10-Q 1 for-3312014x10q.htm 10-Q FOR-3.31.2014-10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33662
_________________________________________________________  
FORESTAR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
 _________________________________________________________ 
Delaware
 
26-1336998
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)
(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)
 _________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Number of Shares Outstanding as of May 5, 2014
Common Stock, par value $1.00 per share
 
34,914,684
 



FORESTAR GROUP INC.
TABLE OF CONTENTS
 

2


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
ASSETS
 
Cash and cash equivalents
$
147,979

 
$
192,307

Real estate, net
526,810

 
519,464

Oil and gas properties and equipment, net
242,454

 
232,641

Investment in unconsolidated ventures
50,459

 
41,147

Timber
10,227

 
10,947

Receivables, net
31,937

 
39,252

Prepaid expenses
5,611

 
5,136

Property and equipment, net
6,275

 
6,112

Deferred tax asset, net
39,164

 
40,398

Goodwill and other intangible assets
66,622

 
66,646

Other assets
15,706

 
18,102

TOTAL ASSETS
$
1,143,244

 
$
1,172,152

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
15,839

 
$
21,409

Accrued employee compensation and benefits
2,284

 
5,814

Accrued property taxes
2,351

 
3,822

Accrued interest
1,143

 
2,343

Income taxes payable
1,708

 
3,876

Other accrued expenses
33,182

 
32,927

Other liabilities
19,194

 
29,157

Debt
345,412

 
357,407

TOTAL LIABILITIES
421,113

 
456,755

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Forestar Group Inc. shareholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share, 25,000,000 authorized shares, none issued

 

Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at first quarter-end 2014 and year-end 2013
36,947

 
36,947

Additional paid-in capital
554,415

 
556,676

Retained earnings
158,752

 
150,418

Treasury stock, at cost, 2,031,919 shares at first quarter-end 2014 and 2,199,666 shares at year-end 2013
(31,779
)
 
(34,196
)
Total Forestar Group Inc. shareholders’ equity
718,335

 
709,845

Noncontrolling interests
3,796

 
5,552

TOTAL EQUITY
722,131

 
715,397

TOTAL LIABILITIES AND EQUITY
$
1,143,244

 
$
1,172,152

Please read the notes to consolidated financial statements.

3


FORESTAR GROUP INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
First Quarter
 
2014
 
2013
 
(In thousands, except per share amounts)
REVENUES
 
 
 
Real estate sales and other
$
55,547

 
$
24,518

Commercial and income producing properties
9,933

 
54,171

Real estate
65,480

 
78,689

Oil and gas
17,554

 
15,504

Other natural resources
1,571

 
3,278

 
84,605

 
97,471

COSTS AND EXPENSES
 
 
 
Cost of real estate sales and other
(26,064
)
 
(12,095
)
Cost of commercial and income producing properties
(10,120
)
 
(40,951
)
Cost of oil and gas producing activities
(12,620
)
 
(7,834
)
Cost of other natural resources
(776
)
 
(692
)
Other operating
(13,997
)
 
(15,909
)
General and administrative
(5,145
)
 
(10,470
)
 
(68,722
)
 
(87,951
)
OPERATING INCOME
15,883

 
9,520

Equity in earnings of unconsolidated ventures
991

 
913

Interest expense
(5,503
)
 
(4,539
)
Other non-operating income
2,294

 
1,141

INCOME BEFORE TAXES
13,665

 
7,035

Income tax expense
(4,658
)
 
(1,993
)
CONSOLIDATED NET INCOME
9,007

 
5,042

Less: Net (income) attributable to noncontrolling interests
(673
)
 
(1,091
)
NET INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.
$
8,334

 
$
3,951

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
Basic
35,576

 
35,259

Diluted
43,913

 
35,722

NET INCOME PER COMMON SHARE
 
 
 
Basic
$
0.20

 
$
0.11

Diluted
$
0.19

 
$
0.11

TOTAL COMPREHENSIVE INCOME
$
8,334

 
$
3,951

Please read the notes to consolidated financial statements.

4


FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) 
 
First Quarter
 
2014
 
2013
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
9,007

 
$
5,042

Adjustments:
 
 
 
Depreciation, depletion and amortization
7,439

 
6,292

Change in deferred income taxes
2,976

 
649

Change in unrecognized tax benefits

 
37

Equity in earnings of unconsolidated ventures
(991
)
 
(913
)
Distributions of earnings of unconsolidated ventures
1,018

 

Share-based compensation
313

 
10,415

Real estate cost of sales
24,812

 
41,345

Dry hole exploration costs
1,626

 
742

Real estate development and acquisition expenditures, net
(35,035
)
 
(17,568
)
Reimbursements from utility and improvement districts
1,536

 
209

Other changes in real estate
652

 
140

Changes in deferred income
(132
)
 
2,429

Other
1,370

 
129

Changes in:
 
 
 
Notes and accounts receivable
7,433

 
643

Prepaid expenses and other
790

 
(26
)
Accounts payable and other accrued liabilities
(15,104
)
 
(17,103
)
Income taxes
(2,167
)
 
833

Net cash provided by operating activities
5,543

 
33,295

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software and reforestation and other
(4,699
)
 
(915
)
Oil and gas properties and equipment
(19,357
)
 
(12,980
)
Investment in unconsolidated ventures
(4,293
)
 
(745
)
Return of investment in unconsolidated ventures
155

 
1,065

Other

 
74

Net cash used for investing activities
(28,194
)
 
(13,501
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of convertible senior notes, net

 
120,795

Payments of debt
(15,711
)
 
(90,748
)
Additions to debt
2,608

 
27,712

Deferred financing fees

 
(15
)
Distributions to noncontrolling interests, net
(498
)
 
(809
)
Purchase of noncontrolling interests
(7,971
)
 

Exercise of stock options
754

 
533

Payroll taxes on issuance of stock-based awards
(879
)
 
(1,024
)
Excess income tax benefit from share-based compensation
20

 
54

Net cash provided by (used for) financing activities
(21,677
)
 
56,498

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(44,328
)
 
76,292

Cash and cash equivalents at beginning of period
192,307

 
10,361

Cash and cash equivalents at end of period
$
147,979

 
$
86,653

Please read the notes to consolidated financial statements.

5


FORESTAR GROUP INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1—Basis of Presentation
Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest and variable interest entities of which we are the primary beneficiary. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any preferential returns and treat distributions as a reduction of our investment). We account for our investment in other entities in which we do not have significant influence over operations and financial policies using the cost method (we recognize as income distributions of accumulated earnings).
We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those principally related to allocating costs to real estate, measuring long-lived assets for impairment, oil and gas revenue accruals, capital expenditure and lease operating expense accruals associated with our oil and gas production activities, oil and gas reserves and depletion of our oil and gas properties. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2013 Annual Report on Form 10-K.
Note 2—New and Pending Accounting Pronouncements
Accounting Standards Adopted in 2014
In first quarter 2014, we adopted ASU 2013-04 — Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This ASU requires an entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. Adoption did not materially affect our earnings or financial position.
Pending Accounting Standards
As of first quarter-end 2014, there are no pending accounting standards that will impact our earnings, financial position or disclosures.
Note 3—Real Estate
Real estate consists of:
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
Entitled, developed and under development projects
$
361,978

 
$
361,687

Undeveloped land (includes land in entitlement)
85,918

 
86,367

Commercial and income producing properties
 
 
 
Carrying value
107,560

 
99,476

Less: accumulated depreciation
(28,646
)
 
(28,066
)
Net carrying value
78,914

 
71,410

 
$
526,810

 
$
519,464


Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $63,743,000 at first quarter-end 2014 and $62,183,000 at year-end 2013, including $41,795,000 at first quarter-end 2014 and year-end 2013 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval

6


and reimbursement. We submitted for reimbursement to these districts $4,126,000 in first quarter 2014 and $103,000 in first quarter 2013. We collected reimbursements of $1,536,000 from these districts in first quarter 2014 and $209,000 in first quarter 2013. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.
Also included in entitled, developed and under development projects is our investment in the resort development owned by third parties at our Cibolo Canyons project. We did not receive any payments from the special improvement district in first quarter 2014 or first quarter 2013. At first quarter-end 2014, we have $28,118,000 invested in the resort development.
In first quarter 2014, commercial and income producing properties increased principally due to the acquisition of a multifamily development site in Austin for $8,239,000. At first quarter-end 2014, commercial and income producing properties primarily represents our investment in a 413 guest room hotel in Austin with a carrying value of $27,658,000 and our investment in multifamily development sites located in Charlotte, Denver, Austin and Dallas with a combined carrying value of $50,660,000.
Depreciation expense, primarily related to commercial and income producing properties, was $580,000 in first quarter 2014 and $849,000 in first quarter 2013 and is included in other operating expenses.
Note 4—Oil and Gas Properties and Equipment, net
Net capitalized costs, utilizing the successful efforts method of accounting, related to our oil and gas producing activities follows:
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
Unproved oil and gas properties
$
93,032

 
$
100,320

Proved oil and gas properties
176,936

 
155,262

Total capitalized costs
269,968

 
255,582

Less: accumulated depreciation, depletion and amortization
(27,514
)
 
(22,941
)
 
$
242,454

 
$
232,641

Note 5—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
Goodwill
$
64,493

 
$
64,493

Identified intangibles, net
2,129

 
2,153

 
$
66,622

 
$
66,646

Goodwill of $60,619,000 represents the excess of the purchase price over the fair value of the tangible and intangible assets associated with acquisition of CREDO Petroleum Corporation (Credo) in 2012 and $3,874,000 associated with a water resources company acquired in 2010.
Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with a water resources company acquired in 2010. In addition, identified intangibles includes $590,000 related to patents with definite lives associated with the Calliope Gas Recovery System associated with our acquisition of Credo and is being amortized over the average remaining useful life of the patents. The net carrying value at first quarter-end 2014 is $448,000.

7


Note 6—Equity
A reconciliation of changes in equity at first quarter-end 2014 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2013
$
709,845

 
$
5,552

 
$
715,397

Net income
8,334

 
673

 
$
9,007

Distributions to noncontrolling interests

 
(498
)
 
$
(498
)
Dissolution of noncontrolling interests

 
1,342

 
$
1,342

Purchase of noncontrolling interests, net of deferred taxes of $1,730,000
(2,968
)
 
(3,273
)
 
$
(6,241
)
Other (primarily share-based compensation)
3,124

 

 
$
3,124


$
718,335

 
$
3,796

 
$
722,131


In first quarter 2014, we acquired our partner's noncontrolling interests in all but one of the Lantana partnerships for $7,971,000. Prior to acquisition of the noncontrolling interests, we were the primary beneficiary of all but one of the Lantana partnerships which were variable interest entities (VIEs) and consolidated in our financial statements. We adjusted the carrying amount of noncontrolling interests to reflect the change in our ownership interest in the partnerships. The difference between the consideration paid and the carrying amount of the noncontrolling interests acquired is recognized as an adjustment to additional paid in capital attributable to Forestar, net of deferred taxes.
Note 7—Investment in Unconsolidated Ventures
At first quarter-end 2014, we had ownership interests generally ranging from 25 to 50 percent in 13 ventures that we account for using the equity method. We have no ventures that are accounted for using the cost method.
In first quarter 2014, we created CREA FMF Nashville LLC venture with Massachusetts Mutual Life Insurance Co. to develop a 320-unit multifamily property in Nashville, Tennessee. We contributed $5,897,000 of land and pre-development costs to the venture, net of $7,191,000 of reimbursements received from the venture for pre-development costs we previously incurred. The venture obtained a senior secured construction loan in the amount of $51,950,000 that bears interest at 30-day LIBOR plus 2.50% per annum, of which $9,300,000 was outstanding at first quarter-end 2014. We provide the lender a construction completion guaranty; a guaranty of repayment of 25 percent of the principal balance and unpaid accrued interest; and a nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent of principal to zero upon achievement of certain conditions. At first quarter-end 2014, our investment in this venture is $5,655,000.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
 
Venture Assets
 
Venture Borrowings(a)
 
Venture Equity
 
Our Investment
 
First
Quarter-End
 
Year-End
 
First
Quarter-End
 
Year-End
 
First
Quarter-End
 
Year-End
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
242, LLC (b)
$
22,804

 
$
23,751

 
$
495

 
$
921

 
$
19,371

 
$
19,838

 
$
8,861

 
$
9,084

CJUF III, RH Holdings
38,072

 
36,320

 
21,063

 
18,492

 
15,202

 
15,415

 
3,021

 
3,235

CL Ashton Woods (c)
10,413

 
10,473

 

 

 
9,924

 
9,704

 
3,862

 
3,544

CL Realty
7,988

 
8,298

 

 

 
7,898

 
8,070

 
3,949

 
4,035

CREA FMF Nashville (b)
16,554

 

 
9,300

 

 
6,125

 

 
5,655

 

FMF Peakview
33,678

 
30,673

 
15,148

 
12,533

 
16,547

 
16,620

 
3,391

 
3,406

HM Stonewall Estates (c)
3,322

 
3,781

 

 
63

 
3,320

 
3,718

 
1,896

 
2,128

LM Land Holdings (c)
38,171

 
33,298

 
10,925

 
9,768

 
16,008

 
13,347

 
8,960

 
8,283

PSW Communities
8,901

 

 
4,457

 

 
4,295

 

 
3,811

 

Temco
13,134

 
13,320

 

 

 
12,942

 
13,160

 
6,471

 
6,580

Other ventures (3) (d)
12,275

 
12,723

 
29,720

 
29,699

 
(31,681
)
 
(31,357
)
 
582

 
852

 
$
205,312

 
$
172,637

 
$
91,108

 
$
71,476

 
$
79,951

 
$
68,515

 
$
50,459

 
$
41,147


8


Combined summarized income statement information for our ventures accounted for using the equity method follows:
 
 Venture Revenues
 
 Venture Earnings (Loss)
 
Our Share of Earnings (Loss)
 
First Quarter
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
242, LLC (b)
$
1,475

 
$
1,634

 
$
533

 
$
483

 
$
277

 
$
258

CJUF III, RH Holdings
363

 

 
(213
)
 
(116
)
 
(213
)
 
(116
)
CL Ashton Woods (c)
708

 
1,472

 
220

 
257

 
318

 
577

CL Realty
368

 
428

 
230

 
236

 
115

 
118

CREA FMF Nashville

 

 
(25
)
 

 
(25
)
 

FMF Peakview

 

 
(73
)
 
(32
)
 
(15
)
 
(6
)
HM Stonewall Estates (c) 
1,001

 

 
352

 
(25
)
 
141

 
(6
)
LM Land Holdings (c)
4,898

 
1,311

 
2,927

 
599

 
677

 
168

PSW Communities

 

 
(216
)
 

 
(189
)
 

Temco
60

 
69

 
(18
)
 
(12
)
 
(9
)
 
(6
)
Other ventures (3)
22

 
4,362

 
(48
)
 
(631
)
 
(86
)
 
(74
)
 
$
8,895

 
$
9,276

 
$
3,669

 
$
759

 
$
991

 
$
913

 _____________________
(a) 
Total includes current maturities of $38,261,000 at first quarter-end 2014, of which $38,115,000 is non-recourse to us, and $37,966,000 at year-end 2013, of which $37,822,000 is non-recourse to us.
(b) 
Includes unamortized deferred gains on real estate contributed by us to ventures. We recognize deferred gains as income as real estate is sold to third parties. Deferred gains of $1,648,000 are reflected as a reduction to our investment in unconsolidated ventures at first quarter-end 2014.
(c) 
Includes unrecognized basis difference of $1,836,000 which is reflected as a reduction of our investment in unconsolidated ventures at first quarter-end 2014. The difference will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures.
(d) 
Our investment in other ventures reflects our ownership interests generally ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 16—Variable Interest Entities for additional information.
In first quarter 2014, we contributed $4,293,000 to these ventures and received $1,173,000 in distributions, and in first quarter 2013, we contributed $745,000 to these ventures and received $1,065,000 in distributions. Distributions include both return of investments and distribution of earnings.
We have provided performance bonds and letters of credit on behalf of certain ventures that could be drawn on due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance with local codes and ordinances. At first quarter-end 2014, we have $26,640,000 outstanding, of which $26,577,000 is related to development and construction of a 257-unit multifamily property in Austin estimated to be completed in second quarter 2014.
Note 8—Receivables
Receivables consist of:
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
Loan secured by real estate
$
6,172

 
$
7,610

Other loans secured by real estate, average interest rates of 4.42% at first quarter-end 2014 and 5.00% at year-end 2013
7,892

 
7,987

Oil and gas joint interest billing receivables
5,410

 
3,896

Oil and gas revenue accruals
7,544

 
8,137

Other receivables and accrued interest
4,945

 
11,648

 
31,963

 
39,278

Allowance for bad debts
(26
)
 
(26
)
 
$
31,937

 
$
39,252


9


At first quarter-end 2014, we have $6,172,000 invested in a loan which was acquired from a financial institution in second quarter 2011 when it was non-performing and is secured by a lien on developed and undeveloped real estate located near Houston designated for single-family residential and commercial development. Interest accrues at nine percent the first three years escalating to ten percent in year four and 12 percent in year five, with interest above 6.25 percent to be forgiven if the loan is prepaid by certain dates. In first quarter 2014, we received principal payments of $3,394,000 and cash interest payments of $216,000. At first quarter-end 2014, the outstanding principal balance was $12,305,000.
Estimated accretable yield follows:
 
First
Quarter-End
 
2014
 
(In thousands)
Beginning of period (year-end 2013)
$
8,908

Change in accretable yield due to change in timing of estimated cash flows
(376
)
Interest income recognized (in first three months 2014)
(2,172
)
End of period
$
6,360

Other loans secured by real estate generally are secured by a deed of trust and generally due within three years.
Note 9—Debt
Debt consists of:
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
Senior secured credit facility
 
 
 
Term loan facility — average interest rate of 4.15% at first quarter-end 2014 and 4.17% at year-end 2013
$
200,000

 
$
200,000

3.75% convertible senior notes due 2020, net of discount
100,716

 
99,890

6.00% tangible equity units, net of discount
23,201

 
25,619

Secured promissory notes — average interest rates of 3.15% at first quarter-end 2014 and 3.17% at year-end 2013
15,400

 
15,400

Other indebtedness — interest rates ranging from 5.00% to 5.50% at first quarter-end 2014
6,095

 
16,498

 
$
345,412

 
$
357,407


Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At first quarter-end 2014, we were in compliance with the financial covenants of these agreements.
At first quarter-end 2014, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017, and a $200,000,000 revolving line of credit maturing September 14, 2015. The term loan and the revolving line of credit may be prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $3,705,000 is outstanding at first quarter-end 2014. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At first quarter-end 2014, we had $140,031,000 in net unused borrowing capacity under our senior secured credit facility.
Under the terms of our senior secured credit facility, at our option we can borrow at LIBOR plus 4.0 percent or at the alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate, (ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR plus 1 percent. Borrowings under the senior secured credit facility are or may be secured by (a) mortgages on the timberland, high value timberland and portions of raw entitled land, as well as pledges of other rights including certain oil and gas operating properties, (b) assignments of current and future leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries or majority-owned joint venture interest, or if such pledge is not permitted, a pledge of the right to distributions from such entities, (e) a pledge of reimbursements, hotel occupancy and other revenues payable to us from special improvement district tax collections in connection with our Cibolo Canyons project, and (f) a negative pledge (without a mortgage) on other assets. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.

10


On March 14, 2014, we entered into an amendment to our senior secured credit facility to permit us to incur up to $300,000,000 of additional bond indebtedness. Please see Note 18—Subsequent Event for information about entry into an agreement to issue senior secured notes.
At first quarter-end 2014, secured promissory notes represent a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $27,658,000. Other indebtedness, principally non-recourse, is collateralized by entitled, developed and under development projects with a carrying value of $21,387,000.
At first quarter-end 2014 and year-end 2013, we have $6,995,000 and $7,896,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $901,000 in first quarter 2014 and $829,000 in first quarter 2013 and is included in interest expense.
Note 10—Fair Value
Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, oil and gas properties, assets held for sale, goodwill and other intangible assets, which are measured for impairment. In first quarter 2014 and 2013, no non-financial assets were remeasured at fair value.
We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
 
First Quarter-End 2014
 
Year-End 2013
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Loan secured by real estate
$
6,172

 
$
13,810

 
$
7,610

 
$
18,025

 
Level 2
Fixed rate debt
(123,917
)
 
(113,102
)
 
(126,640
)
 
(118,634
)
 
Level 2

Note 11—Capital Stock
Pursuant to our stockholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our stockholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.
Please read Note 17—Share-Based Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At first quarter-end 2014, personnel of former affiliates held options to purchase 713,000 shares of our common stock. The options have a weighted average exercise price of $26.02 and a weighted average remaining contractual term of two years. At first quarter-end 2014, the options have an aggregate intrinsic value of $60,000.

11


Note 12—Net Income per Share
Basic and diluted earnings per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security. We have determined that our 6.00% tangible equity units (Units) are participating securities. Per share amounts are computed by dividing earnings available to common shareholders by the weighted average shares outstanding during each period.
The computations of basic and diluted earnings per share are as follows:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Numerator:
 
 
 
Consolidated net income
$
9,007

 
$
5,042

Less: Net income attributable to noncontrolling interest
(673
)
 
(1,091
)
Earnings available for diluted earnings per share
$
8,334

 
$
3,951

Less: Undistributed net income allocated to participating securities
(1,295
)
 

Earnings available to common shareholders for basic earnings per share
$
7,039

 
$
3,951

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding — basic
35,576

 
35,259

Weighted average common shares upon conversion of participating securities (a)
7,857

 

Dilutive effect of stock options, restricted stock and equity-settled awards
480

 
463

Total weighted average shares outstanding — diluted
43,913

 
35,722

Anti-dilutive awards excluded from diluted weighted average shares
2,051

 
2,447

 
_____________________
(a) 
Our earnings per share calculation reflects the weighted average shares issuable upon settlement of the prepaid stock purchase contract component of our 6.00% tangible equity units, issued November 27, 2013.
The actual number of shares we may issue upon settlement of the stock purchase contract will be between 6,547,900 shares (the minimum settlement rate) and 7,857,500 shares (the maximum settlement rate) based on the applicable market value, as defined in the purchase contract agreement associated with issuance of the Units.
We intend to settle the principal amount of our convertible senior notes (Convertible Notes) in cash upon conversion with only the amount in excess of par value of the Convertible Notes to be settled in shares of our common stock. Therefore, our calculation of diluted net income per share using the treasury stock method includes only the amount, if any, in excess of par value of the Convertible Notes. As such, the Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the $24.49 conversion price of the Convertible Notes. The average price of our common stock in first quarter 2014 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our effective tax rate was 34 percent in first quarter 2014, which includes a two percent benefit for noncontrolling interests. Our effective tax rate was 28 percent in first quarter 2013, which included an eight percent benefit for noncontrolling interests. In addition, 2014 and 2013 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We have not provided a valuation allowance for our federal deferred tax asset because we believe it is likely it will be recoverable in future periods.
Note 14—Commitments and Contingencies
Litigation
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash flows. However, it is possible that charges related to these matters could be significant to our results or cash flows in any one accounting period.

12


Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that we can reasonably estimate. We own 288 acres near Antioch, California, portions of which were sites of a former paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. We estimate the remaining cost to complete remediation activities will be approximately $1,000,000, which is included in other accrued expenses. It is possible that remediation or monitoring activities could be required in addition to those included within our estimate, but we are unable to determine the scope, timing or extent of such activities.
We have asset retirement obligations related to the abandonment and site restoration requirements that result from the acquisition, construction and development of oil and gas properties. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset retirement cost is included in cost of oil and gas producing activities on our consolidated statements of income and comprehensive income. At first quarter-end 2014, our asset retirement obligation was $1,530,000, which is included in other liabilities.
Note 15—Segment Information
We manage our operations through three segments: real estate, oil and gas and other natural resources. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land, commercial and income producing properties, primarily a hotel and our multifamily investments. Oil and gas is an independent oil and gas exploration, development and production operation and manages our owned and leased mineral interests. Other natural resources manages our timber, recreational leases and water resource initiatives.
Total assets allocated by segment are as follows:
 
First
Quarter-End
 
Year-End
 
2014
 
2013
 
(In thousands)
Real estate
$
592,447

 
$
582,802

Oil and gas
320,972

 
312,553

Other natural resources
23,381

 
23,478

Assets not allocated to segments (a)
206,444

 
253,319

 
$
1,143,244

 
$
1,172,152

  _________________________
(a) 
Assets not allocated to segments at first quarter-end 2014 principally consist of cash and cash equivalents of $147,979,000 and a net deferred tax asset of $39,164,000. Assets not allocated to segments at year-end 2013 principally consist of cash and cash equivalents of $192,307,000 and a net deferred tax asset of $40,398,000.
We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in Note 1—Basis of Presentation. Our revenues are derived from U.S. operations and all of our assets are located in the U.S. In first quarter 2014, revenues of $15,573,000 from one single customer of our real estate segment accounted for more than ten percent of our total revenues as result of selling approximately 8,400 acres of undeveloped land.

13


Segment revenues and earnings are as follows:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Revenues:
 
 
 
Real estate
$
65,480

 
$
78,689

Oil and gas
17,554

 
15,504

Other natural resources
1,571

 
3,278

Total revenues
$
84,605

 
$
97,471

Segment earnings (loss):
 
 
 
Real estate
$
23,575

 
$
19,446

Oil and gas
807

 
5,127

Other natural resources
(528
)
 
1,252

Total segment earnings
23,854

 
25,825

Items not allocated to segments (a)
(10,862
)
 
(19,881
)
Income before taxes attributable to Forestar Group Inc.
$
12,992

 
$
5,944

  _________________________
(a) 
Items not allocated to segments consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
General and administrative expense
$
(5,168
)
 
$
(4,958
)
Shared-based compensation expense
(313
)
 
(10,415
)
Interest expense
(5,503
)
 
(4,539
)
Other corporate non-operating income
122

 
31

 
$
(10,862
)
 
$
(19,881
)
Note 16—Variable Interest Entities
We participate in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use communities in which we may or may not have a controlling financial interest. Generally accepted accounting principles require consolidation of VIEs in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether we are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture agreements and subsequently when reconsideration events occur.
At first quarter-end 2014, we are not the primary beneficiary of four VIEs that we account for using the equity method. Although we have certain rights regarding major decisions, we do not have the power to direct the activities that are most significant to the economic performance of these VIEs. At first quarter-end 2014, these VIEs have total assets of $36,824,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of $58,991,000, which includes $27,336,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method in Note 7—Investment in Unconsolidated Ventures. At first quarter-end 2014, our investment in these VIEs is $10,311,000 and is included in investment in unconsolidated ventures. In first quarter 2014, we contributed $4,293,000 to these VIEs. Our maximum exposure to loss related to one of these VIEs is estimated at $3,663,000, which exceeds our investment as we have a nominal general partner interest and could be held responsible for its liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.

14


Note 17—Share-Based Compensation
Share-based compensation expense consists of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Cash-settled awards
$
(2,683
)
 
$
6,647

Equity-settled awards
2,349

 
1,719

Restricted stock
46

 
395

Stock options
601

 
1,654

 
$
313

 
$
10,415

Share-based compensation expense is included in:
 
First Quarter
 
2014
 
2013
 
(In thousands)
General and administrative expense
$
(23
)
 
$
5,512

Other operating expense
336

 
4,903

 
$
313

 
$
10,415

In first quarter 2014, we granted 92,800 cash-settled awards and 467,200 equity-settled awards. Equity-settled awards granted to employees in the first quarter 2014 include restricted stock units (RSUs), market-leveraged stock units (MSUs) and performance stock units (PSUs). Both cash-settled and equity-settled RSUs vest ratably over three years from the date of grant. Equity-settled MSUs and PSUs vest after three years from the date of grant upon achievement of market condition for MSUs and upon achievement of performance goals for PSUs. Equity-settled awards in the form of RSUs granted to our directors are fully vested at the time of grant and are issued upon retirement. There were no restricted stock awards or stock options granted in first quarter 2014.
The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $760,000 in first quarter 2014 and $590,000 in first quarter 2013. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $14,082,000 at first quarter-end 2014.
In first quarter 2014 and 2013, we issued 167,747 and 13,807 shares out of our treasury stock associated for vesting of stock-based awards or exercise of stock options, net of 46,314 and 54,322 shares withheld having a value of $879,000 and $1,024,000 for payroll taxes in connection with vesting of stock-based awards.
Note 18—Subsequent Event
On May 7, 2014, we entered into an agreement to issue and sell $250,000,000 aggregate principal amount of 8.50% senior secured notes due 2022 (Notes) in a private placement. We expect to close the sale of the Notes on May 12, 2014. The Notes will pay interest semiannually and will mature on June 1, 2022.
Net proceeds from the offering will be used to retire the $200,000,000 term loan under our senior secured credit facility and pay transaction costs and expenses, and we also intend to use the remaining net proceeds for general corporate purposes, which may include strategic growth opportunities.


15


Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of first quarter-end 2014, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;
our ability to achieve some or all of our strategic initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
significant customer concentration;
future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments;
accuracy of estimates and other assumptions related to investment in 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 of acquiring 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 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

16


our ability to execute our growth strategy and deliver acceptable returns from acquisitions and other investments.

Other factors, including the risk factors described in Item 1A of our 2013 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
A summary of our consolidated results by business segment follows:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Revenues:
 
 
 
Real estate
$
65,480

 
$
78,689

Oil and gas
17,554

 
15,504

Other natural resources
1,571

 
3,278

Total revenues
$
84,605

 
$
97,471

Segment earnings (loss):
 
 
 
Real estate
$
23,575

 
$
19,446

Oil and gas
807

 
5,127

Other natural resources
(528
)
 
1,252

Total segment earnings
23,854

 
25,825

Items not allocated to segments:
 
 
 
General and administrative expense
(5,168
)
 
(4,958
)
Share-based compensation expense
(313
)
 
(10,415
)
Interest expense
(5,503
)
 
(4,539
)
Other corporate non-operating income
122

 
31

Income before taxes
12,992

 
5,944

Income tax expense
(4,658
)
 
(1,993
)
Net income attributable to Forestar Group Inc.
$
8,334

 
$
3,951


17


Significant aspects of our results of operations follow:
First Quarter 2014
Real estate segment earnings benefited from increased undeveloped land sales and residential lot sales activity.
Oil and gas segment earnings decreased principally due to higher exploration, production and operating expenses which were partially offset by higher working interest production volumes compared with first quarter 2013. In addition, segment earnings were negatively impacted by lower production volumes and delay rental revenues associated with our owned mineral interests.
Other natural resources segment earnings decreased primarily due to lower fiber volumes.
First quarter 2014 share-based compensation expense decreased principally as result of a 16 percent decrease in our stock price since year-end 2013, compared with a 26 percent increase in our stock price in first quarter 2013 since year-end 2012, which impacted the value of vested cash-settled awards.
First quarter 2014 net income increased principally due to the reduction in shared-based compensation expense compared with first quarter 2013.
First Quarter 2013
Real estate segment earnings benefited from selling Promesa for $41,000,000, a 289-unit multifamily property we developed in Austin, generating approximately $10,881,000 in segment earnings. In addition, segment earnings also benefited from increased residential lot sales activity, undeveloped land sales from our retail program and commercial tract sales.
Oil and gas segment earnings decreased principally due to lower oil and gas production volumes and average prices and lower delay rental payments received related to our owned mineral interests. This decrease was partially offset by higher working interest production volume and earnings attributable to our exploration and production operations as result of our acquisition of Credo in 2012.
Other natural resources segment earnings benefited from higher levels of harvesting activity which was driven by customer demand and was partially offset by costs of our water resources initiatives.
Share-based compensation expense increased principally as result of a 26 percent increase in our stock price which impacted the value of vested cash-settled awards.
Current Market Conditions
U.S. single-family residential market conditions continued to improve in first quarter 2014, driven by a growing demand for homes and a tightening supply of homes available for sale. Housing demand has been fueled primarily by improved housing affordability, largely due to relatively low mortgage rates, and increased consumer confidence. Inventories of new homes are at historically low levels in many areas. In addition, declining finished lot inventories and supply of economically developable raw land is increasing demand for our developed lots. However, persistently high unemployment levels, national and global economic weakness and uncertainty, and a restrictive mortgage lending environment continue to threaten a robust recovery in the housing market. Multifamily market conditions continue to be strong, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven primarily by limited housing inventory, reduced single-family mortgage credit availability, and the increased propensity to rent among the 18 to 34 year old demographic of the U.S. population.
Oil prices have continued to strengthen over the last several months and generally have been stronger over the last two years. Gas prices are up over 50 percent from year ago levels, but are significantly lower than realized prices over the last decade.  Prolonged cold weather throughout the 2013 - 2014 heating season has taken working gas in storage below the midpoint of the five year average causing gas prices to recover from their lows of a year ago.  Exploration and development activity continues to be oil focused due to the premium price of oil over gas when comparing energy equivalency and current estimates of domestic gas producing supplies are believed to be sufficient.
Business Segments
We manage our operations through three business segments:
Real estate,
Oil and gas, and
Other natural resources.

18


We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.
We operate in cyclical industries. Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, consumer and home builder sentiment, new housing starts, real estate values, employment levels, changes in the market prices for oil, gas and timber, and the overall strength or weakness of the U.S. economy.
Real Estate
We own directly or through ventures 119,000 acres of real estate located in ten states and 13 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own approximately 95,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in our strategic growth corridors, regions across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential single-family lots and tracts, undeveloped land and commercial real estate, and from the operation of income producing properties, primarily a hotel and multifamily properties we may develop and sell as a merchant builder.
A summary of our real estate results follows:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Revenues
$
65,480

 
$
78,689

Cost of sales
(36,184
)
 
(53,046
)
Operating expenses
(8,075
)
 
(6,972
)
 
21,221

 
18,671

Interest income on loan secured by real estate
2,172

 
1,110

Equity in earnings of unconsolidated ventures
855

 
756

Less: Net income attributable to noncontrolling interests
(673
)
 
(1,091
)
Segment earnings
$
23,575

 
$
19,446

First quarter 2014 revenues were principally driven by residential real estate and undeveloped land sales. In addition, first quarter 2014 revenues include construction revenues of $3,233,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor. We are reimbursed for costs paid to subcontractors plus we may earn a development and construction fee on certain projects, both of which are included in commercial and income producing properties revenue. Revenues associated with multifamily construction contracts for first quarter 2013 were $6,146,000.
First quarter 2014 cost of sales includes $5,502,000 related to multifamily construction contract costs we incurred as general contractor and paid to subcontractors associated with our development of two multifamily venture properties, which includes a $2,269,000 charge absorbed by us reflecting estimated cost increases associated with our fixed fee contract as a general contractor for these two multifamily venture properties. Cost of sales associated with multifamily construction contracts for first quarter 2013 were $6,146,000. First quarter 2013 cost of sales also included $29,707,000 in carrying value related to Promesa, a 289-unit multifamily property we developed as a merchant builder and sold.
Interest income principally represents earnings from a loan we hold which is secured by a mixed-use real estate community in Houston.
In first quarter 2014, the decrease in net income attributable to noncontrolling interests compared with first quarter 2013 is principally due to the purchase of the 45 percent noncontrolling interests in all but one of the Lantana ventures for $7,971,000 on March 12, 2014.

19


Revenues in our owned and consolidated ventures consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Residential real estate
$
35,261

 
$
19,102

Commercial real estate
171

 
1,251

Undeveloped land
19,713

 
2,709

Commercial and income producing properties
9,933

 
54,171

Other
402

 
1,456

 
$
65,480

 
$
78,689


Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. Revenues increased in first quarter 2014 compared with first quarter 2013 due to increased lot sales volume offset by lower average price per lot sold. In addition, in first quarter 2014, we sold 831 undeveloped residential tract acres for $1,512,000 which generated segment earnings of $524,000.
In first quarter 2014, undeveloped land sales increased as compared with first quarter 2013 due to sale of 9,329 acres for $19,713,000, or approximately $2,100 per acre, generating approximately $16,233,000 in segment earnings.
In first quarter 2014, commercial and income producing properties revenue decreased compared with first quarter 2013 as a result of the first quarter 2013 sale of Promesa, a 289-unit multifamily property in Austin which we developed and sold as a merchant builder for $41,000,000 generating segment earnings of $10,881,000.
In first quarter 2014, revenues related to our 413 guest room hotel in Austin were up $456,000 when compared with first quarter 2013, primarily due to higher average room rates and food and beverage sales.
Units sold in our owned and consolidated ventures consist of:
 
First Quarter
 
2014
 
2013
Residential real estate:
 
 
 
Lots sold
836

 
355

Revenue per lot sold
$
40,161

 
$
52,460

Commercial real estate:
 
 
 
Acres sold

 
3

Revenue per acre sold
$

 
$
382,741

Undeveloped land:
 
 
 
Acres sold
9,329

 
919

Revenue per acre sold
$
2,113

 
$
2,949

Operating expenses consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Employee compensation and benefits
$
2,858

 
$
1,372

Property taxes
1,586

 
1,996

Professional services
1,139

 
1,170

Depreciation and amortization
648

 
1,029

Other
1,844

 
1,405

 
$
8,075

 
$
6,972



20


Information about our real estate projects and our real estate ventures follows:
 
First
Quarter-End
 
2014
 
2013
Owned and consolidated ventures:
 
 
 
Entitled, developed and under development projects
 
 
 
Number of projects
63

 
65

Residential lots remaining
15,715

 
19,938

Commercial acres remaining
1,832

 
2,048

Undeveloped land and land in the entitlement process
 
 
 
Number of projects
12

 
14

Acres in entitlement process
25,390

 
25,980

Acres undeveloped
76,638

 
88,789

Ventures accounted for using the equity method:
 
 
 
Ventures’ lot sales (for first quarter)
 
 
 
Lots sold
138

 
91

Average price per lot sold
$
57,410

 
$
49,642

Ventures’ entitled, developed and under development projects
 
 
 
Number of projects
8

 
7

Residential lots remaining
3,077

 
3,625

Commercial acres sold (for first quarter)

 

Average price per acre sold
$

 
$

Commercial acres remaining
240

 
321

Ventures’ undeveloped land and land in the entitlement process
 
 
 
Acres sold (for first quarter)

 

Average price per acre sold
$

 
$

Acres undeveloped
5,547

 
5,655

We underwrite development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment charge for such project.
Our net investment in owned and consolidated real estate by geographic location follows:
State
Entitled,
Developed,
and Under
Development
Projects
 
Undeveloped
Land and Land in Entitlement Process
 
Commercial
and Income
Producing
Properties
 
Total
 
(In thousands)
Texas
$
297,001

 
$
6,797

 
$
50,851

 
$
354,649

Georgia
18,141

 
56,017

 

 
74,158

Colorado
21,368

 

 
14,595

 
35,963

California
8,915

 
22,081

 

 
30,996

North Carolina

 

 
13,468

 
13,468

Tennessee
8,599

 
736

 

 
9,335

Other
7,954

 
287

 

 
8,241

 
$
361,978

 
$
85,918

 
$
78,914

 
$
526,810


21


Oil and Gas
Our oil and gas segment is focused on the exploration, development and production of oil and gas on our mineral and leasehold interests.
We are an independent oil and gas exploration, development and production company. We have approximately 273,000 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 Tonkawa and Cleveland formations, and in North Dakota primarily targeting the Bakken and Three Forks formations. Our leasehold interests include 37,000 net acres held by production and 467 gross oil and gas wells with working interest ownership, of which 185 are operated by us. These leasehold interests include about 8,000 net mineral acres in North Dakota focused on the Bakken and Three Forks formations.
In addition, we lease portions of our 590,000 owned net mineral acres located principally in Texas, Louisiana, Georgia and Alabama to other oil and gas companies in return for a lease bonus, delay rentals and a royalty interest, and we may negotiate an option to participate in oil and gas exploration and development or we may elect to drill as an operator. At first quarter-end 2014, we have about 29,000 net acres leased to others, about 36,000 net acres leased to others that are held by production and 547 gross productive wells operated by others on our owned mineral acres. Most leases are for a three to five year term although all or a portion of a lease may be extended as long as actual production is occurring.
A summary of our oil and gas results follows:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Revenues
$
17,554

 
$
15,504

Cost of oil and gas producing activities
(12,620
)
 
(7,834
)
Operating expenses
(4,259
)
 
(2,690
)
 
675

 
4,980

Equity in earnings of unconsolidated ventures
132

 
147

Segment earnings
$
807

 
$
5,127

Revenues consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Oil production (a)
$
14,994

 
$
13,188

Gas production
1,941

 
1,729

Other
619

 
587

 
$
17,554

 
$
15,504

 _________________________
(a) 
Oil production includes revenues from oil, condensate and natural gas liquids (NGLs).
In first quarter 2014, oil and gas production revenues increased principally as a result of higher production volumes. Increased oil production volume contributed $2,152,000, offset by lower oil prices which negatively impacted revenues by $346,000. Decreased gas production volume negatively impacted revenues by $296,000, offset by higher gas prices increasing revenues by $508,000 as compared with first quarter 2013.
In first quarter 2014, other revenues includes $598,000 in lease bonuses received from leasing approximately 1,700 net mineral acres owned in Texas and Louisiana. In first quarter 2013, other revenues include $458,000 in delay rental payments received from others associated with our owned mineral interests principally related to extending the lease term on approximately 1,300 net mineral acres.

22


Cost of oil and gas producing activities consists of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Depletion and amortization
$
4,596

 
$
3,563

Exploration costs
4,135

 
1,308

Production costs
3,848

 
2,798

Other
41

 
165

 
$
12,620

 
$
7,834

In first quarter 2014, cost of oil and gas producing activities increased compared with first quarter 2013 due to higher exploration, production and operating expenses. Depletion and amortization represent the non-cash cost of producing oil and gas associated with our working interests and is computed based on the units of production method. Production costs principally represent our share of production severance taxes related to both our royalty and working interests and lease operating expenses associated with producing working interest wells. Exploration costs principally represent exploratory dry hole costs, geological and geophysical and seismic study costs.

Oil and gas produced and average unit prices related to our royalty and working interests follows:
 
First Quarter
 
2014
 
2013
Consolidated entities:
 
 
 
Oil production (barrels)
157,000

 
133,400

Average oil price per barrel
$
91.40

 
$
95.39

NGL production (barrels)
15,000

 
14,500

Average NGL price per barrel
$
43.11

 
$
31.98

Total oil production (barrels), including NGLs
172,000

 
147,900

Average total oil price per barrel, including NGLs
$
87.18

 
$
89.19

Gas production (millions of cubic feet)
433.8

 
523.6

Average price per thousand cubic feet
$
4.47

 
$
3.30

Our share of ventures accounted for using the equity method:
 
 
 
Gas production (millions of cubic feet)
52.7

 
70.2

Average price per thousand cubic feet
$
3.49

 
$
3.05

Total consolidated and our share of equity method ventures:
 
 
 
Oil production (barrels)
157,000

 
133,400

Average oil price per barrel
$
91.40

 
$
95.39

NGL production (barrels)
15,000

 
14,500

Average NGL price per barrel
$
43.11

 
$
31.98

Total oil production (barrels), including NGLs
172,000

 
147,900

Average total oil price per barrel, including NGLs
$
87.18

 
$
89.19

Gas production (millions of cubic feet)
486.5

 
593.8

Average price per thousand cubic feet
$
4.37

 
$
3.27

Total BOE (barrel of oil equivalent) (a)
253,100

 
246,800

Average price per barrel of oil equivalent
$
67.64

 
$
61.30

 _________________________
(a) 
Gas is converted to barrels of oil equivalent (BOE) using a conversion of six Mcf to one barrel of oil.

23


Operating expenses consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Employee compensation and benefits
$
2,571

 
$
1,869

Professional and consulting services
389

 
258

Depreciation
251

 
159

Property taxes
276

 
82

Other
772

 
322

 
$
4,259

 
$
2,690

First quarter 2014 operating expenses increased compared with first quarter 2013, primarily as a result of increased personnel costs for additional staffing hired in the second half of 2013 to support our oil and gas operations as an independent exploration, development and production company.
Other Natural Resources
Our other natural resources segment manages our timber holdings, recreational leases and water resource initiatives. At first quarter-end 2014, we have about 108,000 real estate acres we own directly or through ventures, primarily in Georgia, with timber, and about 14,000 acres of timber under lease. Our other natural resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. We have water interests in approximately 1.5 million acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama, and approximately 20,000 acres of ground water leases in central Texas. We have not received significant revenue or earnings from these interests.

A summary of our other natural resources results follows:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Revenues
$
1,571

 
$
3,278

Cost of sales
(776
)
 
(692
)
Operating expenses
(1,327
)
 
(1,344
)
 
(532
)
 
1,242

Equity in earnings of unconsolidated ventures
4

 
10

Segment earnings (loss)
$
(528
)
 
$
1,252

Cost of sales principally includes non-cash cost of timber cut and sold and delay rental payments paid to others related to groundwater leases in central Texas.
Revenues consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Fiber
$
1,303

 
$
2,989

Recreational leases and other
268

 
289

 
$
1,571

 
$
3,278


24


Fiber sold consists of:
 
First Quarter
 
2014
 
2013
Pulpwood tons sold
28,200

 
120,600

Average pulpwood price per ton
$
9.66

 
$
9.76

Sawtimber tons sold
28,900

 
70,900

Average sawtimber price per ton
$
21.71

 
$
22.36

Total tons sold
57,100

 
191,500

Average stumpage price per ton (a)
$
15.77

 
$
14.43

 _________________________
(a) 
Average stumpage price per ton is based on gross revenues less cut and haul costs.
In first quarter 2014, total fiber revenues decreased compared with first quarter 2013, due to decreased harvest activity due to higher mill inventories, offset partially by higher average prices.
Information about our recreational leases follows:
 
First Quarter
 
2014
 
2013
Average recreational acres leased
115,200

 
122,700

Average price per leased acre
$
9.24

 
$
9.15

Operating expenses consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Professional and consulting services
$
675

 
$
707

Employee compensation and benefits
505

 
442

Facility and long-term timber lease costs
38

 
79

Other
109

 
116

 
$
1,327

 
$
1,344


Items Not Allocated to Segments
Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. General and administrative expenses principally consist of accounting and finance, tax, legal, human resources, internal audit, information technology and our board of directors. These functions support all of our business segments and are not allocated.
General and administrative expenses consist of:
 
First Quarter
 
2014
 
2013
 
(In thousands)
Employee compensation and benefits
$
2,261

 
$
2,136

Professional services
742

 
837

Depreciation and amortization
144

 
224

Insurance costs
275

 
202

Facility costs
228

 
200

Other
1,518

 
1,359

 
$
5,168

 
$
4,958

Income Taxes
Our effective tax rate was 34 percent in first quarter 2014, which includes a two percent benefit for noncontrolling interests. Our effective tax rate was 28 percent in first quarter 2013, which includes an eight percent benefit for noncontrolling

25


interests. Our 2014 and 2013 effective tax rates also include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We have not provided a valuation allowance for our federal deferred tax asset because we believe it is likely it will be recoverable in future periods based on considerations including taxable income in prior carryback years, future reversals of existing temporary differences, tax planning strategies and future taxable income. If these sources of income are not sufficient in future periods, we may be required to provide a valuation allowance for our federal deferred tax asset.
Capital Resources and Liquidity
Sources and Uses of Cash
We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from oil and gas and income producing properties, borrowings and reimbursements from utility and improvement districts. Our principal cash requirements are for the acquisition and development of real estate and investment in oil and gas leasing and production activities, either directly or indirectly through ventures, taxes, interest and compensation. Operating cash flows are affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements and availability of utilities, and by the timing of oil and gas leasing and production activities. Working capital varies based on a variety of factors, including the timing of sales of real estate and timber, oil and gas leasing and production activities, collection of receivables, reimbursement from utility and improvement districts and the payment of payables and expenses.
We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. We may, at any time, be considering or be in discussions with respect to the purchase or sale of our common stock, debt securities, convertible securities or a combination thereof.
Cash Flows from Operating Activities
Cash flows from our real estate development activities, undeveloped land sales, commercial and income producing properties, timber sales, income from oil and gas properties, recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.
In first quarter 2014, net cash provided by operating activities was $5,543,000 principally as result of selling 9,329 acres for $19,713,000. This is partially offset by real estate development and acquisition expenditures exceeding real estate cost of sales. In first quarter 2013, net cash provided by operating activities was $33,295,000 principally as result of selling Promesa for $41,000,000, a 289-unit multifamily property we developed, generating net proceeds to us of $21,522,000. Real estate cost of sales, which include $29,707,000 in carrying value related to the sale of Promesa, exceeded expenditures for real estate development and acquisition expenditures, which includes the acquisition of one community development site in Nashville for $6,841,000.

Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures, business acquisitions and investment in oil and gas properties and equipment are classified as investing activities. In addition, proceeds from the sale of property and equipment, software costs and expenditures related to reforestation activities are also classified as investing activities.
In first quarter 2014, net cash used in investing activities was $28,194,000 principally due to our investment of $19,357,000 in oil and gas properties and equipment associated with our exploration and production operations. In addition, we invested $4,699,000 in property and equipment, software and reforestation and a net investment in unconsolidated ventures of $4,138,000. In first quarter 2013, net cash used for investing activities was $13,501,000 principally due to our investment of $12,980,000 in oil and gas properties and equipment associated with our exploration and production operations.
Cash Flows from Financing Activities
In first quarter 2014, net cash used by financing activities was $21,677,000 principally due to debt repayments of $15,711,000, of which $2,878,000 is related to debt outstanding for our Lantana partnerships and $2,700,000 is related to first installment payment of our amortizing notes associated with our tangible equity units, and the remaining associated with payment of other indebtedness. In first quarter 2013, net cash provided by financing activities was $56,498,000 principally due to net proceeds of $120,795,000 from the issuance of our 3.75% convertible senior notes partially offset by debt repayments of $90,748,000, of which $68,000,000 is related to outstanding borrowings under our senior secured credit facility and $18,902,000 is related to paying off the loan associated with Promesa.

26


Real Estate Acquisition and Development Activities
We secure entitlements and develop infrastructure, primarily for single family residential and mixed-use communities. We also 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 market the properties for sale.
We categorize real estate development and acquisition expenditures as operating activities on the statement of cash flows. These development and acquisition expenditures include costs for development of residential lots and mixed-used communities and multifamily community projects we develop and sell as a merchant builder.
In first quarter 2014, net real estate development and acquisition expenditures were $35,035,000 which includes the acquisition of two new community development sites for $9,849,000, a multifamily site in Austin for $8,239,000 and real estate development costs of $16,647,000.
Drilling and Other Exploration and Development Activities
In first quarter 2014, we participated in 21 gross wells and at first quarter-end 2014, there were 1,014 gross productive wells. In first quarter 2014, we acquired leasehold interests in over 29,000 net mineral acres in new and existing projects for $5,070,000. Also, leasehold interests of approximately 7,000 net mineral acres expired in the normal course of business.
For full year 2014, our current plan is to drill or participate as a non-operator in approximately 235 gross wells. Regional allocation of our capital expenditures incurred for drilling and completion activity in first quarter 2014 as compared with our 2014 projected annual drilling and completion capital expenditures is shown below:
 
Drilling and Completion Expenditures
 
First Quarter
 
Projected
 
2014
 
2014
 
(In thousands)
Bakken and Three Forks formations of North Dakota
$
9,309

 
$
61,000

Lansing - Kansas City formation of Nebraska and Kansas
4,217

 
18,300

Other formations principally in Texas and Oklahoma
761

 
21,500

 
$
14,287

 
$
100,800

Our accrued capital expenditures for drilling and completion costs and leasehold acquisitions at first quarter-end 2014 were $10,314,000 and are included in other accrued expenses in our consolidated balance sheets. These oil and gas property additions will be reflected as cash used for investing activities in the period the accrued payables are settled.
Our 2014 projected capital expenditures are 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 interest, we may decide to pursue incremental leasehold acquisitions which would require us to adjust our budget. Other factors that could cause us to adjust our projections include commodity prices, service or material costs, opportunities, changes in conditions, or the performance of wells. We will continue to assess the gas and oil price environment along with our liquidity position and may increase or decrease our capital expenditure budget for exploration, development, or acquisition opportunities accordingly.
Liquidity
At first quarter-end 2014, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017 and a $200,000,000 revolving line of credit maturing September 14, 2015 (with one-year extension option). The term loan and the revolving line of credit may be prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $3,705,000 is outstanding at first quarter-end 2014. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula.

27


At first quarter-end 2014, net unused borrowing capacity under our senior secured credit facility is calculated as follows:
 
Senior Credit
Facility
 
(In thousands)
Borrowing base availability
$
343,736

Less: borrowings
(200,000
)
Less: letters of credit
(3,705
)
 
$
140,031

Our unused borrowing capacity in first quarter 2014 ranged from a high of $157,066,000 to a low of $140,031,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential and commercial real estate sales, undeveloped land sales, oil and gas leasing and production activities and mineral lease bonus payments received, timber sales, reimbursements from utility and improvement districts, payment of payables and expenses and capital expenditures.
Our senior secured credit facility and other debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At first quarter-end 2014, we were in compliance with the financial covenants of these agreements.
The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:
Financial Covenant
Requirement
 
First Quarter-End 2014
Interest Coverage Ratio (a)
≥1.50:1.0
 
5.87:1.0

Revenues/Capital Expenditures Ratio (b)
≥1.00:1.0
 
2.26:1.0

Total Leverage Ratio (c)
≤40%
 
36.2
%
Net Worth (d)
≥$579.0 million
 
$677.4 million

Collateral Value to Loan Commitment Ratio (e)
≥1.50:1.0
 
1.64:1.0

 ___________________________________
(a) 
Calculated as EBITDA (earnings before interest, taxes, depreciation, depletion and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is applied at the end of each quarter on a rolling four quarter basis.
(b) 
Calculated as total gross revenues (excluding revenues attributable to the Credo entities), plus our pro rata share of the operating revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures, and excludes investments related to Credo. This covenant is applied at the end of each quarter on a rolling four quarter basis.
(c) 
Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities, reimbursement obligations with respect to letters of credit or similar instruments, and our pro-rata share of joint venture debt outstanding. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business, Credo asset value, special improvement district receipts (SIDR) reimbursements value, Cibolo Resort Special improvement district hotel occupancy tax (SIDHT) value and other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.
(d) 
Calculated as the amount by which consolidated total assets (excluding Credo acquisition goodwill over $50,000,000) exceeds consolidated total liabilities. At first quarter-end 2014, the requirement is $579,049,000 computed as: $572,799,000 plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis. This covenant is applied at the end of each quarter.
(e) 
Calculated as the total collateral value of timberland, high value timberland and our minerals business, raw entitled land that is part of mortgaged property, Credo asset value, SIDR reimbursements value and Cibolo Resort SIDHT value divided by total aggregate loan commitment. This covenant is applied at the end of each quarter.
To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to 10 percent of the aggregate commitments in place. At first quarter-end 2014, the minimum liquidity requirement was $40,000,000, compared with $285,848,000 in actual available liquidity based on the unused borrowing capacity under our senior secured credit facility

28


plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility. In addition, we may elect to make distributions so long as the total leverage ratio is less than 30 percent, the interest coverage is greater than 3.0:1.0, the revenues / capital expenditures ratio exceeds 1.5:1.0, and available liquidity is not less than $125,000,000. At first quarter-end 2014, our total leverage ratio exceeded 30 percent and as a result we are prohibited from making distributions until the above conditions are satisfied.
On March 14, 2014, we entered into an amendment to our senior secured credit facility to permit us to incur up to $300,000,000 of additional bond indebtedness. On May 7, 2014, we entered into an agreement to issue and sell $250,000,000 aggregate principal amount of 8.50% senior secured notes due 2022 (Notes) in a private placement. We expect to close the sale of the Notes on May 12, 2014. The Notes will pay interest semiannually and will mature on June 1, 2022. Net proceeds from the offering will be used to retire the $200,000,000 term loan under our senior secured credit facility and pay transaction costs and expenses, and we also intend to use the remaining net proceeds for general corporate purposes, which may include strategic growth opportunities.
Contractual Obligations and Off-Balance Sheet Arrangements
On January 17, 2014, CREA FMF Nashville LLC, an equity method venture, obtained a senior secured construction loan in the amount of $51,950,000 to develop a 320-unit multifamily project located in Nashville, Tennessee. The outstanding balance at first quarter-end 2014 was $9,300,000. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest ; and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent of principal to zero percent upon achievement of certain conditions.
In 2012, CJUF III RH Holdings LP, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $23,936,000 to develop a 257-unit multifamily property in downtown Austin. The outstanding balance at first quarter-end 2014 was $21,063,000. We have a construction completion guaranty, a repayment guaranty for 20 percent of the principal balance and unpaid accrued interest, and a standard non-recourse carve-out guaranty. The repayment guaranty will reduce from 20 percent of principal upon achievement of certain conditions to zero percent.
In 2012, FMF Peakview LLC, an equity method venture in which we own a 20 percent interest, obtained a senior secured construction loan in the amount of $31,550,000 to develop a 304-unit multifamily property in Denver. The outstanding balance at first quarter-end 2014 was $15,148,000. We have a construction completion guaranty, a repayment guaranty for 25 percent of the principal and unpaid accrued interest, and a standard non-recourse carve-out guaranty.
We have provided performance bonds and letters of credit on behalf of certain ventures that could be drawn on due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance with local codes and ordinances. At first quarter-end 2014, we have $26,640,000 outstanding, of which $26,577,000 is related to the development and construction of a 257-unit multifamily property in Austin estimated to be completed in May 2014.
Cibolo Canyons—San Antonio, Texas
Cibolo Canyons consists of the JW Marriott ® San Antonio Hill Country Resort & Spa development owned by third parties and a mixed-use development we own. We have $79,831,000 invested in Cibolo Canyons at first quarter-end 2014.
Resort Hotel, Spa and Golf Development
In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott ® San Antonio Hill Country Resort & Spa, which includes a 1,002 room destination resort and two PGA Tour ® Tournament Players Club ® (TPC) golf courses. Under these agreements, we agreed to transfer to third party owners 700 acres of undeveloped land, to provide $30,000,000 cash and to provide $12,700,000 of other consideration principally consisting of golf course construction materials, substantially all of which has been provided.
In exchange for our commitment to the resort, the third party owners assigned to us certain rights under an agreement between the third party owners and a legislatively created Special Improvement District (SID). This agreement includes the right to receive from the SID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by the SID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by the SID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service, if any, on bonds issued by the SID collateralized by hotel occupancy tax and other resort sales tax through 2034.
The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the resort and the amount of any applicable debt service incurred by the SID. As a result, there is significant uncertainty as to the amount and timing of collections under this agreement. Until these

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uncertainties are clarified, amounts collected under the agreement will be accounted for as a reduction of our investment in the resort development. The resort began operations in January 2010.
In first quarter 2014, we did not receive any reimbursements from the SID. Since inception, we have received $15,156,000 in reimbursements and have accounted for this as a reduction of our investment. At first quarter-end 2014, we have $28,118,000 invested in the resort development.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include approximately 1,566 residential lots and 150 commercial acres designated for multifamily and retail uses, of which 815 lots and 130 commercial acres have been sold through first quarter-end 2014.
In 2007, we entered into an agreement with the SID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by the SID and unreimbursed amounts accrue interest at 9.75 percent. The SID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses.
Since the amount of each reimbursement is dependent on several factors, including timing of SID approval and the SID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.
Through first quarter-end 2014, we have submitted and received approval for reimbursement of approximately $65,465,000 of infrastructure costs and have received reimbursements totaling $23,670,000. In first quarter 2014, we did not receive any reimbursements from the SID. At first quarter-end 2014, we have $41,795,000 in pending reimbursements, excluding interest. At first quarter-end 2014, we have $51,713,000 invested in the mixed-use development.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2013 Annual Report on Form 10-K.
New and Pending Accounting Pronouncements
Please read Note 2—New and Pending Accounting Pronouncements to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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Statistical and Other Data
A summary of our real estate projects in the entitlement process (a) at first quarter-end 2014 follows:
Project
County
 
Market
 
Project Acres (b)
California
 
 
 
 
 
Hidden Creek Estates
Los Angeles
 
Los Angeles
 
700

Terrace at Hidden Hills
Los Angeles
 
Los Angeles
 
30

Georgia
 
 
 
 
 
Ball Ground
Cherokee
 
Atlanta
 
500

Crossing
Coweta
 
Atlanta
 
230

Fincher Road
Cherokee
 
Atlanta
 
3,890

Fox Hall
Coweta
 
Atlanta
 
960

Garland Mountain
Cherokee/Bartow
 
Atlanta
 
350

Martin’s Bridge
Banks
 
Atlanta
 
970

Mill Creek
Coweta
 
Atlanta
 
770

Wolf Creek
Carroll/Douglas
 
Atlanta
 
12,230

Yellow Creek
Cherokee
 
Atlanta
 
1,060

Texas
 
 
 
 
 
Lake Houston
Harris/Liberty
 
Houston
 
3,700

Total
 
 
 
 
25,390

 _________________________
(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.
A summary of activity within our active projects in the development process, which includes entitled (a), developed and under development real estate projects, at first quarter-end 2014 follows:
 
 
 
 
 
Residential Lots (c)
 
Commercial Acres (d)
Project
County
 
Interest
    Owned (b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres Sold
Since
Inception