FORESTAR GROUP 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
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)
Delaware26-1336998
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
2221 E. Lamar Blvd., Suite 790
Arlington, Texas 76006
(Address of Principal Executive Offices, including Zip Code)
(817) 769-1860
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading SymbolName of Each Exchange on Which Registered
Common Stock, par value $1.00 per share FORNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer
Non-accelerated filer  ¨
Smaller reporting company Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $1.00 par value -- 48,036,414 shares as of April 22, 2020




Table of Contents
FORESTAR GROUP INC.
TABLE OF CONTENTS
 

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2

Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

March 31,
2020
September 30,
2019
 (In millions, except share data)
ASSETS
Cash and cash equivalents$438.2  $382.8  
Real estate1,199.2  1,028.9  
Investment in unconsolidated ventures5.7  7.3  
Income taxes receivable2.5  3.2  
Property and equipment, net1.0  2.4  
Deferred tax asset, net8.0  17.4  
Other assets21.0  13.7  
Total assets$1,675.6  $1,455.7  
LIABILITIES
Accounts payable$23.1  $16.8  
Earnest money deposits on sales contracts100.6  89.9  
Accrued expenses and other liabilities75.0  79.6  
Debt640.1  460.5  
Total liabilities838.8  646.8  
Commitments and contingencies (Note 13)
EQUITY
Common stock, par value $1.00 per share, 200,000,000 authorized shares,
48,025,359 and 47,997,366 shares issued and outstanding at March 31, 2020
and September 30, 2019, respectively
48.0  48.0  
Additional paid-in capital603.3  602.2  
Retained earnings184.6  158.1  
Stockholders' equity835.9  808.3  
Noncontrolling interests0.9  0.6  
Total equity836.8  808.9  
Total liabilities and equity$1,675.6  $1,455.7  















See accompanying notes to consolidated financial statements.
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FORESTAR GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 Three Months Ended
March 31,
Six Months Ended
March 31,
 2020201920202019
 (In millions, except per share amounts)
Revenues$159.1  $65.3  $406.4  $103.8  
Cost of sales136.6  43.6  353.2  74.3  
Selling, general and administrative expense11.2  6.2  21.7  11.9  
Equity in earnings of unconsolidated ventures(0.3)   (0.8) (0.6) 
Gain on sale of assets(0.3)   (0.1) (0.9) 
Interest and other income(1.8) (0.9) (3.4) (2.2) 
Income before income taxes13.7  16.4  35.8  21.3  
Income tax expense3.3  3.6  8.7  4.6  
Net income10.4  12.8  27.1  16.7  
Net income attributable to noncontrolling interests0.8  2.7  0.7  3.3  
Net income attributable to Forestar Group Inc.
$9.6  $10.1  $26.4  $13.4  
Basic net income per common share attributable to Forestar Group Inc.$0.20  $0.24  $0.55  $0.32  
Weighted average number of common shares48.0  42.0  48.0  42.0  
Diluted net income per common share attributable to Forestar Group Inc.$0.20  $0.24  $0.55  $0.32  
Adjusted weighted average number of common shares48.1  42.0  48.1  42.0  


























See accompanying notes to consolidated financial statements.
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Table of Contents
FORESTAR GROUP INC.
CONSOLIDATED STATEMENTS OF TOTAL EQUITY
(Unaudited)

 Common StockAdditional Paid-in CapitalRetained EarningsNon-controlling InterestsTotal Equity
 (In millions, except share data)
Balances at September 30, 2019 (47,997,366 shares)$48.0  $602.2  $158.1  $0.6  $808.9  
Net income (loss)
    16.9  (0.1) 16.8  
Stock issued under employee benefit plans (27,993 shares)
          
Cash paid for shares withheld for taxes
  (0.2)     (0.2) 
Stock-based compensation expense
  0.5      0.5  
Distributions to noncontrolling interests
      (0.4) (0.4) 
Balances at December 31, 2019 (48,025,359 shares)$48.0  $602.5  $175.0  $0.1  $825.6  
Net income
    9.6  0.8  10.4  
Stock-based compensation expense
  0.8      0.8  
Balances at March 31, 2020 (48,025,359 shares)$48.0  $603.3  $184.6  $0.9  $836.8  


 Common StockAdditional Paid-in CapitalRetained EarningsNon-controlling InterestsTotal Equity
 (In millions, except share data)
Balances at September 30, 2018 (41,939,403 shares)$41.9  $506.3  $125.1  $1.2  $674.5  
Net income
    3.3  0.6  3.9  
Stock issued under employee benefit plans (20,463 shares)
0.1        0.1  
Cash paid for shares withheld for taxes
  (0.1)     (0.1) 
Stock-based compensation expense
  0.1      0.1  
Distributions to noncontrolling interests
      (0.5) (0.5) 
Balances at December 31, 2018 (41,959,866 shares)$42.0  $506.3  $128.4  $1.3  $678.0  
Net income
    10.1  2.7  12.8  
Stock-based compensation expense
  0.1      0.1  
Distributions to noncontrolling interests
      (3.1) (3.1) 
Balances at March 31, 2019 (41,959,866 shares)$42.0  $506.4  $138.5  $0.9  $687.8  















See accompanying notes to consolidated financial statements.
5

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FORESTAR GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 Six Months Ended March 31,
 20202019
 (In millions)
OPERATING ACTIVITIES
Net income$27.1  $16.7  
Adjustments:
Depreciation and amortization3.4  3.0  
Deferred income taxes9.4  3.9  
Equity in earnings of unconsolidated ventures(0.8) (0.6) 
Distributions of earnings of unconsolidated ventures  4.9  
Stock-based compensation expense1.3  0.2  
Real estate and land option charges0.4  0.4  
Gain on sale of assets(0.1) (0.9) 
Changes in operating assets and liabilities:
Increase in real estate(170.7) (353.5) 
Increase in other assets(4.5) (1.6) 
(Decrease) increase in accounts payable and other accrued liabilities(1.0) 12.6  
Increase in earnest money deposits on sales contracts11.0  29.5  
Decrease in income taxes receivable0.7  1.9  
Net cash used in operating activities(123.8) (283.5) 
INVESTING ACTIVITIES
Expenditures for property, equipment, software and other(0.2) (0.8) 
Return of investment in unconsolidated ventures2.4  0.1  
Proceeds from sale of assets1.3    
Net cash provided by (used in) investing activities3.5  (0.7) 
FINANCING ACTIVITIES
Additions to debt300.0  40.0  
Repayment of debt(118.9) (5.0) 
Deferred financing fees(4.8)   
Distributions to noncontrolling interests, net(0.4) (3.6) 
Cash paid for shares withheld for taxes(0.2) (0.1) 
Net cash provided by financing activities175.7  31.3  
Net increase (decrease) in cash and cash equivalents55.4  (252.9) 
Cash and cash equivalents at beginning of period382.8  335.0  
Cash and cash equivalents at end of period$438.2  $82.1  










See accompanying notes to consolidated financial statements.
6

Table of Contents
FORESTAR GROUP INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited, consolidated financial statements include the accounts of Forestar Group Inc. (Forestar) and all of its 100% owned, majority-owned and controlled subsidiaries, which are collectively referred to as the Company unless the context otherwise requires. The Company accounts for its investment in other entities in which it has significant influence over operations and financial policies using the equity method. All intercompany accounts, transactions and balances have been eliminated in consolidation. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes. The transactions included in net income in the consolidated statements of operations are the same as those that would be presented in comprehensive income. Thus, the Company's net income equates to comprehensive income.

The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments considered necessary to fairly state the results for the interim periods shown, including normal recurring accruals and other items. These financial statements, including the consolidated balance sheet as of September 30, 2019, which was derived from audited financial statements, do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2019.

In October 2017, Forestar became a majority-owned subsidiary of D.R. Horton, Inc. (D.R. Horton) by virtue of a merger with a wholly-owned subsidiary of D.R. Horton. Immediately following the merger, D.R. Horton owned 75% of the Company's outstanding common stock. In connection with the merger, the Company entered into certain agreements with D.R. Horton including a Stockholder’s Agreement, a Master Supply Agreement, and a Shared Services Agreement. D.R. Horton is considered a related party of Forestar under GAAP. At March 31, 2020, D.R. Horton owned approximately 65% of the Company's outstanding common stock.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Adoption of New Accounting Standard

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires that lease assets and liabilities be recognized on the balance sheet and that key information about leasing arrangements be disclosed. The guidance was effective for the Company beginning October 1, 2019 and did not have a material impact on its consolidated financial position, results of operations or cash flows. As a result of the adoption of this standard on October 1, 2019, the Company recorded right of use assets of $2.7 million and lease liabilities of $2.9 million. Lease right of use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheet.

Pending Accounting Standards

In December 2019, the FASB issued ASU 2019-12 related to simplifying the accounting for income taxes. The guidance is effective for the Company beginning October 1, 2021, although early adoption is permitted. The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations and cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. The guidance was effective beginning March 12, 2020 and the Company may elect to apply the amendments prospectively through December 31, 2022. This guidance has not and is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
7

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Note 2—Segment Information

The Company manages its operations through its real estate segment. The Company's real estate segment is its core business and generates substantially all of the Company’s revenues. The real estate segment primarily acquires land and develops infrastructure for single-family residential communities. The Company's real estate segment generates its revenues principally from sales of residential single-family finished lots to local, regional and national homebuilders. The Company has other business activities for which the related assets and results of operations are immaterial and therefore are included within the Company's real estate segment.



Note 3—Real Estate

Real estate consists of:
March 31,
2020
September 30,
2019
 (In millions)
Developed and under development projects$1,171.0  $1,011.8  
Undeveloped land28.2  17.1  
$1,199.2  $1,028.9  

In the six months ended March 31, 2020, the Company invested $283.5 million for the acquisition of residential real estate and $223.5 million for the development of residential real estate. At March 31, 2020 and September 30, 2019, undeveloped land primarily consists of undeveloped land which the Company has the contractual right to sell to D.R. Horton within approximately one year of its purchase or, if D.R. Horton elects, at an earlier date, at a sales price equal to the carrying value of the land at the time of sale plus additional consideration which ranges from 12% to 16% per annum.

During the latter part of March and to date in April, the impacts of COVID-19 and the related widespread reductions in economic activity have affected the Company’s business operations and the demand for residential lots. The Company’s lot sales pace has declined as homebuilders have slowed their purchases of lots to adjust to lower levels of home sales orders as a result of the pandemic. There is uncertainty regarding the extent and timing of disruption that COVID-19 and related government directives, actions and economic relief efforts will have on the U.S. economy, capital markets and demand for our lots. The extent to which COVID-19 impacts the Company’s operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on the Company’s customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. If economic and housing market conditions are adversely affected for a prolonged period, the Company may be required evaluate its real estate for potential impairment. These evaluations could result in impairment charges which could be significant.



Note 4—Revenues

Revenues consist of:
 Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
 (In millions)
Residential lot sales$156.4  $49.3  $373.5  $84.0  
Residential tract sales    30.0    
Commercial tract sales2.5  15.0  2.5  18.5  
Other0.2  1.0  0.4  1.3  
$159.1  $65.3  $406.4  $103.8  

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Note 5—Capitalized Interest

The Company capitalizes interest costs to real estate throughout the development period (active real estate). Capitalized interest is charged to cost of sales as the related real estate is sold to the buyer. During periods in which the Company’s active real estate is lower than its debt level, a portion of the interest incurred is reflected as interest expense in the period incurred. During the first six months of fiscal 2020 and fiscal year 2019, the Company’s active real estate exceeded its debt level, and all interest incurred was capitalized to real estate.

The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the three and six months ended March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
 (In millions)
Capitalized interest, beginning of period$29.8  $5.3  $23.7  $3.2  
Interest incurred10.6  2.9  20.5  5.7  
Interest charged to cost of sales(2.5) (0.5) (6.3) (1.2) 
Capitalized interest, end of period$37.9  $7.7  $37.9  $7.7  



Note 6—Investment in Unconsolidated Ventures

At March 31, 2020, the Company had ownership interests in four ventures that it accounted for using the equity method. Combined summarized balance sheet and income statement information for these unconsolidated ventures follows:
 March 31,
2020
September 30,
2019
(In millions)
Assets:
Cash and cash equivalents$1.4  $1.6  
Real estate9.4  13.6  
Other assets0.2  0.1  
Total assets$11.0  $15.3  
Liabilities and Equity:
Accounts payable and other liabilities$0.4  $0.3  
Equity10.6  15.0  
Total liabilities and equity$11.0  $15.3  
Forestar's investment in unconsolidated ventures$5.7  $7.3  

Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
 (In millions)
Revenues$1.0  $  $3.0  $1.8  
Earnings$0.6  $  $2.0  $1.4  
Forestar's equity in earnings of unconsolidated ventures$0.3  $  $0.8  $0.6  

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Note 7—Other Assets, Accrued Expenses and Other Liabilities

The Company's other assets at March 31, 2020 and September 30, 2019 were as follows:
 March 31,
2020
September 30,
2019
 (In millions)
Receivables, net$1.0  $1.1  
Lease right of use assets2.7    
Prepaid expenses4.4  3.4  
Land purchase contract deposits6.9  5.1  
Other assets6.0  4.1  
$21.0  $13.7  

The Company's accrued expenses and other liabilities at March 31, 2020 and September 30, 2019 were as follows:
 March 31,
2020
September 30,
2019
 (In millions)
Accrued employee compensation and benefits$6.7  $5.6  
Accrued property taxes1.2  2.1  
Lease liabilities2.9    
Accrued interest14.3  13.5  
Contract liabilities3.1  2.5  
Deferred income9.4  9.3  
Accrued development costs27.0  35.4  
Other accrued expenses6.9  8.4  
Other liabilities3.5  2.8  
$75.0  $79.6  



Note 8—Debt

The Company's notes payable at their principal amounts, net of unamortized discounts and debt issuance costs, consist of the following:
March 31,
2020
September 30,
2019
(In millions)
Unsecured:
3.75% convertible senior notes due 2020$  $116.7  
8.0% senior notes due 2024 (1)
344.5  343.8  
5.0% senior notes due 2028 (1)
295.6    
Revolving credit facility    
$640.1  $460.5  
______________
(1)Debt issuance costs that were deducted from the carrying amounts of the senior notes totaled $9.9 million and $6.2 million at March 31, 2020 and September 30, 2019, respectively.

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Bank Credit Facility

The Company has a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base based on the book value of the Company's real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. At March 31, 2020, there were no borrowings outstanding and $31.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.0 million. There were no borrowings or repayments under the facility during the six months ended March 31, 2020.

In October 2019, the revolving credit facility was amended to extend its maturity date to October 2, 2022. The maturity date may be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require a minimum level of tangible net worth, a minimum level of liquidity, and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At March 31, 2020, the Company was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

Senior Notes

In February 2020, the Company issued $300 million principal amount of 5.0% senior notes due 2028 pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (Securities Act). The notes mature March 1, 2028 with interest payable semi-annually and represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness. The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. On or after March 1, 2023, the notes may be redeemed at 102.5% of their principal amount plus any accrued and unpaid interest. The redemption price decreases annually on a ratable basis to par by March 1, 2026 in accordance with the indenture. The notes are guaranteed by each of the Company's subsidiaries to the extent such subsidiaries guarantee the Company's revolving credit facility. The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 5.2%. The Company also has $350 million principal amount of 8.0% senior notes due 2024 outstanding.

In March 2020, the Company repaid $118.9 million principal amount of its 3.75% convertible senior notes in cash at maturity.

The indentures governing the senior notes require that, upon the occurrence of both a change of control and a rating decline (each as defined in the indenture), the Company offer to purchase the notes at 101% of their principal amount. If the Company or its restricted subsidiaries dispose of assets, under certain circumstances, the Company will be required to either invest the net cash proceeds from such asset sales in its business within a specified period of time, repay certain senior secured debt or debt of its non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash proceeds at a purchase price of 100% of their principal amount. The indentures contain covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments; incur additional debt or issue mandatorily redeemable equity; incur liens on assets; merge or consolidate with another company or sell or otherwise dispose of all or substantially all of the Company’s assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments.

At March 31, 2020, the Company was in compliance with all of the limitations and restrictions associated with its senior note obligations.

On April 20, 2020, the Board of Directors authorized the repurchase of up to $30 million of the Company’s
debt securities. The authorization becomes effective on April 30, 2020 and has no expiration date.

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Note 9—Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, the Company uses a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company elected not to use the fair value option for cash and cash equivalents and debt.

For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at March 31, 2020 and September 30, 2019.
Fair Value at March 31, 2020
 Carrying ValueLevel 1Level 2Level 3Total
 (in millions)
Cash and cash equivalents (a)
$438.2  $438.2  $  $  $438.2  
Debt (b)
640.1    602.5    602.5  

Fair Value at September 30, 2019
Carrying ValueLevel 1Level 2 Level 3Total
(in millions)
Cash and cash equivalents (a)
$382.8  $382.8  $  $  $382.8  
Debt (b)
460.5    497.3    497.3  
 _____________________
(a) The fair values of cash and cash equivalents approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy.
(b) At March 31, 2020 and September 30, 2019, debt consisted of the Company's senior notes. The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.

Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets which the Company reviews for indicators of potential impairment and performs impairment evaluations when necessary. Real estate impairment charges are included in cost of sales in the Company's consolidated statements of operations. For the three and six months ended March 31, 2020, the Company recorded land option charges of $0.1 million and $0.4 million.
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Note 10—Earnings per Share

The computations of basic and diluted earnings per share are as follows:
 Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
 (In millions, except share and per share amounts)
Numerator:
Net income attributable to Forestar Group Inc.$9.6  $10.1  $26.4  $13.4  
Denominator:
Weighted average common shares outstanding — basic48,025,359  41,959,866  48,018,246  41,956,179  
Dilutive effect of share based compensation57,592  6,233  56,439  6,220  
Total weighted average shares outstanding — diluted48,082,951  41,966,099  48,074,685  41,962,399  
Basic net income per common share attributable to Forestar Group Inc.$0.20  $0.24  $0.55  $0.32  
Diluted net income per common share attributable to Forestar Group Inc.$0.20  $0.24  $0.55  $0.32  

In March 2020, the Company repaid $118.9 million principal amount of its 3.75% convertible senior notes in cash at maturity. The notes had no impact on diluted net income per share in any of the prior periods presented.



Note 11—Income Taxes

The Company’s income tax expense for the three and six months ended March 31, 2020 was $3.3 million and $8.7 million compared to $3.6 million and $4.6 million in the prior year periods. The effective tax rate was 24.1% and 24.3% for the three and six months ended March 31, 2020 compared to 22.0% and 21.6% in the prior year periods. The Company's effective tax rate for all periods includes an expense for state income taxes and nondeductible expenses and a benefit related to noncontrolling interests.

At March 31, 2020 and September 30, 2019, deferred tax assets, net of deferred tax liabilities, were $11.3 million and $20.7 million, offset by a valuation allowance of $3.3 million at both dates for the portion of the deferred tax assets that the Company has determined is more likely than not to be unrealizable. The valuation allowance was recorded because it is more likely than not that a portion of the Company's state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because the Company is no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets. Any reversal of the valuation allowance in future periods will impact the effective tax rate.

The Company's unrecognized tax benefits totaled $1.6 million at March 31, 2020, all of which would affect its effective tax rate, if recognized.
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Note 12 — Stockholders' Equity and Stock-Based Compensation

Stockholders' Equity

The Company has an effective shelf registration statement filed with the Securities and Exchange Commission (SEC) in September 2018 registering $500 million of equity securities. At March 31, 2020, $394.3 million remains available for issuance under the shelf registration statement.

Restricted Stock Units (RSUs)

The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors. Restricted stock unit awards may be based on performance (performance-based) or on service over a requisite time period (time-based). Performance-based and time-based RSU equity awards represent the contingent right to receive one share of the Company’s common stock per RSU if the vesting conditions and/or performance criteria are satisfied. The RSUs have no voting rights until vested.

During the three months ended March 31, 2020, a total of 175,325 time-based RSUs were granted. The weighted average grant date fair value of these equity awards was $16.01 per unit, and they vest annually in equal installments over periods of three to five years. Total stock-based compensation expense related to the Company's restricted stock units for the three and six months ended March 31, 2020 was $0.8 million and $1.3 million, respectively, and in both periods includes $0.5 million of stock-based compensation expense related to employees that were retirement eligible on the date of grant.


Note 13—Commitments and Contingencies

Contractual Obligations and Off-Balance Sheet Arrangements

In support of the Company's residential lot development business, it issues letters of credit under the revolving credit facility and has a surety bond program that provides financial assurance to beneficiaries related to the execution and performance of certain development obligations. At March 31, 2020, the Company had outstanding letters of credit of $31.0 million under the revolving credit facility and surety bonds of $174.6 million, issued by third parties to secure performance under various contracts. The Company expects that its performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When the Company completes its performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving the Company with no continuing obligations. The Company has no material third-party guarantees.

Litigation

The Company is involved in various legal proceedings that arise from time to time in the ordinary course of business and believes that adequate reserves have been established for any probable losses. The Company does not believe that the outcome of any of these proceedings will have a significant adverse effect on its financial position, long-term results of operations or cash flows. It is possible, however, that charges related to these matters could be significant to the Company's results or cash flows in any one accounting period.

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Note 14—Related Party Transactions

In October 2017, the Company entered into a Shared Services Agreement with D.R. Horton whereby D.R. Horton provides the Company with certain administrative, compliance, operational and procurement services. During the six months ended March 31, 2020 and 2019, the Company paid D.R. Horton $2.6 million and $1.0 million for these shared services and $1.0 million and $0.6 million for the cost of health insurance and other employee benefits. These expenses are included in selling, general and administrative expense in the consolidated statements of operations.

Under the terms of the Master Supply Agreement with D.R. Horton, both companies identify land development opportunities to expand Forestar's portfolio of assets. At March 31, 2020 and September 30, 2019, the Company owned or controlled through option purchase contracts approximately 52,300 and 38,300 residential lots, of which D.R. Horton had the following involvement.
 March 31,
2020
September 30,
2019
 (Dollars in millions)
Residential lots under contract to sell to D.R. Horton14,200  12,800  
Residential lots subject to right of first offer with D.R. Horton14,400  10,600  
Earnest money deposits from D.R. Horton for lots under contract$98.4  $88.7  
Remaining purchase price of lots under contract with D.R. Horton$1,033.1  $953.8  

In the three months ended March 31, 2020 and 2019, the Company's residential lot sales totaled 1,951 and 548, and lot sales revenues were $156.4 million and $49.3 million. In the six months ended March 31, 2020 and 2019, the Company's residential lot sales totaled 4,373 and 1,066, and lot sales revenues were $373.5 million and $84.0 million. Lot and land sales to D.R. Horton during those periods were as follows.
Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
 (Dollars in millions)
Residential single-family lots sold to D.R. Horton1,906  453  4,296  908  
Residential lot sales revenues from sales to D.R. Horton$151.2  $37.7  $366.8  $70.2  
Residential tract acres sold to D.R. Horton    36    
Residential tract sales revenues from sales to D.R. Horton$  $  $7.2  $  

In addition, a decrease in contract liabilities increased revenues on lot sales to D.R. Horton by $0.8 million and $2.1 million in the three months ended March 31, 2020 and 2019 and an increase in contract liabilities decreased revenues on lot sales to D.R. Horton by $0.6 million and $1.5 million in the six months ended March 31, 2020 and 2019.

During the three and six months ended March 31, 2020, the Company reimbursed D.R. Horton approximately $5.5 million and $16.2 million for previously paid earnest money and $8.2 million and $13.3 million for pre-acquisition and other due diligence and development costs related to land purchase contracts whereby D.R. Horton assigned its rights under these land purchase contracts to the Company. During the three and six months ended March 31, 2019, the Company reimbursed D.R. Horton approximately $4.7 million and $16.8 million for previously paid earnest money and $0.7 million and $3.7 million for pre-acquisition and other due diligence and development costs.

During the three and six months ended March 31, 2020, the Company paid D.R. Horton $1.5 million and $2.9 million for land development services compared to $0.3 million and $0.8 million for these services in the prior year periods. These amounts are included in cost of sales in the Company’s consolidated statements of operations.

At March 31, 2020 and September 30, 2019, undeveloped land was $28.2 million and $17.1 million. Undeveloped land primarily consists of undeveloped land which the Company has the contractual right to sell to D.R. Horton within approximately one year of its purchase or, if D.R. Horton elects, at an earlier date, at a sales price equal to the carrying value of the land at the time of sale plus additional consideration which ranges from 12% to 16% per annum.

At March 31, 2020 and September 30, 2019, accrued expenses and other liabilities on the Company's consolidated balance sheets included $4.8 million and $2.2 million owed to D.R. Horton for any accrued and unpaid shared service charges, land purchase contract deposits and due diligence and other development cost reimbursements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended September 30, 2019. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the “Forward-Looking Statements” section following this discussion.

Our Operations

We are a residential lot development company with operations in 50 markets in 21 states as of March 31, 2020. In October 2017, we became a majority-owned subsidiary of D.R. Horton, Inc. Our alignment with and support from D.R. Horton provides us an opportunity to grow our business into a national, well-capitalized residential lot developer selling lots to D.R. Horton and other homebuilders. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business across a geographically diversified national platform. We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders. This strategy is a unique, lower-risk business model that we expect will produce more consistent returns than other public and private land developers. We also make short term investments in finished lots (lot banking) and undeveloped land with the intent to sell these assets within a short time period, primarily to D.R. Horton, utilizing available capital prior to its deployment into longer term lot development projects.

COVID-19

Economic fundamentals remained solid in the housing and residential lot development markets throughout most of the second quarter of fiscal 2020. During the latter part of March and to date in April, the impacts of the COVID-19 pandemic (COVID-19) and the related widespread reductions in economic activity have affected our business operations and the demand for our residential lots. Our lot sales pace has declined as homebuilders have slowed their purchases of lots to adjust to lower levels of home sales orders as a result of the pandemic.

In almost all municipalities across the U.S. where social distancing and other restrictions have been issued, residential construction has been designated an essential business as part of critical infrastructure. We have continued our lot development operations in those markets where allowed in order to supply homebuilders with finished lots for residential construction. We have implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

Our results of operations can be affected by changes in economic conditions that negatively impact the housing and land development markets. There is uncertainty regarding the extent and timing of disruption that COVID-19 and related government directives, actions and significant economic relief efforts will have on the U.S. economy, capital markets and demand for our lots. The extent to which COVID-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

We believe we are well positioned to operate in this uncertain environment because of our relationship with D.R. Horton, our low net leverage and strong liquidity position. During this period of uncertainty, we intend to limit our land acquisition spending and carefully monitor lot development spending based on our current and anticipated future sales pace.

Business Segment

We manage our operations through our real estate segment. Our real estate segment is our core business and generates substantially all of our revenues. The real estate segment primarily acquires land and develops infrastructure for single-family residential communities. Our real estate segment generates its revenues principally from sales of residential single-family finished lots to local, regional and national homebuilders. We have other business activities for which the related assets and results of operations are immaterial and therefore are included in our real estate segment.
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Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the three and six months ended March 31, 2020 and 2019.

Operating Results

Components of pre-tax income were as follows:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(In millions)
Revenues$159.1  $65.3  $406.4  $103.8  
Cost of sales136.6  43.6  353.2  74.3  
Selling, general and administrative expense11.2  6.2  21.7  11.9  
Equity in earnings of unconsolidated ventures(0.3) —  (0.8) (0.6) 
Gain on sale of assets(0.3) —  (0.1) (0.9) 
Interest and other income(1.8) (0.9) (3.4) (2.2) 
Income before income taxes$13.7  $16.4  $35.8  $21.3  

Lot Sales

Residential lots sold consist of:
 Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
Development projects1,272  412  2,678  874  
Lot banking projects679  136  1,695