Forestar Group Inc.

Previous wording

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. As of June 30, 2024, D.R. Horton owned approximately 62% of the Company's outstanding common stock. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations.

Current wording

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 our outstanding common stock. As of December 31, 2024, D.R. Horton owned approximately 62% of our outstanding common stock. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations.

Previous wording

Our real estate segment conducts a wide range of project planning and management activities related to the entitlement, acquisition, community development and sale of residential lots. We generally secure entitlements while the land is under contract by creating plans that meet the needs of the markets where we operate, and we aim to have all entitlements secured before closing on the investment. Moving land through the entitlement and development process creates significant value. We primarily invest in entitled short-duration projects that can be developed in phases, enabling us to complete and sell lots at a pace that matches market demand, consistent with our focus on maximizing capital efficiency and returns. We occasionally make short-term strategic investments in finished lots (lot banking) and undeveloped land (land banking) with the intent to sell these assets within a short time period to utilize available capital prior to its deployment into longer-term lot development projects. For the nine months ended June 30, 2024, we sold 9,694 lots with an average sales price of $96,300. At June 30, 2024, our lot position consisted of 102,100 residential lots, of which approximately 57,900 were owned and 44,200 were controlled through purchase contracts. Of our 57,900 owned lots, approximately 20,400 lots are under contract to be sold for an aggregate remaining sales price of approximately $1.8 billion.

Current wording

Our real estate segment conducts a wide range of project planning and management activities related to the entitlement, acquisition, community development and sale of residential lots. We generally secure entitlements while the land is under contract by creating plans that meet the needs of the markets where we operate, and we aim to have all entitlements secured before closing on the investment. Moving land through the entitlement and development process creates significant value. We primarily invest in entitled short-duration projects that can be developed in phases, enabling us to complete and sell lots at a pace that matches market demand, consistent with our focus on maximizing capital efficiency and returns. We occasionally make short-term strategic investments in finished lots (lot banking) and undeveloped land (land banking) with the intent to sell these assets within a short time period to utilize available capital prior to its deployment into longer-term lot development projects. For the three months ended December 31, 2024, we sold 2,333 lots with an average sales price of $105,500. At December 31, 2024, our lot position consisted of 106,000 residential lots, of which approximately 68,300 were owned and 37,700 were controlled through purchase contracts. Of our 68,300 owned lots, approximately 25,200 lots are under contract to be sold for an aggregate remaining sales price of approximately $2.2 billion.

Previous wording

We have expanded and diversified our lot development operations across 60 markets in 24 states by investing available capital into our existing markets and by entering new markets. We believe our geographically diverse operations provide a strong platform for us to consolidate market share in the highly fragmented lot development industry. We also believe our geographic diversification lowers our operational risks and enhances our earnings potential by mitigating the effects of local and regional economic cycles.

Current wording

We have expanded and diversified our lot development operations across 62 markets in 24 states by investing available capital into our existing markets and by entering new markets. We believe our geographically diverse operations provide a strong platform for us to consolidate market share in the highly fragmented lot development industry. We also believe our geographic diversification lowers our operational risks and enhances our earnings potential by mitigating the effects of local and regional economic cycles.

Previous wording

Demand for residential lots, particularly at affordable price points, remained strong in the nine months ended June 30, 2024, and our revenues increased 8% from the prior year period. The supply of new and existing homes at affordable price points remains limited, and low resale supply continues to support the demand for new construction. Demographics supporting housing demand remain favorable despite higher mortgage rates and inflationary pressures, and homebuilders have continued to adjust to current market conditions by using incentives and price adjustments. While the disruptions in the supply chain for certain construction materials and tightness in the labor market have largely subsided, municipality delays are still extending development cycle times, and development costs remain elevated. We attempt to offset cost increases in one component with savings in another, and we increase our land and lot sales prices when market conditions permit. However, if market conditions are challenging, we may have to reduce selling prices or may not be able to offset cost increases with higher selling prices.

Current wording

In the three months ended December 31, 2024, total lots closed and total residential lot sales revenue decreased 26% and 19%, respectively, compared to the prior year period primarily due to builders moderating their pace of new home starts to better match current market conditions and sell through existing inventories. Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points generally remains limited, and demographics supporting housing demand remain favorable, despite continued affordability challenges. Mortgage rate buy down incentives offered by builders have helped to address affordability and spur demand. Our ongoing focus is primarily to develop lots for homes at affordable price points. While disruptions in the supply chain for certain construction materials and tightness in the labor market have largely subsided, municipality delays are still extending development cycle times, and development costs remain elevated. We attempt to offset cost increases in one component with savings in another, and we increase our land and lot sales prices when market conditions permit. However, if market conditions are challenging, we may have to reduce selling prices or may not be able to offset cost increases with higher selling prices.

Previous wording

The following tables and related discussion set forth key operating and financial data as of and for the three and nine months ended June 30, 2024 and 2023.

Current wording

The following tables and related discussion set forth key operating and financial data as of and for the three months ended December 31, 2024 and 2023.

Previous wording

Residential lots sold and residential lot sales revenues in the three months ended June 30, 2024 decreased compared to the prior year period. Despite continued strong demand for finished lots, our reduced finished lot inventory and extended development cycle times limited our sales opportunities during the three months ended June 30, 2024. Residential lots sold and residential lot sales revenues in the nine months ended June 30, 2024 increased compared to the prior year period primarily due to improved demand for finished lots as homebuilders increased their pace of new home starts to better match the stronger demand for new homes, particularly at affordable price points.

Current wording

Residential lots sold and residential lot sales revenues in the three months ended December 31, 2024 decreased compared to the prior year period primarily due to builders moderating their pace of new home starts to better match current market conditions and sell through existing inventories.

Previous wording

Residential lot revenues from lot sales to D.R. Horton and customers other than D.R. Horton, before changes in contract liabilities, consisted of:

Current wording

Residential lot revenues from lot sales to D.R. Horton and customers other than D.R. Horton, before deferred development projects and changes in contract liabilities, consisted of:

Previous wording

Lots sold to customers other than D.R. Horton in the nine months ended June 30, 2024 included 124 lots that were sold for $15.1 million to a lot banker who expects to sell those lots to D.R. Horton at a future date. Lots sold to customers other than D.R. Horton in the three and nine months ended June 30, 2023 included 105 and 252 lots that were sold for $12.2 million and $28.2 million to a lot banker who expects to sell those lots to D.R. Horton at a future date.

Current wording

Lots sold to customers other than D.R. Horton in the three months ended December 31, 2023 included 124 lots that were sold for $15.1 million to a lot banker who expects to sell those lots to D.R. Horton at a future date.

Previous wording

Tract sales and other revenue in the three months ended June 30, 2024 primarily consisted of 49 tract acres sold to customers other than D.R. Horton for $8.5 million and 32 tract acres sold to D.R. Horton for $2.1 million compared to 45 tract acres sold to D.R. Horton for $22.8 million in the prior year period. In the nine months ended June 30, 2024, tract sales and other revenue primarily consisted of 49 tract acres sold to customers other than D.R. Horton for $9.1 million and 32 tract acres sold to D.R. Horton for $2.1 million compared to 34 tract acres sold to a customer other than D.R. Horton for $8.0 million and 424 tract acres sold to D.R. Horton for $55.3 million in the prior year period. Tract sales and other revenue sold to customers other than D.R. Horton for thethree and nine months ended June 30, 2024 included 12 tract acres for $5.1 million sold to a third party who expects to sell the tract to D.R. Horton at a later date.

Current wording

Tract sales and other revenue in the three months ended December 31, 2024 primarily consisted of $2.0 million of revenue recognized related to land banking contracts with D.R. Horton.

Previous wording

Cost of sales in the three months ended June 30, 2024 decreased compared to the prior year period primarily due to the decrease in the number of lots sold. Cost of sales in the nine months ended June 30, 2024 increased compared to the prior year period primarily due to the increase in the number of lots sold. Cost of sales related to tract sales and other revenue in the three and nine months ended June 30, 2024 was $7.5 million and $7.9 million compared to $17.5 million and $43.0 million in the prior year periods.

Current wording

Cost of sales in the three months ended December 31, 2024 decreased compared to the prior year period primarily due to the decrease in the number of lots sold.

Previous wording

Each quarter, we review the performance and outlook for all of our real estate for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary. As a result of this process, no impairment charges were recorded in the three and nine months ended June 30, 2024. In the nine months ended June 30, 2023, we recorded non-cash impairment charges of $19.4 million. In the three and nine months ended June 30, 2024, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $0.7 million and $1.0 million, respectively, compared to $0.9 million and $4.2 million in the prior year periods.

Current wording

Each quarter, we review the performance and outlook for all of our real estate for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary. As a result of this process, no impairment charges were recorded in the three months ended December 31, 2024 and 2023. In the three months ended December 31, 2024, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $1.1 million compared to $0.2 million in the prior year period.

Previous wording

We capitalize interest costs 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. Interest incurred was $8.2 million and $24.5 million in the three and nine months ended June 30, 2024 compared to $8.2 million and $24.6 million in the prior year periods. Interest charged to cost of sales in the three and nine months ended June 30, 2024 was 2.4% and 2.5% of total cost of sales (excluding impairments and land option charges) compared to 2.3% and 2.5% in the prior year periods.

Current wording

We capitalize interest costs 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. Interest incurred was $8.3 million in the three months ended December 31, 2024 compared to $8.1 million in the prior year period. Interest charged to cost of sales in the three months ended December 31, 2024 was 1.8% of total cost of sales (excluding impairments and land option charges) compared to 2.6% in the prior year period.

Previous wording

SG&A expense in the three and nine months ended June 30, 2024 was $29.3 million and $86.5 million compared to $26.4 million and $71.3 million in the prior year periods. SG&A expense as a percentage of revenues was 9.2% and 9.0% in the three and nine months ended June 30, 2024 compared to 7.2% and 8.0% in the prior year periods. Our SG&A expense primarily consisted of employee compensation and related costs. Our business operations employed 376 and 282 employees at June 30, 2024 and 2023, respectively. We attempt to control our SG&A costs while ensuring that our infrastructure supports our operations; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.

Current wording

SG&A expense in the three months ended December 31, 2024 was $36.0 million compared to $28.0 million in the prior year period. SG&A expense as a percentage of revenues was 14.4% in the three months ended December 31, 2024 compared to 9.2% in the prior year period. Our SG&A expense primarily consisted of employee compensation and related costs. Our business operations employed 427 and 329 employees at December 31, 2024 and 2023, respectively. We attempt to control our SG&A costs while ensuring that our infrastructure supports our operations; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.

Previous wording

Income tax expense for the three and nine months ended June 30, 2024 was $12.9 million and $39.8 million compared to $15.6 million and $31.7 million in the prior year periods. Our effective tax rate was 25.0% and 24.6% for the three and nine months ended June 30, 2024 compared to 25.0% and 25.1% in the prior year periods. The effective tax rate for all periods included an expense for state income taxes and nondeductible expenses. The effective tax rate for the three and nine months ended June 30, 2024 also included a benefit for stock-based compensation.

Current wording

Income tax expense for the three months ended December 31, 2024 was $5.4 million compared to $13.0 million in the prior year period. Our effective tax rate was 24.7% for the three months ended December 31, 2024 compared to 25.4% in the prior year period. The effective tax rate for both periods included an expense for state income taxes and nondeductible expenses.

Previous wording

At June 30, 2024, we haddeferred tax liabilities, net of deferred tax assets, of $52.0 million. The deferred tax assets were partially offset by a valuation allowance of $0.8 million, resulting in a net deferred tax liability of $52.8 million. At September 30, 2023, deferred tax liabilities, net of deferred tax assets, were $49.8 million. The deferred tax assets were partially offset by a valuation allowance of $0.9 million, resulting in a net deferred tax liability of $50.7 million. The valuation allowance for both periods was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets. Any reversal of the valuation allowance in future periods will impact our effective tax rate.

Current wording

At December 31, 2024, we haddeferred tax liabilities, net of deferred tax assets, of $65.8 million. The deferred tax assets were partially offset by a valuation allowance of $0.8 million, resulting in a net deferred tax liability of $66.6 million. At September 30, 2024, deferred tax liabilities, net of deferred tax assets, were $66.7 million. The deferred tax assets were partially offset by a valuation allowance of $0.8 million, resulting in a net deferred tax liability of $67.5 million. The valuation allowance for both periods was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets. Any reversal of the valuation allowance in future periods will impact our effective tax rate.

Previous wording

At June 30, 2024, we had $359.2 million of cash and cash equivalents and $385.2 million of available borrowing capacity on our revolving credit facility. We have no senior note maturities until fiscal 2026.

Current wording

At December 31, 2024, we had $132.0 million of cash and cash equivalents and $512.5 million of available borrowing capacity on our revolving credit facility. We have no senior note maturities until fiscal 2026. We believe we are well-positioned to operate effectively during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R. Horton.

Previous wording

At June 30, 2024, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 31.8% compared to 33.7% at September 30, 2023 and 35.3% at June 30, 2023. Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 18.7% compared to 5.5% at September 30, 2023 and 19.1% at June 30, 2023. Over the long term, we intend to maintain our ratio of net debt to total capital at approximately 40% or less. We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations. We are confident that we are well-positioned to operate effectively during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R. Horton.

Current wording

At December 31, 2024, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 33.3% compared to 30.7% at September 30, 2024 and 33.4% at December 31, 2023. Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 29.5% compared to 12.4% at September 30, 2024 and 14.9% at December 31, 2023. Over the long term, we intend to maintain our ratio of net debt to total capital at approximately 40% or less. We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations.

Previous wording

We have a $410 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $600 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 total revolving credit commitments. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of our real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. The maturity date of the facility is October 28, 2026. At June 30, 2024, there were no borrowings outstanding and $24.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $385.2 million.

Current wording

We have a senior unsecured revolving credit facility that was amended in December 2024 to increase its capacity from $410 million to $640 million and to raise the uncommitted accordion feature that could increase the size of the facility to $1 billion, subject to certain conditions and availability of additional bank commitments. The amendment also extended the maturity date of the facility. The facility includes bank commitments of $575 million maturing on December 18, 2029 and $65 million maturing on October 28, 2026. 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 total revolving credit commitments. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of our real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. At December 31, 2024, there were $100 million of borrowings outstanding at a 5.9% annual interest rate and $27.5 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $512.5 million.

Previous wording

The revolving credit facility is guaranteed by our wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries. 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 June 30, 2024, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

Current wording

The revolving credit facility is guaranteed by our wholly-owned subsidiaries that are not immaterial subsidiaries and have not been designated as unrestricted subsidiaries. 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 December 31, 2024, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

Previous wording

We have an effective shelf registration statement filed with the Securities and Exchange Commission in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under our at-the-market equity offering program that became effective November 2021. In the nine months ended June 30, 2024, we issued 546,174 shares of common stock under our at-the-market equity offering program for proceeds of $19.7 million, net of commissions and other issuance costs totaling $0.4 million. At June 30, 2024, $728.1 million remained available for issuance under the shelf registration statement, of which $278.1 million was reserved for sales under our at-the-market equity offering program.

Current wording

We have an effective shelf registration statement filed with the Securities and Exchange Commission in September 2024, registering $750 million of equity securities, of which $300 million was reserved for sales under our at-the-market equity offering program that we entered into in November 2024. In the three months ended December 31, 2024, we did not issue any shares of common stock under our at-the-market equity offering program. At December 31, 2024, the full $750 million remained available for issuance under the shelf registration statement, with $300 million reserved for sales under our at-the-market equity offering program.

Previous wording

In the nine months ended June 30, 2024, net cash used in operating activities was $277.6 million, which was primarily the result of the increase in real estate, partially offset by net income generated in the period and the increase in earnest money on sales contracts. In the nine months ended June 30, 2023, net cash provided by operating activities was $136.2 million, which was primarily the result of our net income generated in the period adjusted for impairments and land option charges as well as the decrease in real estate, partially offset by the decreases in accounts payable and other accrued liabilities and accrued development costs.

Current wording

In the three months ended December 31, 2024, net cash used in operating activities was $450.0 million, which was primarily the result of the increase in real estate and the decreases in accounts payable and other liabilities and accrued development costs, partially offset by net income generated in the period and the increase in earnest money on sales contracts. In the three months ended December 31, 2023, net cash used in operating activities was $156.7 million, which was primarily the result of the increase in real estate, partially offset by net income generated in the period and the increases in earnest money on sales contracts.

Previous wording

In the nine months ended June 30, 2024, net cash provided by financing activities was $17.1 million compared to $0.8 million of net cash used in financing activities in the prior year period. Cash provided by financing activities in the nine months ended June 30, 2024 was primarily the result of the issuance of common stock under our at-the-market equity offering program for net proceeds of $19.7 million.

Current wording

In the three months ended December 31, 2024, net cash provided by financing activities was $99.9 million compared to $0.2 million of net cash used in financing activities in the prior year period. Cash provided by financing activities in the three months ended December 31, 2024 was primarily the result of $100 million of borrowings under our senior unsecured revolving credit facility.