverse changes in economic or real estate market conditions, we may have to hold land in inventory longer than planned. Inventory carrying costs can be significant and can result in losses or lower returns and adversely affect our liquidity.
Development of real estate entails a lengthy, uncertain and costly entitlement process.
Approval to develop real property entails an extensive entitlement process involving multiple and overlapping regulatory jurisdictions and often requiring discretionary action by local governments. This process is often political, uncertain and may require significant exactions in order to secure approvals. Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. The process to comply with these regulations is usually lengthy and costly, may not result in the approvals we seek, and can be expected to materially affect our real estate development activities, which may adversely affect our business, liquidity, financial condition and results of operations.
Our real estate development operations are currently concentrated in the major markets of Texas, and a significant portion of our undeveloped land holdings are concentrated in Georgia. As a result, our financial results are dependent on the economic growth and strength of those areas.
The economic growth and strength of Texas, where the majority of our real estate development activity is located, are important factors in sustaining demand for our real estate development activities. Further, the future economic growth and real estate development opportunities in broad area around Atlanta, Georgia may be adversely affected if its infrastructure, such as roads, utilities, and schools, are not improved to meet increased demand. There can be no assurance that these improvements will occur. As a result, any adverse impact to the economic growth and health, or infrastructure development, of those areas could materially adversely affect our business, liquidity, financial condition and results of operations.
Our real estate development operations are highly dependent upon national, regional and local homebuilders.
We are highly dependent upon our relationships with national, regional, and local homebuilders to purchase lots in our residential developments. If homebuilders do not view our developments as desirable locations for homebuilding operations, or if homebuilders are limited in their ability to conduct operations due to economic conditions, including as a result of the recent downturn, our business, liquidity, financial condition and results of operations will be adversely affected.
In addition, we enter into contracts to sell lots to builders. A builder could decide to delay purchases of lots in one or more of our developments due to adverse real estate conditions wholly unrelated to our areas of operations, such as the corporate decisions regarding allocation of limited capital or human resources. Further, home mortgage credit standards have tightened substantially. As a result, we may sell fewer lots and may have lower sales revenues, which could have an adverse effect on our business, liquidity, financial condition and results of operations.
Our strategic partners may have interests that differ from ours and may take actions that adversely affect us.
We enter into strategic alliances or venture relationships as part of our overall strategy for particular developments or regions. While these partners may bring development experience, industry expertise, financing capabilities, and local credibility or other competitive attributes, they may also have economic or business interests or goals that are inconsistent with ours or that are influenced by factors unrelated to our business. We may also be subject to adverse business consequences if the market reputation or financial condition of a partner deteriorates, or if a partner takes actions inconsistent with our interest.
A formal agreement with a partner may also involve special risks, such as: we may not have voting control over the venture; the venture partner may take actions contrary to our instructions or requests, or contrary to our policies or objectives with respect to the real estate investments; the venture partner could experience financial difficulties and actions by a venture partner may subject property owned by the venture to liabilities greater than those contemplated by the venture agreement or have other adverse consequences.

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As a result, actions by a partner may have the result of subjecting venture property to liabilities in excess of those contemplated by the terms of the applicable agreement or have other adverse consequences. Accordingly, there can be no assurance that any such arrangements will achieve the results anticipated or otherwise prove successful.
Our partners’ inability to fund their capital commitments and otherwise fulfill their operating and financial obligations related to a venture could have an adverse effect on the venture and us.
When we enter into a venture, we may rely on our venture partner to fund its share of capital commitments to the venture and to otherwise fulfill its operating and financial obligations. Failure of a venture partner to timely satisfy its funding or other obligations to the venture could require us to elect whether to increase our financial or other operating support of the venture in order to preserve our investment, which may reduce our returns or cause us to incur losses, or to not fund such obligations, which may subject the venture and us to adverse consequences or increase our financial exposure in the project.
Delays or failures by governmental authorities to take expected actions could reduce our returns or cause us to incur losses on certain real estate development projects.
For certain projects, we rely on governmental utility and special improvement districts (SID) to issue bonds as a revenue source for the districts to reimburse us for qualified expenses, such as road and utility infrastructure costs. Bonds must be supported by districts tax revenues, usually from ad valorem taxes. Slowing new home sales, decreasing real estate prices or difficult credit markets for bond sales can reduce or delay district bond sale revenues, causing such districts to delay reimbursement of our qualified expenses. Failure to receive timely reimbursement for qualified expenses could adversely affect our cash flows and reduce our returns or cause us to incur losses on certain real estate development projects.
We are unable to control the approval or timing of reimbursements or other payments from the SID in which our Cibolo Canyons project is located. Delays or failure by the SID to approve infrastructure costs for reimbursement or to issue bonds, or lower than expected revenues generated from taxes, could negatively impact the timing of our future cash flows.
The SID in which our Cibolo Canyons project is located is an independent governmental entity. The SID has an elected governing board of directors comprised of members living within the district, none of whom are affiliated with us. Reimbursement of our infrastructure costs, and timing of payment, is subject to approval and determination by the SID. The SID is also obligated to pay to us certain amounts generated from hotel occupancy revenues and other resort sales revenues collected as taxes by the SID within the district. The amount of revenues collected by the SID will be impacted by hotel occupancy and resort sales, each of which could be lower than projected. If the revenues collected by the SID are lower than expected, then the amount of our future cash flows from the SID could be adversely affected. The amount and timing of receipts from the SID will be impacted by decisions made by the SID in regard to whether and when to issue bonds that would generate funds to support payments to us. Decisions by the SID to delay approval of reimbursements or issuance of bonds could negatively impact the timing of our future cash flows.
Development and construction risks could impact our profitability.
We may develop and construct single family or multifamily communities through wholly-owned projects or through ventures with unaffiliated parties. Our development and construction activities may be exposed to the following risks:
we may incur construction costs for a property that exceed original estimates due to increased materials, labor or other costs or unforeseen environmental or other conditions, which could make completion of the property uneconomical, and we may not be able to increase rents to compensate for the increase in construction costs;
we may be unable to complete construction and/or lease-up of a community on schedule and meet financial goals for development projects;
an adverse incident during construction or development could adversely affect our ability to complete construction, conduct operations or cause substantial losses, including personal injury or loss of life, damage to or destruction of property, equipment, pollution or other environmental contamination, regulatory penalties, suspension of operations, and attorney’s fees and other expenses incurred in the prosecution or defense of litigation; and
because occupancy rates and rents at a newly developed community may fluctuate depending on a number of factors, including market and economic conditions, we may be unable to meet our profitability goals for that community.
Possible difficulty of selling multifamily communities could limit our operational and financial flexibility.
Purchasers may not be willing to pay acceptable prices for multifamily communities that we wish to sell. Furthermore, general uncertainty in real estate markets has resulted in conditions where pricing of some real estate assets may be difficult due to uncertainty with respect to capitalization rates and valuations, among other things. If we are unable to sell multifamily communities or if we can only sell multifamily communities at prices lower than are generally acceptable, then we may have to take on additional leverage in order to provide adequate capital to execute our business strategy.

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Increased competition and increased affordability of residential homes could limit our ability to retain residents, lease apartment homes or increase or maintain rents.
Our multifamily communities compete with numerous housing alternatives in attracting residents, including other multifamily communities and single-family rental homes, as well as owner occupied single and multifamily homes. Competitive housing in a particular area and the increasing affordability of owner occupied single and multifamily homes caused by declining housing prices, mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain residents, lease apartment homes and increase or maintain rents.
Failure to succeed in new markets may limit our growth.
We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate opportunities arise. Our historical experience in existing markets does not ensure that we will be able to operate successfully in new markets. We may be exposed to a variety of risks if we choose to enter new markets, including, among others:
an inability to evaluate accurately local apartment or housing market conditions and local economies;
an inability to obtain land for development or to identify appropriate acquisition opportunities;
an inability to hire and retain key personnel;
an inability to successfully integrate operations; and
lack of familiarity with local governmental and permitting procedures.
Risks Related to our Oil and Gas Operations
Our operations are subject to the numerous risks of oil and gas drilling and production activities.
Our oil and gas drilling and production activities are subject to numerous risks, many of which are beyond our control. These risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, gas leaks, ruptures, discharges of toxic gases, underground migration and surface spills or mishandling of any toxic fracture fluids, including chemical additives. In addition, title problems, weather conditions and mechanical difficulties or shortages or delays in delivery of drilling rigs and other equipment could negatively affect our operations. If any of these or other similar industry operating risks occur, we could have substantial losses. Substantial losses also may result from injury or loss of life, severe damage to or destruction of property, clean-up responsibilities, environmental damage, regulatory investigation, enforcement actions and penalties, and restriction or suspension of operations. In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above. We cannot assure you that our insurance will be adequate to cover losses or liabilities. Also, we cannot predict the continued availability of insurance at premium levels that justify its purchase.
Expenditures related to drilling activities could lead to higher levels of indebtedness.
We expect increasing drilling expenditures that we plan to pay for with cash flow from operations, cash reserves and borrowings under the revolving loan of our senior secured credit facility. We cannot assure you that we will have sufficient capital resources in the future to finance all of our planned drilling expenditures. If cash flows from operations decrease for any reason, our ability to undertake exploration and development activities could be adversely affected and we may have to borrow or seek additional capital to finance such activities. Such borrowings, if available, could lead to higher levels of indebtedness and reduced returns, limiting our financial and operating flexibility and limiting our ability to comply with our debt covenants.
The lack of availability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute our exploitation and development plans on a timely basis and within our budget.
From time to time, there are shortages of drilling rigs, equipment, supplies, oil field services or qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases. During times and in areas of increased activity, the demand for oilfield services will also likely rise, and the costs of these services will likely increase, while the quality of these services may suffer. If the lack of availability or high cost of drilling rigs, equipment, supplies, oil field services or qualified personnel were particularly severe in any of our areas of operation, we could be materially and adversely affected. Delays could also have an adverse effect on our results of operations, including the timing of the initiation of production from new wells.

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Our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors that are beyond our control.
Our drilling operations are subject to a number of risks, including:
unexpected drilling conditions;
facility or equipment failure or accidents;
adverse weather conditions;
title problems;
unusual or unexpected geological formations;
fires, blowouts and explosions; and
uncontrollable flows of oil and gas or well fluids.
The occurrence of any of these events could adversely affect our ability to conduct operations or cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution or other environmental contamination, loss of wells, regulatory investigation, enforcement actions or penalties, restrictions or suspension of operations, and attorney’s fees and other expenses incurred in the prosecution or defense of litigation.
We may not find commercially productive oil and gas reservoirs.
Future oil and gas exploration may involve unprofitable efforts, not only from dry hole wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. There is no assurance that new wells we drill will be productive or that we will recover all or any portion of our capital investment in the wells.
Hydraulic fracturing, the process used for extracting oil and gas from shale and other formations, and other subsurface injections have come under increased scrutiny and could be the subject of further regulation that could impact the timing and cost of extractive activities.
Hydraulic fracturing is the primary production method used to extract reserves located in many of the unconventional oil and gas plays in the United States. The United States Environmental Protection Agency (EPA) is currently engaged in a long-term study mandated by Congress regarding the potential impacts of hydraulic fracturing on drinking water resources that could influence federal and state legislative and regulatory developments. Other federal regulatory developments include (i) interpretive memorandum issued by the EPA in February 2014 in regard to underground injection of hydraulic fracturing fluids that use diesel fuel as a fracking fluid or propping agent; (ii) EPA air regulations for the oil and gas industry, issued in August 2012, that require, beginning in January 2015, “reduced emissions completion” technology to be used after well completion operations involving hydraulic fracturing; and (iii) U.S. Department of the Interior, Bureau of Land Management regulation of well stimulation involving hydraulic fracturing on federal and tribal lands. These regulations were first proposed in May 2012 and then revised and proposed again in May 2013. Hydraulic fracturing is also extensively regulated at the state and local level and has been subject to temporary or permanent moratoria in some states, although to date it has not been subject to such moratoria in the states and locations of our oil and gas operations or minerals. Also under public and governmental scrutiny is subsurface injection of water or other produced fluids from drilling or hydraulic fracturing processes due to potential environmental and physical impacts, including possible links to earthquakes.
Depending on legislation that may ultimately be enacted or regulations that may be adopted at the federal, state and local levels, exploration, exploitation and production activities that entail hydraulic fracturing or other subsurface injection could be subject to additional regulation and permitting requirements. Individually or collectively, such new legislation or regulation could lead to operational delays, increased costs and other burdens that could delay the development of oil and gas resources from formations that are not commercial without the use of these techniques. This could have a material effect on our oil and gas production operations and on the operators conducting activities on our minerals and on the cash flows we receive from them.
Volatile oil and gas prices could adversely affect our cash flows and results of operations.
Our cash flows and results of operations are dependent in part on oil and gas prices, which are volatile. Oil and gas prices also impact the amounts we receive for selling and renewing our mineral leases. Moreover, oil and gas prices depend on factors we cannot control, such as: changes in foreign and domestic supply and demand for oil and gas; actions by the Organization of Petroleum Exporting Countries; weather; political conditions in other oil-producing countries, including the possibility of insurgency or war in such areas; prices of foreign exports; domestic and international drilling activity; price and availability of alternate fuel sources; the value of the U.S. dollar relative to other major currencies; the level and effect of trading in

27



commodity markets; the effect of worldwide energy conservation measures and governmental regulations. Any substantial or extended decline in the price of oil and gas could have a negative impact on our business, liquidity, financial condition and results of operations.
Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves and may have a material adverse effect on our financial condition.
The process of estimating oil and gas reserves is complex involving decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices, revenues, taxes and quantities of recoverable oil and gas reserves might vary from those estimated. Any variance could materially affect the estimated quantities and present value of proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, development, prevailing oil and gas prices and other factors, many of which are beyond our control. Such adjustments could negatively impact our ability to obtain financing.
The estimates of our reserves as of December 31, 2013 are based upon various assumptions about future production levels, prices and costs that may not prove to be correct over time. In particular, estimates of oil and gas reserves, future net revenue from proved reserves and the standardized measure thereof for our oil and gas interests are based on the assumption that future oil and gas prices remain the same as the twelve month first-day-of-the-month average oil and gas prices for the year ended December 31, 2013. The average realized sales prices as of such date used for purposes of such estimates were $2.98 per thousand cubic feet (Mcf) of gas and $91.45 per barrel of oil. The December 31, 2013 estimates also assume that the working interest owners will make future capital expenditures which are necessary to develop and realize the value of proved reserves.
The standardized measure of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated reserves.
Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. As required by SEC regulations, we base our present value of estimated future oil and gas revenues on prices and costs in effect at the time of the estimate. However, actual future net cash flows from our properties will be affected by numerous factors not subject to our control and will be affected by factors such as:
decisions and activities of the well operators;
supply of and demand for oil and gas;
actual prices we receive for oil and gas;
actual operating costs;
the amount and timing of capital expenditures;
the amount and timing of actual production; and
changes in governmental regulations or taxation.
The timing of production will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flow, which is required by the SEC, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and gas industry in general. Any material inaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
Our reserves and production will decline from their current levels.
The rate of production from oil and gas properties generally declines as reserves are produced. Our reserves will decline as they are produced which could materially and adversely affect our future cash flow, liquidity and results of operations.
Our oil and gas production may be subject to interruptions that could have a material and adverse effect on us.
Our oil and gas production may be interrupted, or shut in, from time to time for various reasons, including as a result of accidents, weather conditions, loss of gathering, processing, compression or transportation facility access or field labor issues, or intentionally as a result of market conditions such as oil and gas prices that the operators of our mineral leases, whose decisions we do not control, deem uneconomic. If a substantial amount of production is interrupted, our business, liquidity and results of operations could be materially and adversely affected.

28



We may acquire properties that are not as commercially productive as we initially believed.
From time to time, we seek to acquire oil and gas properties. Although we perform reviews of properties to be acquired in a manner that we believe is consistent with industry practices, reviews of records and properties may not necessarily reveal existing or potential problems, nor may they permit a buyer to become sufficiently familiar with the properties in order to assess fully their deficiencies and potential. Even when problems with a property are identified, we may assume environmental and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements. Moreover, there are numerous uncertainties inherent in estimating quantities of oil and gas reserves, actual future production rates and associated costs with respect to acquired properties. Actual reserves, production rates and costs may vary substantially from those assumed in our estimates.
We do not insure against all potential losses and could be materially and adversely affected by unexpected liabilities.
The exploration for, and production of, oil and gas can be hazardous, involving natural disasters and other unforeseen occurrences such as blowouts, cratering, fires and loss of well control, which can damage or destroy wells or production facilities, result in injury or death, and damage property and the environment. We maintain insurance against many, but not all, potential losses or liabilities arising from operations on our property in accordance with what we believe are customary industry practices and in amounts and at costs that we believe to be prudent and commercially practicable. In addition, we require third party operators to maintain customary and commercially practicable types and limits of insurance, but potential losses or liabilities may not be covered by such third party’s insurance which may subject us to liability as the mineral estate owner. The occurrence of any of these events and any costs or liabilities incurred as a result of such events could have a material adverse effect on our business, financial condition and results of operations.
We have limited control over the activities on properties we do not operate and are unable to ensure their proper operation and profitability.
Many of the properties in which we have working interests are operated by other companies and involve third-party working interest owners. As a result, we have limited ability to influence or control the operation or future development of such properties, including compliance with environmental, safety and other regulations, or the amount of capital expenditures that we will be required to fund with respect to such properties. Moreover, we are dependent on the other working interest owners of such projects to fund their contractual share of the capital expenditures of such projects. These limitations and our dependence on the operator and other working interest owners for these projects could cause us to incur unexpected future costs and materially and adversely affect our business, liquidity, financial condition and results of operations.
In addition, operators determine when and where to drill wells and we have no influence over these decisions. The success and timing of the drilling and development activities on our non-operated properties therefore depends upon a number of factors currently outside of our control, including the operator’s timing and amount of capital expenditures, expertise and financial resources, inclusion of other participants in drilling wells and use of technology, and the operators of our properties may not have the same financial and other resources as other oil and gas companies with whom they compete. Further, new wells may not be productive or may not produce at a level to enable us to recover all or any portion of our capital investment where we have a non-operating working interest.
The ability to sell and deliver oil and gas produced from wells on our mineral interests could be materially and adversely affected if adequate gathering, processing, compression and transportation services are not obtained.
The sale of oil and gas produced from wells on our mineral interests depends on a number of factors beyond our control, including the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities owned or operated by third parties. These facilities may be temporarily unavailable due to market conditions, mechanical reasons or other factors or conditions, and may not be available in the future on terms the operator considers acceptable, if at all. In addition, federal, state and provincial governments in the United States and Canada have issued or are considering issuance of additional regulations governing transportation of crude oil and its byproducts by rail. Such regulations could increase the cost of transportation or limit the availability of suitable rail cars or both. Any significant change in market or other conditions affecting these facilities or the availability of these facilities, including due to the failure or inability to obtain access to these facilities on terms acceptable to the operator or at all, could materially and adversely affect our business, liquidity, financial condition and results of operations.
A significant portion of our Louisiana owned net mineral acres are subject to prescription of non-use under Louisiana law.
A significant portion of our Louisiana owned net mineral acres were severed from surface ownership and retained by creation of one or more mineral servitudes shortly before our 2007 spin-off. Under Louisiana law, a mineral servitude that is not producing minerals or which has not been the subject of good-faith drilling operations will cease to burden the property

29



upon the tenth anniversary of the date of its creation. Upon such event, the mineral rights effectively will revert to the surface owner and we will no longer own the right to lease, explore for or produce minerals from such acreage.
Weather, climate and climate change regulation may have a significant and adverse impact on us.
Demand for gas is, to a significant degree, dependent on weather and climate, which impacts, among other things, the price we receive for the commodities produced from gas wells and, in turn, our cash flow and results of operations. For example, relatively warm temperatures during a winter season generally result in relatively lower demand for gas, higher inventory (as less gas is used to heat residences and businesses) and, as a result, relatively lower prices for gas production.
Drilling for and production of oil and gas also can be impacted by weather and climate. Specifically, cold temperatures or significant precipitation or both can restrict operation of machinery or access to well sites by personnel or equipment. These restrictions may reduce our production and, in turn, our cash flow and results of operations.
Also, the EPA has proposed regulations for the purpose of restricting greenhouse gas emissions from stationary sources. Such regulatory and legislative proposals to restrict greenhouse gas emissions, or to address climate change generally, could increase our operating costs as well operators incur costs to comply with new rules. Such increased costs may include installation of new or expanded emissions control systems, purchase of allowances to authorize greenhouse gas emissions, and increased taxes. Regulation of greenhouse gases may also occur at the state level. Depending on legislation that may ultimately be enacted or regulations that may be adopted at the Federal or state level, there could be increased costs, operational delays and other burdens affecting the oil and gas industry. This could have a material effect on our oil and gas production operations and on the operators conducting activities on our properties and on cash flows we receive from them.
Risks Related to our Other Natural Resources Operations
Our water interests may require governmental permits, the consent of third parties and/or completion of significant transportation infrastructure prior to commercialization, all of which are dependent on the actions of others.
Many jurisdictions require governmental permits to withdraw and transport water for commercial uses, the granting of which may be subject to discretionary determinations by such jurisdictions regarding necessity. In addition, we do not own the executory rights related to our non-participating royalty interest, and as a result, third-party consent from the executor rights owner(s) would be required prior to production. The process to obtain permits can be lengthy, and governmental jurisdictions or third parties from whom we seek permits or consent may not provide the approvals we seek. We may be unable to secure buyers at commercially economic prices for water that we have a right to extract and transport, and transportation infrastructure across property not owned or controlled by us is required for transport of water prior to commercial use. Such infrastructure can require significant capital and may also require the consent of third parties. We may not have cost effective means to transport water from property we own, lease or manage to buyers. As a result, we may lose some or all of our investment in water assets, or our returns may be diminished.
If the Rome, Georgia Mill Complex were to permanently cease operations, the price we receive for our wood fiber may decline, and the cost of delivering logs to alternative customers could increase.
The majority of our wood fiber is sold for use at a Rome, Georgia mill complex, portions of which are owned by International Paper and portions of which are owned by Georgia-Pacific. A significant portion of our other natural resources revenues are generated through sales to the Rome, Georgia mill complex, which is a significant consumer of wood fiber within the immediate area in which a substantial portion of our Georgia timberlands are located. If one or both portions of the Rome, Georgia mill complex were to permanently cease operations, were not willing to pay for wood fiber at prices we deem acceptable or were to cease purchasing wood fiber from us, we may not be able to enter into agreements with alternative customers for the wood fiber, any agreements with alternative customers we do enter into may be for lower rates than we currently receive and the cost of delivering wood fiber to such alternative customers could increase.
Our ability to harvest and deliver timber may be affected by our sales of timberland and may be subject to other limitations, which could adversely affect our operations.
Sales of our timberland reduce the amount of timber that we have available for harvest. In addition, weather conditions, timber growth cycles, access limitations, availability of contract loggers and haulers, and regulatory requirements associated with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including damage by fire, insect infestation, disease, prolonged drought, flooding and other natural disasters. Although damage from such natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain insurance coverage with respect to damage to our timberlands.
The revenues, income and cash flow from operations for our other natural resources segment are dependent to a significant extent on the pricing of our products and our continued ability to harvest timber at adequate levels.

30



Other Risks
The market price of and trading volume of our shares of common stock may be volatile.
The market price of our shares of common stock has fluctuated substantially and may continue to fluctuate in response to the following factors, many of which are beyond our control:
fluctuations in our operating results, including results that vary from expectations of management, analysts and investors;
changes in investors’ and analysts’ perception of the business risks and conditions of our business;
broader market fluctuations;
general financial, economic and political conditions;
regulatory changes affecting our industry generally or our businesses and operations;
environmental regulations and liabilities that could have a negative effect on our operating results;
announcements of strategic developments, acquisitions, financings and other material events by us or our competitors;
the sale of a substantial number of shares of our common stock held by existing security holders in the public market; and
general conditions in the real estate and mineral resources industries.
The stock markets in general have experienced extreme volatility that has at times been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, make it difficult to predict the market price of our common stock in the future and cause the value of our common stock to decline.
Provisions of Delaware law, our charter documents, our shareholder rights plan, the indenture governing the convertible senior notes and the stock purchase contracts under the 6.00% tangible equity units may impede or discourage a takeover, which could cause the market price of our common stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In addition, our board of directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. We have implemented a shareholders’ rights plan, called a poison pill, which would substantially reduce or eliminate the expected economic benefit to an acquirer from acquiring us in a manner or terms not approved by our board of directors. These and other impediments to third party acquisition or change of control could limit the price investors are willing to pay for shares of our common stock, which could in turn reduce the market price of our common stock. In addition, upon the occurrence of a fundamental change under the terms of the convertible senior notes or the tangible equity units, certain repurchase rights and early settlement rights would be triggered under the indenture governing the convertible senior notes and the stock purchase contracts under the 6.00% tangible equity units, respectively. In such event, the increase of the conversion or early settlement rate, as applicable, in connection with certain make-whole fundamental change transactions under the terms of the convertible senior notes or the stock purchase contracts, respectively, could discourage a potential acquirer.
 
Item 1B.
Unresolved Staff Comments.
None.

Item 2.
Properties.
Our principal executive offices are located in Austin, Texas, where we lease approximately 32,000 square feet of office space. We also lease office space in Atlanta, Georgia; Dallas, Texas; Denver, Colorado; Fort Worth, Texas; and Lufkin, Texas. We believe these offices are suitable for conducting our business.
For a description of our properties in our real estate, oil and gas and other natural resources segments, see “Business — Real Estate”, “Business — Oil and Gas” and “Business — Other Natural Resources”, respectively, in Part I, Item 1 of this Annual Report on Form 10-K.
 

31



Item 3.
Legal Proceedings.
We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of any of the proceedings should not have a material adverse effect on our financial position or long-term results of operations or cash flows. It is possible, however, that charges related to these matters could be significant to results of operations or cash flow in any single accounting period.
 
Item 4.
Mine Safety Disclosures.
Not Applicable.

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the New York Stock Exchange. The high and low sales prices in each quarter in 2013 and 2012 were:
 
2013
 
2012
 
Price Range
 
Price Range
 
High
 
Low
 
High
 
Low
First Quarter
$
22.82

 
$
16.99

 
$
17.12

 
$
13.87

Second Quarter
$
24.68

 
$
19.44

 
$
15.97

 
$
12.00

Third Quarter
$
22.57

 
$
19.51

 
$
18.63

 
$
11.13

Fourth Quarter
$
23.59

 
$
18.42

 
$
17.80

 
$
13.61

For the Year
$
24.68

 
$
16.99

 
$
18.63

 
$
11.13

Shareholders
Our stock transfer records indicated that as of March 5, 2014, there were approximately 3,501 holders of record of our common stock.
Dividend Policy
We currently intend to retain any future earnings to support our business and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including without limitation, our financial condition, earnings, capital requirements of our business, the terms of any credit agreements or indentures to which we may be a party at the time, legal requirements, industry practice, and other factors that our Board of Directors deems relevant.
Issuer Purchases of Equity Securities(a) 
Period
Total
Number of
Shares
Purchased(b)
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan or
Programs
 
Maximum
Number of
Shares That
May Yet be
Purchased
Under the
Plans or
Programs
Month 10 (10/1/2013 — 10/31/2013)
47

 
$
21.76

 

 
4,997,855

Month 11 (11/1/2013 — 11/30/2013)

 
$

 

 
4,997,855

Month 12 (12/1/2013 — 12/31/2013)

 
$

 

 
4,997,855

Total
47

 
 
 

 
 
 _____________________
(a) 
On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have purchased 2,002,145 shares under this authorization, which has no expiration date. We have

32



no repurchase plans or programs that expired during the period covered by the table above and no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
(b) 
Includes shares withheld to pay taxes in connection with vesting of restricted stock awards and exercises of stock options.
Performance Graph
In 2013, we composed an index of our peers consisting of Alexander & Baldwin, Inc., AV Homes Inc., Approach Resources, Inc., BRE Properties, Inc., Consolidated-Tomoka Land Co., Cousins Properties Incorporated, Contango Oil and Gas Co., Goodrich Petroleum Corp., Magnum Hunter Resources Corp., Matador Resources Co., Penn Virginia Corp., Petroquest Energy Inc., Post Properties, Inc., Potlatch Corporation, PS Business Parks, Inc., Resolute Energy Corp., The St. Joe Company, and Tejon Ranch Co. In 2012, we changed our peer group to represent a mix of real estate and oil and gas exploration companies following our acquisition of Credo. Our 2012 custom peer group (Old Custom Peer Index) consisted of AV Homes Inc., Matador Resources Co., Approach Resources, Inc., Bluegreen Corporation, BRE Properties, Inc., Consolidated-Tomoka Land Co., Cousins Properties Incorporated, Contango Oil and Gas Co., Goodrich Petroleum Corp., Magnum Hunter Resources Corp., Penn Virginia Corp., Petroquest Energy Inc., Post Properties, Inc., Potlatch Corporation, Resolute Energy Corp., The St. Joe Company, and Tejon Ranch Co. Our cumulative total shareholder return for the last five years compared to the Russell 2000 Index, New Custom Peer Index, and to the Old Custom Peer Index was as shown in the following graph (assuming $100 invested on January 1, 2008):
Pursuant to SEC rules, returns of each of the companies in the Peer Index are weighted according to the respective company’s stock market capitalization at the beginning of each period for which a return is indicated.


33



Item 6.
Selected Financial Data.
 
For the Year
 
2013
 
2012
 
2011
 
2010
 
2009
 
(In thousands, except per share amount)
Revenues:
 
 
 
 
 
 
 
 
 
Real estate
$
248,011

 
$
120,115

 
$
106,168

 
$
68,269

 
$
94,436

Oil and gas
72,313

 
44,220

 
24,448

 
24,790

 
36,256

Other natural resources
10,721

 
8,256

 
4,957

 
8,301

 
15,559

Total revenues
$
331,045

 
$
172,591

 
$
135,573

 
$
101,360

 
$
146,251

Segment earnings (loss):
 
 
 
 
 
 
 
 
 
Real estate(a)
$
68,454

 
$
53,582

 
$
(25,704
)
 
$
(4,634
)
 
$
3,182

Oil and gas
18,859

 
26,608

 
19,783

 
22,846

 
32,370

Other natural resources
6,507

 
29

 
(1,867
)
 
4,995

 
9,622

Total segment earnings (loss)
93,820

 
80,219

 
(7,788
)
 
23,207

 
45,174

Items not allocated to segments:
 
 
 
 
 
 
 
 
 
General and administrative expense(b)
(20,597
)
 
(25,176
)
 
(20,110
)
 
(17,341
)
 
(22,399
)
Share-based compensation expense
(16,809
)
 
(14,929
)
 
(7,067
)
 
(11,596
)
 
(11,998
)
Gain on sale of assets(c)

 
16

 
61,784

 
28,607

 
104,047

Interest expense
(20,004
)
 
(19,363
)
 
(17,012
)
 
(16,446
)
 
(20,459
)
Other corporate non-operating income(d)
119

 
191

 
368

 
1,164

 
375

Income before taxes
36,529

 
20,958

 
10,175

 
7,595

 
94,740

Income tax expense(e)
(7,208
)
 
(8,016
)
 
(3,021
)
 
(2,470
)
 
(35,633
)
Net income attributable to Forestar Group Inc.
$
29,321

 
$
12,942

 
$
7,154

 
$
5,125

 
$
59,107

Diluted net income per common share
$
0.80

 
$
0.36

 
$
0.20

 
$
0.14

 
$
1.64

Average diluted common shares outstanding
36,813

 
35,482

 
35,781

 
36,377

 
36,102

At year-end:
 
 
 
 
 
 
 
 
 
Assets
$
1,172,152

 
$
918,434

 
$
794,857

 
$
789,324

 
$
784,734

Debt
357,407

 
294,063

 
221,587

 
221,589

 
216,626

Noncontrolling interest
5,552

 
4,059

 
1,686

 
4,715

 
5,879

Forestar Group Inc. shareholders’ equity
709,845

 
529,488

 
509,526

 
509,564

 
512,456

Ratio of total debt to total capitalization
33
%
 
36
%
 
30
%
 
30
%
 
30
%
 _____________________
(a) 
Real estate segment earnings (loss) include non-cash impairments of $1,790,000 in 2013, $45,188,000 in 2011, $11,271,000 in 2010 and $10,619,000 in 2009. Real estate segment earnings (loss) also include the effects of net (income) loss attributable to noncontrolling interests.
(b) 
In 2012, general and administrative expense includes $6,323,000 in costs associated with our acquisition of Credo and in 2011 includes $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.
(c) 
Gain on sale of assets in 2011, 2010 and 2009 represents gains from timberland sales in accordance with our strategic initiatives announced first quarter 2009 and completed in 2011.
(d) 
In 2010, other corporate non-operating income principally represents interest income related to a loan to a third-party equity investor in the resort development located at our Cibolo Canyons project. We received payment in full plus interest in fourth quarter 2010.
(e) 
In 2013, income tax expense includes a benefit from recognition of $6,326,000 of previously unrecognized tax benefits upon lapse of the statute of limitations for a previously reserved tax position.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Caution Concerning Forward-Looking Statements
This Annual Report on Form 10-K 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 risk and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;
our ability to achieve some or all of our strategic initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
significant customer concentration;
future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and timing of such payments;
accuracy of estimates and other assumptions related to investment in and development of real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation, oil and gas reserves, revenues, capital expenditures and lease operating expense accruals associated with our oil and gas working interests, and depletion of our oil and gas properties;
the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects and the regions in which they are located;
fluctuations in costs and expenses;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;
demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
our realization of the expected benefits since our acquisition of CREDO Petroleum Corporation (Credo);
risks associated with oil and gas exploration, drilling and production activities;
fluctuations in oil and gas commodity prices;
government regulation of exploration and production technology, including hydraulic fracturing;
the results of financing efforts, including our ability to obtain financing with favorable terms, or at all;
our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior secured credit facility, indentures and other debt agreements;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;
inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal or usage;
the final resolutions or outcomes with respect to our contingent and other liabilities related to our business; and
our ability to execute our growth strategy and deliver acceptable returns from acquisitions and other investments.

35



Other factors, including the risk factors described in Item 1A of this 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.
2014 Strategic Initiatives
On February 13, 2014, we announced Growing FORward, new strategic initiatives designed to further enhance shareholder value by:
Growing segment earnings through strategic and disciplined investments,
Increasing returns, and
Repositioning non-core assets.

Results of Operations for the Years Ended 2013, 2012 and 2011
A summary of our consolidated results by business segment follows:
 
For the Year
 
2013
 
2012
 
2011
 
(In thousands)
Revenues: