10-Q 1 for-0331201610q.htm 10-Q SEC Document

 
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, 2016
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 6, 2016
Common Stock, par value $1.00 per share
 
33,908,002
 



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
 
2016
 
2015
 
(In thousands, except share data)
ASSETS
 
Cash and cash equivalents
$
142,646

 
$
96,442

Real estate, net
471,353

 
586,715

Oil and gas properties and equipment, net
42,380

 
80,613

Assets held for sale
106,548

 

Investment in unconsolidated ventures
79,013

 
82,453

Timber
7,694

 
7,683

Receivables, net
9,677

 
23,656

Income taxes receivable
14,359

 
12,056

Prepaid expenses
3,570

 
3,213

Property and equipment, net
10,195

 
10,732

Goodwill and other intangible assets
55,861

 
63,128

Other assets
4,756

 
5,555

TOTAL ASSETS
$
948,052

 
$
972,246

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
8,576

 
$
11,959

Accrued employee compensation and benefits
1,705

 
5,547

Accrued property taxes
2,507

 
4,788

Accrued interest
6,774

 
3,267

Deferred tax liability, net
1,037

 
1,037

Earnest money deposits
11,009

 
10,214

Other accrued expenses
17,718

 
23,481

Liabilities held for sale
751

 

Other liabilities
24,748

 
26,323

Debt
372,759

 
381,515

TOTAL LIABILITIES
447,584

 
468,131

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Forestar Group Inc. shareholders’ equity:
 
 
 
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at first quarter-end 2016 and year-end 2015
36,947

 
36,947

Additional paid-in capital
559,859

 
561,850

Retained earnings (Accumulated deficit)
(50,422
)
 
(46,046
)
Treasury stock, at cost, 3,038,601 shares at first quarter-end 2016 and 3,203,768 shares at year-end 2015
(48,340
)
 
(51,151
)
Total Forestar Group Inc. shareholders’ equity
498,044

 
501,600

Noncontrolling interests
2,424

 
2,515

TOTAL EQUITY
500,468

 
504,115

TOTAL LIABILITIES AND EQUITY
$
948,052

 
$
972,246

Please read the notes to consolidated financial statements.

3


FORESTAR GROUP INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
First Quarter
 
2016
 
2015
 
(In thousands, except per share amounts)
REVENUES
 
 
 
Real estate sales and other
$
26,408

 
$
21,961

Commercial and income producing properties
9,690

 
10,869

Real estate
36,098

 
32,830

Oil and gas
5,352

 
13,185

Other natural resources
438

 
1,790

 
41,888

 
47,805

COSTS AND EXPENSES
 
 
 
Cost of real estate sales and other
(13,262
)
 
(10,362
)
Cost of commercial and income producing properties
(5,162
)
 
(7,692
)
Cost of oil and gas producing activities
(5,194
)
 
(11,542
)
Cost of other natural resources
(385
)
 
(920
)
Other operating
(13,414
)
 
(18,060
)
General and administrative
(6,479
)
 
(8,142
)
 
(43,896
)
 
(56,718
)
GAIN ON SALE OF ASSETS
2,604

 
1,176

OPERATING INCOME (LOSS)
596

 
(7,737
)
Equity in earnings of unconsolidated ventures
47

 
3,045

Interest expense
(7,639
)
 
(8,821
)
Other non-operating income
74

 
917

INCOME (LOSS) BEFORE TAXES
(6,922
)
 
(12,596
)
Income tax benefit
2,626

 
4,359

CONSOLIDATED NET INCOME (LOSS)
(4,296
)
 
(8,237
)
Less: Net (income) loss attributable to noncontrolling interests
(80
)
 
79

NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.
$
(4,376
)
 
$
(8,158
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
Basic
34,302

 
34,168

Diluted
34,302

 
34,168

NET INCOME (LOSS) PER COMMON SHARE
 
 
 
Basic
$
(0.13
)
 
$
(0.24
)
Diluted
$
(0.13
)
 
$
(0.24
)
TOTAL COMPREHENSIVE INCOME (LOSS)
$
(4,376
)
 
$
(8,158
)
Please read the notes to consolidated financial statements.

4


FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) 
 
First Quarter
 
2016
 
2015
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income (loss)
$
(4,296
)
 
$
(8,237
)
Adjustments:
 
 
 
Depreciation, depletion and amortization
4,785

 
11,325

Change in deferred income taxes

 
(4,359
)
Equity in earnings of unconsolidated ventures
(47
)
 
(3,045
)
Distributions of earnings of unconsolidated ventures
1,304

 
2,845

Share-based compensation
1,380

 
3,342

Real estate cost of sales
12,841

 
9,884

Dry hole and unproved leasehold impairment charges

 
86

Real estate development and acquisition expenditures, net
(14,794
)
 
(34,769
)
Reimbursements from utility and improvement districts
306

 
4,130

Gain on sale of assets
(2,604
)
 
(1,176
)
Other
1,820

 
1,730

Changes in:
 
 
 
Notes and accounts receivable
13,979

 
7,016

Prepaid expenses and other
(660
)
 
2,695

Accounts payable and other accrued liabilities
(6,702
)
 
(15,644
)
Income taxes
(2,303
)
 
5,411

Net cash provided by (used for) operating activities
5,009

 
(18,766
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software, reforestation and other
(3,501
)
 
(2,809
)
Oil and gas properties and equipment
(426
)
 
(23,718
)
Investment in unconsolidated ventures
(3,019
)
 
(831
)
Proceeds from sales of assets
56,828

 
2,000

Return of investment in unconsolidated ventures
1,567

 
655

Net cash provided by (used for) investing activities
51,449

 
(24,703
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments of debt
(11,185
)
 
(2,463
)
Additions to debt
1,307

 
3,119

Deferred financing fees

 
(6
)
Distributions to noncontrolling interests, net
(171
)
 
(338
)
Exercise of stock options

 
14

Payroll taxes on issuance of stock-based awards
(205
)
 
(723
)
Excess income tax benefit from share-based compensation

 
1

Net cash provided by (used for) financing activities
(10,254
)
 
(396
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
46,204

 
(43,865
)
Cash and cash equivalents at beginning of period
96,442

 
170,127

Cash and cash equivalents at end of period
$
142,646

 
$
126,262

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 2015 Annual Report on Form 10-K.
Note 2—New and Pending Accounting Pronouncements
Adoption of New Accounting Standards
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which allows an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The updated standards are effective for financial statements issued for annual and interim periods beginning after December 15, 2015. We adopted ASU 2015-03 in first quarter 2016 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $8,267,000 of debt issuance costs were reclassified in the consolidated balance sheet from other assets to debt. The adoption did not impact our consolidated financial position, results of operations or cash flows. As permitted under this guidance, we will continue to present debt issuance costs associated with revolving-debt agreements as other assets.
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (Topic 810), requiring entities to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The revised consolidation model: (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved with VIEs, and (4) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. The updated standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. The adoption of this guidance, which was applied retrospectively, had no impact to the consolidated financial statements.
Pending Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB decided to defer the effective date of the new standard by one year, to December 15, 2017. We

6


have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to provide increased transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 31, 2020 with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as part of its Simplification Initiative. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The updated standard becomes effective for annual and interim periods beginning after December 31, 2016. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
Note 3—Real Estate
Real estate consists of:
 
First Quarter-End 2016
 
Year-End 2015
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
(In thousands)
Entitled, developed and under development projects
$
352,369

 
$

 
$
352,369

 
$
352,141

 
$

 
$
352,141

Undeveloped land (includes land in entitlement)
96,875

 

 
96,875

 
98,181

 

 
98,181

Commercial
 
 
 
 

 
 
 
 
 
 
Radisson Hotel & Suites (a)

 

 

 
62,889

 
(29,268
)
 
33,621

Income producing properties
 
 
 
 
 
 
 
 
 
 
 
Eleven (a) 

 

 

 
53,896

 
(2,861
)
 
51,035

Dillon (a) 

 

 

 
19,987

 

 
19,987

Music Row (b)

 

 

 
9,947

 

 
9,947

Downtown Edge
12,991

 

 
12,991

 
12,706

 

 
12,706

West Austin
9,118

 

 
9,118

 
9,097

 

 
9,097

 
$
471,353

 
$

 
$
471,353

 
$
618,844

 
$
(32,129
)
 
$
586,715

___________________
(a) 
Classified as assets held for sale at first quarter-end 2016. Please see Note 5—Held for Sale and Note 19—Subsequent Events.
(b) 
Sold in first quarter 2016.
In first quarter 2016, we sold Music Row, a planned 230-unit multifamily property that was under construction in Nashville, for $14,703,000 and recognized a gain of $3,968,000. In addition, in first quarter 2016, we classified $105,987,000 in non-core real estate assets, principally the Radisson Hotel & Suites and Eleven and Dillon multifamily properties, as held for sale as result of our plan to market and sell these assets.
Our estimated costs of assets for which we expect to be reimbursed by utility and improvement districts were $69,770,000 at first quarter-end 2016 and $67,554,000 at year-end 2015, including $22,357,000 at first quarter-end 2016 and $22,302,000 at year-end 2015 related to our Cibolo Canyons project near San Antonio, Texas. In first quarter 2016, we have collected $306,000 in reimbursements that were previously submitted to these districts. At first quarter-end 2016, our inception-to-date submitted and approved reimbursements for the Cibolo Canyons project were $54,376,000 of which we have collected $34,703,000. These costs are principally for water, sewer and other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.

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:
 
First
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Unproved leasehold interests
$
11,453

 
$
19,441

Proved oil and gas properties
75,673

 
119,414

Total costs
87,126

 
138,855

Less: accumulated depreciation, depletion and amortization
(44,746
)
 
(58,242
)
 
$
42,380

 
$
80,613

In first quarter 2016, we recorded a net loss of $10,977,000 on the sale of 190,960 net mineral acres leased from others and 185 gross (66 net) producing oil and gas wells in Nebraska, Kansas, Oklahoma and North Dakota for total sales proceeds of $32,227,000, which includes $3,269,000 in reimbursement of capital costs incurred on in-progress wells that were assumed by the buyer. A significant portion of the net loss on sale, $7,244,000, is related to write-off of allocated goodwill to sold producing oil and gas properties.
Note 5—Held for Sale
At first quarter-end 2016, Radisson Hotel & Suites in Austin, Eleven, a 257-unit multifamily property in Austin, Dillon, a planned 379-unit multifamily property in Charlotte and certain oil and gas properties were classified as held for sale.
The major classes of assets and liabilities of the properties held for sale at first quarter-end 2016 are as follows:
 
First
Quarter-End
 
2016
Assets Held for Sale:
(In thousands)
Real estate, net of accumulated depreciation of $32,945
$
105,987

Oil and gas properties and equipment, net of accumulated depletion of $1,162
401

Prepaid expenses
150

Goodwill and other intangible assets
10

 
$
106,548

 
 
Liabilities Held for Sale:
 
Other accrued expenses
$
74

Other liabilities
677

 
$
751

Note 6—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
 
First
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Goodwill
$
53,920

 
$
61,164

Identified intangibles, net
1,941

 
1,964

 
$
55,861

 
$
63,128


8


Goodwill related to our oil and gas properties is $50,046,000 and $57,290,000 at first quarter-end 2016 and year-end 2015. Goodwill associated with our water resources initiatives is $3,874,000 at first quarter-end 2016 and year-end 2015. The change in goodwill for oil and gas properties is related to goodwill allocated to properties sold or held for sale at first quarter-end 2016.
Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with our water resources initiatives and $260,000 related to patents with definite lives associated with the Calliope Gas Recovery System, a process to increase natural gas production.
Note 7—Equity
A reconciliation of changes in equity at first quarter-end 2016 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2015
$
501,600

 
$
2,515

 
$
504,115

Net income (loss)
(4,376
)
 
80

 
(4,296
)
Distributions to noncontrolling interests

 
(171
)
 
(171
)
Other (primarily share-based compensation)
820

 

 
820


$
498,044

 
$
2,424

 
$
500,468

Note 8—Investment in Unconsolidated Ventures
At first quarter-end 2016, we have ownership interests in 18 ventures that we account for using the equity method.
In first quarter 2016, we sold our interest in FMF Peakview LLC (3600), a 304-unit multifamily joint venture in Denver, and recognized a gain of $9,613,000 which is included in gain on sale of assets.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
 
Venture Assets
 
Venture Borrowings(a)
 
Venture Equity
 
Our Investment
 
First
Quarter-End
 
Year-End
 
First
Quarter-End
 
Year-End
 
First
Quarter-End
 
Year-End
 
First
Quarter-End
 
Year-End
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
242, LLC (b)
$
26,534

 
$
26,687

 
$
180

 
$

 
$
24,577

 
$
24,877

 
$
11,617

 
$
11,766

CL Ashton Woods, LP (c)
4,641

 
7,654

 

 

 
3,451

 
6,084

 
1,653

 
3,615

CL Realty, LLC
7,761

 
7,872

 

 

 
7,709

 
7,662

 
3,854

 
3,831

CREA FMF Nashville LLC (b)
56,348

 
57,820

 
36,832

 
50,845

 
17,940

 
4,291

 
3,649

 
3,820

Elan 99, LLC
44,363

 
34,192

 
23,352

 
14,587

 
15,429

 
15,838

 
13,886

 
14,255

FOR/SR Forsyth LLC
6,950

 
6,500

 

 

 
6,950

 
6,500

 
6,255

 
5,850

FMF Littleton LLC
59,433

 
52,376

 
26,706

 
22,347

 
24,200

 
24,370

 
6,228

 
6,270

FMF Peakview LLC

 
48,869

 

 
30,485

 

 
16,828

 

 
3,447

HM Stonewall Estates, Ltd (c)
1,798

 
2,842

 

 

 
1,798

 
2,842

 
1,034

 
1,294

LM Land Holdings, LP (c)
25,479

 
31,984

 
4,270

 
7,728

 
20,619

 
22,751

 
9,808

 
9,664

MRECV DT Holdings LLC
4,215

 
4,215

 

 

 
4,215

 
4,215

 
3,793

 
3,807

MRECV Edelweiss LLC
2,404

 
2,237

 

 

 
2,404

 
2,237

 
2,170

 
2,029

MRECV Juniper Ridge LLC
4,022

 
3,006

 

 

 
4,021

 
3,006

 
3,645

 
2,730

MRECV Meadow Crossing II LLC
2,187

 
728

 

 

 
2,187

 
728

 
1,982

 
655

Miramonte Boulder Pass, LLC
13,160

 
12,627

 
6,320

 
5,869

 
5,349

 
5,474

 
5,287

 
5,349

Temco Associates, LLC
5,295

 
5,284

 

 

 
5,181

 
5,113

 
2,590

 
2,557

Other ventures (d)
4,167

 
4,174

 
2,202

 
2,242

 
1,958

 
1,922

 
1,562

 
1,514

 
$
268,757

 
$
309,067

 
$
99,862

 
$
134,103

 
$
147,988

 
$
154,738

 
$
79,013

 
$
82,453


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)
 
First Quarter
 
First Quarter
 
First Quarter
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
242, LLC (b)
$

 
$
5,331

 
$
(300
)
 
$
3,464

 
$
(150
)
 
$
1,766

CL Ashton Woods, LP (c)
696

 
1,350

 
367

 
527

 
439

 
678

CL Realty, LLC
133

 
279

 
47

 
160

 
23

 
80

CREA FMF Nashville LLC (b)
901

 
6

 
(571
)
 
(113
)
 
(171
)
 
(113
)
Elan 99, LLC
20

 

 
(410
)
 
(2
)
 
(369
)
 
(2
)
FMF Littleton LLC
321

 

 
(170
)
 

 
(42
)
 

FMF Peakview LLC
939

 
186

 
(248
)
 
(482
)
 
(50
)
 
(96
)
FOR/SR Forsyth LLC

 

 

 

 

 

HM Stonewall Estates, Ltd (c)
4,063

 
1,058

 
220

 
515

 
103

 
230

LM Land Holdings, LP (c)
1,000

 
1,976

 
640

 
1,250

 
144

 
364

MRECV DT Holdings LLC
98

 

 
98

 

 
88

 

MRECV Edelweiss LLC
87

 

 
87

 

 
78

 

MRECV Juniper Ridge LLC
3

 

 
3

 

 
3

 

MRECV Meadow Crossing II LLC

 

 
34

 

 
(31
)
 

Miramonte Boulder Pass, LLC

 

 
(125
)
 

 
(62
)
 

PSW Communities, LP

 
2,427

 

 
195

 

 
173

Temco Associates, LLC
99

 
58

 
67

 
(1
)
 
34

 

Other ventures (d)

 
3,701

 
26

 
(203
)
 
10

 
(35
)
 
$
8,360

 
$
16,372

 
$
(235
)
 
$
5,310

 
$
47

 
$
3,045


 _____________________
(a) 
Total includes current maturities of $8,524,000 at first quarter-end 2016, of which $6,320,000 is non-recourse to us, and $39,590,000 at year-end 2015, of which $6,798,000 is non-recourse to us.
(b) 
Includes unamortized deferred gains on real estate contributed by us to ventures. We recognize deferred gains as income as real estate is sold to third parties. Deferred gains of $1,496,000 are reflected as a reduction to our investment in unconsolidated ventures at first quarter-end 2016.
(c) 
Includes unrecognized basis difference of $30,000 which is reflected as a reduction of our investment in unconsolidated ventures at first quarter-end 2016. The difference will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures.
(d) 
Our investment in other ventures reflects our ownership interests, excluding venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 17—Variable Interest Entities for additional information.
In first quarter 2016, we invested $3,019,000 in these ventures and received $2,871,000 in distributions. In first quarter 2015, we invested $831,000 in these ventures and received $3,500,000 in distributions. Distributions include both return of investments and distribution of earnings.


10


Note 9—Receivables
Receivables consist of:
 
First
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Funds held by qualified intermediary for potential 1031 like-kind exchange
$

 
$
14,703

Oil and gas revenue accruals
2,374

 
3,745

Other receivables and accrued interest
5,244

 
2,448

Oil and gas joint interest billing receivables
777

 
867

Other loans secured by real estate, average interest rates of 12.52% at first quarter-end 2016 and 11.31% at year-end 2015
1,485

 
2,130

 
9,880

 
23,893

Allowance for bad debts
(203
)
 
(237
)
 
$
9,677

 
$
23,656

In first quarter 2016, we received funds previously held by a qualified intermediary because we did not complete an intended like-kind exchange related to a 2015 sale of 6,915 acres of undeveloped land.
Other loans secured by real estate generally are secured by a deed of trust and due within three years.
Note 10—Debt
Debt (a) consists of:
 
First
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
8.50% senior secured notes due 2022
$
216,495

 
$
224,647

3.75% convertible senior notes due 2020, net of discount
105,798

 
104,719

6.00% tangible equity unit notes, net of discount
6,552

 
8,666

Secured promissory notes — average interest rates of 3.43% at first quarter-end 2016 and 3.42% at year-end 2015
15,400

 
15,400

Other indebtedness — interest rates ranging from 2.44% to 5.50%
28,514

 
28,083

 
$
372,759

 
$
381,515

___________________
(a) 
At first quarter-end 2016 and year-end 2015, $7,953,000 and $8,267,000 of unamortized deferred financing fees are deducted from our outstanding debt.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. On December 30, 2015, we amended our senior secured credit facility to reduce the interest coverage ratio from 2.50:1.0 to 2.25:1.0 for the quarter ending December 31, 2015 and March 31, 2016. Thereafter, the interest coverage ratio returns to 2.50:1.0. At first quarter-end 2016, we were in compliance with the financial covenants of these agreements.
At first quarter-end 2016, 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. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $15,817,000 is outstanding at first quarter-end 2016. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At first quarter-end 2016, we had $265,199,000 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

11


permitted, a pledge of the right to distributions from such entities, and (e) a pledge of certain reimbursements payable to us from special improvement district tax collections in connection with our Cibolo Canyons project. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At first quarter-end 2016, our tangible net worth requirement was $379,044,000 plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis. At first quarter-end 2016, there were no adjustments to the tangible net worth requirement for net proceeds from equity offerings or positive net income on a cumulative basis. The tangible net worth requirement is recalculated on a quarterly basis.
We may elect to make distributions to stockholders so long as the total leverage ratio is less than 40 percent, the interest coverage ratio is greater than 3.0:1.0 and available liquidity is not less than $125,000,000. Effective December 30, 2015, the senior secured credit facility was amended to provide that we may make distributions in an aggregate amount not to exceed $50,000,000 to be funded from up to 65% of the net proceeds from sales of multifamily properties and non-core assets, such as the Radisson Hotel & Suites in Austin, and any oil and gas properties. The amendment provides us the flexibility to repurchase stock or pay a special dividend should our Board of Directors determine that we should do so, though no such decisions have been made at this time.
In first quarter 2016, we purchased $8,600,000 principal amount of 8.50% Senior Secured Notes (Notes) at 99% of face value, resulting in a gain of $127,000 on the early extinguishment of the Notes, offset by the write-off of unamortized debt issuance costs of $225,000 allocated to the Notes.
At first quarter-end 2016, secured promissory notes represent a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $33,415,000 classified as assets held for sale. Other indebtedness principally represents a $23,936,000 of senior secured loan for our 257-unit multifamily project in Austin with a carrying value of $50,527,000 classified as assets held for sale at first quarter-end 2016.
At first quarter-end 2016 and year-end 2015, we have $7,953,000 and $8,267,000 in unamortized deferred financing fees which are deducted from our debt. In addition, at first quarter-end 2016 and year-end 2015, unamortized deferred financing fees related to our senior secured credit facility included in other assets was $2,264,000 and $2,768,000. Amortization of deferred financing fees was $927,000 and $1,156,000 in first quarter 2016 and 2015 and is included in interest expense.
Note 11—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.
At first quarter-end 2016, Radisson Hotel & Suites in Austin, Eleven, a 257-unit multifamily property in Austin, Dillon, a planned 379-unit multifamily property in Charlotte, and certain oil and gas properties were classified as held for sale. We record impairment losses for assets held for sale if the fair value of the assets held for sale net of estimated selling costs is less than the carrying amount. In first quarter 2016, we did not record any impairment losses on our assets held for sale.

12


Non-financial assets measured at fair value on a non-recurring basis are as follows:
 
First Quarter-End 2016
 
Year-End 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Non-Financial Assets and Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
$

 
$

 
$

 
$

 
$

 
$

 
$
641

 
$
641

Proved oil and gas properties
$

 
$

 
$

 
$

 
$

 
$

 
$
39,000

 
$
39,000

Unproved leasehold interests
$

 
$

 
$

 
$

 
$

 
$

 
$
18,219

 
$
18,219

We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
 
First Quarter-End 2016
 
Year-End 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Fixed rate debt
$
(336,298
)
 
$
(310,236
)
 
$
(346,090
)
 
$
(321,653
)
 
Level 2
Note 12—Capital Stock
Please read Note 18—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 first quarter-end 2016, personnel of former affiliates held options to purchase 243,000 shares of our common stock. The options have a weighted average exercise price of $30.27 and a weighted average remaining contractual term of less than one year. At first quarter-end 2016, the options have an aggregate intrinsic value of $0.
Note 13—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 first quarter 2016 and 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:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Numerator:
 
 
 
Consolidated net income (loss)
$
(4,296
)
 
$
(8,237
)
Less: Net (income) loss attributable to noncontrolling interest
(80
)
 
79

Earnings (loss) available for diluted earnings per share
$
(4,376
)
 
$
(8,158
)
Less: Undistributed net income allocated to participating securities

 

Earnings (loss) available to common shareholders for basic earnings per share
$
(4,376
)
 
$
(8,158
)
 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding — basic
34,302

 
34,168

Weighted average common shares upon conversion of participating securities

 

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

 

Total weighted average shares outstanding — diluted
34,302

 
34,168

Anti-dilutive awards excluded from diluted weighted average shares
10,468

 
10,743

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 first quarter 2016 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 14—Income Taxes
Our effective tax rate was 38 percent in first quarter 2016, which includes a three percent benefit for a partial release of our valuation allowance and a five percent detriment for goodwill due to the sale of oil and gas assets. Our effective tax rate was 35 percent in first quarter 2015, which included a two percent benefit for noncontrolling interests and a two percent detriment for share-based compensation benefits that will not be realized. Our effective tax rates also include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
At first quarter-end 2016 and year-end 2015, we have a valuation allowance for our deferred tax assets of $95,389,000 and $97,068,000 for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable.
In determining our valuation allowance, we assessed available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax asset. A significant piece of objective evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2016, principally driven by impairments of oil and gas properties in 2015. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.
The amount of the deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.
Note 15—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.

14


On October 4, 2014, James Huffman, a former director and CEO of CREDO Petroleum Corporation (Credo), which we acquired in 2012 and is now known as Forestar Petroleum Corporation, filed Huffman vs. Forestar Petroleum Corporation, Case Number 14CV33811, Civil Division, District Court for the City and County of Denver, Colorado. Prior to his retirement from Credo, Huffman participated in an employee compensation program under which he received overriding royalty interests (ORRI) in certain leases or wells in which Credo had an interest. Huffman claims entitlement to ORRI on nearly all North Dakota leases, none of which were assigned by Credo to Huffman prior to his retirement, and to ORRI on several Kansas and Nebraska leases. Huffman is seeking to have ORRI assigned to him. We believe Huffman’s claims are without merit and are vigorously defending the case. We are unable to estimate a possible loss or range of possible loss for this matter because of, among other factors, (i) significant unresolved questions of fact, including the time period covered by Huffman’s claims, (ii) discovery remaining to be conducted by both parties; (iii) impact of our counterclaims against Huffman, and (iv) any other factors that may have a material effect on the litigation.
Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that we can reasonably estimate. We own 288 acres near Antioch, California, portions of which were sites of a former paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. In first quarter 2016, we increased our reserves for environmental remediation by $86,000 due to additional testing and remediation requirements by state regulatory agencies. We estimate the remaining cost to complete remediation activities will be $678,000, 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. At first quarter-end 2016 and year-end 2015, our asset retirement obligation was $974,000 and $1,758,000, of which $230,000 is included in liabilities held for sale at first quarter-end 2016 and the remaining balance in other liabilities.
Non-Core Assets Restructuring Costs
In connection with key initiatives to reduce costs across our entire organization and exit non-core assets, we incurred and paid severance costs related to workforce reductions of $1,422,000 in our real estate segment, $164,000 in our other natural resources segment and $486,000 in unallocated general and administrative expense. In addition, we offered retention bonuses to certain key personnel provided they remained our employees through completion of sale transactions. We are expensing retention bonus costs over the estimated retention period. These restructuring costs are included in other operating expense.
The following table summarizes activity related to liabilities associated with our restructuring activities in first quarter 2016:
 
Severance Costs
 
Retention Bonuses
 
Total
 
(In thousands)
Balance at year-end 2015
$
(1,049
)
 
$

 
$
(1,049
)
Additions
(2,072
)
 
(491
)
 
(2,563
)
Payments
3,121

 
77

 
3,198

Balance at first quarter-end 2016
$

 
$
(414
)
 
$
(414
)
Note 16—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.


15



Total assets allocated by segment are as follows:
 
First
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Real estate
$
666,726

 
$
691,238

Oil and gas
97,346

 
144,436

Other natural resources
19,025

 
19,106

Assets not allocated to segments (a)
164,955

 
117,466

 
$
948,052

 
$
972,246

 
 _________________________
(a) 
Assets not allocated to segments at first quarter-end 2016 principally consist of cash and cash equivalents of $142,646,000 and an income tax receivable of $14,359,000. Assets not allocated to segments at year-end 2015 principally consist of cash and cash equivalents of $96,442,000 and an income tax receivable of $12,056,000.
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 first quarter 2016, no single customer accounted for more than ten percent of our total revenues.
Segment revenues and earnings are as follows:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Revenues:
 
 
 
Real estate
$
36,098

 
$
32,830

Oil and gas
5,352

 
13,185

Other natural resources
438

 
1,790

Total revenues
$
41,888

 
$
47,805

Segment earnings (loss):
 
 
 
Real estate
$
20,224

 
$
9,066

Oil and gas
(12,441
)
 
(2,941
)
Other natural resources
(581
)
 
(391
)
Total segment earnings (loss)
7,202

 
5,734

Items not allocated to segments (a)
(14,204
)
 
(18,251
)
Income (loss) before taxes attributable to Forestar Group Inc.
$
(7,002
)
 
$
(12,517
)
  _________________________
(a) 
Items not allocated to segments consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
General and administrative expense
$
(4,973
)
 
$
(6,020
)
Shared-based and long-term incentive compensation expense
(1,544
)
 
(3,458
)
Interest expense
(7,639
)
 
(8,821
)
Other corporate non-operating income
(48
)
 
48

 
$
(14,204
)
 
$
(18,251
)

16



Note 17—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 first quarter-end 2016, we have one VIE. We account for this VIE using the equity method since we are not the primary beneficiary. Although we have certain rights regarding major decisions, we do not have the power to direct the activities that are most significant to the economic performance of the VIE. At first quarter-end 2016, the VIE has total assets of $4,161,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of $2,208,000, which includes $2,203,000 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 8—Investment in Unconsolidated Ventures. At first quarter-end 2016, our investment in the VIE is $1,558,000 and is included in investment in unconsolidated ventures. In first quarter 2016, we contributed $44,000 to this VIE. Our maximum exposure to loss related to the VIE is $3,766,000, which exceeds our investment as we have a nominal general partner interest and could be held responsible for its liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.
Note 18—Share-Based and Long-Term Incentive Compensation
Share-based and long-term incentive compensation expense consists of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Cash-settled awards
$
619

 
$
296

Equity-settled awards
479

 
1,997

Restricted stock
6

 
17

Stock options
276

 
1,032

Total share-based compensation
1,380

 
3,342

Deferred cash
164

 
116

 
$
1,544

 
$
3,458

Share-based and long-term incentive compensation expense is included in:
 
First Quarter
 
2016
 
2015
 
(In thousands)
General and administrative expense
$
1,506

 
$
2,122

Other operating expense
38

 
1,336

 
$
1,544

 
$
3,458







17


Share-Based Compensation
In first quarter 2016, we granted 174,419 equity-settled awards to employees in the form of restricted stock units which vest ratably over three years and provide for accelerated vesting upon retirement, disability, death, or if there is a change in control. In addition, in first quarter 2016, we granted 69,760 restricted stock units to our board of directors which vest 25 percent at grant date and 25 percent at each subsequent quarterly board meeting and a stock option grant to acquire 20,000 shares of common stock for each of the two new directors, of which 6,500 shares vest on the first and second anniversary of the date of grant and the remaining 7,000 shares vest on the third anniversary of the date of grant. The option term is ten years. Expense associated with annual restricted stock units and non-qualified stock options to our board of directors is included in share-based compensation expense.
Excluded from share-based compensation expense in the table above are fees earned by our board of directors in the amount of $265,000 and $285,000 in first quarter 2016 and 2015 for which they elected to defer payment until retirement in the form of share-settled units. These expenses are included in general and administrative expense.
The fair value of awards granted to retirement eligible employees expensed at the date of grant was $600,000 and $517,000 in first quarter 2016 and 2015. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $3,879,000 at first quarter-end 2016.
In first quarter 2016 and 2015, we issued 165,167 and 157,201 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of 23,691 and 48,636 shares withheld having a value of $205,000 and $723,000 for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.
Long-Term Incentive Compensation
In first quarter 2016 and 2015, we granted $620,000 and $587,000 of long-term incentive compensation in the form of deferred cash compensation. The 2016 deferred cash awards vest annually over two years, and the 2015 deferred cash awards vest after three years. Both awards provide for accelerated vesting upon retirement, disability, death, or if there is a change in control. Expense associated with deferred cash awards is recognized ratably over the vesting period. The accrued liability was $319,000 and $225,000 at first quarter-end 2016 and year-end 2015 and is included in other liabilities.
Note 19—Subsequent Events
On April 18, 2016, we sold Eleven, a 257-unit multifamily project in Austin for $60,150,000. The transaction generated net proceeds of $35,150,000 after closing costs and prorations and payoff of the related debt of $23,936,000.
On May 4, 2016, we sold Radisson Hotel & Suites in Austin for $130,000,000. The transaction generated net proceeds of $112,000,000 after closing costs and prorations and payoff of the related debt of $15,400,000.
On May 6, 2016, we sold our remaining Bakken/Three Forks oil and gas properties for $50,000,000. Net proceeds after closing costs and prorations were $46,525,000. In second quarter 2016, we expect to incur an additional loss related to this transaction due to allocation of goodwill on a relative fair value basis to these assets. With this transaction, we have completely exited our oil and gas working interest assets in North Dakota.

 

18


Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of first quarter-end 2016, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated, or on a national or global scale;
our ability to achieve some or all of our key initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
future residential or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments;
accuracy of estimates and other assumptions related to investment in and development of real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation, oil and gas reserves, revenues, capital expenditures and lease operating expense accruals associated with our non-core oil and gas working interests, and depletion of our non-core oil and gas properties;
the levels of resale housing inventory in our mixed-use development projects and the regions in which they are located;
fluctuations in costs and expenses, including impacts from shortages in materials or labor;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in commodity prices;
demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
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;
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.

Other factors, including the risk factors described in Item 1A of our 2015 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

19


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.
Key Initiatives
Reducing costs across our entire organization;
Reviewing entire portfolio of assets;
Reviewing capital structure; and
Providing additional information.

Results of Operations
A summary of our consolidated results by business segment follows:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Revenues:
 
 
 
Real estate
$
36,098

 
$
32,830

Oil and gas
5,352

 
13,185

Other natural resources
438

 
1,790

Total revenues
$
41,888

 
$
47,805

Segment earnings (loss):
 
 
 
Real estate
$
20,224

 
$
9,066

Oil and gas
(12,441
)
 
(2,941
)
Other natural resources
(581
)
 
(391
)
Total segment earnings (loss)
7,202

 
5,734

Items not allocated to segments:
 
 
 
General and administrative expense
(4,973
)
 
(6,020
)
Share-based and long-term incentive compensation expense
(1,544
)
 
(3,458
)
Interest expense
(7,639
)
 
(8,821
)
Other corporate non-operating income
(48
)
 
48

Income (loss) before taxes
(7,002
)
 
(12,517
)
Income tax benefit
2,626

 
4,359

Net loss attributable to Forestar Group Inc.
$
(4,376
)
 
$
(8,158
)

20


Significant aspects of our results of operations follow:
First Quarter 2016
First quarter 2016 real estate segment earnings benefited from a $9,613,000 gain associated with the sale of our interest in the 360°, a 304-unit multifamily joint venture in Denver, and a $3,968,000 gain associated with sale of Music Row, a wholly-owned multifamily property under construction in Nashville, both as result of our announced plan to opportunistically exit our multifamily portfolio of assets.
First quarter 2016 oil and gas segment results were down compared with first quarter 2015 due to a $10,977,000 loss associated with the sale of non-core oil and gas properties principally located in Oklahoma, Kansas, Nebraska and North Dakota as a result of our announced plan to exit non-core oil and gas working interests.
Current Market Conditions
New U.S. single-family home starts ended March 2016 at 764,000 on a seasonally adjusted basis, nearly 23 percent above year-ago levels but below historical levels. Inventories of new homes are near historically low levels in many areas. In addition, declining finished lot inventories and limited supply of economically developable raw land has increased 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.
Global supply and demand fundamentals for crude oil at the end of March 2016 remained out of balance with high global and domestic inventories and slower global growth. West Texas Intermediate (WTI) oil prices averaged $33.18 per Bbl in first quarter 2016, nearly 32 percent lower than in first quarter 2015. Estimates for global demand growth continue to be tempered and could extend the global supply glut, resulting in an extended period of low crude oil pricing. Henry Hub natural gas prices in first quarter 2016 averaged $2.00/MMBtu, 31 percent lower than first quarter 2015 and the lowest first quarter average since 1999. Natural gas inventories ended winter withdrawal above the previous end of March record high in 2012 due to warmer-than-normal temperatures and continued high production volumes.
Business Segments
We manage our operations through three business segments:
Real estate,
Oil and gas, and
Other natural resources.
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 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 interests in 57 residential and mixed-use projects comprised of 7,000 acres of real estate located in 11 states and 15 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 87,000 acres of non-core timberland and undeveloped land in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. 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.

21


A summary of our real estate results follows:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Revenues
$
36,098

 
$
32,830

Cost of sales
(18,424
)
 
(18,054
)
Operating expenses
(11,088
)
 
(9,602
)
 
6,586

 
5,174

Interest income
122

 
869

Gain on sale of assets
13,581

 

Equity in earnings of unconsolidated ventures
15

 
2,944

Less: Net (income) loss attributable to noncontrolling interests
(80
)
 
79

Segment earnings
$
20,224

 
$
9,066

Revenues in our owned and consolidated ventures consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Residential real estate
$
17,045

 
$
18,322

Commercial real estate
2,655

 
1,377

Undeveloped land
5,703

 
2,015

Commercial and income producing properties
9,690

 
10,869

Other
1,005

 
247

 
$
36,098

 
$
32,830

Residential real estate revenues principally consist of the sale of single-family lots to local, regional and national homebuilders. Residential lot sales volume in first quarter 2016 was comparable with first quarter 2015, however, average price per lot sold was down 8 percent. Commercial real estate revenues principally consist of the sale of tracts to commercial developers that specialize in the construction and operation of income producing properties such as apartments, retail centers, or office buildings.
In first quarter 2016, we sold 1,972 acres of undeveloped land for $5,703,000, or approximately $2,892 per acre, generating approximately $4,314,000 in segment earnings, as compared with 731 acres sold for $2,015,000 or approximately $2,758 per acre, generating approximately $1,364,000 in segment earnings in first quarter 2015.
Commercial and income producing properties revenue includes revenues from hotel room sales and other guest services, rental revenues from our operating multifamily properties and reimbursement for costs paid to subcontractors plus development and construction fees from certain multifamily projects. First quarter 2016 and 2015 includes $199,000 and $2,029,000 in construction revenues associated with one multifamily joint venture fixed fee contract as general contractor. The construction of this multifamily joint venture project was completed in first quarter 2016. Development fee revenues in first quarter 2016 and 2015 were $1,298,000 and $407,000. The increase in development fee revenues in first quarter 2016 was related to contingent development fee earned on the 360° multifamily venture project upon completion of construction in accordance with the joint venture agreement. Rental revenues from our multifamily operating properties for first quarter 2016 and 2015 were $1,313,000 and $1,762,000. The decrease in rental revenues from our multifamily operating properties in first quarter 2016 when compared with first quarter 2015 was primarily due to the fourth quarter 2015 sale of Midtown Cedar Hill, a 354-unit multifamily property we developed near Dallas. Revenues from hotel room sales and other guest services were $6,880,000 and $6,672,000 in first quarter 2016 and 2015.
The increase in other revenues in first quarter 2016 is primarily associated with easement revenues associated with our undeveloped land.




22


Units sold consist of:
 
First Quarter
 
2016
 
2015
Owned and consolidated ventures:
 
 
 
Residential lots sold
248

 
242

Revenue per lot sold
$
68,696

 
$
73,064

Commercial acres sold
8

 
4

Revenue per commercial acre sold
$
331,033

 
$
329,863

Undeveloped acres sold
1,972

 
731

Revenue per acre sold
$
2,892

 
$
2,758

Ventures accounted for using the equity method:
 
 
 
Residential lots sold
36

 
47

Revenue per lot sold
$
81,643

 
$
92,551

Commercial acres sold

 
29

Revenue per commercial acre sold
$

 
$
312,237

Undeveloped acres sold

 

Revenue per acre sold
$

 
$

Cost of sales in first quarter 2016 and 2015 include $526,000 and $2,434,000 related to multifamily construction contract costs we incurred as general contractor and paid to subcontractors associated with our development of a multifamily venture property near Denver which was completed in first quarter 2016. Included in multifamily construction contract costs are charges of $327,000 and $405,000 in first quarter 2016 and 2015 reflecting estimated cost increases associated with our fixed fee contracts as general contractor. Cost of sales in first quarter 2015 also includes $504,000 of non-cash asset impairment charges associated with a residential development with golf course and country club property located near Fort Worth which was sold in April 2015.
Operating expenses consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
3,687

 
$
2,299

Property taxes
2,027

 
2,114

Professional services
1,205

 
1,434

Depreciation and amortization
856

 
1,724

Other
3,313

 
2,031

 
$
11,088

 
$
9,602

The increase in employee compensation and benefits expense in first quarter 2016 is principally related to $1,422,000 of severance costs incurred as a result of our key initiatives to reduce costs across our entire organization and classifying our multifamily portfolio as non-core and our announced plan to exit these assets. The decrease in depreciation and amortization in first quarter 2016 is primarily due to the fourth quarter 2015 sale of Midtown Cedar Hill multifamily project, full amortization of in-place leases associated with Eleven multifamily project and discontinuing depreciation of the Radisson Hotel & Suites and Eleven multifamily project due to first quarter 2016 classification as assets held for sale. Other operating expense in first quarter 2016 includes $1,058,000 of pre-acquisition costs related to multifamily projects that we no longer intend to pursue.
Interest income principally represents earnings from a loan secured by a mixed-use real estate community in Houston that was paid in full in first quarter 2015 and interest income received on reimbursements from utility and improvement districts.
Gain on sale of assets in first quarter 2016 includes a gain of $9,613,000 related to sale of our interest in 360°, a 304-unit multifamily joint venture in Denver for $13,917,000, of which $750,000 was held in escrow and the gain deferred until completion of certain construction related post-closing obligations and $3,968,000 gain associated with sale of Music Row, a wholly-owned multifamily property under construction in Nashville for $14,703,000, both as a result of our announced plan to opportunistically exit our multifamily portfolio of assets.
Decrease in equity earnings from our unconsolidated ventures in first quarter 2016 compared with first quarter 2015 is primarily due to lower residential lot sales and no commercial real estate sales activity.

23


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
$
264,766

 
$
5,710

 
$
22,109

 
$
292,585

Georgia
5,383

 
65,753

 

 
71,136

California
8,915

 
25,033

 

 
33,948

North & South Carolina
12,509

 
135

 

 
12,644

Colorado
24,040

 
6

 

 
24,046

Tennessee
15,524

 

 

 
15,524

Other
21,232

 
238

 

 
21,470

 
$
352,369

 
$
96,875

 
$
22,109

 
$
471,353

Oil and Gas
Our oil and gas segment is focused on maximizing the value from our owned oil and gas mineral interests through promoting exploration, development and production activities by increasing acreage leased, lease rates and royalty interests.
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. At first quarter-end 2016, we have about 15,000 net acres leased to others, about 40,000 net acres leased to others that are held by production related to our owned mineral interests and 533 gross wells operated by others on our owned mineral acres.
In addition, we are focused on exiting our non-core working interest oil and gas assets, principally in the Bakken/Three Forks of North Dakota and Lansing - Kansas City formation of Nebraska and Kansas. In first quarter 2016, we sold our remaining Nebraska and Kansas oil and gas properties for $21,000,000 and sold certain oil and gas properties in North Dakota for $9,499,000 which includes $3,269,000 in reimbursement of capital costs incurred on in-progress wells that were assumed by the buyer. On May 6, 2016 we sold our our remaining Bakken/Three Forks oil and gas properties for $50,000,000. Net proceeds after purchase price adjustments were $46,525,000 and with the close of this transaction we have completely exited our oil and gas working interests in North Dakota.
A summary of our oil and gas results follows:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Revenues
$
5,352

 
$
13,185

Cost of oil and gas producing activities
(5,194
)
 
(11,542
)
Operating expenses
(1,654
)
 
(5,856
)
 
(1,496
)
 
(4,213
)
Gain (loss) on sale of assets
(10,977
)
 
1,176

Equity in earnings of unconsolidated ventures
32

 
96

Segment earnings (loss)
$
(12,441
)
 
$
(2,941
)




24


Revenues consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Oil production (a)
$
4,522

 
$
11,304

Gas production
749

 
1,516

Other (principally lease bonus and delay rentals)
81

 
365

 
$
5,352

 
$
13,185

 _________________________
(a) 
Oil production includes revenues from oil, condensate and natural gas liquids (NGLs).
In first quarter 2016, oil and gas production revenues decreased principally as a result of lower oil and gas prices and lower production volumes due to selling producing oil and gas properties as result of our exiting non-core working interest assets. The decline in oil prices negatively impacted revenues by $2,623,000 and the decline in oil volumes negatively impacted revenues by $4,160,000 in first quarter 2016 when compared with first quarter 2015. The decline in gas prices negatively impacted revenues by $303,000 and the decline in gas production volumes negatively impacted revenues by $463,000 in first quarter 2016 when compared with first quarter 2015.
Other revenues include $74,000 in lease bonuses received from leasing 366 net mineral acres owned in Texas and Louisiana in first quarter 2016 compared with $279,000 lease bonus revenues received from leasing 800 net mineral acres in Texas and Louisiana in first quarter 2015.
Cost of oil and gas producing activities consists of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Depletion and amortization
$
1,752

 
$
7,204

Production costs
3,329

 
4,102

Exploration costs
42

 
168

Non-cash impairment of proved oil and gas properties and unproved leasehold interests

 
7

Other
71

 
61

 
$
5,194

 
$
11,542

Cost of oil and gas producing activities decreased in first quarter 2016 when compared with first quarter 2015 primarily due to lower depletion and amortization expense as a result of our key initiatives to exit non-core oil and gas properties and lower basis due to previously recorded non-cash impairment charges. Depletion and amortization represent non-cash costs of producing oil and gas associated with our working interests and is computed based on the units of production method.
Exploration costs principally represent exploratory dry hole costs, geological and geophysical and seismic study costs.
Production costs principally represent lease operating expenses associated with producing working interest wells and our share of production severance taxes related to both our royalty and working interests.


25


Oil and gas produced and average unit prices related to our royalty and working interests follows:
 
First Quarter
 
2016
 
2015
Consolidated entities:
 
 
 
Oil production (barrels)
162,000

 
269,900

Average oil price per barrel
$
26.86

 
$
40.18

NGL production (barrels)
23,600

 
23,700

Average NGL price per barrel
$
7.22

 
$
19.28

Total oil production (barrels), including NGLs
185,600

 
293,600

Average total oil price per barrel, including NGLs
$
24.36

 
$
38.50

Gas production (millions of cubic feet)
382.4

 
478.1

Average price per thousand cubic feet
$
1.96

 
$
3.17

Our share of ventures accounted for using the equity method:
 
 
 
Gas production (millions of cubic feet)
37.3

 
42.3

Average price per thousand cubic feet
$
1.78

 
$
3.30

Total consolidated and our share of equity method ventures:
 
 
 
Oil production (barrels)
162,000

 
269,900

Average oil price per barrel
$
26.86

 
$
40.18

NGL production (barrels)
23,600

 
23,700

Average NGL price per barrel
$
7.22

 
$
19.28

Total oil production (barrels), including NGLs
185,600

 
293,600

Average total oil price per barrel, including NGLs
$
24.36

 
$
38.50

Gas production (millions of cubic feet)
419.7

 
520.4

Average price per thousand cubic feet
$
1.94

 
$
3.18

Total BOE (barrel of oil equivalent) (a)
255,600

 
380,400

Average price per barrel of oil equivalent
$
20.89

 
$
34.07

 _________________________
(a) 
Gas is converted to barrels of oil equivalent (BOE) using a conversion of six Mcf to one barrel of oil.
Operating expenses consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
827

 
$
2,621

Professional and consulting services
414

 
707

Depreciation
85

 
211

Other
328

 
2,317

 
$
1,654

 
$
5,856

The decrease in operating expenses in first quarter 2016 compared with first quarter 2015 is primarily due to our key initiative to reduce costs across our entire organization and corresponding reduction in our workforce. First quarter 2015 operating expenses includes $1,750,000 for a lease termination charge associated with closing our office in Fort Worth, Texas and $1,068,000 of employee severance and retention costs.
In first quarter 2016, we recorded a net loss of $10,977,000 on the sale of 190,960 mineral acres leased from others and 185 gross (66 net) producing oil and gas wells primarily in Nebraska, Kansas, Oklahoma and North Dakota for total sales proceeds of $32,227,000. A significant portion of the net loss on sale, $7,244,000, is related to write-off of allocated goodwill to sold producing oil and gas properties. In first quarter 2015, we recorded a gain of $1,176,000 related to the sale of 290 net mineral acres leased from others in North Dakota for approximately $2,000,000.

26


Other Natural Resources
Our other natural resources segment manages our timber holdings, recreational leases and water resource initiatives. At first quarter-end 2016, we have about 87,000 real estate acres with timber we own directly or through ventures, primarily in Georgia and Texas. 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 groundwater leases in central Texas.

A summary of our other natural resources results follows:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Revenues
$
438

 
$
1,790

Cost of sales
(385
)
 
(920
)
Operating expenses
(634
)
 
(1,266
)
 
(581
)
 
(396
)
Equity in earnings of unconsolidated ventures

 
5

Segment earnings (loss)
$
(581
)
 
$
(391
)
Revenues consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Fiber
$
151

 
$
1,245

Water

 
100

Recreational leases and other
287

 
445

 
$
438

 
$
1,790

Fiber sold consists of:
 
First Quarter
 
2016
 
2015
Pulpwood tons sold
5,300

 
27,500

Average pulpwood price per ton
$
8.73

 
$
8.63

Sawtimber tons sold
3,200

 
20,100

Average sawtimber price per ton
$
21.02

 
$
21.50

Total tons sold
8,500

 
47,600

Average stumpage price per ton (a)
$
13.30

 
$
14.07

 _________________________
(a) 
Average stumpage price per ton is based on gross revenues less cut and haul costs.
Water revenues are associated with a groundwater reservation agreement with Hays County, Texas, which commenced in 2013 and was terminated in second quarter 2015.
Information about our recreational leases follows:
 
First Quarter
 
2016
 
2015
Average recreational acres leased
87,500

 
109,700

Average price per leased acre
$
9.39

 
$
8.66

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.

27


Operating expenses consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
301

 
$
683

Professional and consulting services
211

 
349

Other
122

 
234

 
$
634

 
$
1,266


The decrease in operating expenses in first quarter 2016 when compared with first quarter 2015 is primarily due to our key initiative to reduce costs across entire organization and corresponding reduction in our workforce. Employee compensation and benefits includes $164,000 in severance costs incurred in first quarter 2016. Operating expenses associated with our water resources initiatives for first quarter 2016 and 2015 were $297,000 and $750,000.
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 and long-term incentive compensation, 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 expense
General and administrative expenses consist of:
 
First Quarter
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
2,585

 
$
2,208

Professional and consulting services
946