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Forestar Group Inc. - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 
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 September 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33662
_________________________________________________________  
FORESTAR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
 _________________________________________________________ 
Delaware
 
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 November 4, 2013
Common Stock, par value $1.00 per share
 
34,748,426
 


Table of Contents

FORESTAR GROUP INC.
TABLE OF CONTENTS
 

2

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
(Unaudited)
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
ASSETS
 
Cash and cash equivalents
$
54,769

 
$
10,361

Real estate, net
509,467

 
517,150

Oil and gas properties and equipment, net
207,832

 
158,427

Investment in unconsolidated ventures
46,691

 
41,546

Timber
11,324

 
12,293

Receivables, net
34,770

 
33,623

Prepaid expenses
5,836

 
6,455

Income taxes receivable
1,569

 

Property and equipment, net
5,905

 
4,859

Deferred tax asset, net
41,832

 
54,748

Goodwill and other intangible assets
66,656

 
63,868

Other assets
16,836

 
15,104

TOTAL ASSETS
$
1,003,487

 
$
918,434

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
13,921

 
$
18,320

Accrued employee compensation and benefits
3,350

 
5,667

Accrued property taxes
6,643

 
4,231

Accrued interest
1,270

 
1,168

Income taxes payable

 
587

Other accrued expenses
34,843

 
22,648

Other liabilities
28,138

 
38,203

Debt
335,171

 
294,063

TOTAL LIABILITIES
423,336

 
384,887

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 third quarter-end 2013 and year-end 2012
36,947

 
36,947

Additional paid-in capital
434,960

 
407,206

Retained earnings
137,419

 
121,097

Treasury stock, at cost, 2,209,151 shares at third quarter-end 2013 and 2,327,623 shares at year-end 2012
(34,488
)
 
(35,762
)
Total Forestar Group Inc. shareholders’ equity
574,838

 
529,488

Noncontrolling interests
5,313

 
4,059

TOTAL EQUITY
580,151

 
533,547

TOTAL LIABILITIES AND EQUITY
$
1,003,487

 
$
918,434

Please read the notes to consolidated financial statements.

3

Table of Contents

FORESTAR GROUP INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share amounts)
REVENUES
 
 
 
 
 
 
 
Real estate sales and other
$
37,001

 
$
18,310

 
$
84,877

 
$
48,303

Commercial and income producing properties
13,355

 
8,805

 
85,387

 
23,381

Real estate
50,356

 
27,115

 
170,264

 
71,684

Oil and gas
22,095

 
10,479

 
53,430

 
27,053

Other natural resources
2,656

 
3,016

 
8,963

 
5,277

 
75,107

 
40,610

 
232,657

 
104,014

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of real estate sales and other
(18,603
)
 
(10,806
)
 
(43,112
)
 
(27,158
)
Cost of commercial and income producing properties
(13,352
)
 
(6,733
)
 
(70,151
)
 
(15,928
)
Cost of oil and gas producing activities
(10,090
)
 
(1,392
)
 
(26,762
)
 
(3,117
)
Cost of other natural resources
(454
)
 
(1,043
)
 
(1,662
)
 
(2,169
)
Other operating
(16,051
)
 
(14,691
)
 
(45,039
)
 
(39,116
)
General and administrative
(5,945
)
 
(11,298
)
 
(22,245
)
 
(25,010
)
 
(64,495
)
 
(45,963
)
 
(208,971
)
 
(112,498
)
GAIN ON SALE OF ASSETS

 
10,196

 

 
25,506

OPERATING INCOME
10,612

 
4,843

 
23,686

 
17,022

Equity in earnings of unconsolidated ventures
3,125

 
680

 
6,604

 
2,172

Interest expense
(5,231
)
 
(8,094
)
 
(14,892
)
 
(15,649
)
Other non-operating income
1,459

 
1,113

 
3,711

 
2,317

INCOME (LOSS) BEFORE TAXES
9,965

 
(1,458
)
 
19,109

 
5,862

Income tax benefit (expense)
2,932

 
1,078

 
28

 
(1,274
)
CONSOLIDATED NET INCOME (LOSS)
12,897

 
(380
)
 
19,137

 
4,588

Less: Net income attributable to noncontrolling interests
(1,067
)
 
(323
)
 
(2,815
)
 
(1,678
)
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.
$
11,830

 
$
(703
)
 
$
16,322

 
$
2,910

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
35,410

 
35,233

 
35,341

 
35,204

Diluted
36,072

 
35,233

 
35,949

 
35,437

NET INCOME (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.33

 
$
(0.02
)
 
$
0.46

 
$
0.08

Diluted
$
0.33

 
$
(0.02
)
 
$
0.45

 
$
0.08

TOTAL COMPREHENSIVE INCOME (LOSS)
$
11,830

 
$
(703
)
 
$
16,322

 
$
2,910

Please read the notes to consolidated financial statements.

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Table of Contents

FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited) 
 
First Nine Months
 
2013
 
2012
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
19,137

 
$
4,588

Adjustments:
 
 
 
Depreciation, depletion and amortization
21,698

 
12,952

Change in deferred income taxes
3,535

 
(2,971
)
Change in unrecognized tax benefits
(6,251
)
 
114

Equity in earnings of unconsolidated ventures
(6,604
)
 
(2,172
)
Distributions of earnings of unconsolidated ventures
869

 
516

Proceeds from consolidated venture's sale of assets, net

 
24,294

Share-based compensation
15,367

 
11,491

Real estate cost of sales
71,324

 
25,998

Dry hole exploration costs
2,206

 

Real estate development and acquisition expenditures, net
(65,762
)
 
(67,127
)
Reimbursements from utility and improvement districts
4,540

 
2,922

Other changes in real estate
1,440

 
835

Changes in deferred income
(2,229
)
 
927

Gain on sale of assets

 
(25,506
)
Other
154

 
(35
)
Changes in:
 
 
 
Notes and accounts receivable
(544
)
 
(645
)
Prepaid expenses and other
(373
)
 
1,300

Accounts payable and other accrued liabilities
(11,268
)
 
452

Income taxes
(2,156
)
 
(7,283
)
Net cash provided by (used for) operating activities
45,083

 
(19,350
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software and reforestation and other
(6,241
)
 
(1,577
)
Oil and gas properties and equipment
(56,482
)
 
(2,794
)
Investment in unconsolidated ventures
(819
)
 
(1,684
)
Return of investment in unconsolidated ventures
1,271

 
985

Proceeds from sale of multifamily property

 
29,474

Business acquisition, net of cash acquired

 
(152,073
)
Proceeds from sale of venture interest

 
32,095

Other
(45
)
 

Net cash (used for) investing activities
(62,316
)
 
(95,574
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of convertible senior notes, net
121,250

 

Payments of debt
(96,915
)
 
(46,374
)
Additions to debt
38,901

 
158,929

Deferred financing fees
(808
)
 
(5,209
)
Distributions to noncontrolling interests, net
(1,561
)
 
(897
)
Exercise of stock options
1,812

 
1,269

Payroll taxes on restricted stock and stock options
(1,128
)
 
(1,171
)
Excess income tax benefit from share-based compensation
90

 
373

Net cash provided by financing activities
61,641

 
106,920

 
 
 
 
Net increase (decrease) in cash and cash equivalents
44,408

 
(8,004
)
Cash and cash equivalents at beginning of period
10,361

 
18,283

Cash and cash equivalents at end of period
$
54,769

 
$
10,279

Please read the notes to consolidated financial statements.

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Table of Contents

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 and variable interest entities of which we are the primary beneficiary. We eliminate all material intercompany accounts and transactions. In our consolidated balance sheets we have reclassified prior years' other accrued expenses that were included in accounts payable to conform to the current year presentation. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any preferential returns and treat distributions as a reduction of our investment). We account for our investment in other entities in which we do not have significant influence over operations and financial policies using the cost method (we recognize as income distributions of accumulated earnings).
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 cost of sales 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 2012 Annual Report on Form 10-K.
In first quarter 2013, we strategically changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations, real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results to other natural resources. All prior period segment information has been reclassified to conform to the current year presentation. These changes did not impact our consolidated net income or cash flows.
Note 2—New and Pending Accounting Pronouncements
Accounting Standards Adopted in 2013
In first nine months 2013, we adopted Accounting Standards Update (ASU) ASU 2013-11— Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, ASU 2011-10 — Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate, ASU 2012-02 — Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and ASU No. 2013-01 — Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Adoption of these pronouncements did not have a significant effect on our earnings or financial position.
Pending Accounting Standards
ASU 2013-04 — Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date will be effective in first quarter 2014. This ASU requires an entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. We are evaluating the impact adoption of this ASU will have on our earnings, financial position and disclosures.


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Table of Contents

Note 3—Real Estate
Real estate consists of:
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
Entitled, developed and under development projects
$
369,084

 
$
361,827

Undeveloped land (includes land in entitlement)
87,489

 
82,688

Commercial and income producing properties
 
 
 
Carrying value
80,381

 
100,855

Less: accumulated depreciation
(27,487
)
 
(28,220
)
Net carrying value
52,894

 
72,635

 
$
509,467

 
$
517,150


Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $63,795,000 at third quarter-end 2013 and $50,476,000 at year-end 2012, including $41,795,000 at third quarter-end 2013 and $34,252,000 at year-end 2012 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval and reimbursement. We submitted for reimbursement to these districts $15,713,000 in first nine months 2013 and $4,345,000 in first nine months 2012. We collected reimbursements of $1,840,000 from these districts in first nine months 2013 and $972,000 in first nine months 2012. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.
Also included in entitled, developed and under development projects is our investment in the resort development owned by third parties at our Cibolo Canyons project. We received $2,700,000 in payments from the special improvement district in first nine months 2013 and $1,950,000 in first nine months 2012. At third quarter-end 2013, we have $29,818,000 invested in the resort development.
In first nine months 2013, commercial and income producing properties decreased by $29,707,000 as result of selling Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000. We received $21,522,000 in net proceeds, reduced our outstanding debt by $18,902,000 and recognized $10,881,000 in segment earnings. At third quarter-end 2013, commercial and income producing properties primarily represents our investment in a 413 guest room hotel in Austin with a carrying value of $20,881,000 and our investment in multifamily development sites located in Charlotte, Nashville and Dallas with a combined carrying value of $30,367,000.
Depreciation expense, primarily related to commercial and income producing properties, was $1,927,000 in first nine months 2013 and $2,736,000 in first nine months 2012 and is included in other operating expenses.
Note 4—Oil and Gas Properties
Net capitalized costs, utilizing the successful efforts method of accounting, related to our oil and gas producing activities follows:
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
Unproved oil and gas properties
$
92,317

 
$
81,672

Proved oil and gas properties
133,017

 
81,412

Less: accumulated depreciation, depletion and amortization
(17,502
)
 
(4,657
)
Net carrying value of proved oil and gas properties
115,515

 
76,755

 
$
207,832

 
$
158,427


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Table of Contents

Note 5—Goodwill and Other Intangible Assets
Carrying value of goodwill and other intangible assets follows:
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
Goodwill
$
64,493

 
$
61,680

Identified intangibles, net
2,163

 
2,188

 
$
66,656

 
$
63,868

Goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets of $60,619,000 associated with acquisition of Credo in third quarter 2012 and $3,874,000 associated with a water resources company acquired in 2010.
The final purchase price allocation related to the Credo acquisition based on additional information obtained during the acquisition measurement period, in particular, allocation of the estimated values assigned to oil and gas properties and equipment, goodwill and deferred tax liability, is as follows:
 
 
Purchase Price Allocation
 
 
Year-End
 
 
 
Third
Quarter-End
 
 
2012
 
Adjustments
 
2013
 
 
(In thousands)
Cash and short-term investments
 
$
2,300

 
$

 
 
$
2,300

Receivables
 
9,144

 
1,003

(a) 
 
10,147

Oil and gas properties and equipment
 
140,514

 
(4,712
)
(b) 
 
135,802

Other properties and equipment
 
67

 

 
 
67

Goodwill and other intangible assets
 
58,396

 
2,813

(c) 
 
61,209

Other
 
676

 

  
 
676

Total assets acquired
 
211,097

 
(896
)
 
 
210,201

 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
29,927

 
13

(d) 
 
29,940

Deferred tax liability
 
24,700

 
(909
)
(e) 
 
23,791

Other liabilities
 
1,255

 

 
 
1,255

Total liabilities assumed
 
55,882

 
(896
)
 
 
54,986

 
 
 
 
 
 
 
 
Estimated fair value of net assets acquired
 
$
155,215

 
$

 
 
$
155,215

 _____________________
(a)
Primarily related to unrecorded seismic and leasehold costs due from partners.
(b)
Fair value adjustments allocated to near-term expiring leasehold acreage.
(c)
Goodwill adjustments associated with fair value adjustments for oil and gas properties, net of deferred taxes and working capital adjustments.
(d)
Primarily related to current income taxes payable.
(e)
Primarily related to deferred taxes on fair value adjustments of near-term expiring leasehold acreage.
Identified intangibles include $1,667,000 in indefinite lived groundwater leases associated with a water resources company acquired in 2010. In addition, identified intangibles includes $590,000 related to patents with definite lives associated with the Calliope Gas Recovery System associated with our acquisition of Credo and is being amortized over the average remaining useful life of the patents. The net carrying value at third quarter-end 2013 is $496,000.


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Table of Contents

Note 6—Equity
A reconciliation of changes in equity at third quarter-end 2013 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2012
$
529,488

 
$
4,059

 
$
533,547

Net income
16,322

 
2,815

 
$
19,137

Distributions to noncontrolling interests

 
(1,663
)
 
$
(1,663
)
Contributions from noncontrolling interests

 
102

 
$
102

Convertible senior notes
17,058

 

 
$
17,058

Other (primarily share-based compensation)
11,970

 

 
$
11,970

Balance at third quarter-end 2013
$
574,838

 
$
5,313

 
$
580,151

Note 7—Investment in Unconsolidated Ventures
At third quarter-end 2013, we had ownership interests generally ranging from 25 to 50 percent in 13 ventures that we account for using the equity method. We have no ventures that are accounted for using the cost method.

Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
 
Venture Assets
 
Venture Borrowings(a)
 
Venture Equity
 
Our Investment
 
Third
Quarter-End
 
Year-End
 
Third
Quarter-End
 
Year-End
 
Third
Quarter-End
 
Year-End
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
242, LLC (b)
$
22,505

 
$
21,408

 
$

 
$
810

 
$
20,394

 
$
19,576

 
$
9,342

 
$
8,903

CJUF III, RH Holdings
33,134

 
15,970

 
14,800

 
1

 
15,710

 
13,701

 
3,529

 
3,836

CL Ashton Woods (c)
16,536

 
15,701

 

 

 
15,071

 
15,044

 
6,792

 
5,775

CL Realty
8,049

 
8,245

 

 

 
7,844

 
7,842

 
3,922

 
3,921

FMF Peakview
28,772

 
16,859

 
9,567

 

 
16,736

 
13,331

 
3,429

 
2,666

HM Stonewall Estates (c)
4,585

 
5,184

 

 
104

 
4,585

 
5,080

 
2,246

 
2,470

LM Land Holdings (c)
26,051

 
21,094

 
4,937

 
3,086

 
19,600

 
13,128

 
10,042

 
6,045

Temco
13,422

 
13,255

 

 

 
13,114

 
13,066

 
6,557

 
6,533

Other ventures (5) (d)
12,510

 
17,129

 
30,361

 
34,357

 
(32,230
)
 
(31,275
)
 
832

 
1,397

 
$
165,564

 
$
134,845

 
$
59,665

 
$
38,358

 
$
80,824

 
$
69,493

 
$
46,691

 
$
41,546


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Table of Contents

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)
 
Third Quarter
 
First Nine Months
 
Third Quarter
 
First Nine Months
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
242, LLC (b)
$
37

 
$
1,072

 
$
3,168

 
$
2,925

 
$
(20
)
 
$
163

 
$
817

 
$
352

 
$
(10
)
 
$
93

 
$
438

 
$
208

CJUF III, RH Holdings
4

 

 
7

 

 
(133
)
 

 
(357
)
 

 
(133
)
 

 
(357
)
 

CL Ashton Woods (c)
1,355

 
740

 
4,246

 
2,089

 
477

 
197

 
1,027

 
458

 
677

 
350

 
1,817

 
874

CL Realty
445

 
298

 
1,246

 
2,294

 
350

 
104

 
802

 
840

 
175

 
52

 
401

 
420

FMF Peakview
200

 

 
200

 

 
(98
)
 

 
(137
)
 

 
(19
)
 

 
(27
)
 

HM Stonewall Estates (c) 
696

 
526

 
1,794

 
1,696

 
255

 
146

 
655

 
543

 
100

 
57

 
276

 
216

LM Land Holdings (c)
9,387

 
1,700

 
14,651

 
4,970

 
5,515

 
340

 
9,274

 
1,207

 
2,344

 
(16
)
 
3,998

 
151

Temco
162

 
60

 
437

 
560

 
42

 
(18
)
 
48

 
(142
)
 
21

 
(9
)
 
24

 
(71
)
Other ventures (5)
21

 
1,646

 
5,171

 
4,525

 
(120
)
 
(174
)
 
(642
)
 
(579
)
 
(30
)
 
153

 
34

 
374

 
$
12,307

 
$
6,042

 
$
30,920

 
$
19,059

 
$
6,268

 
$
758

 
$
11,487

 
$
2,679

 
$
3,125

 
$
680

 
$
6,604

 
$
2,172

 _____________________
(a) 
Total includes current maturities of $28,034,000 at third quarter-end 2013, of which $27,892,000 is non-recourse to us, and $32,323,000 at year-end 2012, of which $32,083,000 is non-recourse to us.
(b) 
Includes unamortized deferred gains on real estate contributed by us to ventures. We recognize deferred gains as income as real estate is sold to third parties. Deferred gains of $855,000 are reflected as a reduction to our investment in unconsolidated ventures at third quarter-end 2013.
(c) 
We acquired these equity investments from CL Realty in 2012 at estimated fair value. The difference between estimated fair value of the equity investment and our capital account within the respective ventures at closing (basis difference) will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures. Unrecognized basis difference of $2,359,000 is reflected as a reduction of our investment in unconsolidated ventures at third quarter-end 2013.
(d) 
Our investment in other ventures reflects our ownership interests generally ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses. Please read Note 16 — Variable Interest Entities for additional information.
In first nine months 2013, we invested $819,000 in these ventures and received $2,140,000 in distributions, and in first nine months 2012, we invested $1,684,000 in these ventures and received $1,501,000 in distributions. Distributions include both return of investments and distributions of earnings.

We have provided performance bonds and letters of credit on behalf of certain ventures that could be drawn on due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance with local codes and ordinances. At third quarter-end 2013, we have $26,630,000 outstanding, of which $26,577,000 is related to development and construction of a 257-unit multifamily property in Austin estimated to be completed in May 2014.
Note 8—Receivables
Receivables consist of:
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
Loan secured by real estate
$
17,382

 
$
18,507

Notes receivable, average interest rates of 5.22% at third quarter-end 2013 and 6.24% at year-end 2012
1,989

 
1,875

Receivables and accrued interest
15,424

 
13,303

 
34,795

 
33,685

Allowance for bad debts
(25
)
 
(62
)
 
$
34,770

 
$
33,623


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At third quarter-end 2013, we have $17,382,000 invested in a loan which was acquired from a financial institution in 2011 when it was non-performing and is secured by a lien on developed and undeveloped real estate located near Houston designated for single-family residential and commercial development. Interest accrues at nine percent the first three years escalating to ten percent in year four and 12 percent in year five, with interest above 6.25 percent to be forgiven if the loan is prepaid by certain dates. In first nine months 2013, we received principal payments of $3,074,000 and cash interest payments of $1,341,000. At third quarter-end 2013, the outstanding principal balance was $26,940,000.
Estimated accretable yield follows:
 
Third
Quarter-End
 
2013
 
(In thousands)
Beginning of period (year-end 2012)
$
25,149

Change in accretable yield due to change in timing of estimated cash flows
(1,661
)
Interest income recognized (in first nine months 2013)
(3,290
)
End of period
$
20,198

Notes receivable generally are secured by a deed of trust and generally due within three years.
Receivables and accrued interest principally includes oil and gas related revenue accruals, joint interest billing receivables and other miscellaneous operating receivables arising in the normal course of business.
Note 9—Debt
Debt consists of:
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
Senior secured credit facility
 
 
 
Term loan facility — average interest rate of 4.18% at third quarter-end 2013 and 4.21% at year-end 2012
$
200,000

 
$
200,000

Revolving line of credit — average interest rate of 4.75% at year-end 2012

 
44,000

3.75% convertible senior notes due 2020, net of discount
99,122

 

Secured promissory notes — average interest rate of 3.18% at third quarter-end 2013 and 2.80% at year-end 2012
15,400

 
34,171

Other indebtedness due through 2017 at variable and fixed interest rates ranging from 0.24% to 5.50%
20,649

 
15,892

 
$
335,171

 
$
294,063


Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2013, we were in compliance with the financial covenants of these agreements.
At third quarter-end 2013, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017 and a $200,000,000 revolving line of credit maturing September 14, 2015 (with one-year extension option). The term loan and 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 $3,663,000 is outstanding at third quarter-end 2013. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At third quarter-end 2013, we had $196,337,000 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

11

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leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries or majority-owned joint venture interest, or if such pledge is not permitted, a pledge of the right to distributions from such entities, (e) a pledge of reimbursements, hotel occupancy and other revenues payable to us from special improvement district tax collections in connection with our Cibolo Canyons project, and (f) a negative pledge (without a mortgage) on other assets. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
On February 26, 2013, we issued $125,000,000 aggregate principal amount of 3.75% convertible senior notes due 2020 (Notes). Interest on the Notes is payable semiannually at a rate of 3.75 percent per annum and they mature on March 1, 2020. The Notes have an initial conversion rate of 40.8351 per $1,000 principal amount. The initial conversion rate is subject to adjustment upon the occurrence of certain events. Prior to November 1, 2019, the Notes are convertible only upon certain circumstances, and thereafter are convertible at any time prior to the close of business on the second scheduled trading day prior to maturity. If converted, holders will receive cash, shares of our common stock or a combination thereof at our election. We intend to settle the principal amount of the convertible senior notes (Notes) in cash upon conversion, with any excess conversion value to be settled in shares of our common stock. Net proceeds from the offering were used to repay $68,000,000 under our revolving line of credit, and we intend to use the remaining net proceeds for general corporate purposes, including investments in oil and gas exploration and drilling and real estate acquisition and development.
We separately account for the liability and equity conversion components of the Notes due to our option to settle the conversion obligation in cash, shares or a combination thereof at our election. The fair value of the Notes excluding the conversion feature at the date of issuance was estimated to be approximately $97,309,000 and was calculated based on the fair value of similar non-convertible debt instruments. The resulting value of the conversion option of $27,691,000 was recognized as debt discount and recorded as additional paid-in capital on our consolidated balance sheet. The effective interest rate to calculate the accretion of the bond discount is eight percent and is based on our estimated (non-convertible) borrowing rate on long-term debt with a similar maturity at the time the Notes were issued. Interest expense includes the cash coupon rate on the Notes plus the non-cash accretion of the debt discount, which is based on the difference between the effective interest rate and the cash coupon rate. Amortization of debt discount was $1,813,000 in first nine months 2013 and is included in interest expense. At third quarter-end 2013, unamortized debt discount of our Notes was $25,878,000. Total debt issuance costs were $4,205,000 (including underwriters discount of $3,750,000), of which $3,273,000 was allocated to the liability component and $932,000 to the equity component of the Notes. The portion of the issuance costs allocated to the debt component of the Notes is being amortized over the term of the Notes.
At third quarter-end 2013, secured promissory notes represent a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of $20,881,000. In first nine months 2013, secured promissory notes decreased by $18,902,000 as result of selling of Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000. We received $21,522,000 in net proceeds and we recognized $10,881,000 in segment earnings.
At third quarter-end 2013, other indebtedness, principally non-recourse, is collateralized by entitled, developed and under development projects with a carrying value of $60,453,000.
At third quarter-end 2013 and year-end 2012, we have $7,770,000 and $6,508,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $2,282,000 in first nine months 2013 and $2,290,000 in first nine months 2012 and is included in interest expense.
Note 10—Fair Value
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 third quarter 2013 and 2012, no non-financial assets were remeasured at fair value.
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.

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Information about our fixed rate financial instruments not measured at fair value follows:
 
Third Quarter-End 2013
 
Year-End 2012
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Loan secured by real estate
$
17,382

 
$
31,032

 
$
18,507

 
$
35,824

 
Level 2
Fixed rate debt (a)
(103,302
)
 
(91,470
)
 
(3,989
)
 
(4,070
)
 
Level 2
 _____________________
(a)
Third quarter-end 2013 includes our 3.75% convertible senior notes due 2020, issued February 26, 2013.

Note 11—Capital Stock
Pursuant to our stockholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our stockholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.
Please read Note 17 — Share-Based Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At third quarter-end 2013, personnel of former affiliates held options to purchase 799,000 shares of our common stock. The options have a weighted average exercise price of $24.86 and a weighted average remaining contractual term of two years. At third quarter-end 2013, the options have an aggregate intrinsic value of $910,000.
Note 12—Net Income per Share
Earnings attributable to common shareholders and weighted average common shares outstanding used to compute earnings per share were:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Earnings available to common shareholders:
 
 
 
 
 
 
 
Consolidated net income (loss)
$
12,897

 
$
(380
)
 
$
19,137

 
$
4,588

Less: Net income attributable to noncontrolling interest
(1,067
)
 
(323
)
 
(2,815
)
 
(1,678
)
Net income (loss) attributable to Forestar Group Inc.
$
11,830

 
$
(703
)
 
$
16,322

 
$
2,910

Weighted average common shares outstanding — basic
35,410

 
35,233

 
35,341

 
35,204

Dilutive effect of stock options, restricted stock and equity-settled awards
662

 

 
608

 
233

Weighted average common shares outstanding — diluted
36,072

 
35,233

 
35,949

 
35,437

Anti-dilutive awards excluded from diluted weighted average shares
1,764

 
2,661

 
2,022

 
2,582

We intend to settle the principal amount of the convertible senior notes (Notes) in cash upon conversion, with any excess conversion value to be settled in shares of our common stock. Therefore, only the amount in excess of the par value of the Notes will be included in our calculation of diluted net income per share using the treasury stock method. As such, the Notes have no impact on diluted net income per share until the price of our common stock exceeds the conversion price of the Notes of $24.49. The average price of our common stock in third quarter and first nine months 2013 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our effective tax rate was a 29 percent benefit in third quarter 2013 and less than one percent benefit in first nine months 2013, which includes a four percent benefit for noncontrolling interests. Our third quarter and first nine months 2013 effective tax rates include a benefit from recognition of $6,326,000 of previously unrecognized tax benefits upon lapse of the statute of limitations for a previously reserved tax position. Our effective tax rates in third quarter and first nine months 2013 would have

13

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been 33 percent excluding the impact of the foregoing tax benefits. At third quarter-end 2013, we had no unrecognized tax benefits.
Our effective tax rate was a 74 percent benefit in third quarter 2012 and 22 percent expense in first nine months 2012, which included a ten percent benefit for noncontrolling interests. In addition, our third quarter and first nine months 2012 effective tax rates included a non-cash benefit of 38 percent and nine percent associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states.
Our 2013 and 2012 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 because we believe it is likely it will be recoverable in future periods.
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, California, portions of which were sites of a former Temple-Inland paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. We estimate the remaining cost to complete remediation activities will be approximately $1,230,000, 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 third quarter-end 2013, our asset retirement obligation was $1,573,000, which is included in other liabilities.
Note 15—Segment Information
In first quarter 2013, we changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations, real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results in other natural resources. All prior period segment information has been reclassified to conform to the current year presentation.
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 manages our owned mineral interests and interests leased from others and is an independent oil and gas exploration, development and production operation. Other natural resources manages our timber, recreational leases and water resource initiatives.


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Table of Contents

Assets allocated by segment are as follows:
 
Third
Quarter-End
 
Year-End
 
2013
 
2012
 
(In thousands)
Real estate
$
581,725

 
$
588,137

Oil and gas
284,091

 
227,061

Other natural resources
23,272

 
24,066

Assets not allocated to segments (a)
114,399

 
79,170

Total assets
$
1,003,487

 
$
918,434

  _________________________
(a) 
Assets not allocated to segments at third quarter-end 2013 principally consist of cash and cash equivalents of $54,769,000 and a net deferred tax asset of $41,832,000. Assets not allocated to segments at year-end 2012 principally consist of a net deferred tax asset of $54,748,000 and cash and cash equivalents of $10,361,000.
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 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 third quarter 2013, no single customer accounted for more than 10 percent of our total revenues.
Segment revenues and earnings are as follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
50,356

 
$
27,115

 
$
170,264

 
$
71,684

Oil and gas
22,095

 
10,479

 
53,430

 
27,053

Other natural resources
2,656

 
3,016

 
8,963

 
5,277

Total revenues
$
75,107

 
$
40,610

 
$
232,657

 
$
104,014

Segment earnings:
 
 
 
 
 
 
 
Real estate
$
13,197

 
$
12,688

 
$
40,747

 
$
31,931

Oil and gas
8,499

 
7,337

 
17,869

 
19,470

Other natural resources
549

 
552

 
2,792

 
(769
)
Total segment earnings
22,245

 
20,577

 
61,408

 
50,632

Items not allocated to segments (a)
(13,347
)
 
(22,358
)
 
(45,114
)
 
(46,448
)
Income (loss) before taxes attributable to Forestar Group Inc.
$
8,898

 
$
(1,781
)
 
$
16,294

 
$
4,184

  _________________________
(a) 
Items not allocated to segments consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
General and administrative expense
$
(4,648
)
 
$
(8,000
)
 
$
(14,935
)
 
$
(19,482
)
Shared-based compensation expense
(3,492
)
 
(6,327
)
 
(15,367
)
 
(11,491
)
Interest expense
(5,231
)
 
(8,094
)
 
(14,892
)
 
(15,649
)
Other corporate non-operating income
24

 
63

 
80

 
174

 
$
(13,347
)
 
$
(22,358
)
 
$
(45,114
)
 
$
(46,448
)

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Note 16—Variable Interest Entities
At third quarter-end 2013, we are the primary beneficiary of one variable interest entity (VIE) that we consolidate. At third quarter-end 2013, our consolidated balance sheet includes no assets and $1,342,000 in liabilities related to this VIE. In first nine months 2013, there were no contributions to this VIE.
Also at third quarter-end 2013, we are not the primary beneficiary of three VIEs that we account for using the equity method. The unrelated managing partners oversee day-to-day operations and guarantee some of the debt of the VIEs, and while 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 the entities. Although some of the debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At third quarter-end 2013, these three VIEs have total assets of $11,079,000, substantially all of which represent developed and undeveloped real estate, and total liabilities of $44,541,000, which includes $27,902,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method in Note 7 — Investment in Unconsolidated Ventures. At third quarter-end 2013, our investment in these VIEs is $18,000 and is included in investment in unconsolidated ventures. In first nine months 2013, we contributed $111,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at $3,730,000, which exceeds our investment as we have a nominal general partner interest in all of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.
Note 17—Share-Based Compensation
Share-based compensation expense consists of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Cash-settled awards
$
1,823

 
$
4,547

 
$
7,498

 
$
4,829

Equity-settled awards
899

 
609

 
3,565

 
2,438

Restricted stock
85

 
514

 
541

 
1,636

Stock options
685

 
657

 
3,763

 
2,588

 
$
3,492

 
$
6,327

 
$
15,367

 
$
11,491

Share-based compensation expense is included in:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
General and administrative expense
$
1,297

 
$
3,298

 
$
7,310

 
$
5,528

Other operating expense
2,195

 
3,029

 
8,057

 
5,963

 
$
3,492

 
$
6,327

 
$
15,367

 
$
11,491

In first nine months 2013, share-based compensation expense increased principally as result of a 24 percent increase in our stock price since year-end 2012, compared with a 10 percent increase in our stock price in first nine months 2012 since year-end 2011, which impacted the value of vested cash-settled awards.
The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $590,000 in first nine months 2013 and $595,000 in first nine months 2012. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $9,325,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first nine months 2013 or 2012.
In first nine months 2013, we withheld 59,172 shares having a value of $1,128,000 for payroll taxes in connection with vesting of restricted stock awards and exercises of stock options. In first nine months 2012, we withheld 72,199 shares having a value of $1,171,000 for payroll taxes in connection with vesting of restricted stock awards and exercises of stock options.


16

Table of Contents

A summary of awards granted under our 2007 Stock Incentive Plan follows:
Cash-settled awards
Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally vest over three to four years from the date of grant and generally provide for accelerated vesting upon retirement, death, disability or if there is a change in control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.
The following table summarizes the activity of cash-settled restricted stock unit awards in first nine months 2013:
 
Equivalent
Units
 
Weighted
Average Grant
Date Fair Value
 
(In thousands)
 
(Per unit)
Non-vested at beginning of period
350

 
$
17.03

Granted
89

 
18.70

Vested
(199
)
 
17.62

Forfeited
(3
)
 
17.42

Non-vested at end of period
237

 
17.90

The following table summarizes the activity of cash-settled stock appreciation rights in first nine months 2013:
 
Rights
Outstanding
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
(Current
Value Less
Exercise Price)
 
(In thousands)
 
(Per share)
 
(In years)
 
(In thousands)
Balance at beginning of period
866

 
$
11.38

 
6
 
$
5,256

Granted

 

 
 
 
 
Exercised
(265
)
 
10.23

 
 
 
 
Forfeited

 

 
 
 
 
Balance at end of period
601

 
11.88

 
6
 
5,797

Exercisable at end of period
554

 
11.38

 
6
 
5,623

The fair value of awards settled in cash was $6,947,000 in first nine months 2013 and $5,254,000 in first nine months 2012. At third quarter-end 2013, the fair value of vested cash-settled awards is $16,751,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $5,281,000 at third quarter-end 2013 based on a quarter-end stock price of $21.53.
Equity-settled awards
Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, market-leveraged stock units (MSU), which vest after three years from date of grant and performance stock units (PSU), which vest after approximately three years from date of grant if certain performance goals are met. Equity settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and issued upon retirement. The following table summarizes the activity of equity-settled awards in first nine months 2013:
 
Equivalent
Units
 
Weighted
Average Grant
Date Fair Value
 
(In thousands)
 
(Per share)
Non-vested at beginning of period
409

 
$
18.99

Granted
264

 
19.42

Vested
(77
)
 
16.95

Forfeited
(8
)
 
17.34

Non-vested at end of period
588

 
19.47


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In first nine months 2013, we granted 136,000 MSU awards. These awards will be settled in common stock based upon our total shareholder return over three years from the date of grant. The number of shares to be issued could range from a high of 204,000 shares if our stock price increases by 50 percent or more, to a low of 68,000 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.
Unrecognized share-based compensation expense related to non-vested equity-settled awards is $5,084,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Restricted stock
Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first nine months 2013:
 
Restricted
Shares
 
Weighted
Average Grant
Date Fair Value
 
(In thousands)
 
(Per share)
Non-vested at beginning of period
211

 
$
16.95

Granted
8

 
20.55

Vested
(162
)
 
17.80

Forfeited

 

Non-vested at end of period
57

 
15.00

Unrecognized share-based compensation expense related to non-vested restricted stock awards is $247,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Stock options
Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option awards in first nine months 2013:
 
Options
Outstanding
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
(Current
Value Less
Exercise Price)
 
(In thousands)
 
(Per share)
 
(In years)
 
(In thousands)
Balance at beginning of period
1,756

 
$
20.53

 
7
 
$
1,956

Granted
373

 
18.70

 
 
 
 
Exercised
(85
)
 
16.25

 
 
 
 
Forfeited
(29
)
 
26.62

 
 
 
 
Balance at end of period
2,015

 
20.28

 
7
 
6,838

Exercisable at end of period
1,133

 
22.35

 
6
 
3,392


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We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:
 
First Nine Months
 
2013
 
2012
Expected dividend yield
%
 
%
Expected stock price volatility
66.8
%
 
60.2
%
Risk-free interest rate
1.4
%
 
1.3
%
Expected life of options (years)
6

 
6

Weighted average estimated fair value of options granted
$
11.47

 
$
9.22

We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. Our expected stock price volatility is based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.
Unrecognized share-based compensation expense related to non-vested stock options is $3,994,000 at third quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.
Pre-Spin Awards
Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.
Pre-spin stock option awards to our employees to purchase our common stock have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. At third quarter-end 2013, there were 57,000 awards outstanding and exercisable on our stock with a weighted average exercise price of $26.68, weighted average remaining term of two years and aggregate intrinsic value of $26,000.



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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 2012 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of third quarter-end 2013, 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;
our ability to achieve some or all of our strategic initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
significant customer concentration;
future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments;
accuracy of estimates and other assumptions related to investment in 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, revenue, capital expenditure and lease operating expense accruals associated with our oil and gas working interests, and depletion of our oil and gas properties;
the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects and the regions in which they are located;
fluctuations in costs and expenses;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
our realization of the expected benefits of acquiring CREDO Petroleum Corporation (Credo);
risks associated with oil and gas drilling and production activities;
fluctuations in oil and gas commodity prices;
government regulation of exploration and production technology, including hydraulic fracturing;
the results of financing efforts, including our ability to obtain financing with favorable terms, or at all;
our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior credit facility, indenture 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 effecting, water withdrawal or usage;
the final resolutions or outcomes with respect to our contingent and other liabilities related to our business; and
our ability to execute our growth strategy and deliver acceptable returns from acquisitions and other investments.


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Other factors, including the risk factors described in Item 1A of our 2012 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.
2012 Strategic Initiatives
In 2012, we announced Triple in FOR strategic initiatives designed to further enhance shareholder value by:
Accelerating value realization of our real estate and natural resources by increasing total residential lot sales, oil and gas production, and total segment EBITDA.
Optimizing transparency and disclosure by expanding reported oil and gas resources, providing additional information related to groundwater interests, and establishing a progress report on corporate responsibility efforts.
Raising our net asset value through strategic and disciplined investments by pursuing growth opportunities which help prove up our asset value and meet return expectations, developing a low-capital, high-return multifamily business, and accelerating investment in lower-risk oil and gas opportunities.
Segment Reporting Change
In first quarter 2013, we strategically changed our reportable segments to better reflect the underlying market fundamentals and operating strategy of our core business operations, real estate and oil and gas. With this change, we aggregated our fiber and water resource operating results in other natural resources. All prior period segment information has been reclassified to conform to the current period presentation.

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Results of Operations
A summary of our consolidated results by business segment follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
50,356

 
$
27,115

 
$
170,264

 
$
71,684

Oil and gas
22,095

 
10,479

 
53,430

 
27,053

Other natural resources
2,656

 
3,016

 
8,963

 
5,277

Total revenues
$
75,107

 
$
40,610

 
$
232,657

 
$
104,014

Segment earnings:
 
 
 
 
 
 
 
Real estate
$
13,197

 
$
12,688

 
$
40,747

 
$
31,931

Oil and gas
8,499

 
7,337

 
17,869

 
19,470

Other natural resources
549

 
552

 
2,792

 
(769
)
Total segment earnings
22,245

 
20,577

 
61,408

 
50,632

Items not allocated to segments:
 
 
 
 
 
 
 
General and administrative expense
(4,648
)
 
(8,000
)
 
(14,935
)
 
(19,482
)
Share-based compensation expense
(3,492
)
 
(6,327
)
 
(15,367
)
 
(11,491
)
Gain on sale of assets

 
16

 

 
16

Interest expense
(5,231
)
 
(8,094
)
 
(14,892
)
 
(15,649
)
Other corporate non-operating income
24

 
47

 
80

 
158

Income (loss) before taxes
8,898

 
(1,781
)
 
16,294

 
4,184

Income tax benefit (expense)
2,932

 
1,078

 
28

 
(1,274
)
Net income (loss) attributable to Forestar Group Inc.
$
11,830

 
$
(703
)
 
$
16,322

 
$
2,910


Significant aspects of our results of operations follow:
Third Quarter and First Nine Months 2013
Third quarter and first nine months 2013 real estate segment earnings increased due to higher average prices for lots and commercial acres sold, higher lot sales volume and higher undeveloped land sales from our retail land sales program offset partially by lower commercial acres sold as compared with third quarter 2012. First nine months 2013 real estate segment earnings benefited from sale of Promesa, a 289-unit multifamily property we developed in Austin, for $41,000,000, which generated approximately $10,881,000 in segment earnings. In addition, first nine months 2013 segment earnings also benefited from increased residential lot sales activity, undeveloped land sales from our retail program and commercial tract sales.
Oil and gas segment earnings for the third quarter and first nine months 2013, increased principally due to higher working interest production volume and earnings attributable to our exploration and production operations on leased mineral interests as result of our acquisition of Credo in third quarter 2012 and higher average oil and natural gas prices, partially offset by lower oil and gas production volumes and reduced lease bonus and delay rental payments received related to our owned mineral interests.
Third quarter 2013 other natural resources segment earnings remained flat. Higher average fiber prices were offset by lower volumes primarily due to scheduled maintenance outages taken by our customers in the quarter. First nine months 2013 other natural resources segment earnings benefited from higher levels of timber harvesting activity driven by increased customer demand compared to first nine months 2012.
Share-based compensation expense fluctuations are primarily driven by changes in our stock price. First nine month 2013 share-based compensation expense increased principally as result of a 24 percent increase in our stock price since year-end 2012, compared with a 10 percent increase in our stock price in first nine months 2012 since year-end 2011, which impacted the value of vested cash-settled awards.

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Third Quarter and First Nine Months 2012
Third quarter and first nine months 2012 real estate segment earnings benefited primarily from a $10,180,000 gain resulting from the sale of Broadstone Memorial, a 401 unit multifamily project in Houston, and increased residential and commercial sales activity. First nine months 2012 real estate segment earnings also benefited from a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC, a $3,401,000 gain from a consolidated venture’s sale of 800 acres near Dallas, and increased residential and commercial sales activity.
Oil and gas segment earnings benefited from $3,543,000 in lease bonus revenues as a result of leasing over 3,100 net mineral acres and increased oil production volumes. These items were partially offset by increased cost of sales due to higher production volumes, lower prices and from additional oil and natural gas personnel.
Third quarter and first nine months 2012 general and administrative expense includes $3,248,000 and $5,709,000 in transaction costs to outside advisors associated with our acquisition of Credo on September 28, 2012.
Share-based compensation expense increased as result of the increase in our stock price and the impact on cash-settled vested awards.
Interest expense includes a $4,448,000 loss on extinguishment of debt in connection with amendment and extension of our term loan on September 14, 2012.
Current Market Conditions
U.S. single-family residential market conditions continued to improve in first nine months 2013, driven by a growing demand for homes and a tightening supply of homes available for sale. Housing demand has been fueled primarily by high housing affordability, largely due to relatively low mortgage rates, and increased consumer confidence. Inventories of unsold homes are at historically low levels in many areas. In addition, declining finished lot inventories and supply of developable raw land is increasing demand for our developed lots, principally in the major markets of Texas. However, persistently high unemployment levels, national and global economic weakness and uncertainty, and a restrictive mortgage lending environment continue to threaten a robust recovery in the housing market. Multifamily market conditions continue to be strong, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven primarily by limited housing inventory, reduced single-family mortgage credit availability, and the increased propensity to rent among the 18 to 34 year old demographic of the U.S. population.
Oil prices have continued to strengthen over the last several months and generally have been stronger over the last two and one-half years. Natural gas prices are up over 50 percent from year ago levels, but are significantly lower than realized prices over the last decade.  Prolonged cold weather throughout the 2012 - 2013 heating season has taken working gas in storage below the midpoint of the five year average causing natural gas prices to recover from their lows of a year ago.  Exploration and development activity continues to be oil focused due to the premium price of oil over natural gas when comparing energy equivalency and due to the U.S. being net importers of crude oil while current estimates of domestic natural gas producing supplies are believed to be sufficient.
Business Segments
We manage our operations through three business segments:
Real estate,
Oil and gas, and
Other natural resources.
We evaluate performance based on 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 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, natural gas, and timber, and the overall strength or weakness of the U.S. economy.


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Table of Contents

Real Estate
We own directly or through ventures 132,000 acres of real estate located in ten states and 14 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own approximately 100,000 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 commercial and income producing properties, primarily a hotel at third quarter-end 2013, and multifamily properties we may develop and sell as a merchant builder.
A summary of our real estate results follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues
$
50,356

 
$
27,115

 
$
170,264

 
$
71,684

Cost of sales
(31,955
)
 
(17,539
)
 
(113,263
)
 
(43,086
)
Operating expenses
(8,498
)
 
(8,421
)
 
(23,179
)
 
(24,208
)
 
9,903

 
1,155

 
33,822

 
4,390

Interest income primarily from loan secured by real estate
1,435

 
1,066

 
3,631

 
2,159

Gain on sale of assets

 
10,197

 

 
25,273

Equity in earnings of unconsolidated ventures
2,926

 
593

 
6,109

 
1,787

Less: Net income attributable to noncontrolling interests
(1,067
)
 
(323
)
 
(2,815
)
 
(1,678
)
Segment earnings
$
13,197

 
$
12,688

 
$
40,747

 
$
31,931

Third quarter and first nine months 2013 revenues include construction revenues of $9,029,000 and $26,635,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor. We are reimbursed for costs paid to subcontractors plus earn a development and construction fee on certain projects, both of which are included in commercial and income producing properties revenue. Revenues associated with multifamily construction contracts for third quarter and first nine months 2012 were $2,099,000 and $2,158,000.
Third quarter and first nine months 2013, cost of sales include $9,583,000 and $27,189,000 related to multifamily construction contract costs we incurred as general contractor and paid to subcontractors associated with our development of two multifamily venture properties, as well as an estimated loss of $554,000 associated with our fixed fee contract as a general contractor related to one of our venture multifamily properties. Cost of sales associated with multifamily construction contracts for third quarter and first nine months 2012 were $2,099,000 and $2,158,000.
In addition, first nine months 2013, cost of sales includes $29,707,000 in carrying value related to Promesa, a 289-unit multifamily property we developed as a merchant builder and sold.
Third quarter and first nine months 2013 interest income principally represents earnings from a loan we hold which is secured by a mixed-use real estate community in Houston.
In third quarter and first nine months 2012, gain on sale of assets includes $10,180,000 resulting from the sale of Broadstone Memorial, a 401-unit multifamily project in Houston. In addition, first nine months 2012 includes a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC for $32,095,000 and a $3,401,000 gain from a consolidated venture’s sale of 800 acres in Dallas.
In third quarter and first nine months 2013, the increase in equity earnings of unconsolidated ventures compared to third quarter 2012 is primarily due to higher average residential lot prices and lot sales volume and increase in commercial tract sales.

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Revenues in our owned and consolidated ventures consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Residential real estate
$
28,298

 
$
13,564

 
$
65,748

 
$
36,892

Commercial real estate
1,083

 
2,405

 
4,521

 
4,170

Undeveloped land
6,571

 
1,604

 
11,858

 
4,918

Commercial and income producing properties
13,355

 
8,805

 
85,387

 
23,381

Other
1,049

 
737

 
2,750

 
2,323

Total revenues
$
50,356

 
$
27,115

 
$
170,264

 
$
71,684


Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. Revenues increased in third quarter 2013 compared with third quarter 2012 due to both higher average price per lot sold and increased lot sales volume. In addition, in third quarter 2013, we sold about 46 undeveloped residential tract acres for $4,964,000 which generated segment earnings of $2,214,000. In first nine months 2013, residential real estate revenues increased principally as a result of increased lot sales volume due to demand for finished lot inventory by homebuilders in markets where supply has diminished. In addition, in first nine months 2013, we sold 486 undeveloped residential tract acres of which 440 were the remaining undeveloped residential tract acres from a project in Florida for $3,536,000.
Undeveloped land sales increased in third quarter 2013 as compared with third quarter 2012 due to sale of 1,314 undeveloped acres for $6,571,000 which generated segment earnings of $3,769,000. In first nine months 2013, undeveloped land sales increased as compared to first nine months 2012 due to sale of 3,233 acres for $11,858,000, or approximately $3,700 per acre, generating approximately $7,887,000 in segment earnings.
In first nine months 2013, commercial and income producing properties revenue increased primarily as result of selling Promesa, a 289-unit multifamily property in Austin which we developed as a merchant builder and operated until the sale. As a result, we recognized segment earnings of $10,881,000 related to its sale, for $41,000,000. In addition, income producing properties revenue increased in third quarter and first nine months 2013 as a result of construction revenues of $9,029,000 and $26,635,000 associated with our multifamily guaranteed maximum price construction contracts as general contractor.
In first nine months 2013, we entered into a $27,900,000 maximum price construction contract with a third-party general contractor for construction of a 354-unit multifamily property near Dallas. Construction on this multifamily development site began in June 2013. In third quarter 2013, we obtained a senior secured construction loan in the amount of $24,357,000 to finance approximately 70 percent of the total development cost, with no loan balance outstanding at third quarter-end 2013.
Third quarter 2013 revenues related to our 413 guest room hotel in Austin were down $893,000 when compared with third quarter 2012, primarily due to lower occupancy from increased renovation activity. In addition, third quarter 2013 real estate segment operating expenses includes a $776,000 loss on retirement of assets associated with the capital improvement project at the hotel.
Units sold in our owned and consolidated ventures consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
Residential real estate:
 
 
 
 
 
 
 
Lots sold
414

 
193

 
1,028

 
675

Revenue per lot sold
$
56,866

 
$
54,206

 
$
55,417

 
$
49,925

Commercial real estate:
 
 
 
 
 
 
 
Acres sold
2

 
18

 
37

 
56

Revenue per acre sold
$
426,554

 
$
133,882

 
$
115,892

 
$
75,147

Undeveloped land:
 
 
 
 
 
 
 
Acres sold
1,314

 
564

 
3,233

 
1,817

Revenue per acre sold
$
5,001

 
$
2,846

 
$
3,668

 
$
2,707


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Operating expenses consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Employee compensation and benefits
$
2,434

 
$
2,530

 
$
5,708

 
$
6,584

Property taxes
1,669

 
1,964

 
5,714

 
6,305

Professional services
871

 
992

 
2,997

 
3,070

Depreciation and amortization
721

 
1,101

 
2,463

 
3,251

Other
2,803

 
1,834

 
6,297

 
4,998

Total operating expenses
$
8,498

 
$
8,421

 
$
23,179

 
$
24,208


Information about our real estate projects and our real estate ventures follows:
 
Third
Quarter-End
 
2013
 
2012
Owned and consolidated ventures:
 
 
 
Entitled, developed and under development projects
 
 
 
Number of projects
65

 
65

Residential lots remaining
19,378

 
20,019

Commercial acres remaining
2,020

 
2,067

Undeveloped land and land in the entitlement process
 
 
 
Number of projects
13

 
16

Acres in entitlement process
25,830

 
27,580

Acres undeveloped
87,714

 
95,357

Ventures accounted for using the equity method:
 
 
 
Ventures’ lot sales (for first nine months)
 
 
 
Lots sold
325

 
306

Average price per lot sold
$
54,752

 
$
49,125

Ventures’ entitled, developed and under development projects
 
 
 
Number of projects
7

 
7

Residential lots remaining
3,380

 
3,845

Commercial acres sold (for first nine months)
19

 

Average price per acre sold
$
277,739

 
$

Commercial acres remaining
289

 
333

Ventures’ undeveloped land and land in the entitlement process
 
 
 
Acres sold (for first nine months)
68

 
135

Average price per acre sold
$
2,650

 
$
2,600

Acres undeveloped
5,587

 
5,655

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 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.

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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
$
303,404

 
$
8,192

 
$
29,200

 
$
340,796

Georgia
23,392

 
56,519

 

 
79,911

California
8,915

 
20,785

 

 
29,700

Colorado
21,488

 
1,024

 

 
22,512

Tennessee
8,768

 
129

 
12,282

 
21,179

North Carolina

 
563

 
11,412

 
11,975

Other
3,117

 
277

 

 
3,394

Total
$
369,084

 
$
87,489

 
$
52,894

 
$
509,467

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, and we may negotiate an option to participate in oil and gas exploration and development or we may elect to drill on our acreage ourselves as an operator. At third quarter-end 2013, we have about 38,000 net acres under lease to others with expiration dates ranging between 2013 to 2018, about 35,000 net acres leased that are held by production related to our owned mineral interests and 543 gross productive wells operated by others on our owned mineral acres.
In addition, we have approximately 219,000 net mineral acres leased from others principally located in Nebraska and Kansas primarily targeting the Lansing-Kansas City formation, in the Texas Panhandle primarily targeting the Tonkawa and Cleveland formations, and in North Dakota primarily targeting the Bakken and Three Forks formations. With the acquisition of Credo in third quarter 2012, we are an independent oil and gas exploration, development and production company. Our leasehold interests include 35,000 net acres held by production and 449 gross oil and gas wells with working interest ownership, of which 154 are operated by us. These leasehold interests include about 7,000 net mineral acres in North Dakota focused on the Bakken and Three Forks formations.
Drilling and Other Exploration and Development Activities
In first nine months 2013, we participated in approximately 36 gross Bakken or Three Forks wells (in which we own an approximate six percent average working interest) in North Dakota with 19 wells currently producing and 17 wells in the completion stage. We anticipate drilling activity on our leasehold interests in the Bakken and Three Forks formations to accelerate in the remainder of 2013 and into 2014. In addition, in first nine months 2013, we participated in 57 gross wells in Nebraska and Kansas (in which we own an approximate 57 percent average working interest) and operated 40 of these wells. In first nine months 2013, we participated in a total of 70 new economic gross wells. At third quarter-end 2013, 53 of these wells were producing or capable of production and 17 were in the completion stage, all in North Dakota. At third quarter-end 2013, there were 992 gross productive wells.
In first nine months 2013, we acquired leasehold interests in over 65,000 net mineral acres in new and existing projects, principally in Nebraska and Kansas. Also, leasehold interests of approximately 28,000 net mineral acres expired in the normal course of business in first nine months 2013.

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For the full year 2013, our current plan is to drill or participate as a non-operator in approximately 140 gross wells (50 net). Regional allocation of our capital expenditures incurred for drilling and completion activity in first nine months 2013 as compared to our 2013 projected annual drilling and completion capital expenditures is shown below:
 
Drilling and Completion Expenditures
 
First Nine Months
 
Projected
 
2013
 
2013
 
(In thousands)
Bakken and Three Forks formations of North Dakota
$
24,474

 
$
45,200

Lansing - Kansas City formation of Nebraska and Kansas
10,310

 
14,700

Other formations principally in Texas and Oklahoma
7,935

 
14,000

 
$
42,719

 
$
73,900

Our 2013 projected capital expenditures are subject to various conditions, including third-party operator drilling plans, oilfield services and equipment availability, commodity price fluctuations and drilling results. In addition, we may adjust our projections if we decide to pursue significant leasehold acquisitions that were not contemplated during our capital budgeting process. Other factors that could cause us to adjust our projections include commodity prices fluctuations, service or material costs, opportunities, changes in conditions, or the performance of wells. We will continue to assess the natural 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.
In February 2013, we issued $125,000,000 in convertible notes due 2020. Net proceeds from the offering were used to repay $68,000,000 under our revolving line of credit, and we intend to use the remaining net proceeds for general corporate purposes, including investments in oil and gas exploration, development, and acquisition activities, and real estate acquisition and development. We budget these capital and exploration expenditures annually based on our current expectation for future commodity prices and projected cash flows for the year.
A summary of our oil and gas results follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues
$
22,095

 
$
10,479

 
$
53,430

 
$
27,053

Cost of oil and gas producing activities
(10,090
)
 
(1,392
)
 
(26,762
)
 
(3,117
)
Operating expenses
(3,683
)
 
(1,831
)
 
(9,253
)
 
(4,835
)
 
8,322

 
7,256

 
17,415

 
19,101

Equity in earnings of unconsolidated ventures
177

 
81

 
454

 
369

Segment earnings
$
8,499

 
$
7,337

 
$
17,869

 
$
19,470

In third quarter and first nine months 2013, results include $15,349,000 and $36,429,000 in revenues and $4,226,000 and $8,311,000 in segment earnings associated with the operations of Credo, which we acquired in third quarter 2012.
Revenues consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Oil production (a)
$
18,120

 
$
5,234

 
$
45,496

 
$
17,811

Gas production
1,782

 
805

 
4,966

 
2,803

Other
2,193

 
4,440

 
2,968

 
6,439

Total revenues
$
22,095

 
$
10,479

 
$
53,430

 
$
27,053

 _________________________
(a) 
Oil production includes revenues from oil, condensate and natural gas liquids (NGLs).
In third quarter 2013, excluding production revenues attributed to exploration and production operations from our acquisition of Credo, oil and gas production revenues decreased principally as a result of lower production volumes associated with royalties from our owned mineral interests. Decreased oil production volume negatively impacted revenues by

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$2,070,000, offset by higher oil prices increasing revenues by $447,000. Decreased natural gas production volume negatively impacted revenues by $220,000, offset by higher natural gas prices increasing revenues by $357,000 as compared with third quarter 2012.
In first nine months 2013, excluding production revenues attributed to exploration and production operations from our acquisition of Credo, oil and gas production revenues decreased principally as a result of lower production volumes associated with royalties from our owned mineral interests. Decreased oil production volume negatively impacted revenues by $5,818,000 and decreased oil prices negatively impacted revenues by $662,000. Natural gas production volume decreased which negatively impacted revenues by $624,000, offset by increased natural gas prices which positively impacted revenues by $523,000 as compared with first nine months 2012.
In first nine months 2013, other revenues includes $562,000 in delay rental payments received from others associated with our owned mineral interests principally related to extending the lease term on approximately 1,800 net mineral acres and $2,233,000 in lease bonuses received from leasing approximately 8,400 net mineral acres owned in Texas and Louisiana. In first nine months 2012, other revenues include $2,155,000 in delay rental payments received from others associated with our owned mineral interests principally related to extending the lease term on approximately 15,100 net mineral acres in Louisiana and $3,830,000 in lease bonuses received from leasing approximately 3,900 net mineral acres owned in Texas and Louisiana.
Cost of oil and gas producing activities consists of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Depreciation, depletion and amortization
$
5,048

 
$
815

 
$
12,939

 
$
1,014

Production costs
3,265

 
571

 
8,417

 
1,956

Exploration costs
1,713

 
(8
)
 
5,124

 
133

Other
64

 
14

 
282

 
14

Total cost of oil and gas producing activities
$
10,090

 
$
1,392

 
$
26,762

 
$
3,117

In third quarter and first nine months 2013, cost of oil and gas producing activities increased by $9,254,000 and $24,072,000 as result of our acquisition of Credo and operating as an independent exploration, development and production company. Depreciation, 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. Production costs principally represent our share of production severance taxes related to both our royalty and working interests and lease operating expenses associated with producing working interest wells. Exploration costs principally represent exploratory dry hole costs, geological and geophysical and seismic study costs.


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Oil and gas produced and average unit prices related to our royalty and working interests follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
Consolidated entities:
 
 
 
 
 
 
 
Oil production (barrels)
188,900

 
69,100

 
502,600

 
199,800

Average price per barrel
$
95.95

 
$
75.81

 
$
90.53

 
$
89.15

Natural gas production (millions of cubic feet)
480.5

 
351.5

 
1,451.6

 
1,052.0

Average price per thousand cubic feet
$
3.71

 
$
2.29

 
$
3.42

 
$
2.66

Our share of ventures accounted for using the equity method:
 
 
 
 
 
 
 
Natural gas production (millions of cubic feet)
60.9

 
74.9

 
188.9

 
247.1

Average price per thousand cubic feet
$
3.66

 
$
1.99

 
$
3.30

 
$
2.36

Total consolidated and our share of equity method ventures:
 
 
 
 
 
 
 
Oil production (barrels)
188,900

 
69,100

 
502,600

 
199,800

Average price per barrel
$
95.95

 
$
75.81

 
$
90.53

 
$
89.15

Natural gas production (millions of cubic feet)
541.4

 
426.4

 
1,640.5

 
1,299.1

Average price per thousand cubic feet
$
3.70

 
$
2.24

 
$
3.41

 
$
2.61

Total BOE (barrel of oil equivalent) (a)
279,100

 
140,100

 
776,000

 
416,300

Average price per barrel of oil equivalent
$
72.11

 
$
44.17

 
$
65.83

 
$
50.92

 _________________________
(a) 
Natural gas is converted to barrels of oil equivalent (BOE) using a conversion of six Mcf to one barrel of oil.
In third quarter and first nine months 2013, operations acquired with Credo produced 184,700 BOE at an average price of $83.13 per BOE and 473,800 BOE at an average price of $76.89 per BOE.
Operating expenses consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Employee compensation and benefits
$
2,116

 
$
1,055

 
$
5,746

 
$
2,813

Professional and consulting services
462

 
164

 
922

 
297

Depreciation and amortization
342

 
102

 
866

 
314

Property taxes
139

 
89

 
325

 
239

Other
624

 
421

 
1,394

 
1,172

Total operating expenses
$
3,683

 
$
1,831

 
$
9,253

 
$
4,835

In third quarter and first nine months 2013, total operating expenses include approximately $1,869,000 and $4,045,000 related to the operations acquired with Credo, of which approximately $1,062,000 and $2,776,000 are included in employee compensation and benefits.
Other Natural Resources
Our other natural resources segment manages our timber holdings, recreational leases and water resource initiatives. We have about 118,000 real estate acres we own directly or through ventures, primarily in Georgia, with timber, and about 17,000 acres of timber under lease. Our other natural resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. We have water interests in approximately 1,550,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1,400,000 acres in Texas, Louisiana, Georgia and Alabama, and approximately 20,000 acres of ground water leases in central Texas. We have not received significant revenue or earnings from these interests.


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A summary of our other natural resources results follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues
$
2,656

 
$
3,016

 
$
8,963

 
$
5,277

Cost of sales
(454
)
 
(1,043
)
 
(1,662
)
 
(2,169
)
Operating expenses
(1,675
)
 
(1,410
)
 
(4,550
)
 
(4,110
)
 
527

 
563

 
2,751

 
(1,002
)
Gain (loss) on sale of assets, primarily timber termination

 
(17
)
 

 
217

Equity in earnings of unconsolidated ventures
22

 
6

 
41

 
16

Segment earnings
$
549

 
$
552

 
$
2,792

 
$
(769
)
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.
Revenues consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Fiber
$
2,405

 
$
2,282

 
$
8,105

 
$
3,848

Recreational leases and other
251

 
734

 
858

 
1,429

Total revenues
$
2,656

 
$
3,016

 
$
8,963

 
$
5,277

Fiber sold consists of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
Pulpwood tons sold
65,700

 
160,000

 
314,400

 
265,200

Average pulpwood price per ton
$
12.56

 
$
9.54

 
$
11.53

 
$
9.51

Sawtimber tons sold
74,900

 
37,400

 
202,700

 
66,700

Average sawtimber price per ton
$
21.52

 
$
20.21

 
$
22.47

 
$
19.88

Total tons sold
140,600

 
197,400

 
517,100

 
331,900

Average price per ton
$
17.33

 
$
11.56

 
$
15.82

 
$
11.59

In first nine months 2013, total fiber revenues increased due to higher average prices and increased harvest activity, driven by customer demand. The majority of our fiber sales were to International Paper at market prices.
Information about our recreational leases follows:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
Average recreational acres leased
118,700

 
129,200

 
120,900

 
130,500

Average price per leased acre
$
8.63

 
$
8.84

 
$
9.08

 
$
8.84


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Operating expenses consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Professional and consulting services
$
607

 
$
792

 
$
2,157

 
$
2,322

Employee compensation and benefits
799

 
384

 
1,643

 
1,154

Facility and long-term timber lease costs
111

 
121

 
306

 
369

Other
158

 
113

 
444

 
265

Total operating expenses
$
1,675

 
$
1,410

 
$
4,550

 
$
4,110


Items Not Allocated to Segments
Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. General and administrative expenses principally consist of accounting and finance, tax, legal, human resources, internal audit, information technology and our board of directors. These functions support all of our business segments and are not allocated.
General and administrative expenses consist of:
 
Third Quarter
 
First Nine Months
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Employee compensation and benefits
$
1,940

 
$
1,986

 
$
6,040

 
$
5,332

Professional services
858

 
4,020

 
2,606

 
7,985

Depreciation and amortization
218

 
268

 
660

 
841

Insurance costs
214

 
238

 
661

 
749

Facility costs
196

 
195

 
633

 
573

Other
1,222

 
1,293

 
4,335

 
4,002

Total general and administrative expenses
$
4,648

 
$
8,000

 
$
14,935

 
$
19,482

Third quarter and first nine months 2012 professional services includes $3,248,000 and $5,709,000 in transaction costs to outside advisors related to the acquisition of Credo.
Income Taxes
Our effective tax rate was a 29 percent benefit in third quarter 2013 and less than one percent in first nine months 2013, which includes a four percent benefit for noncontrolling interests. Our third quarter and first nine months 2013 effective tax rates include a benefit from recognition of $6,326,000 of previously unrecognized tax benefits upon lapse of the statute of limitations for a previously reserved tax position. Our effective tax rates in third quarter and first nine months 2013 would have been 33 percent excluding the impact of the foregoing tax benefits.
Our effective tax rate was a 74 percent benefit in third quarter 2012 and 22 percent expense in first nine months 2012, which included a ten percent benefit for noncontrolling interests. In addition, our third quarter and first nine months 2012 effective tax rates included a non-cash benefit of 38 percent and nine percent associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states.
Our 2013 and 2012 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 because we believe it is likely it will be recoverable in future periods based on considerations including taxable income in prior carryback years, future reversals of existing temporary differences, tax planning strategies and future taxable income. If these sources of income are not sufficient in future periods, we may be required to provide a valuation allowance for our federal deferred tax asset.

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Capital Resources and Liquidity
Sources and Uses of Cash
We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal cash requirements are for the acquisition and development of real estate and investment in oil and gas leasing and exploration and production activities, either directly or indirectly through ventures, taxes, interest and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from oil and gas and income producing properties, borrowings, and reimbursements from utility and improvement districts. 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 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 development activities, undeveloped land sales, commercial and income producing properties, timber sales, oil and gas properties, recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.
In first nine months 2013, net cash provided by operating activities was $45,083,000 principally as result of selling Promesa, a 289-unit multifamily property we developed and sold for $41,000,000, generating net proceeds to us of $21,522,000. Real estate cost of sales, which include $29,707,000 in carrying value related to the sale of Promesa, exceeded expenditures for real estate development and acquisition expenditures, which includes the acquisition of one community development site in Nashville for $6,841,000 and a multifamily site in Charlotte for $4,849,000. In first nine months 2012, net cash used for operating activities was $19,350,000 as expenditures for real estate development and acquisitions exceeded non-cash real estate cost of sales, principally as result of acquiring real estate assets from CL Realty and Temco for $47,000,000. Subsequent to closing of this acquisition, we received $23,370,000 from the ventures, representing our pro-rata share of distributable cash. Also, we invested $14,341,000 in a 289-unit multifamily property currently under construction in Austin, acquired a multifamily development site in Nashville for $11,081,000 and we paid $11,041,000 in federal and state taxes, net of refunds. We received $24,294,000 in net proceeds from a consolidated venture’s sale of 800 acres in Dallas and $10,934,000 in reimbursements from two new multifamily ventures which represents our venture partners’ pro-rata share of the costs.

Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures 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 nine months 2013, net cash used in investing activities was $62,316,000 principally due to our investment of $56,482,000 in oil and gas properties and equipment associated with our exploration and production operations. In addition, we invested $6,241,000 in property and equipment, software and reforestation of which $3,185,000 is related to capital expenditures on our 413 guest room hotel in Austin. In first nine months 2012, net cash used for investing activities was $95,574,000 principally due to our acquisition of Credo for $152,073,000 purchase price, net of cash acquired. Partially offsetting our investment in Credo were proceeds received from the sale of our 25 percent interest in Palisades West LLC for $32,095,000 and $29,474,000 in net proceeds from the sale of Broadstone Memorial, a 401-unit multifamily project in Houston. In addition, we invested $2,794,000 in oil and natural gas properties and equipment associated with our non-operating working interests and $1,577,000 in property and equipment, software and reforestation and $699,000 in net contributions to unconsolidated ventures.
Cash Flows from Financing Activities
In first nine months 2013, net cash provided by financing activities was $61,641,000 principally due to net proceeds of $121,250,000 from the issuance of our 3.75% convertible senior notes partially offset by debt repayments of $96,915,000, of which $68,000,000 is related to payoff of debt outstanding under our revolving line of credit and $18,902,000 is related to paying off the loan associated with the sale of Promesa. We plan to use the remaining net proceeds from the issuance of our

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convertible senior notes for general corporate purposes, including investments in oil and gas exploration and drilling and real estate acquisition and development. In first nine months 2012, net cash provided by financing activities was $106,920,000. Our net increase in borrowings of $112,555,000 was principally used to fund our acquisition of Credo and our real estate development and acquisition expenditures. We paid $5,209,000 in financing fees primarily related to the amendment and restatement of our senior secured credit facility in third quarter 2012.
Senior Secured Credit Facility
At third quarter-end 2013, our senior secured credit facility provides for a $200,000,000 term loan maturing September 14, 2017 and a $200,000,000 revolving line of credit maturing September 14, 2015 (with one-year extension option). The term loan and 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 $3,663,000 is outstanding at third quarter-end 2013. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula.
At third quarter-end 2013, net unused borrowing capacity under our senior secured credit facility is calculated as follows:
 
Senior Credit
Facility
 
(In thousands)
Borrowing base availability
$
400,000

Less: borrowings
(200,000
)
Less: letters of credit
(3,663
)
Unused borrowing capacity
$
196,337

Our unused borrowing capacity in third quarter 2013 ranged from a high of $196,936,000 to a low of $196,337,000. 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 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 third quarter-end 2013, we were in compliance with the financial covenants of these agreements.
The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:
 
Requirement
 
Third Quarter-End 2013
Financial Covenant
 
 
 
Interest Coverage Ratio (a)
≥1.50:1.0
 
5.61:1.0

Revenues/Capital Expenditures Ratio (b)
≥1.00:1.0
 
2.99:1.0

Total Leverage Ratio (c)
≤40%
 
35.4
%
Net Worth (d)
> $460.8 million
 
$532.3 million

Collateral Value to Loan Commitment Ratio (e)
≥1.50:1.0
 
1.92:1.0

 ___________________________________
(a) 
Calculated as EBITDA (earnings before interest, taxes, depreciation, depletion and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is applied at the end of each quarter on a rolling four quarter basis.
(b) 
Calculated as total gross revenues (excluding revenues attributable to the Credo Entities), plus our pro rata share of the operating revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures, and excludes investments related to Credo. This covenant is applied at the end of each quarter on a rolling four quarter basis.
(c) 
Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities, reimbursement obligations with respect to letters of credit or similar instruments, and our

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pro-rata share of joint venture debt outstanding. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business, Credo asset value, special improvement district receipts (SIDR) reimbursements value, Cibolo Resort Special improvement district hotel occupancy tax (SIDHT) value and other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.
(d) 
Calculated as the amount by which consolidated total assets (excluding Credo acquisition goodwill over $50,000,000) exceeds consolidated total liabilities. At third quarter-end 2013, the requirement is $460,765,000 computed as: $451,893,000 plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis. This covenant is applied at the end of each quarter.
(e) 
Calculated as the total collateral value of timberland, high value timberland and our minerals business, raw entitled land that is part of mortgaged property, Credo asset value, SIDR reimbursements value and Cibolo Resort SIDHT value divided by total aggregate loan commitment. This covenant is applied at the end of each quarter.
To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to 10 percent of the aggregate commitments in place. At third quarter-end 2013, the minimum liquidity requirement was $40,000,000, compared with $245,840,000 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. In addition, we may elect to make distributions so long as the total leverage ratio is less than 30 percent, the interest coverage is greater than 3.0:1.0, the revenues / capital expenditures ratio exceeds 1.5:1.0, and available liquidity is not less than $125,000,000. At third quarter-end 2013, our total leverage ratio exceeded 30 percent and as a result we are prohibited from making distributions until the above conditions are satisfied.
3.75% Convertible Senior Notes due 2020
On February 26, 2013, we issued $125,000,000 aggregate principal amount of 3.75% convertible senior notes due 2020 (Notes). Interest on the Notes is payable semiannually at a rate of 3.75 percent per annum and they mature on March 1, 2020. The Notes have an initial conversion rate of 40.8351 per $1,000 principal amount. The initial conversion rate is subject to adjustment upon the occurrence of certain events. Prior to November 1, 2019, the Notes are convertible only upon certain circumstances, and thereafter are convertible at any time prior to the close of business on the second scheduled trading day prior to maturity. If converted, holders will receive cash, shares of our common stock or a combination thereof at our election. We intend to settle the principal amount of the convertible senior notes (Notes) in cash upon conversion, with any excess conversion value to be settled in shares of our common stock.
Net proceeds from the offering were used to repay $68,000,000 under our revolving line of credit, and we intend to use the remaining net proceeds for general corporate purposes, including investments in oil and gas exploration and drilling and real estate acquisition and development.
Contractual Obligations and Off-Balance Sheet Arrangements
In 2012, CJUF III RH Holdings LP, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $23,936,000 to develop a 257-unit multifamily property in downtown Austin. The outstanding balance at third quarter-end 2013 was $14,800,000. We have a construction completion guaranty, a repayment guaranty for 20 percent of the principal balance and unpaid accrued interest, and a standard non-recourse carve-out guaranty. The repayment guaranty will reduce from 20 percent to 0 percent upon achievement of certain conditions.
In 2012, FMF Peakview 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 third quarter-end 2013 was $9,567,000. We have a construction completion guaranty, a repayment guaranty for 25 percent of the principal and unpaid accrued interest, and a standard non-recourse carve-out guaranty.
We have provided performance bonds and letters of credit on behalf of certain ventures that could be drawn on due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance with local codes and ordinances. At third quarter-end 2013, we have $26,630,000 outstanding, of which $26,577,000 is related to the development and construction of a 257-unit multifamily property in Austin estimated to be completed in May 2014.
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 $78,017,000 invested in Cibolo Canyons at third quarter-end 2013.

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Resort Hotel, Spa and Golf Development
In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott ® San Antonio Hill Country Resort & Spa, which includes a 1,002 room destination resort and two PGA Tour ® Tournament Players Club ® (TPC) golf courses. Under these agreements, we agreed to transfer to third party owners 700 acres of undeveloped land, to provide $30,000,000 cash and to provide $12,700,000 of other consideration principally consisting of golf course construction materials, substantially all of which has been provided.
In exchange for our commitment to the resort, the third party owners assigned to us certain rights under an agreement between the third party owners and a legislatively created Special Improvement District (SID). This agreement includes the right to receive from the SID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by the SID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by the SID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service, if any, on bonds issued by the SID collateralized by hotel occupancy tax and other resort sales tax through 2034.
The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the resort and the amount of any applicable debt service incurred by the SID. As a result, there is significant uncertainty as to the amount and timing of collections under this agreement. Until these uncertainties are clarified, amounts collected under the agreement will be accounted for as a reduction of our investment in the resort development. The resort began operations in January 2010.
In third quarter 2013, we received $900,000 in reimbursements from the SID. Since inception, we have received $13,456,000 in reimbursements and have accounted for this as a reduction of our investment. At third quarter-end 2013, we have $29,818,000 invested in the resort development.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include approximately 1,566 residential lots and 150 commercial acres designated for multifamily and retail uses, of which 783 lots and 97 commercial acres have been sold through third quarter-end 2013.
In 2007, we entered into an agreement with the SID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by the SID and unreimbursed amounts accrue interest at 9.75 percent. The SID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses.
Since the amount of each reimbursement is dependent on several factors, including timing of SID approval and the SID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.
Through third quarter-end 2013, we have submitted and received approval for reimbursement of approximately $65,465,000 of infrastructure costs and have received reimbursements totaling $23,670,000. In third quarter 2013, we received $600,000 in reimbursements from the SID. At third quarter-end 2013, we have $41,795,000 in pending reimbursements, excluding interest. At third quarter-end 2013, we have $48,199,000 invested in the mixed-use development.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2012 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.

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Statistical and Other Data
A summary of our real estate projects in the entitlement process (a) at third quarter-end 2013 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

Fox Hall
Coweta
 
Atlanta
 
960

Garland Mountain
Cherokee/Bartow
 
Atlanta
 
350

Martin’s Bridge
Banks
 
Atlanta
 
970

Mill Creek
Coweta
 
Atlanta
 
770

Serenity
Carroll
 
Atlanta
 
440

Wolf Creek
Carroll/Douglas
 
Atlanta
 
12,230

Yellow Creek
Cherokee
 
Atlanta
 
1,060

Texas
 
 
 
 
 
Lake Houston
Harris/Liberty
 
Houston
 
3,700

Total
 
 
 
 
25,830

 _________________________
(a) 
A project is deemed to be in the entitlement process when customary steps necessary for the preparation of an application for governmental land-use approvals, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.
(b) 
Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.
A summary of activity within our projects in the development process, which includes entitled (a), developed and under development real estate projects, at third quarter-end 2013 follows:
 
 
 
 
 
Residential Lots (c)
 
Commercial Acres (d)
Project
County
 
Interest
    Owned (b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres
Sold
Since
Inception
 
Acres
Remaining (f)
Projects we own
 
 
 
 
 
 
 
 
 
 
 
California
 
 
 
 
 
 
 
 
 
 
 
San Joaquin River
Contra Costa/Sacramento
 
100
%
 

 

 

 
288

Colorado
 
 
 
 
 
 
 
 
 
 
 
Buffalo Highlands
Weld
 
100
%
 

 
164

 

 

Johnstown Farms
Weld
 
100
%
 
229

 
377

 
2

 
7

Pinery West
Douglas
 
100
%
 

 
86

 
20

 
94

Stonebraker
Weld
 
100
%
 

 
603

 

 

Tennessee
 
 
 
 
 
 
 
 
 
 
 
Azalea Park
Williamson
 
100
%
 

 
173

 

 

Texas
 
 
 
 
 
 
 
 
 
 
 
Arrowhead Ranch
Hays
 
100
%
 

 
387

 

 
6

Bar C Ranch
Tarrant
 
100
%
 
292

 
813

 

 


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Residential Lots (c)
 
Commercial Acres (d)
Project
County
 
Interest
    Owned (b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres
Sold
Since
Inception
 
Acres
Remaining (f)
Barrington Kingwood
Harris
 
100
%
 
93

 
87

 

 

Cibolo Canyons
Bexar
 
100
%
 
783

 
783

 
97

 
53

Harbor Lakes
Hood
 
100
%
 
209

 
240

 
2

 
19

Hunter’s Crossing
Bastrop
 
100
%
 
430

 
80

 
38

 
71

La Conterra
Williamson
 
100
%
 
159

 
342

 

 
58

Lakes of Prosper
Collin
 
100
%
 
32

 
253

 

 

Maxwell Creek
Collin
 
100
%
 
866

 
133

 
10

 

Oak Creek Estates
Comal
 
100
%
 
142

 
505

 
13

 

Stoney Creek
Dallas
 
100
%
 
149

 
605

 

 

Summer Creek Ranch
Tarrant
 
100
%
 
855

 
419

 
35

 
44

Summer Lakes
Fort Bend
 
100
%
 
500

 
630

 
56

 

Summer Park
Fort Bend
 
100
%
 

 
198

 
28

 
62

The Colony
Bastrop
 
100
%
 
445

 
704

 
22

 
31

The Preserve at Pecan Creek
Denton
 
100
%
 
449

 
345

 

 
7

Village Park
Collin
 
100
%
 
580

 
176

 
3

 
2

Westside at Buttercup Creek
Williamson
 
100
%
 
1,457

 
38

 
66

 

Other projects (10)
Various
 
100
%
 
2,107

 
150

 
219

 
35

Georgia
 
 
 
 
 
 
 
 
 
 
 
Seven Hills
Paulding
 
100
%
 
696

 
394

 
26

 
113

The Villages at Burt Creek
Dawson
 
100
%
 

 
1,715

 

 
57

Towne West
Bartow
 
100
%
 

 
2,674

 

 
121

Other projects (17)
Various
 
100
%
 
84

 
3,009

 

 
705

Florida
 
 
 
 
 
 
 
 
 
 
 
Other projects (2)
Various
 
100
%
 
301

 

 

 

Missouri and Utah
 
 
 
 
 
 
 
 
 
 
 
Other projects (2)
Various
 
100
%
 
500

 
54

 

 

 
 
 
 
 
11,358

 
16,137

 
637

 
1,773

Projects in entities we consolidate
 
 
 
 
 
 
 
 
 
 
 
Texas
 
 
 
 
 
 
 
 
 
 
 
City Park
Harris
 
75
%
 
1,259

 
52

 
50

 
115

Lantana(e)
Denton
 
55
%
 
864

 
849

 
9

 
3

Timber Creek
Collin
 
88
%
 

 
614

 

 

Willow Creek Farms II
Waller/Fort Bend
 
90
%
 
82

 
476

 

 

Other projects (2)
Various
 
Various

 
9

 
198

 

 
129

Georgia
 
 
 
 
 
 
 
 
 
 
 
The Georgian
Paulding
 
75
%
 
289

 
1,052

 

 

 
 
 
 
 
2,503

 
3,241

 
59

 
247

Total owned and consolidated
 
 
 
 
13,861

 
19,378

 
696

 
2,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Residential Lots (c)
 
Commercial Acres (d)
Project
County
 
Interest
    Owned (b)
 
Lots Sold
Since
Inception
 
Lots
Remaining
 
Acres
Sold
Since
Inception
 
Acres
Remaining (f)
Projects in ventures that we account for using the equity method
 
 
 
 
 
 
 
 
 
 
Texas
 
 
 
 
 
 
 
 
 
 
 
Entrada
Travis
 
50
%
 

 
821

 

 

Fannin Farms West
Tarrant
 
50
%
 
324

 
24

 

 
12

Harper’s Preserve
Montgomery
 
50
%
 
282

 
1,411

 

 
59

Lantana(e)
Denton
 
Various

 
1,163

 
80

 
16

 
42

Long Meadow Farms
Fort Bend
 
38
%
 
1,159

 
643

 
138

 
161

Southern Trails
Brazoria
 
80
%
 
654

 
337

 

 

Stonewall Estates
Bexar
 
50
%
 
322

 
64

 

 

Other projects (1)
Nueces
 
50
%
 

 

 

 
15

Total in ventures
 
 
 
 
3,904

 
3,380

 
154

 
289

Combined total
 
 
 
 
17,765

 
22,758

 
850

 
2,309

 _________________________
(a) 
A project is deemed entitled when all major discretionary governmental land-use approvals have been received. Some projects may require additional permits and/or non-governmental authorizations for development.
(b) 
Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated or accounted for using the equity method.
(c) 
Lots are for the total project, regardless of our ownership interest. Lots remaining represent vacant developed lots, lots under development and future planned lots and are subject to change based on business plan revisions.
(d) 
Commercial acres are for the total project, regardless of our ownership interest, and are net developable acres, which may be fewer than the gross acres available in the project.
(e) 
The Lantana project consists of a series of 23 partnerships in which our voting interests range from 25 percent to 55 percent. We account for two of these partnerships using the equity method and we consolidate the remaining partnerships.
(f) 
Excludes acres associated with commercial and income producing properties.
A summary of our significant commercial and income producing properties at third quarter-end 2013 follows:
Project
 
County
 
Market
 
Interest
    Owned (a)
 
Type
 
Acres
 
Description
Radisson Hotel
 
Travis
 
Austin
 
100
%
 
Hotel
 
2

 
413 guest rooms and suites
Eleven (b)
 
Travis
 
Austin
 
25
%
 
Multifamily
 
3

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

 
304-unit luxury apartment
Midtown Cedar Hill (b)
 
Dallas
 
Dallas
 
100
%
 
Multifamily
 
13

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

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Oil and Gas Owned Mineral Interests
A summary of our oil and gas owned mineral interests(a) at third quarter-end 2013 follows:
State
Unleased
 
Leased (b)
 
Held By
Production (c)
 
Total (d)
 
 
 
(Net acres)
Texas
206,000

 
19,000

 
27,000

 
252,000

Louisiana
117,000

 
19,000

 
8,000

 
144,000

Georgia
152,000

 

 

 
152,000

Alabama
40,000

 

 

 
40,000

California
1,000

 

 

 
1,000

Indiana
1,000

 

 

 
1,000

 
517,000

 
38,000

 
35,000

 
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 natural 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. Excludes 477 owned net mineral acres located in Colorado.

A summary of our Texas and Louisiana owned mineral acres (a) by county or parish at third quarter-end 2013 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.

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Oil and Gas Mineral Interests Leased
A summary of our net oil and gas mineral acres leased from others at third quarter-end 2013 follows:
State
Undeveloped
 
Held By
Production (a)
 
Total
Nebraska
122,000

 
3,000

 
125,000

Kansas
29,000

 
5,000

 
34,000

Oklahoma
4,000

 
17,000

 
21,000

Alabama
10,000

 

 
10,000

Texas
10,000

 
2,000

 
12,000

North Dakota
3,000

 
4,000

 
7,000

Other
6,000

 
4,000

 
10,000

 
184,000

 
35,000

 
219,000

 _________________________
(a) 
Excludes approximately 8,000 net acres of overriding royalty interests.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our interest rate risk is principally related to our variable-rate debt. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable-rate debt, which is $231,869,000 at third quarter-end 2013 and $290,074,000 at year-end 2012.
The following table illustrates the estimated effect on our pre-tax income of immediate, parallel, and sustained shifts in interest rates for the next 12 months on our variable-rate debt at third quarter-end 2013, with comparative year-end 2012 information. This estimate assumes that debt reductions from contractual payments will be replaced with short-term, variable-rate debt; however, that may not be the financing alternative we choose.
Change in Interest Rates
Third Quarter-End 2013
 
Year-End 2012
 
(In thousands)
+2%
$
(4,494
)
 
$
(5,801
)
+1%
(2,319
)
 
(2,901
)
-1%
2,319

 
2,901

-2%
4,637

 
5,697

Foreign Currency Risk
We have no exposure to foreign currency fluctuations.

Commodity Price Risk
We have exposure to commodity price fluctuations which can materially affect our revenues and cash flows. 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 third quarter-end 2013.
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

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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
We completed our acquisition of CREDO Petroleum Corporation in September 2012. During third quarter 2013, we completed the integration of the general ledger system used for our oil and gas operations into our system of internal control over financial reporting. Except as described above, 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 2012 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (a) 
Period
Total
Number of
Shares
Purchased (b)
 
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 7 (7/1/2013 — 7/31/2013)
484

 
$
22.05

 

 
4,997,855

Month 8 (8/1/2013 — 8/31/2013)

 

 

 
4,997,855

Month 9 (9/1/2013 — 9/30/2013)
4,191

 
21.40

 

 
4,997,855

Total
4,675

 
21.47

 

 
 
 _________________________
(a) 
On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have purchased 2,002,145 shares under this authorization, which has no expiration date. We have no repurchase plans or programs that expired during the period covered by the table above and no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
(b) 
Represents shares withheld to pay taxes in connection with vesting of restricted stock awards and exercises of stock options.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.

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Item 6. Exhibits
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 September 30, 2013, 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.

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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: November 8, 2013
By:
/s/ Christopher L. Nines
 
 
Christopher L. Nines
 
 
Chief Financial Officer
 
 
 
 
By:
/s/ Sabita C. Reddy
 
 
Sabita C. Reddy
 
 
Principal Accounting Officer

44