10-K 1 for1231201710-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, 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.)
10700 Pecan Park Blvd., Suite 150
Austin, Texas 78750
(Address of Principal Executive Offices, including Zip Code)
Registrant’s telephone number, including area code: (512) 433-5200
6300 Bee Cave Road, Building Two, Suite 500
Austin, Texas 78746
(Former Name or Former Address,if Changed Since Last Report)
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
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.     þ
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.
Large accelerated filer þ
 
Accelerated filer o
  
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
(Do not check if a smaller reporting 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  ¨    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, 2017, was approximately $707 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 23, 2018, there were 41,938,936 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Company’s definitive proxy statement for the 2018 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.
Item 16.
 
 
 
 

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PART I
 
Item 1.
Business
Overview
Forestar Group Inc. is a residential and mixed-use real estate development company. As of October 5, 2017, we are a majority-owned subsidiary of D.R. Horton, Inc. ("D.R. Horton"). For a discussion of the terms of the D.R. Horton merger (the"Merger"), see "Business - D.R. Horton Merger" in Part I, Item 1 of this annual report on Form 10-K. In our core community development business we own directly or through ventures interests in 49 residential and mixed-use projects located in 11 states and 16 markets. In addition, we own interests in various other assets that have been identified as non-core that we are divesting opportunistically over time. In 2017, we had revenues of $114.3 million and net income of $50.3 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, 2017, and references to acreage owned include approximate acres owned by us and ventures regardless of our ownership interest in a venture.
For the past two years we have focused on reducing costs across our entire organization, selling non-core assets, reducing our outstanding debt and reviewing our portfolio of assets and capital allocation to maximize shareholder value. The merger with D.R. Horton provides us an opportunity to grow our core community development business by establishing a strategic relationship to supply finished lots to D.R. Horton at market prices under the Master Supply Agreement. Under the terms of the Master Supply Agreement, both companies will proactively identify land development opportunities to expand our portfolio of assets. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. As of February 23, 2018, we have acquired 13 new projects since the Merger, representing nearly 5,300 planned lots, of which approximately 35 percent are under contract to sell to D.R. Horton and a majority of these remaining lots are also expected to be sold to D.R. Horton in accordance with the Master Supply Agreement between the two companies.
2018 Strategic Initiatives
Our 2018 strategic initiatives include making significant investments in land acquisition and development to expand our community development business into a diversified national platform and finalizing non-core asset sales. On February 8, 2018, we entered into and closed on a Purchase and Sale Agreement with Starwood Land, L.P. ("Starwood") to sell 24 legacy projects for $232,000,000. This strategic asset sale included projects owned both directly and indirectly through ventures and consisted of approximately 750 developed and under development lots, over 4,000 future undeveloped lots (including all real estate associated with the Cibolo Canyons mixed-use development), 730 unentitled acres in California, an interest in one multifamily operating property and a multifamily development site. This sale helps to further streamline our business and provide additional capital for future growth. We plan to invest the capital principally into new land development projects with goals of improving returns and enhancing value for our shareholders.
Business Segments
We manage our operations through three business segments:
Real estate,
Mineral resources, and
Other.
Our real estate segment provided approximately 99 percent of our 2017 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. We invest in projects across the United States that possess key demographic and growth characteristics that we believe make them attractive real estate investments. In 2016, we announced that multifamily was a non-core business and we have been opportunistically divesting our multifamily assets. At year-end 2017, a multifamily site in Austin was classified within assets held for sale and we owned interests in two multifamily operating properties.
Our mineral resources segment, which is also non-core, provided one percent of our 2017 consolidated revenues. In first quarter 2017, we sold all of the remaining assets for approximately $85,700,000, which generated gains of $82,422,000 in 2017.

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Our other segment, all of which is non-core, provided no material revenues in 2017. Historically, revenues from this segment were generated by sales of wood fiber from our land, principally in Georgia, and leasing land for recreational uses. At year-end 2017, we did not have any remaining timber holdings or recreational leases. 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 that were classified as assets held for sale at year-end 2017, and 20,000 acres of groundwater leases in central Texas.
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, principally 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 may 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.
At year-end 2017, we had 49 entitled, developed or under development projects in 11 states and 16 markets 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 or for other strategic reasons.
A summary of our real estate projects in the entitlement process (a) classified as assets held for sale at year-end 2017 follows:
Project
 
County
 
Market
 
Project Acres (b)
California
 
 
 
 
 
 
Hidden Creek Estates (c)
 
Los Angeles
 
Los Angeles
 
700

Terrace at Hidden Hills (c)
 
Los Angeles
 
Los Angeles
 
30

Total
 
 
 
 
 
730

 _____________________
(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 are approximate.
(c) 
Included in the strategic asset sale to Starwood on February 8, 2018. Please read Note 22 — Subsequent Event to our consolidated financial statements in this report for additional information regarding this transaction.
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 a community by providing convenient locations for resident support services.
We develop lots for single-family homes on sites we typically purchase in the open market. We sell residential lots primarily to local, regional and national home builders. At year-end 2017, we had interests in 49 entitled, developed or under development projects in 11 states and 16 markets, comprised of land planned for approximately 11,600 residential lots and units. We sold approximately 750 developed and under development lots and over 4,000 future undeveloped lots subsequent to year-end 2017 in a strategic asset sale to Starwood.
Land designated for commercial uses is typically sold to regional and local commercial developers. We had approximately 560 acres of entitled land designated for commercial use at year-end 2017, of which approximately 254 acres were sold subsequent to year-end 2017 in a strategic asset sale to Starwood.


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A summary of our projects in the development process, which includes entitled, developed and under development single-family and mixed-use projects, at year-end 2017 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 2017
Texas
 
 
 
 
 
 
 
 
 
 
 
 
Austin
 
 
 
 
 
 
 
 
 
 
 
 
Arrowhead Ranch (e)
 
Hays
 
100
%
 
32

 
352

 

 
19

Hunter's Crossing (e)
 
Bastrop
 
100
%
 
510

 

 
66

 
39

 
 
 
 
 
 
542

 
352

 
66

 
58

Corpus Christi
 
 
 
 
 
 
 
 
 
 
 
 
Padre Island (b)
 
Nueces
 
50
%
 

 

 

 
13

 
 
 
 
 
 

 

 

 
13

Dallas-Ft. Worth
 
 
 
 
 
 
 
 
 
 
 
 
Bar C Ranch
 
Tarrant
 
100
%
 
487

 
660

 

 

Lakes of Prosper
 
Collin
 
100
%
 
283

 
4

 
4

 

Lakewood Trails
 
Kaufman
 
100
%
 

 
599

 

 

Lantana
 
Denton
 
100
%
 
3,801

 
303

 
44

 

Parkside
 
Collin
 
100
%
 
186

 
14

 

 

The Preserve at Pecan Creek
 
Denton
 
100
%
 
669

 
113

 

 
7

River's Edge
 
Denton
 
100
%
 

 
217

 

 

Stoney Creek (e)
 
Dallas
 
100
%
 
347

 
316

 

 

Summer Creek Ranch
 
Tarrant
 
100
%
 
983

 
245

 
79

 

Timber Creek
 
Collin
 
88
%
 
172

 
425

 

 

Village Park
 
Collin
 
100
%
 
567

 

 
5

 

 
 
 
 
 
 
7,495

 
2,896

 
132

 
7

Houston
 
 
 
 
 
 
 
 
 
 
 
 
Barrington Kingwood (e)
 
Harris
 
100
%
 
180

 

 

 

City Park
 
Harris
 
75
%
 
1,468

 

 
78

 
83

Harper's Preserve (b) (e)
 
Montgomery
 
50
%
 
634

 
1,189

 
76

 
1

Imperial Forest
 
Harris
 
100
%
 
84

 
347

 

 

Long Meadow Farms (b)
 
Fort Bend
 
38
%
 
1,762

 
34

 
237

 
60

Southern Colony
 
Fort Bend
 
100
%
 

 
400

 

 

Southern Trails (b)
 
Brazoria
 
80
%
 
995

 

 
1

 

Spring Lakes
 
Harris
 
100
%
 
348

 

 
29

 

Summer Lakes (e)
 
Fort Bend
 
100
%
 
811

 
251

 
58

 
1

Summer Park (e)
 
Fort Bend
 
100
%
 
135

 
64

 
36

 
65

Willow Creek Farms II
 
Waller / Fort Bend
 
90
%
 
218

 
47

 

 

 
 
 
 
 
 
6,635

 
2,332

 
515

 
210

San Antonio
 
 
 
 
 
 
 
 
 
 
 
 
Cibolo Canyons (e)
 
Bexar
 
100
%
 
1,242

 
756

 
108

 
25

Oak Creek Estates
 
Comal
 
100
%
 
352

 

 
13

 

Olympia Hills
 
Bexar
 
100
%
 
754

 

 
10

 

Stonewall Estates
 
Bexar
 
100
%
 
386

 

 

 

 
 
 
 
 
 
2,734

 
756

 
131

 
25

Total Texas
 
 
 
 
 
17,406

 
6,336

 
844

 
313

Colorado
 
 
 
 
 
 
 
 
 
 
 
 
Denver
 
 
 
 
 
 
 
 
 
 
 
 
Buffalo Highlands (e)
 
Weld
 
100
%
 

 
164

 

 

Cielo
 
Douglas
 
100
%
 

 
343

 

 

Johnstown Farms (e)
 
Weld
 
100
%
 
281

 
355

 
2

 

Pinery West (e)
 
Douglas
 
100
%
 
86

 

 
20

 
104

Stonebraker (e)
 
Weld
 
100
%
 

 
603

 

 

 
 
 
 
 
 
367

 
1,465

 
22

 
104

 
 
 
 
 
 
 
 
 
 
 
 
 

5



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Lots/Units
 
Commercial Acres
Project
 
County
 
Interest
Owned
(a)
 
Lots/Units Sold
Since
Inception
 
Lots/Units
Remaining
 
Acres Sold
Since
Inception
 
Acres
   Remaining
Florida
 
 
 
 
 
 
 
 
 
 
 
 
Palm Bay
 
 
 
 
 
 
 
 
 
 
 
 
The Preserves at Stonebriar
 
Brevard
 
100
%
 

 
328

 

 

 
 
 
 
 
 

 
328

 

 

Sarasota-Bradenton
 
 
 
 
 
 
 
 
 
 
 
 
Fox Creek
 
Sarasota
 
100
%
 

 
422

 

 

Palisades
 
Manatee
 
100
%
 

 
150

 

 

 
 
 
 
 
 

 
572

 

 

Total Florida
 
 
 
 
 

 
900

 

 

Georgia
 
 
 
 
 
 
 
 
 
 
 
 
Atlanta
 
 
 
 
 
 
 
 
 
 
 
 
Harris Place
 
Paulding
 
100
%
 
25

 
2

 

 

Independence
 
Gwinnett
 
100
%
 

 
760

 

 

Montebello (b) 
 
Forsyth
 
90
%
 

 
223

 

 

Seven Hills
 
Paulding
 
100
%
 
949

 
303

 
26

 
113

West Oaks
 
Cobb
 
100
%
 
19

 
37

 

 

 
 
 
 
 
 
993

 
1,325

 
26

 
113

North & South Carolina
 
 
 
 
 
 
 
 
 
 
 
 
Charlotte
 
 
 
 
 
 
 
 
 
 
 
 
Ansley Park (e)
 
Lancaster
 
100
%
 

 
307

 

 

Habersham
 
York
 
100
%
 
139

 
48

 
1

 
5

Moss Creek
 
Cabarrus
 
100
%
 

 
84

 

 

Walden (e)
 
Mecklenburg
 
100
%
 

 
384

 

 

 
 
 
 
 
 
139

 
823

 
1

 
5

Raleigh
 
 
 
 
 
 
 
 
 
 
 
 
Beaver Creek (b) (e)
 
Wake
 
90
%
 
108

 
85

 

 

 
 
 
 
 
 
108

 
85

 

 

Total North & South Carolina
 
 
 
 
 
247

 
908

 
1

 
5

Tennessee
 
 
 
 
 
 
 
 
 
 
 
 
Nashville
 
 
 
 
 
 
 
 
 
 
 
 
Beckwith Crossing
 
Wilson
 
100
%
 
58

 
41

 

 

Morgan Farms
 
Williamson
 
100
%
 
151

 
22

 

 

Scales Farmstead (e)
 
Williamson
 
100
%
 
84

 
113

 

 

Weatherford Estates
 
Williamson
 
100
%
 
16

 
1

 

 

 
 
 
 
 
 
309

 
177

 

 

Wisconsin
 
 
 
 
 
 
 
 
 
 
 
 
Madison
 
 
 
 
 
 
 
 
 
 
 
 
Juniper Ridge/Hawks Woods (b) (d) (e)
 
Dane
 
90
%
 
70

 
144

 

 

Meadow Crossing II (b) (c) (e)
 
Dane
 
90
%
 
32

 
140

 

 

 
 
 
 
 
 
102

 
284

 

 

Arizona, California, Utah
 
 
 
 
 
 
 
 
 
 
 
 
Tucson
 
 
 
 
 
 
 
 
 
 
 
 
Boulder Pass (b) (d) (e)
 
Pima
 
50
%
 
39

 
49

 

 

Dove Mountain
 
Pima
 
100
%
 

 

 

 

 
 
 
 
 
 
39

 
49

 

 

Oakland
 
 
 
 
 
 
 
 
 
 
 
 
San Joaquin River
 
Contra Costa/Sacramento
 
100
%
 

 

 
264

 
25

 
 
 
 
 
 

 

 
264

 
25

Salt Lake City
 
 
 
 
 
 
 
 
 
 
 
 
Suncrest (b) (d) (e)
 
Salt Lake
 
90
%
 
5

 
169

 

 

 
 
 
 
 
 
5

 
169

 

 

Total Arizona, California, Utah
 
 
 
 
 
44

 
218

 
264

 
25

Total
 
 
 
 
 
19,468

 
11,613

 
1,157

 
560


6



___________________
(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.
(e) 
Included in the strategic asset sale to Starwood on February 8, 2018. The owned projects are classified as assets held for sale and our equity interests in ventures continued to be classified as investment in unconsolidated ventures at year-end 2017. Please read Note 22 — Subsequent Event to our consolidated financial statements in this report for additional information regarding this transaction.
A summary of our non-core multifamily operating properties at year-end 2017 follows:
Project
 
Market
 
Interest
Owned
(a)
 
Type
 
Acres
 
Description
Elan 99 (b)
 
Houston
 
90
%
 
Multifamily
 
17

 
360-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.
(b)
Included in the strategic asset sale to Starwood on February 8, 2018. Please read Note 22 — Subsequent Event to our consolidated financial statements in this report for additional information regarding this transaction.
Our net investment in owned and consolidated real estate projects by state at year-end 2017 follows:
State
 
Entitled,
Developed,
and Under
Development
Projects
 
Other Real Estate Costs
 
Real Estate, Net
 
Real Estate Held for Sale
 
 
(In thousands)
Texas
 
$
61,835

 
$
2,803

 
$
64,638

 
$
93,990

Georgia
 
25,273

 

 
25,273

 

Florida
 
21,131

 

 
21,131

 

Colorado
 
7,120

 

 
7,120

 
22,878

Tennessee
 
5,611

 
135

 
5,746

 
8,878

North and South Carolina
 
4,805

 

 
4,805

 
27,483

California
 
1,667

 

 
1,667

 
27,018

Total
 
$
127,442

 
$
2,938

 
$
130,380

 
$
180,247


Markets
Sales of new single-family homes in December 2017, according to a joint release by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, were at a seasonally adjusted annual rate of 625,000 units. On a year over year basis, U.S. single family home sales were 14.1% higher than reported in December 2016. A total of 608,000 new home sales were reported for the year, the highest annual level reported since 2007. The number of units for sale at the end of December was 295,000, representing a supply of 5.7 months at the current sales rate. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that housing starts for December 2017 registered a seasonally adjusted annual rate of 1,192,000 units, representing an 8.2% drop from the November estimate of 1,299,000 and a 6.0% decrease from prior year. Seasonally adjusted single-family starts in December were 836,000 units, 11.8% below the revised November rate but 3.5% above prior year. For the year, total housing starts were up 2.4% to 1,202,100, compared to 1,173,800 for 2016, the highest annual rate since 2007. Seasonally adjusted housing permits, generally viewed as a precursor for housing starts, registered 1,302,000 in December 2017, 0.1% below the prior month’s revised reading but 2.8% above the December 2016 rate. Homebuilder confidence, as measured by the National Association of Homebuilders/Wells Fargo Housing Market Index, increased in December on expectations for a stronger economy and potential regulatory relief for the business community. The monthly reading of homebuilder sentiment rose 5 points to 74, the highest reading since 1999 and 5 points

7



higher than a year ago. On a regional basis, the three month moving averages for builders’ confidence increased in all regions with the Midwest registering the highest increase on a percentage basis, followed by the South. The S&P CoreLogic Case-Shiller National Index, which measures home price appreciation for the entire nation, reflected continued price appreciation across the country. On a year over year basis, the S&P Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. Census divisions, reported a 6.2% annual gain in November, up from 6.1% in the previous month.
 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 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 a few national land developer competitors in addition to 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 in a weaker financial condition tend to be less active.
 Discontinued Operations
At year-end 2016, we had 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 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.
In third quarter 2017, we sold the common stock of Forestar Petroleum Corporation for $100,000. With the completion of this transaction we have sold all of our oil and gas working interest assets and related entities. This transaction resulted in a significant tax loss with the corresponding tax benefit reported as discontinued operations.
Mineral Resources
In first quarter 2017, we sold our remaining owned mineral assets for approximately $85,700,000. With the completion of this sale we have divested all of our owned mineral assets.
Other
At year-end 2017, we did not have any remaining timber holdings or recreational leases. We had 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. Our nonparticipating royalty interests are classified as assets held for sale at year-end 2017. We have not received significant revenues or earnings from these interests.
Employees
At year-end 2017, we had 34 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 or withdraw groundwater, or may require us to investigate and remediate contaminated properties. 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,

8



as well as our ability to sell the property or to borrow funds using that property as collateral. Environmental claims generally would not be covered by our insurance programs.
In 2016, we sold all but 25 acres of a 289 acre former paper manufacturing facility near Antioch, California, approximately 80 acres of which had not yet received a certificate of completion under the voluntary environmental remediation program in which we were participating. The buyer of the site 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.
D.R. Horton Merger
Merger Transaction
On June 29, 2017, we entered into an Agreement and Plan of Merger with D.R. Horton and a wholly-owned subsidiary of D.R. Horton (“Merger Sub”). At the effective time on October 5, 2017, we merged (the “Merger”) with Merger Sub and we continued as the surviving entity in the Merger. In the Merger, each existing share of our common stock issued and outstanding immediately prior to the effective time (the “Former Forestar Common Stock”) was converted into the right to receive, at the election of the holders of the shares of Former Forestar Common Stock, either an amount in cash equal to $17.75 per share (the “Cash Consideration”) or one new share of our common stock (the “New Forestar Common Stock”), subject to proration procedures applicable to oversubscription and undersubscription for the Cash Consideration as described in the Merger agreement. The aggregate amount of the Cash Consideration paid by D.R. Horton to holders of Former Forestar Common Stock in the Merger was $558,256,000, and D.R. Horton funded the payment of the Cash Consideration with cash on hand. In the Merger, 10,487,873 shares of New Forestar Common Stock (representing 25% of the outstanding shares of New Forestar Common Stock immediately after the effective time) were issued to the holders of our common stock and 31,451,063 shares of New Forestar Common Stock (representing 75% of the outstanding shares of the New Forestar Common Stock immediately after the effective time) were issued to D.R. Horton. As of October 5, 2017, we became a majority-owned subsidiary of D.R. Horton and a controlled company under New York Stock Exchange rules.
Stockholder’s Agreement
In connection with the Merger, we entered into a Stockholder’s Agreement with D.R. Horton that, among other things, provide D.R. Horton with certain board and board committee appointment rights and certain approval rights.
Additional information regarding the Stockholder’s Agreement, including a copy of the Stockholder’s Agreement, can be found in our Current Report on Form 8-K filed with the SEC on June 29, 2017.
Master Supply Agreement
In connection with the Merger, we entered into a Master Supply Agreement with D.R. Horton. The terms of the Master Supply Agreement, unless earlier terminated, continue until the earlier of (a) the date that D.R. Horton and its affiliates beneficially own less than 15% of our voting securities and (b) June 29, 2037. However, we have the right to terminate the Master Supply Agreement at any time that D.R. Horton and its affiliates beneficially own less than 25% of our voting securities.
Under the Master Supply Agreement, we will present to D.R. Horton all single-family residential lot development opportunities (subject to certain exceptions) that we desire to acquire and develop that have been approved or conditionally approved by the Forestar Investment Committee (a “Forestar Sourced Opportunity”); and D.R. Horton has the right, but not the obligation, to present us with lot development opportunities that D.R. Horton desires to acquire for development (if presented to us, a “D.R. Horton Sourced Opportunity”).
We and D.R. Horton will collaborate regarding all Forestar Sourced Opportunities and all D.R. Horton Sourced Opportunities, after considering current and future market conditions and dynamics. If we and D.R. Horton agree to pursue a Forestar Sourced Opportunity or a D.R. Horton Sourced Opportunity, such agreement will be evidenced by a mutually agreed upon written development plan prepared at the direction of the Forestar Investment Committee (a “Development Plan”), addressing, among other things, the number, size, layout and projected price of lots, phasing, timing, amenities and entitlements, and are referred to as either a “Forestar Sourced Development” or a “D.R. Horton Sourced Development”, as the case may be.
D.R. Horton or its affiliates have (a) a right of first offer (“ROFO”) to buy up to 50% of the lots in the first phase (and in any subsequent phase in which D.R. Horton purchased at least 25% of the lots in the previous phase) in each Forestar Sourced Development; and (b) the right to purchase up to 100% of the lots in each D.R. Horton Sourced Development, at the then current fair market price and terms per lot, as mutually agreed to by us and D.R. Horton. All lots in a Forestar Sourced Development in which a D.R. Horton affiliate participates as a buyer will be equitably allocated among D.R. Horton and any other builders in each phase taking into consideration the location, size and other attributes associated with the lots. The agreement evidencing the ROFO for the lots in the Forestar Sourced Development (the “ROFO Agreement”), and the purchase and sale agreement for the lots in the D.R. Horton Sourced Development (the “PSA”), will be negotiated, finalized and executed as a part of the Development Plan, and in all events the Development Plan will be finalized, and the ROFO Agreement will be negotiated, finalized and executed,

9



prior to the expiration of the feasibility period in any contract to acquire a Forestar Sourced Development. D.R. Horton will assign to us on an “as-is”, “where-is basis” the contract to acquire a D.R. Horton Sourced Development after the finalization of the Development Plan and PSA for such D.R. Horton Sourced Development.
Additional information regarding the Master Supply Agreement, including a copy of the Master Supply Agreement, can be found in our Current Report on Form 8-K filed with the SEC on June 29, 2017.
Shared Services Agreement
On October 6, 2017, we entered into a Shared Services Agreement with D.R. Horton pursuant to which D.R. Horton will provide us certain administrative, compliance, operational and procurement services. Additional information regarding the Shared Services Agreement, including a copy of the Shared Services Agreement, can be found in our Current Report on Form 8-K filed with the SEC on October 10, 2017.
Available Information
Forestar Group Inc. is a Delaware corporation. Our principal executive offices are located at 10700 Pecan Park Blvd., Suite 150, Austin, Texas 78750. 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
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
Donald J. Tomnitz
 
69
 
Executive Chairman of the Board
Daniel C. Bartok
 
61
 
Chief Executive Officer
Charles D. Jehl
 
49
 
Chief Financial Officer and Treasurer
 
 
 
 
 

Donald J. Tomnitz has served as our Executive Chairman of the Board since October 2017 and was appointed in connection with the Merger with D.R. Horton. Prior to joining Forestar, Mr. Tomnitz served as a consultant to D.R. Horton from October 2014 to September 2017. From November 1998 to September 2014, Mr. Tomnitz was the Vice Chairman and Chief Executive Officer of D.R. Horton. From 1996 until 1998, Mr. Tomnitz was President of D.R. Horton's Homebuilding Division. In 1998, he was elected an Executive Vice President of D.R. Horton and in 2000, he became President of D.R. Horton as well. Before joining D.R. Horton, Mr. Tomnitz was a Captain in the U.S. Army, a Vice President of RepublicBank of Dallas, N.A., and a Vice President of Crow Development Company, a Trammell Crow Company. Mr. Tomnitz holds a Bachelor of Arts Degree in Economics from Westminster College and a Masters of Business Administration in Finance from Western Illinois University
Daniel C. Bartok has served as our Chief Executive Officer since December 2017. Prior to joining Forestar, he served as Executive Vice President of Wells Fargo Bank as head of its Owned Real Estate Group from 2008 to 2017. Prior to joining

10



Wells Fargo, he was President of Clarion Realty, Inc. a real estate development company operating across multiple states, with an emphasis on residential land development and homebuilding. Mr. Bartok holds a Bachelor of Sciences degree in Accountancy from the University of Illinois and began his career at Price Waterhouse.
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 June 2013 to February 2015, and as Chief Accounting Officer from 2006 to June 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 holds a Bachelor of Arts Degree in Accounting from Concordia Lutheran College and is also a Certified Public Accountant.






11



Item 1A.
Risk Factors.
Risks Related to our Concentrated Ownership
So long as D.R. Horton controls us, our other stockholders will have limited ability to influence matters requiring stockholder approval, and D.R. Horton's interest may conflict with the interests of our other stockholders.
        D.R. Horton beneficially owns approximately 75% of our common stock. As a result, until such time as D.R. Horton and its controlled affiliates hold shares representing less than a majority of the votes entitled to be cast by our stockholders at a stockholder meeting, D.R. Horton generally has the ability to control the outcome of any matter submitted for the vote of our stockholders, except in certain circumstances set forth in the our certificate of incorporation or bylaws. In addition, under the terms of our certificate of incorporation and the Stockholder's Agreement with D.R. Horton, so long as D.R. Horton or its affiliates own 35% or more of our voting securities, we may not take certain actions without D.R. Horton's approval, including certain actions with respect to equity issuances, indebtedness, acquisitions and executive hiring, termination and compensation.
        In addition, pursuant to the Stockholder's Agreement with D.R. Horton, we are subject to certain requirements and limitations regarding the composition of our Board. However, many of those requirements and limitations expire in January 2019. Thereafter, for so long as D.R. Horton and its controlled affiliates hold shares of our common stock representing at least a majority of the votes entitled to be cast by our stockholders at a stockholder meeting, D.R. Horton is able to nominate and elect all the members of our Board, subject to a requirement that we and D.R. Horton use reasonable best efforts to cause at least three directors to qualify as "independent directors," as such term is defined in the New York Stock Exchange ("NYSE") listing rules, and applicable law. The directors elected by D.R. Horton have the authority to make decisions affecting our capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs and the declaration of dividends.
        The interests of D.R. Horton may not coincide with the interests of our other stockholders. D.R. Horton's ability, subject to the limitations in the Stockholder's Agreement and our certificate of incorporation and bylaws, to control matters submitted to our stockholders for approval limits the ability of other stockholders to influence corporate matters, which may cause us to take actions that our other stockholders do not view as beneficial to them. In such circumstances, the market price of our common stock could be adversely affected. In addition, the existence of a controlling stockholder may have the effect of making it more difficult for a third party to acquire us, or may discourage a third party from seeking to acquire us. A third party would be required to negotiate any such transaction with D.R. Horton, and the interests of D.R. Horton with respect to such transaction may be different from the interests of our other stockholders.
        Subject to limitations in the Stockholder's Agreement and our certificate of incorporation that limit D.R. Horton's ability to take advantage of certain corporate opportunities, D.R. Horton is not restricted from competing with us or otherwise taking for itself or its other affiliates certain corporate opportunities that may be attractive to us.
Any inability to resolve favorably any disputes that may arise between us and D.R. Horton may result in a significant reduction of our revenues and earnings.
        Disputes may arise between D.R. Horton and us in a number of areas, including:
business combinations involving us; 
sales or dispositions by D.R. Horton of all or any portion of its ownership interest in us; 
performance under the Master Supply Agreement between D.R. Horton and us; 
arrangements with third parties that are exclusionary to D.R. Horton or us; and 
business opportunities that may be attractive to both D.R. Horton and us.
        We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.
        New agreements may be entered into between us and D.R. Horton, and agreements we enter into with D.R. Horton may be amended upon agreement between the parties. Because we are controlled by D.R. Horton, we may not have the leverage to negotiate these agreements, or amendments thereto if required, on terms as favorable to us as those that we would negotiate with an unaffiliated third party.
D.R. Horton's ability to control our Board may make it difficult for us to recruit independent directors.
        So long as D.R. Horton and its controlled affiliates hold shares of our common stock representing at least a majority of the votes entitled to be cast by our stockholders at a stockholders' meeting, D.R. Horton is able to elect all of the members of our Board, subject to the requirement to nominate one individual from the pre-merger Board at our 2018 annual meeting of stockholders. Further, the interests of D.R. Horton and our other stockholders may diverge. Under these circumstances, persons who might otherwise accept an invitation to join our Board may decline.

12



We qualify as a "controlled company" within the meaning of the NYSE rules and, as a result, may elect to rely on exemptions from certain corporate governance requirements that provide protection to stockholders of companies that are not "controlled companies."
So long as D.R. Horton owns more than 50% of the total voting power of our common stock, we qualify as a "controlled company" under the NYSE corporate governance standards. As a controlled company, we may under the NYSE rules elect to be exempt from obligations to comply with certain NYSE corporate governance requirements, including the requirements:
that a majority of our Board consist of independent directors; 
that we have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; 
that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and 
that an annual performance evaluation of the nominating and governance committee and compensation committee be performed.
We have not elected to utilize the “controlled company” exemptions at this time. However, if we elect to use the "controlled company" exemptions, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
We may not realize potential benefits of the strategic relationship with D.R. Horton, including the transactions contemplated by the Master Supply Agreement with D.R. Horton.
        The Master Supply Agreement establishes a strategic relationship between us and D.R. Horton for the supply of developed lots. Under the Master Supply Agreement, we will, and D.R. Horton may, present lot development opportunities that it desires to develop to the other party, subject to certain exceptions. The parties may collaborate with respect to such opportunities and, if they elect to develop such opportunities, D.R. Horton has a right of first offer or right to purchase some or all of the lots developed by us, as set forth in the Master Supply Agreement, on market terms as determined by the parties. There are numerous uncertainties associated with our relationship with D.R. Horton, including the risk that the parties will be unable to negotiate mutually acceptable terms for lot development opportunities and the fact that D.R. Horton is not obligated to present its lot development opportunities to us. As a result, we may not realize potential growth or other benefits from the strategic relationship with D.R. Horton, which may affect our financial condition or results of operations.
D.R. Horton's control of us or the strategic relationship between D.R. Horton and us may negatively affect our business relationships with other builder customers.
        So long as D.R. Horton controls us or the strategic relationship between D.R. Horton and us remains in place, our business relationships with other builder customers may be negatively affected, including as a result of the risk that such other builder customers may believe that we will favor D.R. Horton over our other customers. In addition, we have in the past relied on builder referrals as a source for land development opportunities, and there is a risk that builders may refer such opportunities to land developers other than us as a result of our close alignment with D.R. Horton.
Risks Related to our 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.
Our business is cyclical in nature.
Real estate development of residential lots is influenced by new home construction activity, which can be volatile. Cyclical downturns may materially and adversely affect our business, liquidity, financial condition and results of operations. Our operations are also impacted by general and local economic conditions, including employment levels, consumer confidence and spending, housing demand, availability of financing for homebuyers, tax policy for deductibility of home mortgage interest and property taxes, and interest rate and demographic trends.

13



Adverse changes in these general and local economic conditions or deterioration in the broader economy would cause a negative impact on our business and financial results and increase the risk for asset impairments and write-offs. Changes in these economic conditions may affect some of our regions or markets more than others. If adverse conditions affect our larger markets, particularly Texas, they could have a proportionately greater impact on us than on some other real estate development companies.
The real estate development industry is 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 development industry in which we operate is highly competitive.
Competitive conditions in the real estate development 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. 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 than we do. 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 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 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.
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 industry.
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 and the indentures governing our 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. 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 our 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 our convertible senior notes could discourage a potential acquirer.


14



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 real estate development 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. 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 may be dependent on our ability to continue to employ and retain skilled personnel.
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 actions 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. A significant decline in oil prices may impact job growth and housing demand in Texas, particularly in Houston, where the energy industry has a significant concentration. 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, 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 may 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, 2017, our unconsolidated ventures had approximately $85.2 million of debt, of which $80.6 million was non-recourse to us. When debt within our ventures matures, some of our ventures may be unable to renew existing loans or

15



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. 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 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.

Item 1B.
Unresolved Staff Comments.
None.

Item 2.
Properties.
Our principal executive offices are leased and are located in Austin, Texas. We also lease office space in Atlanta, Georgia; Dallas, Texas; 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.


16



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 2017 and 2016 were:
 
2017
 
2016
 
Price Range
 
Price Range
 
High
 
Low
 
High
 
Low
First Quarter
$
13.75

 
$
12.50

 
$
13.04

 
$
8.40

Second Quarter
$
17.65

 
$
13.85

 
$
13.74

 
$
11.23

Third Quarter
$
17.40

 
$
16.95

 
$
12.80

 
$
11.33

Fourth Quarter
$
22.50

 
$
16.35

 
$
13.65

 
$
10.75

For the Year
$
22.50

 
$
12.50

 
$
13.74

 
$
8.40

Shareholders
Our stock transfer records indicated that as of February 23, 2018, there were approximately 1,963 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
 
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 (10/1/2017 — 10/31/2017)

 
$

 

 

Month 11 (11/1/2017 — 11/30/2017)

 
$

 

 

Month 12 (12/1/2017 — 12/31/2017)

 
$

 

 

Total

 
$

 

 
 
 _____________________
(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 terminated upon closing of the Merger with D.R. Horton on October 5, 2017.

17



Performance Graph
Our old peer group consists of a combination of 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. and The St. Joe Company.
Because we are no longer in the oil and gas business, we constructed a new peer group consisting only of real estate companies: The St. Joe Company, Tejon Ranch Co, Consolidated-Tomoka Land Co., Five Points Holding, LLC (Class A), HomeFed Corporation, and Alexander & Baldwin, Inc.
performancegraph2.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.

18



Item 6.
Selected Financial Data.
 
For the Year
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share amount)
Revenues:
 
 
 
 
 
 
 
 
 
Real estate
$
112,746

 
$
190,273

 
$
202,830

 
$
213,112

 
$
248,011

Mineral resources
1,502

 
5,076

 
9,094

 
15,690

 
21,419

Other
74

 
1,965

 
6,652

 
9,362

 
10,721

Total revenues
$
114,322

 
$
197,314

 
$
218,576

 
$
238,164

 
$
280,151

Segment earnings (loss):
 
 
 
 
 
 
 
 
 
Real estate (a)
$
47,281

 
$
121,420

 
$
67,678

 
$
96,906

 
$
68,454

Mineral resources (b)
45,552

 
3,327

 
4,230

 
9,116

 
14,815

Other (c)
(6,393
)
 
(4,625
)
 
(608
)
 
5,499

 
6,507

Total segment earnings
86,440

 
120,122

 
71,300

 
111,521

 
89,776

Items not allocated to segments:
 
 
 
 
 
 
 
 
 
General and administrative expense (d)
(50,354
)
 
(18,274
)
 
(24,802
)
 
(21,229
)
 
(20,597
)
Share-based and long-term incentive compensation expense

(7,201
)
 
(4,425
)
 
(4,474
)
 
(3,417
)
 
(16,809
)
Gain on sale of assets (e)
28,674

 
48,891

 

 

 

Interest expense
(8,532
)
 
(19,985
)
 
(34,066
)
 
(30,286
)
 
(20,004
)
Loss on extinguishment of debt, net (f)
(611
)
 
(35,864
)
 

 

 

Other corporate non-operating income
1,627

 
350

 
256

 
453

 
119

Income from continuing operations before taxes attributable to Forestar Group, Inc.
50,043

 
90,815

 
8,214

 
57,042

 
32,485

Income tax expense (g)
(45,820
)
 
(15,302
)
 
(35,131
)
 
(20,850
)
 
(5,780
)
Net income (loss) from continuing operations attributable to Forestar Group Inc.
4,223

 
75,513

 
(26,917
)
 
36,192

 
26,705

Income (loss) from discontinued operations, net of taxes (h)
46,031

 
(16,865
)
 
(186,130
)
 
(19,609
)
 
2,616

Net income (loss) attributable to Forestar Group Inc.
$
50,254

 
$
58,648

 
$
(213,047
)
 
$
16,583

 
$
29,321

Net income (loss) per diluted share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.10

 
$
1.78

 
$
(0.79
)
 
$
0.83

 
$
0.73

Discontinued operations
$
1.09

 
$
(0.40
)
 
$
(5.43
)
 
$
(0.45
)
 
$
0.07

Net income (loss) per diluted share
$
1.19

 
$
1.38

 
$
(6.22
)
 
$
0.38

 
$
0.80

Average diluted shares outstanding (i)
42,381

 
42,334

 
34,266

 
43,596

 
36,813

At year-end:
 
 
 
 
 
 
 
 
 
Assets
$
761,912

 
$
733,208

 
$
972,246

 
$
1,247,606

 
$
1,168,027

Debt
108,429

 
110,358

 
381,515

 
422,151

 
353,282

Noncontrolling interest
1,420

 
1,467

 
2,515

 
2,540

 
5,552

Forestar Group Inc. shareholders’ equity
604,212

 
560,651

 
501,600

 
707,202

 
709,845

Ratio of total debt to total capitalization
15
%
 
16
%
 
43
%
 
37
%
 
33
%
 _____________________
(a) 
Real estate segment earnings includes gain on sale of assets of $1,915,000 in 2017, $117,856,000 in 2016, $1,585,000 in 2015 and $25,981,000 in 2014. Segment earnings also includes non-cash impairments of $3,420,000 in 2017, $56,453,000 in 2016, $1,044,000 in 2015, $399,000 in 2014 and $1,790,000 in 2013. Real estate segment earnings also include the effects of net (income) loss attributable to noncontrolling interests.
(b) 
Mineral resources segment earnings in 2017 includes gain on sale of assets of $82,422,000 related to the sale of all our remaining owned mineral assets. Segment earnings also includes a non-cash impairment charge of $37,900,000 related to the mineral resources reporting unit goodwill.
(c) 
Other segment earnings (loss) includes non-cash impairment charges of $5,852,000 in 2017 and $3,874,000 in 2016 primarily related to our central Texas water assets.
(d) 
In 2017, general and administrative expense includes merger related transaction costs of $37,216,000 which includes a merger termination fee of $20,000,000 paid to Starwood Capital Group, $11,787,000 in professional fees and other costs, and $5,429,000 in executive severance and change in control costs.

19



(e) 
Gain on sale of assets in 2017 and 2016 represents gains in accordance with our key initiatives to divest non-core timberland and undeveloped land.
(f) 
Loss on extinguishment of debt, net is related to retirement of $5,315,000 of our 8.50% Senior Secured Notes due 2022 and $1,077,000 of our 3.75% Convertible Senior Notes due 2020 in 2017 and $225,245,000 of our 8.50% Senior Secured Notes and $5,000,000 of our 3.75% Convertible Senior Notes in 2016.
(g) 
In 2017, income tax expense was impacted by non-deductible merger transaction costs and goodwill impairment. In 2015, income tax expense from continuing and discontinued operations includes an expense of $97,068,000 for a 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 from recognition of $6,326,000 of previously unrecognized tax benefits upon lapse of the statute of limitations for a previously reserved tax position.
(h) 
Income (loss) from discontinued operations includes an income tax benefit of $46,039,000 in 2017 and 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 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.
(i) 
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.

20



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, where our real estate activities are concentrated, or on a national or global scale;
our ability to achieve our 2018 strategic initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
future 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, and fluctuations in commodity prices;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
the effect of D.R. Horton's controlling level of ownership on us and our stockholders;
our ability to realize the potential benefits of the strategic relationship with D.R. Horton;
the effect of our strategic relationship with D.R. Horton on our ability to maintain relationships with our vendors and customers; 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.
Our Operations
We are a residential and mixed-use real estate development company. As of October 5, 2017, we are a majority-owned subsidiary of D.R. Horton. In our core community development business we own directly or through ventures interests in 49 residential and mixed-use projects located in 11 states and 16 markets. In addition, we own interests in various other assets that have been identified as non-core that we are divesting opportunistically over time.

21



For the past two years we have focused on reducing costs across our entire organization, selling non-core assets, reducing our outstanding debt and reviewing our portfolio of assets and capital allocation to maximize shareholder value. The merger with D.R. Horton provides us an opportunity to grow our core community development business by establishing a strategic relationship to supply finished lots to D. R. Horton at market prices under the Master Supply Agreement. Under the terms of the Master Supply Agreement, both companies will proactively identify land development opportunities to expand our portfolio of assets. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. As of February 23, 2018, we have acquired 13 new projects since the Merger representing nearly 5,300 planned lots, of which approximately 35 percent are under contract to sell to D.R. Horton and a majority of these remaining lots are also expected to be sold to D.R. Horton in accordance with the Master Supply Agreement between the two companies.
2018 Strategic Initiatives
Our 2018 strategic initiatives include making significant investments in land acquisition and development to expand our community development business into a diversified national platform and finalizing non-core asset sales. On February 8, 2018, we entered into and closed on a Purchase and Sale Agreement with Starwood to sell 24 legacy projects for $232,000,000. This strategic asset sale included projects owned both directly and indirectly through ventures and consisted of approximately 750 developed and under development lots, over 4,000 future undeveloped lots (including all real estate associated with the Cibolo Canyons mixed-use development), 730 unentitled acres in California, an interest in one multifamily operating property and a multifamily development site. This sale helps to further streamline our business and provide additional capital for future growth. We plan to invest the capital principally into new land development projects with goals of improving returns and enhancing value for our shareholders.
Discontinued Operations
At year-end 2016, we had 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 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.
In third quarter 2017, we sold the common stock of Forestar Petroleum Corporation for $100,000. With the completion of this transaction we have sold all of our oil and gas working interest assets and related entities. This transaction resulted in a significant tax loss with the corresponding tax benefit reported as discontinued operations.
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 (loss), equity in earnings of unconsolidated ventures, gain on sale 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 expenses, share-based and long-term compensation, gain on sale of strategic timberland and undeveloped land, interest expense, loss on extinguishment of debt 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.


22



Results of Operations for the Years Ended 2017, 2016 and 2015
A summary of our consolidated results by business segment follows:
 
For the Year
 
2017
 
2016
 
2015
 
(In thousands)
Revenues:
 
 
 
 
 
Real estate
$
112,746

 
$
190,273

 
$
202,830

Mineral resources
1,502

 
5,076

 
9,094

Other
74

 
1,965

 
6,652

Total revenues
$
114,322

 
$
197,314

 
$
218,576

Segment earnings (loss):
 
 
 
 
 
Real estate
$
47,281

 
$
121,420

 
$
67,678

Mineral resources
45,552

 
3,327

 
4,230

Other
(6,393
)
 
(4,625
)
 
(608
)
Total segment earnings
86,440

 
120,122

 
71,300

Items not allocated to segments:
 
 
 
 
 
General and administrative expense
(50,354
)
 
(18,274
)
 
(24,802
)
Share-based and long-term incentive compensation expense
(7,201
)
 
(4,425
)
 
(4,474
)
Gain on sale of assets
28,674

 
48,891

 

Interest expense
(8,532
)
 
(19,985
)
 
(34,066
)
Loss on extinguishment of debt, net
(611
)
 
(35,864
)
 

Other corporate non-operating income
1,627

 
350

 
256

Income from continuing operations before taxes attributable to Forestar Group Inc.
50,043

 
90,815

 
8,214

Income tax expense
(45,820
)
 
(15,302
)
 
(35,131
)
Net income (loss) from continuing operations attributable to Forestar Group Inc.
$
4,223

 
$
75,513

 
$
(26,917
)
Significant aspects of our results of operations follow:
2017
Real estate segment earnings in 2017 decreased as compared to 2016 primarily due to gains of $117,856,000 from the sale of non-core assets in 2016 which were partially offset by non-cash impairment charges of $56,453,000. In addition, 2016 included $28,098,000 in earnings from retail sales of undeveloped land and we had no retail sales of undeveloped land in 2017. Segment earnings in 2017 reflect higher equity in earnings from unconsolidated ventures primarily due to higher commercial sales activity from our ventures and a gain of $7,783,000 from the sale of the Acklen multifamily project from a venture in which we own a 30% interest.
Mineral resources segment earnings increased due to the sale of our remaining owned mineral assets for approximately $85,700,000, which generated $82,422,000 in gains. These gains were partially offset by a non-cash impairment charge of $37,900,000 related to the mineral resources reporting unit goodwill.
Other segment earnings (loss) includes non-cash impairment charges of $5,852,000 in 2017 and $3,874,000 in 2016 primarily related to our central Texas water assets.
General and administrative expense increased primarily due to merger-related transaction costs of $37,216,000 which includes a merger termination fee of $20,000,000 paid to Starwood Capital Group, $11,787,000 in professional fees and other costs, and $5,429,000 in executive severance and change in control costs.
Share-based and long-term incentive compensation expense increased by $4,349,000 due to the acceleration of vesting and settlement of outstanding equity awards upon closing of the Merger.
Gain on sale of assets of $28,674,000 represents the sale of approximately 19,000 acres of timberland and undeveloped land in Georgia and Texas for $46,197,000 in accordance with our key initiative to divest non-core assets.
Income tax expense from continuing operations in 2017 includes the impact of non-deductible goodwill impairment and transaction costs related to the Merger.



23



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. In addition, earnings benefited from increased residential lot sales activity and higher retail sales of undeveloped land.
Mineral resources segment earnings decreased due to lower oil and gas prices and production volumes associated with royalty interests and reduced lease bonus and delay rental payments received from our owned mineral interests.
Other segment earnings was negatively impacted due to a $3,874,000 non-cash impairment charge of goodwill related to our central Texas water assets.
General and administrative expense decreased as result of our key initiative to reduce costs across our entire organization.
Gain on sale of assets of $48,891,000 represents the sale of over 58,300 acres of timberland and undeveloped land in Georgia and Alabama for $104,172,000 in accordance with our key initiative to divest non-core assets.
Interest expense decreased primarily due to reducing our debt outstanding by $277,790,000 in 2016 and $323,303,000 since third quarter 2015.
Loss on extinguishment of debt of $35,864,000 is related to debt retirement of portions of our 8.50% Senior Secured Notes due 2022 and 3.75% Convertible Senior Notes due 2020, which includes write-off of unamortized debt issuance costs of $5,489,000 and $1,301,000 in other costs related to tender offer advisory services.
Current Market Conditions
Sales of new single-family homes in December 2017, according to a joint release by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, were at a seasonally adjusted annual rate of 625,000 units. On a year over year basis, U.S. single family home sales were 14.1% higher than reported in December 2016. A total of 608,000 new home sales were reported for the year, the highest annual level reported since 2007. The number of units for sale at the end of December was 295,000, representing a supply of 5.7 months at the current sales rate. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that housing starts for December 2017 registered a seasonally adjusted annual rate of 1,192,000 units, representing an 8.2% drop from the November estimate of 1,299,000 and a 6.0% decrease from prior year. Seasonally adjusted single-family starts in December were 836,000 units, 11.8% below the revised November rate but 3.5% above prior year. For the year, total housing starts were up 2.4% to 1,202,100, compared to 1,173,800 for 2016, the highest annual rate since 2007. Seasonally adjusted housing permits, generally viewed as a precursor for housing starts, registered 1,302,000 in December 2017, 0.1% below the prior month’s revised reading but 2.8% above the December 2016 rate. Homebuilder confidence, as measured by the National Association of Homebuilders/Wells Fargo Housing Market Index, increased in December on expectations for a stronger economy and potential regulatory relief for the business community. The monthly reading of homebuilder sentiment rose 5 points to 74, the highest reading since 1999 and 5 points higher than a year ago. On a regional basis, the three month moving averages for builders’ confidence increased in all regions with the Midwest registering the highest increase on a percentage basis, followed by the South. The S&P CoreLogic Case-Shiller National Index, which measures home price appreciation for the entire nation, reflected continued price appreciation across the country. On a year over year basis, the S&P Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. Census divisions, reported a 6.2% annual gain in November, up from 6.1% in the previous month.

Real Estate
We own directly or through ventures interests in 49 residential and mixed-use real estate projects located in 11 states and 16 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, and in 2016 and 2015 from the operation of income producing properties, primarily a hotel and multifamily properties.





24



A summary of our real estate results follows:
 
For the Year
 
2017
 
2016
 
2015
 
(In thousands)
Revenues
$
112,746

 
$
190,273

 
$
202,830

Cost of sales
(65,014
)
 
(163,095
)
 
(113,891
)
Operating expenses
(18,761
)
 
(29,229
)
 
(40,502
)
 
28,971

 
(2,051
)
 
48,437

Interest income
1,973

 
1,368

 
2,750

Gain on sale of assets
1,915

 
117,856

 
1,585

Equity in earnings of unconsolidated ventures
16,500

 
5,778

 
15,582

Less: Net income attributable to noncontrolling interests
(2,078
)
 
(1,531
)
 
(676
)
Segment earnings
$
47,281

 
$
121,420

 
$
67,678

Revenues in our owned and consolidated ventures consist of:
 
For the Year
 
2017
 
2016
 
2015
 
(In thousands)
Residential real estate
$
98,521

 
$
121,196

 
$
87,771

Commercial real estate
13,001

 
11,151

 
5,390

Retail undeveloped land

 
35,873

 
22,851

Commercial and income producing properties
91

 
13,738

 
82,808

Other
1,133

 
8,315

 
4,010

 
$
112,746

 
$
190,273

 
$
202,830

Residential real estate revenues principally consist of the sale of single-family lots to local, regional and national home builders. In 2017, residential real estate revenues decreased primarily due to lower lot sales activity but were partially offset by higher average sale prices per lot sold and also due to mix of product sold. In 2017, we sold 937 lots from our owned and consolidated projects at an average price of $89,300 per lot. In addition, in 2017, we sold 189 residential tract acres for $12,546,000 generating earnings of $3,842,000. In 2016, residential real estate revenues increased as compared to 2015 primarily due to higher lot sales activity but were partially offset by lower average sale prices per lot as a result of selling 235 bulk lots from four non-core community development projects. Excluding these non-core sales, we sold 1,427 lots from our owned and consolidated projects at an average price of $71,300 per lot in 2016. In addition, in 2016, we sold 1,539 residential tract acres for $8,728,000 generating earnings of $847,000.
The timing of commercial real estate revenues can vary depending on the demand, mix, project life-cycle, size and location of the project. In 2017, we sold 98 commercial acres for $13,001,000 from our owned and consolidated projects, generating earnings of $10,467,000. In 2016, the increase in commercial real estate revenues as compared to 2015 is primarily due to selling 286 commercial acres from four non-core community development projects, of which 264 acres were sold from our San Joaquin River project in Antioch, California for $7,330,000 which provided approximately $37,400,000 in income tax losses to offset tax gains from other sales.
Retail undeveloped land revenues represent land sold from our retail sales program. We did not sell any retail land in 2017. In 2016, we sold 14,438 acres of retail land for $2,485 per acre, generating approximately $28,098,000 in earnings. In 2015, we sold 9,645 acres of retail land for $2,369 per acre, generating approximately $16,542,000 in earnings.
Commercial and income producing properties revenues include revenues from sale of multifamily properties which we developed as a merchant builder and operated until sold, from hotel room sales and other guest services, rental revenues from our operating multifamily properties and reimbursement for costs paid to subcontractors plus development and construction fees from certain multifamily projects. At year-end 2017, we had no owned or consolidated commercial or income producing properties. In 2016, commercial and income producing properties revenues decreased as compared with 2015 as result of selling the Radisson Hotel & Suites in Austin, and Eleven, a multifamily property in Austin, and the impact of selling Midtown Cedar Hill, a multifamily property near Dallas in 2015 for $42,880,000.
Other revenues primarily result from sale of stream and impervious cover credits and from management fee income. In 2017, other revenues principally represents management fee income earned for services provided to certain joint ventures. In 2016, we sold 24 acres of impervious cover credits to home builders for $3,232,000, generating earnings of $2,787,000 and 138,000 mitigation banking credits for $3,265,000, generating earnings of $2,137,000.

25



Units sold consist of:
 
For the Year
 
2017
 
2016
 
2015
Owned and consolidated ventures:
 
 
 
 
 
Residential lots sold
937

 
1,662

 
972

Revenue per lot sold
$
89,312

 
$
66,694

 
$
76,594

Commercial acres sold
98

 
294

 
31

Revenue per commercial acre sold
$
132,938

 
$
37,312

 
$
182,184

Undeveloped acres sold

 
14,438

 
9,645

Revenue per acre sold
$

 
$
2,485

 
$
2,369

Ventures accounted for using the equity method:
 
 
 
 
Residential lots sold
282

 
278

 
500

Revenue per lot sold
$
69,384

 
$
76,866

 
$
78,288

Commercial acres sold
88

 
4

 
32

Revenue per commercial acre sold
$
263,674

 
$
527,152

 
$
309,224

Undeveloped acres sold

 
476

 
4,217

Revenue per acre sold
$

 
$
1,567

 
$
2,129

Cost of sales in 2017 included non-cash impairment charges of $3,420,000 related to the asset group sold in the strategic asset sale to Starwood and one non-core mitigation project. Cost of sales in 2016 included non-cash impairment charges of $56,453,000 associated with six non-core community development projects and two multifamily sites, of which four non-core community development projects and one multifamily site were sold in 2016 and one multifamily site was under contract to be sold at year-end 2017. The non-cash impairments were a result of our key initiative to review our entire portfolio of assets which resulted in business plan changes, inclusive of cash tax savings considerations, to market these properties for sale. Cost of sales in 2015 includes $33,375,000 in carrying value related to Midtown Cedar Hill multifamily property we developed as a merchant builder and sold. In addition, cost of sales includes non-cash impairment charges of $1,044,000 in 2015.
Operating expenses consist of:
 
For the Year
 
2017
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
6,555

 
$
8,384

 
$
8,989

Property taxes
3,209

 
5,996

 
9,031

Professional services
4,532

 
5,134

 
5,749

Depreciation and amortization
131

 
976

 
7,605

Other
4,334

 
8,739

 
9,128

 
$
18,761

 
$
29,229

 
$
40,502

Employee compensation and benefits decreased as compared to 2016 as result of our key initiative to reduce costs across our entire organization. In 2017, employee compensation and benefits include $2,254,000 in costs associated with executive change in control agreements and expense incurred as a result of the Merger with D.R. Horton. The decrease in depreciation and amortization expense and property taxes in 2017 and 2016 are due to the sale of non-core assets. The decrease in other operating expenses in 2017 is primarily due to pre-acquisition and development costs incurred in 2016 and 2015 associated with multifamily and mitigation projects that we elected not to pursue and operating cost savings in 2017 related to non-core community development projects sold in 2016.
Interest income principally represents interest received on reimbursements from utility and improvement districts.
In 2017, gain on sale of assets principally includes a gain of $1,318,000 associated with the reduction of a surety bond in connection with the Cibolo Canyons Special Improvement District ("CCSID") bond offering in 2014 and $465,000 of excess hotel occupancy and sales and use tax pledged revenues from CCSID after their payments to the debt service fund. The surety bond has a balance of $5,312,000 at year-end 2017. The surety bond will decrease as CCSID makes annual ad valorem tax rebate payments to the owner of the resort, which obligation is scheduled to be retired in full by 2020.
In 2016, gain on sale of assets includes a gain of $95,336,000 related to sale of Radisson Hotel & Suites, a gain of $9,116,000 related to sale of Eleven, a gain of $1,223,000 associated with sale of Dillon, a gain of $10,363,000 related to sale of our interest in 3600,, a gain of $3,968,000 associated with sale of Music Row, a loss of $3,870,000 related to selling the

26



Downtown Edge multifamily site, a gain of $1,219,000 associated with the reduction of a surety bond supporting the 2014 CCSID bond offering and $501,000 of excess hotel occupancy and sales and use tax revenues from CCSID.
Increases in equity earnings from our unconsolidated ventures in 2017 compared with 2016 is primarily due to higher commercial sales activity from our ventures and a gain of $7,783,000 from the sale of the Acklen multifamily project from a venture in which we own a 30% interest. Decreases in equity earnings from our unconsolidated ventures in 2016 compared with 2015 is primarily due to lower residential, commercial and undeveloped land sales activity.
We underwrite real estate development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment charge. See Part I, Item 1. Business for information about our net investment in owned and consolidated real estate by state at year-end 2017.

Mineral resources
In 2017, we sold our remaining owned mineral assets for approximately $85,700,000 which generated gains of $82,422,000. These gains were partially offset by a $37,900,000 non-cash impairment charge associated with the mineral resources reporting unit goodwill. With the completion of this sale we have divested of all of our owned mineral assets.
A summary of our mineral resources results follows:
 
For the Year
 
2017
 
2016
 
2015
 
(In thousands)
Revenues
$
1,502

 
$
5,076

 
$
9,094

Cost of mineral resources
(38,315
)
 
(763
)
 
(2,998
)
Operating expenses
(1,452
)
 
(1,159
)
 
(2,141
)
 
(38,265
)
 
3,154

 
3,955

Gain on sale of assets
82,422

 

 

Equity in earnings of unconsolidated ventures
1,395

 
173

 
275

Segment earnings
$
45,552

 
$
3,327

 
$
4,230

Revenues consist of:
 
For the Year
 
2017
 
2016
 
2015
 
(In thousands)
Oil royalties (a)
$
900

 
$
2,905

 
$
5,739

Gas royalties
487

 
1,304

 
2,138

Other
115

 
867

 
1,217

 
$
1,502

 
$
5,076

 
$
9,094

 _____________________
(a) 
Oil royalties includes revenues from oil, condensate and natural gas liquids (NGLs).


27



Oil and gas produced and average unit prices related to our royalty interests follows:
 
For the Year
 
2017
 
2016
 
2015
Consolidated entities:
 
 
 
 
 
Oil production (barrels)
17,400

 
70,700

 
106,800

Average oil price per barrel
$
50.20

 
$
39.74

 
$
50.48

NGL production (barrels)
600

 
8,000

 
21,500

Average NGL price per barrel
$
22.99

 
$
11.84

 
$
16.32

Total oil production (barrels), including NGLs
18,000

 
78,700

 
128,300

Average total oil price per barrel, including NGLs
$
49.38

 
$
36.91

 
$
44.76

Gas production (millions of cubic feet)
159.9

 
633.3

 
771.9

Average price per thousand cubic feet
$
3.05

 
$
2.06