F O R E S T A R 2 0 1 3 A N N U A L R E P O R T
Growing FORward
Delivering Results
2013 FINANCIAL HIG HLI G HTS
Real Estate Revenues
S
E
U
N
E
V
E
R
)
s
n
o
i
l
l
i
m
n
i
$
(
L
A
T
O
T
$160
$140
$120
$100
$80
$60
$40
$20
$30
$25
$20
$15
$10
$5
2010
2011
2012
2013
Income Producing
Residential Tracts
Avg. Lot Margin
Commercial Tracts
Residential Lots
N
I
G
R
A
M
T
O
L
)
s
d
n
a
s
u
o
h
t
.
n
i
G
V
A
$
(
Real Estate
Residential Lot Sales
1,883 lots; up 38% vs. 2012 with higher average lot margins.
Residential Tract Sales
1,617 acres; represents nearly 3,300 potential undeveloped lots.
Commercial Tract Sales
171 acres at over $197,000 per acre on average.
Undeveloped Land Sales
6,811 acres at nearly $3,400 per acre on average.
Multifamily Development
Began pre-leasing two multifamily projects in Austin and Denver.
Sold Promesa multifamily community, generating $10.9 million in earnings.
Oil and Gas Revenues
($ in millions)
Oil and Gas
S
E
U
N
E
V
E
R
L
A
T
O
T
$100
$80
$60
$40
$20
1,200
1,000
800
600
400
200
)
e
o
B
M
M
(
N
O
I
T
C
U
D
O
R
P
2010
2011
2012
2013
Lease Bonus /Delay Rentals
Working Interests
Royalties
Production (MBoe)
Oil Production
Oil production up nearly 88% vs. 2012.
Average daily production 2,897 Boe/Day.
44% of daily production from working interests driven by Bakken/Three Forks.
Acreage in Play
Leased almost 9,200 net fee mineral acres to third parties for $270/acre.
Year-End Reserves
Grew proved reserves by 52% to 8.5MMBoe vs. 2012.
Oil and liquids accounted for 69% of proved reserves.
Exploration and development drives 272% reserve replacement ratio.
This annual report 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,
including, but not limited to: general economic, market, or business conditions; changes in commodity prices; 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 rates or 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 annual report to reflect the occurrence of events after the date of its release.
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
Forestar is a real estate and oil and gas company
with a strategy to recognize and responsibly
deliver the greatest value from every acre — above
and below the ground, today and in the future.
We are Growing FORward given our strong portfolio
of assets and our ability to deliver product to meet
market demand — Growing through strategic
and disciplined investments in both oil and gas and
in real estate — Forward focused and committed
to increasing returns by accelerating total
segment EBITDA.
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
Jim DeCosmo, President and
Chief Executive Officer
To Our Shareholders
In February 2012, we announced Triple in FOR, our strategic initiatives targeting
performance objectives from 2012 through 2015. I am proud to report that
after only two years and with record 2013 total segment earnings, we have
essentially met our four-year objectives.
Our 2013 operating results represent yet another significant step forward — net
income of $0.80 per share or $29.3 million is up 122% compared with $0.36
per share or $12.9 million net income in 2012. I am encouraged by our progress
yet firmly believe we are just beginning to realize Forestar’s potential.
Momentum generated in 2013 transfers into 2014 as Forestar capitalizes on
the U.S. housing recovery in our real estate segment and the North American
energy renaissance in our oil and gas segment.
Real Estate — Thirty-Six Communities Delivering Product in Ten Markets
Sales continue to accelerate as Forestar communities deliver lots and tracts into
supply-constrained markets. Lot sales profits are up $20.4 million, a 77% increase
from 2012. Accelerating residential sales reflect our strong pipeline, and our ability
to deliver product and strategic acquisitions. In response to demand for land
positions, we sold over 1,600 acres of residential tracts for approximately $14,200
per acre. These tracts represent the potential for nearly 3,300 future developed
lots. Furthermore, we sold $18.3 million of commercial tracts in 2013, up from $8.3
million in 2012.
Our expanding multifamily platform provides incremental earnings and returns
within our real estate business. In 2013 we sold Promesa, a high-quality multifamily
community in Austin, and ended the year with four projects under construction
representing 1,235 units with two additional locations ready to break ground.
The 2013 real estate results clearly reflect execution of our strategy — generating
the greatest value from every acre.
Oil and Gas — Investments Growing Production, Proved Reserves and Value
Investments in our oil and gas business generated growth in production
and reserves, up 50% and 52% year over year. Proved reserves increased
from 5.6 MMBoe in 2012 to 8.5 MMBoe in 2013, with oil and natural gas liquids
accounting for 69% of proved reserves volume. The Bakken/Three Forks
formations in North Dakota, one of the nation’s premier oil and gas resources,
accounted for 80% of our reserve additions.
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
Based on current estimates, we have up to 400 future Bakken/Three Forks wells
to be drilled with potential for additional recoveries as lower benches of the
Three Forks formation are tested and proved. In Kansas and Nebraska,
we continue to focus on developing drilling locations in the Lansing-Kansas City
formation, a conventional lower risk oil formation.
Despite lower natural gas prices adversely impacting drilling and exploration
on our owned minerals in the East Texas and Gulf Coast basins, we continue to
develop prospects in preparation for ongoing advancements in drilling and
completion technology and improved natural gas pricing. Owning minerals with
low basis and carry cost in hydrocarbon-rich basins coupled with an experienced
team is expected to be a differentiator as markets and technology develop.
Advancing Our Strategic Initiatives — Growing FORward.
Given 2013 results, investments and raising $275 million in capital, we announced
our Growing FORward strategic initiatives in 2014. Our targets are to deliver
$200 million in total segment EBITDA and drive corporate ROA to 10% by year-end
2016. A key to execution is investing in properties and projects that meet or
exceed our expected rates of return. As always, we will continue to be judicious
and disciplined as we invest to create and deliver long-term shareholder value.
The positive momentum in our financial and operating results is a credit to our
talented management team and the dedication of our employees as we fulfill our
vision – simply to be known as a Great Company. I also would like to recognize
and thank our directors for their invaluable insight, guidance and support — they
are a competitive advantage.
I thank our stockholders for their investment in Forestar. We appreciate your
confidence and remain focused on creating and delivering superior results.
We are committed to maximizing long-term value for all stakeholders.
The future of Forestar is Growing FORward.
Jim DeCosmo
President and Chief Executive Officer
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
Growing through
> Real estate acquisitions and development
> Oil and gas exploration and development
> Strategic investments
We remain focused on growing through strategic and disciplined investment
in both real estate and oil and gas. These investments, combined with growing
demand, are expected to drive momentum in segment EBITDA for both oil and
gas and real estate.
In real estate, this includes ongoing development of residential real estate
communities plus adding multifamily sites in locations where people want
to live. In addition we will pursue acquisitions to build our pipeline of future
projects across our real estate portfolio.
In oil and gas, growth will be driven by a continued focus on exploration and
development in lower-risk, higher return opportunities such as the Bakken/
Three Forks and Lansing-Kansas City. Strategic investments are expected
to further accelerate value creation and continue to build our pipeline of
future opportunities.
Growing Oil and Gas Segment EBITDA
Growing Real Estate Segment EBITDA
S
N
O
I
L
L
I
M
N
I
$100
$80
$60
$40
$20
$0
S
N
O
I
L
L
I
M
N
I
$100
$80
$60
$40
$20
$0
2008-2011
Average
2013
2016E
2008-2011
Average
2013
2016E
disciplined investment
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
F o c u s i n g o n
> Targeting 2016 total segment EBITDA of $200 million
> Targeting 2016 return on assets of 10%
> Repositioning $100 million of non-core assets by 2016
Execution of strategic initiatives has strengthened our portfolio and financial flexibility.
Value creation is being realized through successful strategic investments, delivering results
and generating attractive returns. Operating earnings have continued to grow in real estate
and are poised to accelerate in oil and gas as we target combined total segment EBITDA of
$200 million by 2016.
We are also maintaining a steadfast focus on meeting or exceeding our target returns
while pursuing growth initiatives. Over the past two years we made significant progress
increasing our return on assets from the 2008-2011 average. Growing FORward targets
return on assets of approximately 10% by 2016 while we are developing Forestar into a
great company.
Over the past several years, we have repositioned non-core assets and will continue
to identify such opportunities. In the next three years, we are targeting to reposition
$100 million of non-core assets across our portfolio.
Accelerating Total Segment EBITDA
Increasing Return on Assets
S
N
O
I
L
L
I
M
N
I
$200
$175
$150
$125
$100
$75
$50
$25
10.0%
7.0%
4.0%
1.0%
2008-2011
Average
2013
2016E
2008-2011
Average
2013
2016E
i n c re a s i n g ret u r n s
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
Growing FORward
Forestar is Growing FORward — growing our
businesses while maintaining a steadfast focus
on meeting or exceeding our target returns.
Left to right: Chris Nines, Chief Financial Officer and Treasurer;
Left to Right: Flavious Smith, Chief Oil and Gas Officer;
Jim DeCosmo, President and Chief Executive Officer;
Bruce Dickson, Chief Real Estate Officer
David Grimm, Chief Administrative Officer, General Counsel,
Executive Vice President and Secretary
Reconciliation of non-GAAP Financial Measures (Unaudited)
Forestar’s Total Segment EBITDA for the years ended December 31, 2008, 2009, 2010, 2011, 2012 and
2013 are non-GAAP financial measures within the meaning of Regulation G of the Securities and
Exchange Commission. Non-GAAP financial measures are not in accordance with, or an alternative to,
U.S. Generally Accepted Accounting Principles (GAAP). The company believes presenting non-GAAP
Total Segment EBITDA is helpful to analyze financial performance without the impact of items that may
obscure trends in the company’s underlying performance. A detailed reconciliation is provided below,
outlining the differences between these non-GAAP measures and the directly related GAAP measures.
($ in millions)
2008
2009
2010
2011
2012
2013
Full Year
Total Segment Earnings (Loss),
in accordance with GAAP
Non-cash items, pre-tax
Depreciation, Depletion
& Amortization
Total Segment EBITDA
$62.0
$45.2
$23.2
($7.8)
$80.2
$93.8
5.1
5.5
5.0
7.1
10.6
23.3
$67.1
$50.7
$28.2
($0.7)
$90.8
$117.1
G R O W I N G F O R W A R D
|
F O R E S T A R 2 0 1 3 A N N U A L
R E P O R T
Forestar Group
> Form 10 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number: 001-33662
Forestar Group Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
26-1336998
(I.R.S. Employer
Identification No.)
6300 Bee Cave Road
Building Two, Suite 500
Austin, Texas 78746-5149
(Address of Principal Executive Offices, including Zip Code)
Registrant’s telephone number, including area code: (512) 433-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange On Which Registered
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing sales price of the Common Stock on the
New York Stock Exchange on June 30, 2013, was approximately $662 million. For purposes of this computation, all officers, directors, and ten percent
beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such
directors, officers, or ten percent beneficial owners are, in fact, affiliates of the registrant.
As of March 5, 2014, there were 34,914,560 shares of Common Stock outstanding.
Selected portions of the Company’s definitive proxy statement for the 2014 annual meeting of stockholders are incorporated by reference into Part III of
this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Page
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
SIGNATURES
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
3
22
31
31
32
32
32
34
35
57
58
97
97
97
98
98
98
99
99
99
102
2
PART I
Item 1.
Business
Overview
Forestar Group Inc. is a real estate and oil and gas company. We own directly or through ventures 130,000 acres of real
estate located in ten states and 14 markets. We have 837,000 net acres of oil and gas mineral interests, consisting of fee
ownership and leasehold interests located in 14 states in the continental U.S. Our real estate acres include about 117,000 with
timber, primarily in Georgia, and about 14,000 acres of timber under lease. In 2013, we had revenues of $331 million and net
income of $29 million. Unless the context otherwise requires, references to “we,” “us,” “our” and “Forestar” mean Forestar
Group Inc. and its consolidated subsidiaries. Unless otherwise indicated, information is presented as of December 31, 2013, and
references to acreage owned include all acres owned by ventures regardless of our ownership interest in a venture.
Business Segments
In first quarter 2013, we strategically changed our reportable segments to better reflect the underlying market
fundamentals and operating strategy of our core business operations: real estate and oil and gas. With this change, we
aggregated our fiber and water resource operating results in other natural resources. All prior period segment information has
been reclassified to conform to the current period presentation.
We manage our operations through three business segments:
• Real estate,
• Oil and gas, and
• Other natural resources.
A summary of significant business segment assets at year-end 2013 follows:
Our real estate segment provided 75% percent of our 2013 consolidated revenues. We secure entitlements and develop
infrastructure, primarily for single-family residential and mixed-use communities. We own about 95,000 acres in a broad area
around Atlanta, Georgia, with the balance located primarily in Texas. We invest in projects principally in our strategic growth
corridors, regions across the southern half of the United States that possess key demographic and growth characteristics that we
believe make them attractive for long-term real estate investment. We also develop and own directly or through ventures,
3
multifamily communities as income producing properties, primarily in our target markets. Once these multifamily communities
reach stabilization, we expect to market the properties for sale.
We have 13 real estate projects representing about 26,000 acres in the entitlement process, principally in Georgia. We also
have about 74 entitled, developed or under development projects in eight states and 12 markets encompassing almost 13,000
remaining acres, comprised of land planned for about 20,000 residential lots and about 2,100 commercial acres. We own and
manage projects both directly and through ventures. We sell land at any point within the value chain when additional time
required for entitlement or investment in development will not meet our return criteria. In 2013, we sold 6,811 acres of
undeveloped land at an average price of about $3,400 per acre.
Our oil and gas segment provided 22% percent of our 2013 consolidated revenues. We promote the exploitation,
exploration and development of oil and gas on our 590,000 owned mineral acres and may participate in working interests or
drill as an operator. The four principal areas for our owned mineral acres are Texas, Louisiana, Alabama and Georgia. Our oil
and gas royalty revenues from our owned mineral interests are from 547 gross productive wells operated by third parties,
primarily in Texas and Louisiana, and lease bonus payments received. Historically, these operations require low capital
investment and are low risk. In addition, we have approximately 247,000 net mineral acres leased from others principally
associated with our 2012 acquisition of CREDO Petroleum Corporation (Credo), of which 37,000 acres are held by production
at year-end 2013. The principal areas of operations of our leasehold interests are in Nebraska, Kansas, Oklahoma, North Dakota
and Texas and include 464 gross oil and gas wells with working interest ownership of which we operate approximately 182
wells.
Our other natural resources segment provided 3% percent of our 2013 consolidated revenues. We sell wood fiber from
our land, primarily in Georgia, and lease land for recreational uses. We have about 117,000 real estate acres with timber we own
directly or through ventures and about 14,000 acres of timber under lease. In addition, we have water interests in about 1.5
million acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial
purposes or sold from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 20,000 acres of
groundwater leases in central Texas. We have not received significant revenue or earnings from these water interests.
Our real estate origins date back to the 1955 incorporation of Lumbermen’s Investment Corporation, which in 2006
changed its name to Forestar (USA) Real Estate Group Inc. We have a decades-long legacy of residential and commercial real
estate development operations, primarily in Texas. Our oil and gas origins date back to the mid-1940s when we started leasing
our oil and gas mineral interests to third-party exploration and production companies. In 2007, Temple-Inland distributed all of
the issued and outstanding shares of our common stock to its stockholders, which we will refer to as the “spin-off”.
Our results of operations, including information regarding our business segments, are discussed in Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8, Financial Statements and
Supplementary Data.
Strategy
Our strategy is:
• Recognizing and responsibly delivering the greatest value from every acre; and
• Growing through strategic and disciplined investments.
We are focused on delivering the greatest real estate value from every acre through the entitlement and development of
strategically-located residential and mixed-use communities. We secure entitlements by delivering thoughtful plans and
balanced solutions that meet the needs of the communities where we operate. Moving land through the entitlement and
development process creates significant real estate value. Residential development activities target lot sales to local, regional
and national home builders who build quality products and have strong and effective marketing and sales programs. The lots we
deliver in the majority of our communities are for mid-priced homes, predominantly in the first and second move-up categories.
We also actively market and sell undeveloped land through our retail sales program. We develop multifamily commercial tracts
ourselves as a merchant builder or we may venture with capital partners for the construction, operation, and sale of income
producing properties.
We also seek to maximize value from our owned oil and gas mineral interests through promoting leasing, exploration and
production activity by increasing the acreage leased, lease rates, royalty interests, negotiating additional interests in production
and by entering into seismic exploration agreements and joint ventures. In addition, we lease mineral interests for oil and gas
exploration and production and participate in working interests or drill as an operator on both our owned and leased mineral
interests. We realize value from our undeveloped land by selling fiber and by managing it for future real estate development and
conservation uses. We also generate cash flow and earnings through recreational leases.
4
We are committed to disciplined investment in our business. A majority of our real estate projects were acquired in the
open market, with the remainder coming from entitlement efforts associated with our low basis lands principally located in and
around Atlanta, Georgia. Our mineral interest investments are typically in conventional and unconventional oil and liquid-rich
formations.
Our portfolio of assets in combination with our strategy, management expertise, stewardship and reinvestment in our
business, position Forestar to maximize and grow long-term value for shareholders.
2014 Strategic Initiatives
On February 13, 2014, we announced Growing FORward, new strategic initiatives designed to further enhance
shareholder value by:
• Growing segment earnings through strategic and disciplined investments,
•
Increasing returns, and
• Repositioning non-core assets.
2013 Highlights
In 2013, we essentially achieved our 2012 Triple in FOR strategic initiatives to triple total segment EBITDA, oil and gas
production and total residential lot sales compared with our four-year average from 2008 to 2011.
Real Estate
•
•
•
•
•
Sold 1,883 developed residential lots, with margins up 28% compared with 2012
Sold 6,811 acres of undeveloped land for about $3,400 per acre
Sold 171 commercial acres for over $197,000 per acre
Sold 1,617 acres of residential tracts for nearly $14,200 per acre
Sold Promesa, a stabilized multifamily community for $41.0 million, generating earnings of $10.9 million
Oil and Gas
• Oil production up nearly 88% compared with 2012, primarily due to the acquisition of Credo and additional
investments in leases obtained through acquisition of Credo principally targeting the Bakken/Three Forks and
Lansing-Kansas City formations
• Estimated proved reserves increased 52% to 8.5 million barrel of oil equivalent (BOE) as of year-end 2013 from 5.6
million BOE at year-end 2012
•
83 new productive gross oil and gas wells and 18 wells drilling and/or waiting on completion at year-end 2013
• Leased nearly 9,200 net mineral acres to third parties principally in Texas for nearly $2.5 million
Other Natural Resources
•
Sold over 609,500 tons of fiber for $15.88 per ton
Real Estate
In our real estate segment, we conduct a wide array of project planning and management activities related to the
acquisition, entitlement, development and sale of real estate, primarily residential and mixed-use communities. We own and
manage our projects either directly or through ventures, which we use to achieve a variety of business objectives, including
more effective capital deployment, risk management, and leveraging a partner’s local market contacts and expertise.
We have real estate in ten states and 14 markets encompassing almost 130,000 acres, including about 95,000 acres located
in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. Our development projects are principally
located in the major markets of Texas.
5
Our strategy for creating value in our real estate segment is to move acres up the value chain by moving land located in
growth corridors but not yet entitled, through the entitlement process, and into development. The chart below depicts our real
estate value chain at year-end 2013:
We have approximately 91,000 undeveloped acres located in the path of population growth. As markets grow and mature,
we intend to secure the necessary entitlements, the timing for which varies depending upon the size, location, use and
complexity of a project. We have 26,000 acres in the entitlement process, which includes obtaining zoning and access to water,
sewer and roads. Additional entitlements, such as flexible land use provisions, annexation, and the creation of local financing
districts generate additional value for our business and may provide us the right to reimbursement of major infrastructure costs.
We have almost 13,000 acres entitled, developed and under development, comprised of land planned for about 20,000
residential lots and about 2,100 commercial acres. We use return criteria, which include return on cost, internal rate of return,
and cash multiples, when determining whether to invest initially or make additional investment in a project. When investment
in development meets our return criteria, we will initiate the development process with subsequent sale of lots to homebuilders
or for commercial tracts, internal development, sale to or venture with third parties. We sell land at any point within the value
chain when additional time required for entitlement or investment in development will not meet our return criteria. In 2013, we
sold 6,811 acres of undeveloped land at an average price of about $3,400 per acre.
6
A summary of our real estate projects in the entitlement process(a) at year-end 2013 follows:
Project
California
Hidden Creek Estates
Terrace at Hidden Hills
Georgia
Ball Ground
Crossing
Fincher Road
Fox Hall
Garland Mountain
Martin’s Bridge
Mill Creek
Serenity
Wolf Creek
Yellow Creek
Texas
Lake Houston
Total
_____________________
County
Los Angeles
Los Angeles
Cherokee
Coweta
Cherokee
Coweta
Cherokee/Bartow
Banks
Coweta
Carroll
Carroll/Douglas
Cherokee
Harris/Liberty
Project
Acres(b)
700
30
500
230
3,890
960
350
970
770
440
12,230
1,060
3,700
25,830
(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.
Products
The majority of our projects are single-family residential and mixed-use communities. In some cases, commercial land
uses within a project enhance the desirability of the community by providing convenient locations for resident support services.
We sometimes undertake projects consisting exclusively of commercial tracts and, on occasion, we invest in a venture to
develop a single commercial project.
We develop lots for single-family homes and develop multifamily properties as a merchant builder on our commercial
tracts or other developed sites we may purchase. In addition, we sell commercial tracts that are substantially ready for
construction of buildings for retail, office, industrial or other commercial uses. We sell residential lots primarily to local,
regional and national homebuilders. We have 74 entitled, developed or under development projects in eight states and 12
markets, principally in the major markets of Texas, encompassing almost 13,000 remaining acres, comprised of land planned
for about 20,000 residential lots and about 2,100 commercial acres. We generally focus our lot sales on the first and second
move-up primary housing categories. First and second move-up segments are homes priced above entry-level products yet
below the high-end and custom home segments. As a multifamily merchant builder, we develop and own directly, or through
ventures, multifamily communities as income producing properties, primarily in our target markets. Once these multifamily
communities reach stabilization, we expect to market the properties for sale. We also actively market and sell undeveloped land
through our retail sales program.
Commercial tracts are developed internally or sold to or ventured with commercial developers that specialize in the
construction and operation of income producing properties, such as apartments, retail centers, or office buildings. We also sell
land designated for commercial use to regional and local commercial developers. We have about 2,100 acres of entitled land
designated for commercial use.
Cibolo Canyons is a significant mixed-use project in the San Antonio market area. Cibolo Canyons includes 2,100 acres
planned to include approximately 1,566 residential lots, of which 810 have been sold as of year-end 2013 at an average price of
$69,000 per lot. The residential component includes not only traditional single-family homes but also an active adult section,
and is planned to include condominiums. The commercial component includes about 150 acres designated for multifamily and
retail uses, of which 130 acres have been sold as of year-end 2013. Located at Cibolo Canyons is the JW Marriott® San Antonio
Hill Country Resort & Spa, a 1,002 room destination resort and two PGA Tour® Tournament Players Club® (TPC) golf courses
7
designed by Pete Dye and Greg Norman. The resort hotel began operations in January 2010. We have the right to receive from a
legislatively created special improvement district (SID) nine percent of hotel occupancy revenues and 1.5 percent of other
resort sales revenues collected as taxes by the SID through 2034 and reimbursement of certain infrastructure costs related to the
mixed-use development.
A summary of activity within our projects in the development process, which includes entitled(a), developed and under
development single-family and mixed-use projects, at year-end 2013 follows:
Project
County
Residential Lots
(c)
Commercial Acres
(d)
Interest
Owned(b)
Lots Sold
Since
Inception
Lots
Remaining
Acres
Sold
Since
Inception
Acres
Remaining(f)
Projects we own
California
San Joaquin River
Colorado
Buffalo Highlands
Johnstown Farms
Pinery West
Stonebraker
Tennessee
Morgan Farms
Texas
Arrowhead Ranch
Bar C Ranch
Barrington Kingwood
Cibolo Canyons
Harbor Lakes
Hunter’s Crossing
La Conterra
Lakes of Prosper
Maxwell Creek
Oak Creek Estates
Park Place
Stoney Creek
Summer Creek Ranch
Summer Lakes
Summer Park
The Colony
The Preserve at Pecan Creek
Village Park
Contra Costa/
Sacramento
Weld
Weld
Douglas
Weld
Williamson
Hays
Tarrant
Harris
Bexar
Hood
Bastrop
Williamson
Collin
Collin
Comal
Collin
Dallas
Tarrant
Fort Bend
Fort Bend
Bastrop
Denton
Collin
Westside at Buttercup Creek
Williamson
Other projects (10)
Various
Georgia
Seven Hills
The Villages at Burt Creek
Other projects (18)
Florida
Other projects (2)
Other
Other projects (3)
Paulding
Dawson
Various
Various
Various
—
—
262
—
—
20
—
292
107
810
211
438
167
41
876
164
—
155
878
500
17
445
478
664
1,468
2,110
711
—
95
301
500
11,710
—
164
350
86
603
153
387
813
73
756
238
72
163
244
123
483
200
599
396
630
181
704
316
92
27
147
379
1,715
2,998
—
453
13,545
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
8
—
—
2
20
—
—
—
—
—
130
2
38
—
—
10
13
—
—
35
56
28
22
—
3
66
247
26
—
—
—
—
698
288
—
7
94
—
—
6
—
—
20
19
65
58
—
—
—
—
—
44
—
62
31
7
2
—
7
113
57
705
—
—
1,585
Project
County
Projects in entities we consolidate
Texas
City Park
Lantana(e)
Timber Creek
Harris
Denton
Collin
Willow Creek Farms II
Waller/Fort Bend
Other projects (2)
Georgia
The Georgian
Various
Paulding
Total owned and consolidated
Projects in ventures that we account for using the
equity method
Texas
Entrada
Fannin Farms West
Harper’s Preserve
Lantana(e)
Long Meadow Farms
Southern Trails
Stonewall Estates
Other projects (1)
Total in ventures
Combined Total
Travis
Tarrant
Montgomery
Denton
Fort Bend
Brazoria
Bexar
Nueces
Residential Lots
(c)
Commercial Acres
(d)
Interest
Owned(b)
Lots Sold
Since
Inception
Lots
Remaining
Acres
Sold
Since
Inception
Acres
Remaining(f)
75%
55%
88%
90%
Various
75%
50%
50%
50%
Various
38%
80%
50%
50%
1,287
917
—
90
9
289
2,592
14,302
—
324
284
1,163
1,167
725
330
—
3,993
18,295
482
864
614
315
198
1,052
3,525
17,070
821
24
1,409
80
635
266
56
—
3,291
20,361
50
9
—
—
—
—
59
757
—
—
8
16
183
—
—
—
207
964
115
3
—
—
129
—
247
1,832
—
12
51
42
116
—
—
15
236
2,068
_____________________
(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 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 24 partnerships in which our interests range from 25 percent percent to 55
percent. We account for two of these partnerships using the equity method and we consolidate the remaining partnerships.
(f) Excludes acres associated with commercial and income producing properties.
A summary of our significant commercial and income producing properties at year-end 2013 follows:
Project
Radisson Hotel
Eleven(b)
360°(b)
Midtown Cedar Hill(b)
Market
Austin
Austin
Denver
Dallas
Interest
Owned
(a)
Type
100% Hotel
25% Multifamily
20% Multifamily
Acres
Description
2
3
4
413 guest rooms and suites
257-unit luxury apartment
304-unit luxury apartment
100% Multifamily
13
354-unit luxury apartment
_____________________
(a)
Interest owned reflects our net equity interest in the project, whether owned directly or indirectly.
(b) Construction in progress.
9
Our net investment in owned and consolidated real estate by geographic location at year-end 2013 follows:
State
Texas
Georgia
Colorado
California
Tennessee
North Carolina
Other
Total
Entitled,
Developed,
and Under
Development
Projects
Undeveloped
Land and
Land in
Entitlement
Income
Producing
Properties
(In thousands)
Total
$
291,287
$
8,456
$
32,868
$
332,611
22,503
21,959
8,915
9,230
—
7,793
56,181
—
21,322
130
—
278
—
14,272
—
12,471
11,799
—
78,684
36,231
30,237
21,831
11,799
8,071
$
361,687
$
86,367
$
71,410
$
519,464
Approximately 64 percent of our net investment in real estate is in the major markets of Texas.
Markets
Current U.S. single-family residential market conditions are showing signs of stability with improvement in various
markets; however, more challenging mortgage qualification requirements for purchasers continue to impact housing markets.
Declining finished lot inventories and lack of real estate development during the housing downturn is increasing demand for
our developed lots, principally in the Texas markets. Multifamily market conditions continue to be strong, with many markets
experiencing healthy occupancy levels and positive rent growth. These improvements have been driven primarily by limited
new construction activity, reduced single-family mortgage credit availability, and the increased propensity to rent among the 18
to 34 year old demographic of the U.S. population.
We target investments primarily in markets within our strategic growth corridors, which we define as areas possessing
favorable growth characteristics for population, employment and household formation. These markets are generally located
across the southern half of the U.S., and we believe they represent attractive long-term real estate investment opportunities.
Demand for residential lots, single-family housing, and commercial land is substantially influenced by these growth
characteristics, as well as by immigration and in-migration. Currently, most of our development projects are located within the
major markets of Texas.
Our ten strategic growth corridors encompass 164,000 square miles, or approximately 4.6 percent of the total land area in
the U.S. According to 2010 census data, 91.7 million people, 30 percent of the U.S. total, reside in these corridors. The
population density in these growth corridors is over six times the national average and is projected to grow to over 10 times the
national average between 2010 and 2040. During that time, the corridors are projected to garner approximately 49 percent of
the nation’s population growth and 40 percent of total employment growth. Estimated housing demand from these ten growth
corridors from 2010 to 2040 exceeds 24 million new homes.
Forestar Strategic Growth Corridors
Our value creation strategy includes not only entitlement and development on our own lands but also growth through
strategic and disciplined investment in acquisitions that meet our investment criteria. We continually monitor the markets in our
strategic growth corridors for opportunities to acquire developed lots and land at prices that meet our return criteria.
10
Competition
We face significant competition for the acquisition, entitlement, development and sale of real estate in our markets. Our
major competitors include other landowners who market and sell undeveloped land and numerous national, regional and local
developers. In addition, our projects compete with other development projects offering similar amenities, products and/or
locations. Competition also exists for investment opportunities, financing, available land, raw materials and labor, with entities
that may possess greater financial, marketing and other resources than us. The presence of competition may increase the
bargaining power of property owners seeking to sell. These competitive market pressures sometimes make it difficult to
acquire, entitle, develop or sell land at prices that meet our return criteria. Some of our real estate competitors are well
established and financially strong, may have greater financial resources than we do, or may be larger than us and/or have lower
cost of capital and operating costs than we have and expect to have.
The land acquisition and development business is highly fragmented, and we are unaware of any meaningful
concentration of market share by any one competitor. Enterprises of varying sizes, from individuals or small companies to large
corporations, actively engage in the real estate development business. Many competitors are local, privately-owned companies.
We have a few regional competitors and virtually no national competitors other than national homebuilders that, depending on
business cycles and market conditions, may enter or exit the real estate development business in some locations to develop lots
on which they construct and sell homes. During periods when access to capital is restricted, participants with weaker financial
conditions tend to be less active.
Oil and Gas
Our oil and gas segment is focused on the exploration, development and production of oil and gas on our owned and
leasehold mineral interests.
We typically lease our owned mineral interests to third parties for the exploration and production of oil and gas. When we
lease our mineral interests, we may negotiate a lease bonus payment and retain a royalty interest and may take an additional
participation in production, including a working interest. Working interests refer to well interests in which we pay a share of the
costs to drill, complete and operate a well and receive a proportionate share of the production revenues.
On September 28, 2012, we acquired 100 percent of the outstanding common stock of Credo in an all cash transaction for
$14.50 per share, representing an equity purchase price of approximately $146.4 million. In addition, we paid in full $8.8
million of Credo’s outstanding debt. Credo was an independent oil and gas exploration, development and production company
11
based in Denver, Colorado. The acquired assets included leasehold interests in the Bakken and Three Forks formations of North
Dakota, the Lansing – Kansas City formation in Kansas and Nebraska, and the Tonkawa and Cleveland formations in Texas.
Our strategy for maximizing value from our owned and leased mineral interests is to move acres up the minerals value
chain by participating in working interests in the drilling, completion and production of oil and gas, increasing the net acreage
leased of our owned interests, the lease bonus amount per acre and the size of retained royalty interests. The chart below depicts
our minerals interests value chain:
Owned Mineral Interests
We own mineral interests beneath approximately 590,000 net acres located in the United States, principally in Texas,
Louisiana, Georgia and Alabama. Our revenue from our owned mineral interests is primarily from oil and gas royalty interests,
lease bonus payments and delay rentals received and other related activities. We engage in leasing certain portions of these
mineral interests to third parties for the exploration and production of oil and gas, and we are increasingly leveraging our
mineral interests to participate in wells drilled on or near our acreage.
At year-end 2013, of our 590,000 net acres of owned mineral interests, about 524,000 net acres are available for lease. We
have about 66,000 net acres leased for oil and gas exploration activities, of which about 36,000 net acres are held by production
from over 547 gross oil and gas royalty wells that are operated by others, in which we have working interest ownership in nine
of these wells.
A summary of our owned mineral acres(a) at year-end 2013 follows:
State
Texas
Louisiana
Georgia
Alabama
California
Indiana
_____________________
(a)
Includes ventures.
Unleased
Leased(b)
Held By
Production(c)
Total(d)
205,000
125,000
152,000
40,000
1,000
1,000
524,000
20,000
10,000
—
—
—
—
27,000
9,000
—
—
—
—
30,000
36,000
252,000
144,000
152,000
40,000
1,000
1,000
590,000
12
(b)
Includes leases in primary lease term or for which a delayed rental payment has been received. In the ordinary course of
business, leases covering a significant portion of leased net mineral acres may expire from time to time in a single
reporting period.
(c) Acres being held by production are producing oil or gas in paying quantities.
(d) Texas, Louisiana, California and Indiana net acres are calculated as the gross number of surface acres multiplied by our
percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface
acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling.
A summary of our Texas and Louisiana owned mineral acres(a) primarily in East Texas and Gulf Coast Basins by county
or parish at year-end 2013 follows:
County
Trinity
Angelina
Houston
Anderson
Cherokee
Sabine
Red River
Newton
San Augustine
Jasper
Other
Texas
Louisiana(b)
Net Acres
Parish
Net Acres
46,000 Beauregard
42,000 Vernon
29,000 Calcasieu
25,000 Allen
24,000 Rapides
23,000 Other
14,000
13,000
13,000
12,000
11,000
252,000
79,000
39,000
17,000
7,000
1,000
1,000
144,000
_____________________
(a)
Includes ventures. These owned mineral acre interests contain numerous oil and gas producing formations consisting of
conventional, unconventional, and tight sand reservoirs. Of these reservoirs, we have mineral interests in and around
production trends in the Wilcox, Frio, Cockfield, James Lime, Pettet, Travis Peak, Cotton Valley, Austin Chalk,
Haynesville Shale, Barnett Shale and Bossier formations.
(b) A significant portion of our Louisiana net mineral acres were severed from the surface estate shortly before our 2007 spin-
off. Under Louisiana law, a mineral servitude that is not producing minerals or which has not been the subject of good-
faith drilling operations will cease to burden the property upon the tenth anniversary of the date of its creation.
We engage in leasing certain portions of our owned mineral interests to third parties for the exploration and production of
oil and gas. Leasing mineral acres for exploration and production can create significant value because we may negotiate a lease
bonus payment and retain a royalty interest in all revenues generated by the lessee from oil and gas production. The significant
terms of these arrangements include granting the exploration company the rights to oil or gas it may find and requiring that
drilling be commenced within a specified period. In return, we may receive an initial payment (bonus), subsequent payments if
drilling has not started within the specified period (delay rentals), and a percentage interest in the value of any oil or gas
produced (royalties). If no oil or gas is produced during the required period, all rights are returned to us. Historically, our capital
requirements for our owned mineral acres have been minimal and primarily consist of acquisition costs allocated to mineral
interests and administrative costs.
Our royalty revenues are contractually defined and based on a percentage of production and are received in cash. Our
royalty revenues fluctuate based on changes in the market prices for oil and gas, the inevitable decline in production in existing
wells, and other factors affecting the third-party oil and gas exploration and production companies that operate wells on our
minerals including the cost of development and production.
Most leases are for a three to five year term although a portion or all of a lease may be extended by the lessee as long as
actual production is occurring. Financial terms vary based on a number of market factors including the location of the mineral
interest, the number of acres subject to the agreement, our mineral interest, proximity to transportation facilities such as
pipelines, depth of formations to be drilled and risk.
Mineral Interests Leased
With the acquisition of Credo, we became an independent oil and gas exploration, development and production company.
As of year-end 2013, our leasehold interests include 247,000 net mineral acres leased from others principally located in
Nebraska and Kansas primarily targeting the Lansing – Kansas City formation, in the Texas Panhandle primarily targeting the
13
Tonkawa and Cleveland formations, and in North Dakota primarily targeting the Bakken and Three Forks formations. Our
leasehold interests include approximately 7,000 net mineral acres in the Bakken and Three Forks formations. We have 37,000
net acres held by production and 464 gross oil and gas wells with working interest ownership, of which 182 are operated by us.
A summary of our net mineral acres leased from others principally as a result of our acquisition of Credo as of year-end
2013 follows:
State
Nebraska
Kansas
Oklahoma
Texas
North Dakota
Other(a)
Undeveloped
Held By
Production
Total
138,000
24,000
15,000
11,000
3,000
19,000
210,000
5,000
5,000
17,000
2,000
4,000
4,000
37,000
143,000
29,000
32,000
13,000
7,000
23,000
247,000
__________________
(a) Excludes approximately 8,000 net acres of overriding royalty interests
Nebraska and Kansas
We have about 172,000 net mineral acres primarily located on or near the Central Kansas Uplift and in the western
Kansas counties of Logan, Lane, Thomas and Gove. The Nebraska acreage is located in the southwest portion of Nebraska in
the counties of Dundy, Red Willow and Hitchcock. At year-end 2013, we own working interests in over 100 gross producing
wells with an average working interest of approximately 51 percent.
Oklahoma
We have about 32,000 net mineral acres primarily located on the northern shelf of the Anadarko Basin of Oklahoma,
where we own working interests in approximately 170 gross producing wells with an average working interest of approximately
32 percent.
Texas
We have about 13,000 net mineral acres primarily in Sabine, San Augustine, Hemphill, Tyler and Fayette counties. We
own working interests in over 30 gross producing wells. These wells have an average working interest of approximately 30
percent.
North Dakota
We have about 7,000 net acres in or near the core of the Bakken and Three Forks play. Most of the acreage is located on
the Fort Berthold Indian Reservation, south and west of the Parshall Field. We own working interests in over 80 gross
producing oil wells with an average working interest of approximately 7 percent. Where a well has been drilled on a spacing
unit, in many cases we expect additional development wells to be drilled on those spacing units in the future.
Most leases are for a three to five year term although a portion or all of a lease may be extended as long as production is
occurring. Financial terms vary based on a number of factors including the location of the leasehold interest, the number of
acres subject to the agreement, proximity to transportation facilities such as pipelines, depth of formations to be drilled and risk.
Estimated Proved Reserves
Our net estimated proved oil and gas reserves, all of which are located in the United States, as of year-end 2013, 2012 and
2011 are set forth in the table below, and are based on the estimates prepared by Netherland, Sewell & Associates, Inc. (NSAI),
an independent petroleum engineering firm, in accordance with the definitions and guidelines of the Securities and Exchange
Commission (SEC).
14
Net quantities of proved oil and gas reserves related to our working and royalty interests follow (excludes Credo reserves
for year-end 2011):
Consolidated entities:
Proved developed
Proved undeveloped
Total proved reserves 2013
Proved developed
Proved undeveloped
Total proved reserves 2012
Total proved reserves 2011(a)
Our share of ventures accounted for using the equity method:
Proved developed
Proved undeveloped
Total proved reserves 2013
Proved developed
Proved undeveloped
Total proved reserves 2012
Total proved reserves 2011(a)
Total consolidated and our share of equity method ventures:
Proved developed
Proved undeveloped
Total proved reserves 2013
Proved developed
Proved undeveloped
Total proved reserves 2012
Total proved reserves 2011(a)
Estimated Reserves
Oil
(Barrels)
Gas
(Mcf)
(In thousands)
3,893
1,931
5,824
2,416
804
3,220
1,064
—
—
—
—
—
—
—
3,893
1,931
5,824
2,416
804
3,220
1,064
11,385
2,245
13,630
10,448
1,274
11,722
8,203
2,332
—
2,332
2,572
—
2,572
3,283
13,717
2,245
15,962
13,020
1,274
14,294
11,486
_____________________
(a) We did not have any proved undeveloped reserves prior to our acquisition of Credo in third quarter 2012.
The following summarizes the changes in proved reserves for 2013:
Consolidated entities:
Year-end 2012
Revisions of previous estimates
Extensions and discoveries
Acquisitions
Production
Year-end 2013
Our share of ventures accounted for using the equity method:
Year-end 2012
Revisions of previous estimates
Extensions and discoveries
Production
Year-end 2013
Estimated Reserves
Oil
(Barrels)
Gas
(Mcf)
(In thousands)
3,220
182
3,085
35
(698)
5,824
—
—
—
—
—
11,722
1,243
2,046
531
(1,912)
13,630
2,572
7
—
(247)
2,332
Total consolidated and our share of equity method ventures:
Year-end 2013
5,824
15,962
15
We do not have any estimated reserves of synthetic oil, synthetic gas or products of other non-renewable natural resources
that are intended to be upgraded into synthetic oil and gas.
Reserve estimates were based on the economic and operating conditions existing at year-end 2013, 2012 and 2011. Oil
and gas prices are based on the twelve month unweighted arithmetic average of the first-day-of-the-month price for each month
in the period January through December. For 2013, 2012 and 2011, prices used for reserve estimates were $96.91, $94.71 and
$92.71 per barrel of West Texas Intermediate Crude Oil and gas prices of $3.67, $2.76 and $4.12 per MMBTU per the Henry
Hub spot market. All prices were adjusted for quality, transportation fees and regional price differentials. Since the
determination and valuation of proved reserves is a function of the interpretation of engineering and geologic data and prices
for oil and gas and the cost to produce these reserves, the reserves presented should be expected to change as future information
becomes available. For an estimate of the standardized measure of discounted future net cash flows from proved oil and gas
reserves, please read Note 18 — Supplemental Oil and Gas Disclosures (Unaudited) to our consolidated financial
statements included Part II, Item 8 of this Annual Report on Form 10-K.
The process of estimating oil and gas reserves is complex, involving decisions and assumptions in evaluating the
available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future
production, oil and gas prices, capital costs, operating costs, revenues, taxes and quantities of recoverable oil and gas reserves
might vary from those estimated. Any variance could materially affect the estimated quantities and present value of proved
reserves. In addition, estimates of proved reserves may be adjusted to reflect production history, development, prevailing oil
and gas prices and other factors, many of which are beyond our control.
The primary internal technical person in charge of overseeing our reserves estimates has a Bachelor of Science in Physics
and Mathematics and a Masters of Science in Civil Engineering. He has over 40 years of domestic and international experience
in the exploration and production business including 38 years of reserve evaluations. He has been a registered Professional
Engineer for over 25 years.
As part of our internal control over financial reporting, we have a process for reviewing well production data and division
of interest percentages prior to submitting well level data to NSAI to prepare reserve estimates on our behalf. Our primary
internal technical person and other members of management review the reserve estimates prepared by NSAI, including the
underlying assumptions and estimates upon which they are based, for accuracy and reasonableness.
Production
Oil and gas produced and average unit prices related to our royalty and working interests follows:
Consolidated entities:
Oil production (barrels)(a)
Average price per barrel
Gas production (millions of cubic feet)
Average price per thousand cubic feet
Our share of ventures accounted for using the equity method:
Gas production (millions of cubic feet)
Average price per thousand cubic feet
Total consolidated and our share of equity method ventures:
Oil production (barrels)(a)
Average price per barrel
Gas production (millions of cubic feet)
Average price per thousand cubic feet
Total BOE (barrel of oil equivalent)(b)
Average price per barrel of oil equivalent
For the Year
2013
2012
2011
697,700
89.40
1,912.0
3.48
$
$
371,300
85.09
1,667.7
2.76
$
$
246.5
3.25
$
321.3
2.40
$
697,700
89.40
2,158.5
3.46
1,057,500
66.04
$
$
$
371,300
85.09
1,989.0
2.71
702,800
52.61
$
$
$
$
$
$
$
$
$
151,900
96.84
1,128.6
4.01
493.4
3.81
151,900
96.84
1,622.0
3.95
422,200
50.02
_____________________
(a) Oil production includes natural gas liquids (NGLs).
(b) Gas is converted to barrels of oil equivalent (BOE) using the conversion of six Mcf to one barrel of oil.
In 2013, operations acquired from Credo and subsequent working interests investments produced approximately 526,400
barrels of oil at an average price of $90.66 per barrel and 856 MMcf of gas at an average price of $3.70 per Mcf.
In fourth quarter 2012, operations acquired from Credo produced approximately 116,600 barrels of oil at an average price
of $79.94 per barrel and 225 MMcf of gas at an average price of $3.64 per Mcf.
16
In 2013, 2012 and 2011, production lifting costs, which exclude ad valorem and severance taxes, were $10.35, $7.47 and
$8.88 per BOE related to 473, 403 and seven gross wells in which we have a working interest.
Drilling and Other Exploratory and Development Activities
The following tables set forth the number of gross and net oil and gas wells in which we participated:
Year
2013(a)
2012
2011
Gross Wells
Exploratory
Development
Total
Oil
Gas
Dry
Oil
Gas
Dry
120
40
38
10
8
1
—
1
7
30
9
2
71
16
10
—
2
18
9
4
—
_____________________
(a) Of the gross wells drilled in 2013, we operated 55 or 46 percent. The remaining wells represent our participations in wells
operated by others. Dry holes were principally located in Kansas and Nebraska.
Year
2013
2012
2011
Present Activities
Net Wells
Exploratory
Development
Total
Oil
Gas
Dry
Oil
Gas
Dry
46.7
13.0
4.6
6.0
3.0
0.2
—
—
0.4
18.2
4.9
0.4
16.8
2.6
2.4
—
0.2
1.2
5.7
2.3
—
At year-end 2013, there were eight gross wells being drilled in North Dakota, Kansas and Texas and there were ten gross
wells in North Dakota in some stage of the completion process requiring additional activities prior to generating sales. We
conducted exploratory activities related to unproven properties principally in Oklahoma, Kansas and Nebraska by acquiring
leases and seismic data, and evaluating leasehold and existing mineral acreage for potential exploratory drilling.
Delivery Commitments
We have no oil or gas delivery commitments.
Wells and Acreage
The number of productive wells as of year-end 2013 follows:
Consolidated entities:
Oil
Gas
Total
Ventures accounted for using the equity method:
Oil
Gas
Total
Total consolidated and equity method ventures:
Oil
Gas
Total
Productive Wells (a)
Gross
Net
589
393
982
—
29
29
589
422
1,011
104.4
66.3
170.7
—
1.9
1.9
104.4
68.2
172.6
_____________________
(a) Excludes approximately 1,200 overriding royalty interest wells.
As year-end 2013, 2012 and 2011, we have royalty interests in 547, 542 and 530 gross wells. In addition, at year-end
2013, 2012 and 2011, we have working interests in 473, 403 and eight gross wells.
17
We did not have any wells with production of synthetic oil, synthetic gas or products of other non-renewable natural
resources that are intended to be upgraded into synthetic oil and gas as of year-end 2013, 2012 or 2011. Our plugging liabilities
are accrued on the balance sheet based on the present value of our estimated future obligation.
At year-end 2013, our working interests represent approximately 103,000 gross developed acres and 37,000 net
developed acres leased from others that are held by production. We had approximately 540,000 gross undeveloped acres and
210,000 net undeveloped acres at year-end 2013. We have approximately 48,000 gross and 28,000 net undeveloped acres
scheduled to expire in 2014, some of which we are currently evaluating for lease extension.
Capital Expenditure Budget
Our planned 2014 oil and gas capital expenditure budget for drilling and completion is approximately $140 million, of
which we expect to allocate about $80 million to the Williston Basin of North Dakota to participate as a non-operator in an
estimated 85 gross wells in the Bakken and Three Forks formations. Our average working interest in these wells is expected to
be approximately nine percent. We expect to allocate about $30 million for an estimated 130 gross wells in the Lansing –
Kansas City formation of Kansas and Nebraska through a combination of operated and non-operated working interests with the
remaining $30 million allocated to approximately 20 operated and non-operated gross wells across a number of formations
principally in Texas, Louisiana and Oklahoma.
Our 2014 capital expenditure budget is subject to various conditions, including third-party operator drilling plans, oilfield
services and equipment availability, commodity prices and drilling results. Although a portion of our capital expenditure budget
is allocated to acquiring additional leasehold interests, if we decide to pursue incremental leasehold acquisitions, it would
require us to adjust our budget. Other factors that could cause us to adjust our budget include commodity prices, service or
material costs, or the performance of wells.
Markets
Oil and gas revenues are influenced by prices of, and supply and demand for, oil and gas. These commodities as
determined by both regional and global markets depend on numerous factors beyond our control, including seasonality, the
condition of the domestic and global economies, political conditions in other oil and gas producing countries, the extent of
domestic production and imports of oil and gas, the proximity and capacity of gas pipelines and other transportation facilities,
supply and demand for oil and gas and the effects of federal, state and local regulation. The oil and gas industry also competes
with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers.
Mineral leasing activity is influenced by the location of our owned mineral interests relative to existing or projected oil and gas
reserves and by the proximity of successful production efforts to our mineral interests and by the evolution of new plays and
improvements in drilling and extraction technology.
Competition
The oil and gas industry is highly competitive, and we compete for prospective properties, producing properties,
personnel and services with a substantial number of other companies that may have greater resources. Many of these companies
explore for, produce and market oil and gas, carry on refining operations and market the end products on a worldwide basis.
The primary areas in which we encounter substantial competition are in locating and acquiring desirable leasehold acreage for
our drilling and development operations, locating and acquiring attractive producing oil and gas properties, attracting highly-
skilled personnel and obtaining purchasers and transporters of the oil and gas we produce. We also face competition from
alternative fuel sources, including coal, heating oil, imported LNG, nuclear and other nonrenewable fuel sources, and renewable
fuel sources such as wind, solar, geothermal, hydropower and biomass. Competitive conditions may also be substantially
affected by various forms of energy legislation and/or regulation considered from time to time by the United States government.
It is not possible to predict whether such legislation or regulation may ultimately be adopted or its precise effects upon our
future operations. Such laws and regulations may, however, substantially increase the costs of exploring for, developing or
producing oil and gas and may prevent or delay the commencement or continuation of our operations.
In locations where our owned mineral interests are close to producing wells and proven reserves, we may have multiple
parties interested in leasing our minerals. Conversely, where our mineral interests are in or near areas where reserves have not
been discovered, we may receive nominal interest in leasing our minerals. Portions of our Texas and Louisiana minerals are in
close proximity to producing wells and proven reserves. Interest in leasing our minerals is correlated with the economics of
production which are substantially influenced by current oil and gas prices.
18
Other Natural Resources
We sell wood fiber from portions of our land, primarily in Georgia, and lease land for recreational uses. We have about
117,000 acres of timber we own directly or through ventures and about 14,000 acres of timber under lease. We manage our
timberland in accordance with the Sustainable Forestry Initiative® program of Sustainable Forestry Initiative, Inc. At year-end
2013, approximately 99 percent of available acres of our land including ventures, primarily in Georgia, are leased for
recreational purposes. Most recreational leases are for a one-year term but may be terminated by us on 30 days’ notice to the
lessee. These leases do not inhibit our ability to harvest timber.
Information about our principal timber products follows:
Pulpwood tons sold
Average pulpwood price per ton
Sawtimber tons sold
Average sawtimber price per ton
Total tons sold
Average price per ton
Information about our recreational leases follows:
Average recreational acres leased
Average price per leased acre
For the Year
2013
2012
2011
375,200
11.86
234,300
22.31
609,500
15.88
$
$
$
370,200
9.83
123,700
21.77
493,900
12.82
$
$
$
266,200
8.69
56,800
16.13
323,000
10.00
For the Year
2013
2012
2011
120,400
129,800
9.08
$
8.73
$
174,500
8.80
$
$
$
$
The majority of our fiber sales were to International Paper at market prices.
Competition
We face significant competition from other landowners for the sale of our wood fiber. Some of these competitors own
similar timber assets that are located in the same or nearby markets. However, due to its weight, the cost for transporting wood
fiber long distances is significant, resulting in a competitive advantage for timber that is located reasonably close to paper and
building products manufacturing facilities. A significant portion of our wood fiber is reasonably close to such facilities so we
expect continued demand for our wood fiber.
Water Interests
We have water interests in about 1.5 million acres which includes a 45 percent nonparticipating royalty interest in
groundwater produced or withdrawn for commercial purposes or sold from approximately 1.4 million acres in Texas, Louisiana,
Georgia and Alabama, and about 20,000 acres of groundwater leases in central Texas. We have not received significant
revenues or earnings from these interests.
Employees
We have approximately 145 employees. None of our employees participate in collective bargaining arrangements. We
believe we have a good relationship with our employees.
Environmental Regulations
Our operations are subject to federal, state and local laws, regulations and ordinances relating to protection of public
health and the environment. Changes to laws and regulations may adversely affect our ability to drill for and produce oil and
gas, develop real estate, harvest and sell timber, withdraw groundwater, or may require us to investigate and remediate
contaminated properties. These laws and regulations may relate to, among other things, hydrocarbon drilling, hydraulic
fracturing practices, protection of timberlands, endangered species, timber harvesting practices, protection and restoration of
natural resources, air and water quality, and remedial standards for contaminated property and groundwater. Additionally, these
laws may impose liability on property owners or operators for the costs of removal or remediation of hazardous or toxic
substances on real property, without regard to whether the owner or operator knew, or was responsible for, the presence of the
hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may adversely affect the
value of a property, as well as our ability to sell the property or to borrow funds using that property as collateral or the ability to
produce oil and gas from that property. Environmental claims generally would not be covered by our insurance programs.
19
The particular environmental laws that apply to any given site vary according to the site’s location, its environmental
condition, and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in
delays, may cause us to incur substantial compliance or other costs and can prohibit or severely restrict development activity or
mineral production in environmentally sensitive regions or areas, which could negatively affect our results of operations.
We own approximately 288 acres in several parcels in or near Antioch, California, portions of which were sites of a paper
manufacturing operation that are in remediation. The remediation is being conducted voluntarily with oversight by the
California Department of Toxic Substances Control, or DTSC. We have received certificates of completion on all but one 80
acre tract, a portion of which includes subsurface contamination. We estimate the remaining cost to complete remediation
activities is about $1,000,000 as of year-end 2013.
Oil and gas operations are subject to numerous federal, state and local laws and regulations controlling the generation,
use, processing, storage, transportation, disposal and discharge of materials into the environment or otherwise relating to the
protection of the environment. These laws and regulations affect our operations and costs as a result of their impact on crude oil
and gas exploration, development and production operations. Failure to comply with these laws and regulations may result in
the assessment of administrative, civil and criminal penalties, including the assessment of monetary penalties, the imposition of
investigatory and remedial obligations, the suspension or revocation of necessary permits, licenses and authorizations, the
requirement that additional pollution controls be installed and the issuance of orders enjoining future operations or imposing
additional compliance requirements.
Compliance with environmental laws and regulations increases our overall cost of business, but has not had, to date, a
material adverse effect on our operations, financial condition or results of operations. It is not anticipated, based on current laws
and regulations, that we will be required in the near future to expend amounts (whether for environmental control equipment,
modification of facilities or otherwise) that are material in relation to our total exploration and development expenditure
program in order to comply with such laws and regulations. However, given that such laws and regulations are subject to
change, we are unable to predict the ultimate cost of compliance or the ultimate effect on our operations, financial condition and
results of operations.
Legal Structure
Forestar Group Inc. is a Delaware corporation. The following chart presents the ownership structure for our significant
subsidiaries. It does not contain all our subsidiaries and ventures, some of which are immaterial entities.
Forestar Group Inc.
Forestar (USA) Real Estate
Group Inc.
Forestar Petroleum
Corporation
Forestar Minerals LP
Forestar Oil & Gas LLC
Our principal executive offices are located at 6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746-5149.
Our telephone number is (512) 433-5200.
Available Information
From our Internet website, http://www.forestargroup.com, you may obtain additional information about us including:
•
•
•
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including
amendments to these reports, and other documents as soon as reasonably practicable after we file them with the
Securities and Exchange Commission;
beneficial ownership reports filed by officers, directors, and principal security holders under Section 16(a) of
the Securities Exchange Act of 1934, as amended (or the “Exchange Act”); and
corporate governance information that includes our:
•
•
corporate governance guidelines,
audit committee charter
• management development and executive compensation committee charter,
•
•
nominating and governance committee charter,
standards of business conduct and ethics,
20
•
•
code of ethics for senior financial officers, and
information on how to communicate directly with our board of directors.
We will also provide printed copies of any of these documents to any stockholder free of charge upon request. In addition,
the materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information about the operation of the Public Reference Room is available by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information
statements, and other information that is filed electronically with the SEC.
Executive Officers
The names, ages and titles of our executive officers are:
Name
James M. DeCosmo
Bruce F. Dickson
David M. Grimm
Christopher L. Nines
Flavious J. Smith, Jr.
Phillip J. Weber
Age
Position
55
60
53
42
55
53
President and Chief Executive Officer
Chief Real Estate Officer
Chief Administrative Officer, Executive Vice President, General Counsel and Secretary
Chief Financial Officer and Treasurer
Chief Oil and Gas Officer
Executive Vice President - Water Resources
James M. DeCosmo has served as our President and Chief Executive Officer since 2006. He served as Group Vice
President of Temple-Inland Inc. from 2005 to 2007, and previously served as Vice President, Forest from 2000 to 2005 and as
Director of Forest Management from 1999 to 2000. Prior to joining Temple-Inland, he held various land management positions
throughout the southeastern United States. Mr. DeCosmo also serves on the Policy Advisory Board of the Harvard Housing
Institute.
Bruce F. Dickson has served as our Chief Real Estate Officer since March 2011. From 2009 through March 2011, he was
the owner of Fairchild Investments LLC, a real estate investment firm. He served Standard Pacific Corp. as Southeast Region
President from 2004 to 2009 and as Austin Division President from 2002 to 2004. From 1991 to 2001, he held region or
division president positions with D.R. Horton, Inc., Milburn Homes and Continental Homes. His prior experience includes
investment banking and financial services.
David M. Grimm has served as our Chief Administrative Officer since 2007, in addition to holding the offices of General
Counsel and Secretary since 2006. Mr. Grimm served Temple-Inland Inc. as Group General Counsel from 2005 to 2006,
Associate General Counsel from 2003 to 2005, and held various other legal positions from 1992 to 2003. Prior to joining
Temple-Inland Inc., he was an attorney in private practice in Dallas, Texas. Mr. Grimm is also a Certified Public Accountant.
Christopher L. Nines has served as our Chief Financial Officer since 2007. He served Temple-Inland Inc. as Director of
Investor Relations from 2003 to 2007 and as Corporate Finance Director from 2001 to 2003. He was Senior Vice President of
Finance for ConnectSouth Communications, Inc. from 2000 to 2001.
Flavious J. Smith, Jr. has served as our Chief Oil and Gas Officer since September 2012 and previously served as
Executive Vice President - Mineral Resources from 2008 to September 2012. He served as Division Land Manager for EOG
Resources, Inc. from 2005 to 2008. He owned and operated Flavious Smith Petroleum Properties, an independent oil and
natural gas operator, from 1989 to 2005, and previously held various leadership positions with several oil and gas and energy-
related companies.
Phillip J. Weber has served as our Executive Vice President - Water Resources since May 2013 and previously served as
Executive Vice President - Real Estate from 2009 to May 2013. He served the Federal National Mortgage Association (Fannie
Mae) as Senior Vice President - Multifamily from 2006 to October 2009, as Chief of Staff to the CEO from 2004 to 2006, as
Chief of Staff to non-Executive Chairman of the Board and Corporate Secretary from 2005 to 2006, and as Senior Vice
President, Corporate Development in 2005.
21
Item 1A.
Risk Factors.
General Risks Related to our Operations
Both our real estate and oil and gas businesses are cyclical in nature.
The operating results of our business segments reflect the general cyclical pattern of each segment. While the cycles of
each industry do not necessarily coincide, demand and prices in each may drop substantially in an economic downturn. Real
estate development of residential lots is further influenced by new home construction activity, which has been volatile in recent
years. Oil and gas may be further influenced by national and international commodity prices, principally for oil and gas.
Cyclical downturns may materially and adversely affect our business, liquidity, financial condition and results of operations.
The real estate, oil and gas and natural resource industries are highly competitive and a number of entities with which
we compete are larger and have greater resources, and competitive conditions may adversely affect our results of operations.
The real estate, oil and gas, and natural resources industries in which we operate are highly competitive and are affected
to varying degrees by supply and demand factors and economic conditions, including changes in interest rates, new housing
starts, home repair and remodeling activities, credit availability, consumer confidence, unemployment, housing affordability,
changes in oil and gas prices, and federal energy policies.
The competitive conditions in the real estate industry may result in difficulties acquiring suitable land at acceptable
prices, lower sales volumes and prices, increased development or construction costs and delays in construction and leasing. We
compete with numerous regional and local developers for the acquisition, entitlement, and development of land suitable for
development. We also compete with national, regional and local home builders who develop real estate for their own use in
homebuilding operations, many of which are larger and have greater resources, including greater marketing and technology
budgets. Any improvement in the cost structure or service of our competitors will increase the competition we face.
We face intense competition from both major and independent oil and gas companies in seeking to acquire desirable
producing properties, seeking new properties for future exploration and seeking the human resource expertise necessary to
effectively develop properties. Many of our competitors have financial and other resources substantially greater than ours, and
some of them are fully integrated oil and gas companies. These companies may be able to pay more for development prospects
and productive oil and gas properties and are able to define, evaluate, bid for, purchase and subsequently drill a greater number
of properties and prospects than our financial or human resources permit, effectively reducing our ability to participate in
drilling on certain of our acreage as a working interest owner or drill on properties we operate. Our ability to develop and
exploit our oil and gas properties and to acquire additional quality properties in the future will depend upon our ability to
successfully evaluate, select and acquire suitable properties and join in drilling with reputable operators in this highly
competitive environment.
Our business, financial condition and results of operations may be negatively affected by any of these factors.
Our activities are subject to environmental regulations and liabilities that could have a negative effect on our operating
results.
Our operations are subject to federal, state and local laws and regulations related to the protection of the environment.
Compliance with these provisions or the promulgation of new environmental laws and regulations may result in delays, may
cause us to invest substantial funds to ensure compliance with applicable environmental regulations and can prohibit or
severely restrict timber harvesting, real estate development or mineral production activity in environmentally sensitive regions
or areas.
Significant reductions in cash flow from slowing real estate, oil and gas or other natural resources market conditions
could lead to higher levels of indebtedness, limiting our financial and operating flexibility.
We must comply with various covenants contained in our senior secured credit facility, the indenture governing our
3.75% convertible senior notes due 2020 (Convertible Notes), the indenture governing our 4.50% senior amortizing notes due
2016 (Senior Amortizing Notes), and any other existing or future debt arrangements. Significant reductions in cash flow from
slowing real estate, oil and gas or other natural resources market conditions could require us to increase borrowing levels under
our senior secured credit facility or to borrow under other debt arrangements and lead to higher levels of indebtedness, limiting
our financial and operating flexibility, and ultimately limiting our ability to comply with our debt covenants, including the
maintenance covenants under our senior secured credit facility. Realization of any of these factors could adversely affect our
financial condition and results of operations.
22
Restrictive covenants under our senior secured credit facility and indentures governing our 3.75% convertible senior
notes and 4.50% senior amortizing notes may limit the manner in which we operate.
Our senior secured credit facility and indentures covering our Convertible Notes and Senior Amortizing Notes contain
various covenants and conditions that limit our ability to, among other things:
•
•
•
incur or guarantee additional debt;
pay dividends or make distributions to our stockholders;
repurchase or redeem capital stock or subordinated indebtedness;
• make loans, investments or acquisitions;
•
•
•
incur restrictions on the ability of certain of our subsidiaries to pay dividends or to make other payments to us;
enter into transactions with affiliates;
create liens;
• merge or consolidate with other companies or transfer all or substantially all of our assets; and
•
transfer or sell assets, including capital stock of subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to
engage in favorable business activities or finance future operations or capital needs.
Debt within some of our ventures may not be renewed or may be difficult or more expensive to replace.
As of December 31, 2013, our unconsolidated joint ventures had approximately $71.5 million of debt, substantially all of
which was non-recourse to us. Many lenders have substantially curtailed or ceased making real estate acquisition and
development loans. When debt within our ventures matures, some of our ventures may be unable to renew existing loans or
secure replacement financing, or replacement financing may be more expensive. If our ventures are unable to renew existing
loans or secure replacement financing, we may be required to contribute additional equity to our ventures which could increase
our risk or increase our borrowings under our senior secured credit facility, or both. If our ventures secure replacement
financing that is more expensive, our profits may be reduced.
We may not be able to generate sufficient cash flow to service all of our indebtedness and may be forced to take other
actions to satisfy our obligations under our indebtedness, which may not be successful.
As of December 31, 2013, we had approximately $357 million of consolidated debt outstanding. Our ability to make
scheduled payments or to refinance current or future debt obligations depends on our financial and operating performance,
which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond
our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to
pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or
delay capital expenditures, sell assets or operations, seek additional debt or equity capital or restructure or refinance our
indebtedness. We cannot be certain that we would be able to take any of these actions, that these actions would be successful
and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our
existing or future debt agreements. In the absence of such operating results and resources, we could face substantial liquidity
problems and might be required to dispose of material assets or operations to meet our debt service and other obligations.
Despite current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. If new debt is added to our
and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.
Our business may suffer if we lose key personnel.
We depend to a large extent on the services of certain key management personnel. These individuals have extensive
experience and expertise in our business segments in which they work. The loss of any of these individuals could have a
material adverse effect on our operations. We do not maintain key-man life insurance with respect to any of our employees. Our
success will be dependent on our ability to continue to employ and retain skilled personnel in each of our business segments.
23
Risks Related to our Real Estate Operations
Reduced demand for new housing or commercial tracts in the markets where we operate could adversely impact our
profitability.
The residential development industry is cyclical and is significantly affected by changes in general and local economic
conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence and
housing demand. Adverse changes in these conditions generally, or in the markets where we operate, could decrease demand
for lots for new homes in these areas. Current mortgage credit standards continue to limit the availability of mortgage loans to
acquire new and existing homes, and interest rates are rising. Decline in housing demand could negatively affect our real estate
development activities, which could result in a decrease in our revenues and earnings.
Furthermore, the market value of undeveloped land and lots held by us, including commercial tracts, can fluctuate
significantly as a result of changing economic and real estate market conditions. If there are significant adverse changes in
economic or real estate market conditions, we may have to hold land in inventory longer than planned. Inventory carrying costs
can be significant and can result in losses or lower returns and adversely affect our liquidity.
Development of real estate entails a lengthy, uncertain and costly entitlement process.
Approval to develop real property entails an extensive entitlement process involving multiple and overlapping regulatory
jurisdictions and often requiring discretionary action by local governments. This process is often political, uncertain and may
require significant exactions in order to secure approvals. Real estate projects must generally comply with local land
development regulations and may need to comply with state and federal regulations. The process to comply with these
regulations is usually lengthy and costly, may not result in the approvals we seek, and can be expected to materially affect our
real estate development activities, which may adversely affect our business, liquidity, financial condition and results of
operations.
Our real estate development operations are currently concentrated in the major markets of Texas, and a significant
portion of our undeveloped land holdings are concentrated in Georgia. As a result, our financial results are dependent on
the economic growth and strength of those areas.
The economic growth and strength of Texas, where the majority of our real estate development activity is located, are
important factors in sustaining demand for our real estate development activities. Further, the future economic growth and real
estate development opportunities in broad area around Atlanta, Georgia may be adversely affected if its infrastructure, such as
roads, utilities, and schools, are not improved to meet increased demand. There can be no assurance that these improvements
will occur. As a result, any adverse impact to the economic growth and health, or infrastructure development, of those areas
could materially adversely affect our business, liquidity, financial condition and results of operations.
Our real estate development operations are highly dependent upon national, regional and local homebuilders.
We are highly dependent upon our relationships with national, regional, and local homebuilders to purchase lots in our
residential developments. If homebuilders do not view our developments as desirable locations for homebuilding operations, or
if homebuilders are limited in their ability to conduct operations due to economic conditions, including as a result of the recent
downturn, our business, liquidity, financial condition and results of operations will be adversely affected.
In addition, we enter into contracts to sell lots to builders. A builder could decide to delay purchases of lots in one or
more of our developments due to adverse real estate conditions wholly unrelated to our areas of operations, such as the
corporate decisions regarding allocation of limited capital or human resources. Further, home mortgage credit standards have
tightened substantially. As a result, we may sell fewer lots and may have lower sales revenues, which could have an adverse
effect on our business, liquidity, financial condition and results of operations.
Our strategic partners may have interests that differ from ours and may take actions that adversely affect us.
We enter into strategic alliances or venture relationships as part of our overall strategy for particular developments or
regions. While these partners may bring development experience, industry expertise, financing capabilities, and local credibility
or other competitive attributes, they may also have economic or business interests or goals that are inconsistent with ours or
that are influenced by factors unrelated to our business. We may also be subject to adverse business consequences if the market
reputation or financial condition of a partner deteriorates, or if a partner takes actions inconsistent with our interest.
A formal agreement with a partner may also involve special risks, such as: we may not have voting control over the
venture; the venture partner may take actions contrary to our instructions or requests, or contrary to our policies or objectives
with respect to the real estate investments; the venture partner could experience financial difficulties and actions by a venture
partner may subject property owned by the venture to liabilities greater than those contemplated by the venture agreement or
have other adverse consequences.
24
As a result, actions by a partner may have the result of subjecting venture property to liabilities in excess of those
contemplated by the terms of the applicable agreement or have other adverse consequences. Accordingly, there can be no
assurance that any such arrangements will achieve the results anticipated or otherwise prove successful.
Our partners’ inability to fund their capital commitments and otherwise fulfill their operating and financial obligations
related to a venture could have an adverse effect on the venture and us.
When we enter into a venture, we may rely on our venture partner to fund its share of capital commitments to the venture
and to otherwise fulfill its operating and financial obligations. Failure of a venture partner to timely satisfy its funding or other
obligations to the venture could require us to elect whether to increase our financial or other operating support of the venture in
order to preserve our investment, which may reduce our returns or cause us to incur losses, or to not fund such obligations,
which may subject the venture and us to adverse consequences or increase our financial exposure in the project.
Delays or failures by governmental authorities to take expected actions could reduce our returns or cause us to incur
losses on certain real estate development projects.
For certain projects, we rely on governmental utility and special improvement districts (SID) to issue bonds as a revenue
source for the districts to reimburse us for qualified expenses, such as road and utility infrastructure costs. Bonds must be
supported by districts tax revenues, usually from ad valorem taxes. Slowing new home sales, decreasing real estate prices or
difficult credit markets for bond sales can reduce or delay district bond sale revenues, causing such districts to delay
reimbursement of our qualified expenses. Failure to receive timely reimbursement for qualified expenses could adversely affect
our cash flows and reduce our returns or cause us to incur losses on certain real estate development projects.
We are unable to control the approval or timing of reimbursements or other payments from the SID in which our Cibolo
Canyons project is located. Delays or failure by the SID to approve infrastructure costs for reimbursement or to issue bonds,
or lower than expected revenues generated from taxes, could negatively impact the timing of our future cash flows.
The SID in which our Cibolo Canyons project is located is an independent governmental entity. The SID has an elected
governing board of directors comprised of members living within the district, none of whom are affiliated with us.
Reimbursement of our infrastructure costs, and timing of payment, is subject to approval and determination by the SID. The
SID is also obligated to pay to us certain amounts generated from hotel occupancy revenues and other resort sales revenues
collected as taxes by the SID within the district. The amount of revenues collected by the SID will be impacted by hotel
occupancy and resort sales, each of which could be lower than projected. If the revenues collected by the SID are lower than
expected, then the amount of our future cash flows from the SID could be adversely affected. The amount and timing of
receipts from the SID will be impacted by decisions made by the SID in regard to whether and when to issue bonds that would
generate funds to support payments to us. Decisions by the SID to delay approval of reimbursements or issuance of bonds
could negatively impact the timing of our future cash flows.
Development and construction risks could impact our profitability.
We may develop and construct single family or multifamily communities through wholly-owned projects or through
ventures with unaffiliated parties. Our development and construction activities may be exposed to the following risks:
• we may incur construction costs for a property that exceed original estimates due to increased materials, labor or
other costs or unforeseen environmental or other conditions, which could make completion of the property
uneconomical, and we may not be able to increase rents to compensate for the increase in construction costs;
• we may be unable to complete construction and/or lease-up of a community on schedule and meet financial goals for
development projects;
•
•
an adverse incident during construction or development could adversely affect our ability to complete construction,
conduct operations or cause substantial losses, including personal injury or loss of life, damage to or destruction of
property, equipment, pollution or other environmental contamination, regulatory penalties, suspension of operations,
and attorney’s fees and other expenses incurred in the prosecution or defense of litigation; and
because occupancy rates and rents at a newly developed community may fluctuate depending on a number of factors,
including market and economic conditions, we may be unable to meet our profitability goals for that community.
Possible difficulty of selling multifamily communities could limit our operational and financial flexibility.
Purchasers may not be willing to pay acceptable prices for multifamily communities that we wish to sell. Furthermore,
general uncertainty in real estate markets has resulted in conditions where pricing of some real estate assets may be difficult
due to uncertainty with respect to capitalization rates and valuations, among other things. If we are unable to sell multifamily
communities or if we can only sell multifamily communities at prices lower than are generally acceptable, then we may have to
take on additional leverage in order to provide adequate capital to execute our business strategy.
25
Increased competition and increased affordability of residential homes could limit our ability to retain residents, lease
apartment homes or increase or maintain rents.
Our multifamily communities compete with numerous housing alternatives in attracting residents, including other
multifamily communities and single-family rental homes, as well as owner occupied single and multifamily homes.
Competitive housing in a particular area and the increasing affordability of owner occupied single and multifamily homes
caused by declining housing prices, mortgage interest rates and government programs to promote home ownership could
adversely affect our ability to retain residents, lease apartment homes and increase or maintain rents.
Failure to succeed in new markets may limit our growth.
We may from time to time commence development activity or make acquisitions outside of our existing market areas if
appropriate opportunities arise. Our historical experience in existing markets does not ensure that we will be able to operate
successfully in new markets. We may be exposed to a variety of risks if we choose to enter new markets, including, among
others:
•
•
•
•
•
an inability to evaluate accurately local apartment or housing market conditions and local economies;
an inability to obtain land for development or to identify appropriate acquisition opportunities;
an inability to hire and retain key personnel;
an inability to successfully integrate operations; and
lack of familiarity with local governmental and permitting procedures.
Risks Related to our Oil and Gas Operations
Our operations are subject to the numerous risks of oil and gas drilling and production activities.
Our oil and gas drilling and production activities are subject to numerous risks, many of which are beyond our
control. These risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and
environmental hazards. Environmental hazards include oil spills, gas leaks, ruptures, discharges of toxic gases, underground
migration and surface spills or mishandling of any toxic fracture fluids, including chemical additives. In addition, title
problems, weather conditions and mechanical difficulties or shortages or delays in delivery of drilling rigs and other equipment
could negatively affect our operations. If any of these or other similar industry operating risks occur, we could have substantial
losses. Substantial losses also may result from injury or loss of life, severe damage to or destruction of property, clean-up
responsibilities, environmental damage, regulatory investigation, enforcement actions and penalties, and restriction or
suspension of operations. In accordance with industry practice, we maintain insurance against some, but not all, of the risks
described above. We cannot assure you that our insurance will be adequate to cover losses or liabilities. Also, we cannot predict
the continued availability of insurance at premium levels that justify its purchase.
Expenditures related to drilling activities could lead to higher levels of indebtedness.
We expect increasing drilling expenditures that we plan to pay for with cash flow from operations, cash reserves and
borrowings under the revolving loan of our senior secured credit facility. We cannot assure you that we will have sufficient
capital resources in the future to finance all of our planned drilling expenditures. If cash flows from operations decrease for any
reason, our ability to undertake exploration and development activities could be adversely affected and we may have to borrow
or seek additional capital to finance such activities. Such borrowings, if available, could lead to higher levels of indebtedness
and reduced returns, limiting our financial and operating flexibility and limiting our ability to comply with our debt covenants.
The lack of availability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely
affect our ability to execute our exploitation and development plans on a timely basis and within our budget.
From time to time, there are shortages of drilling rigs, equipment, supplies, oil field services or qualified personnel.
During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. In addition, the
demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases. During times
and in areas of increased activity, the demand for oilfield services will also likely rise, and the costs of these services will likely
increase, while the quality of these services may suffer. If the lack of availability or high cost of drilling rigs, equipment,
supplies, oil field services or qualified personnel were particularly severe in any of our areas of operation, we could be
materially and adversely affected. Delays could also have an adverse effect on our results of operations, including the timing of
the initiation of production from new wells.
26
Our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors that are beyond our
control.
Our drilling operations are subject to a number of risks, including:
•
•
•
•
•
•
•
unexpected drilling conditions;
facility or equipment failure or accidents;
adverse weather conditions;
title problems;
unusual or unexpected geological formations;
fires, blowouts and explosions; and
uncontrollable flows of oil and gas or well fluids.
The occurrence of any of these events could adversely affect our ability to conduct operations or cause substantial losses,
including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution or
other environmental contamination, loss of wells, regulatory investigation, enforcement actions or penalties, restrictions or
suspension of operations, and attorney’s fees and other expenses incurred in the prosecution or defense of litigation.
We may not find commercially productive oil and gas reservoirs.
Future oil and gas exploration may involve unprofitable efforts, not only from dry hole wells, but from wells that are
productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a
well does not assure a profit on the investment or recovery of drilling, completion and operating costs. There is no assurance
that new wells we drill will be productive or that we will recover all or any portion of our capital investment in the wells.
Hydraulic fracturing, the process used for extracting oil and gas from shale and other formations, and other subsurface
injections have come under increased scrutiny and could be the subject of further regulation that could impact the timing
and cost of extractive activities.
Hydraulic fracturing is the primary production method used to extract reserves located in many of the unconventional oil
and gas plays in the United States. The United States Environmental Protection Agency (EPA) is currently engaged in a long-
term study mandated by Congress regarding the potential impacts of hydraulic fracturing on drinking water resources that could
influence federal and state legislative and regulatory developments. Other federal regulatory developments include (i)
interpretive memorandum issued by the EPA in February 2014 in regard to underground injection of hydraulic fracturing fluids
that use diesel fuel as a fracking fluid or propping agent; (ii) EPA air regulations for the oil and gas industry, issued in August
2012, that require, beginning in January 2015, “reduced emissions completion” technology to be used after well completion
operations involving hydraulic fracturing; and (iii) U.S. Department of the Interior, Bureau of Land Management regulation of
well stimulation involving hydraulic fracturing on federal and tribal lands. These regulations were first proposed in May 2012
and then revised and proposed again in May 2013. Hydraulic fracturing is also extensively regulated at the state and local level
and has been subject to temporary or permanent moratoria in some states, although to date it has not been subject to such
moratoria in the states and locations of our oil and gas operations or minerals. Also under public and governmental scrutiny is
subsurface injection of water or other produced fluids from drilling or hydraulic fracturing processes due to potential
environmental and physical impacts, including possible links to earthquakes.
Depending on legislation that may ultimately be enacted or regulations that may be adopted at the federal, state and local
levels, exploration, exploitation and production activities that entail hydraulic fracturing or other subsurface injection could be
subject to additional regulation and permitting requirements. Individually or collectively, such new legislation or regulation
could lead to operational delays, increased costs and other burdens that could delay the development of oil and gas resources
from formations that are not commercial without the use of these techniques. This could have a material effect on our oil and
gas production operations and on the operators conducting activities on our minerals and on the cash flows we receive from
them.
Volatile oil and gas prices could adversely affect our cash flows and results of operations.
Our cash flows and results of operations are dependent in part on oil and gas prices, which are volatile. Oil and gas prices
also impact the amounts we receive for selling and renewing our mineral leases. Moreover, oil and gas prices depend on factors
we cannot control, such as: changes in foreign and domestic supply and demand for oil and gas; actions by the Organization of
Petroleum Exporting Countries; weather; political conditions in other oil-producing countries, including the possibility of
insurgency or war in such areas; prices of foreign exports; domestic and international drilling activity; price and availability of
alternate fuel sources; the value of the U.S. dollar relative to other major currencies; the level and effect of trading in
27
commodity markets; the effect of worldwide energy conservation measures and governmental regulations. Any substantial or
extended decline in the price of oil and gas could have a negative impact on our business, liquidity, financial condition and
results of operations.
Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material
inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of
our reserves and may have a material adverse effect on our financial condition.
The process of estimating oil and gas reserves is complex involving decisions and assumptions in evaluating the available
geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production,
oil and gas prices, revenues, taxes and quantities of recoverable oil and gas reserves might vary from those estimated. Any
variance could materially affect the estimated quantities and present value of proved reserves. In addition, we may adjust
estimates of proved reserves to reflect production history, development, prevailing oil and gas prices and other factors, many of
which are beyond our control. Such adjustments could negatively impact our ability to obtain financing.
The estimates of our reserves as of December 31, 2013 are based upon various assumptions about future production
levels, prices and costs that may not prove to be correct over time. In particular, estimates of oil and gas reserves, future net
revenue from proved reserves and the standardized measure thereof for our oil and gas interests are based on the assumption
that future oil and gas prices remain the same as the twelve month first-day-of-the-month average oil and gas prices for the year
ended December 31, 2013. The average realized sales prices as of such date used for purposes of such estimates were $2.98 per
thousand cubic feet (Mcf) of gas and $91.45 per barrel of oil. The December 31, 2013 estimates also assume that the working
interest owners will make future capital expenditures which are necessary to develop and realize the value of proved reserves.
The standardized measure of future net cash flows from our proved reserves is not necessarily the same as the current
market value of our estimated reserves.
Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present
value of our reserves. As required by SEC regulations, we base our present value of estimated future oil and gas revenues on
prices and costs in effect at the time of the estimate. However, actual future net cash flows from our properties will be affected
by numerous factors not subject to our control and will be affected by factors such as:
•
•
•
•
•
•
•
decisions and activities of the well operators;
supply of and demand for oil and gas;
actual prices we receive for oil and gas;
actual operating costs;
the amount and timing of capital expenditures;
the amount and timing of actual production; and
changes in governmental regulations or taxation.
The timing of production will affect the timing of actual future net cash flows from proved reserves, and thus their actual
present value. In addition, the 10% discount factor we use when calculating discounted future net cash flow, which is required
by the SEC, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks
associated with us or the oil and gas industry in general. Any material inaccuracies in our reserve estimates or underlying
assumptions will materially affect the quantities and present value of our reserves.
Our reserves and production will decline from their current levels.
The rate of production from oil and gas properties generally declines as reserves are produced. Our reserves will decline
as they are produced which could materially and adversely affect our future cash flow, liquidity and results of operations.
Our oil and gas production may be subject to interruptions that could have a material and adverse effect on us.
Our oil and gas production may be interrupted, or shut in, from time to time for various reasons, including as a result of
accidents, weather conditions, loss of gathering, processing, compression or transportation facility access or field labor issues,
or intentionally as a result of market conditions such as oil and gas prices that the operators of our mineral leases, whose
decisions we do not control, deem uneconomic. If a substantial amount of production is interrupted, our business, liquidity and
results of operations could be materially and adversely affected.
28
We may acquire properties that are not as commercially productive as we initially believed.
From time to time, we seek to acquire oil and gas properties. Although we perform reviews of properties to be acquired in
a manner that we believe is consistent with industry practices, reviews of records and properties may not necessarily reveal
existing or potential problems, nor may they permit a buyer to become sufficiently familiar with the properties in order to
assess fully their deficiencies and potential. Even when problems with a property are identified, we may assume environmental
and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements. Moreover, there are
numerous uncertainties inherent in estimating quantities of oil and gas reserves, actual future production rates and associated
costs with respect to acquired properties. Actual reserves, production rates and costs may vary substantially from those assumed
in our estimates.
We do not insure against all potential losses and could be materially and adversely affected by unexpected liabilities.
The exploration for, and production of, oil and gas can be hazardous, involving natural disasters and other unforeseen
occurrences such as blowouts, cratering, fires and loss of well control, which can damage or destroy wells or production
facilities, result in injury or death, and damage property and the environment. We maintain insurance against many, but not all,
potential losses or liabilities arising from operations on our property in accordance with what we believe are customary
industry practices and in amounts and at costs that we believe to be prudent and commercially practicable. In addition, we
require third party operators to maintain customary and commercially practicable types and limits of insurance, but potential
losses or liabilities may not be covered by such third party’s insurance which may subject us to liability as the mineral estate
owner. The occurrence of any of these events and any costs or liabilities incurred as a result of such events could have a
material adverse effect on our business, financial condition and results of operations.
We have limited control over the activities on properties we do not operate and are unable to ensure their proper
operation and profitability.
Many of the properties in which we have working interests are operated by other companies and involve third-party
working interest owners. As a result, we have limited ability to influence or control the operation or future development of such
properties, including compliance with environmental, safety and other regulations, or the amount of capital expenditures that
we will be required to fund with respect to such properties. Moreover, we are dependent on the other working interest owners
of such projects to fund their contractual share of the capital expenditures of such projects. These limitations and our
dependence on the operator and other working interest owners for these projects could cause us to incur unexpected future costs
and materially and adversely affect our business, liquidity, financial condition and results of operations.
In addition, operators determine when and where to drill wells and we have no influence over these decisions. The
success and timing of the drilling and development activities on our non-operated properties therefore depends upon a number
of factors currently outside of our control, including the operator’s timing and amount of capital expenditures, expertise and
financial resources, inclusion of other participants in drilling wells and use of technology, and the operators of our properties
may not have the same financial and other resources as other oil and gas companies with whom they compete. Further, new
wells may not be productive or may not produce at a level to enable us to recover all or any portion of our capital investment
where we have a non-operating working interest.
The ability to sell and deliver oil and gas produced from wells on our mineral interests could be materially and adversely
affected if adequate gathering, processing, compression and transportation services are not obtained.
The sale of oil and gas produced from wells on our mineral interests depends on a number of factors beyond our control,
including the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and
transportation facilities owned or operated by third parties. These facilities may be temporarily unavailable due to market
conditions, mechanical reasons or other factors or conditions, and may not be available in the future on terms the operator
considers acceptable, if at all. In addition, federal, state and provincial governments in the United States and Canada have
issued or are considering issuance of additional regulations governing transportation of crude oil and its byproducts by rail.
Such regulations could increase the cost of transportation or limit the availability of suitable rail cars or both. Any significant
change in market or other conditions affecting these facilities or the availability of these facilities, including due to the failure
or inability to obtain access to these facilities on terms acceptable to the operator or at all, could materially and adversely affect
our business, liquidity, financial condition and results of operations.
A significant portion of our Louisiana owned net mineral acres are subject to prescription of non-use under Louisiana
law.
A significant portion of our Louisiana owned net mineral acres were severed from surface ownership and retained by
creation of one or more mineral servitudes shortly before our 2007 spin-off. Under Louisiana law, a mineral servitude that is
not producing minerals or which has not been the subject of good-faith drilling operations will cease to burden the property
29
upon the tenth anniversary of the date of its creation. Upon such event, the mineral rights effectively will revert to the surface
owner and we will no longer own the right to lease, explore for or produce minerals from such acreage.
Weather, climate and climate change regulation may have a significant and adverse impact on us.
Demand for gas is, to a significant degree, dependent on weather and climate, which impacts, among other things, the
price we receive for the commodities produced from gas wells and, in turn, our cash flow and results of operations. For
example, relatively warm temperatures during a winter season generally result in relatively lower demand for gas, higher
inventory (as less gas is used to heat residences and businesses) and, as a result, relatively lower prices for gas production.
Drilling for and production of oil and gas also can be impacted by weather and climate. Specifically, cold temperatures or
significant precipitation or both can restrict operation of machinery or access to well sites by personnel or equipment. These
restrictions may reduce our production and, in turn, our cash flow and results of operations.
Also, the EPA has proposed regulations for the purpose of restricting greenhouse gas emissions from stationary sources.
Such regulatory and legislative proposals to restrict greenhouse gas emissions, or to address climate change generally, could
increase our operating costs as well operators incur costs to comply with new rules. Such increased costs may include
installation of new or expanded emissions control systems, purchase of allowances to authorize greenhouse gas emissions, and
increased taxes. Regulation of greenhouse gases may also occur at the state level. Depending on legislation that may ultimately
be enacted or regulations that may be adopted at the Federal or state level, there could be increased costs, operational delays
and other burdens affecting the oil and gas industry. This could have a material effect on our oil and gas production operations
and on the operators conducting activities on our properties and on cash flows we receive from them.
Risks Related to our Other Natural Resources Operations
Our water interests may require governmental permits, the consent of third parties and/or completion of significant
transportation infrastructure prior to commercialization, all of which are dependent on the actions of others.
Many jurisdictions require governmental permits to withdraw and transport water for commercial uses, the granting of
which may be subject to discretionary determinations by such jurisdictions regarding necessity. In addition, we do not own the
executory rights related to our non-participating royalty interest, and as a result, third-party consent from the executor rights
owner(s) would be required prior to production. The process to obtain permits can be lengthy, and governmental jurisdictions or
third parties from whom we seek permits or consent may not provide the approvals we seek. We may be unable to secure
buyers at commercially economic prices for water that we have a right to extract and transport, and transportation infrastructure
across property not owned or controlled by us is required for transport of water prior to commercial use. Such infrastructure can
require significant capital and may also require the consent of third parties. We may not have cost effective means to transport
water from property we own, lease or manage to buyers. As a result, we may lose some or all of our investment in water assets,
or our returns may be diminished.
If the Rome, Georgia Mill Complex were to permanently cease operations, the price we receive for our wood fiber may
decline, and the cost of delivering logs to alternative customers could increase.
The majority of our wood fiber is sold for use at a Rome, Georgia mill complex, portions of which are owned by
International Paper and portions of which are owned by Georgia-Pacific. A significant portion of our other natural resources
revenues are generated through sales to the Rome, Georgia mill complex, which is a significant consumer of wood fiber within
the immediate area in which a substantial portion of our Georgia timberlands are located. If one or both portions of the Rome,
Georgia mill complex were to permanently cease operations, were not willing to pay for wood fiber at prices we deem
acceptable or were to cease purchasing wood fiber from us, we may not be able to enter into agreements with alternative
customers for the wood fiber, any agreements with alternative customers we do enter into may be for lower rates than we
currently receive and the cost of delivering wood fiber to such alternative customers could increase.
Our ability to harvest and deliver timber may be affected by our sales of timberland and may be subject to other
limitations, which could adversely affect our operations.
Sales of our timberland reduce the amount of timber that we have available for harvest. In addition, weather conditions,
timber growth cycles, access limitations, availability of contract loggers and haulers, and regulatory requirements associated
with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including
damage by fire, insect infestation, disease, prolonged drought, flooding and other natural disasters. Although damage from such
natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any
damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain
insurance coverage with respect to damage to our timberlands.
The revenues, income and cash flow from operations for our other natural resources segment are dependent to a
significant extent on the pricing of our products and our continued ability to harvest timber at adequate levels.
30
Other Risks
The market price of and trading volume of our shares of common stock may be volatile.
The market price of our shares of common stock has fluctuated substantially and may continue to fluctuate in response to
the following factors, many of which are beyond our control:
•
•
•
•
•
•
•
•
•
fluctuations in our operating results, including results that vary from expectations of management, analysts and
investors;
changes in investors’ and analysts’ perception of the business risks and conditions of our business;
broader market fluctuations;
general financial, economic and political conditions;
regulatory changes affecting our industry generally or our businesses and operations;
environmental regulations and liabilities that could have a negative effect on our operating results;
announcements of strategic developments, acquisitions, financings and other material events by us or our
competitors;
the sale of a substantial number of shares of our common stock held by existing security holders in the public
market; and
general conditions in the real estate and mineral resources industries.
The stock markets in general have experienced extreme volatility that has at times been unrelated to the operating
performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common
stock, make it difficult to predict the market price of our common stock in the future and cause the value of our common stock
to decline.
Provisions of Delaware law, our charter documents, our shareholder rights plan, the indenture governing the convertible
senior notes and the stock purchase contracts under the 6.00% tangible equity units may impede or discourage a takeover,
which could cause the market price of our common stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the
ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In
addition, our board of directors has the power, without stockholder approval, to designate the terms of one or more series of
preferred stock and issue shares of preferred stock. We have implemented a shareholders’ rights plan, called a poison pill,
which would substantially reduce or eliminate the expected economic benefit to an acquirer from acquiring us in a manner or
terms not approved by our board of directors. These and other impediments to third party acquisition or change of control could
limit the price investors are willing to pay for shares of our common stock, which could in turn reduce the market price of our
common stock. In addition, upon the occurrence of a fundamental change under the terms of the convertible senior notes or the
tangible equity units, certain repurchase rights and early settlement rights would be triggered under the indenture governing the
convertible senior notes and the stock purchase contracts under the 6.00% tangible equity units, respectively. In such event, the
increase of the conversion or early settlement rate, as applicable, in connection with certain make-whole fundamental change
transactions under the terms of the convertible senior notes or the stock purchase contracts, respectively, could discourage a
potential acquirer.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Our principal executive offices are located in Austin, Texas, where we lease approximately 32,000 square feet of office
space. We also lease office space in Atlanta, Georgia; Dallas, Texas; Denver, Colorado; Fort Worth, Texas; and Lufkin, Texas.
We believe these offices are suitable for conducting our business.
For a description of our properties in our real estate, oil and gas and other natural resources segments, see “Business —
Real Estate”, “Business — Oil and Gas” and “Business — Other Natural Resources”, respectively, in Part I, Item 1 of this
Annual Report on Form 10-K.
31
Item 3.
Legal Proceedings.
We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary
course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of
any of the proceedings should not have a material adverse effect on our financial position or long-term results of operations or
cash flows. It is possible, however, that charges related to these matters could be significant to results of operations or cash
flow in any single accounting period.
Item 4.
Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our common stock is traded on the New York Stock Exchange. The high and low sales prices in each quarter in 2013 and
2012 were:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the Year
Shareholders
2013
Price Range
2012
Price Range
High
Low
High
Low
$
$
$
$
$
22.82
24.68
22.57
23.59
24.68
$
$
$
$
$
16.99
19.44
19.51
18.42
16.99
$
$
$
$
$
17.12
15.97
18.63
17.80
18.63
$
$
$
$
$
13.87
12.00
11.13
13.61
11.13
Our stock transfer records indicated that as of March 5, 2014, there were approximately 3,501 holders of record of our
common stock.
Dividend Policy
We currently intend to retain any future earnings to support our business and do not anticipate paying cash dividends in
the foreseeable future. The declaration and payment of any future dividends will be at the discretion of our Board of Directors
after taking into account various factors, including without limitation, our financial condition, earnings, capital requirements of
our business, the terms of any credit agreements or indentures to which we may be a party at the time, legal requirements,
industry practice, and other factors that our Board of Directors deems relevant.
Issuer Purchases of Equity Securities(a)
Period
Month 10 (10/1/2013 — 10/31/2013)
Month 11 (11/1/2013 — 11/30/2013)
Month 12 (12/1/2013 — 12/31/2013)
Total
Total
Number of
Shares
Purchased(b)
Average
Price Paid
per Share
47
$
— $
— $
47
21.76
—
—
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan or
Programs
—
—
—
—
Maximum
Number of
Shares That
May Yet be
Purchased
Under the
Plans or
Programs
4,997,855
4,997,855
4,997,855
_____________________
(a) On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of
our common stock. We have purchased 2,002,145 shares under this authorization, which has no expiration date. We have
32
no repurchase plans or programs that expired during the period covered by the table above and no repurchase plans or
programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
(b)
Includes shares withheld to pay taxes in connection with vesting of restricted stock awards and exercises of stock options.
Performance Graph
In 2013, we composed an index of our peers consisting of Alexander & Baldwin, Inc., AV Homes Inc., Approach
Resources, Inc., BRE Properties, Inc., Consolidated-Tomoka Land Co., Cousins Properties Incorporated, Contango Oil and Gas
Co., Goodrich Petroleum Corp., Magnum Hunter Resources Corp., Matador Resources Co., Penn Virginia Corp., Petroquest
Energy Inc., Post Properties, Inc., Potlatch Corporation, PS Business Parks, Inc., Resolute Energy Corp., The St. Joe Company,
and Tejon Ranch Co. In 2012, we changed our peer group to represent a mix of real estate and oil and gas exploration
companies following our acquisition of Credo. Our 2012 custom peer group (Old Custom Peer Index) consisted of AV Homes
Inc., Matador Resources Co., Approach Resources, Inc., Bluegreen Corporation, BRE Properties, Inc., Consolidated-Tomoka
Land Co., Cousins Properties Incorporated, Contango Oil and Gas Co., Goodrich Petroleum Corp., Magnum Hunter Resources
Corp., Penn Virginia Corp., Petroquest Energy Inc., Post Properties, Inc., Potlatch Corporation, Resolute Energy Corp., The St.
Joe Company, and Tejon Ranch Co. Our cumulative total shareholder return for the last five years compared to the Russell
2000 Index, New Custom Peer Index, and to the Old Custom Peer Index was as shown in the following graph (assuming $100
invested on January 1, 2008):
Pursuant to SEC rules, returns of each of the companies in the Peer Index are weighted according to the respective
company’s stock market capitalization at the beginning of each period for which a return is indicated.
33
Item 6.
Selected Financial Data.
Revenues:
Real estate
Oil and gas
Other natural resources
Total revenues
Segment earnings (loss):
Real estate(a)
Oil and gas
Other natural resources
Total segment earnings (loss)
Items not allocated to segments:
General and administrative expense(b)
Share-based compensation expense
Gain on sale of assets(c)
Interest expense
Other corporate non-operating income(d)
Income before taxes
Income tax expense(e)
Net income attributable to Forestar Group Inc.
Diluted net income per common share
Average diluted common shares outstanding
At year-end:
Assets
Debt
Noncontrolling interest
Forestar Group Inc. shareholders’ equity
Ratio of total debt to total capitalization
For the Year
2013
2012
2011
2010
2009
(In thousands, except per share amount)
$
$
$
$
$
248,011
$
120,115
$
106,168
$
68,269
$
72,313
10,721
331,045
68,454
18,859
6,507
93,820
(20,597)
(16,809)
—
(20,004)
119
36,529
(7,208)
29,321
0.80
36,813
$
$
$
$
44,220
8,256
172,591
53,582
26,608
29
80,219
(25,176)
(14,929)
16
(19,363)
191
20,958
(8,016)
12,942
0.36
35,482
$
$
$
$
24,448
4,957
135,573
(25,704)
19,783
(1,867)
(7,788)
(20,110)
(7,067)
61,784
(17,012)
368
10,175
(3,021)
7,154
0.20
35,781
$
$
$
$
24,790
8,301
101,360
(4,634)
22,846
4,995
23,207
(17,341)
(11,596)
28,607
(16,446)
1,164
7,595
(2,470)
5,125
0.14
36,377
$
$
$
$
$
1,172,152
$
918,434
$
794,857
$
789,324
$
357,407
5,552
709,845
294,063
4,059
529,488
221,587
1,686
509,526
221,589
4,715
509,564
94,436
36,256
15,559
146,251
3,182
32,370
9,622
45,174
(22,399)
(11,998)
104,047
(20,459)
375
94,740
(35,633)
59,107
1.64
36,102
784,734
216,626
5,879
512,456
33%
36%
30%
30%
30%
_____________________
(a) Real estate segment earnings (loss) include non-cash impairments of $1,790,000 in 2013, $45,188,000 in 2011,
$11,271,000 in 2010 and $10,619,000 in 2009. Real estate segment earnings (loss) also include the effects of net (income)
loss attributable to noncontrolling interests.
(b)
In 2012, general and administrative expense includes $6,323,000 in costs associated with our acquisition of Credo and in
2011 includes $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of
terms available to us in the credit markets.
(c) Gain on sale of assets in 2011, 2010 and 2009 represents gains from timberland sales in accordance with our strategic
initiatives announced first quarter 2009 and completed in 2011.
(d)
(e)
In 2010, other corporate non-operating income principally represents interest income related to a loan to a third-party
equity investor in the resort development located at our Cibolo Canyons project. We received payment in full plus interest
in fourth quarter 2010.
In 2013, income tax expense includes a benefit from recognition of $6,326,000 of previously unrecognized tax benefits
upon lapse of the statute of limitations for a previously reserved tax position.
34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Caution Concerning Forward-Looking Statements
This Annual Report on Form 10-K and other materials we have filed or may file with the Securities and Exchange
Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking
statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,”
“intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our
current views with respect to future events and are subject to risk and uncertainties. We note that a variety of factors and
uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements.
Factors and uncertainties that might cause such differences include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
general economic, market or business conditions in Texas or Georgia, where our real estate activities are
concentrated;
our ability to achieve some or all of our strategic initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
significant customer concentration;
future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such
approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and timing of such
payments;
accuracy of estimates and other assumptions related to investment in and development of real estate, the expected
timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income
taxes, share-based compensation, oil and gas reserves, revenues, capital expenditures and lease operating expense
accruals associated with our oil and gas working interests, and depletion of our oil and gas properties;
the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects
and the regions in which they are located;
fluctuations in costs and expenses;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;
demand for multifamily communities, which can be affected by a number of factors including local markets and
economic conditions;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
our realization of the expected benefits since our acquisition of CREDO Petroleum Corporation (Credo);
risks associated with oil and gas exploration, drilling and production activities;
fluctuations in oil and gas commodity prices;
government regulation of exploration and production technology, including hydraulic fracturing;
the results of financing efforts, including our ability to obtain financing with favorable terms, or at all;
our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our
senior secured credit facility, indentures and other debt agreements;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;
inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal
or usage;
the final resolutions or outcomes with respect to our contingent and other liabilities related to our business; and
our ability to execute our growth strategy and deliver acceptable returns from acquisitions and other investments.
35
Other factors, including the risk factors described in Item 1A of this Annual Report on Form 10-K, may also cause actual
results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and
it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent
to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-
looking statement.
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by
law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking
statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of
unanticipated events.
Strategy
Our strategy is:
• Recognizing and responsibly delivering the greatest value from every acre; and
• Growing through strategic and disciplined investments.
2014 Strategic Initiatives
On February 13, 2014, we announced Growing FORward, new strategic initiatives designed to further enhance
shareholder value by:
• Growing segment earnings through strategic and disciplined investments,
•
Increasing returns, and
• Repositioning non-core assets.
Results of Operations for the Years Ended 2013, 2012 and 2011
A summary of our consolidated results by business segment follows:
For the Year
2013
2012
2011
(In thousands)
Revenues:
Real estate
Oil and gas
Other natural resources
Total revenues
Segment earnings (loss):
Real estate
Oil and gas
Other natural resources
Total segment earnings (loss)
Items not allocated to segments:
General and administrative expense
Share-based compensation expense
Gain on sale of assets
Interest expense
Other corporate non-operating income
Income before taxes
Income tax expense
$
$
$
248,011
$
120,115
$
$
$
72,313
10,721
331,045
68,454
18,859
6,507
93,820
(20,597)
(16,809)
—
(20,004)
119
36,529
(7,208)
$
$
44,220
8,256
172,591
53,582
26,608
29
80,219
(25,176)
(14,929)
16
(19,363)
191
20,958
(8,016)
Net income attributable to Forestar Group Inc.
$
29,321
$
12,942
$
106,168
24,448
4,957
135,573
(25,704)
19,783
(1,867)
(7,788)
(20,110)
(7,067)
61,784
(17,012)
368
10,175
(3,021)
7,154
36
In 2013, we essentially achieved our 2012 Triple in FOR strategic initiatives to triple total segment EBITDA, oil and gas
production and total residential lot sales compared with our four-year average from 2008 to 2011. Significant aspects of our
results of operations follow:
2013
• Real estate segment earnings benefited from the sale of Promesa, a 289-unit multifamily property we developed in
Austin, for $41,000,000, which generated approximately $10,881,000 in segment earnings. In addition, segment
earnings also benefited from increased residential lot sales activity, residential and commercial tract sales and
interest income associated with yield accretion from a loan we hold secured by a mixed-use community in
Houston.
• Oil and gas segment earnings decreased principally due to lower oil and gas production volumes associated with
royalties and due to reduced lease bonus and delay rental payments received from our owned mineral interests,
which were partially offset by higher working interest production volumes and prices attributable to our
exploration and production operations principally as result of our acquisition of Credo in third quarter 2012.
• Other natural resources segment earnings benefited from higher levels of timber harvesting activity driven by
increased customer demand compared to 2012. In addition, segment earnings also benefited from a $3,828,000
gain from a partial termination of a timber lease related to land sold from a consolidated venture near Atlanta,
Georgia.
•
Share-based compensation increased principally as result of our higher stock price in 2013 and its impact on cash-
settled awards.
2012
• Real estate segment earnings benefited from a $11,675,000 gain from the sale of our 25 percent ownership
interest in Palisades West LLC, a $10,180,000 gain from the sale of Broadstone Memorial, a 401-unit multifamily
investment property in Houston, $8,247,000 in earnings from an unconsolidated venture’s sale of Las Brisas, a
414-unit multifamily property near Austin, a $3,401,000 gain from a consolidated venture’s bulk sale of 800 acres
near Dallas, and increased residential lot and commercial tract sales activity.
• Oil and gas segment earnings benefited from increased lease bonus revenues, higher production volume and
earnings attributable to exploration and production operations from our acquisition of Credo in third quarter 2012,
partially offset by lower oil and gas prices and increased depletion and production severance taxes due to higher
production volumes.
• Other natural resources segment earnings increased principally as a result of higher levels of harvesting activity.
• General and administrative expense includes $6,323,000 in transaction costs paid to outside advisors associated
with our acquisition of Credo in 2012.
Share-based compensation increased principally as a result of our higher stock price in 2012 and its impact on
cash-settled awards.
Interest expense includes a $4,448,000 loss on extinguishment of debt in connection with amendment and
extension of our term loan.
•
•
2011
• Real estate segment earnings were negatively impacted by $45,188,000 of non-cash impairment charges
principally associated with residential development projects located near Atlanta, Denver, and the Texas gulf coast
and with our decision to acquire certain assets from CL Realty and TEMCO, ventures in which we owned a 50
percent interest. Segment earnings were positively impacted by increased undeveloped land sales and higher
residential lot and tract sales. In addition, segment earnings were positively impacted by $3,083,000 as result of
settled litigation and reallocation from us to noncontrolling financial interests of a previously recognized loss
related to foreclosure of a lien on a property owned by a consolidated venture.
• Oil and gas segment earnings declined primarily due to lower lease bonus revenues which was partially offset by
increased oil production volumes and higher average oil prices.
• Other natural resources segment earnings decreased principally due to lower harvest volume as a result of selling
over 217,000 acres of timberland since year-end 2008 and increased costs associated with developing our water
resources initiatives.
37
• General and administrative expenses includes $3,187,000 in costs paid to outside advisors associated with
proposed private debt offerings that we withdrew as a result of deterioration of terms available to us in the credit
markets.
• Gain on sale of assets represents the sale of about 57,000 acres of timberland for $87,061,000 in accordance with
our 2009 strategic initiatives which we completed in 2011.
Current Market Conditions
U.S. single-family residential market conditions continued to improve in 2013, driven by a growing demand for homes
and a tightening supply of homes available for sale. Housing demand has been fueled primarily by job growth, high housing
affordability largely due to relatively low mortgage rates, and increased consumer confidence. Inventories of unsold homes are
at historically low levels in many areas. In addition, declining finished lot inventories and supply of developable raw land is
increasing demand for our developed lots, principally in the major markets of Texas. However, challenging mortgage
qualification requirements for purchasers continue to impact housing markets. Multifamily market conditions continue to be
strong, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven
primarily by limited housing inventory, reduced single-family mortgage credit availability, and the increased propensity to rent
among the 18 to 34 year old demographic of the U.S. population.
Oil prices have continued to strengthen over the last year and generally have been stronger over the last two and one-half
years. Gas prices are up over 35 percent from year ago levels, but are significantly lower than realized prices over the last
decade. Prolonged cold weather throughout the 2012 - 2013 heating season has taken working gas in storage below the
midpoint of the five year average causing gas prices to recover from their lows of a year ago. Exploration and development
activity continues to be oil focused due to the premium price of oil over gas when comparing energy equivalency and due to the
U.S. being net importers of crude oil while current estimates of domestic gas producing supplies are believed to be sufficient.
Business Segments
We manage our operations through three business segments:
• Real estate,
• Oil and gas, and
• Other natural resources.
We evaluate performance based on earnings before unallocated items and income taxes. Segment earnings consist of
operating income, equity in earnings of unconsolidated ventures’, gain on sale of assets, interest income on loans secured by
real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of
general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other
corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the
accounting policy note to the consolidated financial statements.
We operate in cyclical industries. Our operations are affected to varying degrees by supply and demand factors and
economic conditions including changes in interest rates, availability of mortgage credit, consumer and home builder sentiment,
new housing starts, real estate values, employment levels, changes in the market prices for oil, gas, and timber, and the overall
strength or weakness of the U.S. economy.
Real Estate
We own directly or through ventures about 130,000 acres of real estate located in ten states and 14 markets. Our real
estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-
use communities. We own about 95,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in
Texas. We target investments principally in our strategic growth corridors, regions across the southern half of the United States
that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate
investment. We own and manage our projects either directly or through ventures. Our real estate segment revenues are
principally derived from the sales of residential single-family lots and tracts, undeveloped land and commercial real estate and
from the operation of income producing properties, primarily a hotel and multifamily properties we may develop and sell as a
merchant builder.
38
A summary of our real estate results follows:
Revenues
Cost of sales
Operating expenses
Interest income on loan secured by real estate
Gain on sale of assets
Equity in earnings (loss) of unconsolidated ventures
Less: Net income attributable to noncontrolling interests
Segment earnings (loss)
For the Year
2013
2012
2011
(In thousands)
$
248,011
$
120,115
$
(156,794)
(31,952)
59,265
6,840
—
8,089
(5,740)
(70,039)
(34,160)
15,916
3,430
25,273
13,897
(4,934)
$
68,454
$
53,582
$
106,168
(62,975)
(36,184)
7,009
—
—
(30,626)
(2,087)
(25,704)
In 2013, revenues include $41,000,000 from the sale of Promesa, a 289-unit multifamily property we developed in
Austin, and $31,595,000 associated with our multifamily construction contracts we received as a general contractor associated
with the development of two multifamily venture properties. We are reimbursed for costs paid to subcontractors plus earn a
development and construction fee on certain projects, both of which are included in commercial and income producing
properties revenue. Revenues associated with multifamily construction contracts were $10,977,000 in 2012.
In 2013, cost of sales include $32,149,000 related to multifamily construction contract costs we incurred as general
contractor and paid to sub-contractors associated with our development of two multifamily venture properties, compared to
$10,977,000 in 2012. In addition in 2013, cost of sales includes $29,707,000 in carrying value related to Promesa, a 289-unit
multifamily property we developed as a merchant builder and sold and a $554,000 loss we incurred as general contractor for
one of our multifamily construction projects. Cost of sales includes non-cash impairment charges of $1,790,000 in 2013
associated with a master-planned community and golf club near Dallas. We did not have any non-cash impairment charges in
2012. In 2011, we recorded non-cash impairment charges of $11,525,000 principally associated with owned and consolidated
residential development projects near Denver and the Texas gulf coast.
Interest income represents yield accreted from a loan we hold secured by a mixed-use community in Houston in which
we have a first lien position.
In 2012, gain on sale of assets principally includes a $11,675,000 gain from the sale of our 25 percent ownership interest
in Palisades West LLC, a $10,180,000 gain from the sale of Broadstone Memorial, a 401-unit multifamily investment property
in Houston, and a $3,401,000 gain from a consolidated venture’s bulk sale of 800 acres in Dallas.
In 2012, segment results include $8,247,000 in earnings associated with an unconsolidated venture’s sale of Las Brisas, a
414-unit multifamily property near Austin, for $40,400,000. Equity in earnings from unconsolidated ventures includes
$11,013,000 in earnings related to this sale, of which ($2,766,000) was allocated to net income attributable to noncontrolling
interests.
Equity in earnings (loss) of unconsolidated ventures include non-cash impairment charges of $33,663,000 in 2011
principally associated with our decision to acquire certain assets from our CL Realty and TEMCO ventures. In 2011, as a result
of entering into the agreement with CL Realty to acquire certain assets, we offset $2,164,000 of deferred gains against our share
of venture losses.
Revenues in our owned and consolidated ventures consist of:
Residential real estate
Commercial real estate
Undeveloped land
Commercial and income producing properties
Other
Total revenues
For the Year
2013
2012
2011
(In thousands)
107,858
$
51,369
$
18,338
22,757
95,327
3,731
8,320
18,924
38,656
2,846
36,586
736
40,517
26,820
1,509
248,011
$
120,115
$
106,168
$
$
Residential real estate revenues principally consist of the sale of single-family developed lots to national, regional and
local homebuilders. In 2013 and 2012, residential real estate revenues increased principally as a result of higher lot sales
volume due to increased demand for finished lot inventory by homebuilders in markets where supply has diminished.
39
In 2013 and 2012, commercial tract sales benefited from increased demand in our Texas markets as commercial credit
became more readily available to third-party purchasers. In 2013, we sold 99 commercial acres for $17,398,000 or $176,000
per acre from our owned and consolidated projects located in San Antonio, Dallas, Austin and Houston, which generated
combined segment earnings of $11,687,000. In 2012, we sold 83 commercial acres for $9,551,000 or $114,800 per acre from
our owned and consolidated projects located in San Antonio, Houston, Dallas and Fort Worth, of which, $929,000 of profit was
deferred as result of our continued involvement in post-closing construction obligations and will be recognized using the
percentage of completion method. These sales generated combined segment earnings of $5,359,000.
Market conditions for undeveloped land sales remains challenging due to limited credit availability, low consumer
confidence and alternate investment options to buyers in the marketplace. In 2013, undeveloped land sales generated
$10,788,000 in segment earnings due to sale of 6,700 acres for $22,757,000, or approximately $3,400 per acre. In 2012,
undeveloped land sales include the sale of 6,800 acres for $12,800,000 in three retail transactions resulting in combined
segment earnings of $9,700,000. In 2011, undeveloped land sales include the bulk sale of 9,700 acres in Georgia for
$17,980,000, resulting in segment earnings of $13,396,000.
In 2013, segment results benefited from the sale of Promesa, a 289-unit multifamily property in Austin which we
developed as a merchant builder and operated until the sale. As a result, we recognized segment earnings of $10,881,000
related to its sale for $41,000,000. In addition, in 2013, income producing properties revenue increased primarily as a result of
construction revenues of $31,595,000 associated with our multifamily guaranteed maximum price construction contracts as
general contractor compared to construction revenues of $10,977,000 in 2012.
In 2013, revenues related to our 413 guest room hotel in Austin were down $1,140,000 when compared with 2012,
primarily from lower food and beverage revenues due to increased renovation activity.
Other revenues primarily result from sale of stream and impervious cover credits to homebuilders.
Units sold in our owned and consolidated ventures consist of:
Residential real estate:
Lots sold
Average price per lot sold
Commercial real estate:
Acres sold
Average price per acre sold
Undeveloped land:
Acres sold
Average price per acre sold
Operating expenses consist of:
Employee compensation and benefits
Property taxes
Professional services
Depreciation and amortization
Other
Total operating expenses
For the Year
2013
2012
2011
1,469
926
58,101
$
52,016
$
567
56,697
99
83
4
175,972
$
114,846
$
185,344
6,703
3,395
$
9,190
2,059
$
17,130
2,365
For the Year
2013
2012
2011
(In thousands)
8,073
$
10,261
$
7,188
4,206
3,117
9,368
7,903
4,050
4,340
7,606
31,952
$
34,160
$
7,798
7,881
4,938
5,259
10,308
36,184
$
$
$
$
$
In 2013 and 2012, employee compensation and benefits increased when compared with 2011, primarily due to higher
incentive compensation as a result of our improved operating results and value creation activities. In 2013, the increase in
higher incentive compensation was somewhat offset by a decrease in other employee compensation and benefits expense
primarily related to staffing changes.
Other operating expenses for 2013 includes a $776,000 loss on retirement of assets associated with capital improvements
at our hotel and a $583,000 loss on sale of assets related to a project in Austin.
40
Information about our real estate projects and our real estate ventures follows:
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects
Residential lots remaining
Commercial acres remaining
Undeveloped land and land in the entitlement process
Number of projects
Acres in entitlement process
Acres undeveloped
Ventures accounted for using the equity method:
Ventures’ lot sales (for the year)
Lots sold
Average price per lot sold
Ventures’ entitled, developed and under development projects
Number of projects
Residential lots remaining
Commercial acres sold (for the year)
Average price per acre sold
Commercial acres remaining
Ventures’ undeveloped land and land in the entitlement process
Acres sold (for the year)
Average price per acre sold
Acres undeveloped
Year-End
2013
2012
67
17,070
1,832
13
25,830
85,515
414
58,872
$
7
3,291
72
67
20,084
2,051
15
26,070
89,610
439
52,080
7
3,716
12
226,206
$
239,754
236
108
2,737
$
5,547
321
135
2,600
5,655
$
$
$
We underwrite real estate development projects based on a variety of assumptions incorporated into our development
plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are
periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business
conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such
that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment charge for such
project.
Our net investment in owned and consolidated real estate by geographic location at year-end 2013 follows:
State
Texas
Georgia
Colorado
California
Tennessee
North Carolina
Other
Total
Entitled,
Developed,
and Under
Development
Projects
Undeveloped
Land and
Land in
Entitlement
Income
Producing
Properties
(In thousands)
Total
$
291,287
$
8,456
$
32,868
$
332,611
22,503
21,959
8,915
9,230
—
7,793
56,181
—
21,322
130
—
278
—
14,272
—
12,471
11,799
—
78,684
36,231
30,237
21,831
11,799
8,071
$
361,687
$
86,367
$
71,410
$
519,464
Approximately 64 percent of our net investment in real estate is in the major markets of Texas.
41
As of year-end 2013, multifamily community projects under various stages of development are as follows:
Project
East Morehead
Littleton
Westmont
Project
Eleven
360°
Midtown Cedar Hill
Planning Phase(a)
Market
Ownership
Interest(b)
Acquisition of
Property
Project Cost
Incurred to Date
North Carolina
Denver
Tennessee
100% $
100% $
100% $
($ in thousands)
10,628
13,553
10,937
$
$
$
1,171
719
1,048
Under Construction
Market
Austin
Denver
Dallas
Ownership
Interest(b)
Estimated
Project Cost(c)
Project Cost
Incurred to
Date
Planned
Number of
Units
Planned
Rentable
Square Feet
Estimated
Completion
Date
Estimated
Stabilization
Date(d)
25% $
20% $
100% $
($ in thousands)
40,244
49,120
35,600
$
$
$
37,123
31,645
7,886
257
304
354
203,757
2Q 2014
248,684
1Q 2015
317,525
2Q 2015
3Q 2014
3Q 2015
3Q 2015
_____________________
(a) Acquired development site planned for future construction.
(b) We may develop and own these projects directly or through ventures. In January 2014, we formed a venture to develop our
Westmont project in which our ownership interest is 30 percent.
(c) Estimated project costs represent the estimated costs of the project through stabilization. Significant estimation is required
to derive these costs and final costs may differ from these estimates. The projected stabilization dates are also estimates
and are subject to change as the project proceeds through the development process.
(d) Estimated stabilization represents the quarter within which we estimate the project will achieve 90% economic occupancy.
Oil and Gas
Our oil and gas segment is focused on the exploration, development and production of oil and gas on our owned and
leasehold mineral interests.
We lease portions of our 590,000 owned net mineral acres located principally in Texas, Louisiana, Georgia and Alabama
to other oil and gas companies in return for a lease bonus, delay rentals and a royalty interest, and we may negotiate an option
to participate in oil and gas exploration and development or we may elect to drill as an operator. At year-end 2013, we have
about 30,000 net acres under lease to others with expiration dates ranging between 2014 to 2018, and about 36,000 net acres
leased that are held by production related to our owned mineral interests and 547 gross productive wells operated by others on
our owned mineral acres.
On September 28, 2012, we acquired 100 percent of the outstanding common stock of Credo in an all cash transaction for
$14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000
of Credo’s outstanding debt. Credo was an independent oil and gas exploration, development and production company based in
Denver, Colorado. The acquired assets included leasehold interests in the Bakken and Three Forks formations of North Dakota,
the Lansing – Kansas City formation in Kansas and Nebraska, and the Tonkawa and Cleveland formations in Texas.
With this acquisition, we became an independent oil and gas exploration, development and production company. As of
year-end 2013, our leasehold interests include 247,000 net mineral acres leased from others principally located in Nebraska and
Kansas primarily targeting the Lansing – Kansas City formation, in the Texas Panhandle primarily targeting the Tonkawa and
Cleveland formations, and in North Dakota primarily targeting the Bakken and Three Forks formations. Our leasehold interests
include approximately 7,000 net mineral acres in the Bakken and Three Forks formations. We have 37,000 net acres held by
production and 464 gross oil and gas wells with working interest ownership, of which 182 are operated by us.
42
A summary of our oil and gas results follows:
Revenues
Cost of oil and gas producing activities
Operating expenses
Gain on sale
Equity in earnings of unconsolidated ventures
Segment earnings
For the Year
2013
2012
2011
(In thousands)
$
72,313
$
44,220
$
(42,067)
(13,312)
16,934
1,333
592
(10,842)
(7,279)
26,099
—
509
$
18,859
$
26,608
$
24,448
(2,062)
(3,997)
18,389
—
1,394
19,783
Our 2013 oil and gas results include full year results attributed to exploration and production operations related to our
acquisition of Credo, which generated $50,894,000 in revenues and $7,112,000 in segment earnings.
Oil and gas segment earnings decreased in 2013 principally due to lower oil and gas production volumes, lower oil prices
associated with royalties, and reduced lease bonus and delay rental payments received from our owned mineral interests, which
were partially offset by higher working interest production volumes and prices and earnings attributable to exploration and
production operations as result of our acquisition of Credo in third quarter 2012. In addition, dry hole and seismic exploration
costs were $10,486,000 in 2013 compared with $1,754,000 in 2012. This increase is as a result of higher level of drilling
activity in Kansas and Nebraska.
In 2013, gain on sale of $1,333,000 is related to assigning our leasehold interests in 1,365 net mineral acres in Oklahoma
to third parties for a three-year term.
Equity in earnings of unconsolidated ventures includes our share of royalty revenue from producing wells in the Barnett
Shale gas formation.
Revenues consist of:
Oil production(a)
Gas production
Other
Total revenues
For the Year
2013
2012
2011
(In thousands)
62,379
$
31,592
$
6,657
3,277
4,611
8,017
72,313
$
44,220
$
$
$
14,711
4,528
5,209
24,448
_____________________
(a) Oil production includes revenues from oil, condensate and natural gas liquids (NGLs). In 2013, 2012 and 2011, NGLs
accounted for $1,639,000, $2,685,000, and $1,051,000 of oil production revenues.
In 2013, oil and gas production revenues from exploration and production operations increased due to our acquisition of
Credo at third quarter-end 2012. Increased oil production contributed $32,766,000 and higher oil prices contributed $5,643,000.
Increased gas production contributed about $2,299,000 and higher gas prices contributed $51,000. In 2013, oil and gas
production royalty revenues from our owned mineral interests decreased principally as a result of lower production volumes
and lower oil prices. Decreased oil production volume negatively impacted revenues by $7,293,000 and lower oil prices by
$329,000. Decreased gas production volume negatively impacted revenues by $1,022,000, offset by higher gas prices
increasing revenues by $718,000 compared with 2012.
In 2012, oil and gas production revenues from exploration and production operations related to our acquisition of Credo
at third quarter-end 2012 contributed $9,318,000 and $817,000 of oil production and gas production revenues. In 2012, oil and
gas production royalty revenues from our owned mineral interests increased principally as a result of increased oil and gas
production which was partially offset by decreases in oil and gas prices. Decrease in oil price is due to impact of decrease in
prices of NGLs. Increased oil production contributed about $9,955,000 which was offset by about $2,392,000 due to a decrease
in oil prices. Increased gas production contributed about $1,257,000 which was offset by about $1,991,000 due to a decrease in
gas prices.
In 2013, other revenues include $2,486,000 in lease bonus payments received from leasing 9,200 owned mineral acres to
third parties for an average of about $270 per acre and $588,000 related to delay rental payments received compared to
$5,319,000 in lease bonus payments received from leasing 8,900 owned mineral acres to third parties for an average of about
$600 per acre and $2,219,000 related to delay rental payments received in 2012.
43
Oil and gas produced and average unit prices related to our royalty and working interests follows:
Consolidated entities:
Oil production (barrels)(a)
Average price per barrel
Gas production (millions of cubic feet)
Average price per thousand cubic feet
Our share of ventures accounted for using the equity method:
Gas production (millions of cubic feet)
Average price per thousand cubic feet
Total consolidated and our share of equity method ventures:
Oil production (barrels)(a)
Average price per barrel
Gas production (millions of cubic feet)
Average price per thousand cubic feet
Total BOE (barrel of oil equivalent)(b)
Average price per barrel of oil equivalent
For the Year
2013
2012
2011
697,700
89.40
1,912.0
3.48
$
$
371,300
85.09
1,667.7
2.76
$
$
246.5
3.25
$
321.3
2.40
$
697,700
89.40
2,158.5
3.46
1,057,500
66.04
$
$
$
371,300
85.09
1,989.0
2.71
702,800
52.61
$
$
$
$
$
$
$
$
$
151,900
96.84
1,128.6
4.01
493.4
3.81
151,900
96.84
1,622.0
3.95
422,200
50.02
_____________________
(a) Oil production includes natural gas liquids (NGLs).
(b) Gas is converted to barrels of oil equivalent (BOE) using the conversion of six Mcf to one barrel of oil.
In 2013, operations acquired with Credo produced approximately 526,400 barrels of oil at an average price of $90.66 per
barrel and 856 MMcf of gas at an average price of $3.70 per Mcf.
In fourth quarter 2012, operations acquired with Credo produced approximately 116,600 barrels of oil at an average price
of $79.94 per barrel and 225 MMcf of gas at an average price of $3.64 per Mcf.
At year-end 2013, there were 1,011 productive gross wells of which 547 were operated by others on our owned mineral
acres and 473 wells on our leased mineral acres, of which 182 were operated by us. At year-end 2012, there were 936
productive gross wells of which 542 were operated by others on our owned mineral acres and 394 wells were associated with
our third quarter acquisition of Credo, of which 136 were operated by us. At year-end 2011, there were 530 productive gross
wells that were operated by others on our owned mineral acres.
Cost of oil and gas producing activities consists of:
Depletion and amortization
Production costs
Exploration costs
Other
Total cost of oil and gas producing activities
For the Year
2013
2012
2011
(In thousands)
18,417
$
4,526
$
12,477
10,959
214
4,472
1,754
90
42,067
$
10,842
$
$
$
21
1,492
549
—
2,062
Depletion and amortization represent non-cash costs of producing oil and gas associated with our working interests and
are computed based on the units of production method. Production costs principally represent our share of production
severance taxes related to both our royalty and working interests and lease operating expenses associated with working interest
wells. Exploration costs principally represent exploratory dry hole costs, geological and geophysical and seismic study costs. In
2013 and 2012, cost of oil and gas producing activities includes $38,825,000 and $6,892,000 related to operations acquired
from Credo in third quarter 2012.
44
Operating expenses consist of:
Employee compensation and benefits
Professional and consulting services
Depreciation
Property taxes
Other
Total operating expenses
For the Year
2013
2012
2011
(In thousands)
8,168
$
4,250
$
1,557
1,135
436
2,016
13,312
$
769
429
312
1,519
7,279
$
2,063
241
315
257
1,121
3,997
$
$
In 2013, operating expenses increased as a result our acquisition of Credo in third quarter 2012 and staffing to operate as
an independent exploration, development and production company.
Oil and Gas Owned Mineral Interests
A summary of our oil and gas owned mineral interests(a) at year-end 2013 follows:
State
Texas
Louisiana
Georgia
Alabama
California
Indiana
Unleased
Leased(b)
Held By
Production(c)
Total(d)
205,000
125,000
152,000
40,000
1,000
1,000
524,000
20,000
10,000
—
—
—
—
27,000
9,000
—
—
—
—
30,000
36,000
252,000
144,000
152,000
40,000
1,000
1,000
590,000
_____________________
(a)
(b)
Includes ventures.
Includes leases in primary lease term or for which a delayed rental payment has been received. In the ordinary course of
business, leases covering a significant portion of leased owned mineral acres may expire from time to time in a single
reporting period.
(c) Acres being held by production are producing oil or gas in paying quantities.
(d) Texas, Louisiana, California and Indiana net acres are calculated as the gross number of surface acres multiplied by our
percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface
acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling.
Oil and Gas Mineral Interests Leased
A summary of our net oil and gas mineral acres leased from others at year-end 2013, principally as a result of operations
acquired from Credo, follows:
State
Nebraska
Kansas
Oklahoma
Texas
North Dakota
Other(a)
_____________________
(a) Excludes approximately 8,000 net acres of overriding royalty interests.
45
Undeveloped
Held By
Production(a)
Total
138,000
24,000
15,000
11,000
3,000
19,000
210,000
5,000
5,000
17,000
2,000
4,000
4,000
37,000
143,000
29,000
32,000
13,000
7,000
23,000
247,000
Other Natural Resources
Our other natural resources segment manages our timber holdings, recreational leases and water resource initiatives. We
have about 117,000 acres of timber we own directly or through ventures, primarily in Georgia, and about 14,000 acres of
timber under lease. Our other natural resources segment revenues are principally derived from the sales of wood fiber from our
land and leases for recreational uses. In addition, we have water interests in about 1.5 million acres, including a 45 percent
nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately
1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 20,000 acres of groundwater leases in central Texas. We
have not received significant revenue or earnings from these interests.
A summary of our other natural resources results follows:
Revenues
Cost of other natural resources
Operating expenses
Gain on sale of assets
Equity in earnings of unconsolidated ventures
Segment earnings
For the Year
2013
2012
2011
(In thousands)
$
10,721
$
8,256
$
(2,033)
(6,065)
2,623
3,828
56
$
6,507
$
(2,995)
(5,989)
(728)
694
63
29
$
4,957
(1,928)
(5,100)
(2,071)
181
23
(1,867)
In 2013, other natural resources segment earnings increased principally as a result of higher average prices and increased
harvesting activity compared with 2012 and a $3,828,000 gain associated with partial termination of a timber lease related to
2,400 acres of undeveloped land sold in Georgia from a consolidated venture.
Revenues consist of:
Fiber
Recreational leases and other
Total revenues
Fiber sold consists of:
Pulpwood tons sold
Average pulpwood price per ton
Sawtimber tons sold
Average sawtimber price per ton
Total tons sold
Average price per ton
For the Year
2013
2012
2011
9,584
1,137
10,721
2013
375,200
11.86
234,300
22.31
609,500
15.88
$
$
$
$
$
(In thousands)
6,332
1,924
8,256
For the Year
2012
370,200
9.83
123,700
21.77
493,900
12.82
$
$
$
$
$
$
$
$
$
$
3,229
1,728
4,957
2011
266,200
8.69
56,800
16.13
323,000
10.00
In 2013, total fiber tons sold increased principally as a result of accelerated harvesting levels to meet customer demand.
The majority of our fiber sales were to International Paper at market prices.
Information about our recreational leases follows:
Average recreational acres leased
Average price per leased acre
For the Year
2013
2012
2011
120,400
129,800
$
9.08
$
8.73
$
174,500
8.80
46
Operating expenses consist of:
Employee compensation and benefits
Professional and consulting services
Facility and long-term timber lease costs
Other
Total operating expenses
For the Year
2013
2012
2011
$
$
(In thousands)
2,280
$
1,526
$
2,813
416
556
3,570
478
415
6,065
$
5,989
$
1,289
3,040
455
316
5,100
The increase in employee compensation and benefits in 2013 compared with 2012 was primarily due to staff additions to
support our water operations. The decrease in professional and consulting services in 2013 when compared to 2012 was
primarily due to additional professional fees incurred in 2012 related to obtaining or extending groundwater leases.
Items Not Allocated to Segments
Unallocated items represent income and expenses managed on a company-wide basis and include general and
administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate
non-operating income and expense. General and administrative expenses principally consist of accounting and finance, tax,
legal, human resources, internal audit, information technology and our board of directors. These functions support all of our
business segments and are not allocated.
General and administrative expense
General and administrative expenses consist of:
Employee compensation and benefits
$
Professional services
Insurance costs
Facility costs
Depreciation and amortization
Other
Total general and administrative expenses
For the Year
2013
2012
2011
(In thousands)
7,523
$
9,468
944
766
1,114
5,361
8,783
$
3,416
898
838
833
5,829
5,662
6,578
1,083
800
1,393
4,594
$
20,597
$
25,176
$
20,110
In 2013 and 2012, employee compensation and benefits increased primarily due to higher incentive compensation
associated with our improved operating results and value creation activities. In 2012, professional services include $6,323,000
in transaction costs paid to outside advisors associated with our acquisition of Credo. In 2011, professional services include
$3,187,000 in costs paid to outside advisors associated with proposed private debt offerings that we withdrew as a result of
deterioration in terms available to us in the capital markets.
Share-based compensation expense
Our share-based compensation expense fluctuates because a portion of our awards are cash settled and as a result are
affected by changes in the market price of our common stock. In 2013 and 2012, share-based compensation increased when
compared with 2011 principally as a result of increase in our stock price and its impact on cash-settled awards. Our share price
increased by 23 percent in 2013 since year-end 2012 and increased by 15 percent in 2012 since year-end 2011.
Gain on sale of assets
Gain on sale of assets represents gains associated with our 2009 strategic initiatives, which we completed in 2011. In
2011, we recognized gains of $61,784,000 from the sale of 57,000 acres of timberland.
Interest expense
The increase in interest expense in 2013 is primarily due to additional interest expense associated with the issuance of
3.75% convertible senior notes in February 2013 when compared with interest expense in 2012, which includes $4,448,000 loss
on extinguishment of debt in connection with the 2012 amendment and extension of our term loan. Interest expense in 2012,
excluding loss on extinguishment of debt, decreased when compared with 2011 principally due to lower interest rates and lower
average levels of debt outstanding.
47
Income taxes
Our effective tax rate and the benefit attributable to noncontrolling interests was 17 percent and five percent in 2013, 31
percent and seven percent in 2012, and 25 percent and six percent in 2011. Our 2013 rate includes a 15 percent benefit from the
recognition of previously unrecognized tax benefits due to lapse of the statute of limitations for a previously reserved tax
position as well as benefits from percentage depletion. Our 2012 rate includes benefits from percentage depletion and a
detriment from nondeductible acquisition expenses and our 2011 rate includes benefits from percentage depletion and
charitable contributions related to timberland conservation.
We have not provided a valuation allowance for our federal deferred tax asset because we believe it is likely it will be
recoverable in future periods based on considerations including taxable income in prior carryback years, future reversals of
existing temporary differences, tax planning strategies and future taxable income. If these sources of income are not sufficient
in future periods, we may be required to provide a valuation allowance for our deferred tax asset.
Capital Resources and Liquidity
Sources and Uses of Cash
We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal cash requirements are for the
acquisition and development of real estate and investment in oil and gas leasing and production activities, either directly or
indirectly through ventures, taxes, interest and compensation. Our principal sources of cash are proceeds from the sale of real
estate and timber, the cash flow from oil and gas and income producing properties, borrowings, and reimbursements from
utility and improvement districts. Our cash flows are affected by the timing of the payment of real estate development
expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially
depending on many factors including the size of the project, state and local permitting requirements and availability of utilities,
and by the timing of oil and gas leasing and production activities. Working capital is subject to operating needs, the timing of
sales of real estate and timber, oil and gas leasing and production activities, collection of receivables, reimbursement from
utility and improvement districts and the payment of payables and expenses.
We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected
cash flows, growth and operating capital requirements and capital market conditions. We may, at any time, be considering or be
in discussions with respect to the purchase or sale of our common stock, debt securities, convertible securities or a combination
thereof.
Cash Flows from Operating Activities
Cash flows from our real estate development activities, undeveloped land sales, income producing properties, timber
sales, income from oil and gas properties and recreational leases and reimbursements from utility and improvement districts are
classified as operating cash flows.
In 2013, net cash provided by operations was $88,777,000 primarily due to higher earnings and due to the sale of
Promesa, a 289-unit multifamily property we developed and sold for $41,000,000, of which $10,881,000 is included in pre-tax
income and $29,707,000 of carrying value is included in real estate cost on sales on the statement of cash flows. These cash
flows were partially offset by real estate development and acquisition expenditures, which includes the acquisition of one
community development site in Nashville for $6,841,000, an additional tract on a previously acquired multifamily site in
Charlotte for $4,849,000 and the acquisition of a multifamily site in Littleton, Colorado for $13,553,000.
In 2012, net cash used for operations was $22,218,000 principally due to expenditures for real estate development and
acquisitions significantly exceeding non-cash real estate cost of sales, principally as result of acquiring real estate assets from
CL Realty and Temco for $47,000,000. Subsequent to closing of this acquisition, we received $23,370,000 from the ventures,
representing our pro-rata share of distributable cash. We invested $17,334,000 in construction of a 289-unit multifamily
development property near Austin which was completed at year-end 2012. We acquired two multifamily development sites in
Charlotte and Nashville for $16,651,000, acquired a single-family development project near Dallas for $8,951,000 and we paid
$21,678,000 in federal and state taxes, net of refunds. In addition, we received $24,294,000 in net proceeds from a consolidated
venture’s bulk sale of 800 acres near Dallas, $10,759,000 in reimbursements from two new multifamily ventures which
represents our venture partners’ pro-rata share of costs we previously incurred and $8,524,000 in reimbursements from utility
and improvement districts.
In 2011, net cash provided by operations was $39,852,000 principally due to the sale of 57,000 acres of timberland in
accordance with our 2009 strategic initiatives generating net proceeds of $86,018,000. Expenditures for development and
acquisitions exceeded non-cash real estate cost of sales principally due to our acquisition of a non-performing loan secured by a
lien on approximately 900 acres of developed and undeveloped land near Houston for $21,137,000 and $32,789,000 in real
estate acquisitions principally located in various Texas markets. We received $10,461,000 in reimbursements from utility and
48
improvement districts, of which $8,656,000 was related to our Cibolo Canyons project and was accounted for as a reduction of
our investment. We paid $25,335,000 in federal and state income taxes, net of refunds.
Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures, business acquisitions and investment in
oil and gas properties and equipment are classified as investing activities. In addition, proceeds from the sale of property and
equipment, software costs and expenditures related to reforestation activities are also classified as investing activities.
In 2013, net cash used for investing activities was $103,927,000 principally due to our investment of $96,069,000 in oil
and gas properties and equipment associated with our exploration and production operations. In addition, we invested
$11,828,000 in property and equipment, software and reforestation of which $7,245,000 is related to capital expenditures on
our 413 guest room hotel in Austin.
In 2012, net cash used for investing activities was $105,119,000 principally due to our acquisition of Credo for
approximately $152,915,000 including debt, net of cash acquired. In addition, we invested $21,416,000 in oil and gas
properties and equipment. Partially offsetting our investment in Credo and oil and gas properties were proceeds received from
the sale of our 25 percent ownership interest in Palisades West LLC for $32,095,000 and $29,474,000 in net proceeds from the
sale of Broadstone Memorial, a 401-unit multifamily investment property in Houston. We also invested $2,735,000 in property
and equipment, software and reforestation and received $10,336,000 in net distributions from unconsolidated ventures, of
which $6,850,000 is associated with a venture’s sale of Las Brisas, a 414-unit multifamily property near Austin.
In 2011, net cash used for investing activities was $4,895,000. We invested $4,304,000 in oil and gas properties and
equipment associated with our working interests and $2,044,000 in property, equipment, software and reforestation. Net cash
return of investment in our unconsolidated ventures was $1,060,000.
Cash Flows from Financing Activities
In 2013, net cash provided by financing activities was $197,096,000 principally due to net proceeds of $120,795,000
from the issuance of 3.75% convertible senior notes and net proceeds of $144,998,000 from the issuance of 6.00% tangible
equity units partially offset by net debt repayments of $106,076,000, of which $68,000,000 is related to payoff of debt
outstanding under our revolving line of credit and $18,902,000 is related to paying off a loan associated with Promesa. We plan
to use the remaining net proceeds from the issuance of our convertible senior notes and tangible equity units for general
corporate purposes, including investments in oil and gas exploration and drilling and real estate acquisition and development.
In 2012, net cash provided by financing activities was $119,415,000. Our net increase in borrowings of $129,416,000
was principally used to fund our acquisition of Credo and our real estate development and acquisition expenditures and our
investment in oil and gas properties. We paid $5,883,000 in financing fees primarily related to the amendment and extension of
our senior secured credit facility. Also, in 2012, our other consolidated debt decreased by $57,491,000, of which $26,500,000
was due to the sale of Broadstone Memorial, a 401-unit multifamily investment property in Houston and the buyer’s
assumption of the debt and $30,991,000 was due to our consolidated venture’s bulk sale of 800 acres in Dallas and the buyer’s
assumption of debt. We also purchased about 94,450 shares of our common stock for $1,409,000 which was offset by
$1,159,000 in proceeds from exercise of stock options.
In 2011, net cash used for financing activities was $22,040,000 as we repurchased about 907,000 shares of our common
stock for $12,977,000 and incurred $3,750,000 in deferred financing fees primarily related to supplementing and amending our
senior secured credit facility.
Real Estate Acquisition and Development Activities
We secure entitlements and develop infrastructure, primarily for single family residential and mixed-use communities.
We also develop and own directly or through ventures multifamily communities as income producing properties, primarily in
our target markets. Once these multifamily communities reach stabilization, we market the properties for sale.
We categorize real estate development and acquisition expenditures as operating activities on the statement of cash flows.
These development and acquisition expenditures include costs for development of residential lots and mixed-used communities
and multifamily community projects we develop and sell as a merchant builder.
49
A summary of our real estate acquisition and development expenditures is shown below:
Community Development
Acquisitions:
Barrington
Bel-Aire
Heron Pond
Lakes of Prosper
CL Realty/TEMCO
Morgan Farms
Habersham
Park Place
Development:
Owned projects
Consolidated venture projects
Multifamily
Acquisitions:
Pre-acquisition projects
Eleven
360°
Cedar Hill
Westmont
East Morehead
Littleton
Development:
Promesa
Eleven(a)
360°(a)
Cedar Hill
Westmont
East Morehead
Littleton
Undeveloped Land/Mitigation
Acquisitions:
Dierks Galo
Cochran Creek
Development:
Owned projects
Total
_____________________
Market
Houston
Atlanta
Atlanta
Dallas
Various
Nashville
Charlotte
Dallas
Various
Various
Various
Austin
Denver
Dallas
Nashville
Charlotte
Colorado
Austin
Denver
Dallas
Tennessee
Charlotte
Denver
San Antonio
Atlanta
Various
2013
2012
2011
(In thousands)
$
— $
— $
8,950
—
—
—
—
6,841
3,878
2,177
46,314
19,567
797
—
—
—
—
4,849
13,553
—
—
—
4,232
1,048
996
719
—
—
1,638
548
1,003
8,951
22,468
—
—
—
17,073
13,701
962
—
—
—
10,872
5,779
—
16,783
(3,157)
(6,572)
87
65
175
—
—
1,935
1,267
$
106,609
$
91,940
$
—
—
—
—
—
—
—
13,117
11,102
—
6,406
7,309
2,266
—
—
—
7,782
465
107
355
—
—
—
7,858
—
1,280
66,997
(a)
Includes reimbursements received from the ventures for land and pre-development costs.
Drilling and Other Exploration and Development Activities
In 2013, we drilled or participated as a non-operator in approximately 120 gross wells (47 net). At year-end 2013, there
were 1,011 gross productive wells.
In 2013, we acquired leasehold interests principally in Nebraska, Kansas, Texas, Oklahoma and North Dakota for
$35,806,000 representing over 100,000 net mineral acres. Also, leasehold interests of approximately 30,000 net mineral acres
expired in the normal course of business in year 2013.
50
Regional allocation of our capital expenditures incurred and paid for drilling and completion activity in 2013 is shown
below:
Bakken and Three Forks formations of North Dakota
Lansing - Kansas City formation of Nebraska and Kansas
Other formations principally in Texas and Oklahoma
Drilling and
Completion
Expenditures
Actual
2013
(In thousands)
$
$
34,985
13,592
11,686
60,263
Our total cash capital expenditures for leasehold acquisitions, drilling and completion costs were $96,069,000 in 2013. Our
accrued capital expenditures for leasehold acquisitions and drilling and completion costs at year-end 2013 were $12,976,000
and are included in other accrued expense in our consolidated balance sheets. These oil and gas property additions will be
reflected as cash used for investing activities in the period the accrued payables are settled.
Liquidity
At year-end 2013, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017,
and a $200,000,000 revolving line of credit maturing September 14, 2015 (with a one-year extension option). Both the term
loan and the revolving loan bear interest, at our option, using either (i) the LIBOR rate plus 4% or (ii) 3% plus the greater of (a)
KeyBank prime rate, (b) Federal funds rate plus one-half percent, or (c) LIBOR rate plus 1%. The term loan and revolving line
of credit may be prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of
credit, of which $3,653,000 is outstanding at year-end 2013. Total borrowings under our senior secured credit facility
(including the face amount of letters of credit) may not exceed a borrowing base formula.
At year-end 2013, net unused borrowing capacity under our senior secured credit facility is calculated as follows:
Borrowing base availability
Less: borrowings
Less: letters of credit
Net unused borrowing capacity
Senior
Credit Facility
(In thousands)
$
$
368,338
(200,000)
(3,653)
164,685
Our net unused borrowing capacity during 2013 ranged from a high of $196,347,000 to a low of $164,685,000. This
facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential real estate sales,
undeveloped land sales, oil and gas leasing and production activities and mineral lease bonus payments received, timber sales,
payment of accounts payables and expenses and capital expenditures.
Our senior secured credit facility and other debt agreements contain financial covenants customary for such agreements
including minimum levels of interest coverage and limitations on leverage. At year-end 2013, we were in compliance with the
financial covenants of these agreements.
The following table details our compliance with the financial and other covenants calculated as provided in the senior
secured credit facility:
Financial Covenant
Interest Coverage Ratio(a)
Revenues/Capital Expenditures Ratio(b)
Total Leverage Ratio(c)
Net Worth(d)
Collateral Value to Loan Commitment Ratio(e)
_____________________
Requirement
Year-End
2013
5.69:1.0
2.85:1.0
32.3%
$668.1 million
1.76:1.0
(a) Calculated as EBITDA (earnings before interest, taxes, depreciation, depletion and amortization), plus non-cash
compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is
applied at the end of each quarter on a rolling four quarter basis.
51
(b) Calculated as total gross revenues (excluding revenues of the Credo entities), plus our pro rata share of the operating
revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated
development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition
expenditures. This covenant is applied at the end of each quarter on a rolling four quarter basis.
(c) Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed
funds, secured liabilities, reimbursement obligations with respect to letters of credit or similar instruments, and our pro-rata
share of joint venture debt outstanding. Adjusted asset value is defined as the sum of unrestricted cash and cash
equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business,
Credo asset value, special improvement district receipts (SIDR) reimbursements value, Cibolo resort special improvement
district hotel occupancy tax (SIDHT) value and other real estate owned at book value without regard to any indebtedness
and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end
of each quarter.
(d) Calculated as the amount by which consolidated total assets (excluding Credo acquisition goodwill over $50,000,000)
exceeds consolidated total liabilities. At year-end 2013, the requirement is $572,799,000 computed as: $460,765,000 plus
85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net
income, on a cumulative basis. This covenant is applied at the end of each quarter.
(e) Calculated as the total collateral value of timberland, high value timberland and our minerals business, raw entitled land
that is part of mortgaged property, Credo asset value, SIDR reimbursements value, SIDHT value divided by total aggregate
loan commitment. This covenant is applied at the end of each quarter.
To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to 10 percent of
the aggregate commitments in place. At year-end 2013 the minimum liquidity requirement was $40,000,000, compared with
$353,549,000 in actual available liquidity based on the net unused borrowing capacity under our senior secured credit facility
plus unrestricted cash and cash equivalents. As of year-end 2013, we were in compliance with these requirements. The failure
to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility. In
addition, we may elect to make distributions so long as the total leverage ratio is less than 30%, the interest coverage is greater
than 3.0:1.0, the revenues / capital expenditures ratio exceeds 1.5:1.0, and available liquidity is not less than $125,000,000. At
year-end 2013, our total leverage ratio exceeded 30 percent and as a result we are prohibited from making distributions until the
above conditions are satisfied.
3.75% Convertible Senior Notes due 2020
On February 26, 2013, we issued $125,000,000 aggregate principal amount of 3.75% Convertible Senior Notes due 2020
(Notes). The Notes pay interest semiannually at a rate of 3.75 percent per annum and mature on March 1, 2020. The Notes have
an initial conversion rate of 40.8351 per $1,000 principal amount (equivalent to a conversion price of approximately $24.49 per
share of common stock and a conversion premium of 37.5 percent based on the closing share price of $17.81 per share of our
common stock on February 20, 2013). The initial conversion rate is subject to adjustment upon the occurrence of certain events.
Prior to November 1, 2019, the Notes are convertible only upon certain circumstances, and thereafter are convertible at any
time prior to the close of business on the second scheduled trading day prior to maturity. Upon conversion, holders will receive
cash, shares of our common stock or a combination thereof at our election.
Net proceeds from the offering were used to repay $68,000,000 under our revolving line of credit, the balance to be used
for general corporate purposes, including investments in oil and gas exploration and drilling and real estate acquisition and
development.
6.00% Tangible Equity Units
On November 27, 2013, we issued $150,000,000 aggregate principal amount of 6.00% tangible equity units (Units). The
total offering was 6,000,000 Units, including an over-allotment option of 600,000 exercised by the underwriters, each with a
stated amount of $25.00. Each Unit is comprised of (i) a prepaid stock purchase contract to be settled by delivery of a number
of shares of our common stock, par value $1.00 per share to be determined pursuant to a purchase contract agreement, and (ii) a
senior amortizing note due December 15, 2016 that has an initial principal amount of $4.2522, bears interest at a rate of 4.50%
per annum and has a final installment payment date of December 15, 2016. The aggregate principal amount of the senior
amortizing notes is $25,619,000. The aggregate number of shares we may issue upon settlement of the stock purchase
contracts will between 6,547,900 shares (the minimum settlement rate) and 7,857,500 (the maximum settlement rate).
Net proceeds of $144,998,000 from the issuance of the Units are designated for general corporate purposes, including
investments in strategic growth opportunities.
52
Contractual Obligations
At year-end 2013, contractual obligations consist of:
Debt(a)
Interest payments on debt
Purchase obligations
Operating leases
Total
Total
2014
2015-16
2017-18
Thereafter
Payments Due or Expiring by Year
(In thousands)
$
$
357,407
$
28,247
$
28,183
$
201,087
$
62,635
50,924
16,311
15,069
50,924
3,283
27,619
—
6,002
14,478
—
4,643
99,890
5,469
—
2,383
487,277
$
97,523
$
61,804
$
220,208
$
107,742
_____________________
(a)
Items included in our balance sheet.
Interest payments on debt include interest payments related to our fixed rate debt and estimated interest payments related
to our variable rate debt. Estimated interest payments on variable rate debt were calculated assuming that the outstanding
balances and interest rates that existed at year-end 2013 remain constant through maturity.
Purchase obligations are defined as legally binding and enforceable agreements to purchase goods and services. Our
purchase obligations include commitments of $11,907,000 for land acquisition and development related to community
development projects and commitments of $39,017,000 for engineering and construction contracts associated with multifamily
projects. The multifamily project obligations typically are reimbursed by equity method ventures on jointly owned projects or
funded by construction loan draws on wholly-owned projects.
Our operating leases are for timberland, facilities, equipment and groundwater. In 2008, we entered into a 10-year
agreement to lease approximately 32,000 square feet in Austin, Texas as our corporate headquarters. At year-end 2013, the
remaining contractual obligation is $6,853,000. Also included in operating leases is a long-term timber lease of about
14,000 acres that has a remaining lease term of 12 years and a remaining contractual obligation of $3,857,000 and about
20,000 acres of groundwater leases in central Texas with remaining contractual obligations of $2,019,000.
Off-Balance Sheet Arrangements
From time to time, we enter into off-balance sheet arrangements to facilitate our operating activities. At year-end 2013,
our off-balance sheet unfunded arrangements, excluding contractual interest payments, purchase obligations, operating lease
obligations and venture contributions included in the table of contractual obligations, consist of:
Performance bonds
Standby letters of credit
Recourse obligations
Total
Payments Due or Expiring by Year
Total
2014
2015-16
2017-18
Thereafter
(In thousands)
$
$
44,336
$
44,336
$
— $
— $
5,873
1,487
3,078
658
2,795
164
51,696
$
48,072
$
2,959
$
—
25
25
$
—
—
640
640
Performance bonds, letters of credit and recourse obligations provided on behalf of certain ventures would be drawn on
due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in
accordance with local codes and ordinances. In connection with our unconsolidated venture operations, at year-end 2013 we
have provided performance bonds and letters of credit aggregating $26,587,000, of which $26,577,000 is related to the
development and construction of a 257-unit multifamily property in Austin estimated to be completed in second quarter 2014.
In 2012, CJUF III RH Holdings, an equity method venture in which we own a 25 percent interest, obtained a senior
secured construction loan in the amount of $23,936,000 to develop a 257-unit multifamily property in downtown Austin, of
which $18,492,000 was outstanding at year-end 2013. We have a construction completion guaranty, a repayment guaranty for
20 percent of the principal balance and unpaid accrued interest, and a standard non-recourse carve-out guaranty. The repayment
guaranty will reduce from 20 percent to 0 percent upon achievement of certain conditions.
In 2012, FMF Peakview, an equity method venture in which we own a 20 percent interest, obtained a senior secured
construction loan in the amount of $31,550,000 to develop a 304-unit multifamily property in Denver, of which $12,533,000
was outstanding at year-end 2013. We have a construction completion guaranty, a repayment guaranty for 25 percent of the
principal and unpaid accrued interest, and a standard non-recourse carve-out guaranty.
53
On January 17, 2014, a venture in which we own a 30 percent interest obtained a senior secured construction loan in the
amount of $51,950,000 to develop a 320-unit multifamily project located in Nashville, Tennessee. The loan is secured by a lien
on the project land and improvements to be constructed, and by a collateral assignment of present and future leases and rents.
We provided the lender with a guaranty of completion of the improvements; a guaranty of repayment of 25 percent of the
principal, repayment of all accrued and unpaid interest, and payment of all operating expenses of the project (except for certain
expenses); and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent to zero percent
of the principal upon achievement of certain conditions.
At year-end 2013, we participate in three equity method partnerships that are variable interest entities. The partnerships
have total assets of $11,304,000 and total liabilities of $43,910,000, which includes $27,277,000 of borrowings classified as
current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings;
however, there is no assurance that this can be done. Although these borrowings are guaranteed by third parties, we may under
certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate
resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these
partnerships is $17,000 at year-end 2013.
Cibolo Canyons — San Antonio, Texas
Cibolo Canyons consists of the JW Marriott® San Antonio Hill Country Resort & Spa development owned by third
parties and a mixed-use development we own. We have about $77,957,000 invested in Cibolo Canyons at year-end 2013.
Resort Hotel, Spa and Golf Development
In 2007, we entered into agreements to facilitate third-party construction and ownership of the JW Marriott ® San
Antonio Hill Country Resort & Spa, which includes a 1,002 room destination resort and two PGA Tour ® Tournament Players
Club ® (TPC) golf courses. Under these agreements, we agreed to transfer to third-party owners 700 acres of undeveloped land,
to provide $30,000,000 cash and to provide $12,700,000 of other consideration principally consisting of golf course
construction materials, all of which has been provided.
In exchange for our commitment to the resort, the third-party owners assigned to us certain rights under an agreement
between the third-party owners and a legislatively created Special Improvement District (SID). This agreement includes the
right to receive from the SID nine percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected
as taxes by the SID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by the SID to
the third-party owners of the resort through 2020. In addition, these payments will be net of debt service, if any, on bonds
issued by the SID collateralized by hotel occupancy tax and other resort sales tax through 2034.
The amounts we collect under this agreement are dependent on several factors including the amount of revenues
generated by and ad valorem taxes imposed on the resort and the amount of any applicable debt service incurred by the SID. As
a result, there is significant uncertainty as to the amount and timing of collections under this agreement. Until these
uncertainties are clarified, amounts collected under the agreement will be accounted for as a reduction of our investment in the
resort development. The resort began operations in January 2010.
In 2013, we received $4,400,000 in reimbursements from the SID. Since inception, we have received $15,156,000 in
reimbursements and have accounted for this as a reduction of our investment. At year-end 2013, we have $28,118,000 invested
in the resort development.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include about 1,566 residential lots and about 150
commercial acres designated for multifamily and retail uses, of which 810 lots and 130 commercial acres have been sold
through year-end 2013.
In 2007, we entered into an agreement with the SID providing for reimbursement of certain infrastructure costs related to
the mixed-use development. Reimbursements are subject to review and approval by the SID and unreimbursed amounts accrue
interest at 9.75 percent. The SID’s funding for reimbursements is principally derived from its ad valorem tax collections and
bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service
expenses.
Because the amount of each reimbursement is dependent on several factors, including timing of SID approval and the
SID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and
timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and
reimbursement of approved infrastructure costs from the SID. We have not recognized income from interest due, but not
collected. As these uncertainties are clarified, we will modify our accounting accordingly.
54
Through year-end 2013, we have submitted and received approval for reimbursement of about $65,465,000 of
infrastructure costs and have received reimbursements totaling $23,670,000, of which $600,000 was received in 2013,
$550,000 was received in 2012, $1,750,000 was received in 2011, all were accounted for as a reduction of our investment in the
mixed-use development. At year-end 2013, we have $41,795,000 in approved and pending reimbursements, excluding interest.
At year-end 2013, we have $49,839,000 invested in the mixed-use development.
Accounting Policies
Critical Accounting Estimates
In preparing our financial statements, we follow generally accepted accounting principles, which in many cases require
us to make assumptions, estimates, and judgments that affect the amounts reported. Our significant accounting policies are
included in Note 1 to the Consolidated Financial Statements. Many of these principles are relatively straightforward. There are,
however, a few accounting policies that are critical because they are important in determining our financial condition and
results of operations and involve significant assumptions, estimates and judgments that are difficult to determine. We must
make these assumptions, estimates and judgments currently about matters that are inherently uncertain, such as future
economic conditions, operating results and valuations, as well as our intentions. As the difficulty increases, the level of
precision decreases, meaning actual results can, and probably will, differ from those currently estimated. We base our
assumptions, estimates and judgments on a combination of historical experiences and other factors that we believe are
reasonable. We have reviewed the selection and disclosure of these critical accounting estimates with our Audit Committee.
•
Investment in Real Estate and Cost of Real Estate Sales — In allocating costs to real estate owned and real estate
sold, we must estimate current and future real estate values. Our estimates of future real estate values sometimes
must extend over periods 15 to 20 years from today and are dependent on numerous assumptions including our
intentions and future market and economic conditions. In addition, when we sell real estate from projects that are
not finished, we must estimate future development costs through completion. Differences between our estimates and
actual results will affect future carrying values and operating results.
• Accrued Oil and Gas Revenue — We recognize revenue as oil and gas is produced and sold. There are a significant
amount of oil and gas properties which we do not operate and, therefore, revenue is typically recorded in the month
of production based on an estimate of our share of volumes produced and prices realized. We obtain the most
current available production data from the operators and price indices for each well to estimate the accrual of
revenue. Obtaining production data on a timely basis for some wells is not feasible; therefore we utilize past
production receipts and estimated sales price information to estimate accrual of working interest revenue on all
other non-operated wells each month. Revisions to such estimates are recorded as actual results become known.
•
•
Impairment of Real Estate Long-Lived Assets — Measuring real assets for impairment requires estimating future fair
values based on our intentions as to holding periods, future operating cash flows and the residual value of assets
under review, primarily undeveloped land. Depending on the asset under review, we use varying methods to
determine fair value, such as discounting expected future cash flows, determining resale values by market, or
applying a capitalization rate to net operating income using prevailing rates in a given market. Changes in economic
conditions, demand for real estate, and the projected net operating income for a specific property will inevitably
change our estimates.
Impairment of Oil and Gas Properties — We review our proved oil and gas properties for impairment whenever
events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. We
estimate the expected undiscounted future cash flows of our oil and gas properties and compare such undiscounted
future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is
recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the
carrying amount of the oil and gas properties to fair value. The factors used to determine fair value are subject to our
judgment and expertise and include, but are not limited to, recent sales prices of comparable properties, the present
value of future cash flows, net of estimated operating and development costs using estimates of proved reserves,
future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates
commensurate with the risk and current market conditions associated with realizing the expected cash flows
projected. Because of the uncertainty inherent in these factors, we cannot predict when or if future impairment
charges for proved properties will be recorded.
The assessment of unproved properties to determine any possible impairment requires significant judgment. We
assess our unproved properties periodically for impairment on a property-by-property basis based on remaining
lease terms, drilling results or future plans to develop acreage. Due to the uncertainty inherent in these factors, we
cannot predict the amount of impairment charges that may be recorded in the future.
55
•
•
Impairment of Goodwill — Measuring goodwill for impairment annually requires estimation of future cash flows
and determination of fair values using many assumptions and inputs, including estimated future selling prices and
volumes, estimated future costs to develop and explore, observable market inputs, weighted average cost of capital,
estimated operating expenses and various other projected economic factors. Changes in economic and operating
conditions can affect these assumptions and could result in additional interim testing and goodwill impairment
charges in the future periods.
Share-Based Compensation — We use the Black-Scholes option pricing model to determine the fair value of stock
options. The determination of the fair value of share-based payment awards on the date of grant using an option-
pricing model is affected by the stock price as well as assumptions regarding a number of other variables. These
variables include expected stock price volatility over the term of the awards, actual and projected employee stock
option exercise behaviors (term of option), risk-free interest rate and expected dividends. We have limited historical
experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions.
The expected life was based on the simplified method utilizing the midpoint between the vesting period and the
contractual life of the awards. In 2013 and 2012, the expected stock price volatility was based on a blended rate
utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the
expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their
expected activity and historical trends. We use Monte Carlo simulation pricing model to determine the fair value of
market-leveraged stock units (MSU's). A typical Monte Carlo exercise simulates a distribution of stock prices to
yield an expected distribution of stock prices at the end of the performance period. The simulations are repeated
many times in order to derive a probabilistic assessment of stock performance. The stock-paths are simulated using
assumptions which include expected stock price volatility and risk-free interest rate.
• Asset Retirement Obligations — We make estimates of the future costs of the retirement obligations of our
producing oil and gas properties. Estimating future costs involves significant assumptions and judgments regarding
such factors as estimated costs of plugging and abandonment, timing of settlements, discount rates and inflation
rates. Such cost estimates could be subject to significant revisions in subsequent years due to changes in regulatory
requirements, technological advances and other factors which may be difficult to predict.
•
Income Taxes — In preparing our consolidated financial statements, significant judgment is required to estimate our
income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual
current tax due and assess temporary and permanent differences resulting from differing treatment of items for tax
and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. If needed, we record a valuation allowance against our deferred tax assets. In
addition, when we believe a tax position is supportable but the outcome uncertain, we include the item in our tax
return but do not recognize the related benefit in our provision for taxes. Instead, we record a reserve for
unrecognized tax benefits, which represents our expectation of the most likely outcome considering the technical
merits and specific facts of the position. Changes to liabilities are only made when an event occurs that changes the
most likely outcome, such as settlement with the relevant tax authority, expiration of statutes of limitations, changes
in tax law, or recent court rulings. Adjustments to temporary differences, permanent differences or uncertain tax
positions could materially impact our financial position, cash flow and results of operation.
• Oil and Gas Reserves — The estimation of oil and gas reserves is a significant estimate which affects the amount of
non-cash depletion expense we record as well as impairment analysis we perform. On an annual basis, our
consulting petroleum engineering firm, with our assistance, prepares estimates of crude oil and gas reserves based
on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir
performance history, production data and other available sources of engineering, geological and geophysical
information. Oil and gas prices are volatile and largely affected by worldwide or domestic production and
consumption and are outside our control.
Adopted and Pending Accounting Pronouncements
We adopted several new accounting pronouncements in 2013, the adoption of which did not have a significant effect on
our earnings or financial position. There is one pending accounting pronouncement that we will be required to adopt in 2014,
which we are currently evaluating its impact on our earnings, financial position and disclosures. Please read Note 2 — New
and Pending Accounting Pronouncements to the Consolidated Financial Statements.
Effects of Inflation
Inflation has had minimal effects on operating results the past three years. Our real estate, oil and gas properties, timber,
and property and equipment are carried at historical costs. If carried at current replacement costs, the cost of real estate sold,
timber cut, and depreciation expense would have been significantly higher than what we reported.
56
Legal Proceedings
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business. We
believe we have established adequate reserves for any probable losses, and we do not believe that the outcome of any of these
proceedings should have a material adverse effect on our financial position, long-term results of operations, or cash flow. It is
possible, however, that charges related to these matters could be significant to results of operations or cash flows in any one
accounting period.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our interest rate risk is principally related to our variable-rate debt. Interest rate changes impact earnings due to the
resulting increase or decrease in our variable-rate debt, which was $230,767,000 at year-end 2013 and $290,074,000 at year-
end 2012.
The following table illustrates the estimated effect on our pre-tax income of immediate, parallel, and sustained shifts in
interest rates for the next 12 months on our variable-rate debt at year-end 2013, with comparative year-end 2012 information.
This estimate assumes that debt reductions from contractual payments will be replaced with short-term, variable-rate debt;
however, that may not be the financing alternative we choose.
Change in Interest Rates
2%
1%
(1)%
(2)%
Foreign Currency Risk
We have no exposure to foreign currency fluctuations.
Commodity Price Risk
At Year-End
2013
2012
(In thousands)
$
$
$
$
(4,472) $
(2,308) $
2,308
4,615
$
$
(5,697)
(2,901)
2,901
5,801
We have exposure to commodity price fluctuations from our oil and gas production which can materially affect our
revenues and cash flows. The prices we receive for our production depend on numerous factors beyond our control. Based on
our 2013 production, a 10% decrease in our average realized price received for oil and gas would have reduced our oil and gas
production revenues by $6,238,000 and $747,000. To manage our exposure to commodity price risks associated with the sale
of oil and gas, we may periodically enter into derivative hedging transactions for a portion of our estimated production. We do
not have any commodity derivative positions outstanding at year-end 2013.
57
Item 8.
Financial Statements and Supplementary Data.
Index to Financial Statements
Management’s Annual Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Audited Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Financial Statement Schedule
Schedule III — Consolidated Real Estate and Accumulated Depreciation
Page
59
60
61
62
63
64
65
66
93
58
MANAGEMENT’S ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Forestar is responsible for establishing and maintaining adequate internal control over financial
reporting. Management has designed our internal control over financial reporting to provide reasonable assurance that our
published financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting
principles.
Management is required by paragraph (c) of Rule 13a-15 of the Securities Exchange Act of 1934, as amended, to assess
the effectiveness of our internal control over financial reporting as of each year end. In making this assessment, management
used the Internal Control — Integrated Framework (1992) by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Management conducted the required assessment of the effectiveness of our internal control over financial reporting as of
year-end. Based upon this assessment, management believes that our internal control over financial reporting is effective as of
year-end 2013.
Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included in
this Form 10-K, has also audited our internal control over financial reporting. Their attestation report follows this report of
management.
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Forestar Group Inc.
We have audited Forestar Group Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework) (the COSO criteria). Forestar Group Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Forestar Group Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Forestar Group Inc. as of December 31, 2013 and December 31, 2012, and the related
consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years in the period
ended December 31, 2013 of Forestar Group Inc. and our report dated March 11, 2014 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 11, 2014
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Forestar Group Inc.
We have audited the accompanying consolidated balance sheets of Forestar Group Inc. as of December 31, 2013 and 2012, and
the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years in
the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Forestar Group Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all materials respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Forestar Group Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
framework) and our report dated March 11, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 11, 2014
61
FORESTAR GROUP INC.
CONSOLIDATED BALANCE SHEETS
At Year-End
2013
2012
(In thousands, except
share data)
$
192,307
$
519,464
232,641
41,147
10,947
39,252
5,136
6,112
40,398
66,646
18,102
1,172,152
21,409
5,814
3,822
2,343
3,876
32,927
29,157
357,407
456,755
$
$
$
$
10,361
517,150
158,427
41,546
12,293
33,623
6,455
4,859
54,748
63,868
15,104
918,434
18,320
5,667
4,231
1,168
587
22,648
38,203
294,063
384,887
ASSETS
Cash and cash equivalents
Real estate, net
Oil and gas properties and equipment, net
Investment in unconsolidated ventures
Timber
Receivables, net
Prepaid expenses
Property and equipment, net
Deferred tax asset, net
Goodwill and other intangible assets
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Accounts payable
Accrued employee compensation and benefits
Accrued property taxes
Accrued interest
Income taxes payable
Other accrued expenses
Other liabilities
Debt
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
EQUITY
Forestar Group Inc. shareholders’ equity:
Preferred stock, par value $0.01 per share, 25,000,000 authorized shares, none issued
—
—
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at December 31, 2013
and December 31, 2012
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 2,199,666 shares at December 31, 2013 and 2,327,623 shares at December 31, 2012
Total Forestar Group Inc. shareholders’ equity
Noncontrolling interests
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
36,947
556,676
150,418
(34,196)
709,845
5,552
715,397
$
1,172,152
$
36,947
407,206
121,097
(35,762)
529,488
4,059
533,547
918,434
Please read the notes to the consolidated financial statements.
62
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FORESTAR GROUP INC.
REVENUES
Real estate sales and other
Commercial and income producing properties
Real estate
Oil and gas
Other natural resources
EXPENSES
Cost of real estate sales and other
Cost of commercial and income producing properties
Cost of oil and gas producing activities
Cost of other natural resources
Other operating
General and administrative
GAIN ON SALE OF ASSETS
OPERATING INCOME
Equity in earnings (loss) of unconsolidated ventures
Interest expense
Other non-operating income
INCOME BEFORE TAXES
Income tax expense
NET INCOME
Less: Net (income) attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic
Diluted
NET INCOME PER COMMON SHARE
Basic
Diluted
COMPREHENSIVE INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.
For the Year
2013
2012
2011
(In thousands, except per share amounts)
$
152,684
$
81,459
$
95,327
248,011
72,313
10,721
331,045
(76,628)
(80,166)
(42,067)
(2,033)
(60,359)
(28,376)
38,656
120,115
44,220
8,256
172,591
(40,400)
(29,639)
(10,842)
(2,995)
(55,213)
(32,320)
79,348
26,820
106,168
24,448
4,957
135,573
(44,929)
(18,046)
(2,062)
(1,928)
(49,132)
(23,326)
(289,629)
(171,409)
(139,423)
5,161
46,577
8,737
(20,004)
6,959
42,269
(7,208)
35,061
(5,740)
25,983
27,165
14,469
(19,363)
3,621
25,892
(8,016)
17,876
(4,934)
$
$
$
$
29,321
$
12,942
$
35,365
36,813
0.81
0.80
29,321
$
$
$
35,214
35,482
0.37
0.36
12,942
$
$
$
61,965
58,115
(29,209)
(17,012)
368
12,262
(3,021)
9,241
(2,087)
7,154
35,413
35,781
0.20
0.20
7,154
Please read the notes to the consolidated financial statements.
63
FORESTAR GROUP INC.
CONSOLIDATED STATEMENTS OF EQUITY
Forestar Group Inc. Shareholders
Common Stock
Treasury Stock
Total
Shares
Amount
Additional
Paid-in
Capital
Shares
Amount
Retained
Earnings
Non-
controlling
Interests
(In thousands, except per share amounts)
Balance at December 31, 2010
$
514,279
36,667,210
$ 36,667
$
391,352
(1,216,647)
$ (19,456)
$ 101,001
$
Net income
Distributions to noncontrolling interest
Contributions from noncontrolling interest
Issuances of common stock
Issuances of restricted stock
Issuances from exercises of stock options, net of swaps
Shares withheld for payroll taxes
Shares repurchased
Forfeitures of restricted stock
Share-based compensation
Tax benefit from exercise of restricted stock units and stock
options and vested restricted stock
9,241
(5,259)
143
—
—
1,290
(1,367)
(12,977)
—
5,972
(110)
—
—
—
1,347
39,595
127,580
—
—
—
—
—
—
—
—
1
40
—
—
—
(1)
(40)
—
—
—
—
—
—
—
—
—
—
128
1,342
(9,795)
(180)
—
—
—
—
—
—
—
2
5,972
(110)
(77,562)
(1,367)
(906,708)
(12,977)
(2,164)
—
—
(2)
—
—
7,154
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2011
$
511,212
36,835,732
$ 36,836
$
398,517
(2,212,876)
$ (33,982)
$ 108,155
$
Net income
Distributions to noncontrolling interest
Contributions from noncontrolling interest
Issuances of common stock
Issuances of restricted stock
Issuances from exercises of stock options, net of swaps
Shares withheld for payroll taxes
Shares repurchased
Share-based compensation
Tax benefit from exercise of restricted stock units and stock
options and vested restricted stock
17,876
(3,694)
1,133
—
300
1,159
(968)
(1,409)
7,572
366
—
—
—
18,469
—
92,402
—
—
—
—
—
—
—
19
—
92
—
—
—
—
—
—
—
(19)
(129)
899
—
—
7,572
366
—
—
—
—
27,934
11,372
(59,603)
(94,450)
—
—
—
—
—
—
429
168
(968)
(1,409)
—
—
12,942
—
—
—
—
—
—
—
—
—
Balance at December 31, 2012
$
533,547
36,946,603
$ 36,947
$
407,206
(2,327,623)
$ (35,762)
$ 121,097
$
Net income
Distributions to noncontrolling interest
Contributions from noncontrolling interest
Issuances of restricted stock
Convertible note issuance proceeds, net of issuance costs
and taxes
TEU issuance proceeds, net of issuance costs - 6,000,000
units
Issuances from exercises of stock options, net of swaps
Shares withheld for payroll taxes
Forfeitures of restricted stock
Share-based compensation
Tax benefit from exercise of restricted stock units and stock
options and vested restricted stock
35,061
(7,269)
3,022
3,747
17,058
120,335
2,106
(1,137)
—
9,035
(108)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,597
7,298
17,058
120,335
—
—
(449)
189,864
(8)
10
9,035
(108)
(59,219)
(9,986)
—
—
—
—
—
150
—
—
2,555
(1,129)
(10)
—
—
29,321
—
—
—
—
—
—
—
—
—
—
4,715
2,087
(5,259)
143
—
—
—
—
—
—
—
—
1,686
4,934
(3,694)
1,133
—
—
—
—
—
—
—
4,059
5,740
(7,269)
3,022
—
—
—
—
—
—
—
—
Balance at December 31, 2013
$
715,397
36,946,603
$ 36,947
$
556,676
(2,199,666)
$ (34,196)
$ 150,418
$
5,552
Please read the notes to the consolidated financial statements.
64
FORESTAR GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2013
For the Year
2012
(In thousands)
2011
$
35,061
$
17,876
$
9,241
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income
Adjustments:
Depreciation, depletion and amortization
Change in deferred income taxes
Change in unrecognized tax benefits
Equity in (earnings) loss of unconsolidated ventures
Distributions of earnings of unconsolidated ventures
Proceeds from consolidated ventures’ sale of assets, net
Share-based compensation
Real estate cost of sales
Cost of assets sold
Dry hole exploration costs
Real estate development and acquisition expenditures, net
Acquisition of loan secured by real estate
Reimbursements from utility and improvement districts
Other changes in real estate
Changes in deferred income
Asset impairments
Gain on sale of assets
Other
Changes in:
Notes and accounts receivables
Prepaid expenses and other
Accounts payable and other accrued liabilities
Income taxes
Net cash provided by (used for) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software, reforestation and other
Oil and gas properties and equipment
Investment in unconsolidated ventures
Return of investment in unconsolidated ventures
Business acquisition, net of cash acquired
Proceeds from sale of multifamily property
Proceeds from sale of venture interest
Other
Net cash (used for) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible senior notes, net
Proceeds from issuance of tangible equity units, net
Payments of debt
Additions to debt
Deferred financing fees
Distributions to noncontrolling interests
Exercise of stock options
Repurchases of common stock
Payroll taxes on restricted stock and stock options
Excess income tax benefit from share-based compensation
Net cash (used for) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at year-end
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Capitalized interest
Noncontrolling interests
$
$
$
$
$
Please read the notes to the consolidated financial statements.
65
29,980
5,389
(6,251)
(8,737)
6,360
—
16,809
104,899
—
5,837
(106,609)
—
9,945
3,146
(2,246)
1,790
(5,161)
1,491
(3,864)
(795)
(1,557)
3,290
88,777
(11,828)
(96,069)
(857)
3,494
—
—
—
1,333
(103,927)
120,795
144,998
(106,076)
43,911
(438)
(7,154)
2,106
—
(1,137)
91
197,096
181,946
10,361
192,307
13,818
4,955
816
2,907
$
$
$
$
$
18,926
(6,506)
151
(14,469)
3,251
24,294
14,929
39,360
—
1,069
(91,940)
—
8,524
1,384
1,070
—
(25,983)
(21)
(1,132)
(2,560)
(2,527)
(7,914)
(22,218)
(2,735)
(21,416)
(2,318)
12,654
(152,915)
29,474
32,095
42
(105,119)
—
—
(74,226)
203,642
(5,883)
(3,266)
1,159
(1,409)
(968)
366
119,415
(7,922)
18,283
10,361
12,820
21,678
721
1,032
$
$
$
$
$
10,802
(27,177)
(147)
29,209
6,597
—
7,067
34,137
24,931
—
(66,997)
(21,137)
10,461
(284)
32
11,525
(134)
73
1,359
536
4,549
5,209
39,852
(2,044)
(4,304)
(2,007)
3,067
—
—
—
393
(4,895)
—
—
(123,399)
123,397
(3,750)
(5,124)
1,290
(12,977)
(1,367)
(110)
(22,040)
12,917
5,366
18,283
14,166
25,335
625
8
FORESTAR GROUP INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures, and other
entities in which we have a controlling interest and variable interest entities of which we are the primary beneficiary. We
eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities
are recognized before income taxes. We account for our investment in other entities in which we have significant influence over
operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any
preferential returns and treat distributions as a reduction of our investment). We account for our investment in other entities in
which we do not have significant influence over operations and financial policies using the cost method (we recognize as
income only distribution of accumulated earnings).
We prepare our financial statements in accordance with generally accepted accounting principles in the United States,
which require us to make estimates and assumptions about future events. Actual results can, and probably will, differ from
those we currently estimate. Examples of significant estimates include those related to allocating costs to real estate, measuring
assets for impairment, oil and gas revenue accrual and depletion of our oil and gas properties.
Cash and Cash Equivalents
Cash and cash equivalents include cash and other short-term instruments with original maturities of three months or less.
At year-end 2013 and 2012, restricted cash was $3,954,000 and $1,160,000 and is included in other assets.
Cash Flows
Expenditures for the acquisition and development of single-family and multifamily real estate are classified as operating
activities. Expenditures for the acquisition of stabilized income producing properties, investment in oil and gas properties and
equipment, and business acquisitions are classified as investing activities. Our accrued capital expenditures for leasehold
acquisitions and drilling and completion costs at year-end 2013 and 2012 were $12,976,000 and $5,440,000 and are included in
other accrued expenses in our consolidated balance sheets. These oil and gas property additions will be reflected as cash used
for investing activities in the period the accrued payables are settled.
Capitalized Software
We capitalize purchased software costs as well as the direct internal and external costs associated with software we
develop for our own use. We amortize these capitalized costs using the straight-line method over estimated useful lives
generally ranging from three to five years. The carrying value of capitalized software was $1,544,000 at year-end 2013 and
$1,797,000 at year-end 2012 and is included in other assets. The amortization of these capitalized costs was $1,593,000 in
2013, $1,320,000 in 2012 and $1,493,000 in 2011 and is included in general and administrative and operating expenses.
Environmental and Asset Retirement Obligations
We recognize environmental remediation liabilities on an undiscounted basis when environmental assessments or
remediation are probable and we can reasonably estimate the cost. We adjust these liabilities as further information is obtained
or circumstances change. Our asset retirement obligations are related to the abandonment and site restoration requirements that
result from the acquisition, construction and development of our oil and gas properties. We record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to
capitalized asset retirement cost is included in cost of oil and gas producing activities on our consolidated statements of
income.
66
The following summarizes the changes in asset retirement obligations:
Beginning balance
Acquisition of Credo
Accretion expense
Additions
Fair Value Measurements
Year-End
2013
2012
(In thousands)
1,360
$
—
94
29
1,483
$
—
1,255
26
79
1,360
$
$
Financial instruments for which we did not elect the fair value option include cash and cash equivalents, accounts and
notes receivables, other assets, long-term debt, accounts payable and other liabilities. With the exception of long-term notes
receivable and debt, the carrying amounts of these financial instruments approximate their fair values due to their short-term
nature or variable interest rates.
Goodwill and Other Intangible Assets
We record goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified
tangible and intangible assets acquired. We do not amortize goodwill or other indefinite lived intangible assets. Instead, we
measure these assets for impairment based on the estimated fair values at least annually or more frequently if impairment
indicators exist. We perform the annual impairment measurement in the fourth quarter of each year. Intangible assets with finite
useful lives are amortized over their estimated useful lives.
Impairment of Real Estate Long-Lived Assets
We review real estate long-lived assets held for use for impairment when events or circumstances indicate that their
carrying value may not be recoverable. Impairment exists if the carrying amount of the long-lived asset is not recoverable from
the undiscounted cash flows expected from its use and eventual disposition. We determine the amount of the impairment loss
by comparing the carrying value of the long-lived asset to its estimated fair value. In the absence of quoted market prices, we
determine estimated fair value generally based on the present value of future probability weighted cash flows expected from the
sale of the long-lived asset. Non-cash impairment charges related to our owned and consolidated real estate assets are included
in cost of real estate sales and other.
Impairment of Oil and Gas Properties
We evaluate our oil and gas properties, including facilities and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. We estimate the expected undiscounted
future cash flows of our oil and gas properties and compare such undiscounted future cash flows to the carrying amount of the
oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated
undiscounted future cash flows, we will adjust the carrying amount of the oil and gas properties to fair value. The factors used
to determine fair value are subject to our judgment and expertise and include, but are not limited to, recent sales prices of
comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates
of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various
discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows
projected. Because of the uncertainty inherent in these factors, we cannot predict when or if future impairment charges for
proved properties will be recorded.
The assessment of unproved properties to determine any possible impairment requires significant judgment. We assess
our unproved properties periodically for impairment on a property-by-property basis based on remaining lease terms, drilling
results or future plans to develop acreage. Impairment expense for proved and unproved oil and gas properties are included in
costs of oil and gas producing activities.
Income Taxes
We provide deferred income taxes using current tax rates for temporary differences between the financial accounting
carrying value of assets and liabilities and their tax accounting carrying values. We recognize and value income tax exposures
for the various taxing jurisdictions where we operate based on laws, elections, commonly accepted tax positions, and
management estimates. We include tax penalties and interest in income tax expense. We provide a valuation allowance for any
deferred tax asset that is not likely to be recoverable in future periods.
67
When we believe a tax position is supportable but the outcome uncertain, we include the item in our tax return but do not
recognize the related benefit in our provision for taxes. Instead, we record a reserve for unrecognized tax benefits, which
represents our expectation of the most likely outcome considering the technical merits and specific facts of the position.
Changes to liabilities are only made when an event occurs that changes the most likely outcome, such as settlement with the
relevant tax authority, expiration of statutes of limitations, changes in tax law, or recent court rulings.
Owned Mineral Interests
We acquire real estate that may include the subsurface rights associated with the property, including minerals. We
capitalize the costs of acquiring these mineral interests. We amortize the cost assigned to unproved interests, principally
acquisition costs, using the straight-line method over appropriate periods based on our experience, generally no longer than ten
years. Costs assigned to individual unproven interests are minimal and amortized on an aggregate basis. When we lease these
interests to third-party oil and gas exploration and production entities, any related unamortized costs are accounted for using the
cost recovery method from the cash proceeds received from lease bonus payments.
When we lease our mineral interests to third-party exploration and production entities, we retain a royalty interest and
may take an additional participation in production, including a working interest. Mineral interests and working interests related
to our owned mineral interests are included in oil and gas properties and equipment on our balance sheet, net of accumulated
depletion.
Oil and Gas Properties
We use the successful efforts method of accounting for our oil and gas producing activities. Costs to acquire mineral
interests leased, costs to drill and complete development of oil and gas wells and related asset retirement costs are capitalized.
Costs to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves and if
determined incapable of producing commercial quantities of oil and gas these costs are expensed as dry hole costs. Exploration
costs include dry hole costs, geological and geophysical costs, and seismic studies, and are expensed as incurred. We generally
capitalize interest on expenditures for exploration and development projects that last more than six months while activities are
in progress to bring the assets to their intended use. Production costs incurred to maintain wells and related equipment are
charged to expense as incurred.
Depreciation and depletion of producing oil and gas properties is calculated using the units-of-production method. Proved
developed reserves are used to compute unit rates for unamortized tangible and intangible drilling and completion costs. Proved
reserves are used to compute unit rates for unamortized acquisition of proved leasehold costs. Unit-of-production amortization
rates are revised whenever there is an indication of the need for revision but at least once a year and those revisions are
accounted for prospectively as changes in accounting estimates.
Net capitalized costs related to our oil and gas producing activities are as follows:
Unproved oil and gas properties
Proved oil and gas properties
Total costs
Less accumulated depreciation, depletion and amortization
Operating Leases
At Year-End
2013
2012
(In thousands)
100,320
$
155,262
255,582
(22,941)
232,641
$
81,672
81,412
163,084
(4,657)
158,427
$
$
We occupy office space in various locations under operating leases. The lease agreements may contain rent escalation
clauses, construction allowances and/or contingent rent provisions. We expense operating leases ratably over the shorter of the
useful life or the lease term. For scheduled rent escalation clauses, we recognize the base rent expense on a straight-line basis
and record the difference between the recognized rent expense and the amounts payable under the lease as deferred lease
credits included in other liabilities in the consolidated balance sheets. Deferred lease credits are amortized over the lease term.
For construction allowances, we record leasehold improvement assets included in property and equipment in the consolidated
balance sheets amortized over the shorter of their economic lives or the lease term. The related deferred lease credits are
amortized as a reduction of rent expense over the lease term.
68
Property and Equipment
We carry property and equipment at cost less accumulated depreciation. We capitalize the cost of significant additions
and improvements, and we expense the cost of repairs and maintenance. We capitalize interest costs incurred on major
construction projects. We depreciate these assets using the straight-line method over their estimated useful lives as follows:
Buildings and building improvements
Property and equipment
Less: accumulated depreciation
Estimated
Useful Lives
Carrying
Value Year-End
2013
2012
(In thousands)
10 to 40 years
$
4,111
$
2 to 10 years
8,240
12,351
(6,239)
$
6,112
$
4,835
5,745
10,580
(5,721)
4,859
Depreciation expense of property and equipment was $1,028,000 in 2013, $962,000 in 2012 and $893,000 in 2011.
Real Estate
We carry real estate at the lower of cost or fair value less cost to sell. We capitalize interest costs once development
begins, and we continue to capitalize throughout the development period. We also capitalize infrastructure, improvements,
amenities, and other development costs incurred during the development period. We determine the cost of real estate sold using
the relative sales value method. When we sell real estate from projects that are not finished, we include in the cost of real estate
sold estimates of future development costs through completion, allocated based on relative sales values. These estimates of
future development costs are reevaluated at least annually, with any adjustments being allocated prospectively to the remaining
units available for sale. We receive cash deposits from builders for purchases of real estate community development projects.
These deposits are released to the builders as lots are developed and sold. Our escrow deposits at year-end 2013 and 2012 were
$6,805,000 and $4,598,000 and are included in other accrued expenses in our consolidated balance sheets.
Income producing properties are carried at cost less accumulated depreciation computed using the straight-line method
over their estimated useful lives.
We have agreements with utility or improvement districts, principally in Texas, whereby we agree to convey to the
district's water, sewer and other infrastructure-related assets we have constructed in connection with projects within their
jurisdiction. The reimbursement for these assets ranges from 70 to 100 percent of allowable cost as defined by the district. The
transfer is consummated and we receive payment when the districts have a sufficient tax base to support funding of their bonds.
The cost we incur in constructing these assets is included in capitalized development costs, and upon collection, we remove the
assets from capitalized development costs. We provide an allowance to reflect our past experiences related to claimed allowable
development costs.
Reclassifications
In 2013, we have reclassified prior years' other accrued expenses that were included in accounts payable on the balance
sheet to conform to the current year presentation. In 2012, we reclassified non-cash cost of timber cut for 2011 on the statement
of cash flows to depreciation, depletion and amortization.
Revenue
Real Estate
We recognize revenue from sales of real estate when a sale is consummated, the buyer’s initial investment is adequate,
any receivables are probable of collection, the usual risks and rewards of ownership have been transferred to the buyer, and we
do not have significant continuing involvement with the real estate sold. If we determine that the earnings process is not
complete, we defer recognition of any gain until earned. We recognize revenue from hotel room sales and other guest services
when rooms are occupied and other guest services have been rendered. We recognize revenue from our multifamily properties
when payments are due from residents, generally on a monthly basis.
We exclude from revenue amounts we collect from utility or improvement districts related to the conveyance of water,
sewer and other infrastructure related assets. We also exclude from revenue amounts we collect for timber sold on land being
developed. These proceeds reduce capitalized development costs. We exclude from revenue amounts we collect from customers
that represent sales tax or other taxes that are based on the sale. These amounts are included in other accrued expenses until
paid.
69
Oil and Gas
We recognize revenue as oil and gas is produced and sold. There are a significant amount of oil and gas properties which
we do not operate and, therefore, revenue is typically recorded in the month of production based on an estimate of our share of
volumes produced and prices realized. We obtain the most current available production data from the operators and price
indices for each well to estimate the accrual of revenue. Obtaining production data on a timely basis for some wells is not
feasible; therefore we utilize past production receipts and estimated sales price information to estimate accrual of working
interest revenue on all other non-operated wells each month. Revisions to such estimates are recorded as actual results become
known. We review accounts receivable periodically and reduce the carrying amount by a valuation allowance that reflects our
best estimate of the amount that may not be collectible. No such allowance was considered necessary at December 31, 2013 or
2012.
A majority of our sales are made under contractual arrangements with terms that are considered to be usual and
customary in the oil and gas industry. The contracts are for periods of up to five years with prices determined upon a percentage
of pre-determined and published monthly index price. The terms of these contracts have not had an effect on how we recognize
revenue.
We recognize revenue from mineral bonus payments received as a result of leasing our owned mineral interests to others
when we have received an executed agreement with the exploration company transferring the rights to any oil or gas it may
find and requiring drilling be done within a specified period, the payment has been collected, and we have no obligation to
refund the payment. We recognize revenue from delay rentals received if drilling has not started within the specified period and
when the payment has been collected. We recognize revenue from mineral royalties when the minerals have been delivered to
the buyer, the value is determinable, and we are reasonably sure of collection.
Other Natural Resources
We recognize revenue from timber sales upon passage of title, which occurs at delivery; when the price is fixed and
determinable; and we are reasonably sure of collection. We recognize revenue from recreational leases on the straight-line basis
over the lease term.
Share-Based Compensation
We use the Black-Scholes option pricing model for stock options, Monte Carlo simulation pricing model for market-
leveraged stock units, grant date fair value for equity-settled awards and period-end fair value for cash-settled awards. We
expense share-based awards ratably over the vesting period or earlier based on retirement eligibility.
Timber
We carry timber at cost less the cost of timber cut. We expense the cost of timber cut based on the relationship of the
timber carrying value to the estimated volume of recoverable timber multiplied by the amount of timber cut. We include the
cost of timber cut in cost of fiber resources and other in the income statement. We determine the estimated volume of
recoverable timber using statistical information and other data related to growth rates and yields gathered from physical
observations, models and other information gathering techniques. Changes in yields are generally due to adjustments in growth
rates and similar matters and are accounted for prospectively as changes in estimates. We capitalize reforestation costs incurred
in developing viable seedling plantations (up to two years from planting), such as site preparation, seedlings, planting,
fertilization, insect and wildlife control, and herbicide application. We expense all other costs, such as property taxes and costs
of forest management personnel, as incurred. Once the seedling plantation is viable, we expense all costs to maintain the viable
plantations, such as fertilization, herbicide application, insect and wildlife control, and thinning, as incurred.
We own directly or through ventures about 117,000 acres of timber, primarily in Georgia, and about 14,000 acres of
timber under lease. The non-cash cost of timber cut and sold is $609,000 in 2013, $1,220,000 in 2012 and $990,000 in 2011
and is included in depreciation, depletion and amortization in our statement of cash flows.
Note 2 — New and Pending Accounting Pronouncements
Accounting Standards Adopted in 2013
In 2013, we adopted Accounting Standards Update (ASU) ASU 2013-11— Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,
ASU 2011-10 — Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate, ASU 2012-02 —
Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and ASU No. 2013-01
— Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Adoption of these pronouncements did not
materially affect our earnings or financial position.
70
Pending Accounting Standards
ASU 2013-04 — Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which
the Total Amount of the Obligation Is Fixed at the Reporting Date will be effective in first quarter 2014. This ASU requires an
entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-
obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. We are evaluating the impact
of adopting ASU 2013-04 on our earnings, financial position and disclosures.
Note 3 — Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
Goodwill
Identified intangibles, net
Year-End
2013
2012
(In thousands)
$
$
64,493
2,153
66,646
$
$
61,680
2,188
63,868
Goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets
of $60,619,000 associated with our acquisition of Credo in third quarter 2012 and $3,874,000 associated with a water resources
company acquired in 2010.
On September 28, 2012, we acquired 100 percent of the outstanding common stock of CREDO Petroleum Corporation
(Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In
addition, we paid in full $8,770,000 of Credo’s outstanding debt.
The following unaudited pro forma information for the year 2012 and 2011 represents the results of our consolidated
operations as if the acquisition of Credo had occurred on January 1, 2011. This information is based on historical results of
operations, adjusted for certain estimated accounting adjustments and does not purport to represent our actual results of
operations if the transaction would have occurred on January 1, 2011, nor is it necessarily indicative of future results.
Revenues
Net income
For the Year
2012
2011
(In thousands)
$
190,634
$
21,583
152,340
(2,639)
The final purchase price allocation related to the Credo acquisition based on additional information obtained during the
acquisition measurement period, in particular, allocation of the estimated values assigned to oil and gas properties and
equipment, goodwill and deferred tax liability, is as follows:
Cash and short-term investments
Receivables
Oil and gas properties and equipment
Other properties and equipment
Goodwill and other intangible assets
Other
Total assets acquired
Accounts payable and accrued liabilities
Deferred tax liability
Other liabilities
Total liabilities assumed
Purchase Price Allocation
Year-End
2012
$
$
2,300
9,144
140,514
67
58,396
676
211,097
29,927
24,700
1,255
55,882
Adjustments
(In thousands)
Final
$
—
1,003 (a)
(4,712) (b)
—
2,813 (c)
—
(896)
13 (d)
(909) (e)
—
(896)
2,300
10,147
135,802
67
61,209
676
210,201
29,940
23,791
1,255
54,986
Estimated fair value of net assets acquired
$
155,215
$
—
$
155,215
_____________________
(a)
Primarily related to unrecorded seismic and leasehold costs due from partners.
71
(b)
(c)
(d)
(e)
Fair value adjustments allocated to near-term expiring leasehold acreage.
Goodwill adjustments associated with fair value adjustments for oil and gas properties, net of deferred taxes and
working capital adjustments.
Primarily related to current income taxes payable.
Primarily related to deferred taxes on fair value adjustments of near-term expiring leasehold acreage.
Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with a water resources
company acquired in 2010. In addition, identified intangibles includes $590,000 related to patents with definite lives associated
with the Calliope Gas Recovery System acquired as part of our acquisition of Credo and is being amortized over the average
remaining useful life of the patents. The net carrying value at year-end 2013 is $472,000.
Note 4 — Real Estate
Real estate consists of:
Entitled, developed and under development projects
Undeveloped land (includes land in entitlement)
Income producing properties
Carrying value
Accumulated depreciation
Net carrying value
At Year-End
2013
2012
(In thousands)
$
361,687
$
86,367
99,476
(28,066)
71,410
$
519,464
$
361,827
82,688
100,855
(28,220)
72,635
517,150
Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to
utility and improvement districts of $62,183,000 in 2013 and $50,476,000 in 2012, including about $41,795,000 at year-end
2013 and about $34,252,000 at year-end 2012 related to our Cibolo Canyons project near San Antonio. These costs relate to
water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval and
reimbursement. In 2013, these costs increased by $11,707,000 as result of development costs exceeding reimbursements by the
utility or improvement districts. We submitted for reimbursement to these districts $17,923,000 in 2013 and $6,432,000 in
2012. We collected $5,545,000 from these districts in 2013, of which $600,000 related to our Cibolo Canyons project and was
accounted for as a reduction of our investment in the mixed-use development. We collected $5,674,000 from these districts in
2012, of which $550,000 related to our Cibolo Canyons project. We expect to collect the remaining amounts billed when these
districts achieve adequate tax bases to support payment.
Also included in entitled, developed and under development projects is our investment in the resort development owned
by third parties at our Cibolo Canyons project. In 2013 and 2012, we received $4,400,000 and $2,850,000 from the Special
Improvement District (SID) from hotel occupancy and sales revenues collected as taxes by the SID. We currently account for
these receipts as a reduction of our investment in the resort development. At year-end 2013, we have $28,118,000 invested in
the resort development.
We recognized non-cash asset impairment charges of $1,790,000 in 2013 associated with a master-planned community
and golf club near Dallas. We had no non-cash impairment charges in 2012. We recognized non-cash asset impairment charges
of $11,525,000 in 2011 principally associated with owned and consolidated residential real estate projects located near Denver
and the Texas gulf coast.
Depreciation expense related to income producing properties was $2,507,000 in 2013, $3,640,000 in 2012 and
$3,547,000 in 2011 and is included in other operating expense.
72
Note 5 — Investment in Unconsolidated Ventures
At year-end 2013, we had ownership interests in 13 ventures that we account for using the equity method. We have no
real estate ventures that are accounted for using the cost method.
Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
242, LLC(b)
CJUF III, RH Holdings
CL Ashton Woods(c)
CL Realty
FMF Peakview
HM Stonewall Estates(c)
LM Land Holdings(c)
Temco
Other ventures (5)(d)
Venture Assets
Venture Borrowings(a)
Venture Equity
Our Investment
At Year-End
2013
2012
2013
2012
2013
2012
2013
2012
$
23,751
$
21,408
$
921
$
810
$
19,838
$
19,576
$
9,084
$
(In thousands)
36,320
10,473
8,298
30,673
3,781
33,298
13,320
12,723
15,970
15,701
8,245
16,859
5,184
21,094
13,255
17,129
18,492
—
—
12,533
63
9,768
—
1
—
—
—
104
3,086
—
15,415
9,704
8,070
16,620
3,718
13,347
13,160
13,701
15,044
7,842
13,331
5,080
13,128
13,066
29,699
34,357
(31,357)
(31,275)
3,235
3,544
4,035
3,406
2,128
8,283
6,580
852
8,903
3,836
5,775
3,921
2,666
2,470
6,045
6,533
1,397
$
172,637
$
134,845
$
71,476
$
38,358
$
68,515
$
69,493
$
41,147
$
41,546
Combined summarized income statement information for our ventures accounted for using the equity method follows:
Revenues
Earnings (Loss)
For the Year
Our Share of Earnings (Loss)
2013
2012
2011
2013
2012
2011
2013
2012
2011
$
6,269
$
4,868
$
2,378
$
1,512
$
1,040
$
239
$
805
$
572
$
(In thousands)
242, LLC(b)
CJUF III, RH Holdings
CL Ashton Woods(c)
CL Realty(e)
FMF Peakview
HM Stonewall Estates(c)
LM Land Holdings(c)
Palisades West
Temco(f)
Other ventures (5)(g)
_____________________
120
9,018
1,357
1
2,922
25,426
—
445
—
3,353
2,667
—
2,500
10,268
—
702
—
—
9,141
—
—
—
16,230
653
5,994
8,790
12,472
(652)
2,660
1,028
(252)
1,082
11,012
—
96
176
(241)
1,472
1,060
(116)
829
1,895
—
(80)
10,032
—
—
(22,832)
—
—
—
5,858
(42,242)
(434)
(652)
4,169
514
(50)
452
3,418
—
48
33
153
—
—
(11,416)
—
—
—
1,464
(241)
2,024
530
(23)
332
257
—
(40)
(21,121)
11,058
1,711
$
51,552
$
33,148
$
40,874
$
16,662
$
15,891
$ (59,411) $
8,737
$
14,469
$ (29,209)
(a) Total includes current maturities of $37,966,000 at year-end 2013, of which $37,822,000 is non-recourse to us, and
$32,323,000 at year-end 2012, of which $32,083,000 is non-recourse to us.
(b)
Includes unamortized deferred gains on real estate contributed by us to ventures. We recognize deferred gains as income as
real estate is sold to third parties. Deferred gains of $835,000 are reflected as a reduction to our investment in
unconsolidated ventures at year-end 2013.
(c) We acquired these equity investments from CL Realty in 2012 at estimated fair values. The difference between estimated
fair value of the equity investment and our capital account within the respective ventures at closing (basis difference) will
be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the
respective ventures. Unrecognized basis difference of $1,601,000 is reflected as a reduction of our investment in
unconsolidated ventures at year-end 2013.
(d) Our investment in other ventures reflects our ownership interests generally ranging from 25 to 50 percent, excluding
venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 15 —
Variable Interest Entities for additional information.
(e)
In 2011, CL Realty’s loss includes non-cash impairment charges of $25,750,000, of which, $23,255,000 relates to
additional non-cash impairments associated with real estate assets sold in 2012.
73
(f)
(g)
In 2011, Temco’s loss includes non-cash impairment charges of $41,226,000, of which, $21,426,000 principally relates to
additional non-cash impairments associated with real estate assets sold in 2012.
In 2012, other ventures earnings include $5,307,000 related to a consolidated venture’s share of the gain associated with
Round Rock Luxury Apartments sale of Las Brisas. Our share of these earnings was $2,541,000 and we allocated
$2,766,000 to net income attributable to noncontrolling interests. In 2011, our share of other ventures earnings (loss)
includes $2,164,000 in earnings related to a deferred gain recognized as a result of entering into an agreement to acquire
certain of CL Realty’s real estate assets and $4,869,000 in deferred gains for year 2010 related to CL Realty’s sale of 625
acres to a third party for $20,250,000.
In 2013, we invested $857,000 in these ventures and received $9,854,000 in distributions; in 2012, we invested
$2,318,000 in these ventures and received $15,905,000 in distributions; in 2011, we invested $2,007,000 in these ventures and
received $9,664,000 in distributions. Distributions include both return of investments and distributions of earnings.
We provide construction and development services for some of these ventures for which we receive fees. Fees for these
services were $1,068,000 in 2013, $935,000 in 2012 and $804,000 in 2011 and are included in real estate revenues.
Note 6 — Receivables
Receivables consist of:
Loan secured by real estate
Other loans secured by real estate, average interest rate of 5.00% at year-end 2013 and 6.24% at year-end 2012
Joint interest billing receivables
Oil and gas revenue accruals
Other receivables and accrued interest
Allowance for bad debts
At Year-End
2013
2012
(In thousands)
$
7,610
$
18,507
7,987
3,896
8,137
11,648
39,278
(26)
$
39,252
$
1,875
2,375
5,556
5,372
33,685
(62)
33,623
At year-end 2013, we have $7,610,000 invested in a loan secured by real estate. The loan was acquired from a financial
institution in 2011 when it was non-performing and is secured by a lien on developed and undeveloped real estate located near
Houston designated for single-family residential and commercial development. In 2012, an approved bankruptcy plan of
reorganization of the borrower became effective establishing a principal amount of $33,900,000 maturing in April 2017.
Interest accrues at nine percent the first three years escalating to ten percent in year four and 12 percent in year five, with
interest above 6.25 percent to be forgiven if the loan is prepaid by certain dates. Commencing with the reorganization, we
estimated future cash flows and calculated accretable yield to be recognized over the term of the loan, which is included in
other non-operating income. In 2013 and 2012, we received principal payments of $14,315,000 and $3,887,000 and interest
payments of $1,872,000 and $1,635,000. At year-end 2013, the outstanding principal balance was $15,698,000.
Estimated accretable yield is as follows:
Beginning of year
Change in accretable yield due to change in timing of estimated cash flows
Interest income recognized
At Year-End
2013
2012
(In thousands)
25,149
$
(10,950)
(5,291)
8,908
$
28,926
(515)
(3,262)
25,149
$
$
Other loans secured by real estate generally are secured by a deed of trust and due within three years. The increase in
2013 is principally associated with the sale of 33 commercial tract acres from our Cibolo Canyons project in San Antonio,
Texas for $7,700,000 in which we seller-financed $6,160,000 at an interest rate of prime plus one percent. Principal and
accrued interest are due in June 2014, with a possible extension of three months. The remaining loans secured by real estate at
year-end 2013 principally consist of $959,000 related to the 2012 sale of the remaining 109 residential lots from a project in
Florida and $550,000 related to a real estate contract for a project in Los Angeles. The original principal balance of the Florida
project loan was $1,501,000, and in 2013 we received principal payments of $542,000 and interest payments of $67,000. The
74
loan matures July 1, 2014 and bears interest at five percent per annum. The $550,000 loan is due and payable in full on April
30, 2016 at an interest rate of zero percent per annum prior to maturity and, subject to conditions specified in the Los Angeles
real estate contract, 3.5 percent per annum thereafter.
Note 7 — Debt
Debt consists of:
Senior secured credit facility
At Year-End
2013
2012
(In thousands)
Term loan facility — average interest rate of 4.17% at year-end 2013 and 4.21% at year-end 2012
$
200,000
$
Revolving line of credit — average interest rate of 4.75% at year-end 2012
3.75% convertible senior notes due 2020, net of discount
6.00% tangible equity units, net of discount
Secured promissory notes — average interest rates of 3.17% at year-end 2013 and 2.80% at year-end 2012
Other indebtedness due through 2017 at variable and fixed interest rates ranging from 4.50% to 5.50%
—
99,890
25,619
15,400
16,498
$
357,407
$
200,000
44,000
—
—
34,171
15,892
294,063
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest
coverage and limitations on leverage. At year-end 2013, we were in compliance with the financial covenants of these
agreements. In addition, we may elect to make distributions so long as the total leverage ratio is less than 30%, the interest
coverage is greater than 3.0:1.0, the revenues / capital expenditures ratio exceeds 1.5:1.0, and available liquidity is not less than
$125,000,000. At year-end 2013, our total leverage ratio exceeded 30 percent and as a result we are prohibited from making
distributions until the above conditions are satisfied.
At year-end 2013, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017,
and a $200,000,000 revolving line of credit maturing September 14, 2015. The term loan and revolving line of credit may be
prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which
$3,653,000 is outstanding at year-end 2013. Total borrowings under our senior secured credit facility (including the face
amount of letters of credit) may not exceed a borrowing base formula. At year-end 2013, we had $164,685,000 in net unused
borrowing capacity under our senior credit facility.
Under the terms of our senior secured credit facility, at our option, we can borrow at LIBOR plus 4.0 percent or at the
alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate,
(ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR plus 1 percent. Borrowings under the senior secured
credit facility are or may be secured by (a) mortgages on the timberland, high value timberland and portions of raw entitled
land, as well as pledges of other rights including certain oil and gas operating properties, (b) assignments of current and future
leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current
and future material operating subsidiaries or majority-owned joint venture interest, or if such pledge is not permitted, a pledge
of the right to distributions from such entities, (e) a pledge of certain reimbursements and other revenues payable to us from
special improvement district tax collections in connection with our Cibolo Canyons project, and (f) a negative pledge (without
a mortgage) on other assets. The senior secured credit facility provides for releases of real estate provided that borrowing base
compliance is maintained.
On February 26, 2013, we issued $125,000,000 aggregate principal amount of 3.75% convertible senior notes due 2020
(Convertible Notes). Interest on the Convertible Notes is payable semiannually at a rate of 3.75 percent per annum and they
mature on March 1, 2020. The Convertible Notes have an initial conversion rate of 40.8351 per $1,000 principal amount. The
initial conversion rate is subject to adjustment upon the occurrence of certain events. Prior to November 1, 2019, the
Convertible Notes are convertible only upon certain circumstances, and thereafter are convertible at any time prior to the close
of business on the second scheduled trading day prior to maturity. If converted, holders will receive cash, shares of our
common stock or a combination thereof at our election. We intend to settle the principal amount of the Convertible Notes in
cash upon conversion, with any excess conversion value to be settled in shares of our common stock. Net proceeds from the
offering were used to repay $68,000,000 under our revolving line of credit, the balance to be used for general corporate
purposes, including investments in oil and gas exploration and drilling and real estate acquisition and development.
We separately account for the liability and equity conversion components of the Convertible Notes due to our option to
settle the conversion obligation in cash, shares or a combination thereof at our election. The fair value of the Convertible Notes
excluding the conversion feature at the date of issuance was estimated to be approximately $97,309,000 and was calculated
based on the fair value of similar non-convertible debt instruments. The resulting value of the conversion option of $27,691,000
75
was recognized as debt discount and recorded as additional paid-in capital on our consolidated balance sheet. The effective
interest rate to calculate the accretion of the bond discount is eight percent and is based on our estimated (non-convertible)
borrowing rate on long-term debt with a similar maturity at the time the Convertible Notes were issued. Interest expense
includes the cash coupon rate on the Convertible Notes plus the non-cash accretion of the debt discount, which is based on the
difference between the effective interest rate and the cash coupon rate. Amortization of debt discount was $2,581,000 in 2013
and is included in interest expense. At year-end 2013, unamortized debt discount of our Convertible Notes was $25,110,000.
Total debt issuance costs were $4,205,000 (including underwriters discount of $3,750,000), of which $3,273,000 was allocated
to the liability component and $932,000 to the equity component of the Convertible Notes. The portion of the issuance costs
allocated to the debt component of the Convertible Notes is being amortized over the term of the Convertible Notes.
On November 27, 2013, we issued $150,000,000 aggregate principal amount of 6.00% tangible equity units (Units). The
total offering was 6,000,000 Units, including 600,000 exercised by the underwriters, each with a stated amount of $25.00.
Each Unit is comprised of (i) a prepaid stock purchase contract to be settled by delivery of a number of shares of our common
stock, par value $1.00 per share to be determined pursuant to a purchase contract agreement, and (ii) a senior amortizing note
due December 15, 2016 that has an initial principal amount of $4.2522, bears interest at a rate of 4.50% per annum and has a
final installment payment date of December 15, 2016.
We separately account for the purchase contracts and amortizing notes. The purchase contract component of the Units is
recorded in equity as additional paid in capital. The amortizing note component of the Units is recorded as debt. The fair value
of the amortizing notes was based on the fair value of similar debt instruments and was estimated to be approximately
$25,514,000. The resulting value of the purchase contracts of $124,486,000 was recorded as additional paid-in capital on our
consolidated balance sheet. Total issuance costs associated with the Units were $5,002,000 (including the underwriters discount
of $4,500,000), of which $851,000 was allocated to the liability component and $4,151,000 was allocated to the equity
component of the Units. Net proceeds of $144,998,000 from the issuance of the Units are designated for general corporate
purposes, including investments in strategic growth opportunities. The portion of the issuance costs allocated to the debt
component of the Units is being amortized over the term of the amortizing note.
At year-end 2013, secured promissory notes include a $15,400,000 loan collateralized by a 413 guest room hotel located
in Austin with a carrying value of $24,391,000. In 2013, secured promissory notes decreased by $18,902,000 as result of selling
of Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000. We received $21,522,000 in net
proceeds and we recognized $10,881,000 in segment earnings.
At year-end 2013, other indebtedness, principally non-recourse, is collateralized by entitled, developed and under
development projects with a carrying value of $60,553,000.
At year-end 2013 and 2012, we have $7,896,000 and $6,508,000 in unamortized deferred fees which are included in
other assets. Amortization of deferred financing fees, excluding loss on extinguishment of debt, was $3,050,000 in 2013,
$2,922,000 in 2012 and $2,881,000 in 2011 and is included in interest expense.
Debt maturities during the next five years are: 2014 — $28,247,000; 2015 — $12,699,000; 2016 — $15,484,000;
2017 — $201,087,000; 2018 — $0 and thereafter — $99,890,000.
Note 8 — Fair Value
Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly
transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to
establish fair value are the following:
• Level 1 — Quoted prices in active markets for identical assets or liabilities;
• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities; and
• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, goodwill and
intangible assets, which are measured for impairment. In 2013, certain real estate assets were remeasured and reported at fair
value due to events or circumstances that indicated the carrying value may not be recoverable. We determined estimated fair
value based on the present value of future probability weighted cash flows expected from the sale of the long-lived asset or
based on a third party appraisal of current value. As a result, we recognized non-cash asset impairment charges of $1,790,000 in
2013 associated with a master-planned community and golf club near Dallas. We had no non-cash impairment charges in 2012.
76
Year-End 2013
Year-End 2012
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(In thousands)
Non-Financial Assets and Liabilities:
Real estate
$
— $
3,700
$
— $
3,700
$
— $
— $
— $
—
We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets,
variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate
their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial
instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
Loan secured by real estate
Fixed rate debt(a)
_____________________
Year-End 2013
Year-End 2012
Carrying
Amount
Fair
Value
Carrying
Amount
(In thousands)
Fair
Value
Valuation
Technique
$
$
7,610
$
18,025
$
(126,640) $
(118,634) $
18,507
$
(3,989) $
35,824
(4,070)
Level 2
Level 2
(a) Year-end 2013 includes our 3.75% convertible senior notes due 2020, issued February 26, 2013 and our amortizing notes
associated with 6.00% tangible equity units, issued November 27, 2013.
Note 9 — Capital Stock
Pursuant to our shareholder rights plan, each share of common stock outstanding is coupled with one-quarter of a
preferred stock purchase right (Right). Each Right entitles our shareholders to purchase, under certain conditions, one one-
hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be
exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender
or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We
will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public
announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.
Please read Note 7 — Debt and Note 10 — Net Income per Share for information about shares of common stock that
could be issued under our 3.75% convertible senior notes due 2020 and our 6.00% tangible equity units.
Please read Note 16 — Share-Based Compensation for information about additional shares of common stock that
could be issued under terms of our share-based compensation plans.
At year-end 2013, personnel of former affiliates held options to purchase 779,000 shares of our common stock. The
options have a weighted average exercise price of $25.11 and a weighted average remaining contractual term of two years. At
year-end 2013, the options have an aggregate intrinsic value of $711,000.
In 2013, we did not repurchase shares of our common stock. In 2012, we repurchased 94,450 shares of our common
stock for $1,409,000. We have repurchased 2,002,145 shares of our common stock for $29,564,000 since we announced our
2009 strategic initiative of repurchasing up to 20 percent or 7,000,000 shares of our common stock.
Note 10 — Net Income per Share
Basic and diluted earnings per share is computed using the two-class method. The two-class method is an earnings
allocation formula that determines net income per share for each class of common stock and participating security. We have
determined that our 6.00% tangible equity units are participating securities. Per share amounts are computed by dividing
earnings available to common shareholders by the weighted average shares outstanding during each period.
77
The computations of basic and diluted earnings per share are as follows:
Numerator:
Consolidated net income
Less: Net income attributable to noncontrolling interest
Earnings available for diluted earnings per share
Less: Undistributed net income allocated to participating securities
Earnings available to common shareholders for basic earnings per share
Denominator:
Weighted average common shares outstanding — basic
Weighted average common shares upon conversion of participating securities (a)
Dilutive effect of stock options, restricted stock and equity-settled awards
Total weighted average shares outstanding — diluted
Anti-dilutive awards excluded from diluted weighted average shares outstanding
_____________________
For the Year
2013
2012
2011
(In thousands)
$
$
$
$
$
35,061
(5,740)
29,321
(585)
17,876
(4,934)
12,942
$
$
—
28,736
$
12,942
$
35,365
835
613
36,813
1,803
35,214
—
268
35,482
2,713
9,241
(2,087)
7,154
—
7,154
35,413
—
368
35,781
2,008
(a) Our earnings per share calculation reflects the weighted average shares issuable upon settlement of the prepaid stock
purchase contract component of our 6.00% tangible equity units, issued November 27, 2013.
The actual number of shares we may issue upon settlement of the stock purchase contract will be between 6,547,900
shares (the minimum settlement rate) and 7,857,500 shares (the maximum settlement rate) based on the applicable market
value, as defined in the purchase contract agreement associated with issuance of the Units.
We intend to settle the principal amount of the Convertible Notes in cash upon conversion, with any excess conversion
value to be settled in shares of our common stock. Therefore, only the amount in excess of the par value of the Convertible
Notes will be included in our calculation of diluted net income per share using the treasury stock method. As such, the
Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the conversion
price of the Convertible Notes of $24.49. The average price of our common stock in 2013 did not exceed the conversion price
which resulted in no additional diluted outstanding shares.
Note 11 — Income Taxes
Income tax expense consists of:
Current tax provision:
U.S. Federal
State and other
Deferred tax provision:
U.S. Federal
State and other
Income tax expense
For the Year
2013
2012
2011
(In thousands)
$
(6,004) $
(11,834) $
(2,066)
(8,070)
1,148
(286)
862
(2,171)
(14,005)
4,910
1,079
5,989
$
(7,208) $
(8,016) $
(27,442)
(3,013)
(30,455)
26,264
1,170
27,434
(3,021)
78
A reconciliation of the federal statutory rate to the effective income tax rate on continuing operations follows:
Federal statutory rate
State, net of federal benefit
Recognition of previously unrecognized tax benefits
State rate change due to acquisition
Acquisition costs
Noncontrolling interests
Charitable contributions
Oil and gas percentage depletion
Other
Effective tax rate
For the Year
2013
2012
2011
35%
4
(15)
—
—
(5)
—
(2)
—
17%
35%
35%
5
—
(2)
4
(7)
—
(5)
1
10
—
—
—
(6)
(6)
(8)
—
31%
25%
Our 2013 effective tax rate includes a 15 percent benefit from recognition of $6,326,000 of previously unrecognized tax
benefits upon lapse of the statute of limitations for a previously reserved tax position. Our 2012 effective tax rate includes a two
percent non-cash benefit associated with state deferred tax rate changes due to our acquisition of Credo and operating in
additional states.
Significant components of deferred taxes are:
Deferred Tax Assets:
Real estate
Employee benefits
Net operating loss carryforwards
Income producing properties
Oil and gas percentage depletion carryforwards
Accruals not deductible until paid
Gross deferred tax assets
Valuation allowance
Deferred tax asset net of valuation allowance
Deferred Tax Liabilities:
Oil and gas properties
Undeveloped land
Convertible debt
Timber
Gross deferred tax liabilities
Net Deferred Tax Asset
At Year-End
2013
2012
(In thousands)
$
75,157
$
17,902
3,076
3,529
3,344
960
103,968
(375)
103,593
(46,966)
(5,961)
(8,803)
(1,465)
(63,195)
$
40,398
$
74,946
15,323
11,897
3,209
3,193
1,608
110,176
(643)
109,533
(44,631)
(8,345)
—
(1,809)
(54,785)
54,748
At year-end 2013, we had federal and state net operating loss carryforwards of approximately $7,500,000 primarily as a
result of our acquisition of Credo in third quarter 2012. These are subject to certain limitations. If not utilized, these
carryforwards will expire in 2031 for federal purposes and 2015 to 2032 for state purposes. We had approximately $9,200,000
of oil and gas percentage depletion carryforwards that also were a result of our acquisition of Credo. These carryforwards are
subject to certain limitations but do not expire.
At year-end 2012, we disclosed federal and state net operating loss carryforwards of approximately $31,000,000. We
subsequently made a tax return election to capitalize approximately $26,000,000 of intangible drilling costs thereby increasing
our tax basis in depletable oil and gas properties and decreasing our net operating loss carryforwards. These capitalized
intangible drilling costs are amortizable over 60 months for tax purposes.
At year-end 2013 and 2012, we have not provided a valuation allowance for our federal deferred tax asset because we
believe it is likely it will be recoverable in future periods. We have provided a valuation allowance for some of our state net
operating loss carryforwards. The change in our state valuation allowance for the year was $268,000. Our deferred tax liability
on oil and gas properties includes purchase accounting amounts for the excess of fair value allocated to Credo oil and gas
properties over the carryover tax basis received. Goodwill associated with our acquisition of Credo is not deductible for
income tax purposes.
79
We file income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. We are no longer subject to
U.S. federal income tax examinations for years before 2010 and state examinations for years before 2009.
Prior to our 2007 spin-off, we were included in Temple-Inland’s consolidated income tax returns. In conjunction with our
spin-off, we entered into an agreement with Temple-Inland whereby we agreed to indemnify Temple-Inland for any
adjustments related to our tax positions reported in their pre-spin income tax returns. All federal and state examinations for pre-
spin years have been finalized resulting in no adjustments to us.
A reconciliation of the beginning and ending amount of tax benefits not recognized for book purposes is as follows:
Balance at beginning of year
Reductions for tax positions of prior years
Reductions due to lapse of statute of limitations
Balance at end of year that would affect the annual effective tax rate if recognized
At Year-End
2013
2012
2011
(In thousands)
5,831
$
5,831
$
—
(5,831)
—
—
— $
5,831
$
$
$
7,394
(1,563)
—
5,831
We recognize interest accrued related to unrecognized tax benefits in income tax expense. In 2013, 2012 and 2011, we
recognized approximately $75,000, $152,000 and $41,000 in interest expense. At year-end 2013, we have no accrued interest or
penalties. At year-end 2012 and 2011, we have $420,000 and $269,000 of accrued interest and no penalties.
Note 12 — Litigation and Environmental Contingencies
Litigation
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and
believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of
these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash
flows. It is possible, however, that charges related to these matters could be significant to our results or cash flows in any one
accounting period.
Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we
have established adequate reserves for any probable losses that we can reasonably estimate. We own 288 acres near Antioch,
California, portions of which were sites of a former paper manufacturing operation that are in remediation. We have received
certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. We estimate the
remaining cost to complete remediation activities will be approximately $1,000,000, which is included in other accrued
expenses. It is possible that remediation or monitoring activities could be required in addition to those included within our
estimate, but we are unable to determine the scope, timing or extent of such activities.
We have asset retirement obligations related to the abandonment and site restoration requirements that result from the
acquisition, construction and development of oil and gas properties. We record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset
retirement cost is included in cost of oil and gas producing activities on our consolidated statements of income and
comprehensive income. At year-end 2013, our asset retirement obligation was $1,483,000, which is included in other liabilities.
Note 13 — Commitments and Other Contingencies
We lease timberland, facilities and equipment under non-cancelable long-term operating lease agreements. In addition,
we have various obligations under other office space and equipment leases of less than one year. Lease expense on timberland
was $311,000 in 2013, $382,000 in 2012 and $349,000 in 2011. Rent expense on facilities and equipment was $2,374,000 in
2013, $2,115,000 in 2012 and $2,000,000 in 2011. Future minimum rental commitments under non-cancelable operating leases
having a remaining term in excess of one year are: 2014 — $3,283,000; 2015 — $3,161,000; 2016 — $2,841,000; 2017 —
$2,792,000; 2018 — $1,851,000 and thereafter —$2,383,000.
We have 12 years remaining on a 65-year timber lease associated with about 14,000 acres. At year-end 2013, the
remaining contractual obligation for this lease is $3,857,000. In addition, we have five years remaining on groundwater leases
of about 20,000 acres. At year-end 2013, the remaining contractual obligation for these groundwater leases is $2,019,000.
80
In 2008, we entered into a 10-year operating lease for approximately 32,000 square feet in Austin, Texas, which we
occupy as our corporate headquarters. This lease contains predetermined fixed increases of the minimum rental rate during the
initial lease term and a construction allowance for leasehold improvements. The remaining contractual obligation for this lease
is $6,853,000. In addition, we maintain offices in Ft. Worth, Texas and Denver, Colorado with approximately 8,000 and 10,000
square feet. The total remaining contractual obligations for these leases is $1,921,000.
We may provide performance bonds and letters of credit on behalf of certain ventures that would be drawn on due to
failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance
with local codes and ordinances. In connection with our unconsolidated venture operations, we have provided performance
bonds and letters of credit aggregating $26,587,000 at year-end 2013.
Note 14 — Segment Information
We manage our operations through three business segments: real estate, oil and gas and other natural resources. Real
estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities,
and manages our undeveloped land and income producing properties, primarily a hotel and our multifamily properties. Oil and
gas manages our owned mineral interests and interests leased from others and is an independent oil and gas exploration,
development and production operation. Other natural resources manages our timber, recreational leases and water resource
initiatives.
We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings
(loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sale of assets, interest income
on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business
segments consist of general and administrative expense, share-based compensation, gain on sale of strategic timberland,
interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same
as those described in Note 1 — Summary of Significant Accounting Policies. Our revenues are derived from our U.S.
operations and all of our assets are located in the U.S. In 2013 and 2012, no single customer accounted for more than 10
percent of our total revenues. In 2011, revenues of $17,980,000 from one customer of our real estate segment exceeded 10
percent of our total revenues as result of selling about 9,700 acres of undeveloped land.
For the year or at year-end 2013
Revenues
Depreciation, depletion and amortization
Equity in earnings (loss) of unconsolidated ventures
Income (loss) before taxes
Total assets
Investment in unconsolidated ventures
Capital expenditures(b)
For the year or at year-end 2012
Revenues
Depreciation, depletion and amortization
Equity in earnings (loss) of unconsolidated ventures
Income (loss) before taxes
Total assets
Investment in unconsolidated ventures
Capital expenditures(b)
For the year or at year-end 2011
Revenues
Depreciation, depletion and amortization
Equity in earnings of unconsolidated ventures
Income (loss) before taxes
Total assets
Investment in unconsolidated ventures
Capital expenditures(b)
Real
Estate
Oil and Gas
Other Natural
Resources
(In thousands)
Items Not
Allocated to
Segments
Total
$
248,011
$
72,313
$
10,721
$
—
$
331,045
3,117
8,089
68,454
582,802
41,147
7,265
19,552
592
18,859
312,553
—
97,696
651
56
6,507
23,478
—
2,720
6,660
—
(57,291) (a)
253,319
—
216
29,980
8,737
36,529
1,172,152
41,147
107,897
$
120,115
$
44,220
$
8,256
$
—
$
172,591
4,340
13,897
53,582
588,137
41,546
1,093
4,987
509
26,608
227,061
—
21,971
1,254
63
29
24,066
—
292
8,345
—
(59,261) (a)
79,170
—
795
$
106,168
$
24,448
$
4,957
$
—
$
339
1,394
19,783
5,484
—
4,690
5,729
(30,626)
(25,704)
657,099
64,223
739
81
1,029
23
(1,867)
27,862
—
153
3,705
—
17,963 (a)
104,412
—
766
18,926
14,469
20,958
918,434
41,546
24,151
135,573
10,802
(29,209)
10,175
794,857
64,223
6,348
_____________________
(a)
Items not allocated to segments consist of:
General and administrative expense
Share-based compensation expense
Gain on sale of assets
Interest expense
Other corporate non-operating income
For the Year
2013
2012
2011
(In thousands)
(20,597) $
(25,176) $
(16,809)
—
(20,004)
119
(14,929)
16
(19,363)
191
(57,291) $
(59,261) $
$
$
(20,110)
(7,067)
61,784
(17,012)
368
17,963
(b) Consists of expenditures for oil and gas properties and equipment, property, plant and equipment and reforestation of
timber.
Note 15 — Variable Interest Entities
We participate in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use
communities in which we may or may not have a controlling financial interest. Generally accepted accounting principles
require consolidation of variable interest entities (VIE) in which an enterprise has a controlling financial interest and is the
primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the
VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to
receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether we
are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture
agreements and subsequently when reconsideration events occur.
At year-end 2013, we are the primary beneficiary of 23 VIEs, primarily Lantana partnerships, that we consolidate. We
have the power to unilaterally control development activities that are significant to the economic success of these partnerships
and therefore, we are the primary beneficiary. At year-end 2013 and 2012, these VIEs had assets totaling $29,900,000 and
$33,212,000, liabilities of $10,478,000 and $11,585,000 and net working capital (deficit) of $189,000 and $(746,000). In 2013
and 2012, we contributed $8,317,000 and $4,985,000 to these VIEs.
Also at year-end 2013, we are not the primary beneficiary of three VIEs that we account for using the equity method. The
unrelated managing partners oversee the day-to-day operations and guarantee some of the debt of the VIEs while we have the
authority to approve project budgets and the issuance of additional debt. Although some of the debt is guaranteed by the
managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At year-
end 2013, these VIEs have total assets of $11,304,000, substantially all of which represent developed and undeveloped real
estate and total liabilities of $43,910,000, which includes $27,277,000 of borrowings classified as current maturities. These
amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using
the equity method in Note 5 — Investment in Unconsolidated Ventures. At year-end 2013, our investment is $17,000 and is
included in investment in unconsolidated ventures. In 2013, we contributed $149,000 to these VIEs. Our maximum exposure to
loss related to these VIEs is estimated at $3,698,000, which exceeds our investment as we have a nominal general partner
interest in these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the
maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless,
without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.
82
Note 16 — Share-Based Compensation
Share-based compensation expense consists of:
Cash-settled awards
Equity-settled awards
Restricted stock
Stock options
Share-based compensation expense is included in:
General and administrative
Other operating
For the Year
2013
2012
2011
(In thousands)
7,774
$
6,465
$
4,281
538
4,216
3,059
2,154
3,251
16,809
$
14,929
$
For the Year
2013
2012
2011
(In thousands)
7,779
9,030
16,809
$
$
7,144
7,785
14,929
$
$
1,095
941
2,505
2,526
7,067
3,216
3,851
7,067
$
$
$
$
In 2013, share-based compensation expense increased principally as a result of increase in our stock price and its impact
on cash-settled awards.
The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $590,000 in
2013, $595,000 in 2012 and $654,000 in 2011. Unrecognized share-based compensation expense related to non-vested equity-
settled awards, restricted stock and stock options is $8,033,000 at year-end 2013. The weighted average period over which this
amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in 2013, 2012 or
2011.
In 2013, we withheld 59,219 shares in connection with vesting of restricted stock awards and exercises of stock options,
which are accounted for as treasury stock. In 2013, $1,137,000 was withheld for payroll taxes and is reflected in financing
activities in our consolidated statements of cash flows.
A summary of awards granted under our 2007 Stock Incentive Plan follows:
Cash-settled awards
Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally
vest over three to four years from the date of grant and generally provide for accelerated vesting upon death, disability or if
there is a change in control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum
one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term,
generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death,
disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market
value of our stock on the date of grant.
Cash-settled awards granted to our directors in the form of restricted stock units are fully vested at the time of grant and
payable upon retirement.
The following table summarizes the activity of cash-settled restricted stock unit awards in 2013:
Non-vested at beginning of period
Granted
Vested
Forfeited
Non-vested at end of period
Equivalent
Units
(In thousands)
350
89
(200)
(6)
233
Weighted Average
Grant Date Fair
Value
(Per unit)
$17.03
18.70
17.63
17.67
17.90
The weighted average grant date fair value of our non-vested cash-settled restricted stock unit awards at year-end 2012
was $17.03 for 350,000 equivalent units and at year-end 2011 was $13.13 for 449,000 equivalent units.
83
The following table summarizes the activity of cash-settled stock appreciation rights in 2013:
Balance at beginning of period
Granted
Exercised
Forfeited
Balance at end of period
Exercisable at end of period
Rights
Outstanding
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(Current Value
Less Exercise
Price)
(In thousands)
(Per share)
(In years)
(In thousands)
866
—
(285)
(1)
580
534
$11.38
—
10.16
17.80
11.96
11.46
6
5
5
$5,256
5,400
5,240
The weighted average exercise price of our cash-settled stock appreciation rights at year-end 2012 was $11.38 for
866,000 awards and at year-end 2011 was $11.31 for 895,000 awards.
The fair value of awards settled in cash was $7,237,000 in 2013, $5,299,000 in 2012 and $197,000 in 2011. At year-end
2013, the fair value of accrued cash-settled awards is $16,737,000 and is included in other liabilities. The aggregate current
value of non-vested awards is $5,112,000 at year-end 2013 based on a year-end stock price of $21.27.
Equity-settled awards
Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years
from the date of grant, market-leveraged stock units (MSU), which vest after three years from date of grant and performance
stock units (PSU), which generally vest after three years from the date of grant if certain performance goals are met. Equity
settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and settled upon
retirement. The following table summarizes the activity of equity-settled awards in 2013:
Non-vested at beginning of period
Granted
Vested
Forfeited
Non-vested at end of period
Equivalent
Units
Weighted Average
Grant Date Fair
Value
(In thousands)
(Per unit)
$
409
275
(88)
(15)
581
18.99
20.21
19.73
17.49
19.50
In 2013, we granted 136,000 MSU awards. These awards will be settled in common stock based upon our stock price
performance over three years from the date of grant. The number of shares to be issued could range from a high of 204,000
shares if our stock price increases by 50 percent or more, to 68,000 shares if our stock price decreases by 50 percent, or could
be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued
using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate
assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite
service period is satisfied.
The weighted average grant date fair value of our non-vested equity-settled awards at year-end 2012 was $18.99 for
409,000 non-vested restricted shares and at year-end 2011 was $20.74 for 159,000 non-vested restricted shares.
Unrecognized share-based compensation expense related to non-vested equity-settled awards is $4,182,000 at year-end
2013. The weighted average period over which this amount will be recognized is estimated to be two years.
84
Restricted stock
Restricted stock awards generally vest over three years, typically if we achieve a minimum one percent annualized return
on assets over such three-year period. The following table summarizes the activity of restricted stock awards in 2013:
Non-vested at beginning of period
Granted
Vested
Forfeited
Non-vested at end of period
Restricted
Shares
Weighted Average
Grant Date Fair
Value
(In thousands)
(Per unit)
211
$
8
(162)
(10)
47
16.95
20.55
17.80
15.02
14.99
The weighted average grant date fair value of our non-vested restricted stock awards at year-end 2012 was $16.95 for
211,000 non-vested restricted shares and at year-end 2011 was $15.02 for 399,000 non-vested restricted shares.
Unrecognized share-based compensation expense related to non-vested restricted stock awards is $255,000 at year-end
2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Stock options
Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or
continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise
price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option
awards in 2013:
Balance at beginning of period
Granted
Exercised
Forfeited
Balance at end of period
Exercisable at end of period
Options
Outstanding
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(Current
Value Less
Exercise Price)
(In thousands)
(Per share)
(In years)
(In thousands)
1,756
$
373
(85)
(38)
2,006
1,133
20.53
18.70
16.25
24.39
20.30
22.35
7
$
1,956
7
5
6,433
3,251
We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:
Expected stock price volatility
Risk-free interest rate
Expected life of options (years)
Expected dividend yield
For the Year
2013
2012
2011
66.8%
1.4%
6
—%
60.2%
1.3%
6
—%
56.2%
2.4%
6
—%
Weighted average estimated fair value of options at grant date
$
11.47
$
9.22
$
10.11
We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our
valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period
and the contractual life of the awards. The expected stock price volatility is based on a blended rate utilizing our historical
volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options.
Unrecognized share-based compensation expense related to non-vested stock options is $3,596,000 at year-end 2013. The
weighted average period over which this amount will be recognized is estimated to be two years.
Pre-Spin Awards
Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with our 2007
spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off
85
entities. As a result of Temple-Inland’s merger with International Paper in first quarter 2012, all outstanding awards on Temple-
Inland stock were settled with an intrinsic value of $1,132,000.
Pre-spin stock option awards to our employees to purchase our common stock have a ten-year term, generally become
exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there
is a change in control. At year-end 2013, there were 57,000 pre-spin awards outstanding and exercisable on our stock with a
weighted average exercise price of $26.68, weighted average remaining term of two years and aggregate intrinsic value of
$23,000.
The intrinsic value of options exercised was $51,000 in 2013, $64,000 in 2012 and $766,000 in 2011.
Note 17 — Retirement Plans
Our defined contribution retirement plans include a 401(k) plan, which is funded, and a supplemental plan for certain
employees, which is unfunded. The expense of our defined contribution retirement plans was $1,456,000 in 2013, $1,393,000
in 2012 and $924,000 in 2011. The unfunded liability for our supplemental plan was $586,000 at year-end 2013 and $449,000
at year-end 2012 and is included in other liabilities.
Note 18 — Supplemental Oil and Gas Disclosures (Unaudited)
The following unaudited information regarding our oil and gas reserves has been prepared and is presented pursuant to
requirements of the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB).
We lease our mineral interests, principally in Texas and Louisiana, to third-party entities for the exploration and
production of oil and gas. When we lease our mineral interests, we may negotiate a lease bonus payment and we retain a
royalty interest and may take an additional participation in production, including a working interest in which we pay a share of
the costs to drill, complete and operate a well and receive a proportionate share of the production revenues.
On September 28, 2012, we acquired 100 percent of the outstanding common stock of Credo in an all cash transaction for
$14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000
of Credo’s outstanding debt. Credo was an independent oil and gas exploration, development and production company based in
Denver, Colorado. The acquired assets included leasehold interests in the Bakken and Three Forks formations of North Dakota,
the Lansing – Kansas City formation in Kansas and Nebraska, and the Tonkawa and Cleveland formations in Texas.
We engaged independent petroleum engineers, Netherland, Sewell & Associates, Inc., to prepare estimates of our proved
oil and gas reserves, all of which are located in the U.S., and future net cash flows as of year-end 2013, 2012 and 2011.
These estimates were based on the economic and operating conditions existing at year-end 2013, 2012 and 2011. Proved
developed reserves are those quantities of petroleum from existing wells and facilities, which by analysis of geosciences and
engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward for
known reservoirs and under defined economic conditions, operating methods and government regulations.
SEC rules require disclosure of proved reserves using the twelve-month average beginning-of-month price (which we
refer to as the average price) for the year. These same average prices also are used in calculating the amount of (and changes in)
future net cash inflows related to the standardized measure of discounted future net cash flows.
For 2013, 2012 and 2011, the average spot price per barrel of oil based on the West Texas Intermediate Crude price is
$96.91, $94.71 and $92.71 and the average price per MMBTU of gas based on the Henry Hub spot market is $3.67, $2.76 and
$4.12. All prices were adjusted for quality, transportation fees and regional price differentials.
The process of estimating proved reserves and future net cash flows is complex involving decisions and assumptions in
evaluating the available engineering and geologic data and prices for oil and gas and the cost to produce these reserves and
other factors, many of which are beyond our control. As a result, these estimates are imprecise and should be expected to
change as future information becomes available. These changes could be significant. In addition, this information should not be
construed as being the current fair market value of our proved reserves.
86
Estimated Quantities of Proved Oil and Gas Reserves
Estimated quantities of proved oil and gas reserves are summarized as follows:
Estimated Reserves
Oil
(Barrels)
Gas
(Mcf)
(In thousands)
Consolidated entities:
Year-end 2010
Revisions of previous estimates
Extensions and discoveries
Production
Year-end 2011
Revisions of previous estimates
Extensions and discoveries
Acquisitions
Production
Year-end 2012
Revisions of previous estimates
Extensions and discoveries
Acquisitions
Production
Year-end 2013
Our share of ventures accounted for using the equity method:
Year-end 2010
Revisions of previous estimates
Extensions and discoveries
Production
Year-end 2011
Revisions of previous estimates
Extensions and discoveries
Production
Year-end 2012
Revisions of previous estimates
Extensions and discoveries
Production
Year-end 2013
Total consolidated and our share of equity method ventures:
Year-end 2011(a)
Year-end 2012
Proved developed reserves
Proved undeveloped reserves
Total Year-end 2012
Year-end 2013
Proved developed reserves
Proved undeveloped reserves
Total Year-end 2013
_____________________
609
197
410
(152)
1,064
45
86
2,396
(371)
3,220
182
3,085
35
(698)
5,824
—
—
—
—
—
—
—
—
—
—
—
—
—
1,064
2,416
804
3,220
3,893
1,931
5,824
6,659
3
2,670
(1,129)
8,203
(2,163)
241
7,109
(1,668)
11,722
1,243
2,046
531
(1,912)
13,630
3,871
(95)
—
(493)
3,283
(390)
—
(321)
2,572
7
—
(247)
2,332
11,486
13,020
1,274
14,294
13,717
2,245
15,962
(a)
In 2011, consolidated entities and equity method ventures did not include any proved undeveloped reserves. In 2013 and
2012, proved undeveloped reserves are a result of our acquisition of Credo.
87
We do not have any estimated reserves of synthetic oil, synthetic gas or products of other non-renewable natural
resources that are intended to be upgraded into synthetic oil and gas.
In 2013, increase in gas prices accounted for about 1,243,000 Mcf of upward revisions in gas reserves for our
consolidated entities.
In 2012, decreases in gas prices accounted for about 800,000 Mcf of downward revisions in gas reserves for our
consolidated entities and about 330,000 Mcf of downward revisions for our equity method ventures. The remaining downward
revisions in gas reserves for our consolidated entities were attributable to adverse performance from reducing the total fluid
withdrawal rate in a natural water drive reservoir, adverse performance from increasing total fluid withdrawal rate in another
natural water drive reservoir, from unfavorable performance from newer wells in over-pressured reservoirs that are exhibiting
pressure-dependent permeability reductions, and generally due to higher operating pressures adversely affecting gas well
performances in a higher back-pressure environment.
In 2011, increases in oil prices accounted for about 28,000 barrels of the upward revisions in oil reserves for our
consolidated entities. The remaining upward revisions to oil reserves were attributable to continued improved response from a
steam injection program, improved operational efficiencies from water drive reservoirs, improved performance of recently
completed oil wells and generally from improved production performances as a result of more efficient operations driven by
higher oil prices.
In 2013, 2012 and 2011, reserve additions from new wells drilled and completed during the year are shown for both
consolidated entities and ventures accounted for using the equity method under extensions and discoveries for the royalty
interest wells and in 2012 with the acquisition of Credo, working interest wells apply industry practices for new well
classifications. There were 88 new well additions in 2013, 27 new well additions in 2012 and 36 new well additions in 2011.
Capitalized Costs Relating to Oil and Gas Producing Activities
Capitalized costs related to our oil and gas producing activities are as follows:
Consolidated entities:
Unproved oil and gas properties
Proved oil and gas properties
Total costs
Less accumulated depreciation, depletion and amortization
Net capitalized costs
At Year-End
2013
2012
(In thousands)
$
$
100,320
$
155,262
255,582
(22,941)
232,641
$
81,672
81,412
163,084
(4,657)
158,427
We have not capitalized any costs for our share in ventures accounted for using the equity method.
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and development activities, whether capitalized or
expensed, follows:
Consolidated entities:
Acquisition of properties
Exploration costs
Development costs
Total cost incurred for consolidated entities
For the Year
2013
2012
2011
(In thousands)
$
$
35,806
$
4,418
$
10,486
54,538
1,752
15,938
100,830
$
22,108
$
714
549
3,597
4,860
88
We have not incurred any costs for our share in ventures accounted for using the equity method. In 2013 and 2012,
acquisition of leasehold interests, exploration expenses, and development costs have increased as a result of our increased focus
on these activities to increase production, reserves, and add net asset value, and also to explore and develop the assets acquired
from Credo.
Standardized Measure of Discounted Future Net Cash Flows
Estimates of future cash flows from proved oil and gas reserves are shown in the following table. Estimated income taxes
are calculated by applying the appropriate tax rates to the estimated future pre-tax net cash flows less depreciation of the tax
basis of properties and the statutory depletion allowance.
Consolidated entities:
Future cash inflows
Future production and development costs
Future income tax expenses
Future net cash flows
10% annual discount for estimated timing of cash flows
Standardized measure of discounted future net cash flows
Our share in ventures accounted for using the equity method:
Future cash inflows
Future production and development costs
Future income tax expenses
Future net cash flows
10% annual discount for estimated timing of cash flows
Standardized measure of discounted future net cash flows
Total consolidated and our share of equity method ventures
At Year-End
2013
2012
2011
(In thousands)
544,098
$
322,098
$
142,043
(231,801)
(77,361)
234,936
(99,383)
135,553
4,765
(512)
(1,616)
2,637
(1,337)
1,300
136,853
$
$
$
$
(104,441)
(50,350)
167,307
(60,764)
106,543
5,125
(551)
(1,738)
2,836
(1,423)
1,413
107,956
$
$
$
$
(18,929)
(38,681)
84,433
(31,735)
52,698
12,346
(1,731)
(3,154)
7,461
(3,953)
3,508
56,206
$
$
$
$
$
Future net cash flows were computed using prices used in estimating proved oil and gas reserves, year-end costs, and
statutory tax rates (adjusted for tax deductions) that relate to proved oil and gas reserves.
89
Changes in the standardized measure of discounted future net cash flow follows:
Year-end 2010
Changes resulting from:
Net change in sales prices and production costs
Sales of oil and gas, net of production costs
Net change due to extensions and discoveries
Net change due to revisions of quantity estimates
Accretion of discount
Net change in income taxes
Aggregate change for the year
Year-end 2011
Changes resulting from:
Net change in sales prices and production costs
Net change in future development costs
Sales of oil and gas, net of production costs
Net change due to extensions and discoveries
Net change due to acquisition of reserves
Net change due to revisions of quantity estimates
Previously estimated development costs incurred
Accretion of discount
Net change in income taxes
Aggregate change for the year
Year-end 2012
Changes resulting from:
Net change in sales prices and production costs
Net change in future development costs
Sales of oil and gas, net of production costs
Net change due to extensions and discoveries
Net change due to acquisition of reserves
Net change due to revisions of quantity estimates
Previously estimated development costs incurred
Accretion of discount
Net change in timing and other
Net change in income taxes
Aggregate change for the year
Year-end 2013
Consolidated
For the Year
Our Share of Equity
Method Ventures
(In thousands)
Total
$
26,810
$
4,327
$
31,137
8,476
(17,747)
32,671
17,586
3,013
(18,111)
25,888
52,698
(5,709)
(1,834)
(31,732)
5,596
86,013
(2,254)
1,007
7,377
(4,619)
53,845
106,543
23,422
(2,897)
(56,559)
54,539
1,160
8,673
4,124
13,540
(718)
(16,274)
29,010
153
(1,622)
—
(204)
466
388
(819)
3,508
(2,497)
—
(632)
—
—
18
—
401
615
(2,095)
1,413
415
—
(801)
—
—
6
—
228
(31)
70
(113)
$
135,553
$
1,300
$
8,629
(19,369)
32,671
17,382
3,479
(17,723)
25,069
56,206
(8,206)
(1,834)
(32,364)
5,596
86,013
(2,236)
1,007
7,778
(4,004)
51,750
107,956
23,837
(2,897)
(57,360)
54,539
1,160
8,679
4,124
13,768
(749)
(16,204)
28,897
136,853
Results of Operations for Oil and Gas Producing Activities
Our royalty interests are contractually defined and based on a percentage of production at prevailing market prices. We
receive our percentage of production in cash. Similarly, our working interests and the associated net revenue interests are
contractually defined and we pay our proportionate share of the capital and operating costs to develop and operate the well and
we market our share of the production. Our revenues fluctuate based on changes in the market prices for oil and gas, the
inevitable decline in production in existing wells, and other factors affecting oil and gas exploration and production activities,
including the cost of development and production.
90
Information about the results of operations of our oil and gas interests follows:
Consolidated entities(a)
Revenues
Production costs
Exploration costs
Depreciation, depletion, amortization
Oil and gas administrative expenses
Accretion expense
Income tax expenses
Results of operations
Our share in ventures accounted for using the equity method:
Revenues
Production costs
Oil and gas administrative expenses
Income tax expenses
Results of operations
Total results of operations
_____________________
For the Year
2013
2012
2011
(In thousands)
$
69,036
$
36,204
$
(12,477)
(10,959)
(19,552)
(14,407)
(94)
(3,471)
8,076
(4,472)
(1,754)
(4,905)
(8,332)
(26)
(4,841)
11,874
$
$
$
801
$
770
$
(123)
(86)
(178)
414
8,490
$
$
(138)
(123)
(147)
362
12,236
$
$
19,239
(1,492)
(549)
(337)
(4,445)
—
(3,645)
8,771
1,882
(260)
(228)
(400)
994
9,765
(a) 2012 includes only three months of operations from Credo due to our third quarter 2012 acquisition.
Production costs represent our share of oil and gas production severance taxes, and lease operating expenses. Exploration
costs principally represent exploratory dry hole costs, geological and geophysical and seismic study costs.
Note 19 — Summary of Quarterly Results of Operations (Unaudited)
Summarized quarterly financial results for 2013 and 2012 follows:
2013
Total revenues
Gross profit
Operating income
Equity in earnings of unconsolidated ventures
Income before taxes
Net income attributable to Forestar Group Inc.
Net income per share — basic
Net income per share — diluted
2012
Total revenues
Gross profit
Operating income
Equity in earnings of unconsolidated ventures
Income (loss) before taxes
Net income (loss) attributable to Forestar Group Inc.
Net income (loss) per share — basic
Net income (loss) per share — diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share amounts)
$
97,471
$
35,899
9,520
913
7,035
3,951
60,079
$
22,463
3,554
2,566
2,109
541
75,107
$
32,608
10,612
3,125
9,965
11,830
0.11
0.11
$
$
0.02
0.02
$
$
0.33
0.33
$
$
28,092
$
16,258
35,312
$
18,748
8,220
724
5,117
2,802
3,959
768
2,203
811
0.08
0.08
$
$
0.02
0.02
$
$
40,610
$
20,636
4,843
680
(1,458)
(703)
(0.02) $
(0.02) $
$
$
$
$
$
91
98,388
39,181
22,891
2,133
23,160
12,999
0.34
0.33
68,577
33,073
10,143
12,297
20,030
10,032
0.28
0.28
Note 20 — Subsequent Event
On January 17, 2014, a venture in which we own a 30 percent interest obtained a senior secured construction loan in
the amount of $51,950,000 to develop a 320-unit multifamily project located in Nashville, Tennessee. The loan is secured by a
lien on the project land and improvements to be constructed, and by a collateral assignment of present and future leases and
rents. We provided the lender with a guaranty of completion of the improvements; a guaranty of repayment of 25 percent,
repayment of all accrued and unpaid interest, and payment of all operating expenses of the project (except for certain
expenses); and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent to zero percent
of the principal upon achievement of certain conditions.
92
Forestar Group Inc.
Schedule III — Consolidated Real Estate and Accumulated Depreciation
Year-End 2013
(In thousands)
Initial Cost to
Company
Costs Capitalized
Subsequent to Acquisition
Gross Amount Carried at End of Period
Description
Encumbrances
Land
Entitled, Developed, and Under Development Projects:
Buildings &
Improvements
Improvements
less Cost of
Sales and Other
Carrying
Costs(a)
Land & Land
Improvements
Buildings &
Improvements
Total
Accumulated
Depreciation
Date of
Construction
Date
Acquired
CALIFORNIA
Contra Costa County
San Joaquin River
COLORADO
Douglas County
Pinery West
Weld County
Buffalo Highlands
Johnstown Farms
Stonebraker
FLORIDA
Hillsborough County
Bridle Path Estates
GEORGIA
Bartow County
Towne West
Euharlee North
Parkside at Woodbury
Coweta County
Cedar Creek Preserve
Corinth Landing
Coweta South Industrial Park
Fox Hall
Genesee
Dawson County
Woodlands at Burt Creek
SOUTH CAROLINA
York County
Habersham
TENNESEE
Williamson County
Morgan Farms
TEXAS
Bastrop County
Hunter’s Crossing
The Colony
Bexar County
Cibolo Canyons
Calhoun County
Caracol
$ 12,225
$
(3,310)
$
8,915
$
8,915
7,308
3,001
2,749
3,878
2,683
936
269
134
852
607
532
166
480
71
3,878
6,841
3,613
8,726
25,569
3,218
587
2,437
$
188
(1,407)
(2,683)
(936)
138
374
247
585
476
2,239
1,176
1,670
10,526
3,588
5,374
2,471
—
—
407
508
1,099
1,192
1,008
2,405
1,656
1,741
642
(239)
4,281
2,223
166
9,230
7,586
12,256
358
161
11,557
21,143
50,839
1,549
77,957
$
5,072
8,603
3,438
2,047
14,088
93
10,526
3,588
5,374
2,471
—
—
407
508
1,099
1,192
1,008
2,405
1,656
1,741
4,281
9,230
11,557
21,143
77,957
14,088
(b)
2006
2006
2006
2002
2005
2005
2002
2005
2012
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
2013
2013
2001
1999
2001
1999
2004
1986
2006
2006
Description
Collin County
Lakes of Prosper
Maxwell Creek
Park Place
Timber Creek
Village Park
Comal County
Oak Creek Estates
Dallas County
Stoney Creek
Denton County
Lantana
The Preserve at Pecan Creek
Fort Bend County
Summer Lakes
Summer Park
Willow Creek Farms
Harris County
Barrington
City Park
Hays County
Arrowhead Ranch
Hood County
Harbor Lakes
Nueces County
Tortuga Dunes
Tarrant County
Summer Creek Ranch
The Bar C Ranch
Williamson County
Westside at Buttercup Creek
Chandler Road Properties
La Conterra
MISSOURI
Clay County
Somerbrook
Other
Total Entitled, Developed, and Under
Development Projects
Forestar Group Inc.
Schedule III — Consolidated Real Estate and Accumulated Depreciation
Year-End 2013
(In thousands)
Initial Cost to
Company
Costs Capitalized
Subsequent to Acquisition
Gross Amount Carried at End of Period
Encumbrances
Land
Buildings &
Improvements
Improvements
less Cost of
Sales and Other
Carrying
Costs(a)
Land & Land
Improvements
Buildings &
Improvements
Total
Accumulated
Depreciation
Date of
Construction
Date
Acquired
$
3,458
1,748
469
4,621
1,130
$
8,951
9,904
2,177
7,282
6,550
1,921
12,822
31,451
5,855
4,269
4,803
3,479
8,950
3,946
12,856
3,514
12,080
2,887
1,365
13,149
3,552
4,024
3,061
25,081
$
137
$
(5,889)
69
3,456
(3,346)
2,728
3,981
(4,312)
(1,753)
261
(153)
3,823
(4,155)
619
2,228
$
180
635
81
175
49
436
90
1,641
9,268
4,650
2,246
10,738
3,285
4,824
16,852
27,139
4,538
4,530
4,650
7,392
4,795
6,206
15,084
(742)
312
3,084
9,441
(849)
210
(12,257)
(3,552)
(659)
(218)
(5,673)
488
293
13
824
21,521
2,038
1,575
1,380
—
3,658
2,856
20,232
$
9,268
4,650
2,246
10,738
3,285
4,824
16,852
27,139
4,538
4,530
4,650
7,392
4,795
6,206
15,084
3,084
21,521
2,038
1,575
1,380
—
3,658
2,856
20,232
$
16,498
$ 287,050
$
— $
65,190
$
9,447
$
361,687
$
— $ 361,687
$
—
94
2000
2007
2012
2000
2013
2007
2012
2006
2005
2007
2007
2000
2006
2002
1999
2005
2012
2012
2012
2011
2001
2007
2000
1998
2006
2012
2012
1993
2004
2006
1993
2004
2003
2001
Forestar Group Inc.
Schedule III — Consolidated Real Estate and Accumulated Depreciation
Year-End 2013
(In thousands)
Initial Cost to
Company
Costs Capitalized
Subsequent to Acquisition
Gross Amount Carried at End of Period
Description
Encumbrances
Land
Undeveloped Land and land in entitlement:
CALIFORNIA
Los Angeles County
Buildings &
Improvements
Improvements
less Cost of
Sales and Other
Carrying
Costs(a)
Land & Land
Improvements
Buildings &
Improvements
Total
Accumulated
Depreciation
Date of
Construction
Date
Acquired
Land In Entitlement Process
$
3,969
$
16,530
$
20,499
$ 20,499
1997
GEORGIA
Bartow County
Undeveloped Land
Carroll County
Undeveloped Land
Land In Entitlement Process
Cherokee County
Undeveloped Land
Land In Entitlement Process
Coweta County
Undeveloped Land
Land In Entitlement Process
Dawson County
Undeveloped Land
Gilmer County
Undeveloped Land
Lumpkin County
Undeveloped Land
Paulding County
Undeveloped Land
Pickens County
Undeveloped Land
TEXAS
Bexar County
Undeveloped Land
Harris County
Land in Entitlement Process
San Augustine County
Undeveloped Land
Other
Undeveloped Land
Land in Entitlement Process
3,863
5,984
9,309
3,382
2,340
454
2,128
2,248
2,823
3,049
1,406
2,368
685
1,495
9,276
2,334
60
116
2,346
94
565
379
412
1,497
27
4
124
29
1,351
1,144
6,357
(1,781)
3,923
6,100
11,655
3,476
2,905
833
2,540
3,745
2,850
3,053
1,530
2,397
1,351
1,829
1,495
15,633
553
3,923
6,100
11,655
3,476
2,905
833
2,540
3,745
2,850
3,053
1,530
2,397
1,351
1,829
1,495
15,633
553
Total Undeveloped Land and land in entitlement
$
— $ 57,113
$
— $
29,254
$
— $
86,367
$
— $ 86,367
$
—
95
Forestar Group Inc.
Schedule III — Consolidated Real Estate and Accumulated Depreciation
Year-End 2013
(In thousands)
Initial Cost to
Company
Costs Capitalized
Subsequent to Acquisition
Gross Amount Carried at End of Period
Encumbrance
Land
Buildings &
Improvements
Improvements
less Cost of
Sales and
Other
Carrying
Costs(a)
Land & Land
Improvements
Buildings &
Improvements
Total
Accumulated
Depreciation
Date of
Construction
Date
Acquired
$ 12,553
$
1,719
$
14,272
$ 14,272
5,779
11,547
2,266
6,020
925
5,594
11,799
11,799
12,472
12,472
7,860
7,860
2013
2012
2012
2011
Description
Income Producing Properties:
COLORADO
Jefferson County
Littleton
NORTH CAROLINA
Mechlanburg County
East Morehead
TENNESSEE
Davidson County
Westmont
TEXAS
Dallas County
Cedar Hill
Travis County
Radisson Hotel & Suites
Hood County
Harbor Lakes Golf Club
Total Income Producing Properties
Total
_____________________
$
$
$
15,400
15,400
$ 32,145
31,898
$ 376,308
$
$
$
(a) We do not capitalize carrying costs until development begins.
(b) The acquisition date for this land is not available.
10,603
40,390
— $
50,993
50,993
$
(26,602)
1,446
12,049
12,049
$
$
634
55,282
149,726
$
$
2,080
2,080
— $
46,403
9,447
$
494,457
$
$
53,073
$ 99,476
53,073
$ 547,530
$
$
(1,464)
(28,066)
(28,066)
2000
1998
96
Reconciliation of real estate:
Balance at beginning of year
Amounts capitalized
Amounts retired or adjusted
Balance at close of period
Reconciliation of accumulated depreciation:
Balance at beginning of year
Depreciation expense
Amounts retired or adjusted
Balance at close of period
2013
2012
(In thousands)
2011
545,370
$
592,322
$
111,428
(109,268)
143,711
(190,663)
547,530
$
545,370
$
2013
2012
(In thousands)
2011
(28,220) $
(26,955) $
(2,185)
2,339
(3,640)
2,375
(28,066) $
(28,220) $
585,090
66,338
(59,106)
592,322
(23,438)
(3,547)
30
(26,955)
$
$
$
$
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
(a) Disclosure controls and procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (or the Exchange Act)) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in
ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Internal control over financial reporting
Management’s report on internal control over financial reporting is included in Part II, Item 8 of this Annual Report on
Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the fourth quarter 2013 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
None.
97
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
Set forth below is certain information about the members of our Board of Directors:
Name
Kenneth M. Jastrow, II
Kathleen Brown
William G. Currie
James M. DeCosmo
Michael E. Dougherty
James A. Johnson
Charles W. Matthews
William C. Powers, Jr.
James A. Rubright
Richard M. Smith
Carl A. Thomason
Year First
Elected to
the Board
Age
66
68
66
55
73
70
69
67
67
68
61
2007
2007
2007
2007
2008
2007
2012
2007
2007
2007
2012
Principal Occupation
Non-Executive Chairman of Forestar Group Inc.
Partner at Manatt, Phelps & Phillips, L.L.P.
Chairman of Universal Forest Products, Inc.
President and Chief Executive Officer of Forestar Group Inc.
Founder and Chairman of Dougherty Financial Group LLC
Chairman and Chief Executive Officer of Johnson Capital Partners
Retired Vice President and General Counsel of Exxon Mobil Corporation
President of The University of Texas at Austin
Retired Chairman and Chief Executive Officer of Rock-Tenn Company
President of Pinkerton Foundation
President of Great Northern Gathering and Marketing, LLC
The remaining information required by this item is incorporated herein by reference from our definitive proxy statement,
involving the election of directors, to be filed pursuant to Regulation 14A with the SEC not later than 120 days after the end of
the fiscal year covered by this Form 10-K (or Definitive Proxy Statement). Certain information required by this item
concerning executive officers is included in Part I of this report.
Item 11.
Executive Compensation.
The information required by this item is incorporated by reference from our Definitive Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
We have only one equity compensation plan, the Forestar 2007 Stock Incentive Plan. It was approved by our sole
stockholder prior to spin-off and material terms and amendments thereto were subsequently approved by our stockholders.
Information at year-end 2013 about our equity compensation plan under which our common stock may be issued follows:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
_____________________
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)(2)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(a)
(b)
(c)
3,686,338
$
None
3,686,338
$
21.74
None
21.74
1,133,863
None
1,133,863
(1)
(2)
Includes approximately 779,000 issuable to personnel of Temple-Inland and the other spin-off entity resulting from the
equitable adjustment of Temple-Inland equity awards in connection with our spin-off.
Includes approximately 387,000 equity-settled restricted stock units, 416,000 market-leveraged stock units and 41,000
performance stock units, which are excluded from the calculation of weighted-average exercise price. The market-
leveraged stock unit awards will be settled in common stock based upon our stock price performance over three years from
the date of grant. The number of shares to be issued could range from a high of 624,000 shares if our stock price increases
98
by 50 percent or more, to 208,000 shares if our stock price decreases by 50 percent, or could be zero if our stock price
decreases by more than 50 percent, the minimum threshold performance.
The remaining information required by this item is incorporated by reference from our Definitive Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from our Definitive Proxy Statement.
Item 14.
Principal Accountant Fees and Services.
The information required by this item is incorporated by reference from our Definitive Proxy Statement.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report.
(1) Financial Statements
Our Consolidated Financial Statements are included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Schedule III — Consolidated Real Estate and Accumulated Depreciation is included in Part II, Item 8 of this Annual
Report on Form 10-K.
Schedules other than those listed above are omitted as the required information is either inapplicable or the information is
presented in our Consolidated Financial Statements and notes thereto.
(3) Exhibits
The exhibits listed in the Exhibit Index in (b) below are filed or incorporated by reference as part of this Annual Report on
Form 10-K.
(b) Exhibits
Exhibit
Number
2.1
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
4.2
Exhibit
Agreement and Plan of Merger, dated June 3, 2012, by and among CREDO Petroleum Corporation, Forestar Group Inc. and Longhorn
Acquisition Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on
June 4, 2012).
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on
Form 8-K filed with the Commission on December 11, 2007).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the
Commission on December 11, 2007).
First Amendment to Amended and Restated Bylaws of Forestar Real Estate Group Inc. (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K filed with the Commission on February 19, 2008).
Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.3 of the Company’s
Current Report on Form 8-K filed with the Commission on December 11, 2007).
Second Amendment to Amended and Restated Bylaws of Forestar Real Estate Group Inc. (incorporated by reference to Exhibit 3.5 of
the Company’s Annual Report on Form 10-K filed with the Commission on March 5, 2009).
Certificate of Ownership and Merger, dated November 21, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Current
Report on Form 8-K filed with the Commission on November 24, 2008).
Third Amendment to Amended and Restated Bylaws of Forestar Group Inc. (incorporated by reference to Exhibit 3.2 of the Company’s
Current Report on Form 8-K filed with the Commission on November 24, 2008).
Fourth Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 of the Company’s
Current Report on Form 8-K filed with the Commission on November 26, 2012).
Specimen Certificate for shares of common stock, par value $1.00 per share, of Forestar Real Estate Group Inc. (incorporated by
reference to Exhibit 4.1 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007).
Rights Agreement, dated December 11, 2007, between Forestar Real Estate Group Inc. and Computershare Trust Company, N.A., as
Rights Agent (including Form of Rights Certificate) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed with the Commission on December 11, 2007).
99
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2†
10.3†
10.4†
10.5†*
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18
10.19
10.20
10.21
10.22
10.23
Indenture, dated February 26, 2013 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with
the Commission on February 26, 2013).
Supplemental Indenture, dated February 26, 2013 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form
8-K filed with the Commission on February 26, 2013).
Form of 3.75% Convertible Senior Note due 2020 (included in Exhibit 4.4 above) (incorporated by reference to Exhibit 4.3 of the
Company’s Current Report on Form 8-K filed with the Commission on February 26, 2013).
Second Supplemental Indenture, dated November 27, 2013 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report
on Form 8-K filed with the Commission on November 27, 2013).
Purchase Contract Agreement, dated November 27, 2013, between the Company and U.S. Bank National Association (incorporated by
reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed with the Commission on November 27, 2013).
Form of 6.00% Tangible Equity Unit (incorporated by reference to Exhibit 4.4 of the Company’s Current Report on Form 8-K filed with
the Commission on November 27, 2013).
Form of Purchase Contract (incorporated by reference to Exhibit 4.5 of the Company’s Current Report on Form 8-K filed with the
Commission on November 27, 2013).
Form of Amortizing Note (incorporated by reference to Exhibit 4.6 of the Company’s Current Report on Form 8-K filed with the
Commission on November 27, 2013).
Employee Matters Agreement, dated December 11, 2007, among Forestar Real Estate Group Inc., Guaranty Financial Group Inc., and
Temple — Inland Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the
Commission on December 11, 2007).
Form of Forestar Real Estate Group Supplemental Employee Retirement Plan (incorporated by reference to Exhibit 10.5 of Amendment
No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007).
Amendment No. 1 to Forestar Group Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.3 of the
Company’s Annual Report on Form 10-K filed with the Commission on March 14, 2013).
Form of Forestar Real Estate Group 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 of Amendment No. 5 to the
Company’s Form 10 filed with the Commission on December 10, 2007).
Amended and Restated Forestar Group Inc. Directors' Fee Deferral Plan.
Form of Indemnification Agreement to be entered into between the Company and each of its directors (incorporated by reference to
Exhibit 10.9 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007).
Form of Change in Control Agreement between the Company and its named executive officers (incorporated by reference to
Exhibit 10.10 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007).
Employment Agreement between the Company and James M. DeCosmo dated August 9, 2007 (incorporated by reference to
Exhibit 10.11 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007).
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on
Form 10-K filed with the Commission on March 5, 2009).
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K filed
with the Commission on March 14, 2013).
Form of Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K
filed with the Commission on March 14, 2013).
Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-
K filed with the Commission on February 12, 2009).
First Amendment to the Forestar Real Estate Group Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed with the Commission on May 13, 2009).
Second Amendment to the Forestar Group Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.22 to the Company’s
Annual Report on Form 10-K filed with the Commission on March 3, 2010).
First Amendment to Employment Agreement, dated as of November 10, 2010, by and between the Company and James M. DeCosmo
(incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K filed with the Commission on March 2,
2011).
Form of Market-Leveraged Stock Unit Award Agreement (incorporated by reference to Exhibit 10.18 of the Company’s Annual Report
on Form 10-K filed with the Commission on March 14, 2013).
Form of Indemnification Agreement entered into between the Company and each of its executive officers (incorporated by reference to
Exhibit 10.19 of the Company’s Annual Report on Form 10-K filed with the Commission on March 14, 2013).
Underwriting Agreement, dated as of February 20, 2013, by and between the Company and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2013).
Second Amended and Restated Revolving and Term Credit Agreement dated September 14, 2012, by and among the Company; Forestar
(USA) Real Estate Group Inc. and certain of its wholly-owned subsidiaries signatory thereto; KeyBank National Association, as lender,
swing line lender and agent, the lenders party thereto; and the other parties thereto (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on September 17, 2012).
Consulting Agreement, dated effective as of October 1, 2012, by and between Forestar (USA) Real Estate Group Inc. and Craig A.
Knight (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on
November 9, 2012).
Guaranty Agreement dated June 28, 2012 by Forestar (USA) Real Estate Group. in favor of Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 29, 2012).
Voting Agreement, dated June 3, 2012, by and among Forestar Group Inc., James T. Huffman, RCH Energy Opportunity Fund III, LP
and RCH Energy SSI Fund, LP (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on June 4, 2012).
Guaranty Agreement dated May 24, 2012 by Forestar (USA) Real Estate Group Inc. in favor of Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 29, 2012).
100
10.24
10.25†*
10.26
10.27
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*
32.2*
99.1*
101.1*
Underwriting Agreement, dated as of November 21, 2013, by and between the Company and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 27, 2013).
Amendment No. 2 to Forestar Group Inc. Supplemental Executive Retirement Plan.
Agreement of Guaranty and Suretyship (Completion) dated January 17, 2014 by Forestar Group Inc. in favor of PNC Bank, National
Association (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on
January 17, 2014).
Agreement of Guaranty and Suretyship (Payment) dated January 17, 2014 by Forestar Group Inc. in favor of PNC Bank, National
Association (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on
January 17, 2014).
List of Subsidiaries of the Company.
Consent of Ernst & Young LLP.
Consent of Netherland, Sewell & Associates, Inc.
Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Reserve report of Netherland, Sewell & Associates, Inc., dated February 6, 2014.
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL
(Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and
Comprehensive Income, (iii) Consolidated Statement of Equity (iv) Consolidated Statements of Cash Flows, and (v) Notes to
Consolidated Financial Statements.
_____________________
*
†
Filed herewith.
Management contract or compensatory plan or arrangement.
101
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
FORESTAR GROUP INC.
By:
/s/ James M. DeCosmo
James M. DeCosmo
President and Chief Executive Officer
Date: March 11, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ James M. DeCosmo
James M. DeCosmo
/s/ Christopher L. Nines
Christopher L. Nines
/s/ Sabita C. Reddy
Sabita C. Reddy
/s/ Kenneth M. Jastrow, II
Kenneth M. Jastrow, II
/s/ Kathleen Brown
Kathleen Brown
/s/ William G. Currie
William G. Currie
/s/ Michael E. Dougherty
Michael E. Dougherty
/s/ James A. Johnson
James A. Johnson
/s/ Charles W. Matthews
Charles W. Matthews
/s/ William C. Powers, Jr.
William C. Powers, Jr.
/s/ James A. Rubright
James A. Rubright
/s/ Richard M. Smith
Richard M. Smith
/s/ Carl A. Thomason
Carl A. Thomason
Date
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
Capacity
Director, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Vice President Accounting
(Principal Accounting Officer)
Non-Executive
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
Director
Director
102
Forestar Group Inc.
Stockholder Information
Transfer Agent & Registrar
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
781.575.2879
Independent Auditors
Ernst & Young, LLP, Austin, Texas
Annual Meeting
The 2013 annual meeting of our stockholders will be held at
the Radisson Hotel & Suites located at 111 East Cesar Chavez Street,
Austin, Texas 78701, at 9:00 am on May 13, 2014.
Stock Listing
Forestar’s common stock is listed on the New York Stock Exchange
under the ticker symbol FOR.
Company Website
Additional information regarding Forestar, including the Annual Report
on Form 10-K and other periodic reports filed with the Securities and
Exchange Commission, may be obtained from Forestar’s home page
on the Internet, the address of which is www.forestargroup.com.
A copy of Forestar’s Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be sent without charge
upon written request made to the company’s Investor Relations
Department at the mailing address below.
Mailing Address
Forestar Group, Inc.
6300 Bee Cave Road / Building Two / Suite 500
Austin, Texas 78746
512.433.5200
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Board Members
Kenneth M. Jastrow, II
Non-Executive Chairman of the Board
Kathleen Brown
Partner at Manatt, Phelps & Phillips, LLP
William G. Currie
Chairman of Universal Forest Products, Inc.
James M. DeCosmo
President and Chief Executive Officer
Michael E. Dougherty
Chairman of Dougherty Financial Group, LLC
James A. Johnson
Chairman and Chief Executive Officer
of Johnson Capital Partners
Charles W. Matthews
Retired Vice President and General Counsel
of Exxon Mobil Corporation
William C. Powers, Jr.
President of The University of Texas at Austin
James A. Rubright
Retired Chairman and Chief Executive Officer
of Rock-Tenn Company
Richard M. Smith
Chairman of Pinkerton Foundation
Carl A. Thomason
President of Great Northern
Gathering and Marketing, LLC
6300 Bee Cave Road
Building Two, Suite 500
Austin, Texas 78746-5149
512.433.5200
forestargroup.com