10-Q 1 for-0930201510q.htm 10-Q 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33662
_________________________________________________________  
FORESTAR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
 _________________________________________________________ 
Delaware
 
26-1336998
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)
(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)
 _________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Number of Shares Outstanding as of November 2, 2015
Common Stock, par value $1.00 per share
 
33,616,255
 



FORESTAR GROUP INC.
TABLE OF CONTENTS
 

2


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands, except share data)
ASSETS
 
Cash and cash equivalents
$
92,640

 
$
170,127

Real estate, net
620,813

 
575,756

Oil and gas properties and equipment, net
121,775

 
263,493

Investment in unconsolidated ventures
85,325

 
65,005

Timber
8,320

 
8,315

Receivables, net
13,212

 
24,589

Income taxes receivable
3,878

 
7,503

Prepaid expenses
2,714

 
6,000

Property and equipment, net
10,727

 
11,627

Deferred tax asset, net
1,118

 
40,624

Goodwill and other intangible assets
63,440

 
66,131

Other assets
17,254

 
19,029

TOTAL ASSETS
$
1,041,216

 
$
1,258,199

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
13,976

 
$
20,400

Accrued employee compensation and benefits
8,532

 
8,323

Accrued property taxes
7,839

 
5,966

Accrued interest
7,607

 
3,451

Earnest money deposits
10,172

 
10,045

Other accrued expenses
21,573

 
35,729

Other liabilities
27,817

 
31,799

Debt
435,295

 
432,744

TOTAL LIABILITIES
532,811

 
548,457

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Forestar Group Inc. shareholders’ equity:
 
 
 
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at third quarter-end 2015 and year-end 2014
36,947

 
36,947

Additional paid-in capital
562,591

 
558,945

Retained earnings (Accumulated deficit)
(39,880
)
 
167,001

Treasury stock, at cost, 3,329,060 shares at third quarter-end 2015 and 3,485,278 shares at year-end 2014
(53,085
)
 
(55,691
)
Total Forestar Group Inc. shareholders’ equity
506,573

 
707,202

Noncontrolling interests
1,832

 
2,540

TOTAL EQUITY
508,405

 
709,742

TOTAL LIABILITIES AND EQUITY
$
1,041,216

 
$
1,258,199

Please read the notes to consolidated financial statements.

3


FORESTAR GROUP INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share amounts)
REVENUES
 
 
 
 
 
 
 
Real estate sales and other
$
18,369

 
$
23,067

 
$
68,630

 
$
122,738

Commercial and income producing properties
9,588

 
9,378

 
31,566

 
30,360

Real estate
27,957

 
32,445

 
100,196

 
153,098

Oil and gas
13,485

 
24,145

 
42,835

 
66,076

Other natural resources
1,726

 
2,250

 
5,372

 
7,284

 
43,168

 
58,840

 
148,403

 
226,458

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of real estate sales and other
(9,588
)
 
(10,662
)
 
(33,840
)
 
(60,145
)
Cost of commercial and income producing properties
(6,780
)
 
(9,391
)
 
(22,020
)
 
(28,117
)
Cost of oil and gas producing activities
(95,553
)
 
(18,470
)
 
(177,236
)
 
(48,016
)
Cost of other natural resources
(819
)
 
(711
)
 
(2,599
)
 
(2,288
)
Other operating
(13,963
)
 
(12,860
)
 
(45,665
)
 
(43,187
)
General and administrative
(9,467
)
 
(5,140
)
 
(22,510
)
 
(17,141
)
 
(136,170
)
 
(57,234
)
 
(303,870
)
 
(198,894
)
GAIN (LOSS) ON SALE OF ASSETS
(1,749
)
 
11,110

 
265

 
27,977

OPERATING INCOME (LOSS)
(94,751
)
 
12,716

 
(155,202
)
 
55,541

Equity in earnings of unconsolidated ventures
2,909

 
2,016

 
11,538

 
3,965

Interest expense
(8,315
)
 
(8,634
)
 
(25,851
)
 
(21,507
)
Other non-operating income
62

 
1,896

 
1,762

 
6,459

INCOME (LOSS) BEFORE TAXES
(100,095
)
 
7,994

 
(167,753
)
 
44,458

Income tax benefit (expense)
(64,236
)
 
(2,755
)
 
(39,133
)
 
(15,464
)
CONSOLIDATED NET INCOME (LOSS)
(164,331
)
 
5,239

 
(206,886
)
 
28,994

Less: Net (income) loss attributable to noncontrolling interests
115

 
(12
)
 
5

 
(611
)
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.
$
(164,216
)
 
$
5,227

 
$
(206,881
)
 
$
28,383

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
34,299

 
35,498

 
34,248

 
35,437

Diluted
34,299

 
43,868

 
34,248

 
43,750

NET INCOME (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
(4.79
)
 
$
0.12

 
$
(6.04
)
 
$
0.66

Diluted
$
(4.79
)
 
$
0.12

 
$
(6.04
)
 
$
0.65

TOTAL COMPREHENSIVE INCOME (LOSS)
$
(164,216
)
 
$
5,227

 
$
(206,881
)
 
$
28,383

Please read the notes to consolidated financial statements.

4


FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) 
 
First Nine Months
 
2015
 
2014
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income (loss)
$
(206,886
)
 
$
28,994

Adjustments:
 
 
 
Depreciation, depletion and amortization
36,780

 
29,109

Change in deferred income taxes
39,106

 
10,649

Equity in earnings of unconsolidated ventures
(11,538
)
 
(3,965
)
Distributions of earnings of unconsolidated ventures
7,343

 
2,817

Share-based compensation
5,531

 
4,523

Real estate cost of sales
33,575

 
59,251

Dry hole and unproved leasehold impairment charges
46,722

 
11,541

Real estate development and acquisition expenditures, net
(81,055
)
 
(82,864
)
Reimbursements from utility and improvement districts
8,285

 
8,554

Other changes in real estate
338

 
3,148

Changes in deferred income
(191
)
 
102

Asset impairments
91,146

 
94

Gain on sale of assets
(265
)
 
(27,977
)
Other
2,243

 
1,603

Changes in:
 
 
 
Notes and accounts receivable
9,395

 
(6,300
)
Prepaid expenses and other
3,106

 
4,232

Accounts payable and other accrued liabilities
(2,300
)
 
(3,249
)
Income taxes
3,625

 
(3,876
)
Net cash provided by (used for) operating activities
(15,040
)
 
36,386

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software, reforestation and other
(10,882
)
 
(13,583
)
Oil and gas properties and equipment
(47,043
)
 
(65,661
)
Acquisition of partner's interest in unconsolidated multifamily venture, net of cash

 
(20,155
)
Investment in unconsolidated ventures
(23,908
)
 
(5,016
)
Proceeds from sales of assets
13,571

 
19,885

Return of investment in unconsolidated ventures
7,783

 
1,601

Net cash used for investing activities
(60,479
)
 
(82,929
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of senior secured notes, net

 
241,947

Payments of debt
(7,527
)
 
(222,468
)
Additions to debt
7,105

 
17,169

Deferred financing fees
(153
)
 
(3,114
)
Distributions to noncontrolling interests, net
(703
)
 
(1,070
)
Purchase of noncontrolling interests

 
(7,971
)
Exercise of stock options
31

 
1,197

Payroll taxes on issuance of stock-based awards
(722
)
 
(1,024
)
Excess income tax benefit from share-based compensation
1

 
176

Net cash provided by (used for) financing activities
(1,968
)
 
24,842

 
 
 
 
Net decrease in cash and cash equivalents
(77,487
)
 
(21,701
)
Cash and cash equivalents at beginning of period
170,127

 
192,307

Cash and cash equivalents at end of period
$
92,640

 
$
170,606

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. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.
We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those principally related to allocating costs to real estate, measuring long-lived assets for impairment, oil and gas revenue accruals, capital expenditure and lease operating expense accruals associated with our oil and gas production activities, oil and gas reserves and depletion of our oil and gas properties. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2014 Annual Report on Form 10-K.
Note 2—New and Pending Accounting Pronouncements
Pending Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB decided to defer the effective date of the new standard by one year. This deferral results in the new standard being effective after December 15, 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (Topic 810), requiring entities to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The revised consolidation model: (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved with VIEs, and (4) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. The updated standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. The updated standard may be applied retrospectively or using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which allows an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The updated standards are effective for financial statements issued for annual and interim periods beginning after December 15, 2015. The updated standards are not expected to materially impact our financial position or disclosures.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (Subtopic 350-40), in order to provide clarification on whether a cloud computing arrangement includes a software license. If a

6


software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The update is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the effect that the updated standard will have on our financial position and disclosures.
In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Updates. The amendments in this update cover a wide range of topics in the codification and are generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and, Minor Improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to impact our financial position or results of operations.
Note 3—Real Estate
Real estate consists of:
 
Third Quarter-End 2015
 
Year-End 2014
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
(In thousands)
Entitled, developed and under development projects
$
359,532

 
$

 
$
359,532

 
$
321,273

 
$

 
$
321,273

Undeveloped land (includes land in entitlement)
93,824

 

 
93,824

 
93,182

 

 
93,182

Commercial
 
 
 
 

 
 
 
 
 
 
Radisson Hotel
62,693

 
(28,396
)
 
34,297

 
59,773

 
(29,062
)
 
30,711

Harbor Lakes golf course and country club

 

 

 
2,054

 
(1,508
)
 
546

Income producing properties
 
 
 
 
 
 
 
 
 
 
 
Eleven
53,906

 
(2,312
)
 
51,594

 
53,958

 
(576
)
 
53,382

Midtown
34,952

 
(1,399
)
 
33,553

 
33,293

 
(231
)
 
33,062

Dillon (a)
18,120

 

 
18,120

 
15,203

 

 
15,203

Music Row (a)
8,483

 

 
8,483

 
7,675

 

 
7,675

Downtown Edge
12,335

 

 
12,335

 
11,856

 

 
11,856

West Austin
9,075

 

 
9,075

 
8,866

 

 
8,866

 
$
652,920

 
$
(32,107
)
 
$
620,813

 
$
607,133

 
$
(31,377
)
 
$
575,756

 _________________________
(a) 
Construction in progress at third quarter-end 2015.
Our estimated costs of assets for which we expect to be reimbursed by utility and improvement districts were $67,925,000 at third quarter-end 2015 and $65,212,000 at year-end 2014, including $21,438,000 at third quarter-end 2015 and $31,913,000 at year-end 2014 related to our Cibolo Canyons project near San Antonio, Texas. In first nine months 2015, we have collected $7,860,000 in reimbursements that were previously submitted to these districts. At third quarter-end 2015, our inception to-date submitted and approved reimbursements for the Cibolo Canyons project were $54,376,000 of which we have collected $34,703,000. These costs are principally for water, sewer and other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.

7


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:
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Unproved leasehold interests
$
44,387

 
$
90,446

Proved oil and gas properties
133,246

 
221,299

Total costs
177,633

 
311,745

Less: accumulated depreciation, depletion and amortization
(55,858
)
 
(48,252
)
 
$
121,775

 
$
263,493


We review unproved oil and gas properties for impairment based on our current exploration plans and proved oil and gas properties by comparing the expected undiscounted future cash flows at a producing field level to the unamortized capitalized cost of the asset.
In third quarter 2015, we recognized $81,240,000 in non-cash impairment charges of which $65,382,000 is related to our proved oil and gas properties, primarily in North Dakota, Nebraska and Kansas and $15,858,000 is related to our unproved leasehold interests primarily in North Dakota. These non-cash impairment charges are a result of continued decline in oil prices and our current exploration plans. West Texas Intermediate (WTI) oil prices (the principal benchmark price for our oil sales), declined approximately 24 percent during third quarter 2015. Impairment charges are included in cost of oil and gas producing activities on our consolidated statements of income and comprehensive income.
Third quarter 2015 non-cash impairment charges included $1,361,000 of write-down associated with certain producing properties that met the assets held for sale criteria. Carrying value of these assets was adjusted to fair value and $1,534,000 were reclassified from oil and gas properties to assets held for sale which is included in other assets on our consolidated balance sheet. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to identify and expense any excess of carrying value over fair value less estimated costs to sell.
In first nine months 2015, we recognized non-cash impairment charges of $36,768,000 on our unproved leasehold interests and $90,417,000 on our proved properties principally due to a significant decline in oil prices, drilling results, a change in our plans to develop acreage and increased likelihood that certain non-core oil and gas assets will be sold. Dry hole costs in first nine months 2015 were $9,952,000, which includes a $9,674,000 charge in second quarter 2015 primarily associated with an exploratory well in Oklahoma. In addition, in second quarter 2015 we expensed $917,000 of capitalized costs related to pre-drilling activities associated with non-core oil and gas properties in Oklahoma.
In first nine months 2015, we recorded a net loss of ($1,320,000) on the sale of 27,662 net mineral acres leased from others and the disposition of 29 gross (5 net) producing oil and gas wells in Nebraska, Texas, Colorado, North Dakota and Oklahoma for total sales proceeds of $13,111,000.
Note 5—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Goodwill
$
61,452

 
$
63,423

Identified intangibles, net
1,988

 
2,708

 
$
63,440

 
$
66,131

Goodwill related to our oil and gas properties is $57,578,000 and $59,549,000 at third quarter-end 2015 and year-end 2014. Goodwill associated with our water resources initiatives is $3,874,000 at third quarter-end 2015 and year-end 2014. The change in goodwill for oil and gas properties is related to goodwill allocated to properties sold or held for sale in first nine months 2015.

8


Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with our water resources initiatives and $307,000 related to patents with definite lives associated with the Calliope Gas Recovery System, a process to increase natural gas production.
Note 6—Equity
A reconciliation of changes in equity at third quarter-end 2015 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2014
$
707,202

 
$
2,540

 
$
709,742

Net income (loss)
(206,881
)
 
(5
)
 
(206,886
)
Distributions to noncontrolling interests

 
(703
)
 
(703
)
Other (primarily share-based compensation)
6,252

 

 
6,252


$
506,573

 
$
1,832

 
$
508,405

Note 7—Investment in Unconsolidated Ventures
At third quarter-end 2015, we have ownership interests in 20 ventures that we account for using the equity method.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
 
Venture Assets
 
Venture Borrowings(a)
 
Venture Equity
 
Our Investment
 
Third
Quarter-End
 
Year-End
 
Third
Quarter-End
 
Year-End
 
Third
Quarter-End
 
Year-End
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
242, LLC (b)
$
27,647

 
$
33,021

 
$

 
$
6,940

 
$
25,822

 
$
21,789

 
$
12,239

 
$
10,098

CL Ashton Woods, LP (c)
8,453

 
13,269

 

 

 
5,671

 
11,453

 
2,620

 
6,015

CL Realty, LLC
8,246

 
7,960

 

 

 
8,084

 
7,738

 
4,042

 
3,869

CREA FMF Nashville LLC (b)
57,193

 
40,014

 
49,960

 
29,660

 
4,780

 
5,987

 
4,309

 
5,516

Elan 99, LLC
25,572

 
10,070

 
5,726

 
1

 
15,885

 
9,643

 
14,297

 
8,679

FOR/SR Forsyth LLC
6,300

 

 

 

 
6,300

 

 
5,670

 

FMF Littleton LLC
43,828

 
26,953

 
15,665

 

 
24,585

 
24,435

 
6,324

 
6,287

FMF Peakview LLC
48,984

 
43,638

 
29,426

 
23,070

 
16,924

 
17,464

 
3,467

 
3,575

HM Stonewall Estates, Ltd (c)
3,054

 
3,750

 

 
669

 
3,054

 
3,081

 
1,822

 
1,752

LM Land Holdings, LP (c)
33,397

 
25,561

 
8,015

 
4,448

 
23,679

 
18,500

 
11,033

 
9,322

MRECV DT Holdings LLC
3,899

 

 

 

 
3,899

 

 
3,510

 

MRECV Edelweiss LLC
2,000

 

 

 

 
2,000

 

 
1,800

 

MRECV Juniper Ridge LLC
1,796

 

 

 

 
1,796

 

 
1,616

 

Miramonte Boulder Pass, LLC
12,429

 

 
5,360

 

 
5,533

 

 
5,403

 

PSW Communities, LP
14,060

 
16,045

 
6,880

 
10,515

 
6,557

 
4,415

 
4,123

 
3,924

Temco Associates, LLC
5,813

 
11,756

 

 

 
5,232

 
11,556

 
2,616

 
5,778

Other ventures (d)
6,605

 
8,453

 
22,956

 
26,944

 
(31,306
)
 
(25,614
)
 
434

 
190

 
$
309,276

 
$
240,490

 
$
143,988

 
$
102,247

 
$
128,495

 
$
110,447

 
$
85,325

 
$
65,005


9


Combined summarized income statement information for our ventures accounted for using the equity method follows:
 
 Venture Revenues
 
 Venture Earnings (Loss)
 
Our Share of Earnings (Loss)
 
Third Quarter
 
First Nine Months
 
Third Quarter
 
First Nine Months
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
242, LLC (b)
$
2,884

 
$
88

 
$
20,583

 
$
1,563

 
$
1,161

 
$
(32
)
 
$
9,034

 
$
448

 
$
597

 
$
(15
)
 
$
4,642

 
$
236

CL Ashton Woods, LP (c)
3,958

 
790

 
6,369

 
1,859

 
1,341

 
277

 
2,719

 
573

 
1,849

 
373

 
3,405

 
826

CL Realty, LLC
205

 
413

 
674

 
1,240

 
103

 
294

 
346

 
846

 
52

 
147

 
174

 
423

CREA FMF Nashville LLC (b)
442

 

 
477

 

 
(991
)
 

 
(1,207
)
 
(25
)
 
(991
)
 

 
(1,207
)
 
(25
)
Elan 99, LLC

 

 

 

 

 

 
(2
)
 

 

 

 
(2
)
 

FMF Littleton LLC
6

 

 
6

 

 
(152
)
 

 
(152
)
 

 
(38
)
 

 
(38
)
 

FMF Peakview LLC
628

 
3

 
1,280

 
3

 
(286
)
 
(109
)
 
(1,020
)
 
(261
)
 
(58
)
 
(21
)
 
(204
)
 
(52
)
FOR/SR Forsyth LLC

 

 

 

 

 

 

 

 

 

 

 

HM Stonewall Estates, Ltd (c)
921

 
292

 
2,590

 
1,727

 
480

 
91

 
1,292

 
613

 
157

 
36

 
730

 
245

LM Land Holdings, LP (c)
1,857

 
4,604

 
8,154

 
13,897

 
1,391

 
3,397

 
5,179

 
10,368

 
423

 
1,200

 
1,710

 
3,097

MRECV DT Holdings LLC

 

 

 

 
167

 

 
167

 

 

 

 

 

MRECV Edelweiss LLC

 

 

 

 
125

 

 
125

 

 
65

 

 
65

 

MRECV Juniper Ridge LLC

 

 

 

 
105

 

 
105

 

 

 

 

 

Miramonte Boulder Pass, LLC

 

 

 

 
(92
)
 

 
(141
)
 

 
(46
)
 

 
(71
)
 

PSW Communities, LP
5,145

 

 
21,214

 

 
613

 
(11
)
 
3,141

 
(231
)
 
127

 
(9
)
 
1,088

 
(204
)
Temco Associates, LLC
8,019

 
79

 
9,163

 
793

 
1,618

 
42

 
2,077

 
158

 
809

 
21

 
1,039

 
79

Other ventures (d)
71

 
2,427

 
3,772

 
3,546

 
242

 
386

 
(16
)
 
(454
)
 
(37
)
 
284

 
207

 
(660
)
 
$
24,136

 
$
8,696

 
$
74,282

 
$
24,628

 
$
5,825

 
$
4,335

 
$
21,647

 
$
12,035

 
$
2,909

 
$
2,016

 
$
11,538

 
$
3,965


 _____________________
(a) 
Total includes current maturities of $72,637,000 at third quarter-end 2015, of which $40,902,000 is non-recourse to us, and $65,795,000 at year-end 2014, of which $42,566,000 is non-recourse to us.
(b) 
Includes unamortized deferred gains on real estate contributed by us to ventures. We recognize deferred gains as income as real estate is sold to third parties. Deferred gains of $1,496,000 are reflected as a reduction to our investment in unconsolidated ventures at third quarter-end 2015.
(c) 
Includes unrecognized basis difference of $588,000 which is reflected as a reduction of our investment in unconsolidated ventures at third quarter-end 2015. The difference will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures.
(d) 
Our investment in other ventures reflects our ownership interests, excluding venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 16—Variable Interest Entities for additional information.
In first nine months 2015, we invested $23,908,000 in these ventures and received $15,126,000 in distributions. In first nine months 2014, we invested $5,016,000 in these ventures and received $4,418,000 in distributions. Distributions include both return of investments and distribution of earnings.


10


Note 8—Receivables
Receivables consist of:
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Oil and gas revenue accruals
$
5,825

 
$
7,293

Other receivables and accrued interest
4,146

 
6,505

Oil and gas joint interest billing receivables
1,439

 
5,738

Other loans secured by real estate, average interest rates of 11.12% at third quarter-end 2015 and 4.41% at year-end 2014
2,045

 
1,737

Loan secured by real estate

 
3,574

 
13,455

 
24,847

Allowance for bad debts
(243
)
 
(258
)
 
$
13,212

 
$
24,589

In second quarter 2011, we acquired a non-performing loan that was secured by a lien on developed and undeveloped real estate located near Houston designated for single-family residential and commercial development. In first quarter 2015, the loan was paid in full and we received principal payments of $4,394,000 and interest payments of $49,000.
Estimated accretable yield follows:
 
Third
Quarter-End
 
2015
 
(In thousands)
Beginning of period (year-end 2014)
$
839

Change in accretable yield due to change in timing of estimated cash flows
30

Interest income recognized (in first nine months 2015)
(869
)
End of period
$

Other loans secured by real estate generally are secured by a deed of trust and due within three years.
Note 9—Debt
Debt consists of:
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
8.50% senior secured notes due 2022
$
250,000

 
$
250,000

3.75% convertible senior notes due 2020, net of discount
105,672

 
103,194

6.00% tangible equity unit notes, net of discount
10,899

 
17,154

Secured promissory notes — average interest rates of 3.19% at third quarter-end 2015 and 3.17% at year-end 2014
15,400

 
15,400

Other indebtedness — interest rates ranging from 2.25% to 5.50%
53,324

 
46,996

 
$
435,295

 
$
432,744

Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. On September 30, 2015, we received a waiver of the consolidated tangible net worth maintenance covenant requirement of our senior credit facility for third quarter 2015, and amended the consolidated tangible net worth maintenance covenant requirement to an amount equal to 80 percent of the actual consolidated tangible net worth as calculated using the September 30, 2015 financial statements. The amendment provides us with additional flexibility given the on-going volatility and continued decline in oil prices, which resulted in approximately $81,240,000 of additional non-cash asset impairment charges in the oil and gas segment in third quarter 2015. At third quarter-end 2015, we were in compliance with the financial covenants of these agreements.
At third quarter-end 2015, our senior secured credit facility provides for a $300,000,000 revolving line of credit maturing May 15, 2017 (with two one-year extension options). The revolving line of credit may be prepaid at any time without penalty.

11


The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $16,184,000 is outstanding at third quarter-end 2015. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At third quarter-end 2015, we had $283,816,000 in net unused borrowing capacity under our senior secured credit facility.
Under the terms of our senior secured credit facility, at our option we can borrow at LIBOR plus 4.0 percent or at the alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate, (ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR plus 1 percent. Borrowings under the senior secured credit facility are or may be secured by (a) mortgages on the timberland, high value timberland and portions of raw entitled land, as well as pledges of other rights including certain oil and gas operating properties, (b) assignments of current and future leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries and most of our majority-owned joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) a pledge of certain reimbursements payable to us from special improvement district tax collections in connection with our Cibolo Canyons project. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
At third quarter-end 2015, secured promissory notes represent a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $34,297,000. Other indebtedness principally represents $48,103,000 of senior secured loans for two wholly-owned multifamily properties, our 257-unit multifamily project in Austin and our 354-unit multifamily property near Dallas. The combined carrying value of these two multifamily properties is $85,147,000 at third quarter-end 2015.
At third quarter-end 2015 and year-end 2014, we have $12,407,000 and $15,168,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $2,992,000 and $3,089,000 in first nine months 2015 and 2014 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 nine months 2015, we recognized proved oil and gas properties non-cash impairment charges of $90,417,000 principally due to a significant decline in oil and gas prices and an increased likelihood that certain non-core oil and gas assets will be sold. The fair value of these properties was determined using Level 3 inputs and the income valuation method. We used a discount rate of ten percent as of third quarter-end 2015 which is commensurate with current market and risk conditions associated with realizing the expected cash flows projected for these investments. Fair value of assets held for sale was based on net realizable value less cost to sell. Fair value of certain unproved leasehold interests that were impaired was based on market comparables.
In first nine months 2015, we recognized real estate non-cash asset impairment of $729,000, of which $504,000 was recognized in first quarter 2015 related to a residential development with golf course and country club property located near Fort Worth which was sold in April 2015 and $225,000 was recognized in second quarter 2015 related to an owned project near Atlanta where the remaining lots were sold in August 2015.

12


Non-financial assets measured at fair value on a non-recurring basis are as follows:
 
Third Quarter-End 2015
 
Year-End 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Non-Financial Assets and Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
$

 
$

 
$

 
$

 
$

 
$
970

 
$

 
$
970

Proved oil and gas properties
$

 
$

 
$
80,551

 
$
80,551

 
$

 
$

 
$
3,655

 
$
3,655

Unproved leasehold interests
$

 
$
1,226

 
$
11,489

 
$
12,715

 
$

 
$

 
$

 
$

Assets held for sale - oil and gas properties
$

 
$
1,534

 
$

 
$
1,534

 
$

 
$

 
$

 
$

We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
 
Third Quarter-End 2015
 
Year-End 2014
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Loan secured by real estate
$

 
$

 
$
3,574

 
$
4,859

 
Level 2
Fixed rate debt
$
(366,571
)
 
$
(357,857
)
 
$
(370,348
)
 
$
(359,131
)
 
Level 2
Note 11—Capital Stock
In first quarter 2015, we accelerated the expiration date of our shareholder rights plan from December 11, 2017 to March 13, 2015, resulting in termination of the plan.
Please read Note 17—Share-Based and Long-Term Incentive Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At third quarter-end 2015, personnel of former affiliates held options to purchase 501,000 shares of our common stock. The options have a weighted average exercise price of $28.62 and a weighted average remaining contractual term of one year. At third quarter-end 2015, the options have an aggregate intrinsic value of $0.
Note 12—Net Income (Loss) per Share
Basic and diluted earnings per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security. We have determined that our 6.00% tangible equity units (Units) are participating securities. Per share amounts are computed by dividing earnings available to common shareholders by the weighted average shares outstanding during each period. In periods with a net loss, no such adjustment is made to earnings as the holders of the participating securities have no obligation to fund losses.

13


Due to a net loss in third quarter and first nine months 2015, as the effect of potentially dilutive securities would be anti-dilutive, basic and diluted loss per share are the same. The computations of basic and diluted earnings per share are as follows:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Numerator:
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(164,331
)
 
$
5,239

 
$
(206,886
)
 
$
28,994

Less: Net (income) loss attributable to noncontrolling interest
115

 
(12
)
 
5

 
(611
)
Earnings (loss) available for diluted earnings per share
$
(164,216
)
 
$
5,227

 
$
(206,881
)
 
$
28,383

Less: Undistributed net income allocated to participating securities

 
(947
)
 

 
(5,151
)
Earnings (loss) available to common shareholders for basic earnings per share
$
(164,216
)
 
$
4,280

 
$
(206,881
)
 
$
23,232

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding — basic
34,299

 
35,498

 
34,248

 
35,437

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

 
7,857

 

 
7,857

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

 
513

 

 
456

Total weighted average shares outstanding — diluted
34,299

 
43,868

 
34,248

 
43,750

Anti-dilutive awards excluded from diluted weighted average shares
10,933

 
1,959

 
10,835

 
2,171

___________________
(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 6,547,800 shares (the minimum settlement rate) and 7,857,000 shares (the maximum settlement rate) based on the applicable market value, as defined in the purchase contract agreement associated with issuance of the Units.
We intend to settle the principal amount of our 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 third quarter 2015 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our provision for income taxes including the impact of deferred tax asset valuation allowance is as follows:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Current income tax benefit (expense)
$
(27
)
 
$
(200
)
 
$
(27
)
 
$
(4,815
)
Deferred income tax benefit (expense)
34,678

 
(2,555
)
 
60,844

 
(10,649
)
Deferred tax asset valuation allowance benefit (expense)
(98,887
)
 

 
(99,950
)
 

Income tax benefit (expense)
$
(64,236
)
 
$
(2,755
)
 
$
(39,133
)
 
$
(15,464
)
Our effective tax rate was 64 percent in third quarter 2015 and 23 percent in first nine months 2015. Excluding the impact of valuation allowance, our effective tax rate was a 35 percent benefit in third quarter 2015 and 36 percent benefit in first nine months 2015. Our effective tax rate was 35 percent in third quarter and first nine months 2014. Our effective tax rates include the effect of state income taxes, noncontrolling interests, nondeductible items and benefits of percentage depletion.
We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax asset. In determining our valuation allowance, a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2015, principally driven by impairments of oil and gas assets. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.
A valuation allowance was recorded for the portion of our deferred tax asset that we believe is more likely than not to be unrealizable at third quarter-end 2015. The amount of deferred tax asset considered realizable, however, could be adjusted if

14


estimates of future taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.
Note 14—Commitments and Contingencies
Litigation
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash flows. However, it is possible that charges related to these matters could be significant to our results or cash flows in any one accounting period.
Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that we can reasonably estimate. We own 288 acres near Antioch, California, portions of which were sites of a former paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. In third quarter 2015, we increased our reserves for environmental remediation by $388,000 due to additional testing and remediation requirements by state regulatory agencies. We estimate the remaining cost to complete remediation activities will be approximately $600,000, which is included in other accrued expenses. It is possible that remediation or monitoring activities could be required in addition to those included within our estimate, but we are unable to determine the scope, timing or extent of such activities.
We have asset retirement obligations related to the abandonment and site restoration requirements that result from the acquisition, construction and development of oil and gas properties. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset retirement cost is included in cost of oil and gas producing activities on our consolidated statements of income and comprehensive income. At third quarter-end 2015 and year-end 2014, our asset retirement obligation was $1,748,000 and $1,807,000, which is included in other liabilities.
Unallocated Severance-related Costs
In connection with the departures of our former Chief Executive Officer and Chief Financial Officer in September 2015, we recorded one-time severance-related charges of $3,314,000 which are included in general and administrative expense on our consolidated statements of income and comprehensive income. Approximately $2,721,000 of these severance-related charges will be paid in fourth quarter 2015 with the balance to be paid in 2016.
Oil and Gas Restructuring Costs
In connection with review of strategic alternatives with respect to our oil and gas business that was announced in December 2014, we offered retention bonuses to key personnel provided they remain our employees through December 2015. We are expensing retention bonus costs over the retention period. In first nine months 2015, we incurred severance expenses related to staff reductions, paid a portion of the December 2014 accrual under written severance agreements and incurred costs associated with closure of our Fort Worth office. Office closure costs include a $1,750,000 lease termination charge and $391,000 for write off of leasehold improvements which were partially offset by a deferred lease credit of $364,000. These restructuring costs are included in other operating expense on our consolidated statements of income and comprehensive income. We may incur additional costs related to our strategic initiatives associated with lowering capital expenditures and operating costs in our oil and gas segment.

15


The following table summarizes activity related to liabilities associated with our oil and gas restructuring activities in first nine months 2015:
 
Employee-Related Costs
 
Lease Termination Charge
 
Total
 
(In thousands)
Balance at year-end 2014
$
(2,367
)
 
$

 
$
(2,367
)
Additions
(1,979
)
 
(1,750
)
 
(3,729
)
Payments
2,047

 
1,750

 
3,797

Balance at third quarter-end 2015
$
(2,299
)
 
$

 
$
(2,299
)
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:
 
Third
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Real estate
$
713,912

 
$
654,774

Oil and gas
191,328

 
342,703

Other natural resources
20,034

 
22,531

Assets not allocated to segments (a)
115,942

 
238,191

 
$
1,041,216

 
$
1,258,199

 
 _________________________
(a) 
Assets not allocated to segments at third quarter-end 2015 principally consist of cash and cash equivalents of $92,640,000 and a net deferred tax asset of $1,118,000. Assets not allocated to segments at year-end 2014 principally consist of cash and cash equivalents of $170,127,000 and a net deferred tax asset of $40,624,000.
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 and long-term incentive compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in Note 1—Basis of Presentation. Our revenues are derived from U.S. operations and all of our assets are located in the U.S. In third quarter 2015, no single customer accounted for more than ten percent of our total revenues.

16


Segment revenues and earnings are as follows:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
27,957

 
$
32,445

 
$
100,196

 
$
153,098

Oil and gas
13,485

 
24,145

 
42,835

 
66,076

Other natural resources
1,726

 
2,250

 
5,372

 
7,284

Total revenues
$
43,168

 
$
58,840

 
$
148,403

 
$
226,458

Segment earnings (loss):
 
 
 
 

 

Real estate
$
5,154

 
$
15,987

 
$
29,747

 
$
66,859

Oil and gas
(86,192
)
 
6,002

 
(146,000
)
 
16,331

Other natural resources
(77
)
 
669

 
(511
)
 
2,220

Total segment earnings (loss)
(81,115
)
 
22,658

 
(116,764
)
 
85,410

Items not allocated to segments (a)
(18,865
)
 
(14,676
)
 
(50,984
)
 
(41,563
)
Income (loss) before taxes attributable to Forestar Group Inc.
$
(99,980
)
 
$
7,982

 
$
(167,748
)
 
$
43,847

  _________________________
(a) 
Items not allocated to segments consist of:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
General and administrative expense
$
(8,343
)
 
$
(5,190
)
 
$
(19,540
)
 
$
(15,924
)
Shared-based and long-term incentive compensation expense
(2,245
)
 
(991
)
 
(5,726
)
 
(4,523
)
Interest expense
(8,315
)
 
(8,634
)
 
(25,851
)
 
(21,507
)
Other corporate non-operating income
38

 
139

 
133

 
391

 
$
(18,865
)
 
$
(14,676
)
 
$
(50,984
)
 
$
(41,563
)
Note 16—Variable Interest Entities
We participate in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use communities in which we may or may not have a controlling financial interest. Generally accepted accounting principles require consolidation of Variable Interest Entities (VIEs) in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether we are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture agreements and continuously reassess to see if we are the primary beneficiary of a VIE.
At third quarter-end 2015, we have four VIEs. We account for these VIEs using the equity method since we are not the primary beneficiary. Although we have certain rights regarding major decisions, we do not have the power to direct the activities that are most significant to the economic performance of these VIEs. At third quarter-end 2015, these VIEs have total assets of $77,672,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of $97,828,000, which includes $29,835,000 of borrowings classified as current maturities. These amounts are included in the summarized balance sheet information for ventures accounted for using the equity method in Note 7—Investment in Unconsolidated Ventures. At third quarter-end 2015, our investment in these VIEs is $8,822,000 and is included in investment in unconsolidated ventures. In first nine months 2015, we contributed $111,000 to these VIEs. Our maximum exposure to loss related to one of these VIEs is estimated at $3,808,000, 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.

17


Note 17—Share-Based and Long-Term Incentive Compensation
Share-based and long-term incentive compensation expense consists of:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Cash-settled awards
$
146

 
$
(801
)
 
$
(1,005
)
 
$
(1,996
)
Equity-settled awards
1,654

 
1,307

 
4,569

 
4,897

Restricted stock
16

 
22

 
13

 
101

Stock options
388

 
463

 
1,954

 
1,521

Total share-based compensation
2,204

 
991

 
5,531

 
4,523

Deferred cash
41

 

 
195

 

 
$
2,245

 
$
991

 
$
5,726

 
$
4,523

Share-based and long-term incentive compensation expense is included in:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
General and administrative expense
$
1,124

 
$
(50
)
 
$
2,970

 
$
1,217

Other operating expense
1,121

 
1,041

 
2,756

 
3,306

 
$
2,245

 
$
991

 
$
5,726

 
$
4,523

Share-Based Compensation
In first quarter 2015, we granted 89,900 cash-settled stock appreciation rights awards and 598,600 equity-settled awards. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, or disability or if there is a change in control. Equity-settled awards granted to employees include market-leveraged stock units (MSUs) and stock options. Equity-settled MSUs will be settled in common stock based upon our stock price performance over three years from the date of grant. Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, or disability or if there is a change in control. Equity-settled awards in the form of restricted stock units granted to our directors are fully vested at the time of grant and are issued upon retirement.
In third quarter 2015, we granted 141,300 stock option awards in connection with management promotions. These awards have a ten-year term, vest ratably over three years and are exercisable only when our stock price exceeds $17.50 per share. We also granted 24,200 cash-settled restricted stock units which vest after three years and provide for accelerated or continued vesting upon death, disability or if there is a change in control. In addition, 36,100 cash-settled restricted stock units were awarded to certain key employees as retention grants. These awards vest over three years and are not eligible for retirement acceleration.
The fair value of awards granted to retirement eligible employees expensed at the date of grant was $517,000 and $760,000 in first nine months 2015 and 2014. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $6,160,000 at third quarter-end 2015.
In first nine months 2015 and 2014, we issued 159,867 and 211,333 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of 48,636 and 54,272 shares withheld having a value of $722,000 and $1,024,000 for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.
Long-Term Incentive Compensation
In first quarter 2015, we granted $587,000 of long-term incentive compensation in the form of deferred cash compensation. Deferred cash will be paid out after the earlier of three years or the employee's retirement eligibility date and the expense is recognized ratably over the vesting period. The accrued liability was $195,000 at third quarter-end 2015 and is included in other liabilities.
Note 18—Subsequent Event
On October 16, 2015, we obtained a senior secured construction loan in the amount of $52,000,000 from PNC Bank, National Association to finance the construction of a 379-unit multifamily project (Dillon) located in Charlotte, North

18


Carolina. The loan is secured by a lien on the land and improvements to be constructed, and by a collateral assignment of present and future leases and rents. The loan bears interest at the LIBOR rate plus 2.20 percent, payable monthly, has an initial term of 48 months and may be extended for two additional 12-month periods following the initial term, subject to payment of extension fees and fulfillment of specified conditions.

19


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 2014 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of third quarter-end 2015, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated, or on a national or global scale;
our ability to achieve some or all of our 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;
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, including impacts from shortages in materials or labor;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in commodity prices;
demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
risks associated with oil and gas exploration, drilling and production activities;
fluctuations in oil and gas commodity prices;
our ability to fully realize our deferred tax assets is dependent upon generating future taxable income, executing tax planning strategies, and reversals of existing taxable temporary differences;
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 or amend and satisfy the other covenants contained in our senior secured credit facility, indentures and other debt agreements;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;
inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal or usage;
the final resolutions or outcomes with respect to our contingent and other liabilities related to our business; and

20


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 2014 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.
Results of Operations
A summary of our consolidated results by business segment follows:
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
27,957

 
$
32,445

 
$
100,196

 
$
153,098

Oil and gas
13,485

 
24,145

 
42,835

 
66,076

Other natural resources
1,726

 
2,250

 
5,372

 
7,284

Total revenues
$
43,168

 
$
58,840

 
$
148,403

 
$
226,458

Segment earnings (loss):
 
 
 
 
 
 
 
Real estate
$
5,154

 
$
15,987

 
$
29,747

 
$
66,859

Oil and gas
(86,192
)
 
6,002

 
(146,000
)
 
16,331

Other natural resources
(77
)
 
669

 
(511
)
 
2,220

Total segment earnings (loss)
(81,115
)
 
22,658

 
(116,764
)
 
85,410

Items not allocated to segments:
 
 
 
 
 
 
 
General and administrative expense
(8,343
)
 
(5,190
)
 
(19,540
)
 
(15,924
)
Share-based and long-term incentive compensation expense
(2,245
)
 
(991
)
 
(5,726
)
 
(4,523
)
Interest expense
(8,315
)
 
(8,634
)
 
(25,851
)
 
(21,507
)
Other corporate non-operating income
38

 
139

 
133

 
391

Income (loss) before taxes
(99,980
)
 
7,982

 
(167,748
)
 
43,847

Income tax benefit (expense)
(64,236
)
 
(2,755
)
 
(39,133
)
 
(15,464
)
Net income (loss) attributable to Forestar Group Inc.
$
(164,216
)
 
$
5,227

 
$
(206,881
)
 
$
28,383


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Significant aspects of our results of operations follow:
Third Quarter and First Nine Months 2015
Third quarter 2015 real estate earnings declined principally due to a $7,610,000 gain in third quarter 2014 associated with the acquisition of our partner's interest in the Eleven multifamily venture, decreased residential lot sales activity and $1,757,000 of interest income in third quarter 2014 related to a loan secured by a mixed-use real estate community in Houston. First nine months 2015 real estate segment earnings declined principally due to lower undeveloped land sales, a $10,476,000 gain in second quarter 2014 associated with a non-monetary exchange of leasehold timber rights for 5,400 acres of undeveloped land with a partner in a consolidated venture, a $7,610,000 gain in third quarter 2014 associated with the acquisition of our partner's interest in the Eleven multifamily venture, decreased residential lot sales activity and $1,757,000 interest income in third quarter 2014 related to a loan secured by a mixed-use real estate community in Houston.
Third quarter 2015 oil and gas segment earnings were down compared with third quarter 2014 principally due to non-cash asset impairment charges of $81,240,000, of which $65,382,000 is related to proved oil and gas properties and $15,858,000 is related to unproved leasehold interests, principally driven by current and projected future lower oil and gas prices. In addition, lower realized oil and gas prices negatively impacted results despite an increase in production volumes, which were partially offset by lower operating costs. First nine months 2015 oil and gas segment results include $138,054,000 of non-cash charges, which include impairments of $90,417,000 for proved oil and gas properties and $36,768,000 for unproved leasehold interests, and exploratory dry hole costs and pre-drilling costs of $10,869,000. First nine months 2015 results also include $1,979,000 of employee severance and retention bonus costs as part of our initiative to significantly reduce oil and gas operating costs and a lease termination charge of $1,750,000 associated with the closure of our office in Fort Worth, Texas.
General and administrative expense increased principally as a result of one-time severance-related charges of $3,314,000 related to departures of our former Chief Executive officer (CEO) and Chief Financial Officer (CFO).
Current Market Conditions
Sales of new U.S. single-family homes were 468,000 units in September 2015, on a seasonally adjusted annualized basis, up two percent compared with September 2014, but down over 11 percent compared with the downwardly-revised August 2015 results, representing the lowest level of new homes sales since November 2014, indicating the housing recovery remains tentative. Inventories of new homes are at or below historical levels in many areas. In addition, declining finished lot inventories and supply of economically developable raw land has resulted in demand for our developed lots. However, national and global economic weakness and uncertainty, and a restrictive mortgage lending environment continue to threaten a robust recovery in the housing market, despite low interest rates. 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.
West Texas Intermediate crude oil prices at third quarter-end 2015 declined over 50 percent compared with third quarter-end 2014, driven by a combination of lower worldwide economic growth, record inventory levels and concern over higher oil exports from Iran. In response to the significant decline in crude oil prices, exploration and development activity in the U.S. has declined sharply, however production has remained at historically high levels, aided by increased drilling efficiencies and lower costs. U.S. production continues to be liquids focused principally 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.
Henry Hub natural gas prices at third quarter-end 2015 were down approximately 40 percent compared with third quarter-end 2014, and remain significantly lower than realized prices over the last decade. The decline in natural gas prices is principally driven by higher inventories, which are 35 percent higher than year ago levels, and modestly above the previous five year average. Despite low prices, natural gas production in the U.S. remains high, driven by continued improvements in drilling efficiency and lower operating costs, which is expected to result in additional inventory growth.
Business Segments
We manage our operations through three business segments:
Real estate,
Oil and gas, and