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Form 10-Q Forestar Group Inc. For: Jun 30

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August 7, 2015 7:18 AM EDT

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33662
_________________________________________________________  
FORESTAR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
 _________________________________________________________ 
Delaware
 
26-1336998
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)
(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)
 _________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
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. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Number of Shares Outstanding as of August 3, 2015
Common Stock, par value $1.00 per share
 
33,614,877
 


FORESTAR GROUP INC.
TABLE OF CONTENTS
 

2

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands, except share data)
ASSETS
 
Cash and cash equivalents
$
98,761

 
$
170,127

Real estate, net
603,525

 
575,756

Oil and gas properties and equipment, net
224,465

 
263,493

Investment in unconsolidated ventures
76,722

 
65,005

Timber
8,360

 
8,315

Receivables, net
14,610

 
24,589

Income taxes receivable
3,930

 
7,503

Prepaid expenses
3,502

 
6,000

Property and equipment, net
10,850

 
11,627

Deferred tax asset, net
65,327

 
40,624

Goodwill and other intangible assets
65,583

 
66,131

Other assets
16,684

 
19,029

TOTAL ASSETS
$
1,192,319

 
$
1,258,199

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
9,903

 
$
20,400

Accrued employee compensation and benefits
3,801

 
8,323

Accrued property taxes
5,599

 
5,966

Accrued interest
3,458

 
3,451

Earnest money deposits
8,997

 
10,045

Other accrued expenses
27,433

 
35,729

Other liabilities
27,907

 
31,799

Debt
434,840

 
432,744

TOTAL LIABILITIES
521,938

 
548,457

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Forestar Group Inc. shareholders’ equity:
 
 
 
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at second quarter-end 2015 and year-end 2014
36,947

 
36,947

Additional paid-in capital
560,264

 
558,945

Retained earnings
124,335

 
167,001

Treasury stock, at cost, 3,331,726 shares at second quarter-end 2015 and 3,485,278 shares at year-end 2014
(53,128
)
 
(55,691
)
Total Forestar Group Inc. shareholders’ equity
668,418

 
707,202

Noncontrolling interests
1,963

 
2,540

TOTAL EQUITY
670,381

 
709,742

TOTAL LIABILITIES AND EQUITY
$
1,192,319

 
$
1,258,199

Please read the notes to consolidated financial statements.

3

FORESTAR GROUP INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share amounts)
REVENUES
 
 
 
 
 
 
 
Real estate sales and other
$
28,300

 
$
44,124

 
$
50,261

 
$
99,671

Commercial and income producing properties
11,109

 
11,049

 
21,978

 
20,982

Real estate
39,409

 
55,173

 
72,239

 
120,653

Oil and gas
16,165

 
24,377

 
29,350

 
41,931

Other natural resources
1,856

 
3,463

 
3,646

 
5,034

 
57,430

 
83,013

 
105,235

 
167,618

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of real estate sales and other
(13,890
)
 
(23,419
)
 
(24,252
)
 
(49,483
)
Cost of commercial and income producing properties
(7,548
)
 
(8,606
)
 
(15,240
)
 
(18,726
)
Cost of oil and gas producing activities
(70,141
)
 
(16,926
)
 
(81,683
)
 
(29,546
)
Cost of other natural resources
(860
)
 
(801
)
 
(1,780
)
 
(1,577
)
Other operating
(13,642
)
 
(16,330
)
 
(31,702
)
 
(30,327
)
General and administrative
(4,901
)
 
(6,856
)
 
(13,043
)
 
(12,001
)
 
(110,982
)
 
(72,938
)
 
(167,700
)
 
(141,660
)
GAIN ON SALE OF ASSETS
838

 
16,867

 
2,014

 
16,867

OPERATING INCOME (LOSS)
(52,714
)
 
26,942

 
(60,451
)
 
42,825

Equity in earnings of unconsolidated ventures
5,584

 
958

 
8,629

 
1,949

Interest expense
(8,715
)
 
(7,370
)
 
(17,536
)
 
(12,873
)
Other non-operating income
783

 
2,269

 
1,700

 
4,563

INCOME (LOSS) BEFORE TAXES
(55,062
)
 
22,799

 
(67,658
)
 
36,464

Income tax benefit (expense)
20,744

 
(8,051
)
 
25,103

 
(12,709
)
CONSOLIDATED NET INCOME (LOSS)
(34,318
)
 
14,748

 
(42,555
)
 
23,755

Less: Net (income) loss attributable to noncontrolling interests
(189
)
 
74

 
(110
)
 
(599
)
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.
$
(34,507
)
 
$
14,822

 
$
(42,665
)
 
$
23,156

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
34,278

 
35,458

 
34,223

 
35,407

Diluted
34,278

 
43,688

 
34,223

 
43,690

NET INCOME (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
(1.01
)
 
$
0.34

 
$
(1.25
)
 
$
0.54

Diluted
$
(1.01
)
 
$
0.34

 
$
(1.25
)
 
$
0.53

TOTAL COMPREHENSIVE INCOME (LOSS)
$
(34,507
)
 
$
14,822

 
$
(42,665
)
 
$
23,156

Please read the notes to consolidated financial statements.

4

FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) 
 
First Six Months
 
2015
 
2014
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income (loss)
$
(42,555
)
 
$
23,755

Adjustments:
 
 
 
Depreciation, depletion and amortization
23,360

 
17,927

Change in deferred income taxes
(25,103
)
 
7,668

Equity in earnings of unconsolidated ventures
(8,629
)
 
(1,949
)
Distributions of earnings of unconsolidated ventures
5,089

 
1,768

Share-based compensation
3,327

 
3,532

Real estate cost of sales
24,151

 
47,976

Dry hole and unproved leasehold impairment costs
30,663

 
7,004

Real estate development and acquisition expenditures, net
(57,353
)
 
(66,558
)
Reimbursements from utility and improvement districts
7,154

 
6,618

Other changes in real estate
631

 
2,341

Changes in deferred income
137

 
1,141

Asset impairments
25,764

 
—

Gain on sale of assets
(2,014
)
 
(16,867
)
Other
1,565

 
1,144

Changes in:
 
 
 
Notes and accounts receivable
8,144

 
(6,809
)
Prepaid expenses and other
2,502

 
3,751

Accounts payable and other accrued liabilities
(17,919
)
 
(9,156
)
Income taxes
3,573

 
(4,291
)
Net cash provided by (used for) operating activities
(17,513
)
 
18,995

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software, reforestation and other
(6,971
)
 
(9,823
)
Oil and gas properties and equipment
(40,286
)
 
(44,632
)
Investment in unconsolidated ventures
(10,136
)
 
(4,430
)
Proceeds from sales of assets
2,984

 
11,022

Return of investment in unconsolidated ventures
1,960

 
155

Net cash used for investing activities
(52,449
)
 
(47,708
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of senior secured notes, net
—

 
241,947

Payments of debt
(4,925
)
 
(219,653
)
Additions to debt
5,016

 
10,383

Deferred financing fees
(100
)
 
(3,068
)
Distributions to noncontrolling interests, net
(687
)
 
(898
)
Purchase of noncontrolling interests
—

 
(7,971
)
Exercise of stock options
14

 
754

Payroll taxes on issuance of stock-based awards
(723
)
 
(972
)
Excess income tax benefit from share-based compensation
1

 
52

Net cash provided by (used for) financing activities
(1,404
)
 
20,574

 
 
 
 
Net decrease in cash and cash equivalents
(71,366
)
 
(8,139
)
Cash and cash equivalents at beginning of period
170,127

 
192,307

Cash and cash equivalents at end of period
$
98,761

 
$
184,168

Please read the notes to consolidated financial statements.

5

FORESTAR GROUP INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1—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. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.
We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those principally related to allocating costs to real estate, measuring long-lived assets for impairment, oil and gas revenue accruals, capital expenditure and lease operating expense accruals associated with our oil and gas production activities, oil and gas reserves and depletion of our oil and gas properties. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2014 Annual Report on Form 10-K.
Note 2—New and Pending Accounting Pronouncements
Pending Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB decided to defer the effective date of the new standard by one year. This proposed deferral would result in the new standard being effective after December 15, 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (Topic 810), requiring entities to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The revised consolidation model: (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved with VIEs, and (4) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. The updated standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. The updated standard may be applied retrospectively or using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The updated standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. The updated standard is not expected to materially impact our financial position or disclosures.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (Subtopic 350-40), in order to provide clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The update is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the effect that the updated standard will have on our financial position and disclosures.

6

In June 2015, FASB issued Accounting Standards Update (ASU) No. 2015-10, Technical Corrections and Updates. The amendments in this update cover a wide range of topics in the codification and are generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and, Minor Improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to impact our financial position or results of operations.
Note 3—Real Estate
Real estate consists of:
 
Second Quarter-End 2015
 
Year-End 2014
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
(In thousands)
Entitled, developed and under development projects
$
345,181

 
$
—

 
$
345,181

 
$
321,273

 
$
—

 
$
321,273

Undeveloped land (includes land in entitlement)
93,013

 
—

 
93,013

 
93,182

 
—

 
93,182

Commercial
 
 
 
 

 
 
 
 
 
 
Radisson Hotel
61,628

 
(27,536
)
 
34,092

 
59,773

 
(29,062
)
 
30,711

Harbor Lakes golf course and country club
—

 
—

 
—

 
2,054

 
(1,508
)
 
546

Income producing properties
 
 
 
 
 
 
 
 
 
 
 
Eleven
53,901

 
(1,734
)
 
52,167

 
53,958

 
(576
)
 
53,382

Midtown
34,933

 
(963
)
 
33,970

 
33,293

 
(231
)
 
33,062

Dillon (a)
15,870

 
—

 
15,870

 
15,203

 
—

 
15,203

Music Row (a)
8,265

 
—

 
8,265

 
7,675

 
—

 
7,675

Downtown Edge
11,938

 
—

 
11,938

 
11,856

 
—

 
11,856

West Austin
9,029

 
—

 
9,029

 
8,866

 
—

 
8,866

 
$
633,758

 
$
(30,233
)
 
$
603,525

 
$
607,133

 
$
(31,377
)
 
$
575,756

 _________________________
(a) 
Construction in progress.
Our estimated costs of assets for which we expect to be reimbursed by utility and improvement districts were $87,516,000 at second quarter-end 2015 and $65,212,000 at year-end 2014, including $44,063,000 at second quarter-end 2015 and $31,913,000 at year-end 2014 related to our Cibolo Canyons project near San Antonio, Texas. In first six months 2015, we have collected $7,154,000 in reimbursements that were previously submitted to these districts. At second quarter-end 2015, our inception to-date submitted and approved reimbursements for the Cibolo Canyons project were $65,438,000 of which we collected $33,552,000. These costs are principally for water, sewer and other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.    
Note 4—Oil and Gas Properties and Equipment, net
Net capitalized costs, utilizing the successful efforts method of accounting, related to our oil and gas producing activities follows:
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Unproved oil and gas properties
$
64,653

 
$
90,446

Proved oil and gas properties
222,713

 
221,299

Total costs
287,366

 
311,745

Less: accumulated depreciation, depletion and amortization
(62,901
)
 
(48,252
)
 
$
224,465

 
$
263,493



7

We review unproved oil and gas properties for impairment based on our current exploration plans and proved oil and gas properties by comparing the expected undiscounted future cash flows at a producing field level to the unamortized capitalized cost of the asset. In second quarter 2015, we recognized non-cash impairment charges of $20,903,000 on our unproved leasehold interests and $25,035,000 on our proved properties principally due to a significant decline in oil prices, drilling results, a change in our plans to develop acreage and increased likelihood that these non-core oil and gas assets in Oklahoma, Nebraska and Kansas will be sold. Impairment charges are included in cost of oil and gas producing activities on our income statement. Dry hole costs in first six months 2015 were $9,752,000, which includes a $9,674,000 charge in second quarter 2015 primarily associated with an exploratory well in Oklahoma. In addition, in second quarter 2015 we expensed $917,000 of capitalized costs related to pre-drilling activities associated with non-core oil and gas properties in Oklahoma.
In first six months 2015, we recorded a net gain of $854,000 on the sale of 17,168 net mineral acres leased from others in Nebraska and North Dakota and the disposition of 2 gross (1 net) producing oil and gas wells in Nebraska and Oklahoma for total proceeds of $2,524,000.
Note 5—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Goodwill
$
63,355

 
$
63,423

Identified intangibles, net
2,228

 
2,708

 
$
65,583

 
$
66,131

Goodwill related to our oil and gas properties is $59,481,000 and $59,549,000 at second quarter-end 2015 and year-end 2014. Goodwill associated with our water resources company acquired in 2010 is $3,874,000 at second quarter-end 2015 and year-end 2014. The change in goodwill for oil and gas properties is related to goodwill allocated to proved properties in first six months 2015.
Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with a water resources company acquired in 2010, $217,000 related to in-place tenant leases with definite lives associated with the purchase of our partner's interest in the Eleven multifamily venture and $330,000 related to patents with definite lives associated with the Calliope Gas Recovery System, a process to increase natural gas production.
Note 6—Equity
A reconciliation of changes in equity at second quarter-end 2015 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2014
$
707,202

 
$
2,540

 
$
709,742

Net income (loss)
(42,665
)
 
110

 
(42,555
)
Distributions to noncontrolling interests
—

 
(687
)
 
(687
)
Other (primarily share-based compensation)
3,881

 
—

 
3,881


$
668,418

 
$
1,963

 
$
670,381

Note 7—Investment in Unconsolidated Ventures
At second quarter-end 2015, we have ownership interests in 16 ventures that we account for using the equity method.

8


Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
 
Venture Assets
 
Venture Borrowings(a)
 
Venture Equity
 
Our Investment
 
Second
Quarter-End
 
Year-End
 
Second
Quarter-End
 
Year-End
 
Second
Quarter-End
 
Year-End
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
242, LLC (b)
$
29,618

 
$
33,021

 
$
1,268

 
$
6,940

 
$
26,661

 
$
21,789

 
$
12,642

 
$
10,098

CL Ashton Woods, LP (c)
10,548

 
13,269

 
—

 
—

 
7,831

 
11,453

 
3,570

 
6,015

CL Realty, LLC
8,099

 
7,960

 
—

 
—

 
7,982

 
7,738

 
3,991

 
3,869

CREA FMF Nashville LLC (b)
55,028

 
40,014

 
46,322

 
29,660

 
5,771

 
5,987

 
5,300

 
5,516

Elan 99, LLC
17,250

 
10,070

 
1

 
1

 
14,548

 
9,643

 
13,094

 
8,679

FMF Littleton LLC
38,344

 
26,953

 
8,608

 
—

 
24,736

 
24,435

 
6,362

 
6,287

FMF Peakview LLC
47,753

 
43,638

 
27,790

 
23,070

 
17,210

 
17,464

 
3,524

 
3,575

HM Stonewall Estates, Ltd (c)
3,573

 
3,750

 
—

 
669

 
3,573

 
3,081

 
2,165

 
1,752

LM Land Holdings, LP (c)
32,070

 
25,561

 
9,284

 
4,448

 
20,442

 
18,500

 
10,609

 
9,322

Miramonte Boulder Pass, LLC
11,150

 
—

 
4,299

 
—

 
5,594

 
—

 
5,449

 
—

PSW Communities, LP
14,498

 
16,045

 
6,951

 
10,515

 
6,943

 
4,415

 
3,996

 
3,924

Temco Associates, LLC
11,406

 
11,756

 
—

 
—

 
11,014

 
11,556

 
5,507

 
5,778

Other ventures (d)
4,504

 
8,453

 
23,125

 
26,944

 
(25,729
)
 
(25,614
)
 
513

 
190

 
$
283,841

 
$
240,490

 
$
127,648

 
$
102,247

 
$
126,576

 
$
110,447

 
$
76,722

 
$
65,005

Combined summarized income statement information for our ventures accounted for using the equity method follows:
 
 Venture Revenues
 
 Venture Earnings (Loss)
 
Our Share of Earnings (Loss)
 
Second Quarter
 
First Six Months
 
Second Quarter
 
First Six Months
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
242, LLC (b)
$
12,368

 
$
—

 
$
17,699

 
$
1,475

 
$
4,409

 
$
(53
)
 
$
7,873

 
$
480

 
$
2,279

 
$
(26
)
 
$
4,045

 
$
251

CL Ashton Woods, LP (c)
1,061

 
361

 
2,411

 
1,069

 
851

 
76

 
1,378

 
296

 
878

 
135

 
1,556

 
453

CL Realty, LLC
190

 
459

 
469

 
827

 
83

 
322

 
243

 
552

 
42

 
161

 
122

 
276

CREA FMF Nashville LLC (b)
29

 
—

 
35

 
—

 
(103
)
 
—

 
(216
)
 
(25
)
 
(103
)
 
—

 
(216
)
 
(25
)
Elan 99, LLC
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
—

 
(2
)
 
—

FMF Littleton LLC
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

FMF Peakview LLC
466

 
—

 
652

 
—

 
(252
)
 
(79
)
 
(734
)
 
(152
)
 
(50
)
 
(16
)
 
(146
)
 
(31
)
HM Stonewall Estates, Ltd (c)
611

 
434

 
1,669

 
1,435

 
297

 
170

 
812

 
522

 
343

 
68

 
573

 
209

LM Land Holdings, LP (c)
4,321

 
4,395

 
6,297

 
9,293

 
2,538

 
4,044

 
3,788

 
6,971

 
923

 
1,220

 
1,287

 
1,897

Miramonte Boulder Pass, LLC
—

 
—

 
—

 
—

 
(49
)
 
—

 
(49
)
 
—

 
(25
)
 
—

 
(25
)
 
—

PSW Communities, LP
13,642

 
—

 
16,069

 
—

 
2,333

 
(4
)
 
2,528

 
(220
)
 
788

 
(6
)
 
961

 
(195
)
Temco Associates, LLC
1,086

 
654

 
1,144

 
714

 
460

 
134

 
459

 
116

 
230

 
67

 
230

 
58

Other ventures (d)
—

 
734

 
3,701

 
1,119

 
(55
)
 
(579
)
 
(258
)
 
(840
)
 
279

 
(645
)
 
244

 
(944
)
 
$
33,774

 
$
7,037

 
$
50,146

 
$
15,932

 
$
10,512

 
$
4,031

 
$
15,822

 
$
7,700

 
$
5,584

 
$
958

 
$
8,629

 
$
1,949

 _____________________
(a) 
Total includes current maturities of $72,716,000 at second quarter-end 2015, of which $42,579,000 is non-recourse to us, and $65,795,000 at year-end 2014, of which $42,566,000 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 $1,512,000 are reflected as a reduction to our investment in unconsolidated ventures at second quarter-end 2015.
(c) 
Includes unrecognized basis difference of $1,245,000 which is reflected as a reduction of our investment in unconsolidated ventures at second quarter-end 2015. The 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.

9

(d) 
Our investment in other ventures reflects our ownership interests, excluding venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 16—Variable Interest Entities for additional information.
In first six months 2015, we invested $10,136,000 in these ventures and received $7,049,000 in distributions. In first six months 2014, we invested $4,430,000 in these ventures and received $1,923,000 in distributions. Distributions include both return of investments and distribution of earnings.
Note 8—Receivables
Receivables consist of:
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Oil and gas revenue accruals
$
6,673

 
$
7,293

Other receivables and accrued interest
4,171

 
6,505

Oil and gas joint interest billing receivables
2,055

 
5,738

Other loans secured by real estate, average interest rates of 10.68% at second quarter-end 2015 and 4.41% at year-end 2014
1,948

 
1,737

Loan secured by real estate
$
—

 
$
3,574

 
14,847

 
24,847

Allowance for bad debts
(237
)
 
(258
)
 
$
14,610

 
$
24,589

In second quarter 2011, we acquired a non-performing loan that was secured by a lien on developed and undeveloped real estate located near Houston designated for single-family residential and commercial development. In first quarter 2015, the loan was paid in full and we received principal payments of $4,394,000 and interest payments of $49,000.
Estimated accretable yield follows:
 
Second
Quarter-End
 
2015
 
(In thousands)
Beginning of period (year-end 2014)
$
839

Change in accretable yield due to change in timing of estimated cash flows
30

Interest income recognized (in first six months 2015)
(869
)
End of period
$
—

Other loans secured by real estate generally are secured by a deed of trust and due within three years.
Note 9—Debt
Debt consists of:
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
8.50% senior secured notes due 2022
$
250,000

 
$
250,000

3.75% convertible senior notes due 2020, net of discount
104,846

 
103,194

6.00% tangible equity unit notes, net of discount
13,008

 
17,154

Secured promissory notes — average interest rates of 3.19% at second quarter-end 2015 and 3.17% at year-end 2014
15,400

 
15,400

Other indebtedness — interest rates ranging from 2.19% to 5.50%
51,586

 
46,996

 
$
434,840

 
$
432,744

Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At second quarter-end 2015, we were in compliance with the financial covenants of these agreements.

10

At second quarter-end 2015, our senior secured credit facility provides for a $300,000,000 revolving line of credit maturing May 15, 2017 (with two one-year extension options). The 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 $14,816,000 is outstanding at second quarter-end 2015. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At second quarter-end 2015, we had $285,184,000 in net unused borrowing capacity under our senior secured 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 and most of our majority-owned joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) a pledge of certain reimbursements payable to us from special improvement district tax collections in connection with our Cibolo Canyons project. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
At second quarter-end 2015, secured promissory notes represent a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $34,092,000. Other indebtedness principally represents $47,388,000 of senior secured loans for two multifamily properties, our 257-unit multifamily project in Austin and our 354-unit multifamily property near Dallas. The combined carrying value of these two multifamily properties is $86,137,000 at second quarter-end 2015.
At second quarter-end 2015 and year-end 2014, we have $13,331,000 and $15,168,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $2,016,000 and $2,107,000 in first six months 2015 and 2014 and is included in interest expense.
Note 10—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, oil and gas properties, assets held for sale, goodwill and other intangible assets, which are measured for impairment.
In second quarter 2015, we recognized proved oil and gas property non-cash impairment charges of $25,035,000 principally due to a significant decline in oil prices, declining well performance and an increased likelihood that these non-core oil and gas assets in Oklahoma, Nebraska and Kansas will be sold. The fair value of these properties was determined using Level 3 inputs and the income valuation method. We used a discount rate of 10 percent as of second quarter-end 2015 which is commensurate with our risk and current market conditions associated with realizing the expected cash flows projected for these investments.
In first six months 2015, we recognized non-cash asset impairment charges of $729,000, of which $504,000 was recognized in first quarter 2015 related to a residential development with golf course and country club property located near Fort Worth which was sold in April 2015 and $225,000 was recognized in second quarter 2015 related to one owned project near Atlanta. Fair value of the one owned project near Atlanta was determined based on the present value of future estimated cash flows expected from these properties.

11

 
Second Quarter-End 2015
 
Year-End 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Non-Financial Assets and Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
$
—

 
$
70

 
$
—

 
$
70

 
$
—

 
$
970

 
$
—

 
$
970

Proved oil and gas properties
$
—

 
$
—

 
$
28,359

 
$
28,359

 
$
—

 
$
—

 
$
3,655

 
$
3,655

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:
 
Second Quarter-End 2015
 
Year-End 2014
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Loan secured by real estate
$
—

 
$
—

 
$
3,574

 
$
4,859

 
Level 2
Fixed rate debt
$
(367,854
)
 
$
(365,260
)
 
$
(370,348
)
 
$
(359,131
)
 
Level 2
Note 11—Capital Stock
In first quarter 2015, we accelerated the expiration date of our shareholder rights plan from December 11, 2017 to March 13, 2015, resulting in termination of the plan.
Please read Note 17—Share-Based and Long-Term Incentive Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At second quarter-end 2015, personnel of former affiliates held options to purchase 510,000 shares of our common stock. The options have a weighted average exercise price of $28.42 and a weighted average remaining contractual term of one year. At second quarter-end 2015, the options have an aggregate intrinsic value of $17,700.
Note 12—Net Income (Loss) 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 (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. In periods with a net loss, no such adjustment is made to earnings as the holders of the participating securities have no obligation to fund losses.
Due to a net loss in second quarter and first six months 2015, as the effect of potentially dilutive securities would be anti-dilutive, basic and diluted loss per share are the same. The computations of basic and diluted earnings per share are as follows:

12

 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Numerator:
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(34,318
)
 
$
14,748

 
$
(42,555
)
 
$
23,755

Less: Net loss (income) attributable to noncontrolling interest
(189
)
 
74

 
(110
)
 
(599
)
Earnings (loss) available for diluted earnings per share
$
(34,507
)
 
$
14,822

 
$
(42,665
)
 
$
23,156

Less: Undistributed net income allocated to participating securities
—

 
(2,689
)
 
—

 
(4,205
)
Earnings (loss) available to common shareholders for basic earnings per share
$
(34,507
)
 
$
12,133

 
$
(42,665
)
 
$
18,951

 
 
 
 
 


 


Denominator:
 
 
 
 


 


Weighted average common shares outstanding — basic
34,278

 
35,458

 
34,223

 
35,407

Weighted average common shares upon conversion of participating securities (a)
—

 
7,857

 
—

 
7,857

Dilutive effect of stock options, restricted stock and equity-settled awards
—

 
373

 
—

 
426

Total weighted average shares outstanding — diluted
34,278

 
43,688

 
34,223

 
43,690

Anti-dilutive awards excluded from diluted weighted average shares
10,829

 
2,503

 
10,786

 
2,277

___________________
(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 6,547,800 shares (the minimum settlement rate) and 7,857,000 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 our convertible senior notes (Convertible Notes) in cash upon conversion with only the amount in excess of par value of the Convertible Notes to be settled in shares of our common stock. Therefore, our calculation of diluted net income per share using the treasury stock method includes only the amount, if any, in excess of par value of the Convertible Notes. As such, the Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the $24.49 conversion price of the Convertible Notes. The average price of our common stock in second quarter 2015 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our effective tax rate was 38 percent in second quarter 2015 and 37 percent in first six months 2015. Our effective tax rate for first six months 2015 includes a one percent benefit for noncontrolling interests and a two percent detriment for a state valuation allowance and share-based compensation benefits that will not be realized. Our effective tax rate was 35 percent in second quarter 2014 and first six months 2014, which included a one percent benefit for noncontrolling interests. Our effective tax rates also include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We have not provided a valuation allowance for our federal deferred tax asset and the majority of our state deferred tax assets because, although realization is not assured, we believe it is more likely than not they 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. The amount of deferred tax assets considered recoverable, however, could be reduced if estimates of future taxable income are reduced due to additional oil and gas restructuring costs or other factors.
Note 14—Commitments and 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. However, it is possible 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,

13

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 $332,000, 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 second quarter-end 2015 and year-end 2014, our asset retirement obligation was $1,926,000 and $1,807,000, which is included in other liabilities.
Oil and Gas Restructuring Costs
In connection with review of strategic alternatives with respect to our oil and gas business that was announced in December 2014, we offered retention bonuses to key personnel provided they remain our employees through December 2015. We are expensing retention bonus costs over the retention period. In first six months 2015, we incurred severance expenses related to staff reductions, paid a portion of the December 2014 accrual under written severance agreements and incurred costs associated with closure of our Fort Worth office. Office closure costs include a $1,750,000 lease termination charge and $391,000 for write off of leasehold improvements which were partially offset by a deferred lease credit of $364,000. These restructuring costs are included in other operating expense on our consolidated statements of income and comprehensive income. We may incur additional costs related to our strategic initiatives associated with lowering capital expenditures and operating costs associated with our oil and gas business.
The following table summarizes activity related to liabilities associated with our oil and gas restructuring activities in first six months 2015:
 
Employee-Related Costs
 
Lease Termination Charge
 
Total
 
(In thousands)
Balance at year-end 2014
$
(2,367
)
 
$
—

 
$
(2,367
)
Additions
(1,574
)
 
(1,750
)
 
(3,324
)
Payments
2,038

 
1,750

 
3,788

Balance at second quarter-end 2015
$
(1,903
)
 
$
—

 
$
(1,903
)
Note 15—Segment Information
We manage our operations through three 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, commercial and income producing properties, primarily a hotel and our multifamily investments. Oil and gas is an independent oil and gas exploration, development and production operation and manages our owned and leased mineral interests. Other natural resources manages our timber, recreational leases and water resource initiatives.
Total assets allocated by segment are as follows:
 
Second
Quarter-End
 
Year-End
 
2015
 
2014
 
(In thousands)
Real estate
$
689,409

 
$
654,774

Oil and gas
295,759

 
342,703

Other natural resources
20,074

 
22,531

Assets not allocated to segments (a)
187,077

 
238,191

 
$
1,192,319

 
$
1,258,199

 

14

 _________________________
(a) 
Assets not allocated to segments at second quarter-end 2015 principally consist of cash and cash equivalents of $98,761,000 and a net deferred tax asset of $65,327,000. Assets not allocated to segments at year-end 2014 principally consist of cash and cash equivalents of $170,127,000 and a net deferred tax asset of $40,624,000.
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 sales 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 and long-term incentive 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—Basis of Presentation. Our revenues are derived from U.S. operations and all of our assets are located in the U.S. In second quarter 2015, no single customer accounted for more than ten percent of our total revenues.
Segment revenues and earnings are as follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
39,409

 
$
55,173

 
$
72,239

 
$
120,653

Oil and gas
16,165

 
24,377

 
29,350

 
41,931

Other natural resources
1,856

 
3,463

 
3,646

 
5,034

Total revenues
$
57,430

 
$
83,013

 
$
105,235

 
$
167,618

Segment earnings (loss):
 
 
 
 

 

Real estate
$
15,527

 
$
27,297

 
$
24,593

 
$
50,872

Oil and gas
(56,867
)
 
9,522

 
(59,808
)
 
10,329

Other natural resources
(43
)
 
2,079

 
(434
)
 
1,551

Total segment earnings (loss)
(41,383
)
 
38,898

 
(35,649
)
 
62,752

Items not allocated to segments (a)
(13,868
)
 
(16,025
)
 
(32,119
)
 
(26,887
)
Income (loss) before taxes attributable to Forestar Group Inc.
$
(55,251
)
 
$
22,873

 
$
(67,768
)
 
$
35,865

  _________________________
(a) 
Items not allocated to segments consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
General and administrative expense
$
(5,177
)
 
$
(5,566
)
 
$
(11,197
)
 
$
(10,734
)
Shared-based and long-term incentive compensation expense
(23
)
 
(3,219
)
 
(3,481
)
 
(3,532
)
Interest expense
(8,715
)
 
(7,370
)
 
(17,536
)
 
(12,873
)
Other corporate non-operating income
47

 
130

 
95

 
252

 
$
(13,868
)
 
$
(16,025
)
 
$
(32,119
)
 
$
(26,887
)
Note 16—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 (VIEs) 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 continuously reassess to see if we are the primary beneficiary of a VIE.
At second quarter-end 2015, we have four VIEs. We account for these VIEs using the equity method and we are not the primary beneficiary. Although we have certain rights regarding major decisions, we do not have the power to direct the activities that are most significant to the economic performance of these VIEs. At second quarter-end 2015, these VIEs have total assets of $73,836,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of

15

$87,046,000, which includes $30,075,000 of borrowings classified as current maturities. These amounts are included in the summarized balance sheet information for ventures accounted for using the equity method in Note 7—Investment in Unconsolidated Ventures. At second quarter-end 2015, our investment in these VIEs is $9,682,000 and is included in investment in unconsolidated ventures. In first six months 2015, we contributed $74,000 to these VIEs. Our maximum exposure to loss related to one of these VIEs is estimated at $3,843,000, which exceeds our investment as we have a nominal general partner interest and could be held responsible for its 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.
Note 17—Share-Based and Long-Term Incentive Compensation
Share-based and long-term incentive compensation expense consists of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Cash-settled awards
$
(1,447
)
 
$
1,488

 
$
(1,151
)
 
$
(1,195
)
Equity-settled awards
918

 
1,241

 
2,915

 
3,590

Restricted stock
(20
)
 
33

 
(3
)
 
79

Stock options
534

 
457

 
1,566

 
1,058

Total share-based compensation
(15
)
 
3,219

 
3,327

 
3,532

Deferred cash
38

 
—

 
154

 
—

 
$
23

 
$
3,219

 
$
3,481

 
$
3,532

Share-based and long-term incentive compensation expense is included in:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
General and administrative expense
$
(276
)
 
$
1,290

 
$
1,846

 
$
1,267

Other operating expense
299

 
1,929

 
1,635

 
2,265

 
$
23

 
$
3,219

 
$
3,481

 
$
3,532

Share-Based Compensation
In first six months 2015, we granted 89,900 cash-settled stock appreciation rights awards and 598,600 equity-settled awards. 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, or disability or if there is a change in control. Equity-settled awards granted to employees in the first six months 2015 include market-leveraged stock units (MSUs) and stock options. Equity-settled MSUs will be settled in common stock based upon our stock price performance over three years from the date of grant. Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, or disability or if there is a change in control. Equity-settled awards in the form of restricted stock units granted to our directors are fully vested at the time of grant and are issued upon retirement.
The fair value of awards granted to retirement eligible employees expensed at the date of grant was $517,000 and $760,000 in first six months 2015 and 2014. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $8,843,000 at second quarter-end 2015.
In first six months 2015 and 2014, we issued 157,201 and 162,380 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of 48,636 and 51,681 shares withheld having a value of $723,000 and $972,000 for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.
Long-Term Incentive Compensation
In first six months 2015, we granted $587,000 of long-term incentive compensation in the form of deferred cash compensation. Deferred cash will be paid out after the earlier of three years or the employee's retirement eligibility date and the expense is recognized ratably over the vesting period. The accrued liability was $154,000 at second quarter-end 2015 and is included in other liabilities.


16

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2014 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of second quarter-end 2015, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 risks 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, or on a national or global scale;
•
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;
•
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 the 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, including impacts from shortages in materials or labor;
•
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in commodity prices;
•
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;
•
risks associated with oil and gas exploration, drilling and production activities;
•
fluctuations in oil and gas commodity prices;
•
our ability to fully realize our deferred tax assets is dependent upon generating future taxable income, executing tax planning strategies, and reversals of existing taxable temporary differences;
•
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

17

•
our ability to execute our growth strategy and deliver acceptable returns from acquisitions and other investments.

Other factors, including the risk factors described in Item 1A of our 2014 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.
2015 Strategic Initiatives
On May 12, 2015, we announced that as a result of its strategic review, our Board of Directors had unanimously approved and initiated a plan to focus on growing our core real estate business and maximizing long-term shareholder value through:
•Acquiring, entitling and developing residential and mixed-use communities,
•Investing in multifamily opportunities, including projects that provide additional recurring cash flow,
•Harvesting cash flow from oil and gas by significantly lowering capital investments and operating costs,
•Transitioning timberland into real estate properties.

Results of Operations
A summary of our consolidated results by business segment follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
39,409

 
$
55,173

 
$
72,239

 
$
120,653

Oil and gas
16,165

 
24,377

 
29,350

 
41,931

Other natural resources
1,856

 
3,463

 
3,646

 
5,034

Total revenues
$
57,430

 
$
83,013

 
$
105,235

 
$
167,618

Segment earnings (loss):
 
 
 
 
 
 
 
Real estate
$
15,527

 
$
27,297

 
$
24,593

 
$
50,872

Oil and gas
(56,867
)
 
9,522

 
(59,808
)
 
10,329

Other natural resources
(43
)
 
2,079

 
(434
)
 
1,551

Total segment earnings (loss)
(41,383
)
 
38,898

 
(35,649
)
 
62,752

Items not allocated to segments:
 
 
 
 
 
 
 
General and administrative expense
(5,177
)
 
(5,566
)
 
(11,197
)
 
(10,734
)
Share-based and long-term incentive compensation expense
(23
)
 
(3,219
)
 
(3,481
)
 
(3,532
)
Interest expense
(8,715
)
 
(7,370
)
 
(17,536
)
 
(12,873
)
Other corporate non-operating income
47

 
130

 
95

 
252

Income (loss) before taxes
(55,251
)
 
22,873

 
(67,768
)
 
35,865

Income tax benefit (expense)
20,744

 
(8,051
)
 
25,103

 
(12,709
)
Net income (loss) attributable to Forestar Group Inc.
$
(34,507
)
 
$
14,822

 
$
(42,665
)
 
$
23,156


18

Significant aspects of our results of operations follow:
Second Quarter and First Six Months 2015
•
Second quarter and first six months 2015 real estate segment earnings declined principally due to a $10,476,000 gain in second quarter 2014 associated with a non-monetary exchange of leasehold timber rights for 5,400 acres of undeveloped land with a partner in a consolidated venture, lower undeveloped land sales and decreased residential lot sales activity.
•
Oil and gas segment results decreased in second quarter and first six months 2015 principally due to $56,529,000 of non-cash impairment charges, which include $25,035,000 for proved oil and gas properties, $20,903,000 for unproved leasehold interests principally in Oklahoma, Nebraska and Kansas, and exploratory dry hole and pre-drilling costs of $10,591,000 related to non-core oil and gas properties in Oklahoma. In addition, segment earnings were negatively impacted by lower realized oil and gas prices despite an increase in production volumes and lower operating costs when compared with the same period in 2014. First six months 2015 results also include a lease termination penalty of $1,750,000 associated with the closure of our office in Fort Worth, Texas and $1,574,000 of employee severance and retention bonus costs as part of our initiative to significantly reduce oil and gas operating costs.
•
Share-based and long-term incentive compensation expense decreased principally as result of a 15 percent decrease in our stock price since year-end 2014, compared with a ten percent decrease in our stock price in first six months 2014 since year-end 2013, which impacted the value of vested cash-settled awards.
•
Second quarter and first six months 2015 interest expense increased primarily due to higher average borrowing rates and increased debt outstanding.
Second Quarter and First Six Months 2014
•
Second quarter and first six months 2014 real estate segment earnings benefited from increased undeveloped land sales and residential lot sales activity. In addition, second quarter 2014 real estate segment earnings included a $10,476,000 gain associated with a non-monetary exchange of leasehold timber rights for 5,400 acres of undeveloped land with a partner in a consolidated venture.
•
Oil and gas segment earnings increased principally due to gain of $5,706,000 related to the sale of oil and gas properties in Oklahoma and North Dakota. Segment earnings also benefited from higher working interest production volumes compared with second quarter and first six months 2013, offset partially by higher exploration, production and operating expenses. In addition, segment earnings were negatively impacted by lower production volumes and delay rental revenues associated with our owned mineral interests.
•
Second quarter 2014 other natural resources segment earnings increased compared with second quarter 2013 principally due to a groundwater reservation agreement which generated $698,000 in segment earnings and a $685,000 gain from a partial termination of a timber lease. Second quarter and first six months 2014 segment earnings were impacted by lower fiber volumes compared with second quarter and first six months 2013.
•
Share-based compensation expense decreased principally as result of a ten percent decrease in our stock price since year-end 2013, compared with a 16 percent increase in our stock price in first six months 2013 since year-end 2012, which impacted the value of vested cash-settled awards.
•
Second quarter and first six months 2014 interest expense increased primarily due to higher average borrowing rates and debt outstanding.
Current Market Conditions
    
Sales of new U.S. single-family homes were 482,000 units in June 2015, on an annualized basis, up 18 percent compared with June 2014, but down almost seven percent compared with the downwardly-revised May 2015 results, indicating the housing recovery remains tentative.  Inventories of new homes are at below historical levels in many areas. In addition, declining finished lot inventories and supply of economically developable raw land has resulted in demand for our developed lots. However, national and global economic weakness and uncertainty, and a restrictive mortgage lending environment continue to threaten a robust recovery in the housing market, despite low interest rates. 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

West Texas Intermediate crude oil prices at the end of second quarter 2015 have declined over 40 percent compared with second quarter 2014, driven by a combination of lower worldwide economic growth, record inventory levels and concern over higher oil exports from Iran. In response to the significant decline in crude oil prices, exploration and development activity in

19

the U.S. has declined sharply, however production has remained at historically high levels, aided by increased drilling efficiencies and lower costs. U.S. production continues to be liquids focused principally due to the premium price of oil over gas when comparing energy equivalency and current estimates of domestic gas producing supplies are believed to be sufficient.

Henry Hub natural gas prices at the end of second quarter 2015 were down approximately 37 percent compared with second quarter 2014, and remain significantly lower than realized prices over the last decade. The decline in natural gas prices is principally driven by higher inventories, which are 35 percent higher than year ago levels, and modestly above the previous five year average. Despite low prices, natural gas production in the U.S. remains high, driven by continued improvements in drilling efficiency and lower operating costs, which is expected to result in additional inventory growth.
Business Segments
We manage our operations through three business segments:
•
Real estate,
•
Oil and gas, and
•
Other natural resources.
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 sales 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 and long-term incentive 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 approximately 111,000 acres of real estate located in 11 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 approximately 87,000 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.
A summary of our real estate results follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues
$
39,409

 
$
55,173

 
$
72,239

 
$
120,653

Cost of sales
(21,438
)
 
(32,025
)
 
(39,492
)
 
(68,209
)
Operating expenses
(9,674
)
 
(9,315
)
 
(19,276
)
 
(17,390
)
 
8,297

 
13,833

 
13,471

 
35,054

Interest income
736

 
2,139

 
1,605

 
4,311

Gain on sale of assets
1,160

 
10,476

 
1,160

 
10,476

Equity in earnings of unconsolidated ventures
5,523

 
775

 
8,467

 
1,630

Less: Net (income) loss attributable to noncontrolling interests
(189
)
 
74

 
(110
)
 
(599
)
Segment earnings
$
15,527

 
$
27,297

 
$
24,593

 
$
50,872




20

Revenues in our owned and consolidated ventures consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Residential real estate
$
23,820

 
$
33,901

 
$
42,142

 
$
69,162

Commercial real estate
1,477

 
609

 
2,854

 
780

Undeveloped land
2,750

 
7,297

 
4,765

 
27,010

Commercial and income producing properties
11,109

 
11,050

 
21,978

 
20,983

Other
253

 
2,316

 
500

 
2,718

 
$
39,409

 
$
55,173

 
$
72,239

 
$
120,653

Residential real estate revenues principally consist of the sale of single-family lots to local, regional and national homebuilders. Revenues decreased in first six months 2015 compared with first six months 2014 primarily due to lower residential lot sales and reduced undeveloped land sales. In addition, in first six months 2015, we sold 783 acres of residential tract for $4,035,000 which generated segment earnings of $1,275,000, compared to 910 acres of residential tract for $6,567,000 which generated segment earnings of $2,698,000 in first six months 2014.
In first six months 2015, we sold 1,634 acres of undeveloped land for $4,765,000, or approximately $2,916 per acre, generating approximately $3,468,000 in segment earnings, as compared with 12,279 acres sold for $27,010,000 or approximately $2,200 per acre, generating approximately $20,667,000 in segment earnings in first six months 2014.
Commercial and income producing properties revenue include revenues from hotel room sales and other guest services, rental revenues from our operating multifamily properties and our reimbursement for costs paid to subcontractors plus development and construction fees we may earn on certain multifamily projects. Second quarter and first six months 2015 include $2,525,000 and $4,554,000 in construction revenues associated with our multifamily fixed fee contract as general contractor. Revenues associated with multifamily construction contracts for second quarter and first six months 2014 were $3,461,000 and $6,694,000. Rental revenues from our multifamily operating properties for second quarter and first six months 2015 were $2,041,000 and $3,803,000 compared with no rental revenues in first six months 2014, primarily due to the substantial completion of the Eleven multifamily project at the end of second quarter 2014 and acquiring our partner's interest in Eleven multifamily venture in third quarter 2014. In addition, our Midtown Cedar Hill multifamily project near Dallas was substantially completed in second quarter 2015 and is 77 percent occupied at second quarter-end 2015.
Units sold consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
Owned and consolidated ventures:
 
 
 
 
 
 
 
Residential lots sold
271

 
481

 
513

 
1,317

Revenue per lot sold
$
71,465

 
$
60,651

 
$
72,219

 
$
47,644

Commercial acres sold
20

 
3

 
24

 
3

Revenue per commercial acre sold
$
73,345

 
$
96,774

 
$
117,014

 
$
96,774

Undeveloped acres sold
903

 
2,950

 
1,634

 
12,279

Revenue per acre sold
$
3,044

 
$
2,473

 
$
2,916

 
$
2,200

Ventures accounted for using the equity method:
 
 
 
 
 
 
 
Residential lots sold
248

 
56

 
295

 
194

Revenue per lot sold
$
75,543

 
$
93,306

 
$
78,253

 
$
67,772

Commercial acres sold
1

 
—

 
30

 
—

Revenue per commercial acre sold
$
303,734

 
$
—

 
$
311,995

 
$
—

Undeveloped acres sold
345

 
258

 
345

 
258

Revenue per acre sold
$
2,983

 
$
2,306

 
$
2,983

 
$
2,306

Cost of sales in second quarter and first six months 2015 include $2,692,000 and $5,126,000 related to multifamily construction contract costs we incurred as general contractor and paid to subcontractors associated with our development of a multifamily venture property near Denver, compared with $3,539,000 and $9,041,000 associated with two multifamily venture properties in second quarter and first six months 2014, of which one of was completed in second quarter 2014. Included in multifamily construction contract costs are charges of $167,000 and $572,000 in second quarter and first six months 2015 reflecting estimated cost increases associated with our fixed fee contracts as general contractor for one multifamily venture

21

property compared with charges of $78,000 and $2,347,000 associated with two multifamily venture properties in second quarter and first six months 2014. Cost of sales in first six months 2015 also includes $729,000 of non-cash asset impairment charges, of which $504,000 was recognized in first quarter 2015 associated with a residential development with golf course and country club property located near Fort Worth, which was sold in April 2015, and $225,000 was recognized in second quarter 2015 related to one owned project near Atlanta.
Operating expenses consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Employee compensation and benefits
$
2,027

 
$
2,655

 
$
4,326

 
$
5,513

Property taxes
2,723

 
1,899

 
4,837

 
3,485

Professional services
1,856

 
2,272

 
2,536

 
3,411

Depreciation and amortization
2,005

 
695

 
3,729

 
1,343

Other
1,063

 
1,794

 
3,848

 
3,638

 
$
9,674

 
$
9,315

 
$
19,276

 
$
17,390

The increase in operating expenses for second quarter and first six months 2015 is principally related to increase in depreciation and amortization and property taxes associated with the Eleven multifamily project which was completed in second quarter 2014 and Midtown Cedar Hill multifamily project which is substantially complete. In third quarter 2014, we acquired full ownership of the Eleven multifamily project in Austin in which we previously held a 25 percent equity interest.
Interest income principally represents earnings from a loan secured by a mixed-use real estate community in Houston that was paid in full in first quarter 2015 and interest income received on reimbursements from utility and improvement districts.
In second quarter 2015, we recorded a gain of $1,160,000 associated with the reduction of a surety bond in connection with the Cibolo Canyons Special Improvement District bond offering in 2014. In second quarter 2014, the $10,476,000 gain is associated with a non-monetary exchange of leasehold timber rights on approximately 10,300 acres for 5,400 acres of undeveloped land with a partner in a consolidated venture.
Increase in equity earnings from our unconsolidated ventures in first six months 2015 is primarily related to increased lot sales activity associated with two ventures in Houston, Texas.
Net income attributable to noncontrolling interests in first six months 2015 declined as compared with the prior year principally due to the purchase of noncontrolling interests in the Lantana ventures for $7,971,000 in March 2014.
Information about our real estate projects and our real estate ventures follows:
 
Second
Quarter-End
 
2015
 
2014
Owned and consolidated ventures:
 
 
 
Entitled, developed and under development projects
 
 
 
Number of projects
68

 
65

Residential lots remaining
15,009

 
15,077

Commercial acres remaining
1,733

 
1,718

Undeveloped land and land in the entitlement process
 
 
 
Number of projects
11

 
11

Acres in entitlement process
24,430

 
24,430

Acres undeveloped
71,044

 
79,563

Ventures accounted for using the equity method:
 
 
 
Ventures’ entitled, developed and under development projects
 
 
 
Number of projects
8

 
8

Residential lots remaining
2,594

 
3,021

Commercial acres remaining
182

 
240

Ventures’ undeveloped land and land in the entitlement process
 
 
 
Acres undeveloped
4,358

 
5,073

We underwrite 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

22

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 follows:
State
Entitled,
Developed,
and Under
Development
Projects
 
Undeveloped
Land and Land
in Entitlement Process
 
Commercial
and Income
Producing
Properties
 
Total
 
(In thousands)
Texas
$
252,382

 
$
5,768

 
$
141,196

 
$
399,346

Georgia
14,537

 
62,953

 
—

 
77,490

California
8,915

 
23,783

 
—

 
32,698

North Carolina
12,299

 
40

 
15,870

 
28,209

Colorado
24,603

 
256

 
—

 
24,859

Tennessee
15,417

 
63

 
8,265

 
23,745

Other
17,028

 
150

 
—

 
17,178

 
$
345,181

 
$
93,013

 
$
165,331

 
$
603,525

Oil and Gas
Our oil and gas segment is focused on the exploration, development and production of oil and gas on our mineral and leasehold 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. At second quarter-end 2015, we have about 21,000 net acres leased to others, about 36,000 net acres leased to others that are held by production and 528 gross productive wells operated by others on our owned mineral acres. Most leases are for a three to five year term although all or a portion of a lease may be extended as long as actual production is occurring.
At second quarter-end 2015, our leasehold interests include 345,000 net mineral acres leased from others principally located in Nebraska and Kansas primarily targeting the Lansing-Kansas City formation, in Oklahoma targeting various formations in the Anadarko Basin, 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 9,000 net mineral acres in the Bakken and Three Forks formation. We have 47,000 net acres of leasehold interests held by production and 414 gross oil and gas wells with working interest ownership, of which 151 are operated by us.
A summary of our oil and gas results follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues
$
16,165

 
$
24,377

 
$
29,350

 
$
41,931

Cost of oil and gas producing activities
(70,141
)
 
(16,926
)
 
(81,683
)
 
(29,546
)
Operating expenses
(2,626
)
 
(3,812
)
 
(8,482
)
 
(8,071
)
 
(56,602
)
 
3,639

 
(60,815
)
 
4,314

Gain (loss) on sale of assets
(322
)
 
5,706

 
854

 
5,706

Equity in earnings of unconsolidated ventures
57

 
177

 
153

 
309

Segment earnings (loss)
$
(56,867
)
 
$
9,522

 
$
(59,808
)
 
$
10,329


23

Revenues consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Oil production (a)
$
14,458

 
$
22,010

 
$
25,762

 
$
37,004

Gas production
1,388

 
1,840

 
2,904

 
3,781

Other (principally lease bonus and delay rentals)
319

 
527

 
684

 
1,146

 
$
16,165

 
$
24,377

 
$
29,350

 
$
41,931

 _________________________
(a) 
Oil production includes revenues from oil, condensate and natural gas liquids (NGLs).
In second quarter and first six months 2015, oil and gas production revenues decreased principally as a result of lower oil and gas prices despite an increase in oil and gas production volumes as compared with the same period in 2014. The decline in oil prices negatively impacted revenues by $12,362,000 and $26,927,000 in second quarter and first six months 2015 as compared with the previous year. This decline was partially offset by a $4,807,000 and $15,685,000 increase in revenues as a result of higher oil production volumes in second quarter and first six months 2015, respectively. The decline in gas prices negatively impacted revenues by $940,000 and $1,566,000 in second quarter and first six months 2015, partially offset by a $492,000 and $689,000 increase in revenues as a result of increased gas production volumes in second quarter and first six months 2015, as compared with the previous year.
Other revenues include $482,000 in lease bonuses received from leasing 1,600 net mineral acres owned in Texas and Louisiana during the first six months 2015 as compared with $1,084,000 in lease bonuses received from leasing approximately 3,100 net mineral acres owned in Texas and Louisiana during the same period in 2014.
Cost of oil and gas producing activities consists of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Depletion and amortization
$
7,679

 
$
7,213

 
$
14,883

 
$
11,809

Production costs
5,289

 
4,457

 
9,391

 
8,305

Exploration costs
10,126

 
4,599

 
10,294

 
7,979

Impairment of proved properties and unproved leasehold interests
45,938

 
584

 
45,945

 
1,339

Other
1,109

 
73

 
1,170

 
114

 
$
70,141

 
$
16,926

 
$
81,683

 
$
29,546

Cost of oil and gas producing activities increased in second quarter and first six months 2015 principally as a result of non-cash impairment charges of $25,035,000 for proved oil and gas properties, $20,903,000 for unproved leasehold interests principally in Oklahoma, Nebraska and Kansas and exploratory dry hole and pre-drilling costs of $10,591,000 related to non-core oil and gas properties in Oklahoma. In second quarter and first six months 2015, cost of oil and gas producing activities were also affected by an increase in depletion expenses due to higher oil and gas production volumes, as compared to the same period during 2014. Depletion and amortization represent the non-cash cost of producing oil and gas associated with our working interests and is computed based on the units of production method.
Exploration costs principally represent exploratory dry hole costs, geological and geophysical and seismic study costs. Dry hole costs in first six months 2015 were $9,752,000, which includes a $9,674,000 charge in second quarter 2015 primarily associated with an exploratory well in Oklahoma. Dry hole costs in first six months 2014 were $5,665,000, which includes a $2,141,000 charge in second quarter 2014 associated with an exploratory well in east Texas. As a result of expiring leasehold interests, we recorded non-cash impairment charges on our unproved oil and gas properties of $1,339,000 in first six months 2014.
Production costs principally represent lease operating expenses associated with producing working interest wells and our share of production severance taxes related to both our royalty and working interests.


24

Oil and gas produced and average unit prices related to our royalty and working interests follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
Consolidated entities:
 
 
 
 
 
 
 
Oil production (barrels)
262,000

 
225,300

 
531,900

 
382,300

Average oil price per barrel
$
53.37

 
$
95.38

 
$
46.68

 
$
93.75

NGL production (barrels)
27,200

 
12,000

 
50,900

 
27,000

Average NGL price per barrel
$
17.54

 
$
43.24

 
$
18.35

 
$
43.17

Total oil production (barrels), including NGLs
289,200

 
237,300

 
582,800

 
409,300

Average total oil price per barrel, including NGLs
$
50.00

 
$
92.75

 
$
44.20

 
$
90.41

Gas production (millions of cubic feet)
518.9

 
409.4

 
997.0

 
843.2

Average price per thousand cubic feet
$
2.68

 
$
4.49

 
$
2.91

 
$
4.48

Our share of ventures accounted for using the equity method:
 
 
 
 
 
 
 
Gas production (millions of cubic feet)
40.1

 
50.5

 
82.4

 
103.2

Average price per thousand cubic feet
$
2.37

 
$
4.54

 
$
2.85

 
$
4.01

Total consolidated and our share of equity method ventures:
 
 
 
 
 
 
 
Oil production (barrels)
262,000

 
225,300

 
531,900

 
382,300

Average oil price per barrel
$
53.37

 
$
95.38

 
$
46.68

 
$
93.75

NGL production (barrels)
27,200

 
12,000

 
50,900

 
27,000

Average NGL price per barrel
$
17.54

 
$
43.24

 
$
18.35

 
$
43.17

Total oil production (barrels), including NGLs
289,200

 
237,300

 
582,800

 
409,300

Average total oil price per barrel, including NGLs
$
50.00

 
$
92.75

 
$
44.20

 
$
90.41

Gas production (millions of cubic feet)
559.0

 
459.9

 
1,079.4

 
946.4

Average price per thousand cubic feet
$
2.65

 
$
4.50

 
$
2.91

 
$
4.43

Total BOE (barrel of oil equivalent) (a)
382,300

 
313,900

 
762,700

 
567,000

Average price per barrel of oil equivalent
$
41.70

 
$
76.70

 
$
37.89

 
$
72.66

 _________________________
(a) 
Gas is converted to barrels of oil equivalent (BOE) using a conversion of six Mcf to one barrel of oil.
Operating expenses consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Employee compensation and benefits
$
1,433

 
$
2,443

 
$
4,054

 
$
5,014

Professional and consulting services
465

 
288

 
1,172

 
677

Depreciation
271

 
264

 
482

 
515

Other
457

 
817

 
2,774

 
1,865

 
$
2,626

 
$
3,812

 
$
8,482

 
$
8,071

Operating expenses increased in first six months 2015 as compared with the previous year, primarily as result of restructuring costs of $1,750,000 for a lease termination penalty associated with closing our office in Fort Worth, Texas and $1,574,000 of employee severance and retention costs. These restructuring costs were partially offset by lower staffing costs as result of a reduction in our workforce and initiatives to reduce oil and gas operating expenses.
In first six months 2015, we recorded a net gain of $854,000 on the sale of 17,168 net mineral acres leased from others in Nebraska and North Dakota and the disposition of 2 gross (1 net) producing oil and gas wells in Nebraska and Oklahoma for total proceeds of $2,524,000. In second quarter 2014, we recorded a total gain of $5,706,000 in conjunction with the sale of 97 gross (6 net) producing oil and gas wells in Oklahoma and the sale of 223 net mineral acres leased from others in North Dakota.
Other Natural Resources
Our other natural resources segment manages our timber holdings, recreational leases and water resource initiatives. At second quarter-end 2015, we have about 100,000 real estate acres with timber we own directly or through ventures, primarily in Georgia and Texas. Our other natural resources segment revenues are principally derived from the sales of wood fiber from our

25

land and leases for recreational uses. We have water interests in approximately 1.5 million acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama, and approximately 20,000 acres of groundwater leases in central Texas.

A summary of our other natural resources results follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenues
$
1,856

 
$
3,463

 
$
3,646

 
$
5,034

Cost of sales
(860
)
 
(801
)
 
(1,780
)
 
(1,577
)
Operating expenses
(1,043
)
 
(1,274
)
 
(2,309
)
 
(2,601
)
 
(47
)
 
1,388

 
(443
)
 
856

Gain on sale and partial termination of timber lease
—

 
685

 
—

 
685

Equity in earnings of unconsolidated ventures
4

 
6

 
9

 
10

Segment earnings (loss)
$
(43
)
 
$
2,079

 
$
(434
)
 
$
1,551

Revenues consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Fiber
$
1,391

 
$
2,441

 
$
2,636

 
$
3,744

Water
200

 
750

 
300

 
750

Recreational leases and other
265

 
272

 
710

 
540

 
$
1,856

 
$
3,463

 
$
3,646

 
$
5,034

Fiber sold consists of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
Pulpwood tons sold
36,000

 
58,200

 
63,500

 
86,400

Average pulpwood price per ton
$
9.39

 
$
11.42

 
$
9.06

 
$
10.85

Sawtimber tons sold
19,300

 
49,600

 
39,400

 
78,500

Average sawtimber price per ton
$
21.54

 
$
23.23

 
$
21.52

 
$
22.67

Total tons sold
55,300

 
107,800

 
102,900

 
164,900

Average stumpage price per ton (a)
$
13.62

 
$
16.86

 
$
13.83

 
$
16.48

 _________________________
(a) 
Average stumpage price per ton is based on gross revenues less cut and haul costs.
Water revenues are associated with a groundwater reservation agreement with Hays County, Texas, which commenced in third quarter 2013 and was terminated in second quarter 2015.
Information about our recreational leases follows:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
Average recreational acres leased
100,100

 
110,000

 
101,300

 
113,200

Average price per leased acre
$
9.34

 
$
9.69

 
$
9.30

 
$
9.41

Cost of sales principally includes non-cash cost of timber cut and sold and delay rental payments paid to others related to groundwater leases in central Texas.

26

Operating expenses consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Employee compensation and benefits
$
560

 
$
604

 
$
1,243

 
$
1,109

Professional and consulting services
299

 
532

 
648

 
1,207

Other
184

 
138

 
418

 
285

 
$
1,043

 
$
1,274

 
$
2,309

 
$
2,601


Gain on sale and partial termination of timber lease in first six months 2014 includes a $685,000 gain associated with partial termination of a timber lease related to the sale of 697 acres of undeveloped land in Georgia from a consolidated venture recorded in second quarter 2014.
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 and long-term incentive compensation, 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 expenses consist of:
 
Second Quarter
 
First Six Months
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Employee compensation and benefits
$
1,989

 
$
2,465

 
$
4,197

 
$
4,726

Professional and consulting services
1,581

 
1,361

 
3,249

 
2,366

Facility costs
221

 
248

 
454

 
476

Depreciation and amortization
150

 
151

 
331

 
295

Insurance costs
164

 
240

 
315

 
515

Other
1,072

 
1,101

 
2,651

 
2,356

 
$
5,177

 
$
5,566

 
$
11,197

 
$
10,734

Income Taxes
    
Our effective tax rate was 38 percent in second quarter 2015 and 37 percent for the first six months 2015. Our effective tax rate for first six months 2015 includes a one percent benefit for noncontrolling interests and a two percent detriment for a state valuation allowance and share-based compensation benefits that will not be realized. Our effective tax rate was 35 percent in second quarter 2014 and first six months 2014, which included a one percent benefit for noncontrolling interests. Our effective tax rates also include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We have not provided a valuation allowance for our federal deferred tax asset and the majority of our state deferred tax assets because, although realization is not assured, we believe it is more likely than not they 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. The amount of deferred tax assets considered recoverable, however, could be reduced if estimates of future taxable income are reduced due to additional oil and gas restructuring costs or other factors.
Capital Resources and Liquidity
Sources and Uses of Cash
We operate in cyclical industries and our cash flows fluctuate accordingly. 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 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. Operating 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

27

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 varies based on a variety of factors, including 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 acquisition and development activities, undeveloped land sales, commercial and income producing properties, timber sales, income from oil and gas properties, recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.
In first six months 2015, net cash used for operating activities was $17,513,000 primarily due to lower residential lot sales activity and a decrease in undeveloped land sales. In addition, our real estate development and acquisition expenditures were $57,353,000 exceeding $24,151,000 of real estate cost of sales. In first six months 2014, net cash provided by operating activities was $18,995,000 principally due to increased residential lot sales and undeveloped land sales activity, partially offset by real estate development and acquisition expenditures exceeding real estate cost of sales.

Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures, costs incurred to acquire, develop and construct multifamily projects that will be held as commercial operating properties upon stabilization as investment property, 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 first six months 2015, net cash used for investing activities was $52,449,000 principally due to our investment of $40,286,000 in oil and gas properties associated with our previously committed capital investments related to exploration and production operations. In addition, we invested $6,971,000 in property and equipment, software and reforestation, of which $4,693,000 is related to capital expenditures for our 413 guest room hotel in Austin. In first six months 2014, net cash used for investing activities was $47,708,000 principally due to our investment of $44,632,000 in oil and gas properties associated with our exploration and production operations. In addition, we invested $9,823,000 in property and equipment, software and reforestation, of which $4,254,000 is related to capital expenditures on our 413 guest room hotel in Austin and $3,914,000 is related to water well development, and a net investment in unconsolidated ventures of $4,275,000, partially offset by proceeds of $11,022,000 related to sale of certain oil and gas properties in Oklahoma and North Dakota.
Cash Flows from Financing Activities
In first six months 2015, net cash used for financing activities was $1,404,000 principally due to payroll taxes on share-settled equity awards and distributions to noncontrolling interests. In first six months 2014, net cash provided by financing activities was $20,574,000 principally due to net proceeds of $241,947,000 from the issuance of 8.5% senior secured notes, partially offset by debt payments of $219,653,000, of which $200,000,000 is related to retirement of the term loan associated with our senior secured credit facility, $4,950,000 is related to payments of our amortizing notes associated with our tangible equity units, $2,878,000 is related to debt outstanding for our Lantana partnerships and the remaining associated with payment of other indebtedness.
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.
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 that will be marketed for sale upon stabilization.
In first six months 2015, real estate development and acquisition expenditures were $57,353,000 which includes the acquisition of five new community development sites for $24,387,000 and real estate development costs of $32,966,000.

28

Oil and Gas Drilling and Other Exploration and Development Activities
At second quarter-end 2015, we had working interests in 414 gross active wells.
Our planned expenditures for 2015 are expected to be significantly lower compared with 2014 and are primarily related to existing well commitments in the Bakken/Three Forks formation of North Dakota. In first six months 2015, drilling and completion activity was primarily related to existing well commitments with 26 gross Bakken/Three Forks wells generating initial production and ten wells waiting on completion. In addition, in first six months 2015, we have elected to participate as a non-operator in 11 new gross wells for $10,017,000 in the Bakken/Three Forks formation of North Dakota. Regional allocation of our capital expenditures for drilling and completion activities in first six months 2015 is shown below:
 
First Six Months
 
2015
 
(In thousands)
Bakken and Three Forks formations of North Dakota
$
21,482

Lansing - Kansas City formation of Nebraska and Kansas
2,841

Other formations principally in Oklahoma
15,963

 
$
40,286

Our accrued capital expenditures for drilling and completion costs at second quarter-end 2015 were $13,572,000 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. Of the $40,286,000 of capital expenditures that we incurred and paid in first six months 2015 for drilling and completion activities, $36,778,000 was related to settling year-end 2014 accrued capital expenditures and payment of 2014 well commitments that were completed as of second quarter-end 2015.
Our 2015 projected capital expenditures are subject to various conditions, including third-party operator drilling plans, oilfield services and equipment availability, commodity prices and drilling results. Other factors that could cause us to adjust our projections include changes in commodity prices, service or material costs, opportunities, changes in conditions, or the performance of wells. We will continue to assess the gas and oil price environment along with our liquidity position and may increase or decrease our capital expenditure budget for exploration, development, or acquisition opportunities accordingly.
Liquidity
At second quarter-end 2015, our senior secured credit facility provides for a $300,000,000 revolving line of credit maturing May 15, 2017 (with two one-year extension options). The 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 $14,816,000 is outstanding at second quarter-end 2015. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula.
At second quarter-end 2015, net unused borrowing capacity under our senior secured credit facility is calculated as follows:
 
Senior Credit
Facility
 
(In thousands)
Borrowing base availability
$
300,000

Less: borrowings
—

Less: letters of credit
(14,816
)
 
$
285,184

Our net unused borrowing capacity during second quarter 2015 ranged from a high of $285,184,000 to a low of $284,711,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential and commercial real estate sales, undeveloped land sales, oil and gas leasing, exploration and production activities and mineral lease bonus payments received, timber sales, reimbursements from utility and improvement districts, payment of 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 second quarter-end 2015, we were in compliance with the financial covenants of these agreements.

29

The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:
Financial Covenant
Requirement
 
Second Quarter-End 2015
Interest Coverage Ratio (a)
≥2.50:1.0
 
3.23:1.0

Total Leverage Ratio (b)
≤50%
 
40.4
%
Net Worth (c)
≥$593.3 million
 
$632.7 million

 ___________________________________
(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.
(b) 
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 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.
(c) 
Calculated as the amount by which consolidated total assets (excluding Credo acquisition goodwill over $50,000,000) exceeds consolidated total liabilities. At second quarter-end 2015, the requirement is $593,287,000 computed as: $593,287,000 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.
To make additional discretionary investments, acquisitions, or distributions, we must maintain available liquidity equal to 10 percent of the aggregate commitments in place. At second quarter-end 2015, the minimum liquidity requirement was $30,000,000, compared with $380,423,000 in actual available liquidity based on the unused borrowing capacity under our senior secured credit facility plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility.
Discretionary investments in community development may be restricted in the event that the revenue/capital expenditure ratio is less than or equal to 1.0x. At second quarter-end 2015, the revenue/capital expenditure ratio was 2.1x. Revenue is defined as total gross revenues (excluding revenues attributed to Credo and multifamily properties), plus our pro rata share of the operating revenues from unconsolidated ventures. Capital expenditures are defined as consolidated development and acquisition expenditures (excluding investments related to Credo and multifamily properties), plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures.
In addition, we may elect to make distributions so long as the total leverage ratio is less than 40 percent, the interest coverage is greater than 3.0:1.0 and available liquidity is not less than $125,000,000. At second quarter-end 2015, our total leverage ratio exceeded 40 percent and as a result we are prohibited from making restricted payments until the above conditions are satisfied.
Contractual Obligations and Off-Balance Sheet Arrangements
In 2014, FMF Littleton LLC, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $46,384,000 to develop a 385-unit multifamily project located in Littleton, Colorado. The outstanding balance was $8,608,000 at second quarter-end 2015. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent of principal to ten percent upon achievement of certain conditions.
In 2014, CREA FMF Nashville LLC, an equity method venture with Massachusetts Mutual Life Insurance Co. (MassMutual) 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 outstanding balance at second quarter-end 2015 was $46,322,000. MassMutual is obligated to make a capital contribution to the venture in an amount equal to its equity commitment under the construction loan in an amount not to exceed $14,220,000. Such capital contribution shall be paid upon the earlier of (i) March 16, 2016 (ii) two months after the issuance of final certificates of occupancy with respect to the entire project, or (iii) ten business days after the date on which the long-term credit rating of MassMutual is less than AA- from Standard & Poor's or A1 from Moody's. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out

30

guaranty. The principal guaranty will reduce from 25 percent of principal to zero percent upon achievement of certain conditions.
In 2012, FMF Peakview LLC, 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. The outstanding balance at second quarter-end 2015 was $27,790,000. We provided the lender with 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.
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 $56,412,000 invested in Cibolo Canyons at second quarter-end 2015, all of which is related to the mixed-use development.
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 (the Resort), which includes a 1,002 room destination resort and two PGA Tour ® Tournament Players Club ® (TPC) golf courses.
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 Cibolo Canyons Special Improvement District (CCSID). This agreement includes the right to receive from CCSID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by CCSID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by CCSID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service on bonds issued by CCSID collateralized by hotel occupancy tax (HOT) 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 debt service incurred by CCSID.
In 2014, we received $50,550,000 from CCSID principally related to its issuance of $48,900,000 HOT and Sales and Use Tax Revenue Bonds, resulting in recovery of our full Resort investment. These bonds are obligations solely of CCSID and are payable from HOT and sales and use taxes levied on the Resort by CCSID. To facilitate the issuance of the bonds, we provided a $6,846,000 letter of credit to the bond trustee as security for certain debt service fund obligations in the event CCSID tax collections are not sufficient to support payment of the bonds in accordance with their terms. The letter of credit must be maintained until the earlier of redemption of the bonds or scheduled bond maturity in 2034. We also entered into an agreement with the owner of the Resort to assign its senior rights to us in exchange for consideration provided by us, including a surety bond to be drawn if CCSID tax collections are not sufficient to support ad valorem tax rebates payable.  The surety bond will decrease as CCSID makes annual ad valorem tax rebate payments, which obligation is scheduled to be retired in full by 2020. All future receipts are expected to be recognized as gains in the period collected. In second quarter 2015, we recorded a gain of $1,160,000 associated with the reduction of the surety bond from $9,010,000 at year-end 2014 to $7,850,000 at second quarter-end 2015.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include approximately 1,769 residential lots and 150 commercial acres designated for multifamily and retail uses, of which 944 lots and 130 commercial acres have been sold through second quarter-end 2015.
In 2007, we entered into an agreement with CCSID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by CCSID and unreimbursed amounts accrue interest at 9.75 percent. CCSID’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 CCSID approval and CCSID 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 CCSID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.

31

Through second quarter-end 2015, we have submitted for and were approved for reimbursement of approximately $65,438,000 of infrastructure costs, of which we have received reimbursements totaling $33,552,000. We did not receive any reimbursements from CCSID in first six months 2015. At second quarter-end 2015, we have $31,886,000 in pending reimbursements, excluding interest.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2014 Annual Report on Form 10-K.
New and Pending Accounting Pronouncements
Please read Note 2—New and Pending Accounting Pronouncements to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Statistical and Other Data
A summary of our real estate projects in the entitlement process (a) at second quarter-end 2015 follows:
Project
County
 
Market
 
Project Acres (b)
California
 
 
 
 
 
Hidden Creek Estates
Los Angeles
 
Los Angeles
 
700

Terrace at Hidden Hills
Los Angeles
 
Los Angeles
 
30

Georgia
 
 
 
 
 
Ball Ground
Cherokee
 
Atlanta
 
500

Crossing
Coweta
 
Atlanta
 
230

Fincher Road
Cherokee
 
Atlanta
 
3,890

Garland Mountain
Cherokee/Bartow
 
Atlanta
 
350

Martin’s Bridge
Banks
 
Atlanta
 
970

Mill Creek
Coweta
 
Atlanta
 
770

Wolf Creek
Carroll/Douglas
 
Atlanta
 
12,230

Yellow Creek
Cherokee
 
Atlanta
 
1,060

Texas
 
 
 
 
 
Lake Houston
Harris/Liberty
 
Houston
 
3,700

Total
 
 
 
 
24,430

 _________________________
(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.

32

A summary of activity within our active projects in the development process, which includes entitled (a), developed and under development real estate projects, at second quarter-end 2015 follows:
 
 
 
 
 
Residential Lots (c)
 
Commercial Acres (d)
Project
County
 
Interest
    Owned (b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres Sold
Since
Inception
 
Acres
Remaining (e)
Projects we own
 
 
 
 
 
 
 
 
 
 
 
California
 
 
 
 
 
 
 
 
 
 
 
San Joaquin River
Contra Costa/Sacramento
 
100
%
 
—

 
—

 
—

 
288

Colorado
 
 
 
 
 
 
 
 
 
 
 
Buffalo Highlands
Weld
 
100
%
 
—

 
164

 
—

 
—

Johnstown Farms
Weld
 
100
%
 
281

 
313

 
2

 
3

Pinery West
Douglas
 
100
%
 
86

 
—

 
20

 
106

Stonebraker
Weld
 
100
%
 
—

 
603

 
—

 
—

Georgia
 
 
 
 
 
 
 
 
 
 
 
Mars Hill
Cobb
 
100
%
 
—

 
57

 
—

 
—

Seven Hills
Paulding
 
100
%
 
828

 
255

 
26

 
113

The Villages at Burt Creek
Dawson
 
100
%
 
—

 
1,715

 
—

 
57

Other projects (17)
Various
 
100
%
 
228

 
2,403

 
—

 
705

North & South Carolina
 
 
 
 
 
 
 
 
 
 
 
Habersham
York
 
100
%
 
—

 
187

 
—

 
—

Walden
Mecklenburg
 
100
%
 
—

 
387

 
—

 
—

Tennessee
 
 
 
 
 
 
 
 
 
 
 
Beckwith Crossing
Wilson
 
100
%
 
—

 
99

 
—

 
—

Morgan Farms
Williamson
 
100
%
 
79

 
94

 
—

 
—

Scales
Williamson
 
100
%
 
—

 
87

 
—

 
—

Weatherford Estates
Williamson
 
100
%
 
—

 
17

 
—

 
—

Texas
 
 
 
 
 
 
 
 
 
 
 
Arrowhead Ranch
Hays
 
100
%
 
—

 
381

 
—

 
11

Bar C Ranch
Tarrant
 
100
%
 
350

 
755

 
—

 
—

Barrington Kingwood
Harris
 
100
%
 
166

 
14

 
—

 
—

Cibolo Canyons
Bexar
 
100
%
 
944

 
825

 
130

 
56

Harbor Lakes
Hood
 
100
%
 
231

 
—

 
21

 
—

Hunter’s Crossing
Bastrop
 
100
%
 
510

 
—

 
54

 
49

Imperial Forest
Harris
 
100
%
 
—

 
428

 
—

 
—

La Conterra
Williamson
 
100
%
 
202

 
—

 
3

 
55

Lakes of Prosper
Collin
 
100
%
 
127

 
160

 
4

 
—

Lantana
Denton
 
100
%
 
1,207

 
557

 
14

 
—

Maxwell Creek
Collin
 
100
%
 
941

 
60

 
10

 
—

Oak Creek Estates
Comal
 
100
%
 
253

 
301

 
13

 
—

Parkside
Collin
 
100
%
 
—

 
200

 
—

 
—

River's Edge
Denton
 
100
%
 
—

 
202

 
—

 
—

Stoney Creek
Dallas
 
100
%
 
221

 
487

 
—

 
—

Summer Creek Ranch
Tarrant
 
100
%
 
983

 
268

 
35

 
44

Summer Lakes
Fort Bend
 
100
%
 
666

 
403

 
56

 
—

Summer Park
Fort Bend
 
100
%
 
69

 
130

 
28

 
68

The Colony
Bastrop
 
100
%
 
454

 
1,431

 
22

 
31

The Preserve at Pecan Creek
Denton
 
100
%
 
576

 
206

 
—

 
7

Village Park
Collin
 
100
%
 
567

 
—

 
3

 
2

Westside at Buttercup Creek
Williamson
 
100
%
 
1,496

 
1

 
66

 
—

Other projects (7)
Various
 
100
%
 
1,565

 
21

 
133

 
7

Other
 
 
 
 
 
 
 
 
 
 
 
Other projects (3)
Various
 
100
%
 
543

 
320

 
—

 
—

 
 
 
 
 
13,573

 
13,531

 
640

 
1,602


33

 
 
 
 
 
Residential Lots (c)
 
Commercial Acres (d)
Project
County
 
Interest
    Owned (b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres Sold
Since
Inception
 
Acres
Remaining (e)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Projects in entities we consolidate
 
 
 
 
 
 
 
 
 
 
 
Texas
 
 
 
 
 
 
 
 
 
 
 
City Park
Harris
 
75
%
 
1,311

 
504

 
52

 
113

Timber Creek
Collin
 
88
%
 
—

 
601

 
—

 
—

Willow Creek Farms II
Waller/Fort Bend
 
90
%
 
90

 
175

 
—

 
—

Other projects (2)
Various
 
Various

 
10

 
198

 
—

 
18

 
 
 
 
 
1,411

 
1,478

 
52

 
131

Total owned and consolidated
 
 
 
 
14,984

 
15,009

 
692

 
1,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Projects in ventures that we account for using the equity method
 
 
 
 
 
 
 
 
Texas
 
 
 
 
 
 
 
 
 
 
 
Entrada
Travis
 
50
%
 
—

 
821

 
—

 
—

Fannin Farms West
Tarrant
 
50
%
 
324

 
—

 
—

 
—

Harper’s Preserve
Montgomery
 
50
%
 
473

 
1,255

 
30

 
49

Lantana - Rayzor Ranch
Denton
 
25
%
 
1,163

 
—

 
50

 
—

Long Meadow Farms
Fort Bend
 
38
%
 
1,496

 
308

 
187

 
118

Southern Trails
Brazoria
 
80
%
 
818

 
178

 
1

 
—

Stonewall Estates
Bexar
 
50
%
 
358

 
32

 
—

 
—

Other projects (2)
Various
 
Various

 
—

 
—

 
—

 
15

Total in ventures
 
 
 
 
4,632

 
2,594

 
268

 
182

Combined total
 
 
 
 
19,616

 
17,603

 
960

 
1,915

 _________________________
(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) 
Excludes acres associated with commercial and income producing properties.
A summary of our significant commercial and income producing properties at second quarter-end 2015 follows:
Project
 
Market
 
Interest
    Owned (a)
 
Type
 
Acres
 
Description
Radisson Hotel
 
Austin
 
100
%
 
Hotel
 
2

 
413 guest rooms and suites
Eleven
 
Austin
 
100
%
 
Multifamily
 
3

 
257-unit luxury apartment
Midtown
 
Dallas
 
100
%
 
Multifamily
 
13

 
354-unit luxury apartment
360° (b)
 
Denver
 
20
%
 
Multifamily
 
4

 
304-unit luxury apartment
Acklen (b)
 
Nashville
 
30
%
 
Multifamily
 
6

 
320-unit luxury apartment
HiLine (b)
 
Denver
 
25
%
 
Multifamily
 
6

 
385-unit luxury apartment
Elan 99 (b)
 
Houston
 
90
%
 
Multifamily
 
14

 
360-unit luxury apartment
 _________________________
(a) 
Interest owned reflects our total interest in the project, whether owned directly or indirectly.
(b) 
Construction in progress.

34

Oil and Gas Owned Mineral Interests
A summary of our oil and gas owned mineral interests (a) at second quarter-end 2015 follows:
State
Unleased
 
Leased (b)
 
Held By
Production (c)
 
Total (d)
 
 
 
(Net acres)
Texas
209,000

 
16,000

 
27,000

 
252,000

Louisiana
130,000

 
5,000

 
9,000

 
144,000

Georgia
152,000

 
—

 
—

 
152,000

Alabama
40,000

 
—

 
—

 
40,000

California
1,000

 
—

 
—

 
1,000

Indiana
1,000

 
—

 
—

 
1,000

 
533,000

 
21,000

 
36,000

 
590,000

 _________________________
(a) 
Includes ventures.
(b) 
Includes leases in primary lease term or for which a delay 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. Georgia and Alabama 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) by county or parish at second quarter-end 2015 follows:
Texas
 
Louisiana
County
 
Net Acres
 
Parish
 
Net Acres
Trinity
 
46,000

 
Beauregard
 
79,000

Angelina
 
42,000

 
Vernon
 
39,000

Houston
 
29,000

 
Calcasieu
 
17,000

Anderson
 
25,000

 
Allen
 
7,000

Cherokee
 
24,000

 
Rapides
 
1,000

Sabine
 
23,000

 
Other
 
1,000

Red River
 
14,000

 
 
 
144,000

Newton
 
13,000

 
 
 
 
San Augustine
 
13,000

 
 
 
 
Jasper
 
12,000

 
 
 
 
Other
 
11,000

 
 
 
 
 
 
252,000

 
 
 
 
 _________________________
(a) 
Includes ventures.

35

Oil and Gas Mineral Interests Leased
A summary of our net oil and gas mineral acres leased from others at second quarter-end 2015 follows:
State
Undeveloped
 
Held By
Production (a)
 
Total
Nebraska
232,000

 
11,000

 
243,000

Kansas
12,000

 
8,000

 
20,000

Oklahoma
22,000

 
17,000

 
39,000

Texas
10,000

 
2,000

 
12,000

North Dakota
4,000

 
5,000

 
9,000

Other
18,000

 
4,000

 
22,000

 
298,000

 
47,000

 
345,000

 _________________________
(a) 
Excludes approximately 8,000 net acres of overriding royalty interests.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
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 $66,986,000 at second quarter-end 2015.
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 second quarter-end 2015. 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.
 
Second
Quarter-End
Change in Interest Rates
2015
 
(In thousands)
2%
$
(1,152
)
1%
$
(670
)
(1)%
$
670

(2)%
$
1,340

Foreign Currency Risk
We have no exposure to foreign currency fluctuations.
Commodity Price Risk
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 first six months 2015 production, a 10% decrease in our average realized oil and gas prices would have reduced our oil and gas production revenues by $2,866,000. 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 second quarter-end 2015.
Item 4. 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

36

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) 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 period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. 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, long-term results of operations or cash flows. It is possible, however, that circumstances beyond our control or significant subsequent developments could result in additional charges related to these matters that could be significant to results of operations or cash flow in any single accounting period.
Item 1A. Risk Factors
There are no material changes from the risk factors disclosed in our 2014 Annual Report on Form 10-K, except as follows:

The value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results.

As of June 30, 2015, we had approximately $65 million in net deferred tax assets. These deferred tax assets can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, we may be required to provide additional valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is provided and could have a material adverse effect on our results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (a) 
Period
Total
Number of
Shares
Purchased 
 
Average
Price
Paid per
Share
 
Total Number
of  Shares
Purchased as
Part of  Publicly
Announced
Plans  or
Programs
 
Maximum
Number of
Shares That
May Yet be
Purchased
Under the
Plans or
Programs
Month 4 (4/1/2015 — 4/30/2015)
—

 
$
—

 
—

 
3,506,668

Month 5 (5/1/2015 — 5/31/2015)
—

 
$
—

 
—

 
3,506,668

Month 6 (6/1/2015 — 6/30/2015)
—

 
$
—

 
—

 
3,506,668

 
—

 
$
—

 
—

 
 
 _________________________
(a) 
On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have purchased 3,493,332 shares under this authorization, which has no expiration date. We have 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.
Item 3. Defaults Upon Senior Securities
None.

37

Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
 
Description
 
 
 
31.1
 
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.
 
 
 
31.2
 
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.
 
 
 
32.1
 
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.
 
 
 
32.2
 
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.
 
 
 
101.1
 
The following materials from Forestar’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.

38

SIGNATURES
Pursuant to the requirements 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.
 
 
FORESTAR GROUP INC.
 
 
 
Date: August 7, 2015
By:
/s/ Christopher L. Nines
 
 
Christopher L. Nines
 
 
Chief Financial Officer
 
 
 
 
By:
/s/ Sabita C. Reddy
 
 
Sabita C. Reddy
 
 
Principal Accounting Officer

39


Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, James M. DeCosmo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Forestar Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
 
/s/ James M. DeCosmo
 
James M. DeCosmo
Chief Executive Officer
Date: August 7, 2015






Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Christopher L. Nines, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Forestar Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ Christopher L. Nines
 
Christopher L. Nines
Chief Financial Officer
Date: August 7, 2015





Exhibit 32.1
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
I, James M. DeCosmo, Chief Executive Officer of Forestar Group Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, this quarterly report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Forestar Group Inc.
 
 
/s/ James M. DeCosmo
 
James M. DeCosmo
Date: August 7, 2015





Exhibit 32.2
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
I, Christopher L. Nines, Chief Financial Officer of Forestar Group Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, this quarterly report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Forestar Group Inc.
 
 
/s/ Christopher L. Nines
 
Christopher L. Nines
Date: August 7, 2015




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