10-Q 1 for-0630201710q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33662
_________________________________________________________  
FORESTAR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
 _________________________________________________________ 
Delaware
 
26-1336998
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)
(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)
 _________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Number of Shares Outstanding as of August 4, 2017
Common Stock, par value $1.00 per share
 
41,934,751
 



FORESTAR GROUP INC.
TABLE OF CONTENTS
 

2


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands, except share data)
ASSETS
 
Cash and cash equivalents
$
381,390

 
$
265,798

Real estate
282,034

 
293,003

Assets of discontinued operations
1

 
14

Assets held for sale
14,599

 
30,377

Investment in unconsolidated ventures
74,674

 
77,611

Receivables, net
8,705

 
8,931

Income taxes receivable

 
10,867

Prepaid expenses
2,453

 
2,000

Property and equipment, net
1,144

 
3,116

Deferred tax asset, net
278

 
323

Goodwill

 
37,900

Other assets
2,841

 
3,268

TOTAL ASSETS
$
768,119

 
$
733,208

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
5,633

 
$
4,804

Accrued employee compensation and benefits
1,866

 
4,126

Accrued property taxes
1,983

 
2,008

Accrued interest
1,543

 
1,585

Income taxes payable
8,759

 

Earnest money deposits
12,436

 
10,511

Other accrued expenses
7,792

 
12,598

Liabilities of discontinued operations
157

 
5,295

Liabilities held for sale

 
103

Other liabilities
28,821

 
19,702

Debt, net
113,368

 
110,358

TOTAL LIABILITIES
182,358

 
171,090

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Forestar Group Inc. shareholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share, 200,000 authorized shares at second quarter-end 2017 and none at year-end 2016, none issued

 

Common stock, par value $1.00 per share, 200,000,000 authorized shares, 44,803,603 issued at second quarter-end 2017 and year-end 2016
44,804

 
44,804

Additional paid-in capital
548,871

 
553,005

Retained earnings
35,228

 
12,602

Treasury stock, at cost, 2,868,852 shares at second quarter-end 2017 and 3,187,253 shares at year-end 2016
(44,597
)
 
(49,760
)
Total Forestar Group Inc. shareholders’ equity
584,306

 
560,651

Noncontrolling interests
1,455

 
1,467

TOTAL EQUITY
585,761

 
562,118

TOTAL LIABILITIES AND EQUITY
$
768,119

 
$
733,208

Please read the notes to consolidated financial statements.

3


FORESTAR GROUP INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share amounts)
REVENUES
 
 
 
 
 
 
 
Real estate sales and other
$
27,901

 
$
43,018

 
$
48,653

 
$
69,426

Commercial and income producing properties
91

 
3,363

 
91

 
13,053

Real estate
27,992

 
46,381

 
48,744

 
82,479

Mineral resources
5

 
1,337

 
1,502

 
2,419

Other
18

 
274

 
74

 
712

 
28,015

 
47,992

 
50,320

 
85,610

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of real estate sales and other
(16,348
)
 
(66,877
)
 
(28,380
)
 
(80,139
)
Cost of commercial and income producing properties

 
(5,789
)
 
11

 
(10,951
)
Cost of mineral resources

 
(160
)
 
(38,315
)
 
(390
)
Cost of other
(108
)
 
(119
)
 
(409
)
 
(504
)
Other operating expenses
(5,728
)
 
(8,317
)
 
(10,685
)
 
(20,408
)
General and administrative
(28,372
)
 
(4,852
)
 
(33,063
)
 
(11,331
)
 
(50,556
)
 
(86,114
)
 
(110,841
)
 
(123,723
)
GAIN ON SALE OF ASSETS
29,506

 
107,650

 
103,721

 
121,231

OPERATING INCOME
6,965

 
69,528

 
43,200

 
83,118

Equity in earnings of unconsolidated ventures
2,747

 
188

 
9,109

 
235

Interest expense
(2,166
)
 
(6,918
)
 
(4,401
)
 
(14,557
)
Loss on extinguishment of debt, net

 
(35,766
)
 

 
(35,864
)
Other non-operating income
622

 
199

 
1,298

 
371

INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
8,168

 
27,231

 
49,206

 
33,303

Income tax expense
(11,928
)
 
(14,929
)
 
(28,139
)
 
(17,081
)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
(3,760
)
 
12,302

 
21,067

 
16,222

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES
1,229

 
(2,048
)
 
1,647

 
(10,264
)
CONSOLIDATED NET INCOME (LOSS)
(2,531
)
 
10,254

 
22,714

 
5,958

Less: Net (income) attributable to noncontrolling interests
(48
)
 
(640
)
 
(88
)
 
(720
)
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.
$
(2,579
)
 
$
9,614

 
$
22,626

 
$
5,238

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
42,259

 
34,302

 
42,171

 
34,302

Diluted
42,259

 
42,423

 
42,454

 
42,372

NET INCOME (LOSS) PER BASIC SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.09
)
 
$
0.28

 
$
0.50

 
$
0.37

Discontinued operations
0.03

 
(0.05
)
 
0.04

 
(0.24
)
NET INCOME (LOSS) PER BASIC SHARE
$
(0.06
)
 
$
0.23

 
$
0.54

 
$
0.13

NET INCOME (LOSS) PER DILUTED SHARE
 
 
 
 
 
 
 
Continuing operations
(0.09
)
 
0.28

 
0.49

 
0.37

Discontinued operations
0.03

 
(0.05
)
 
0.04

 
(0.24
)
NET INCOME (LOSS) PER DILUTED SHARE
(0.06
)
 
0.23

 
0.53

 
0.13

TOTAL COMPREHENSIVE INCOME (LOSS)
$
(2,579
)
 
$
9,614

 
$
22,626

 
$
5,238

Please read the notes to consolidated financial statements.

4


FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) 
 
First Six Months
 
2017
 
2016
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
22,714

 
$
5,958

Adjustments:
 
 
 
Depreciation, depletion and amortization
2,862

 
7,268

Change in deferred income taxes
45

 
(45
)
Equity in earnings of unconsolidated ventures
(9,109
)
 
(235
)
Distributions of earnings of unconsolidated ventures
12,036

 
2,067

Share-based compensation
2,259

 
1,716

Real estate cost of sales
28,438

 
33,836

Real estate development and acquisition expenditures, net
(25,623
)
 
(33,066
)
Reimbursements from utility and improvement districts
4,671

 
306

Asset impairments
37,900

 
49,438

Loss on debt extinguishment, net

 
35,864

Gain on sale of assets
(103,821
)
 
(106,658
)
Other
2,135

 
3,402

Changes in:
 
 
 
Notes and accounts receivable
912

 
18,849

Prepaid expenses and other
(267
)
 
1,080

Accounts payable and other accrued liabilities
(6,135
)
 
(16,069
)
Income taxes
19,626

 
8,828

Net cash provided by (used for) operating activities
(11,357
)
 
12,539

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software and other
(41
)
 
(5,639
)
Oil and gas properties and equipment
(2,400
)
 
(567
)
Investment in unconsolidated ventures
(3,617
)
 
(4,658
)
Proceeds from sales of assets
130,011

 
318,480

Return of investment in unconsolidated ventures
2,906

 
1,914

Net cash provided by investing activities
126,859

 
309,530

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments of debt

 
(307,491
)
Additions to debt
770

 
1,462

Deferred financing fees
(148
)
 

Distributions to noncontrolling interests, net
(100
)
 
(1,108
)
Exercise of stock options
548

 

Repurchases of common stock

 
(3,537
)
Payroll taxes on issuance of stock-based awards
(980
)
 
(205
)
Other

 
(211
)
Net cash provided by (used for) financing activities
90

 
(311,090
)
 
 
 
 
Net increase in cash and cash equivalents
115,592

 
10,979

Cash and cash equivalents at beginning of period
265,798

 
96,442

Cash and cash equivalents at end of period
$
381,390

 
$
107,421

Please read the notes to consolidated financial statements.

5


FORESTAR GROUP INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1—Basis of Presentation
Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.
We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those principally related to allocating costs to real estate and measuring long-lived assets for impairment. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2016 Annual Report on Form 10-K.
At year-end 2016, we had divested of 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 the consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented.
Note 2—New and Pending Accounting Pronouncements
Adoption of New Accounting Standards
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as part of its simplification initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The updated standard is effective for annual and interim periods beginning after December 31, 2016. Effective first quarter 2017, stock-based compensation (SBC) excess tax benefits or deficiencies are reflected in the consolidated statements of income (loss) and comprehensive income (loss) as a component of the provision for income taxes, whereas they previously were recognized in equity to the extent additional paid-in capital pool was available. Additionally, our consolidated statements of cash flows will now present excess tax benefits as an operating activity, if applicable. Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result of the adoption of ASU 2016-09 in first six months 2017, there were no material impacts to our consolidated financial statements.
Pending Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The updated standard becomes effective for annual and interim periods beginning after December 15, 2017. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using the cumulative catch-up transition method. We anticipate this standard will not have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we expect revenue related to lot and tract sales to remain substantially unchanged. Due to the complexity of certain of our real estate sale transactions, the revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in limited circumstances from recognition at the time of the sale closing.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to provide increased transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 31, 2020 with early

6


adoption permitted. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), in order to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures, but we do not expect it to have a material effect on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230). This ASU requires that a statement of cash flow explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash investments. This standard is effective for fiscal years beginning after December 15, 2017. The adoption of ASU 2016-18 will modify our current disclosures and reclassifications relating to the consolidated statements of cash flows, but we do not expect it to have a material effect on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718), in order to provide guidance about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2017. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures, but we do not expect it to have a material effect on our consolidated financial statements.
Note 3—Proposed Merger
 
On April 13, 2017, we entered into an Agreement and Plan of Merger with affiliates of Starwood Capital Group (“Starwood”) pursuant to which, as amended, Starwood would acquire each share of the Company’s common stock, par value $1.00 per share (“Our Common Stock”) for $16.00 per share (as amended, the “Starwood Merger Agreement”).
On June 29, 2017, we terminated the Starwood Merger Agreement and entered into an Agreement and Plan of Merger with D.R. Horton, Inc. (“D.R. Horton”) pursuant to which D.R. Horton would acquire approximately 75 percent of our outstanding common stock for $17.75 per share (the “D.R. Horton Merger Agreement”). The D.R. Horton Merger Agreement has been unanimously approved by our and D.R. Horton’s boards of directors.
Subject to the terms and conditions of the D. R. Horton Merger Agreement, at the effective time of the Merger (the “Effective Time”), all of Our Common Stock will be converted into the right to receive, either
(i) an amount in cash per share of Our Common Stock equal to $17.75 (the “Cash Consideration”); or
(ii) one share of common stock of Forestar (the “Surviving Company Common Stock”),
in each case at the election of the holder of such share of Our Common Stock, subject to proration procedures applicable to oversubscription and undersubscription for Cash Consideration by stockholders. The aggregate amount of Cash Consideration will be approximately $558,256,000.
In connection with entry into each of the Starwood Merger Agreement and the D.R. Horton Merger Agreement, we amended our tax benefits preservation plan dated January 5, 2017, in each case rendering the plan inapplicable to such agreement and the transactions contemplated thereby. Please see Note 13—Capital Stock for additional information regarding our tax benefits preservation plan.
Closing of the merger with D.R. Horton (the “Merger”) is subject to approval of our stockholders and certain other closing conditions, and is expected to close in fourth quarter 2017. Following closing of the Merger, Forestar will continue as a separate publicly-traded company.
In connection with these matters, in first six months 2017 we paid a $20,000,000 termination fee to Starwood and incurred $4,070,000 in professional fees and other costs related to the proposed transactions, all of which are included in general and administrative expenses. Upon consummation of the proposed merger, we will pay our financial advisor a sale transaction fee of approximately $5,600,000 which is contingent upon the successful completion of the Merger.

Note 4—Held for Sale
In first quarter 2017, we sold all of our remaining owned mineral assets for approximately $85,700,000. We recognized $74,222,000 in total gains related to the sale of our mineral assets in first six months 2017 and will recognize a deferred gain of $8,200,000 in third quarter 2017 as a result of the expiration of the title review period.
In second quarter 2017, we sold approximately 19,000 acres of timberland and undeveloped land in Georgia and Texas for $46,197,000 in three transactions generating combined net proceeds of $44,771,000. We recognized combined gains of

7


$28,049,000 and deferred a gain of $625,000 pending receipt of certain regulatory approvals and release of funds held in escrow.
At second quarter-end 2017, assets held for sale principally includes a multifamily site in Austin, central Texas groundwater assets, and nonparticipating royalty interests in water rights located in east Texas.
The major classes of assets and liabilities of the properties held for sale are as follows:
 
Second
Quarter-End
Year-End
 
2017
2016
 
(In thousands)
Assets Held for Sale:
 
 
Real estate
$
5,740

$
19,931

Timber

1,682

Other intangible assets (a)
1,681

1,681

Oil and gas properties and equipment, net
149

782

Property and equipment, net (b)
7,029

6,301

 
$
14,599

$
30,377

 
 
 
Liabilities Held for Sale:
 
 
Other liabilities

103

 
$

$
103

___________________
(a) Related to indefinite lived groundwater leases associated with our central Texas water assets.
(b) Related to water wells associated with our Texas water assets.

Note 5—Real Estate
Real estate consists of:
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands)
Entitled, developed and under development projects
$
252,332

 
$
263,859

Land in the entitlement process and other
29,702

 
29,144

 
$
282,034

 
$
293,003

Our estimated costs of assets for which we expect to be reimbursed by utility and improvement districts were $46,205,000 at second quarter-end 2017 and $45,157,000 at year-end 2016, including $15,457,000 at second quarter-end 2017 and $14,749,000 at year-end 2016 related to our Cibolo Canyons project near San Antonio, Texas. In first six months 2017, we have collected $4,671,000 in reimbursements that were previously submitted to these districts. At second quarter-end 2017, our inception-to-date submitted and approved reimbursements for the Cibolo Canyons project were $58,790,000 of which we have collected $45,132,000. These costs are principally for water, sewer and other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.
Note 6—Investment in Unconsolidated Ventures
We participate in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use communities in which we may or may not have a controlling financial interest. U.S. GAAP requires consolidation of Variable Interest Entities (VIEs) in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE.

8


We examine specific criteria and use judgment when determining whether a venture is a VIE and whether we are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture agreements and reassess upon reconsideration events.
At second quarter-end 2017, we had ownership interests in 15 ventures that we accounted for using the equity method, none of which are a VIE.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
 
Venture Assets
 
Venture Borrowings(a)
 
Venture Equity
 
Our Investment
 
Second
Quarter-End
 
Year-End
 
Second
Quarter-End
 
Year-End
 
Second
Quarter-End
 
Year-End
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
242, LLC (b)
$
23,014

 
$
26,503

 
$

 
$
1,107

 
$
22,822

 
$
23,136

 
$
10,863

 
$
10,934

CL Ashton Woods, LP (c)
1,350

 
2,653

 

 

 
1,296

 
2,198

 
939

 
1,107

CL Realty, LLC
7,989

 
8,048

 

 

 
7,900

 
7,899

 
3,950

 
3,950

CREA FMF Nashville LLC (b)
54,121

 
56,081

 
35,844

 
37,446

 
17,321

 
17,091

 
4,850

 
4,923

Elan 99, LLC
49,191

 
49,652

 
36,356

 
36,238

 
11,845

 
13,100

 
10,659

 
11,790

FMF Littleton LLC
70,541

 
70,282

 
46,158

 
44,446

 
23,618

 
23,798

 
6,083

 
6,128

FMF Peakview LLC

 

 

 

 

 

 

 

FOR/SR Forsyth LLC
11,195

 
10,672

 
1,545

 
1,568

 
9,627

 
8,990

 
8,664

 
8,091

HM Stonewall Estates, Ltd

 
852

 

 

 

 
852

 

 
477

LM Land Holdings, LP (c)
24,211

 
25,538

 
2,470

 
3,477

 
13,162

 
20,945

 
6,424

 
9,685

MRECV DT Holdings LLC
3,855

 
4,155

 

 

 
3,855

 
4,144

 
3,470

 
3,729

MRECV Edelweiss LLC/MRECV Lender VIII LLC
7,283

 
3,484

 

 

 
7,283

 
3,484

 
6,555

 
3,358

MRECV Juniper Ridge LLC
3,371

 
4,156

 

 

 
3,371

 
4,156

 
3,034

 
3,741

MRECV Meadow Crossing II LLC
2,850

 
2,492

 

 

 
2,850

 
2,491

 
2,565

 
2,242

Miramonte Boulder Pass, LLC
8,903

 
10,738

 
2,648

 
4,006

 
4,670

 
5,265

 
4,467

 
5,330

Temco Associates, LLC
4,406

 
4,368

 

 

 
4,302

 
4,253

 
2,151

 
2,126

Other ventures

 

 

 

 

 

 

 

 
$
272,280

 
$
279,674

 
$
125,021

 
$
128,288

 
$
133,922

 
$
141,802

 
$
74,674

 
$
77,611


9


Combined summarized income statement information for our ventures accounted for using the equity method follows:
 
 Venture Revenues
 
 Venture Earnings (Loss)
 
Our Share of Earnings (Loss)
 
Second Quarter
 
First Six Months
 
Second Quarter
 
First Six Months
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
242, LLC (b)
$

 
$

 
$
13,073

 
$

 
$
(83
)
 
$
(164
)
 
$
8,382

 
$
(464
)
 
$
(41
)
 
$
(82
)
 
$
4,277

 
$
(232
)
CL Ashton Woods, LP (c)
846

 
993

 
2,628

 
1,689

 
348

 
151

 
1,098

 
518

 
473

 
324

 
1,432

 
763

CL Realty, LLC

 
113

 
199

 
246

 
(64
)
 
17

 
2,401

 
64

 
(32
)
 
8

 
1,200

 
31

CREA FMF Nashville LLC (b)
1,465

 
1,081

 
2,870

 
1,982

 
(150
)
 
(498
)
 
(320
)
 
(1,069
)
 
(43
)
 
(149
)
 
(97
)
 
(320
)
Elan 99, LLC
1,026

 
147

 
1,928

 
167

 
(601
)
 
(934
)
 
(1,254
)
 
(1,344
)
 
(541
)
 
(841
)
 
(1,129
)
 
(1,210
)
FMF Littleton LLC
1,596

 
526

 
3,011

 
847

 
(15
)
 
(178
)
 
(180
)
 
(348
)
 
(4
)
 
(44
)
 
(45
)
 
(86
)
FMF Peakview LLC

 

 

 
939

 

 

 

 
(248
)
 

 

 

 
(50
)
FOR/SR Forsyth LLC

 

 

 

 
(36
)
 
(17
)
 
(68
)
 
(17
)
 
(33
)
 
(15
)
 
(61
)
 
(15
)
HM Stonewall Estates, Ltd

 
580

 
496

 
1,126

 

 
294

 
243

 
514

 

 
124

 
103

 
227

LM Land Holdings, LP (c)
15,880

 
2,026

 
16,933

 
3,026

 
5,589

 
1,415

 
6,217

 
2,055

 
1,774

 
501

 
1,989

 
645

MRECV DT Holdings LLC
287

 
119

 
588

 
217

 
287

 
117

 
586

 
215

 
259

 
105

 
528

 
193

MRECV Edelweiss LLC/MRECV Lender VIII LLC
238

 
94

 
423

 
181

 
237

 
87

 
422

 
174

 
214

 
78

 
380

 
156

MRECV Juniper Ridge LLC
597

 
202

 
610

 
205

 
597

 
203

 
610

 
206

 
537

 
183

 
549

 
186

MRECV Meadow Crossing II LLC
237

 
29

 
359

 
29

 
236

 
16

 
358

 
(18
)
 
212

 
14

 
322

 
(17
)
Miramonte Boulder Pass, LLC
894

 
663

 
2,536

 
663

 
(40
)
 
(34
)
 
4

 
(159
)
 
(38
)
 
(17
)
 
(363
)
 
(79
)
Temco Associates, LLC
48

 
48

 
96

 
147

 
22

 
12

 
49

 
79

 
10

 
6

 
24

 
40

Other ventures

 

 

 

 

 
(83
)
 

 
(57
)
 

 
(7
)
 

 
3

 
$
23,114

 
$
6,621

 
$
45,750

 
$
11,464

 
$
6,327

 
$
404

 
$
18,548

 
$
101

 
$
2,747

 
$
188

 
$
9,109

 
$
235


 _____________________
(a) 
Total includes current maturities of $123,991,000 at second quarter-end 2017, of which $107,075,000 is non-recourse to us, and $89,756,000 at year-end 2016, of which $78,557,000 is non-recourse to us.
(b) 
Includes unamortized deferred gains on real estate we contributed to ventures. We recognize deferred gains as income as the real estate is sold to third parties. Deferred gains of $1,372,000 are reflected as a reduction to our investment in unconsolidated ventures at second quarter-end 2017.
(c) 
Includes unrecognized basis difference of $436,000 which is reflected as an increase of our investment in unconsolidated ventures at second quarter-end 2017. The difference will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures.
In first six months 2017, we invested $3,617,000 in these ventures and received $14,942,000 in distributions. In first six months 2016, we invested $4,658,000 in these ventures and received $3,981,000 in distributions. Distributions include both return of investments and distribution of earnings.
The increase in our share of earnings from our unconsolidated ventures in second quarter 2017 compared with second quarter 2016 is primarily due to higher earnings from LM Land Holdings, LP which benefited from the sale of 42 commercial acres for $13,600,000 generating venture earnings of $10,683,000, of which $6,321,000 was deferred and will be recognized as development is completed. Based on our 37.5% interest in this venture, our pro-rata share of the earnings associated with this sale was $1,636,000 and our pro-rata share of the distributable cash was $4,411,000.
In addition, the increase in our share of earnings and distributions from our unconsolidated ventures in first six months 2017 is primarily due to higher earnings from 242, LLC which benefited from the sale of 46 commercial acres for $9,719,000 generating $6,612,000 in earnings to the venture. Based on our 50% interest in the venture, our pro-rata share of the earnings associated with this sale was $3,306,000 and our pro-rata share of the total distributable cash was $4,348,000. CL Realty, LLC, a venture in which we own a 50% interest, sold certain mineral assets to us for $2,400,000. Subsequent to closing of this transaction, we received $1,200,000 from the venture, representing our pro-rata share of distributable cash.

10


In first quarter 2016, we sold our interest in FMF Peakview LLC (3600), a 304-unit multifamily joint venture project near Denver, generating $13,167,000 in net proceeds and we recognized a gain of $9,613,000 which is included in gain on sale of assets.
Note 7—Goodwill
Carrying value of goodwill follows:
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands)
Goodwill
$

 
$
37,900

Goodwill related to our owned mineral assets was $0 at second quarter-end 2017 and $37,900,000 at year-end 2016. In first six months 2017, we recognized a non-cash impairment charge of $37,900,000 related to goodwill attributable to our mineral resources reporting unit. This impairment was a result of selling our remaining owned mineral assets for approximately $85,700,000 in first quarter 2017. Impairment charge is included in cost of mineral resources on our consolidated statements of income (loss) and comprehensive income (loss).
Note 8—Discontinued Operations
At year-end 2016, we had divested of 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 the consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented.
Summarized results from discontinued operations were as follows:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Revenues
$
4

 
$
1,377

 
$
13

 
$
5,647

Cost of sales
(4
)
 
(1,521
)
 
(10
)
 
(6,485
)
Other operating expenses
1,043

 
(1,066
)
 
989

 
(2,389
)
Income (loss) from discontinued operations before income taxes
$
1,043

 
$
(1,210
)
 
$
992

 
$
(3,227
)
Gain (loss) on sale of assets before income taxes
100

 
(3,596
)
 
100

 
(14,573
)
Income tax benefit
86

 
2,758

 
555

 
7,536

Income (loss) from discontinued operations, net of taxes
$
1,229

 
$
(2,048
)
 
$
1,647

 
$
(10,264
)

In second quarter 2017, other operating expenses include a benefit of $1,043,000 due to a reduction of an accrual resulting from a change in estimate related to potential environmental liabilities to plug and abandon certain oil and gas wells in Wyoming.
In second quarter 2016, we recorded a net loss of $3,596,000 on the sale of nearly 8,100 net mineral acres leased from others and 175 gross (16 net) producing oil and gas working interest wells principally in North Dakota for total sales proceeds of $46,986,000. In addition, in first six months 2016, we recorded a net loss of $10,977,000 on the sale of 190,960 net mineral acres leased from others and 185 gross (66 net) producing oil and gas working interest wells in Nebraska, Kansas, Oklahoma and North Dakota for total net proceeds of $32,227,000, which includes $3,269,000 in reimbursement of capital costs incurred on in-progress wells that were assumed by the buyer. A significant portion of the net loss on sale, $7,244,000, is related to write-off of allocated goodwill to sold producing oil and gas properties.

    





11


The major classes of assets and liabilities of discontinued operations at second quarter-end 2017 and year-end 2016 are as follows:
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands)
Assets of Discontinued Operations:
 
 
 
Receivables, net of allowance for bad debt
$
1

 
$
6

Prepaid expenses

 
8

 
$
1

 
$
14

 
 
 
 
Liabilities of Discontinued Operations:
 
 
 
Accounts payable
$

 
$
67

Other accrued expenses
157

 
5,228

 
$
157

 
$
5,295

Significant operating activities and investing activities of discontinued operations included in our consolidated statements of cash flows are as follows:
 
First Six Months
 
2017
 
2016
 
(In thousands)
Operating activities:
 
 
 
Asset impairments
$

 
$
612

Accounts payable and other accrued liabilities
(3,000
)
 

Loss on sale of assets

 
14,573

Depreciation, depletion and amortization

 
2,147

 
$
(3,000
)
 
$
17,332

 
 
 
 
Investing activities:
 
 
 
Oil and gas properties and equipment
$

 
$
(567
)
Proceeds from sales of assets
100

 
75,944

 
$
100

 
$
75,377

Note 9—Receivables
Receivables consist of:
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands)
Other receivables and accrued interest
613

 
1,505

Other loans secured by real estate, average interest rates of 4.97% at second quarter-end 2017 and 4.94% at year-end 2016
8,118

 
7,452

 
8,731

 
8,957

Allowance for bad debts
(26
)
 
(26
)
 
$
8,705

 
$
8,931





12


Note 10—Equity
A reconciliation of changes in equity at second quarter-end 2017 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2016
$
560,651

 
$
1,467

 
$
562,118

Net income
22,626

 
88

 
22,714

Distributions to noncontrolling interests

 
(100
)
 
(100
)
Other (primarily share-based compensation)
1,029

 

 
1,029


$
584,306

 
$
1,455

 
$
585,761


Note 11—Debt, net
Debt consists of:
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands)
8.50% senior secured notes due 2022, net
$
5,211

 
$
5,200

3.75% convertible senior notes due 2020, net of discount
106,900

 
104,673

Other indebtedness — 5.50% interest rate
1,257

 
485

 
$
113,368

 
$
110,358

On May 12, 2017, we amended our senior secured credit facility to reduce the available line of credit commitment from $125,000,000 to $50,000,000, none of which was drawn at second quarter-end 2017. The senior secured credit facility matures on May 15, 2018 (following exercise of our one-year extension option on May 12, 2017). This revolving line of credit may be prepaid at any time without penalty and includes a $50,000,000 sublimit for letters of credit, of which $15,719,000 was outstanding at second quarter-end 2017. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At second quarter-end 2017, we had $14,240,000 in net unused borrowing capacity under our senior secured credit facility.
Under the terms of our senior secured credit facility, at our option we can borrow at LIBOR plus 4.0 percent or at the alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate, (ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR plus 1 percent. Borrowings under the senior secured credit facility are or may be secured by (a) high value timberland and portions of raw entitled land (b) assignments of current and future leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries and most of our majority-owned joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) a pledge of certain reimbursements payable to us from special improvement district tax collections in connection with our Cibolo Canyons project. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At second quarter-end 2017, we were in compliance with the financial covenants of these agreements. The proposed D.R. Horton Merger is expected to constitute a “fundamental change” under our 3.75% convertible senior notes, which would provide holders with the right to convert their notes or sell their notes to us at par, subject to certain conditions. In addition, absent lender consent, the proposed D.R. Horton Merger would constitute an event of default under our senior secured credit facility and we are currently in discussions with our lenders regarding a potential waiver as well as certain other alternatives.
We may elect to make distributions to stockholders so long as the total leverage ratio is less than 40 percent, the interest coverage ratio is greater than 3.0:1.0 and available liquidity is not less than $125,000,000, all of which were satisfied at second quarter-end 2017. Regardless of whether the foregoing conditions are satisfied, we may make distributions in an aggregate amount not to exceed $50,000,000 to be funded from up to 65 percent of the net proceeds from sales of multifamily properties and non-core assets, such as the Radisson Hotel & Suites in Austin, and any oil and gas properties.

13


At second quarter-end 2017 and year-end 2016, we had $1,393,000 and $1,633,000 in unamortized deferred financing fees which were deducted from our debt. In addition, at second quarter-end 2017 and year-end 2016, unamortized deferred financing fees related to our senior secured credit facility included in other assets were $129,000 and $314,000. Amortization of deferred financing fees were $574,000 and $1,877,000 in first six months 2017 and 2016 and were included in interest expense.
Note 12—Fair Value
Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, oil and gas properties, assets held for sale, goodwill and other intangible assets, which are measured for impairment.
In first six months 2017, we recognized a non-cash impairment charge of $37,900,000 related to goodwill attributable to our mineral resources reporting unit. The impairment was a result of selling all of our remaining owned mineral assets in first quarter 2017 for approximately $85,700,000.
We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
 
Second Quarter-End 2017
 
Year-End 2016
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Fixed rate debt
$
(113,504
)
 
$
(116,257
)
 
$
(111,506
)
 
$
(109,789
)
 
Level 2
Note 13—Capital Stock
Pursuant to our tax benefits preservation plan (Plan) adopted January 5, 2017, as amended on April 13, 2017 and June 29, 2017, each share of common stock outstanding is coupled with one preferred stock purchase right (Right). Each Right entitles our stockholders to purchase, under certain conditions, one one-thousandth of a share (Unit) of newly issued Series B Junior Participating Preferred Stock at a purchase price of $50 per Unit, subject to adjustment. Rights will be exercisable only if someone becomes a five-percent stockholder after adoption of the Plan without meeting certain customary exceptions. Stockholders owning five percent or more of our outstanding stock at the time of adoption of the Plan are grandfathered and will cause Rights to be distributed and become exercisable only if they acquire an additional one percent of our outstanding shares. Our board of directors has the discretion to exempt certain transactions and persons from the coverage of the Plan, and the Plan has been amended to exempt the D.R. Horton Merger Agreement from the coverage of the Plan. The Plan will terminate immediately prior to the effective time of the D. R. Horton Merger Agreement and, in the event the D.R. Horton Merger Agreement is not consummated, the Rights will expire on January 5, 2020.
Note 14—Net Income (Loss) per Share
Basic and diluted earnings per share are computed using the treasury stock method for second quarter and first six months 2017 and the two-class method for second quarter and first six months 2016. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security. We previously determined that our 6.00% tangible equity units issued in 2013 were participating securities. In December 2016, we issued 7,857,000 shares of our common stock upon the mandatory settlement of the stock purchase contract related to the 6.00%

14


tangible equity units. Per share amounts are computed by dividing earnings available to common shareholders by the weighted average shares outstanding during each period. In periods with a net loss, no such adjustment is made to earnings as the holders of the participating securities have no obligation to fund losses.
The computations of basic and diluted earnings per share are as follows:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Numerator:
 
 
 
 
 
 
 
Continuing operations
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(3,760
)
 
$
12,302

 
$
21,067

 
$
16,222

Less: Net (income) attributable to noncontrolling interest
(48
)
 
(640
)
 
(88
)
 
(720
)
Earnings (loss) available for diluted earnings per share
$
(3,808
)
 
$
11,662

 
$
20,979

 
$
15,502

Less: Undistributed net income from continuing operations allocated to participating securities

 
(2,173
)
 

 
(2,889
)
Earnings (loss) from continuing operations available to common shareholders for basic earnings per share
$
(3,808
)
 
$
9,489

 
$
20,979

 
$
12,613

 
 
 
 
 
 
 
 
Discontinued operations
 
 
 
 
 
 
 
Net income (loss) from discontinued operations available for diluted earnings per share
$
1,229

 
$
(2,048
)
 
$
1,647

 
$
(10,264
)
Less: Undistributed net income from discontinued operations allocated to participating securities

 
382

 

 
1,913

Earnings (loss) from discontinued operations available to common shareholders for basic earnings per share
$
1,229

 
$
(1,666
)
 
$
1,647

 
$
(8,351
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding — basic
42,259

 
34,302

 
42,171

 
34,302

Weighted average common shares upon conversion of participating securities

 
7,857

 

 
7,857

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

 
264

 
283

 
213

Total weighted average shares outstanding — diluted
42,259

 
42,423

 
42,454

 
42,372

Anti-dilutive awards excluded from diluted weighted average shares
1,774

 
1,987

 
1,663

 
2,218

We intend to settle the remaining principal amount of our 3.75% convertible senior notes due in 2020 (Convertible Notes) in cash upon conversion with only the amount in excess of par value of the Convertible Notes to be settled in shares of our common stock. Therefore, our calculation of diluted net income per share includes only the amount, if any, in excess of par value of the Convertible Notes. As such, the Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the $24.49 conversion price of the Convertible Notes. The average price of our common stock in second quarter 2017 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 15—Income Taxes
Our effective tax rate from continuing operations was 146 percent in second quarter 2017 and 57 percent for first six months 2017. Our effective tax rate from continuing operations for second quarter 2017 exceeded the statutory rate due to a change in our valuation allowance due to current period transaction costs (termination fee and other costs) associated with the proposed D.R. Horton Merger. In addition, our effective tax rate from continuing operations for first six months 2017 exceeded the statutory rate due to goodwill impairment associated with our first quarter 2017 sale of owned mineral assets and a benefit from a valuation allowance decrease due to net decreases in our deferred tax assets.
Our effective tax rate from continuing operations was 55 percent in second quarter 2016 and 51 percent for first six months 2016, which included an 18 percent detriment from a valuation allowance increase due to net increases in our deferred tax assets. In addition, 2017 and 2016 effective tax rates from continuing operations include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
At second quarter-end 2017 and year-end 2016, we have a valuation allowance for our deferred tax assets of $73,867,000 and $73,405,000 for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable under U.S. GAAP.
In determining our valuation allowance, we assessed available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets under U.S. GAAP. A significant piece of objective evidence evaluated was the cumulative loss incurred over the three-year period ended June 30,

15


2017, principally driven by impairments of oil and gas and real estate properties in prior years. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.
The amount of the deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.
Our unrecognized tax benefits totaled approximately $1,500,000 at second quarter-end 2017, all of which would affect our effective tax rate, if recognized.
Note 16—Commitments and Contingencies
Litigation
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business, and we believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash flows. However, it is possible that charges related to these matters could be significant to our results or cash flows in any one accounting period.
Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that can be reasonably estimated. We have asset retirement obligations related to the abandonment and site restoration requirements that result from the acquisition, construction and development of oil and gas properties. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset retirement cost is included in cost of oil and gas producing activities of discontinued operations. At second quarter-end 2017 and year-end 2016, our estimated asset retirement obligation was $112,000 and $1,258,000, of which $112,000 and $1,155,000 is included in liabilities of discontinued operations and the remaining balance at year-end 2016 was in liabilities held for sale. In second quarter 2017, we reduced our accrual related to potential environmental liabilities to plug and abandon certain oil and gas wells in Wyoming by $1,043,000 due to a change in estimate of our potential exposure.
Note 17—Segment Information
We manage our operations through three segments: real estate, mineral resources and other. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land and commercial and income producing properties, which consists of three multifamily projects and one site. Mineral resources manages our owned mineral interests. Other manages our timber, recreational leases and water resource initiatives.
Total assets allocated by segment are as follows:
 
Second
Quarter-End
 
Year-End
 
2017
 
2016
 
(In thousands)
Real estate
$
374,246

 
$
403,062

Mineral resources
188

 
38,907

Other
10,134

 
11,531

Assets of discontinued operations
1

 
14

Assets not allocated to segments (a)
383,550

 
279,694

 
$
768,119

 
$
733,208

 
 _________________________
(a) 
Assets not allocated to segments at second quarter-end 2017 principally consist of cash and cash equivalents of $381,390,000. Assets not allocated to segments at year-end 2016 principally consist of cash and cash equivalents of $265,798,000 and an income tax receivable of $10,867,000.
We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income

16


on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of strategic timberland and undeveloped land, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in Note 1—Basis of Presentation. Our revenues are derived from U.S. operations and all of our assets are located in the U.S.
Segment revenues and earnings are as follows:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
27,992

 
$
46,381

 
$
48,744

 
$
82,479

Mineral resources
5

 
1,337

 
1,502

 
2,419

Other
18

 
274

 
74

 
712

Total revenues
$
28,015

 
$
47,992

 
$
50,320

 
$
85,610

Segment earnings (loss):
 
 
 
 

 

Real estate
$
11,545

 
$
73,290

 
$
22,018

 
$
93,514

Mineral resources
(348
)
 
933

 
37,468

 
1,486

Other
(304
)
 
(197
)
 
(691
)
 
(778
)
Total segment earnings
10,893

 
74,026

 
58,795

 
94,222

Items not allocated to segments (a)
(2,773
)
 
(47,435
)
 
(9,677
)
 
(61,639
)
Income from continuing operations before taxes attributable to Forestar Group Inc.
$
8,120

 
$
26,591

 
$
49,118

 
$
32,583

  _________________________
(a) 
Items not allocated to segments consist of:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
General and administrative expense
$
(27,549
)
 
$
(4,514
)
 
$
(31,577
)
 
$
(9,487
)
Shared-based and long-term incentive compensation expense
(1,448
)
 
(412
)
 
(2,343
)
 
(1,956
)
Gain on sale of assets
28,049

 

 
28,049

 

Interest expense
(2,166
)
 
(6,918
)
 
(4,401
)
 
(14,557
)
Loss on extinguishment of debt, net

 
(35,766
)
 

 
(35,864
)
Other corporate non-operating income
341

 
175

 
595

 
225

 
$
(2,773
)
 
$
(47,435
)
 
$
(9,677
)
 
$
(61,639
)

Note 18—Share-Based and Long-Term Incentive Compensation
Share-based and long-term incentive compensation expense consists of:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Cash-settled awards
$
1,026

 
$
(494
)
 
$
1,113

 
$
125

Equity-settled awards
285

 
625

 
903

 
1,104

Restricted stock

 
6

 

 
12

Stock options
105

 
199

 
243

 
475

Total share-based compensation
1,416

 
336

 
2,259

 
1,716

Deferred cash
32

 
76

 
84

 
240

 
$
1,448

 
$
412

 
$
2,343

 
$
1,956




17


Share-based and long-term incentive compensation expense is included in:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
General and administrative expense
$
823

 
$
338

 
$
1,486

 
$
1,844

Other operating expense
625

 
74

 
857

 
112

 
$
1,448

 
$
412

 
$
2,343

 
$
1,956


Share-Based Compensation
We did not grant any new equity-settled or cash-settled awards to employees in first six months 2017.
In first six months 2017, we granted 58,212 restricted stock units to our board of directors, of which 34,746 were annual restricted stock units which vest 25 percent at grant date and 25 percent at each subsequent quarterly board meeting. Expense associated with annual restricted stock units is included in share-based compensation expense.
Excluded from share-based compensation expense in the table above are fees earned by our board of directors in the amount of $127,000 and $163,000 in second quarter of 2017 and 2016 and $314,000 and $428,000 in the first six months of 2017 and 2016 for which they elected to defer payment until retirement in the form of share-settled units. These expenses are included in general and administrative expense.
The fair value of awards granted to retirement eligible employees expensed at the date of grant was $600,000 in first six months 2016. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $1,144,000 at second quarter-end 2017.
In first six months 2017 and 2016, we issued 318,401 and 165,167 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of 75,870 and 23,691 shares withheld having a value of $980,000 and $205,000 for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.
Long-Term Incentive Compensation
We did not grant any long-term incentive compensation to employees in first six months 2017.


18


Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of second quarter-end 2017, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas, where our real estate activities are concentrated, or on a national or global scale;
our ability to achieve some or all of our key initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
future residential or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments;
accuracy of estimates and other assumptions related to investment in and development of real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation;
the levels of resale housing inventory in our mixed-use development projects and the regions in which they are located;
fluctuations in costs and expenses, including impacts from shortages in materials or labor;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in commodity prices;
demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
our ability to make interest and principal payments on our debt or amend and satisfy the other covenants contained in our senior secured credit facility, indentures and other debt agreements;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal or usage;
the occurrence of any event, change or other circumstances that could give rise to the termination of the agreement and plan of merger between Forestar and affiliates of D.R. Horton, Inc.;
the effect of the announcement of our merger with D.R. Horton, Inc. on our ability to maintain relationships with our vendors and customers and retain key personnel; 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 our 2016 Annual Report on Form 10-K, in Item 1A of our first quarter 2017 Quarterly Report on Form 10-Q, and in Item 1A of this second quarter 2017 Quarterly Report on Form 10-Q, 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.

19


Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Key Initiatives
Reducing costs across our entire organization;
Reviewing the entire portfolio of our assets (complete non-core assets sales); and
Reviewing our capital structure (allocate capital to maximize shareholder value).
Proposed Merger

On April 13, 2017, we entered into an Agreement and Plan of Merger with affiliates of Starwood Capital Group (“Starwood”) pursuant to which, as amended, Starwood would acquire each share of the Company’s common stock, par value $1.00 per share (“Our Common Stock”) for $16.00 per share (as amended, the “Starwood Merger Agreement”).
On June 29, 2017, we terminated the Starwood Merger Agreement and entered into an Agreement and Plan of Merger with D.R. Horton, Inc. (“D.R. Horton”) pursuant to which D.R. Horton would acquire approximately 75 percent of our outstanding common stock for $17.75 per share (the “D.R. Horton Merger Agreement”). The D.R. Horton Merger Agreement has been unanimously approved by our and D.R. Horton’s boards of directors.
Subject to the terms and conditions of the D. R. Horton Merger Agreement, at the effective time of the Merger (the “Effective Time”), all of Our Common Stock will be converted into the right to receive, either
(i) an amount in cash per share of Our Common Stock equal to $17.75 (the “Cash Consideration”); or
(ii) one share of common stock of Forestar (the “Surviving Company Common Stock”),
in each case at the election of the holder of such share of Our Common Stock, subject to proration procedures applicable to oversubscription and undersubscription for Cash Consideration by stockholders. The aggregate amount of Cash Consideration will be approximately $558,256,000.
In connection with entry into each of the Starwood Merger Agreement and the D.R. Horton Merger Agreement, we amended our tax benefits preservation plan dated January 5, 2017, in each case rendering the plan inapplicable to such agreement and the transactions contemplated thereby. Please see Note 13—Capital Stock for additional information regarding our tax benefits preservation plan.
Closing of the merger with D.R. Horton (the “Merger”) is subject to approval of our stockholders and certain other closing conditions, and is expected to close in fourth quarter 2017. Following closing of the Merger, Forestar will continue as a separate publicly-traded company.
In connection with these matters, in first six months 2017 we paid a $20,000,000 termination fee to Starwood and incurred $4,070,000 in professional fees and other costs related to the proposed transactions, all of which are included in general and administrative expenses. Upon consummation of the proposed merger, we will pay our financial advisor a sale transaction fee of approximately $5,600,000 which is contingent upon the successful completion of the Merger.
Discontinued Operations
At year-end 2016, we had divested of 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. The discussion of our results of operations is based on the results from our continuing operations unless otherwise indicated.







20


Results of Operations
A summary of our consolidated results by business segment follows:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
27,992

 
$
46,381

 
$
48,744

 
$
82,479

Mineral resources
5

 
1,337

 
1,502

 
2,419

Other
18

 
274

 
74

 
712

Total revenues
$
28,015

 
$
47,992

 
$
50,320

 
$
85,610

Segment earnings (loss):
 
 
 
 
 
 
 
Real estate
$
11,545

 
$
73,290

 
$
22,018

 
$
93,514

Mineral resources
(348
)
 
933

 
37,468

 
1,486

Other
(304
)
 
(197
)
 
(691
)
 
(778
)
Total segment earnings
10,893

 
74,026

 
58,795

 
94,222

Items not allocated to segments:
 
 
 
 
 
 
 
General and administrative expense
(27,549
)
 
(4,514
)
 
(31,577
)
 
(9,487
)
Share-based and long-term incentive compensation expense
(1,448
)
 
(412
)
 
(2,343
)
 
(1,956
)
Gain on sale of assets
28,049

 

 
28,049

 

Interest expense
(2,166
)
 
(6,918
)
 
(4,401
)
 
(14,557
)
Loss on extinguishment of debt, net

 
(35,766
)
 

 
(35,864
)
Other corporate non-operating income
341

 
175

 
595

 
225

Income from continuing operations before taxes attributable to Forestar Group Inc.
8,120

 
26,591

 
49,118

 
32,583

Income tax expense
(11,928
)
 
(14,929
)
 
(28,139
)
 
(17,081
)
Net income (loss) from continuing operations attributable to Forestar Group Inc.
$
(3,808
)
 
$
11,662

 
$
20,979

 
$
15,502

Significant aspects of our results of operations follow:
Second Quarter and First Six Months 2017
Second quarter and first six months 2017 real estate segment earnings decreased compared with second quarter and first six months 2016 primarily due to gains of $107,650,000 and $121,231,000, respectively, in 2016 as a result of executing our key initiative to opportunistically sell non-core assets. In addition, we generated segment earnings of $10,565,000 and $14,879,000 in second quarter and first six months 2016, respectively, from retail land sales. These items were partially offset by non-cash impairment charges of $48,826,000 related to five non-core community development projects and one multifamily site in second quarter 2016. Segment earnings in 2017 reflect higher equity in earnings of unconsolidated ventures as a result of an increase in commercial tract and residential lot sales in first six months 2017 compared with first six months 2016. We had no retail land sales in second quarter or first six months 2017.
In first quarter 2017, we sold all of our remaining owned mineral assets for approximately $85,700,000. We recognized $74,222,000 in total gains related to the sale of our mineral assets in first six months 2017 and will recognize a deferred gain of $8,200,000 in third quarter 2017 as a result of the expiration of the title review period. In addition, as a result of selling our remaining mineral assets in first quarter 2017, we recognized a non-cash impairment charge of $37,900,000 in first six months 2017 related to the mineral resources reporting unit goodwill.
Second quarter and first six months 2017 general and administrative expense increased compared to second quarter and first six months 2016 primarily due to the termination fee of $20,000,000 related to terminating the Starwood Merger Agreement and entering into the D.R. Horton Merger Agreement and $4,070,000 in professional fees and other costs incurred associated with the proposed transactions.
Second quarter and first six months 2017 gain on sale of assets increased compared to second quarter and first six months 2016 due to the sale of approximately 19,000 acres of timberland and undeveloped land in Georgia and Texas for $46,197,000 in three transactions generating combined proceeds of $44,771,000. We recognized combined gains of $28,049,000 and recorded a deferred gain of $625,000 pending receipt of certain regulatory approvals and release of funds from escrow.
Second quarter and first six months 2017 interest expense decreased primarily due to reducing our debt outstanding by $277,790,000 in 2016.

21


Loss on extinguishment of debt in second quarter and first six months 2016 represents the cash tender offer of our 8.5% senior secured notes and other open market purchases of debt securities.
Current Market Conditions
Sales of new U.S. single-family homes in June 2017, according to U.S. Census Bureau Department of Commerce, were at a seasonally adjusted annual rate of 610,000, rising for the second straight month and registering .8 percent higher than the revised May 2017 rate of 605,000 and 9.1% above the June 2016 rate. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that housing starts for June 2017 registered a seasonally adjusted annual rate of 1,215,000, reflecting an 8.3% gain above the revised May estimate of 1,122,000 units and a 2.1% gain over prior year’s reading of 1,190,000 units. Single-family housing permits, generally viewed as a precursor to starts, increased 4.1% in June to a rate of 811,000, 4.1% above the revised May figure of 779,000. Homebuilder confidence, as measured by the National Association of Homebuilders/Wells Fargo Housing Market Index, declined two points in July from a downwardly revised June reading but sentiment continues to remain in strong territory. The decline indicated concerns over rising material prices as well as cost and availability of land. The S&P CoreLogic Case-Shiller National Index, which measures home price appreciation for the entire nation, reflected a 5.6% annual gain in May, the same reading as in the prior month with Seattle, Portland and Denver continuing to register the highest home price appreciation in the nation.
Business Segments
We manage our operations through three business segments:
Real estate;
Mineral resources; and
Other
We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of strategic timberland and undeveloped land, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.
Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, consumer and home builder sentiment, new housing starts, real estate values, employment levels, and the overall strength or weakness of the U.S. economy.
Real Estate
We own directly or through ventures interests in 48 residential and mixed-use projects comprised of approximately 4,400 acres of real estate located in 10 states and 14 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential single-family lots and tracts, undeveloped land and commercial real estate.









22


A summary of our real estate results follows:
 
Second Quarter
 
First Six Months
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Revenues
$
27,992

 
$
46,381

 
$
48,744

 
$
82,479