10-K 1 for1231201610-k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 78746-5149
(Address of Principal Executive Offices, including Zip Code)
Registrant’s telephone number, including area code: (512) 433-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange On Which Registered
Common Stock, par value $1.00 per share
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes  ¨    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer þ
  
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing sales price of the Common Stock on the New York Stock Exchange on June 30, 2016, was approximately $210 million. For purposes of this computation, all officers, directors, and ten percent beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or ten percent beneficial owners are, in fact, affiliates of the registrant.
As of February 27, 2017, there were 41,694,432 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Company’s definitive proxy statement for the 2017 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
 




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

2



PART I
 
Item 1.
Business
Overview
Forestar Group Inc. is a residential and mixed-use real estate development company. In our core community development business we own directly or through ventures interests in 50 residential and mixed-use projects comprised of 4,600 acres of real estate located in 10 states and 14 markets. In addition, we own interests in various other assets that have been identified as non-core that the company is divesting opportunistically over time. At year-end 2016, our remaining non-core assets principally include approximately 523,000 net acres of owned mineral assets principally located in Texas, Louisiana, Georgia and Alabama, 19,000 acres of timberland and undeveloped land (including mitigation banking), four multifamily assets and approximately 20,000 acres of groundwater leases in central Texas. On February 17, 2017, we sold our owned mineral assets for $85.6 million. In 2016, we had revenues of $197.3 million and net income of $58.6 million. Unless the context otherwise requires, references to “we,” “us,” “our” and “Forestar” mean Forestar Group Inc. and its consolidated subsidiaries. Unless otherwise indicated, information is presented as of December 31, 2016, and references to acreage owned include approximate acres owned by us and ventures regardless of our ownership interest in a venture.
Key Initiatives
Reducing costs across our entire organization;
Reviewing entire portfolio of assets (complete non-core asset sales); and
Reviewing capital structure (allocate capital to maximize shareholder value).    
2016 Transformation Highlights (including ventures):
Core Community Development:
Sold 1,940 residential lots for approximately $68,200 per lot
Approximately 2,100 lots under option contracts with builders at year-end 2016
Sold 298 commercial acres for approximately $44,600 per acre (principally non-core projects)
Sold 1,792 residential tract acres for approximately $8,700 per acre (principally non-core projects)
Cost Reductions:
Reduced SG&A, including discontinued operations, by over 28% compared with full year 2015
Divest Non-core Assets:
Executed non-core asset sales generating $481.9 million in pre-tax net proceeds:
Assets
Pre-Tax Net Proceeds
 
(In millions)
Timberland and Undeveloped Land (bulk and retail, ~73,000 acres)
$
138.0

Radisson Hotel & Suites
128.8

Multifamily properties (five properties)
118.7

Oil and Gas Working Interests
77.1

Non-core Community Development Projects (five projects)
19.3

 
$
481.9

Reduced outstanding debt by $277.8 million in 2016 and $323.3 million since third quarter-end 2015
Business Segments
We manage our operations through three business segments:
Real estate,
Mineral resources, and
Other.

3



Our real estate segment provided approximately 96% percent of our 2016 consolidated revenues. We are focused on maximizing real estate value through the entitlement and development of strategically located residential and mixed-use communities. We secure entitlements by delivering thoughtful plans and balanced solutions that meet the needs of communities where we operate. Residential development activities target lot sales to local, regional and national home builders who build quality products and have strong and effective marketing and sales programs. The lots we develop in the majority of our communities are for mid-priced homes, predominantly in the first and second move up categories. We invest in projects principally in regions across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment. A majority of our active real estate projects are developed on land we or our ventures acquired in the open market. In 2016, we announced that multifamily is a non-core business and are opportunistically divesting our multifamily portfolio and will no longer allocate capital to new communities in this business. At year-end 2016, a multifamily site in Austin was classified as assets held for sale.
Our mineral resources segment provided three percent of our 2016 consolidated revenues. We promote the exploration, development and production of oil and gas on our owned mineral interests. These interests include 523,000 owned net mineral acres which we determined were non-core in 2016 and we are opportunistically divesting these assets over time. At year-end 2016, we classified our non-core mineral assets as held for sale. On February 17, 2017, we sold these assets for $85.6 million.
Our other segment, all of which is non-core, provided one percent of our 2016 consolidated revenues. We sell wood fiber from our land, primarily in Georgia, and lease land for recreational uses. We have 19,000 acres of non-core timberland and undeveloped land that was classified as assets held for sale at year-end 2016. In addition, we have non-core water interests in 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 20,000 acres of groundwater leases in central Texas that were classified as assets held for sale at year-end 2016.
Our results of operations, including information regarding our business segments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8, Financial Statements and Supplementary Data.
Real Estate
In our real estate segment, we conduct project planning and management activities related to the acquisition, entitlement, development and sale of real estate, primarily residential and mixed-use communities, which we refer to as community development. We own and manage our projects either directly or through ventures, which we use to achieve a variety of business objectives, including more effective capital deployment, risk management, and leveraging a partner’s local market contacts and expertise. Our development projects are principally located in the major markets of Texas.
We have two real estate projects representing approximately 730 acres currently in the entitlement process in California, which includes obtaining zoning and access to water, sewer and roads. In fourth quarter 2016, we classified 3,700 acres in Texas previously in the entitlement process as timberland and undeveloped land as it was determined it was unlikely this project would be entitled and developed in the future, and at year-end 2016 it was classified as assets held for sale. Additional entitlements, such as flexible land use provisions, annexation, and the creation of local financing districts generate additional value for our business and may provide us the right to reimbursement of major infrastructure costs. We use return criteria, which include return on cost, internal rate of return, cash multiples, and margin on sales when determining whether to invest initially or make additional investment in a project. When investment in development meets our return criteria, we will initiate the development process with subsequent sale of lots to home builders or for commercial tracts, internal development, sale to or venture with third parties.
We have 50 entitled, developed or under development projects in 10 states and 14 markets encompassing 4,600 acres planned for residential and commercial uses. We may sell land at any point when additional time required for entitlement or investment in development will not meet our return criteria. In 2016, we sold nearly 73,000 acres of timberland and undeveloped land at an average price of $1,925 per acre, of which 58,000 acres were bulk timberland and undeveloped land sales and 15,000 acres were retail land sales.
A summary of our real estate projects in the entitlement process (a) at year-end 2016 follows:
Project
 
County
 
Market
 
Project Acres (b)
California
 
 
 
 
 
 
Hidden Creek Estates
 
Los Angeles
 
Los Angeles
 
700

Terrace at Hidden Hills
 
Los Angeles
 
Los Angeles
 
30

Total
 
 
 
 
 
730

 _____________________

4



(a) 
A project is deemed to be in the entitlement process when customary steps necessary for the preparation of an application for governmental land-use approvals, such as conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.
(b) 
Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.

A summary of our non-core timberland and undeveloped land classified as assets held for sale at year-end 2016 follows:
 
 
Acres
Timberland
 
 
Georgia
 
11,100

Texas (a)
 
7,900

Total
 
19,000

 _____________________
(a) 
Includes 3,700 acres in Houston that was previously in the entitlement process.
Products
The majority of our projects are single-family residential and mixed-use communities. In some cases, commercial land uses within a project enhance the desirability of the community by providing convenient locations for resident support services.
We develop lots for single-family homes on sites we may purchase. We sell residential lots primarily to local, regional and national home builders. We have 4,600 acres, principally in the major markets of Texas, comprised of land planned for approximately 10,200 residential lots and units. We generally focus our lot sales on the first and second move-up primary housing categories. First and second move-up segments are homes priced above entry-level products yet below the high-end and custom home segments.
Commercial tracts are developed internally or ventured with commercial developers that specialize in the construction and operation of income producing properties, such as apartments, retail centers, or office buildings. We also sell land designated for commercial use to regional and local commercial developers. We have about 770 acres of entitled land designated for commercial use.
Cibolo Canyons is a significant mixed-use project in the San Antonio market area. Cibolo Canyons includes 2,100 acres planned to include 1,791 residential lots, of which 1,142 have been sold as of year-end 2016 at an average price of $75,000 per lot. The residential component includes not only traditional single-family homes but also an active adult section, and is planned to include condominiums. The remaining 58 acres of commercial component is designated principally for multifamily and retail uses. Located at Cibolo Canyons is the JW Marriott® San Antonio Hill Country Resort & Spa (Resort), a 1,002 room destination resort and two PGA Tour® Tournament Players Club® (TPC) golf courses designed by Pete Dye and Greg Norman. We have the right to receive from the Cibolo Canyons Special Improvement District (CCSID) nine percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by CCSID through 2034 and reimbursement of certain infrastructure costs related to the mixed-use development. The amount we receive is net of annual ad valorem tax reimbursements by CCSID to the third-party owners of the resort through 2020. In addition, these payments will be net of debt service on bonds issued in 2014 by CCSID as discussed below which are collateralized by hotel occupancy tax (HOT) and other resort sales tax through 2034.
In 2014, we received $50,550,000 from CCSID principally related to its issuance of $48,900,000 Hotel Occupancy Tax (HOT) and Sales and Use Tax Revenue Bonds, resulting in recovery of our full Resort investment. These bonds are obligations solely of CCSID and are payable from HOT and sales and use taxes levied by CCSID. To facilitate the issuance of the bonds, we provided a $6,846,000 letter of credit to the bond trustee as security for certain debt service fund obligations in the event CCSID tax collections are not sufficient to support payment of the bonds in accordance with their terms. The letter of credit must be maintained until the earlier of redemption of the bonds or scheduled bond maturity in 2034. We also entered into an agreement with the owner of the Resort to assign its senior rights to us in exchange for consideration provided by us, including a surety bond to be drawn if CCSID tax collections are not sufficient to support ad valorem tax rebates payable. The surety bond decreases as CCSID makes annual ad valorem tax rebate payments, which obligation is scheduled to be retired in full by 2020.

5



A summary of activity within our projects in the development process, which includes entitled, developed and under development single-family and mixed-use projects, at year-end 2016 follows:
 
 
 
 
 
 
Residential Lots/Units
 
Commercial Acres
Project
 
County
 
Interest
Owned
(a)
 
Lots/Units Sold
Since
Inception
 
Lots/Units
Remaining
 
Acres Sold
Since
Inception
 
Acres
   Remaining
Projects with lots/units in inventory, under development or future planned development, projects with remaining commercial acres only and projects sold out in 2016
Texas
 
 
 
 
 
 
 
 
 
 
 
 
Austin
 
 
 
 
 
 
 
 
 
 
 
 
Arrowhead Ranch
 
Hays
 
100
%
 
6

 
378

 

 
19

The Colony
 
Bastrop
 
100
%
 
566

 

 
27

 

Double Horn Creek
 
Burnet
 
100
%
 
167

 

 

 

Hunter's Crossing
 
Bastrop
 
100
%
 
510

 

 
54

 
51

La Conterra
 
Williamson
 
100
%
 
202

 

 
3

 

Westside at Buttercup Creek
 
Williamson
 
100
%
 
1,497

 

 
66

 

 
 
 
 
 
 
2,948

 
378

 
150

 
70

Corpus Christi
 
 
 
 
 
 
 
 
 
 
 
 
Caracol
 
Calhoun
 
75
%
 
65

 

 
14

 

Padre Island (b)
 
Nueces
 
50
%
 

 

 

 
15

Tortuga Dunes
 
Nueces
 
75
%
 
95

 

 
4

 

 
 
 
 
 
 
160

 

 
18

 
15

Dallas-Ft. Worth
 
 
 
 
 
 
 
 
 
 
 
 
Bar C Ranch
 
Tarrant
 
100
%
 
467

 
654

 

 

Keller
 
Tarrant
 
100
%
 

 

 
1

 

Lakes of Prosper
 
Collin
 
100
%
 
187

 
100

 
4

 

Lantana
 
Denton
 
100
%
 
3,670

 
432

 
44

 

Maxwell Creek
 
Collin
 
100
%
 
1,001

 

 
10

 

Parkside
 
Collin
 
100
%
 
138

 
62

 

 

The Preserve at Pecan Creek
 
Denton
 
100
%
 
631

 
151

 

 
7

River's Edge
 
Denton
 
100
%
 

 
202

 

 

Stoney Creek
 
Dallas
 
100
%
 
320

 
376

 

 

Summer Creek Ranch
 
Tarrant
 
100
%
 
983

 
245

 
35

 
44

Timber Creek
 
Collin
 
88
%
 
80

 
521

 

 

Village Park
 
Collin
 
100
%
 
567

 

 
3

 
2

 
 
 
 
 
 
8,044

 
2,743

 
97

 
53

Houston
 
 
 
 
 
 
 
 
 
 
 
 
Barrington Kingwood
 
Harris
 
100
%
 
176

 
4

 

 

City Park
 
Harris
 
75
%
 
1,468

 

 
58

 
104

Harper's Preserve (b)
 
Montgomery
 
50
%
 
588

 
1,094

 
30

 
49

Imperial Forest
 
Harris
 
100
%
 
84

 
347

 

 

Long Meadow Farms (b)
 
Fort Bend
 
38
%
 
1,648

 
149

 
194

 
99

Southern Trails (b)
 
Brazoria
 
80
%
 
954

 
41

 
1

 

Spring Lakes
 
Harris
 
100
%
 
348

 

 
25

 
4

Summer Lakes
 
Fort Bend
 
100
%
 
780

 
294

 
56

 

Summer Park
 
Fort Bend
 
100
%
 
125

 
74

 
34

 
67

Willow Creek Farms II
 
Waller / Fort Bend
 
90
%
 
154

 
111

 

 

 
 
 
 
 
 
6,325

 
2,114

 
398

 
323

San Antonio
 
 
 
 
 
 
 
 
 
 
 
 
Cibolo Canyons
 
Bexar
 
100
%
 
1,142

 
649

 
97

 
58

Oak Creek Estates
 
Comal
 
100
%
 
326

 
227

 
13

 

Olympia Hills
 
Bexar
 
100
%
 
747

 
7

 
10

 

Stonewall Estates (b)
 
Bexar
 
50
%
 
378

 
8

 

 

 
 
 
 
 
 
2,593

 
891

 
120

 
58

Total Texas
 
 
 
 
 
20,070

 
6,126

 
783

 
519

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Lots/Units
 
Commercial Acres
Project
 
County
 
Interest
Owned
(a)
 
Lots/Units Sold
Since
Inception
 
Lots/Units
Remaining
 
Acres Sold
Since
Inception
 
Acres
   Remaining
Colorado
 
 
 
 
 
 
 
 
 
 
 
 
Denver
 
 
 
 
 
 
 
 
 
 
 
 
Buffalo Highlands
 
Weld
 
100
%
 

 
164

 

 

Cielo
 
Douglas
 
100
%
 

 
343

 

 

Johnstown Farms
 
Weld
 
100
%
 
281

 
317

 
2

 

Pinery West
 
Douglas
 
100
%
 
86

 

 
20

 
104

Stonebraker
 
Weld
 
100
%
 

 
603

 

 

 
 
 
 
 
 
367

 
1,427

 
22

 
104

Georgia
 
 
 
 
 
 
 
 
 
 
 
 
Atlanta
 
 
 
 
 
 
 
 
 
 
 
 
Harris Place
 
Paulding
 
100
%
 
22

 
5

 

 

Montebello (b) 
 
Forsyth
 
90
%
 

 
224

 

 

Seven Hills
 
Paulding
 
100
%
 
912

 
341

 
26

 
113

West Oaks
 
Cobb
 
100
%
 
6

 
50

 

 

 
 
 
 
 
 
940

 
620

 
26

 
113

North & South Carolina
 
 
 
 
 
 
 
 
 
 
 
 
Charlotte
 
 
 
 
 
 
 
 
 
 
 
 
Ansley Park
 
Lancaster
 
100
%
 

 
307

 

 

Habersham
 
York
 
100
%
 
91

 
96

 

 
6

Moss Creek
 
Cabarrus
 
100
%
 

 
84

 

 

Walden
 
Mecklenburg
 
100
%
 

 
384

 

 

 
 
 
 
 
 
91

 
871

 

 
6

Raleigh
 
 
 
 
 
 
 
 
 
 
 
 
Beaver Creek (b)
 
Wake
 
90
%
 
31

 
162

 

 

 
 
 
 
 
 
31

 
162

 

 

 
 
 
 
 
 
122

 
1,033

 

 
6

Tennessee
 
 
 
 
 
 
 
 
 
 
 
 
Nashville
 
 
 
 
 
 
 
 
 
 
 
 
Beckwith Crossing
 
Wilson
 
100
%
 
32

 
67

 

 

Morgan Farms
 
Williamson
 
100
%
 
132

 
41

 

 

Scales Farmstead
 
Williamson
 
100
%
 
26

 
171

 

 

Weatherford Estates
 
Williamson
 
100
%
 
8

 
9

 

 

 
 
 
 
 
 
198

 
288

 

 

Wisconsin
 
 
 
 
 
 
 
 
 
 
 
 
Madison
 
 
 
 
 
 
 
 
 
 
 
 
Juniper Ridge/Hawks Woods (b) (d)
 
Dane
 
90
%
 
18

 
196

 

 

Meadow Crossing II (b) (c)
 
Dane
 
90
%
 
7

 
165

 

 

 
 
 
 
 
 
25

 
361

 

 

Arizona, California, Missouri, Utah
 
 
 
 
 
 
 
 
 
 
 
 
Tucson
 
 
 
 
 
 
 
 
 
 
 
 
Boulder Pass (b) (d)
 
Pima
 
50
%
 
29

 
59

 

 

Dove Mountain
 
Pima
 
100
%
 

 
98

 

 

Oakland
 
 
 
 
 
 
 
 
 
 
 
 
San Joaquin River
 
Contra Costa/Sacramento
 
100
%
 

 

 
264

 
25

Kansas City
 
 
 
 
 
 
 
 
 
 
 
 
Somerbrook
 
Clay
 
100
%
 
185

 

 

 

Salt Lake City
 
 
 
 
 
 
 
 
 
 
 
 
Suncrest (b) (c)
 
Salt Lake
 
90
%
 

 
171

 

 

 
 
 
 
 
 
214

 
328

 
264

 
25

Total
 
 
 
 
 
21,936

 
10,183

 
1,095

 
767

___________________

7



(a) 
Interest owned reflects our total interest in the project, whether directly or indirectly, which may be different than our economic interest in the project.
(b) 
Projects in ventures that we account for using equity method.
(c)
Venture project that develops and sells homes.
(d)
Venture project that develops and sells lots and homes.
A summary of our non-core multifamily properties, excluding one multifamily site in Austin classified as held for sale, at year-end 2016 follows:
Project
 
Market
 
Interest
Owned
(a)
 
Type
 
Acres
 
Description
Elan 99
 
Houston
 
90
%
 
Multifamily
 
17

 
360-unit luxury apartment
Acklen
 
Nashville
 
30
%
 
Multifamily
 
4

 
320-unit luxury apartment
HiLine
 
Denver
 
25
%
 
Multifamily
 
18

 
385-unit luxury apartment
 
 
 
 
 
 
 
 
 
 
 
_____________________
(a) 
Interest owned reflects our total interest in the project, whether owned directly or indirectly, which may be different than our economic interest in the project.
Our net investment in owned and consolidated real estate projects by geographic location at year-end 2016 follows:
State
 
Entitled,
Developed,
and Under
Development
Projects
 
Undeveloped
Land and
Land in
Entitlement
 
Total
 
 
(In thousands)
Texas
 
$
167,772

 
$
2,639

 
$
170,411

Georgia
 
7,504

 
409

 
7,913

North and South Carolina
 
27,915

 
117

 
28,032

California
 
1,667

 
25,957

 
27,624

Tennessee
 
23,624

 
22

 
23,646

Colorado
 
29,514

 

 
29,514

Other
 
5,863

 

 
5,863

Total
 
$
263,859

 
$
29,144

 
$
293,003

Approximately 58 percent of our net investment in real estate is in the major markets of Texas.
Markets
Sales of new U.S. single-family homes according to U.S Census Bureau Department of Commerce declined 0.4% on a year over year basis as of December 31, 2016 and 10.4% below prior month's rate in December 2016, suggesting that the 40 basis point rise in mortgage rates and the return of winter weather affected December 2016 sales. Consumer confidence as measured by The Conference Board increased in December 2016 to its highest level since August 2001, registering 113.7 up from 109.4 in November 2016. The elevated monthly reading was attributed in part to increases in consumers' outlook for business conditions over the next six-months and more positive outlooks for the labor market and rising incomes. Builder confidence as measured by the NAHB/Wells Fargo Housing Market Index ended 2016 on a high note, jumping seven points to its highest reading since July 2005, largely attributable to a post-election bounce. On a monthly basis, housing starts increased significantly in December 2016 due to volatile multifamily activity, while housing permit activity, viewed as a precursor to starts increased 1.9% year over year basis ending December 2016. Home prices as measured by S&P Corelogic Case-Shiller Home Price index hit a new high in November 2016 after rising at approximately a 5.5% annual rate over the last two-and-a half years. As of the November 2016 reading, average home prices for the metropolitan statistical areas (MSAs) within the two composite indices were back to their winter 2007 levels. As of year-end 2016, finished vacant supply of new homes and vacant developed lot supply in MSAs in which Forestar's single family activity is located remained extremely tight, registering below the two month and 24 month equilibrium levels.
 Competition
We face significant competition for the acquisition, entitlement, development and sale of real estate in our markets. Our major competitors include other landowners who market and sell undeveloped land and numerous national, regional and local developers, including home builders. In addition, our projects compete with other development projects offering similar

8



amenities, products and/or locations. Competition also exists for investment opportunities, financing, available land, raw materials and labor, with entities that may possess greater financial, marketing and other resources than us. The presence of competition may increase the bargaining power of property owners seeking to sell. These competitive market pressures sometimes make it difficult to acquire, entitle, develop or sell land at prices that meet our return criteria. Some of our real estate competitors are well established and financially strong, may have greater financial resources than we do, or may be larger than us and/or have lower cost of capital and operating costs than we have and expect to have.
The land acquisition and development business is highly fragmented, and we are unaware of any meaningful concentration of market share by any one competitor. Enterprises of varying sizes, from individuals or small companies to large corporations, actively engage in the real estate development business. Many competitors are local, privately-owned companies. We have a few regional competitors and virtually no national competitors other than national home builders that, depending on business cycles and market conditions, may enter or exit the real estate development business in some locations to develop lots on which they construct and sell homes. During periods when access to capital is restricted, participants with weaker financial conditions tend to be less active.
 Discontinued Operations
In 2016, we have divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within our consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interests to owned mineral interests.
Mineral Resources
Our mineral resources 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. Our revenue from our owned mineral interests is primarily from oil and gas royalty interests, lease bonus payments and delay rentals received and other related activities. We typically lease our owned mineral interests to third parties for exploration and production of oil and gas.
At year-end 2016, we had approximately 523,000 net acres of owned mineral acres that are classified as assets held for sale. On February 17, 2017, we sold substantially all of our remaining oil and gas assets for a total purchase price of $85,600,000. Please read Note 21  — Subsequent Events for additional information about these items. At year-end 2016, we had about 57,000 net acres leased for oil and gas exploration activities, of which about 44,000 net acres were held by production from over 473 gross oil and gas wells that were operated by others, in which we had royalty interests. In addition, we had working interest ownership in 31 of these wells. Many of these wells are part of an oil and gas unit, however; we count each well regardless of the unitization.
A summary of our non-core owned mineral acres (a) at year-end 2016 follows:
State
 
Unleased
 
Leased (b)
 
Held By
Production (c)
 
Total (d)
Texas (e)
 
210,000

 
8,000

 
34,000

 
252,000

Louisiana (e) (f)
 
129,000

 
5,000

 
10,000

 
144,000

Georgia
 
84,000

 

 

 
84,000

Alabama
 
41,000

 

 

 
41,000

California
 
1,000

 

 

 
1,000

Indiana
 
1,000

 

 

 
1,000

 
 
466,000

 
13,000

 
44,000

 
523,000

 _____________________
(a)
Includes ventures.
(b)
Includes leases in primary lease term or for which a delayed rental payment has been received. In the ordinary course of business, leases covering a significant portion of leased net mineral acres may expire from time to time in a single reporting period.
(c)
Acres being held by production are producing oil or gas in paying quantities.
(d)
Texas, Louisiana, California and Indiana net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling. In fourth quarter

9



2016, we sold approximately 58,300 acres of timberland and undeveloped land in Georgia and Alabama which included selling any owned minerals rights associated with these acres.
(e) 
These owned mineral acre interests contain numerous oil and gas producing formations consisting of conventional, unconventional, and tight sand reservoirs. Of these reservoirs, we have mineral interests in and around production trends in the Wilcox, Frio, Cockfield, James Lime, Petet, Travis Peak, Cotton Valley, Austin Chalk, Haynesville Shale, Barnett Shale and Bossier formations.
(f) 
A significant portion of our Louisiana net acres was severed from the surface estate shortly before our 2007 spin-off. Under Louisiana law, a mineral servitude that is not producing minerals or which has not been the subject of good-faith drilling operations will cease to burden the property upon the tenth anniversary of the date of its creation. The total number of net acres subject to prescription can fluctuate based on oil and gas development and production activities. Some or all of approximately 70,000 of our Louisiana net acres may revert to the surface owner unless drilling operations or production commences prior to October 2017.
We engage in leasing certain portions of our owned mineral interests to third parties for the exploration and production of oil and gas. The significant terms of these arrangements include granting the exploration company the rights to oil or gas it may find and requiring that drilling be commenced within a specified period. In return, we may receive an initial lease payment (bonus), subsequent payments if drilling has not started within the specified period (delay rentals), and a percentage interest in the value of any oil or gas produced (royalties). If no oil or gas is produced during the required period, all rights are returned to us. Historically, our capital requirements for our owned mineral acres have been minimal.
Our royalty revenues are contractually defined and based on a percentage of production and are received in cash. Our royalty revenues fluctuate based on changes in the market prices for oil and gas, the decline in production in existing wells, and other factors affecting the third-party oil and gas exploration and production companies that operate wells on our minerals including the cost of development and production.
Most leases are for a three to five year term although a portion or all of a lease may be extended by the lessee as long as actual production is occurring. Financial terms vary based on a number of market factors including the location of the mineral interest, the number of acres subject to the agreement, proximity to transportation facilities such as pipelines, depth of formations to be drilled and risk.
Estimated Proved Reserves (Including Discontinued Operations)    
Our net estimated proved oil and gas reserves, all of which are located in the United States, as of year-end 2016, 2015 and 2014 are set forth in the table below. We engaged independent petroleum engineers, Netherland, Sewell & Associates, Inc. (NSAI), to assist us in preparing estimates of our proved oil and gas reserves in accordance with the definitions and guidelines of the Securities and Exchange Commission (SEC).

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Net quantities of proved oil and gas reserves related to our working and royalty interests follow, including oil and gas working interest assets classified as discontinued operations in 2016:
 
Reserves
 
Oil (a)
(Barrels)
 
Gas
(Mcf)
 
(In thousands)
Consolidated entities:
 
 
 
Proved developed
446

 
3,836

Proved undeveloped

 

Total proved reserves 2016
446

 
3,836

Proved developed
5,179

 
7,957

Proved undeveloped

 

Total proved reserves 2015
5,179

 
7,957

Proved developed
5,269

 
10,848

Proved undeveloped
2,403

 
1,801

Total proved reserves 2014
7,672

 
12,649

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

 
1,199

Proved undeveloped

 

Total proved reserves 2016

 
1,199

Proved developed

 
1,263

Proved undeveloped

 

Total proved reserves 2015

 
1,263

Proved developed

 
1,751

Proved undeveloped

 

Total proved reserves 2014

 
1,751

Total consolidated and our share of equity method ventures:
 
 
 
Proved developed
446

 
5,035

Proved undeveloped

 

Total proved reserves 2016
446

 
5,035

Proved developed
5,179

 
9,220

Proved undeveloped

 

Total proved reserves 2015
5,179

 
9,220

Proved developed
5,269

 
12,599

Proved undeveloped
2,403

 
1,801

Total proved reserves 2014
7,672

 
14,400

 _____________________
(a) 
Includes natural gas liquids.

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The following summarizes the changes in proved reserves for 2016:
 
Reserves
 
Oil
(Barrels)
 
Gas
(Mcf)
 
(In thousands)
Consolidated entities:
 
 
 
Year-end 2015
5,179

 
7,957

Revisions of previous estimates
(11
)
 
631

Extensions and discoveries
29

 

Acquisitions

 

Sales
(4,460
)
 
(3,756
)
Production
(291
)
 
(996
)
Year-end 2016
446

 
3,836

Our share of ventures accounted for using the equity method:
 
 
 
Year-end 2015

 
1,263

Revisions of previous estimates

 
79

Extensions and discoveries

 

Production

 
(143
)
Year-end 2016

 
1,199

Total consolidated and our share of equity method ventures:
 
 
 
Year-end 2016
446

 
5,035

We do not have any estimated reserves of synthetic oil, synthetic gas or products of other non-renewable natural resources that are intended to be upgraded into synthetic oil and gas.
At year-end 2016, we have no barrels of oil equivalent (BOE) of proved undeveloped (PUD) reserves because we have substantially divested all our non-core oil and gas working interest assets. At year-end 2015, we had no BOE of PUD reserves due to our planned divestiture of oil and gas working interest assets and not allocating capital to this non-core business. At year-end 2014, we had 2,703,000 BOE of PUD reserves.
We did not participate in any drilling activity in 2016. In 2015, we invested approximately $9,205,000 to convert 610,000 BOE of PUD reserves into proved developed reserves.
Reserve estimates were based on the economic and operating conditions existing at year-end 2016, 2015 and 2014. Oil and gas prices were based on the twelve month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December. For 2016, 2015 and 2014, prices used for reserve estimates were $42.75, $50.28 and $94.99 per barrel of West Texas Intermediate and gas prices of $2.48, $2.59 and $4.35 per MMBTU per the Henry Hub spot. All prices were then adjusted for quality, transportation fees and differentials. Since the determination and valuation of proved reserves is a function of the interpretation of engineering and geologic data and prices for oil and gas and the cost to produce these reserves, the reserves presented should be expected to change as future information becomes available. For an estimate of the standardized measure of discounted future net cash flows from proved oil and gas reserves, please read Note 19  — Supplemental Oil and Gas Disclosures (Unaudited) to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
The process of estimating oil and gas reserves is complex, involving decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices, capital costs, operating costs, revenues, taxes and quantities of recoverable oil and gas reserves might vary from those estimated. Any variance could materially affect the estimated quantities and present value of proved reserves. In addition, estimates of proved reserves may be adjusted to reflect production history, development, prevailing oil and gas prices and other factors, many of which are beyond our control.
The primary internal technical person in charge of overseeing our reserves estimates has a Bachelor of Science in Physics and Mathematics and a Master's of Science in Civil Engineering. He has over 40 years of domestic and international experience in the exploration and production business including 40 years of reserve evaluations. He has been a registered Professional Engineer for over 25 years.
As part of our internal control over financial reporting, we have a process for reviewing well production data and division of interest percentages prior to submitting well level data to NSAI to assist us in preparing reserve estimates. Our primary internal technical person and other members of management review the reserve estimates prepared by NSAI, including the underlying assumptions and estimates upon which they are based, for accuracy and reasonableness.

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Production
In 2016, 2015 and 2014, oil and gas produced was approximately 291,000, 1,158,500 and 931,100 barrels of oil at an average realized price of $27.58, $40.08 and $80.63 per barrel and 1,139.5, 2,134.8 and 2,060.2 MMcf of gas at an average realized price of $2.04, $2.60 and $4.19 per Mcf. Natural gas liquids (NGLs) are aggregated with oil volumes and prices.
In 2016, 2015 and 2014, production lifting costs, which exclude ad valorem and severance taxes, were $12.33, $12.95 and $13.40 per BOE.
Drilling and Other Exploratory and Development Activities
The following tables set forth the number of gross and net oil and gas wells in which we participated:
Gross Wells
 
 
 
 
Exploratory
 
Development
Year
 
Total
 
Oil
 
Gas
 
Dry
 
Oil
 
Gas
 
Dry
2016
 

 

 

 

 

 

 

2015 (a)
 
38

 
2

 

 
1

 
34

 

 
1

2014 (b)
 
119

 
21

 

 
32

 
46

 
1

 
19

 _____________________
(a) 
Of the gross wells drilled in 2015, we operated 3 wells or 8 percent. The remaining wells represent our participations in wells operated by others. The exploratory dry hole was located in Oklahoma.
(b) 
Of the gross wells drilled in 2014, we operated 72 wells or 61 percent. The remaining wells represent our participations in wells operated by others. Dry holes were principally located in Nebraska, Kansas and Oklahoma.
Net Wells
 
 
 
 
Exploratory
 
Development
Year
 
Total
 
Oil
 
Gas
 
Dry
 
Oil
 
Gas
 
Dry
2016
 

 

 

 

 

 

 

2015
 
6.3

 
0.7

 

 
0.8

 
4.3

 

 
0.5

2014
 
57.3

 
11.9

 

 
20.1

 
13.6

 
0.1

 
11.6

Present Activities
None.
Delivery Commitments
We have no oil or gas delivery commitments.
Wells and Acreage
The number of productive wells as of year-end 2016 follows:
 
Productive Wells
 
Gross
 
Net
Consolidated entities:

 
 
Oil
274

 
40.8

Gas
177

 
12.2

Total
451

 
53.0

Ventures accounted for using the equity method:
 
 
 
Oil

 

Gas
23

 
1.8

Total
23

 
1.8

Total consolidated and equity method ventures:
 
 
 
Oil
274

 
40.8

Gas
200

 
14.0

Total
474

 
54.8



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At year-end 2016, 2015 and 2014, we had royalty interests in 473, 534 and 551 gross wells. In addition, at year-end 2016, 2015 and 2014, we had working interests in 32, 400 and 426 gross wells. At year-end 2016, we had 78 working interest wells in Wyoming, of which 77 of them are shut in wells, and not included in our productive well count, in which we have 10 percent working interest and have associated plugging liabilities accrued on the balance sheet based on the present value of our estimated future obligation.
We did not have any wells with production of synthetic oil, synthetic gas or products of other non-renewable natural resources that are intended to be upgraded into synthetic oil and gas as of year-end 2016, 2015 or 2014.
At year-end 2016, our remaining working interests represent approximately 4,300 gross developed acres and 890 net developed acres leased from others that are held by production. At year-end 2016, we had approximately 8,100 gross undeveloped acres and 5,900 net undeveloped acres leased from others.
Markets
Oil and gas revenues are influenced by prices of, and global and domestic supply and demand for, oil and gas. These commodities as determined by both regional and global markets depend on numerous factors beyond our control, including seasonality, the condition of the domestic and global economies, political conditions in other oil and gas producing countries, the extent of domestic production and imports of oil and gas, the proximity and capacity of gas pipelines and other transportation facilities, supply and demand for oil and gas and the effects of federal, state and local regulation. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. The price of crude oil decreased during the first half of 2016 as compared with the first half of 2015. Prices increased during the second half of 2016 as compared to the first half of 2016 as the number of U.S. crude oil rigs and inventories declined in the last half of 2015 and into early 2016. Natural gas prices decreased in 2016 compared with 2015, primarily due to domestic oversupply driven by lack of a normal winter withdrawal cycle in the winter of 2015-2016. West Texas Intermediate (WTI) oil prices averaged $43.33 per Bbl in 2016, nearly 11% lower than in 2015, and $48.66 per Bbl in 2015, nearly 48% lower than in 2014.
Mineral leasing activity is influenced by changes in commodity prices, the location of our owned mineral interests relative to existing or projected oil and gas reserves, the proximity of successful production efforts to our mineral interests and the evolution of new plays and improvements in drilling and extraction technology.
Competition
The oil and gas industry is highly competitive, and we compete with a substantial number of other companies that may have greater resources than us. Many of these companies explore for, produce and market oil and gas, carry on refining operations and market the end products on a worldwide basis. The primary areas in which we face competition are from alternative fuel sources, including coal, heating oil, imported LNG, nuclear and other nonrenewable fuel sources, and renewable fuel sources such as wind, solar, geothermal, hydropower and biomass. Competitive conditions may also be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the United States government. It is not possible to predict whether such legislation or regulation may ultimately be adopted or its precise effects upon our future operations. Such laws and regulations may, however, substantially increase the costs of exploring for, developing or producing oil and gas.
In locations where our owned mineral interests are close to producing wells and proven reserves, we may have multiple parties interested in leasing our minerals. Conversely, where our mineral interests are in or near areas where reserves have not been discovered, we may receive nominal interest in leasing our minerals. Portions of our Texas and Louisiana minerals are in close proximity to producing wells and proven reserves. Interest in leasing our minerals is correlated with the economics of production which are substantially influenced by current oil and gas prices and improvements in drilling and extraction technologies.
Other
We sell wood fiber from portions of our land, primarily in Georgia, and lease land for recreational uses. We have 19,000 acres of non-core timberland and undeveloped land we own directly that was classified as assets held for sale at year-end 2016. We have water interests in 1.5 million acres which includes 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 20,000 acres of groundwater leases in central Texas which was classified as assets held for sale at year-end 2016. We have not received significant revenues or earnings from these interests.
Competition
We face competition from other landowners for the sale of wood fiber. Some of these competitors own similar timber assets that are located in the same or nearby markets. However, due to its weight, the cost for transporting wood fiber long

14



distances is significant, resulting in a competitive advantage for timber that is located reasonably close to paper and building products manufacturing facilities.
Employees
At year-end 2016, we had 59 employees. None of our employees participate in collective bargaining arrangements. We believe we have a good relationship with our employees.
Environmental Regulations
Our operations are subject to federal, state and local laws, regulations and ordinances relating to protection of public health and the environment. Changes to laws and regulations may adversely affect our ability to develop real estate, develop minerals, harvest and sell timber, or withdraw groundwater, or may require us to investigate and remediate contaminated properties. These laws and regulations may relate to, among other things, water quality, endangered species, protection and restoration of natural resources, timber harvesting practices, and remedial standards for contaminated property and groundwater. Additionally, these laws may impose liability on property owners or operators for the costs of removal or remediation of hazardous or toxic substances on real property, without regard to whether the owner or operator knew, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may adversely affect the value of a property, as well as our ability to sell the property or to borrow funds using that property as collateral or the ability to produce oil and gas from that property. Environmental claims generally would not be covered by our insurance programs.
The particular environmental laws that apply to any given site vary according to the site’s location, its environmental condition, and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance or other costs and can prohibit or severely restrict development activity or mineral production in environmentally sensitive regions or areas, which could negatively affect our results of operations.
In 2016, we sold all but 25 of our 289 acres near Antioch, California, approximately 80 acres of which had not yet received a certificate of completion under the voluntary remediation program in which we were participating. The buyer of the former paper manufacturing sites assumed responsibility for environmental, remediation and monitoring activities, subject to limited exclusions, and obtained a $20,000,000, ten year pollution legal liability insurance policy naming us as an additional insured.
Oil and gas operations are subject to numerous federal, state and local laws and regulations controlling the generation, use, processing, storage, transportation, disposal and discharge of materials into the environment or otherwise relating to the protection of the environment. These laws and regulations affect our operations and costs as a result of their impact on oil and gas production operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, including the assessment of monetary penalties, the imposition of investigatory and remedial obligations, the suspension or revocation of necessary permits, licenses and authorizations, the requirement that additional pollution controls be installed and the issuance of orders enjoining future operations or imposing additional compliance requirements.
Compliance with environmental laws and regulations increases our overall cost of business, but has not had, to date, a material adverse effect on our operations, financial condition or results of operations. It is not anticipated, based on current laws and regulations, that we will be required in the near future to expend amounts (whether for environmental control equipment, modification of facilities or otherwise) that are material in relation to our total development expenditure program in order to comply with such laws and regulations. However, given that such laws and regulations are subject to change, we are unable to predict the ultimate cost of compliance or the ultimate effect on our operations, financial condition and results of operations.
Available Information
Forestar Group Inc. is a Delaware corporation. Our principal executive offices are located at 6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746-5149. Our telephone number is (512) 433-5200.
From our Internet website, http://www.forestargroup.com, you may obtain additional information about us including:
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents as soon as reasonably practicable after we file them with SEC;
beneficial ownership reports filed by officers, directors, and principal security holders under Section 16(a) of the Securities Exchange Act of 1934, as amended (or the “Exchange Act”); and
corporate governance information that includes our:
corporate governance guidelines,
audit committee charter

15



management development and executive compensation committee charter,
nominating and governance committee charter,
standards of business conduct and ethics,
code of ethics for senior financial officers, and
information on how to communicate directly with our board of directors.
We will also provide printed copies of any of these documents to any stockholder free of charge upon request. In addition, the materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information about the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information that is filed electronically with the SEC.
Executive Officers
The names, ages and titles of our executive officers are:
Name
 
Age
 
Position
Phillip J. Weber
 
56
 
Chief Executive Officer
Charles D. Jehl
 
48
 
Chief Financial Officer and Treasurer
David M. Grimm
 
56
 
Chief Administrative Officer, Executive Vice President, General Counsel and Secretary
Michael J. Quinley
 
55
 
President - Community Development
Phillip J. Weber has served as our Chief Executive Officer since September 2015. He has served as Chairman of the Real Estate Investment Committee since May 2013 and previously served as Executive Vice President - Water Resources from May 2013 to September 2015 and as Executive Vice President - Real Estate from 2009 to May 2013. Prior to joining Forestar, he served the Federal National Mortgage Association (Fannie Mae) as Senior Vice President - Multifamily from 2006 to October 2009, as Chief of Staff to the CEO from 2004 to 2006, as Chief of Staff to non-Executive Chairman of the Board and Corporate Secretary from 2005 to 2006, and as Senior Vice President, Corporate Development in 2005.
Charles D. Jehl has served as our Chief Financial Officer and Treasurer since September 2015. He previously served as our Executive Vice President - Oil and Gas from February 2015 to September 2015, as Executive Vice President - Oil and Gas Business Administration from 2013 to February 2015, and as Chief Accounting Officer from 2006 to 2013. Mr. Jehl served as Chief Operations Officer and Chief Financial Officer of Guaranty Insurance Services, Inc. from 2005 to 2006, and as Senior Vice President and Controller from 2000 to 2005. From 1989 to 1999, Mr. Jehl held various financial management positions within Temple-Inland’s financial services segment. Mr. Jehl is also a Certified Public Accountant.
David M. Grimm has served as our Chief Administrative Officer since 2007, in addition to holding the offices of General Counsel and Secretary since 2006. Mr. Grimm served Temple-Inland Inc. as Group General Counsel from 2005 to 2006, Associate General Counsel from 2003 to 2005, and held various other legal positions from 1992 to 2003. Prior to joining Temple-Inland Inc., he was an attorney in private practice in Dallas, Texas. Mr. Grimm is also a Certified Public Accountant. Mr. Grimm will retire from the Company effective March 31, 2017.
Michael J. Quinley has served as our President - Community Development since September 2015. He previously served as our Executive Vice President - Real Estate, East Region from 2011 to September 2015, as Executive Vice President - Eastern Region Real Estate Investments & Development from 2010 to 2011, and as Executive Vice President - Eastern Region Developments & Investments from 2008 to 2010. He has more than 30 years of prior real estate experience, including as CEO of Patrick Malloy Communities, as Senior Executive Vice President of Cousins Properties Incorporated and as Senior Vice President and CFO of Peachtree Corners Inc., all based in Atlanta.






16



Item 1A.
Risk Factors.
General Risks Related to our Operations
Both our real estate and mineral resources businesses are cyclical in nature.
The operating results of our business segments reflect the general cyclical pattern of each segment. While the cycles of each industry do not necessarily coincide, demand and prices in each may drop substantially during the same period. Real estate development of residential lots is further influenced by new home construction activity, which can be volatile. Mineral resources may be further influenced by national and international commodity prices, principally for oil and gas. Cyclical downturns may materially and adversely affect our business, liquidity, financial condition and results of operations. All of our operations are impacted by both national and global economic conditions.
The real estate and mineral resources industries are highly competitive and a number of entities with which we compete are larger and have greater resources, and competitive conditions may adversely affect our results of operations.
The real estate and mineral resources industries in which we operate are highly competitive and are affected to varying degrees by supply and demand factors and economic conditions, including changes in interest rates, new housing starts, home repair and remodeling activities, credit availability, consumer confidence, unemployment, housing affordability, changes in commodity prices, and federal energy policies.
Competitive conditions in the real estate industry may result in difficulties acquiring suitable land at acceptable prices, lower sales volumes and prices, increased development or construction costs and delays in construction and leasing. We compete with numerous regional and local developers for the acquisition, entitlement, and development of land suitable for development. We also compete with national, regional and local home builders who develop real estate for their own use in homebuilding operations, many of which are larger and have greater resources, including greater marketing budgets. Any improvement in the cost structure or service of our competitors will increase the competition we face.
Our business, financial condition and results of operations may be negatively affected by any of these factors.
We may be unable to successfully divest our non-core assets at favorable prices or on our target schedule, which could adversely affect our results of operations or cash flows.
We have announced that we are focused on our core community development business, and that we intend to exit non-core, non-residential housing assets. The sale of non-core real estate assets may be impacted by market conditions outside of our control, such as capitalization rates, anticipated market demand and job growth, property location and other existing or anticipated competitive properties, interest rates, availability of financing, and other factors that we do not control. Our ability to divest non-core assets, the timing for such divestments, and the prices we may ultimately receive may be impacted by the foregoing or other factors.
We may have continuing liabilities relating to non-core assets that have been sold, which could adversely impact our results of operations.
In the course of selling our non-core assets we are typically required to make contractual representations and warranties and to provide contractual indemnities to the buyers. These contractual obligations typically survive the closing of the transactions for some period of time. If a buyer is successful in sustaining a claim against us we may incur additional expenses pertaining to an asset we no longer own, and we may also be obligated to defend and/or indemnify the buyer from certain third party claims. Such obligations could be material and they could adversely impact our results of operations.
Any significant reduction in our borrowing base under our senior secured credit facility as a result of the sale of non-core assets may reduce the credit that is available to us under the facility and impact our ability to fund our operations.
Our senior secured credit facility is secured by some of our assets, and the borrowing base available to us thereunder is derived substantially from valuations associated with the assets pledged. Historically, a substantial portion of the borrowing base was derived from valuations associated with non-core assets, many of which were sold in 2015 and 2016. A portion of the existing borrowing base is also supported by non-core assets that we may market for sale or sell in the near future. Although we have additional assets that have not been but could be pledged to support additional borrowing capacity under our senior secured credit facility, until such time as additional assets are pledged, the reduction of the borrowing base could negatively impact our ability to fund our operations and, as a result may have a material adverse effect on our financial position, results of operation and cash flow.
Restrictive covenants under our senior secured credit facility and indentures governing our 3.75% convertible senior notes may limit the manner in which we operate.
Our senior secured credit facility and indentures covering our 3.75% convertible senior notes contain various covenants and conditions that limit our ability to, among other things:
incur or guarantee additional debt;
pay dividends or make distributions to our stockholders;

17



repurchase or redeem capital stock or subordinated indebtedness;
make loans, investments or acquisitions;
incur restrictions on the ability of certain of our subsidiaries to pay dividends or to make other payments to us;
enter into transactions with affiliates;
create liens;
merge or consolidate with other companies or transfer all or substantially all of our assets; and
transfer or sell assets, including capital stock of subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs.
Despite current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.
We may be unable to fully realize the benefits of our tax attributes if we experience an ownership change.
We have significant deferred tax assets that are generally available to offset future taxable income or income tax. If we experienced an “ownership change” under Section 382 of the Internal Revenue Code (“Section 382”), Section 382 would impose an annual limit on the amount of our future taxable income that may be reduced by our tax attributes, such as built in losses and other tax attributes (“Tax Benefits”), existing prior to the ownership change. In general, an ownership change would occur if our “5-percent shareholders” (as defined in Section 382) collectively increase their ownership in the Company by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. For these purposes, a 5-percent shareholder is generally any person or group of persons that at any time during the relevant three-year period has owned 5 percent or more of our outstanding common stock. Under Section 382, stock ownership is determined under complex attribution rules and generally includes shares held directly, indirectly (though intervening entities), and constructively (by certain related parties and certain unrelated parties acting as a group). On January 5, 2017, we adopted a Tax Benefits Preservation Plan in order to help protect our tax attributes, such as built-in losses and other tax attributes. Our Tax Benefits Preservation Plan is intended to provide a meaningful deterrent effect against acquisitions of our common stock that could cause the Company to experience an ownership change; however, the Tax Benefits Preservation Plan does not guarantee that the Company will not experience an ownership change. If an ownership change were to occur, our ability to use our Tax Benefits in the future would be limited, which would have a significant negative impact on our financial position and results of operations. The ratification of the extension of the Tax Benefits Preservation Plan to January 5, 2020 is subject to shareholder approval at the Company’s 2017 Annual Meeting. If our shareholders do not approve such extension, the Tax Benefits Preservation Plan will expire on January 5, 2018. Please read Note 21  — Subsequent Events for additional information about the Tax Benefits Preservation Plan.
The market price of and trading volume of our shares of common stock may be volatile.
The market price of our shares of common stock has fluctuated substantially and may continue to fluctuate in response to many factors which are beyond our control, including:
fluctuations in our operating results, including results that vary from expectations of management, analysts and investors;
announcements of strategic developments, acquisitions, financings and other material events by us or our competitors;
the sale of a substantial number of shares of our common stock held by existing security holders in the public market; and
general conditions in the real estate and mineral resources industries.
The stock markets in general may experience extreme volatility that may be unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, make it difficult to predict the market price of our common stock in the future and cause the value of our common stock to decline.
Provisions of Delaware law, our charter documents, the Tax Benefits Preservation Plan and the indentures governing the 3.75% convertible senior notes may impede or discourage a takeover, which could cause the market price of our common stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In

18



addition, our Tax Benefits Preservation Plan could be deemed to have an “anti-takeover” effect because, among other things, an Acquiring Person (as defined under the Tax Benefits Preservation Plan) may be diluted upon the occurrence of a triggering event. Our board of directors also has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. These and other impediments to third party acquisition or change of control could limit the price investors are willing to pay for shares of our common stock, which could in turn reduce the market price of our common stock. In addition, upon the occurrence of a fundamental change under the terms of the convertible senior notes, certain repurchase rights and early settlement rights would be triggered under the indentures governing the convertible senior notes. In such event, the increase of the conversion or early settlement rate, as applicable, in connection with certain make-whole fundamental change transactions under the terms of the convertible senior notes could discourage a potential acquirer.
Our activities are subject to environmental regulations and liabilities that could have a negative effect on our operating results.
Our operations are subject to federal, state and local laws and regulations related to the protection of the environment. Compliance with these provisions or the promulgation of new environmental laws and regulations may result in delays, may cause us to invest substantial funds to ensure compliance with applicable environmental regulations and can prohibit or severely restrict timber harvesting, real estate development or mineral production activity in environmentally sensitive regions or areas.
Our business may suffer if we lose key personnel.
We depend to a large extent on the services of certain key management personnel. These individuals have extensive experience and expertise in our business segments in which they work. The loss of any of these individuals could have a material adverse effect on our operations. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to employ and retain skilled personnel in each of our business segments.

Risks Related to our Real Estate Operations
Reduced demand for new housing or commercial tracts in the markets where we operate could adversely impact our profitability.
The residential development industry is cyclical and is significantly affected by changes in general and local economic conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence and housing demand. Adverse changes in these conditions generally, or in the markets where we operate, could decrease demand for lots for new homes in these areas. Decline in housing demand could negatively affect our real estate development activities, which could result in a decrease in our revenues and earnings.
Furthermore, the market value of undeveloped land and lots held by us, including commercial tracts, can fluctuate significantly as a result of changing economic and real estate market conditions. If there are significant adverse changes in economic or real estate market conditions, we may have to hold land in inventory longer than planned. Inventory carrying costs can be significant and can result in losses or lower returns and adversely affect our liquidity.
Development of real estate entails a lengthy, uncertain and costly entitlement process.
Approval to develop real property entails an extensive entitlement process involving multiple and overlapping regulatory jurisdictions and often requiring discretionary action by local governments. This process is often political, uncertain and may require significant exactions in order to secure approvals. Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. The process to comply with these regulations is usually lengthy and costly, may not result in the approvals we seek, and can be expected to materially affect our real estate development activities, which may adversely affect our business, liquidity, financial condition and results of operations.
Our real estate development operations are currently concentrated in the major markets of Texas, and as a result, our financial results may be significantly influenced by the Texas economy.
The economic growth and strength of Texas, where the majority of our real estate development activity is located, are important factors in sustaining demand for our real estate development activities. The decline in oil prices over the past several years may impact near-term job growth and housing demand in Texas, particularly in Houston, where the energy industry has traditionally generated significant job growth. As a result, any adverse impact to the economic growth and health, or infrastructure development, of Texas could materially adversely affect our business, liquidity, financial condition and results of operations.
Our real estate development operations are highly dependent upon national, regional and local home builders.
We are highly dependent upon our relationships with national, regional, and local home builders to purchase lots in our residential developments. If home builders do not view our developments as desirable locations for homebuilding operations, or if home builders are limited in their ability to conduct operations due to economic conditions, our business, liquidity,

19



financial condition and results of operations will be adversely affected.
In addition, we enter into contracts to sell lots to home builders. A home builder could decide to delay purchases of lots in one or more of our developments due to adverse real estate conditions wholly unrelated to our areas of operations, such as the corporate decisions regarding allocation of limited capital or human resources. As a result, we may sell fewer lots and may have lower sales revenues, which could have an adverse effect on our business, liquidity, financial condition and results of operations.
Our strategic partners may have interests that differ from ours and may take actions that adversely affect us.
We enter into strategic alliances or venture relationships as part of our overall strategy for particular developments or regions. While these partners may bring development experience, industry expertise, financing capabilities, local credibility or other competitive attributes, they may also have economic or business interests or goals that are inconsistent with ours or that are influenced by factors unrelated to our business. We may also be subject to adverse business consequences if the market reputation or financial condition of a partner deteriorates, or if a partner takes actions inconsistent with our interest.
When we enter into a venture, we may rely on our venture partner to fund its share of capital commitments to the venture and to otherwise fulfill its operating and financial obligations. Failure of a venture partner to timely satisfy its funding or other obligations to the venture could require us to elect whether to increase our financial or other operating support of the venture in order to preserve our investment, which may reduce our returns or cause us to incur losses, or to not fund such obligations, which may subject the venture and us to adverse consequences or increase our financial exposure in the project.
Debt within some of our ventures may not be renewed or may be difficult or more expensive to replace.
As of December 31, 2016, our unconsolidated ventures had approximately $128.3 million of debt, of which $78.6 million was non-recourse to us. When debt within our ventures matures, some of our ventures may be unable to renew existing loans or secure replacement financing, or replacement financing may be more expensive. If our ventures are unable to renew existing loans or secure replacement financing, we may be required to contribute additional equity or elect to loan or contribute funds to our ventures, which could increase our risk or increase our borrowings under our senior secured credit facility, or both. If our ventures secure replacement financing that is more expensive, our profits may be reduced.
Delays or failures by governmental authorities to take expected actions could reduce our returns or cause us to incur losses on certain real estate development projects.
For certain projects, we rely on governmental utility and special improvement districts to issue bonds to reimburse us for qualified expenses, such as road and utility infrastructure costs. Bonds must be supported by district tax revenues, usually from ad valorem taxes. Slowing new home sales, decreasing real estate prices or difficult credit markets for bond sales can reduce or delay district bond sale revenues, causing such districts to delay reimbursement of our qualified expenses. Failure to receive timely reimbursement for qualified expenses could adversely affect our cash flows and reduce our returns or cause us to incur losses on certain real estate development projects.
Failure to succeed in new markets may limit our growth.
We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate opportunities arise. Our historical experience in existing markets does not ensure that we will be able to operate successfully in new markets. We may be exposed to a variety of risks if we choose to enter new markets, including, among others:
an inability to accurately evaluate local housing market conditions and local economies;
an inability to obtain land for development or to identify appropriate acquisition opportunities;
an inability to hire and retain key personnel;
an inability to successfully integrate operations; and lack of familiarity with local governmental and permitting procedures.

Risks Related to our Mineral Resources Operations
We do not operate any properties, and have limited control over the activities on properties we do not operate. 
The properties in which we have an interest are operated by other companies and involve third-party working interest owners. As a result, we have limited ability to influence or control the operation or future development of such properties, including compliance with environmental, safety and other regulations, or the amount of capital expenditures that we will be required to fund with respect to such properties. Decisions by other parties may significantly influence the revenues we receive from our mineral resources.
Volatile oil and natural gas prices could adversely affect our cash flows and results of operations. 
Our cash flows and results of operations are dependent in part on oil and natural gas prices, which can be volatile. Any substantial or extended decline in the price of oil and natural gas could have a negative impact on our business operations and future revenues. Moreover, oil and natural gas prices depend on factors we cannot control, such as: changes in foreign and

20



domestic supply and demand for oil and natural gas; actions by the Organization of Petroleum Exporting Countries; weather; political conditions in other oil-producing countries, including the possibility of insurgency or war in such areas; prices of foreign exports; domestic and international drilling activity; price and availability of alternate fuel sources; the value of the U.S. dollar relative to other major currencies; the level and effect of trading in commodity markets, the effect of worldwide energy conservation measures, and governmental regulations.
The ability to sell and deliver oil and natural gas produced from wells on our mineral interests could be materially and adversely affected if adequate gathering, processing, compression and transportation services are not obtained.
 The sale of oil and natural gas produced from wells on our mineral interests depends on a number of factors beyond our control, including the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities owned by third parties. These facilities may be temporarily unavailable due to market conditions, mechanical reasons or other factors or conditions, and may not be available to us in the future on terms we consider acceptable, if at all. Any significant change in market or other conditions affecting these facilities or the availability of these facilities, including due to our failure or inability to obtain access to these facilities on terms acceptable to us or at all, could materially and adversely affect our business and, in turn, our financial condition and results of operations. 
Our reserves and production will decline from their current levels. 
The rate of production from oil and natural gas properties generally declines as reserves are produced. Our reserves will decline as they are produced which could materially and adversely affect our future cash flow and results of operations.
 A portion of our oil and natural gas production may be subject to interruptions that could have a material and adverse effect on us. 
A portion of oil and natural gas production from our minerals may be interrupted, or shut in, from time to time for various reasons, including as a result of accidents, weather conditions, loss of gathering, processing, compression or transportation facility access or field labor issues, or intentionally as a result of market conditions such as oil and natural gas prices that we deem uneconomic. If a substantial amount of production is interrupted, our cash flow and, in turn, our results of operations could be materially and adversely affected. 
Weather and climate may have a significant and adverse impact on us. 
Demand for natural gas is, to a significant degree, dependent on weather and climate, which impacts, among other things, the price we receive for the commodities produced from wells on our mineral interests and, in turn, our cash flow and results of operations. For example, relatively warm temperatures during a winter season generally result in relatively lower demand for natural gas (as less natural gas is used to heat residences and businesses) and, as a result, relatively lower prices for natural gas production. 
Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. 
The process of estimating oil and natural gas reserves is complex involving decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and natural gas prices, revenues, taxes and quantities of recoverable oil and natural gas reserves might vary from those estimated. Any variance could materially affect the estimated quantities and present value of proved developed reserves. In addition, we may adjust estimates of proved reserves to reflect production history, development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
The standardized measure of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated reserves. Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. 
As required by SEC regulations, we base the estimated discounted future net cash flows from our proved reserves on prices and costs in effect at the time of the estimate. However, actual future net cash flows from our properties will be affected by numerous factors not subject to our control.
 
The timing of production will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flow, which is required by the SEC, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. Any material inaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
 

21



A significant portion of our Louisiana owned net mineral acres are subject to prescription of non-use under Louisiana law.
A significant portion of our Louisiana owned net mineral acres were severed from surface ownership and retained by creation of one or more mineral servitudes shortly before our 2007 spin-off. Under Louisiana law, a mineral servitude that is not producing minerals or which has not been the subject of good-faith drilling operations will cease to burden the property upon the tenth anniversary of the date of its creation. Upon such event, the mineral rights effectively will revert to the surface owner and we will no longer own the right to lease, explore for or produce minerals from such acreage. The total number of net acres subject to prescription can fluctuate based on oil and gas development and production activities. Some or all of approximately 70,000 of our Louisiana net acres may revert to the surface owner unless drilling operations or production activities commences prior to October 2017.
Risks Related to our Other Operations
Our water interests may require governmental permits, the consent of third parties and/or completion of significant transportation infrastructure prior to commercialization, all of which are dependent on the actions of others.
Many jurisdictions require governmental permits to withdraw and transport water for commercial uses, the granting of which may be subject to discretionary determinations by such jurisdictions regarding necessity. In addition, we do not own the executory rights related to our non-participating royalty interest, and as a result, third-party consent from the executor rights owner(s) would be required prior to production. The process to obtain permits can be lengthy, and governmental jurisdictions or third parties from whom we seek permits or consent may not provide the approvals we seek. We may be unable to secure buyers at commercially economic prices for water that we have a right to extract and transport, and transportation infrastructure across property not owned or controlled by us is required for transport of water prior to commercial use. Such infrastructure can require significant capital and may also require the consent of third parties. We may not have cost effective means to transport water from property we own, lease or manage to buyers. As a result, we may lose some or all of our investment in water assets, or our returns may be diminished.
Item 1B.
Unresolved Staff Comments.
None.

Item 2.
Properties.
Our principal executive offices are located in Austin, Texas, where we lease approximately 22,000 square feet. We also lease office space in Atlanta, Georgia; Dallas, Texas; Denver, Colorado; and Houston, Texas. We believe these offices are suitable for conducting our business.
For a description of our properties in our real estate, mineral resources and other segments, see “Business — Real Estate”, “Business — Mineral Resources” and “Business — Other”, respectively, in Part I, Item 1 of this Annual Report on Form 10-K.
 
Item 3.
Legal Proceedings.
We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of any of the proceedings should not have a material adverse effect on our financial position or long-term results of operations or cash flows. It is possible, however, that charges related to these matters could be significant to results of operations or cash flow in any single accounting period.

Item 4.
Mine Safety Disclosures.
Not Applicable.


22



PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the New York Stock Exchange. The high and low sales prices in each quarter in 2016 and 2015 were:
 
2016
 
2015
 
Price Range
 
Price Range
 
High
 
Low
 
High
 
Low
First Quarter
$
13.04

 
$
8.40

 
$
15.91

 
$
13.27

Second Quarter
$
13.74

 
$
11.23

 
$
16.29

 
$
13.16

Third Quarter
$
12.80

 
$
11.33

 
$
13.67

 
$
11.98

Fourth Quarter
$
13.65

 
$
10.75

 
$
14.59

 
$
10.58

For the Year
$
13.74

 
$
8.40

 
$
16.29

 
$
10.58

Shareholders
Our stock transfer records indicated that as of February 27, 2017, there were approximately 3,144 holders of record of our common stock.
Dividend Policy
We currently intend to retain any future earnings to support our business. The declaration and payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including without limitation, our financial condition, earnings, capital requirements of our business, the terms of any credit agreements or indentures to which we may be a party at the time, legal requirements, industry practice, and other factors that our Board of Directors deems relevant.
Issuer Purchases of Equity Securities (a) 
Period
Total
Number of
Shares
Purchased (b)
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan or
Programs
 
Maximum
Number of
Shares That
May Yet be
Purchased
Under the
Plans or
Programs
Month 10 (10/1/2016 — 10/31/2016)

 
$

 

 
3,222,692

Month 11 (11/1/2016 — 11/30/2016)
56

 
$
11.10

 

 
3,222,692

Month 12 (12/1/2016 — 12/31/2016)

 
$

 

 
3,222,692

Total
56

 
$
11.10

 

 
 
 _____________________
(a) 
On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have purchased 3,777,308 shares under this authorization, which has no expiration date. We have no repurchase plans or programs that expired during the period covered by the table above and no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
(b) 
Includes shares withheld to pay taxes in connection with vesting of restricted stock awards and exercises of stock options.

23



Performance Graph
Our 2016 peer group consists of the following real estate and oil and gas companies: Alexander & Baldwin, Inc., AV Homes Inc., Approach Resources, Inc., Cousins Properties Incorporated, Contango Oil and Gas Co., Goodrich Petroleum Corp., Matador Resources Co., Petroquest Energy Inc., Post Properties, Inc., Potlatch Corporation, PS Business Parks, Inc., Resolute Energy Corp., The St. Joe Company, and Tejon Ranch Co. Magnum Hunter Resources Corp. and Penn Virginia Corp are omitted from our peer group because they have ceased trading.
graph1.jpg
Pursuant to SEC rules, returns of each of the companies in the Peer Index are weighted according to the respective company’s stock market capitalization at the beginning of each period for which a return is indicated.

24



Item 6.
Selected Financial Data.
 
For the Year
 
2016
 
2015
 
2014
 
2013
 
2012
 
(In thousands, except per share amount)
Revenues:
 
 
 
 
 
 
 
 
 
Real estate
$
190,273

 
$
202,830

 
$
213,112

 
$
248,011

 
$
120,115

Mineral resources
5,076

 
9,094

 
15,690

 
21,419

 
34,086

Other
1,965

 
6,652

 
9,362

 
10,721

 
8,256

Total revenues
$
197,314

 
$
218,576

 
$
238,164

 
$
280,151

 
$
162,457

Segment earnings (loss):
 
 
 
 
 
 
 
 
 
Real estate (a)
$
121,420

 
$
67,678

 
$
96,906

 
$
68,454

 
$
53,582

Mineral resources
3,327

 
4,230

 
9,116

 
14,815

 
29,190

Other
(4,625
)
 
(608
)
 
5,499

 
6,507

 
29

Total segment earnings
120,122

 
71,300

 
111,521

 
89,776

 
82,801

Items not allocated to segments:
 
 
 
 
 
 
 
 
 
General and administrative expense (b)
(18,274
)
 
(24,802
)
 
(21,229
)
 
(20,597
)
 
(25,176
)
Share-based compensation expense
(4,425
)
 
(4,474
)
 
(3,417
)
 
(16,809
)
 
(14,929
)
Gain on sale of assets (c)
48,891

 

 

 

 
16

Interest expense
(19,985
)
 
(34,066
)
 
(30,286
)
 
(20,004
)
 
(19,363
)
Loss on extinguishment of debt, net (d)
(35,864
)
 

 

 

 

Other corporate non-operating income
350

 
256

 
453

 
119

 
191

Income from continuing operations before taxes attributable to Forestar Group, Inc.
90,815

 
8,214

 
57,042

 
32,485

 
23,540

Income tax expense (e)
(15,302
)
 
(35,131
)
 
(20,850
)
 
(5,780
)
 
(9,016
)
Net income (loss) from continuing operations attributable to Forestar Group Inc.
75,513

 
(26,917
)
 
36,192

 
26,705

 
14,524

Income (loss) from discontinued operations, net of taxes (f)
(16,865
)
 
(186,130
)
 
(19,609
)
 
2,616

 
(1,582
)
Net income (loss) attributable to Forestar Group Inc.
$
58,648

 
$
(213,047
)
 
$
16,583

 
$
29,321

 
$
12,942

Net income (loss) per diluted share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
1.78

 
$
(0.79
)
 
$
0.83

 
$
0.73

 
$
0.41

Discontinued operations
$
(0.40
)
 
$
(5.43
)
 
$
(0.45
)
 
$
0.07

 
$
(0.05
)
Net income (loss) per diluted share
$
1.38

 
$
(6.22
)
 
$
0.38

 
$
0.80

 
$
0.36

Average diluted shares outstanding (g)
42,334

 
34,266

 
43,596

 
36,813

 
35,482

At year-end:
 
 
 
 
 
 
 
 
 
Assets
$
733,208

 
$
972,246

 
$
1,247,606

 
$
1,168,027

 
$
917,869

Debt
110,358

 
381,515

 
422,151

 
353,282

 
293,498

Noncontrolling interest
1,467

 
2,515

 
2,540

 
5,552

 
4,059

Forestar Group Inc. shareholders’ equity
560,651

 
501,600

 
707,202

 
709,845

 
529,488

Ratio of total debt to total capitalization
16
%
 
43
%
 
37
%
 
33
%
 
35
%
 _____________________
(a) 
Real estate segment earnings (loss) includes gain on sale of assets of $117,856,000 in 2016, $1,585,000 in 2015, $25,981,000 in 2014 and $25,273,000 in 2012. Segment earnings also includes non-cash impairments of $56,453,000 in 2016, $1,044,000 in 2015, $399,000 in 2014 and $1,790,000 in 2013. Real estate segment earnings (loss) also include the effects of net (income) loss attributable to noncontrolling interests.
(b) 
General administrative expense includes severance-related charges of $3,314,000 in 2015 and $6,323,000 in costs associated with our acquisition of Credo in 2012.
(c) 
Gain on sale of assets in 2016 represents gains in accordance with our key initiatives to divest non-core timberland and undeveloped land.
(d) 
Loss on extinguishment of debt, net is related to retirement of $225,245,000 of our 8.5% Senior Secured Notes due 2022 and $5,000,000 of our 3.75% of Convertible Senior Notes due 2020 in 2016.
(e) 
In 2015, income tax expense includes an expense of $97,068,000 for valuation allowance on a portion of our deferred tax asset that was determined to be more likely than not to be unrealizable. In 2013, income tax expense includes a benefit

25



from recognition of $6,326,000 of previously unrecognized tax benefits upon lapse of the statute of limitations for a previously reserved tax position.
(f) 
Income (loss) from discontinued operations includes non-cash impairment charges of $612,000 in 2016, $163,029,000 in 2015, $32,665,000 in 2014 and $473,000 in 2013 related to proved properties and unproved leasehold interests related to our non-core oil and gas working interests. Income (loss) from discontinued operations also includes losses of $13,664,000 in 2016 and $706,000 in 2015 and gains of $8,526,000 in 2014 associated with sale of working interest oil and gas properties.
(g) 
Our 2015 weighted average diluted shares outstanding excludes dilutive effect of equity awards and 7,857,000 shares issuable upon settlement of the prepaid stock purchase contract component of our 6.00% tangible equity units, due to our net loss attributable to Forestar Group Inc.

26



Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Caution Concerning Forward-Looking Statements
This Annual Report on Form 10-K and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risk and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated, 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 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;
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, 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;
fluctuations in oil and gas commodity prices;
demand by oil and gas operators to lease our minerals, which may be influenced by government regulation of exploration and production activities including hydraulic fracturing;
our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior secured credit facility, indentures and other debt agreements;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal or usage; and
the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.
Other factors, including the risk factors described in Item 1A of this Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

27



Key Initiatives
Reducing costs across our entire organization,
Reviewing entire portfolio of assets (complete non-core asset sales); and
Reviewing capital structure (allocate capital to maximize shareholder value).
Discontinued Operations / Segment Name Changes
At year-end 2016 we have divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations for all periods presented. In addition, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests. We also changed the name of the other natural resources segment to other. The discussion of our results of operations is based on the results from our continuing operations unless otherwise indicated.    

Results of Operations for the Years Ended 2016, 2015 and 2014
A summary of our consolidated results by business segment follows:
 
For the Year
 
2016
 
2015
 
2014
 
(In thousands)
Revenues:
 
 
 
 
 
Real estate
$
190,273

 
$
202,830

 
$
213,112

Mineral resources
5,076

 
9,094

 
15,690

Other
1,965

 
6,652

 
9,362

Total revenues
$
197,314

 
$
218,576

 
$
238,164

Segment earnings (loss):
 
 
 
 
 
Real estate
$
121,420

 
$
67,678

 
$
96,906

Mineral resources
3,327

 
4,230

 
9,116

Other
(4,625
)
 
(608
)
 
5,499

Total segment earnings (loss)
120,122

 
71,300

 
111,521

Items not allocated to segments:
 
 
 
 
 
General and administrative expense
(18,274
)
 
(24,802
)
 
(21,229
)
Share-based and long-term incentive compensation expense
(4,425
)
 
(4,474
)
 
(3,417
)
Gain on sale of assets
48,891

 

 

Interest expense
(19,985
)
 
(34,066
)
 
(30,286
)
Loss on extinguishment of debt, net
(35,864
)
 

 

Other corporate non-operating income
350

 
256

 
453

Income from continuing operations before taxes attributable to Forestar Group Inc.
90,815

 
8,214

 
57,042

Income tax expense
(15,302
)
 
(35,131
)
 
(20,850
)
Net income (loss) from continuing operations attributable to Forestar Group Inc.
$
75,513

 
$
(26,917
)
 
$
36,192


28



Significant aspects of our results of operations follow:
2016
Real estate segment earnings benefited from combined gains of $117,856,000 which generated combined net proceeds before debt repayment of $247,506,000 as a result of executing our key initiative to opportunistically divest non-core assets. These gains were partially offset by non-cash impairment charges of $56,453,000 related to six non-core community development projects and two multifamily sites. These impairments were a result of our key initia