Forestar Group Inc. Reports Third Quarter 2011 Results

Well Positioned To Benefit from Increasing Oil Production and Declining Finished Lot Inventories in Texas Markets

“During third quarter, a substantial increase in our share of oil production generated the highest quarterly royalty revenues over the last two years, as we began to realize the benefit of increased oil production related to 2,800 acres in the Upper Wilcox formation located in Beauregard Parish, Louisiana. These wells are expected to significantly increase our reserves, a driver of future cash flow and earnings growth. In addition, our increased residential lot sales activity reflects declining finished lot inventories and relatively stable demand in the major markets of Texas. In addition, we sold 57,000 acres of timberland for approximately $87 million, generating a pre-tax gain on sale of almost $62 million, essentially completing the timberland sales portion of our near-term strategic initiatives,” said Jim DeCosmo, president and chief executive officer of Forestar Group.

Third Quarter Significant Highlights

Minerals – Oil & Gas
  • Nine new oil and gas wells completed; 510 active wells producing oil and natural gas operated by exploration and production lessees at quarter-end
  • Oil production up over 50% compared with third quarter 2010 and second quarter 2011

Real Estate
  • Sold 311 finished residential lots, a 66% increase compared with third quarter 2010 and a 10% increase compared with second quarter 2011 – Over 1,500 lots under option contracts
  • Sold 25 acres of raw entitled land for $1.9 million, representing the remaining 80 undeveloped lots in a residential community located near Dallas, Texas

Strategic Initiatives
  • Sold 50,000 acres of timberland in Georgia and Alabama to Plum Creek for $75 million
  • Sold 7,000 acres of timberland in Texas to The Conservation Fund for $12 million

Forestar Group Inc. (NYSE: FOR) today reported third quarter 2011 net income of approximately $36.4 million, or $1.02 per diluted share, compared with third quarter 2010 net income of $8.9 million, or $0.25 per diluted share outstanding. Third quarter 2011 results include a gain of $1.12 per diluted share, after-tax, from the sale of about 57,000 acres of timberland for approximately $87 million.

Forestar manages its operations through three business segments: Real Estate, Mineral Resources and Fiber Resources.

MINERAL RESOURCES
  • Nine new wells completed by exploration and production lessees, 510 active wells, up 19 compared with third quarter 2010
  • Oil production up over 50% compared with third quarter 2010 and second quarter 2011
  • Leased 380 net mineral acres in Louisiana and Texas
  • Over 67,000 net mineral acres put in play during 2011 through leases, seismic and exploration agreements, targeting oil and natural gas liquid opportunities

Segment Financial Results:
($ in millions)     3Q 2011     3Q 2010     2Q 2011
 
Segment Revenues $5.9 $6.7 $4.6
 
Segment Earnings $3.6 $6.2 $3.1

Mineral resources segment earnings declined in third quarter 2011 compared with third quarter 2010 principally due to lower lease revenues and increased costs associated with developing our water initiatives as a result of our acquisition of a water resources company in fourth quarter 2010. Segment earnings increased in third quarter 2011 compared with second quarter 2011 primarily due to increased royalties associated with a 50% increase in oil production.

REAL ESTATE

  • Sold 311 finished residential lots, a 66% increase compared with third quarter 2010 and a 10% increase compared with second quarter 2011 – Over 1,500 lots under option contracts
  • Sold 80 paper lots for $1.9 million, representing the remaining 25 acres of undeveloped entitled land in a residential community located near Dallas, Texas
  • Sold 550 acres of undeveloped land for $2,800 per acre
  • Acquired 180 fully developed lots for $9 million in a master-planned, mixed-use community located in Houston, Texas - including the right to receive about $4 million in reimbursements through a development agreement with the City of Houston
  • Acquired two multifamily development sites for $9 million – located in Austin and Dallas

Segment Financial Results:
($ in millions)     3Q 2011     3Q 2010     2Q 2011
 
Segment Revenues $19.1 $15.1 $19.6
 
Segment Earnings (Loss) ($4.3) ($1.9) $1.0

Third quarter 2011 real estate segment earnings were down compared with third quarter 2010 and second quarter 2011 due to $3.4 million in charges principally related to environmental remediation activities at our San Joaquin River project located near Antioch, California.

FIBER RESOURCES

  • Sold over 108,000 tons of fiber
  • Recreational leasing activity remains strong, almost 99% of available land leased

Segment Financial Results:
($ in millions)     3Q 2011     3Q 2010     2Q 2011
 
Segment Revenues $1.3 $2.2 $1.3
 
Segment Earnings $0.5 $1.4 $0.7

Third quarter 2011 fiber resources segment earnings declined compared with third quarter 2010 principally due to reduced harvest volumes associated with the sale of 30,000 acres of timberland during 2010 and postponing harvest plans on acres previously held for sale. Recreational leasing activity remained strong during the quarter, with almost 99% of available land leased for recreation. Second quarter 2011 fiber resources segment earnings include a $0.2 million gain on the termination of a timber lease.

OUTLOOK

“Higher oil prices have increased exploration and production in Louisiana, creating additional opportunities to deliver value through increasing royalty income and working interests. Since first quarter 2011, we have elected to take working interests in three oil wells in Beauregard Parish, Louisiana. These working interests provide Forestar with an additional low-cost, low-risk opportunity to realize the greatest value from every acre by securing a greater interest in oil and gas production.

“Natural gas prices have remained soft during 2011, principally due to increased production and high levels of inventory. As a result, we have experienced lower demand for mineral leases as operators focus primarily on drilling wells to hold existing leases. Longer-term, we are bullish on the outlook for natural gas as there are abundant domestic supplies which reduces Middle Eastern geopolitical risk, natural gas is currently much cheaper than oil on an energy equivalent basis, it is a cleaner burning fuel compared with oil and coal and demand will benefit from continued population growth and increased economic activity.

“We continue to see improving housing fundamentals in our Texas markets, driven by continued tightening of finished residential lot inventories and relatively stable market demand. In addition, we remain confident that underlying fundamental demand for single and multifamily housing will improve as markets recover from the economic downturn.

“During third quarter 2011 we sold 57,000 acres of timberland, essentially completing the sale of 175,000 acres of timberland associated with our near-term strategic initiatives. In addition, excluding $26.5 million of non-recourse debt associated with the acquisition of a multifamily project during fourth quarter 2010, we have reduced debt over $150 million since first quarter 2009, and repurchased 1.2 million shares of our common stock since second quarter 2010. Through the successful execution of our strategic initiatives, we have transformed our balance sheet, significantly improving liquidity and financial flexibility, positioning the company to maximize long-term value for shareholders,” concluded Mr. DeCosmo.

The Company will host a conference call on November 2, 2011 at 10:00 am ET to discuss results of third quarter 2011. The meeting may be accessed through webcast or by conference call. The webcast may be accessed through Forestar’s Internet site at www.forestargroup.com. To access the conference call, listeners calling from North America should dial 1-866-804-6927 at least 15 minutes prior to the start of the meeting. Those wishing to access the call from outside North America should dial 1-857-350-1673. The password is Forestar. Replays of the call will be available for two weeks following the completion of the live call and can be accessed at 1-888-286-8010 in North America and at 1-617-801-6888 outside North America. The password for the replay is 72520808.

About Forestar Group

Forestar Group Inc. operates in three business segments: real estate, mineral resources and fiber resources. At the end of the third quarter 2011, the real estate segment owns directly or through ventures over 159,000 acres of real estate located in nine states and twelve markets in the U.S. The real estate segment has 16 real estate projects representing approximately 27,600 acres currently in the entitlement process, and 75 entitled, developed and under development projects in seven states and eleven markets encompassing almost 16,000 acres, comprised of approximately 28,000 residential lots and over 2,300 commercial acres. The mineral resources segment manages about 602,000 net acres of oil and gas mineral interests located principally in Texas, Louisiana, Alabama, and Georgia. Also included in the mineral resources segment is a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 17,800 acres of groundwater leases in central Texas. The fiber resources segment includes the sale of wood fiber and management of our recreational leases. Forestar’s address on the World Wide Web is www.forestargroup.com.

Forward-looking Statements

This release contains “forward-looking statements” within the meaning of the federal securities laws. These statements reflect management’s 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; the opportunities (or lack thereof) that may be presented to us and that we may pursue; fluctuations in costs and expenses including development costs; demand for new housing, including impacts from mortgage credit availability; lengthy and uncertain entitlement processes; cyclicality of our businesses; accuracy of accounting assumptions; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond our control. Except as required by law, we expressly disclaim any obligation to publicly revise any forward-looking statements contained in this news release to reflect the occurrence of events after the date of this news release.
FORESTAR GROUP INC.
(UNAUDITED)
 

Business Segments
 
    Third Quarter      

First Nine Months
  2011        

2010
    2011        

2010
 

(In thousands,

except per share)

(In thousands,

except per share)

Revenues
Real estate $ 19,060 $ 15,139 $ 59,814 $ 53,936
Mineral resources 5,871 6,654 17,784 18,387
Fiber resources   1,310     2,220     3,968     6,185  
Total revenues $ 26,241   $ 24,013   $ 81,566   $ 78,508  
 

Segment earnings (loss)
Real estate $ (4,266 ) $ (1,883 ) $ (684 ) $ 883
Mineral resources 3,592 6,196 12,292 16,640
Fiber resources   446     1,372     1,790     3,900  
Total segment earnings (loss) (228 ) 5,685 13,398 21,423
Items not allocated to segments
General and administrative expense (a) (4,827 ) (3,860 ) (15,824 ) (13,438 )
Share-based compensation expense 3,553 (1,817 ) (399 ) (7,370 )
Gain on sale of assets 61,784 15,441 61,784 15,441
Interest expense (4,271 ) (3,913 ) (12,933 ) (12,562 )
Other non-operating income   26     246     77     690  
Income before taxes 56,037 11,782 46,103 4,184
Income tax expense   (19,609 )   (2,860 )   (16,069 )   (1,507 )
Net income attributable to Forestar Group Inc. $ 36,428   $ 8,922   $ 30,034   $ 2,677  
 
Net income per common share:
Basic $ 1.03 $ 0.25 $ 0.85 $ 0.07
Diluted $ 1.02 $ 0.25 $ 0.84 $ 0.07
 
Weighted average common shares outstanding:
Basic 35.5 35.9 35.5 36.1
Diluted 35.8 36.4 35.9 36.6
 
Third Quarter

Supplemental Financial Information:
  2011     2010  
(In thousands)
 
Cash & Cash Equivalents $ 29,121 $ 4,483
 
Borrowings under credit facility $ 130,000 $ 144,000
Other debt (b)   93,697     73,566  
Total debt $ 223,697   $ 217,566  

(a) General and administrative expenses include $0.5 million and $3.2 million for third quarter and first nine months 2011 paid to outside advisors related to private debt offerings which were withdrawn due to the deterioration in terms available to us in the capital markets.

(b) Consists principally of consolidated venture non-recourse debt.

FORESTAR GROUP INC.
MINERAL RESOURCES SEGMENT
PERFORMANCE METRICS
       
Third Quarter First Nine Months
MINERAL RESOURCES 2011     2010 2011     2010
Leasing Activity
Acres Leased 380 9,600 7,700 11,700
Average Bonus / Acre $ 265 $ 274 $ 288 $ 495
Delay Rental Revenues $ 252,800 $ 890,000 $ 479,300 $ 2,080,000
 
Royalties1
Natural Gas Production (MMcf) 408.0 436.6 1,248.4 1,291.6
Average Natural Gas Price ($ / Mcf) $ 4.27 $ 4.11 $ 3.96 $ 4.38
Oil Production (Barrels) 42,300 27,700 102,200 87,600
Average Oil Price ($ / Barrel) $ 97.83 $ 71.41 $ 94.23 $ 72.53
MMcfe Production2 662.1 602.8 1,861.6 1,817.3
Average Price ($ / MMcfe) $ 8.89 $ 6.26 $ 7.83 $ 6.61
 
Well Activity3
Net Acres Held By Production 30,300 29,500 30,300 29,500
Wells Drilled 9 9 16 19
Active Wells 510 491 510 491

1 Includes our share of venture activity. Forestar’s share of venture natural gas production activity is 112 MMcf and 398 MMcf in third quarter and first nine months 2011, and 138 MMcf and 346 MMcf in third quarter and first nine months 2010. Forestar owns a 50% interest in this venture.

2 MMcfe - Million Cubic Feet Equivalent (converting oil to natural gas at 6 Mcfe / Bbl)

3 Wells are owned and operated by third-party lessees / operators

THIRD QUARTER 2011 MINERAL RESOURCES PIPELINE 1

Forestar’s mineral resources segment includes approximately 602,000 net mineral acres principally located in Texas, Louisiana, Alabama and Georgia.
State  

Availablefor Lease
    Leased    

Held byProduction
    Total 2
Texas 191,000 36,000 25,000 252,000
Louisiana 116,000 23,000 5,000 144,000
Georgia 164,000 - - 164,000
Alabama 40,000 - - 40,000
California 1,000 - - 1,000
Indiana 1,000 - - 1,000
Total   513,000     59,000     30,000     602,000

1 Includes ventures

2 Excludes 477 net mineral acres located in Colorado
FORESTAR GROUP INC.
FIBER RESOURCES SEGMENT
PERFORMANCE METRICS
       
Third Quarter First Nine Months
FIBER RESOURCES 2011     2010 2011     2010
Fiber Sales *
Pulpwood Tons Sold 85,800 116,900 222,100 295,600
Average Pulpwood Price / Ton $ 7.57 $ 9.41 $ 8.57 $ 10.31
Sawtimber Tons Sold 22,900 37,500 51,200 90,900
Average Sawtimber Price / Ton $ 14.33 $ 17.79 $ 15.47 $ 19.23
 
Total Tons Sold 108,700 154,400 273,300 386,500
Average Price / Ton $ 8.99 $ 11.45 $ 9.86 $ 12.41
 
Recreational Activity
Average Acres Leased 164,600 205,900 185,300 209,900
Average Lease Rate / Acre $ 8.28 $ 8.60 $ 8.84 $ 8.33

*The majority of our fiber sales were to Temple-Inland Inc. at market prices.
FORESTAR GROUP INC.
REAL ESTATE SEGMENT
PERFORMANCE METRICS
       
Third Quarter First Nine Months
REAL ESTATE 2011     2010 2011     2010
Owned, Consolidated & Equity Method Ventures:
Residential Lots Sold 311 187 808 617
Revenue per Lot Sold $ 46,200 $ 48,800 $ 48,900 $ 49,600
Commercial Acres Sold - 0.4 24.0 16.7
Revenue per Commercial Acre Sold - $ 623,400 $ 157,900 $ 84,400
Undeveloped Acres Sold 550 1,150 3,960 4,700
Revenue per Acre Sold $ 2,800 $ 3,800 $ 2,600 $ 3,700
Owned & Consolidated Ventures:
Residential Lots Sold 155 105 458 356
Revenue per Lot Sold $ 52,200 $ 52,300 $ 55,300 $ 54,100
Commercial Acres Sold - - 4.0 1.3
Revenue per Commercial Acre Sold - - $ 185,300 $ 121,700
Undeveloped Acres Sold 550 1,150 3,940 4,700
Revenue per Acre Sold $ 2,800 $ 3,800 $ 2,600 $ 3,700
Ventures Accounted For Using the Equity Method:
Residential Lots Sold 156 82 350 261
Revenue per Lot Sold $ 40,200 $ 44,200 $ 40,600 $ 43,400
Commercial Acres Sold - 0.4 20.0 15.4
Revenue per Commercial Acre Sold - $ 623,400 $ 152,500 $ 81,300
Undeveloped Acres Sold - - 20 -
Revenue per Acre Sold - - $ 3,000 -
 
THIRD QUARTER 2011
REAL ESTATE PIPELINE
                 
Real Estate Undeveloped

InEntitlementProcess
Entitled

Developed &UnderDevelopment

TotalAcres*
 
Undeveloped Land
Owned 108,869 115,827
Ventures 6,958
 
Residential
Owned 24,867 8,211 571 38,511
Ventures 4,366 496
 
Commercial
Owned 2,723 1,118 550 5,069
Ventures 454 224
 
Total Acres 115,827 27,590 14,149 1,842 159,407
                             
Estimated Residential Lots           24,793     3,181     27,974
 

* In addition, Forestar owns a 58% interest in a venture which controls approximately 16,000 acres of undeveloped land in Georgia with minimal investment. Excludes acres associated with fully developed commercial and income producing properties.

FORESTAR GROUP INC.

PROJECTS IN ENTITLEMENT
   

A summary of projects in the entitlement process(a) at third quarter-end 2011 follows:
 

Project

Project

County

Acres(b)
 

California
Hidden Creek Estates Los Angeles 700
Terrace at Hidden Hills Los Angeles 30
 

Georgia
Ball Ground Cherokee 500
Crossing Coweta 230
Fincher Road Cherokee 3,890
Fox Hall Coweta 960
Garland Mountain Cherokee/Bartow 350
Home Place Coweta 1,510
Martin’s Bridge Banks 970
Mill Creek Coweta 770
Serenity Carroll 440
Waleska Cherokee 100
Wolf Creek Carroll/Douglas 12,230
Yellow Creek Cherokee 1,060
 

Texas
Lake Houston Harris/Liberty 3,700
San Jacinto Montgomery 150
 

Total

27,590

(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, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.

(b) Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.

FORESTAR GROUP INC. REAL ESTATE PROJECTS

A summary of our entitled, (a) developed & under development projects at third quarter-end 2011 follows:
        Residential Lots (c)     Commercial Acres (d)
Project County Interest

Owned(b)
Lots Sold Since

Inception
    Lots

Remaining
Acres Sold Since

Inception
    Acres Remaining
Projects we own
California
San Joaquin River Contra Costa/

Sacramento
100% - - - 288
Colorado
Buffalo Highlands Weld 100% - 164 - -
Johnstown Farms Weld 100% 115 497 2 7
Pinery West Douglas 100% - - - 115
Stonebraker Weld 100% - 603 - 13
Texas
Arrowhead Ranch Hays 100% - 259 - 6
Barrington Kingwood Harris 100% - 180 - -
Caruth Lakes Rockwall 100% 362 287 - -
Cibolo Canyons Bexar 100% 694 721 68 153
Harbor Lakes Hood 100% 202 247 2 12
Hunter’s Crossing Bastrop 100% 378 112 38 71
La Conterra Williamson 100% 78 422 - 58
Maxwell Creek Collin 100% 719 280 10 -
Oak Creek Estates Comal 100% 90 557 13 -
The Colony Bastrop 100% 418 729 22 31
The Gables at North Hill Collin 100% 203 - - -
The Preserve at Pecan Creek Denton 100% 329 465 - 7
The Ridge at Ribelin Ranch Travis 100% - - 195 -
Westside at Buttercup Creek Williamson 100% 1,369 145 66 -
Other projects (9) Various 100% 1,557 16 197 24
Georgia
Villages of Burt Creek Dawson 100% - 1,715 - 57
Towne West Bartow 100% - 2,674 - 121
Other projects (13) Various 100% - 2,834 - 705
Missouri and Utah
Other projects (2) Various 100% 466 88 - -
6,980 12,995 613 1,668
Projects in entities we consolidate
Texas
City Park Harris 75% 1,176 135 50 115
Lantana Denton 55% (e) 723 1,537 - -
Light Farms Collin 65% - 2,501 - -
Stoney Creek Dallas 90% 110 644 - -
Timber Creek Collin 88% - 614 - -
Other projects (4) Various Various 710 253 26 25
2,719 5,684 76 140
Total owned and consolidated 9,699 18,679 689 1,808
Projects in ventures that we account for using the equity method
Georgia
Seven Hills Paulding 50% 641 452 26 113
The Georgian Paulding 38% 289 1,095 - -
Other projects (3) Various Various 1,710 77 3 -
Texas
Bar C Ranch Tarrant 50% 269 930 - -
Entrada Travis 50% - 821 - 3
Fannin Farms West Tarrant 50% 323 58 - 15
Harper’s Preserve Montgomery 50% 42 1,683 - 72
Lantana Denton Various (e) 1,438 94 14 44
Long Meadow Farms Fort Bend 19% 838 1,245 107 113
Southern Trails Brazoria 40% 475 552 - -
Stonewall Estates Bexar 25% 280 108 - -
Summer Creek Ranch Tarrant 50% 806 468 - 71
Summer Lakes Fort Bend 50% 382 748 56 -
Village Park Collin 50% 368 203 3 2
Waterford Park Fort Bend 50% - 210 - 90
Other projects (2) Various Various 298 226 - 15
Florida
Other projects (3) Various Various 520 325 - -
Total in ventures 8,679 9,295 209 538
Combined Total 18,378 27,974 898 2,346

(a) A project is deemed entitled when all major discretionary governmental land-use approvals have been received. Some projects may require additional permits and/or non-governmental authorizations for development.

(b) Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated and/or accounted for using the equity method.

(c) Lots are for the total project, regardless of our ownership interest. Lots remaining represent vacant developed lots, lots under development and future planned lots and are subject to change based on business plan revisions.

(d) Commercial acres are for the total project, regardless of our ownership interest and are net developable acres, which may be fewer than the gross acres available in the project.

(e) The Lantana project consists of a series of 22 partnerships in which our voting interests range from 25% to 55%. We account for three of these partnerships using the equity method and we consolidate the remaining partnerships.

A summary of our significant commercial and income producing properties at third quarter-end 2011 follows:
            Interest            
Project     County     Market     Owned (a)     Type     Acres     Description
Broadstone Memorial Harris Houston 100% Multifamily 9 401 unit luxury apartment
Radisson Hotel Travis Austin 100% Hotel 2 413 guest rooms and suites
Palisades West Travis Austin 25% Office 22 375,000 square feet
Las Brisas Williamson Austin 59% Multifamily 30 414 unit luxury apartment
Promesa (b) Travis Austin 100% Multifamily 16 289 unit luxury apartment
(construction in progress)

(a) Interest owned reflects our total equity interest in the project, whether owned directly or indirectly.

(b) Formerly marketed as the Ridge at Ribelin Ranch.

Copyright Business Wire 2010

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