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Forestar Group Inc. - Quarter Report: 2016 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, 2016
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 3, 2016
Common Stock, par value $1.00 per share
 
33,722,230
 


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
 
2016
 
2015
 
(In thousands, except share data)
ASSETS
 
Cash and cash equivalents
$
122,130

 
$
96,442

Real estate, net
387,074

 
586,715

Assets of discontinued operations
124

 
104,967

Assets held for sale
14,394

 

Investment in unconsolidated ventures
79,564

 
82,453

Timber
6,629

 
7,683

Receivables, net
1,300

 
19,025

Income taxes receivable
23,068

 
12,056

Prepaid expenses
1,606

 
3,116

Property and equipment, net
9,686

 
10,732

Goodwill and other intangible assets
43,455

 
43,455

Other assets
3,047

 
5,602

TOTAL ASSETS
$
692,077

 
$
972,246

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
6,535

 
$
11,617

Accrued employee compensation and benefits
4,360

 
5,547

Accrued property taxes
4,197

 
4,529

Accrued interest
569

 
3,267

Deferred tax liability, net
1,021

 
1,037

Earnest money deposits
11,370

 
10,214

Other accrued expenses
10,488

 
14,556

Liabilities of discontinued operations
3,637

 
11,192

Other liabilities
20,372

 
24,657

Debt, net
112,348

 
381,515

TOTAL LIABILITIES
174,897

 
468,131

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 2016 and year-end 2015
36,947

 
36,947

Additional paid-in capital
560,248

 
561,850

Accumulated deficit
(31,143
)
 
(46,046
)
Treasury stock, at cost, 3,224,373 shares at third quarter-end 2016 and 3,203,768 shares at year-end 2015
(50,339
)
 
(51,151
)
Total Forestar Group Inc. shareholders’ equity
515,713

 
501,600

Noncontrolling interests
1,467

 
2,515

TOTAL EQUITY
517,180

 
504,115

TOTAL LIABILITIES AND EQUITY
$
692,077

 
$
972,246

Please read the notes to consolidated financial statements.

3

Table of Contents

FORESTAR GROUP INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share amounts)
REVENUES
 
 
 
 
 
 
 
Real estate sales and other
$
45,285

 
$
18,369

 
$
114,711

 
$
68,630

Commercial and income producing properties
12

 
9,588

 
13,065

 
31,566

Real estate
45,297

 
27,957

 
127,776

 
100,196

Mineral resources
1,423

 
2,502

 
3,842

 
7,616

Other
487

 
1,726

 
1,199

 
5,372

 
47,207

 
32,185

 
132,817

 
113,184

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of real estate sales and other
(24,884
)
 
(9,588
)
 
(105,023
)
 
(33,840
)
Cost of commercial and income producing properties
(4,375
)
 
(6,780
)
 
(15,326
)
 
(22,020
)
Cost of mineral resources
(182
)
 
(2,119
)
 
(572
)
 
(2,774
)
Cost of other
(363
)
 
(819
)
 
(867
)
 
(2,599
)
Other operating expenses
(6,471
)
 
(12,319
)
 
(26,879
)
 
(37,013
)
General and administrative
(5,177
)
 
(9,467
)
 
(16,508
)
 
(22,510
)
 
(41,452
)
 
(41,092
)
 
(165,175
)
 
(120,756
)
GAIN ON SALE OF ASSETS
501

 
425

 
121,732

 
1,585

OPERATING INCOME (LOSS)
6,256

 
(8,482
)
 
89,374

 
(5,987
)
Equity in earnings of unconsolidated ventures
3,637

 
2,909

 
3,872

 
11,538

Interest expense
(3,369
)
 
(8,315
)
 
(17,926
)
 
(25,851
)
Loss on extinguishment of debt, net

 

 
(35,864
)
 

Other non-operating income
1,249

 
62

 
1,620

 
1,762

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES
7,773

 
(13,826
)
 
41,076

 
(18,538
)
Income tax benefit (expense)
9,666

 
(43,568
)
 
(7,415
)
 
(41,699
)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
17,439

 
(57,394
)
 
33,661

 
(60,237
)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES
(7,164
)
 
(106,937
)
 
(17,428
)
 
(146,649
)
CONSOLIDATED NET INCOME (LOSS)
10,275

 
(164,331
)
 
16,233

 
(206,886
)
Less: Net (income) loss attributable to noncontrolling interests
(610
)
 
115

 
(1,330
)
 
5

NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.
$
9,665

 
$
(164,216
)
 
$
14,903

 
$
(206,881
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
34,099

 
34,299

 
34,234

 
34,248

Diluted
42,260

 
34,299

 
42,334

 
34,248

NET INCOME (LOSS) PER BASIC SHARE
 
 
 
 
 
 
 
Continuing operations
$
0.40

 
$
(1.67
)
 
$
0.77

 
$
(1.76
)
Discontinued operations
(0.17
)
 
(3.12
)
 
(0.42
)
 
(4.28
)
NET INCOME (LOSS) PER BASIC SHARE
$
0.23

 
$
(4.79
)
 
$
0.35

 
$
(6.04
)
NET INCOME (LOSS) PER DILUTED SHARE
 
 
 
 
 
 
 
Continuing operations
0.40

 
(1.67
)
 
0.76

 
(1.76
)
Discontinued operations
(0.17
)
 
(3.12
)
 
(0.41
)
 
(4.28
)
NET INCOME (LOSS) PER DILUTED SHARE
0.23

 
(4.79
)
 
0.35

 
(6.04
)
TOTAL COMPREHENSIVE INCOME (LOSS)
$
9,665

 
$
(164,216
)
 
$
14,903

 
$
(206,881
)
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
 
2016
 
2015
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income (loss)
$
16,233

 
$
(206,886
)
Adjustments:
 
 
 
Depreciation, depletion and amortization
9,885

 
36,780

Change in deferred income taxes
(16
)
 
39,106

Equity in earnings of unconsolidated ventures
(3,872
)
 
(11,538
)
Distributions of earnings of unconsolidated ventures
4,793

 
7,343

Share-based compensation
2,665

 
5,531

Real estate cost of sales
56,817

 
33,575

Dry hole and unproved leasehold impairment charges

 
46,722

Real estate development and acquisition expenditures, net
(56,552
)
 
(81,055
)
Reimbursements from utility and improvement districts
13,698

 
8,285

Asset impairments
57,065

 
91,146

Loss on debt extinguishment, net
35,864

 

Gain on sale of assets
(108,114
)
 
(265
)
Other
3,639

 
2,390

Changes in:
 
 
 
Notes and accounts receivable
20,734

 
9,395

Prepaid expenses and other
1,536

 
3,106

Accounts payable and other accrued liabilities
(13,556
)
 
(2,300
)
Income taxes
(11,012
)
 
3,625

Net cash provided by (used for) operating activities
29,807

 
(15,040
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, equipment, software, reforestation and other
(5,902
)
 
(10,882
)
Oil and gas properties and equipment
(579
)
 
(47,043
)
Investment in unconsolidated ventures
(5,615
)
 
(23,908
)
Proceeds from sales of assets
319,351

 
13,571

Return of investment in unconsolidated ventures
3,948

 
7,783

Net cash provided by (used for) investing activities
311,203

 
(60,479
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments of debt
(311,724
)
 
(7,527
)
Additions to debt
2,749

 
7,105

Distributions to noncontrolling interests, net
(2,378
)
 
(703
)
Repurchases of common stock
(3,537
)
 

Payroll taxes on issuance of stock-based awards
(221
)
 
(722
)
Other
(211
)
 
(121
)
Net cash used for financing activities
(315,322
)
 
(1,968
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
25,688

 
(77,487
)
Cash and cash equivalents at beginning of period
96,442

 
170,127

Cash and cash equivalents at end of period
$
122,130

 
$
92,640

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. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.
We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those principally related to allocating costs to real estate, measuring long-lived assets for impairment, oil and gas revenue accruals, capital expenditure and lease operating expense accruals associated with our oil and gas production activities, oil and gas reserves and depletion of our oil and gas properties. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2015 Annual Report on Form 10-K.
At third quarter-end 2016, we have divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within the consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests. We also changed the name of the other natural resources segment to other.
Note 2—New and Pending Accounting Pronouncements
Adoption of New Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which allows an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The updated standards are effective for financial statements issued for annual and interim periods beginning after December 15, 2015. We adopted ASU 2015-03 in first quarter 2016 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $8,267,000 of debt issuance costs were reclassified in the consolidated balance sheet from other assets to debt. The adoption did not impact our consolidated financial position, results of operations or cash flows. As permitted under this guidance, we will continue to present debt issuance costs associated with revolving-debt agreements as other assets.
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (Topic 810), requiring entities to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The revised consolidation model: (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved with VIEs, and (4) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. The updated standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. The adoption of this guidance, which was applied retrospectively, had no impact to our consolidated financial statements.

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Table of Contents

Pending Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for annual and interim periods beginning after December 15, 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to provide increased transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 31, 2020 with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as part of its simplification initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The updated standard becomes effective for annual and interim periods beginning after December 31, 2016. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), in order to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures.
Note 3—Real Estate
Real estate consists of:
 
Third Quarter-End 2016
 
Year-End 2015
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
Carrying Value
 
Accumulated Depreciation
 
Net Carrying Value
 
(In thousands)
Entitled, developed and under development projects
$
293,356

 
$

 
$
293,356

 
$
352,141

 
$

 
$
352,141

Timberland and undeveloped land (includes land in entitlement)
93,718

 

 
93,718

 
98,181

 

 
98,181

Commercial
 
 
 
 

 
 
 
 
 
 
Radisson Hotel & Suites (a)

 

 

 
62,889

 
(29,268
)
 
33,621

Income producing properties
 
 
 
 
 
 
 
 
 
 
 
Eleven (a) 

 

 

 
53,896

 
(2,861
)
 
51,035

Dillon (a) 

 

 

 
19,987

 

 
19,987

Music Row (a)

 

 

 
9,947

 

 
9,947

Downtown Edge multifamily site (b)

 

 

 
12,706

 

 
12,706

West Austin multifamily site (b)

 

 

 
9,097

 

 
9,097

 
$
387,074

 
$

 
$
387,074

 
$
618,844

 
$
(32,129
)
 
$
586,715

___________________
(a) 
Sold in 2016.
(b) 
Classified as assets held for sale at third quarter-end 2016.
At third quarter-end 2016, Downtown Edge and West Austin, two multifamily sites in Austin, were classified as held for sale at a net carrying amount of $14,394,000.


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In first nine months 2016, we sold the Radisson Hotel & Suites, a 413 room hotel in Austin, for $130,000,000, generating$128,764,000 in net proceeds before paying in full the associated debt of $15,400,000 and recognized a gain on sale of $95,336,000. We also sold Eleven, a wholly-owned 257-unit multifamily property in Austin, for $60,150,000, generating $59,719,000 in net proceeds before paying in full the associated debt of $23,936,000 and recognized a gain on sale of $9,116,000. In addition, we sold Dillon, a planned 379-unit multifamily property that was under construction in Charlotte, for $25,979,000, generating $25,433,000 in net proceeds and recognized a gain on sale of $1,229,000 and Music Row, a planned 230-unit multifamily property that was under construction in Nashville, for $15,025,000, generating $14,703,000 in net proceeds and recognized a gain on sale of $3,968,000.
In third quarter and first nine months 2016, we recognized non-cash impairment charges of $7,627,000 and $56,453,000 related to six non-core community development projects and two multifamily sites. These impairments were a result of our key initiative to review our entire portfolio of assets which resulted in business plan changes, inclusive of cash tax savings considerations, to market these properties for sale, which resulted in adjustment of the carrying value to fair value.
Our estimated costs of assets for which we expect to be reimbursed by utility and improvement districts were $54,290,000 at third quarter-end 2016 and $67,554,000 at year-end 2015, including $22,361,000 at third quarter-end 2016 and $22,302,000 at year-end 2015 related to our Cibolo Canyons project near San Antonio, Texas. In first nine months 2016, we have collected $13,197,000 in reimbursements that were previously submitted to these districts. At third quarter-end 2016, our inception-to-date submitted and approved reimbursements for the Cibolo Canyons project were $54,376,000 of which we have collected $36,109,000. These costs are principally for water, sewer and other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.
Note 4—Discontinued Operations
At third quarter-end 2016, we have divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within the consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests.
Summarized results from discontinued operations were as follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues
$
180

 
$
10,983

 
$
5,827

 
$
35,219

Cost of sales
(108
)
 
(93,434
)
 
(6,593
)
 
(174,462
)
Other operating expenses
(3,318
)
 
(1,644
)
 
(5,707
)
 
(8,652
)
Loss from discontinued operations before income taxes
$
(3,246
)
 
$
(84,095
)
 
$
(6,473
)
 
$
(147,895
)
Gain (loss) on sale of assets before income taxes
955

 
(2,174
)
 
(13,618
)
 
(1,320
)
Income tax benefit (expense)
(4,873
)
 
(20,668
)
 
2,663

 
2,566

Loss from discontinued operations, net of taxes
$
(7,164
)
 
$
(106,937
)
 
$
(17,428
)
 
$
(146,649
)

In first nine months 2016, we recorded a net loss of $13,618,000 on the sale of 199,263 net mineral acres leased from others and 379 gross (95 net) producing oil and gas working interest wells in Nebraska, Kansas, Oklahoma and North Dakota for total net proceeds of $80,084,000, which includes $3,269,000 in reimbursement of capital costs incurred on in-progress wells that were assumed by the buyer. Other operating expenses in third quarter 2016 include loss contingency charges of $1,100,000 related to the Huffman litigation and $1,155,000 related to potential environmental liabilities to plug and abandon certain oil and gas wells in Wyoming. Please read Note 14—Commitments and Contingencies for additional information about these items. In third quarter and first nine months 2015, cost of sales includes non-cash impairment charges of $79,438,000 and $125,383,000.




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Table of Contents

The major classes of assets and liabilities of discontinued operations at third quarter-end 2016 and year-end 2015 are as follows:
 
Third
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Assets of Discontinued Operations:
 
 
 
Receivables, net of allowance for bad debt
$
116

 
$
4,632

Oil and gas properties and equipment, net

 
79,733

Goodwill and other intangible assets

 
19,673

Prepaid expenses
8

 
96

Other assets

 
833

 
$
124

 
$
104,967

 
 
 
 
Liabilities of Discontinued Operations:
 
 
 
Accounts payable
$
91

 
$
342

Accrued property taxes

 
259

Other accrued expenses
3,546

 
8,924

Other liabilities

 
1,667

 
$
3,637

 
$
11,192


Significant operating activities and investing activities of discontinued operations are as follows:
 
First Nine Months
 
2016
 
2015
 
(In thousands)
Operating activities:
 
 
 
Asset impairments
$
612

 
$
88,614

Dry hole and unproved leasehold impairment charges

 
46,722

Loss (gain) on sale of assets
13,618

 
1,320

Depreciation, depletion and amortization
2,202

 
24,254

 
$
16,432

 
$
160,910

 
 
 
 
Investing activities:
 
 
 
Oil and gas properties and equipment
$
(579
)
 
$
(47,043
)
Proceeds from sales of assets
76,815

 
13,111

 
$
76,236

 
$
(33,932
)








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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
 
2016
 
2015
 
(In thousands)
Goodwill
$
41,774

 
$
41,774

Identified intangibles
1,681

 
1,681

 
$
43,455

 
$
43,455

Goodwill related to our mineral interests was $37,900,000 at third quarter-end 2016 and year-end 2015. Goodwill associated with our water resources initiatives was $3,874,000 at third quarter-end 2016 and year-end 2015.
Identified intangibles include $1,681,000 in indefinite lived groundwater leases associated with our water resources initiatives.
Note 6—Equity
A reconciliation of changes in equity through third quarter-end 2016 follows:
 
Forestar
Group Inc.
 
Noncontrolling
Interests
 
Total
 
(In thousands)
Balance at year-end 2015
$
501,600

 
$
2,515

 
$
504,115

Net income (loss)
14,903

 
1,330

 
16,233

Distributions to noncontrolling interests

 
(2,378
)
 
(2,378
)
Repurchase of common shares
(3,537
)
 

 
(3,537
)
Other (primarily share-based compensation)
2,747

 

 
2,747


$
515,713

 
$
1,467

 
$
517,180


In first nine months 2016, we repurchased 283,976 shares of our common stock at an average price of $12.45 per share.
Note 7—Investment in Unconsolidated Ventures
We participate in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use communities in which we may or may not have a controlling financial interest. U.S. GAAP requires consolidation of Variable Interest Entities (VIEs) in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether a venture is a VIE and whether we are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture agreements and reassess upon reconsideration events.
At third quarter-end 2016, we had ownership interests in 17 ventures that we accounted for using the equity method, of which none are a VIE.
In first nine months 2016, we sold our interest in FMF Peakview LLC (3600), a 304-unit multifamily joint venture near Denver, generating $13,917,000 in net proceeds and recognized a gain of $10,363,000 which is included in gain on sale of assets.









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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
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
242, LLC (b)
$
27,110

 
$
26,687

 
$
3,182

 
$

 
$
21,428

 
$
24,877

 
$
10,048

 
$
11,766

CL Ashton Woods, LLC (c)
4,426

 
7,654

 

 

 
3,685

 
6,084

 
2,107

 
3,615

CL Realty, LLC
7,913

 
7,872

 

 

 
7,798

 
7,662

 
3,899

 
3,831

CREA FMF Nashville LLC (b)
56,117

 
57,820

 
37,192

 
50,845

 
17,297

 
4,291

 
4,984

 
3,820

Elan 99, LLC
49,671

 
34,192

 
32,461

 
14,587

 
13,628

 
15,838

 
12,265

 
14,255

FOR/SR Forsyth LLC
9,584

 
6,500

 

 

 
9,016

 
6,500

 
8,115

 
5,850

FMF Littleton LLC
70,704

 
52,376

 
42,083

 
22,347

 
23,838

 
24,370

 
6,138

 
6,270

FMF Peakview LLC

 
48,869

 

 
30,485

 

 
16,828

 

 
3,447

HM Stonewall Estates, Ltd (c)
814

 
2,842

 

 

 
814

 
2,842

 
814

 
1,294

LM Land Holdings, LP (c)
29,350

 
31,984

 
4,481

 
7,728

 
23,762

 
22,751

 
10,770

 
9,664

MRECV DT Holdings LLC
4,039

 
4,215

 

 

 
4,039

 
4,215

 
3,635

 
3,807

MRECV Edelweiss LLC
2,816

 
2,237

 

 

 
2,816

 
2,237

 
2,764

 
2,029

MRECV Juniper Ridge LLC
4,403

 
3,006

 

 

 
4,403

 
3,006

 
3,882

 
2,730

MRECV Meadow Crossing II LLC
2,366

 
728

 

 

 
2,366

 
728

 
2,129

 
655

Miramonte Boulder Pass, LLC
12,783

 
12,627

 
6,660

 
5,869

 
5,380

 
5,474

 
5,387

 
5,349

Temco Associates, LLC
5,357

 
5,284

 

 

 
5,225

 
5,113

 
2,612

 
2,557

Other ventures
26

 
4,174

 

 
2,242

 
26

 
1,922

 
15

 
1,514

 
$
287,479

 
$
309,067

 
$
126,059

 
$
134,103

 
$
145,521

 
$
154,738

 
$
79,564

 
$
82,453


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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
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
242, LLC (b)
$
937

 
$
2,884

 
$
937

 
$
20,583

 
$
15

 
$
1,161

 
$
(449
)
 
$
9,034

 
$
14

 
$
597

 
$
(218
)
 
$
4,642

CL Ashton Woods, LP (c)
288

 
3,958

 
1,977

 
6,369

 
83

 
1,341

 
601

 
2,719

 
129

 
1,849

 
892

 
3,405

CL Realty, LLC
140

 
205

 
386

 
674

 
72

 
103

 
136

 
346

 
37

 
52

 
68

 
174

CREA FMF Nashville LLC (b) (d)
1,291

 
442

 
3,273

 
477

 
(145
)
 
(991
)
 
(1,214
)
 
(1,207
)
 
1,484

 
(991
)
 
1,164

 
(1,207
)
Elan 99, LLC
461

 

 
628

 

 
(867
)
 

 
(2,211
)
 
(2
)
 
(779
)
 

 
(1,989
)
 
(2
)
FMF Littleton LLC
944

 
6

 
1,791

 
6

 
(183
)
 
(152
)
 
(531
)
 
(152
)
 
(47
)
 
(38
)
 
(133
)
 
(38
)
FMF Peakview LLC

 
628

 
939

 
1,280

 

 
(286
)
 
(248
)
 
(1,020
)
 

 
(58
)
 
(50
)
 
(204
)
FOR/SR Forsyth LLC

 

 

 

 
(21
)
 

 
(38
)
 

 
(19
)
 

 
(34
)
 

HM Stonewall Estates, Ltd (c)
822

 
921

 
1,948

 
2,590

 
280

 
480

 
794

 
1,292

 
120

 
157

 
347

 
730

LM Land Holdings, LP (c)
3,505

 
1,857

 
6,531

 
8,154

 
2,502

 
1,391

 
4,557

 
5,179

 
836

 
423

 
1,481

 
1,710

MRECV DT Holdings LLC
162

 

 
379

 

 
157

 
167

 
372

 
167

 
141

 

 
334

 

MRECV Edelweiss LLC
106

 

 
287

 

 
106

 
125

 
280

 
125

 
96

 
65

 
252

 
65

MRECV Juniper Ridge LLC
151

 

 
356

 

 
151

 
105

 
357

 
105

 
135

 

 
321

 

MRECV Meadow Crossing II LLC
112

 

 
141

 

 
112

 

 
94

 

 
101

 

 
84

 

Miramonte Boulder Pass, LLC
1,015

 

 
1,678

 

 
(126
)
 
(92
)
 
(285
)
 
(141
)
 
(63
)
 
(46
)
 
(142
)
 
(71
)
PSW Communities, LP

 
5,145

 

 
21,214

 

 
613

 

 
3,141

 

 
127

 

 
1,088

Temco Associates, LLC
77

 
8,019

 
224

 
9,163

 
32

 
1,618

 
111

 
2,077

 
16

 
809

 
56

 
1,039

Other ventures
6,520

 
71

 
6,520

 
3,772

 
2,166

 
242

 
2,109

 
(16
)
 
1,436

 
(37
)
 
1,439

 
207

 
$
16,531

 
$
24,136

 
$
27,995

 
$
74,282

 
$
4,334

 
$
5,825

 
$
4,435

 
$
21,647

 
$
3,637

 
$
2,909

 
$
3,872

 
$
11,538


 _____________________
(a) 
Total includes current maturities of $88,249,000 at third quarter-end 2016, of which $68,430,000 is non-recourse to us, and $39,590,000 at year-end 2015, of which $29,691,000 is non-recourse to us.
(b) 
Includes unamortized deferred gains on real estate we contributed to ventures. We recognize deferred gains as income as the real estate is sold to third parties. Deferred gains of $1,490,000 are reflected as a reduction to our investment in unconsolidated ventures at third quarter-end 2016.
(c) 
Includes unrecognized basis difference of $122,000 which is reflected as an increase of our investment in unconsolidated ventures at third quarter-end 2016. The difference will be accreted as income or expense over the life of the investment and included in our share of earnings (loss) from the respective ventures.
(d) 
Our share of venture earnings in third quarter and first nine months 2016 includes reallocation of prior year cumulative losses incurred by the venture as a result of equity contribution by the venture partner in 2016.
In first nine months 2016, we invested $5,615,000 in these ventures and received $8,741,000 in distributions. In first nine months 2015, we invested $23,908,000 in these ventures and received $15,126,000 in distributions. Distributions include both return of investments and distribution of earnings.


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Table of Contents

Note 8—Receivables
Receivables consist of:
 
Third
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Funds held by qualified intermediary for potential 1031 like-kind exchange
$

 
$
14,703

Other receivables and accrued interest
561

 
2,218

Other loans secured by real estate, average interest rates of 12.91% at third quarter-end 2016 and 11.31% at year-end 2015
764

 
2,130

 
1,325

 
19,051

Allowance for bad debts
(25
)
 
(26
)
 
$
1,300

 
$
19,025

In first quarter 2016, we received funds previously held by a qualified intermediary because we did not complete an intended like-kind exchange related to a 2015 sale of 6,915 acres of undeveloped land.
Other loans secured by real estate generally are secured by a deed of trust and due within three years.
Note 9—Debt, net
Debt (a) consists of:
 
Third
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
8.50% senior secured notes due 2022, net
$
5,195

 
$
224,647

3.75% convertible senior notes due 2020, net of discount
103,637

 
104,719

6.00% tangible equity unit notes, net
2,219

 
8,666

Secured promissory note — average interest rate of 3.42% at year-end 2015

 
15,400

Other indebtedness — interest rates ranging from 5.0% to 5.50%
1,297

 
28,083

 
$
112,348

 
$
381,515

___________________
(a) 
At third quarter-end 2016 and year-end 2015, $1,768,000 and $8,267,000 of unamortized deferred financing fees are deducted from our outstanding debt.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2016, we were in compliance with the financial covenants of these agreements.
Effective September 2, 2016, we reduced the revolving commitment provided by our senior secured credit facility, which matures on May 15, 2017 (with two one-year extension options), from $300,000,000 to $125,000,000, none of which was drawn at third quarter-end 2016. As a result of this reduction, we expensed $831,000 in unamortized debt issuance costs in third quarter 2016. 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 $13,679,000 was outstanding at third quarter-end 2016. 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 2016, we had $111,321,000 in net unused borrowing capacity under our senior secured credit facility.
Under the terms of our senior secured credit facility, at our option we can borrow at LIBOR plus 4.0 percent or at the alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate, (ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR plus 1 percent. Borrowings under the senior secured credit facility are or may be secured by (a) mortgages on the timberland, high value timberland and portions of raw entitled land, as well as pledges of other rights including certain oil and gas operating properties, (b) assignments of current and future leases, rents and contracts, (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries and most of our majority-owned joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) a pledge of certain reimbursements payable to us

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Table of Contents

from special improvement district tax collections in connection with our Cibolo Canyons project. The senior secured credit facility provides for releases of real estate and other collateral provided that borrowing base compliance is maintained.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2016, our tangible net worth requirement was $379,044,000 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 since third quarter-end 2015. The tangible net worth requirement is recalculated on a quarterly basis.
We may elect to make distributions to stockholders so long as the total leverage ratio is less than 40 percent, the interest coverage ratio is greater than 3.0:1.0 and available liquidity is not less than $125,000,000, all of which were satisfied at third quarter-end 2016. Regardless of whether the foregoing conditions are satisfied, we may make distributions in an aggregate amount not to exceed $50,000,000 to be funded from up to 65% of the net proceeds from sales of multifamily properties and non-core assets, such as the Radisson Hotel & Suites in Austin, and any oil and gas properties.
In second quarter 2016, we completed a cash tender offer for our 8.50% Senior Secured Notes due 2022 (Notes), pursuant to which we purchased $215,495,000 principal amount (representing approximately 97.6% outstanding) of the Notes. Total consideration paid was $245,604,000, which included $29,091,000 in premium at 113.5% and $1,018,000 in accrued and unpaid interest. In addition, we received consent from holders of the Notes to eliminate or modify certain covenants, events of default and other provisions contained in the indenture governing the Notes, and to release the subsidiary guarantees and collateral securing the Notes. We also purchased $1,150,000 principal amount of the Notes at 99.95% of face value in open market transactions. The second quarter 2016 tender offer and open market purchases resulted in a $35,583,000 loss on extinguishment of debt, which includes the premium paid to repurchase the Notes, write-off of unamortized debt issuance costs of $5,191,000 and $1,301,000 in other costs related to tender offer advisory services. In first quarter 2016, we purchased $8,600,000 principal amount of the Notes at 99% of face value in the open market transactions, resulting in a $127,000 gain on the early extinguishment of the Notes offset by the write-off of unamortized debt issuance costs of $225,000.
In second quarter 2016, we purchased $5,000,000 of 3.75% Convertible Senior Notes due 2020 at 93.25% of face value in open market transactions for $4,662,500 and we allocated $4,452,000 to extinguish the debt and $211,000 to reacquire the equity component within the convertible notes based on the fair value of the debt component. We recognized a $110,000 loss on extinguishment of debt based on the difference between the fair value of the debt component prior to conversion and the carrying value of the debt component. Total loss on extinguishment of debt including write-off of debt issuance costs allocated to the repurchased notes was $183,000.
In second quarter 2016, a secured promissory note of $15,400,000 was paid in full in connection with sale of the Radisson Hotel & Suites, a 413 guest room hotel located in Austin, for $130,000,000.
In second quarter 2016, other indebtedness decreased principally as result of selling Eleven, a 257-unit multifamily project in Austin, for $60,150,000 and paying in full the associated debt of $23,936,000.
At third quarter-end 2016 and year-end 2015, we had $1,768,000 and $8,267,000 in unamortized deferred financing fees which were deducted from our debt. In addition, at third quarter-end 2016 and year-end 2015, unamortized deferred financing fees related to our senior secured credit facility included in other assets were $524,000 and $2,768,000. Amortization of deferred financing fees were $3,253,000 and $2,992,000 in first nine months 2016 and 2015 and were included in interest expense.
Note 10—Fair Value
Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, oil and gas properties, assets held for sale, goodwill and other intangible assets, which are measured for impairment.

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Table of Contents

In first nine months 2016, we recognized non-cash impairment charges of $56,453,000 related to six non-core community development projects and two multifamily sites as a result of the review of our entire portfolio of assets and marketing these properties for sale. We based our valuations primarily on executed purchase and sale agreements, current negotiations and letters of intent with expected buyers and third party broker price opinions. In second quarter 2016, we recognized non-cash impairment charges of $612,000 related to oil and gas working interests properties that were sold in third quarter 2016.
Non-financial assets measured at fair value on a non-recurring basis are as follows:
 
Third Quarter-End 2016
 
Year-End 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Non-Financial Assets and Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
$

 
$

 
$
36,243

 
$
36,243

 
$

 
$

 
$
641

 
$
641

Assets of discontinued operations
$

 
$

 
$

 
$

 
$

 
$

 
$
57,219

 
$
57,219

We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:
 
Third Quarter-End 2016
 
Year-End 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Valuation
Technique
 
(In thousands)
 
 
Fixed rate debt
$
(112,810
)
 
$
(112,455
)
 
$
(346,090
)
 
$
(321,653
)
 
Level 2
Note 11—Capital Stock
Please read Note 16—Share-Based and Long-Term Incentive Compensation for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
At third quarter-end 2016, personnel of former affiliates held options to purchase 241,000 shares of our common stock. The options have a weighted average exercise price of $30.30 and a weighted average remaining contractual term of less than one year. At third quarter-end 2016, the options had an aggregate intrinsic value of $0.
Note 12—Net Income (Loss) per Share
Basic and diluted earnings per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security. We have determined that our 6.00% tangible equity units are participating securities. Per share amounts are computed by dividing earnings available to common shareholders by the weighted average shares outstanding during each period. In periods with a net loss, no such adjustment is made to earnings as the holders of the participating securities have no obligation to fund losses.

15

Table of Contents

Due to a net loss from continuing operations in third quarter and first nine months 2015, as the effect of potentially dilutive securities would be anti-dilutive, basic and diluted loss per share are the same. The computations of basic and diluted earnings per share are as follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Numerator:
 
 
 
 
 
 
 
Continuing operations
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
17,439

 
$
(57,394
)
 
$
33,661

 
$
(60,237
)
Less: Net (income) loss attributable to noncontrolling interest
(610
)
 
115

 
(1,330
)
 
5

Earnings (loss) available for diluted earnings per share
$
16,829

 
$
(57,279
)
 
$
32,331

 
$
(60,232
)
Less: Undistributed net income from continuing operations allocated to participating securities
(3,152
)
 

 
(6,035
)
 

Earnings (loss) from continuing operations available to common shareholders for basic earnings per share
$
13,677

 
$
(57,279
)
 
$
26,296

 
$
(60,232
)
 
 
 
 
 
 
 
 
Discontinued operations
 
 
 
 
 
 
 
Net income (loss) from discontinued operations available for diluted earnings per share
$
(7,164
)
 
$
(106,937
)
 
$
(17,428
)
 
$
(146,649
)
Less: Undistributed net income from discontinued operations allocated to participating securities
1,342

 

 
3,253

 

Earnings (loss) from discontinued operations available to common shareholders for basic earnings per share
$
(5,822
)
 
$
(106,937
)
 
$
(14,175
)
 
$
(146,649
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding — basic
34,099

 
34,299

 
34,234

 
34,248

Weighted average common shares upon conversion of participating securities
7,857

 

 
7,857

 

Dilutive effect of stock options, restricted stock and equity-settled awards
304

 

 
243

 

Total weighted average shares outstanding — diluted
42,260

 
34,299

 
42,334

 
34,248

Anti-dilutive awards excluded from diluted weighted average shares
2,001

 
10,933

 
2,146

 
10,835

The actual number of shares we may issue upon settlement of the stock purchase contract related to the 6.00% tangible equity units will be between 6,547,800 shares (the minimum settlement rate) and 7,857,000 shares (the maximum settlement rate) based on the applicable market value, as defined in the purchase contract agreement associated with issuance of the such units.
We intend to settle the remaining principal amount of our 3.75% convertible senior notes due 2020 (Convertible Notes) in cash upon conversion with only the amount in excess of par value of the Convertible Notes to be settled in shares of our common stock. Therefore, our calculation of diluted net income per share includes only the amount, if any, in excess of par value of the Convertible Notes. As such, the Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the $24.49 conversion price of the Convertible Notes. The average price of our common stock in third quarter 2016 did not exceed the conversion price which resulted in no additional diluted outstanding shares.
Note 13—Income Taxes
Our effective tax rate from continuing operations was a tax benefit of 124 percent in third quarter 2016, and a tax expense of 18 percent for the first nine months 2016. The year to date tax expense of 18 percent differs from the statutory rate of 35 percent primarily due to a benefit for decrease in our valuation allowance related to decrease in our deferred tax assets. Our effective tax rate from continuing operations was 315 percent in third quarter 2015 and 225 percent in first nine months 2015, which was attributable almost entirely to a valuation allowance recorded against our net deferred tax asset. In addition, 2016 and 2015 effective tax rates from continuing operations include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We assessed available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit recognition of the existing deferred tax assets under U.S. GAAP. A significant piece of objective evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2016, principally driven by impairments of oil and gas properties in 2015. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.
On the basis of this evaluation, at third quarter-end 2016 and year-end 2015, we have a valuation allowance for our deferred tax assets of $88,773,000 and $97,068,000 for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable under U.S. GAAP.

16

Table of Contents

The amount of the deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.
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.
On October 4, 2014, James Huffman, a former director and CEO of CREDO Petroleum Corporation (Credo), which we acquired in 2012 and is now known as Forestar Petroleum Corporation, filed Huffman vs. Forestar Petroleum Corporation, Case Number 14CV33811, Civ. Div., Dist. Ct., City and County of Denver, Colorado. Huffman claimed entitlement under a Credo employee compensation program to overriding royalty interests (ORRI) on nearly all North Dakota leases, none of which were assigned by Credo to Huffman prior to his retirement, and on several Kansas and Nebraska leases. On August 11, 2016, we agreed to pay Huffman $150,000 in settlement of all claims except those involving North Dakota assets. Following a jury trial, on September 23, 2016, an adverse verdict was received in the amount of $923,899 for breach of contract related to the North Dakota claims. At third quarter-end 2016, we have accrued $1,100,000 for damages, prejudgment interest and costs. We intend to contest the verdict, and judgment has not been entered by the court because non-jury claims by both parties remain outstanding. The remaining claims have not been adjudicated and we are unable to conclude whether loss on these claims is probable or remote. We are unable to estimate a possible loss or range of loss on the remaining claims because (a) the parties have not fully briefed their positions or applicable law, (b) Huffman did not seek monetary damages in his trial pleadings, and (c) our claim for unjust enrichment would result, if we prevail, in reduction or elimination of damages already accrued and no additional damages.
Environmental
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 of discontinued operations. At third quarter-end 2016 and year-end 2015, our estimated asset retirement obligation was $1,256,000 and $1,758,000, of which $1,155,000 and $1,667,000 is included in liabilities of discontinued operations and the remaining balance in other liabilities.
Non-Core Assets Restructuring Costs
In connection with key initiatives to reduce costs across our entire organization and divest non-core assets, in first nine months 2016, we incurred and paid severance costs related to workforce reductions of $1,422,000 in our real estate segment, $164,000 in our other segment and $486,000 in unallocated general and administrative expense. In addition, we offered retention bonuses to certain key personnel provided they remained our employees through completion of sale transactions. We are expensing retention bonus costs over the estimated retention period. These restructuring costs are included in other operating expense.
The following table summarizes activity related to liabilities associated with our restructuring activities for first nine months 2016:
 
Severance Costs
 
Retention Bonuses
 
Total
 
(In thousands)
Balance at year-end 2015
$
(1,049
)
 
$

 
$
(1,049
)
Additions
(2,072
)
 
(832
)
 
(2,904
)
Payments
3,121

 
792

 
3,913

Balance at third quarter-end 2016
$

 
$
(40
)
 
$
(40
)


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Note 15—Segment Information
We manage our operations through three segments: real estate, mineral resources and other. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land and commercial and income producing properties, which consist of three projects and two multifamily sites. Mineral resources manages our owned mineral interests. Other manages our timber, recreational leases and water resource initiatives.
In second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests. We also changed the name of the other natural resources to other.
Total assets allocated by segment are as follows:
 
Third
Quarter-End
 
Year-End
 
2016
 
2015
 
(In thousands)
Real estate
$
484,426

 
$
691,238

Mineral resources
39,140

 
39,469

Other
20,422

 
19,106

Assets of discontinued operations
124

 
104,967

Assets not allocated to segments (a)
147,965

 
117,466

 
$
692,077

 
$
972,246

 
 _________________________
(a) 
Assets not allocated to segments at third quarter-end 2016 principally consist of cash and cash equivalents of $122,130,000 and an income tax receivable of $23,068,000. Assets not allocated to segments at year-end 2015 principally consist of cash and cash equivalents of $96,442,000 and an income tax receivable of $12,056,000. Assets of discontinued operations represent oil and gas working interest assets we have or will be divesting.
We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of strategic timberland, interest expense, loss on extinguishment of debt 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 2016, no single customer accounted for more than ten percent of our total revenues.
Segment revenues and earnings are as follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
45,297

 
$
27,957

 
$
127,776

 
$
100,196

Mineral resources
1,423

 
2,502

 
3,842

 
7,616

Other
487

 
1,726

 
1,199

 
5,372

Total revenues
$
47,207

 
$
32,185

 
$
132,817

 
$
113,184

Segment earnings (loss):
 
 
 
 

 

Real estate
$
15,017

 
$
5,154

 
$
108,531

 
$
29,747

Mineral resources
1,182

 
77

 
2,668

 
3,215

Other
(196
)
 
(77
)
 
(974
)
 
(511
)
Total segment earnings
16,003

 
5,154

 
110,225

 
32,451

Items not allocated to segments (a)
(8,840
)
 
(18,865
)
 
(70,479
)
 
(50,984
)
Income (loss) from continuing operations before taxes attributable to Forestar Group Inc.
$
7,163

 
$
(13,711
)
 
$
39,746

 
$
(18,533
)
  _________________________

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(a) 
Items not allocated to segments consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
General and administrative expense
$
(4,505
)
 
$
(8,343
)
 
$
(13,992
)
 
$
(19,540
)
Shared-based and long-term incentive compensation expense
(1,024
)
 
(2,245
)
 
(2,980
)
 
(5,726
)
Interest expense
(3,369
)
 
(8,315
)
 
(17,926
)
 
(25,851
)
Loss on extinguishment of debt, net

 

 
(35,864
)
 

Other corporate non-operating income
58

 
38

 
283

 
133

 
$
(8,840
)
 
$
(18,865
)
 
$
(70,479
)
 
$
(50,984
)
Note 16—Share-Based and Long-Term Incentive Compensation
Share-based and long-term incentive compensation expense consists of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Cash-settled awards
$
(43
)
 
$
146

 
$
82

 
$
(1,005
)
Equity-settled awards
765

 
1,654

 
1,869

 
4,569

Restricted stock
10

 
16

 
22

 
13

Stock options
217

 
388

 
692

 
1,954

Total share-based compensation
949

 
2,204

 
2,665

 
5,531

Deferred cash
75

 
41

 
315

 
195

 
$
1,024

 
$
2,245

 
$
2,980

 
$
5,726

Share-based and long-term incentive compensation expense is included in:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
General and administrative expense
$
672

 
$
1,124

 
$
2,516

 
$
2,970

Other operating expense
352

 
1,121

 
464

 
2,756

 
$
1,024

 
$
2,245

 
$
2,980

 
$
5,726

Share-Based Compensation
In first nine months 2016, we granted 174,419 equity-settled awards to employees in the form of restricted stock units which vest ratably over three years and provide for accelerated vesting upon retirement, disability, death, or if there is a change in control. In addition, in first nine months 2016, we granted 69,760 restricted stock units to our board of directors which vest 25 percent at grant date and 25 percent at each subsequent quarterly board meeting and a stock option grant to acquire 20,000 shares of common stock for each of two new directors, of which 6,500 shares vest on the first and second anniversary of the date of grant and the remaining 7,000 shares vest on the third anniversary of the date of grant. The option term is ten years. Expense associated with annual restricted stock units and non-qualified stock options to our board of directors is included in share-based compensation expense.
Excluded from share-based compensation expense in the table above are fees earned by our board of directors in the amount of $169,000 and $292,000 in third quarter of 2016 and 2015 and $596,000 and $807,000 in first nine months 2016 and 2015 for which they elected to defer payment until retirement in the form of share-settled units. These expenses are included in general and administrative expense.
The fair value of awards granted to retirement eligible employees expensed at the date of grant was $600,000 and $517,000 in first nine months 2016 and 2015. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $2,361,216 at third quarter-end 2016.
In first nine months 2016 and 2015, we issued 263,371 and 159,867 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of 25,026 and 48,636 shares withheld having a value of $221,000 and $722,000 for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.

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Table of Contents

Long-Term Incentive Compensation
In first nine months 2016 and 2015, we granted $620,000 and $587,000 of long-term incentive compensation in the form of deferred cash compensation. The 2016 deferred cash awards vest annually over two years, and the 2015 deferred cash awards vest after three years. Both awards provide for accelerated vesting upon retirement, disability, death, or if there is a change in control. Expense associated with deferred cash awards is recognized ratably over the vesting period. The accrued liability was $469,000 and $225,000 at third quarter-end 2016 and year-end 2015 and is included in other liabilities.

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Table of Contents

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 2015 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of third quarter-end 2016, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated, or on a national or global scale;
our ability to achieve some or all of our key initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
our ability to hire and retain key personnel;
future residential or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments;
accuracy of estimates and other assumptions related to investment in and development of real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation;
the levels of resale housing inventory in our mixed-use development projects and the regions in which they are located;
fluctuations in costs and expenses, including impacts from shortages in materials or labor;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in commodity prices;
demand for multifamily communities, which can be affected by a number of factors including local markets and economic conditions;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
fluctuations in oil and gas commodity prices;
demand by oil and gas operators to lease our minerals, which may be influenced by government regulation of exploration and production activities including hydraulic fracturing;
our ability to make interest and principal payments on our debt or amend and satisfy the other covenants contained in our senior secured credit facility, indentures and other debt agreements;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;
inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal or usage;
the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.

Other factors, including the risk factors described in Item 1A of our 2015 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.

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Table of Contents

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.
Key Initiatives
Reducing costs across our entire organization;
Reviewing the entire portfolio of our assets; and
Reviewing our capital structure.
Discontinued Operations / Segment Name Changes
At third quarter-end 2016 we have divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests. We also changed the name of the other natural resources segment to other. The discussion of our results of operations is based on the results from our continuing operations unless otherwise indicated.

Results of Operations
A summary of our consolidated results by business segment follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Real estate
$
45,297

 
$
27,957

 
$
127,776

 
$
100,196

Mineral resources
1,423

 
2,502

 
3,842

 
7,616

Other
487

 
1,726

 
1,199

 
5,372

Total revenues
$
47,207

 
$
32,185

 
$
132,817

 
$
113,184

Segment earnings (loss):
 
 
 
 
 
 
 
Real estate
$
15,017

 
$
5,154

 
$
108,531

 
$
29,747

Mineral resources
1,182

 
77

 
2,668

 
3,215

Other
(196
)
 
(77
)
 
(974
)
 
(511
)
Total segment earnings
16,003

 
5,154

 
110,225

 
32,451

Items not allocated to segments:
 
 
 
 
 
 
 
General and administrative expense
(4,505
)
 
(8,343
)
 
(13,992
)
 
(19,540
)
Share-based and long-term incentive compensation expense
(1,024
)
 
(2,245
)
 
(2,980
)
 
(5,726
)
Interest expense
(3,369
)
 
(8,315
)
 
(17,926
)
 
(25,851
)
Loss on extinguishment of debt, net

 

 
(35,864
)
 

Other corporate non-operating income
58

 
38

 
283

 
133

Income (loss) from continuing operations before taxes attributable to Forestar Group Inc.
7,163

 
(13,711
)
 
39,746

 
(18,533
)
Income tax (expense) benefit
9,666

 
(43,568
)
 
(7,415
)
 
(41,699
)
Net income (loss) from continuing operations attributable to Forestar Group Inc.
$
16,829

 
$
(57,279
)
 
$
32,331

 
$
(60,232
)

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Significant aspects of our results of operations follow:
Third Quarter and First Nine Months 2016
Third quarter 2016 real estate segment earnings benefited from higher undeveloped land sales activity compared with third quarter 2015, which were offset by non-cash impairment charges of $7,627,000 related to two non-core community development projects and one multifamily site.
First nine months 2016 real estate segment earnings benefited from combined gains of $121,732,000 which generated combined net proceeds before debt repayment of $243,037,000 as a result of executing our key initiative to opportunistically divest non-core assets. These gains were partially offset by non-cash impairment charges of $56,453,000 related to six non-core community development projects and two multifamily sites. These impairments were a result of our key initiative to review our entire portfolio of assets which resulted in business plan changes, inclusive of cash tax savings considerations, to market these properties for sale.
Third quarter and first nine months 2016 interest expense decreased due to reducing our debt outstanding by $321,179,000 since third quarter-end 2015. First nine months 2016 debt retirement of portions of our 8.50% Senior Secured Notes due 2022 and 3.75% Convertible Senior Notes due 2020 resulted in a net loss on debt extinguishment of $35,864,000, which includes write-off of unamortized debt issuance costs of $5,489,000 and $1,301,000 in other costs related to tender offer advisory services.
The decrease in general and administrative and share-based compensation expenses in third quarter and first nine months 2016 compared with third quarter and first nine months 2015 is due to executing our initiative to reduce costs across our entire organization.
Current Market Conditions
New U.S. single-family home starts ended September 2016 at 783,000 on a seasonally adjusted basis, over five percent above year-ago levels but below historical levels. Inventories of new homes are at or below equilibrium levels in our key markets. In addition, declining finished lot inventories and limited supply of economically developable raw land has increased demand for our developed lots. Job growth remains above national average in most of our key markets, supporting continued housing demand. However, global economic weakness and uncertainty, and an ongoing restrictive mortgage lending environment continue to threaten a robust recovery in the housing market, despite low interest rates.
Global supply and demand fundamentals for crude oil at the end of September 2016 remained out of balance with high global and domestic inventories and slower global growth. West Texas Intermediate (WTI) oil prices averaged $44.85 per Bbl in third quarter 2016, three percent lower than in third quarter 2015. Estimates for global demand growth continue to be tempered and could extend the global supply glut, resulting in an extended period of low crude oil pricing.
Henry Hub natural gas prices in third quarter 2016 averaged $2.88/MMBtu, four percent higher than third quarter 2015. Current natural gas prices are higher than at any point during the last winter heating season, reflecting a combination of higher demand for natural gas for electricity generation, lower-than-normal inventory builds, and the market's expectation for colder temperatures this winter compared with temperatures last winter.
Business Segments
We manage our operations through three business segments:
Real estate,
Mineral resources, and
Other
We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of strategic timberland, interest expense, loss on extinguishment of debt and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.
We operate in cyclical industries. Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, consumer and home builder sentiment, new housing starts, real estate values, employment levels, changes in the market prices for oil, gas and timber, and the overall strength or weakness of the U.S. economy.

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Table of Contents

Real Estate
We own directly or through ventures interests in 55 residential and mixed-use projects comprised of 7,000 acres of real estate located in 11 states and 15 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 70,000 acres of non-core timberland and undeveloped land in a broad area around Atlanta, Georgia and approximately 4,000 acres in Texas. 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 in 2015 from the operation of several income producing properties, primarily a hotel and multifamily properties.
A summary of our real estate results follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues
$
45,297

 
$
27,957

 
$
127,776

 
$
100,196

Cost of sales
(29,259
)
 
(16,368
)
 
(120,349
)
 
(55,860
)
Operating expenses
(5,671
)
 
(9,831
)
 
(24,382
)
 
(29,107
)
 
10,367

 
1,758

 
(16,955
)
 
15,229

Interest income
1,191

 
24

 
1,337

 
1,629

Gain on sale of assets
501

 
425

 
121,732

 
1,585

Equity in earnings of unconsolidated ventures
3,568

 
2,832

 
3,747

 
11,299

Less: Net (income) loss attributable to noncontrolling interests
(610
)
 
115

 
(1,330
)
 
5

Segment earnings
$
15,017

 
$
5,154

 
$
108,531

 
$
29,747

Revenues in our owned and consolidated ventures consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Residential real estate
$
18,963

 
$
15,488

 
$
66,126

 
$
57,630

Commercial real estate
7,000

 
60

 
9,655

 
2,914

Undeveloped land
15,667

 
2,157

 
34,184

 
6,922

Commercial and income producing properties
12

 
9,588

 
13,065

 
31,566

Other
3,655

 
664

 
4,746

 
1,164

 
$
45,297

 
$
27,957

 
$
127,776

 
$
100,196

Residential real estate revenues principally consist of the sale of single-family lots to local, regional and national homebuilders. Owned and consolidated venture residential lot sales volume in first nine months 2016 was up when compared with first nine months 2015, although average price per lot sold was down eight percent due to mix of product sold. Commercial real estate revenues principally consist of the sale of tracts to commercial developers that specialize in the construction and operation of income producing properties such as apartments, retail centers, or office buildings. The commercial real estate revenues in third quarter and first nine months 2016 relate primarily to the sale of 108 acres from our San Joaquin River project in Antioch, California for $7,000,000 which provides approximately $37,400,000 in income tax losses to offset tax gains.
In third quarter 2016, we sold approximately 6,500 acres of undeveloped land for $15,667,000, or approximately $2,410 per acre, generating $12,810,000 in segment earnings, as compared with approximately 750 acres sold for $2,157,000 or approximately $2,900 per acre, generating $1,775,000 in segment earnings in third quarter 2015.
In first nine months 2016, we sold 13,898 acres of undeveloped land for $34,184,000, or approximately $2,460 per acre, generating $27,688,000 in segment earnings, as compared with 2,378 acres sold for $6,922,000 or approximately $2,911 per acre, generating $5,242,000 in segment earnings in first nine months 2015.
Commercial and income producing properties revenue includes revenues from hotel room sales and other guest services, rental revenues from our operating multifamily properties and reimbursement for costs paid to subcontractors plus development and construction fees from certain multifamily projects. First nine months 2016 and 2015 included $199,000 and $6,003,000 in construction revenues associated with one multifamily joint venture fixed fee contract as general contractor. The construction of this multifamily joint venture project was completed in first quarter 2016. Development fee revenues in first nine months

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Table of Contents

2016 and 2015 were $1,632,000 and $1,591,000. Rental revenues from our multifamily operating properties for first nine months 2016 and 2015 were $1,605,000 and $6,150,000. The decrease in rental revenues from our multifamily operating properties in first nine months 2016 when compared with first nine months 2015 was primarily due to the fourth quarter 2015 sale of Midtown Cedar Hill, a 354-unit multifamily property we developed near Dallas and second quarter 2016 sale of Eleven, a multifamily property in Austin. Revenues from hotel room sales and other guest services were $9,951,000 and $18,607,000 in first nine months 2016 and 2015. The decrease in revenues from hotel room sales and other guest services in third quarter and first nine months 2016 when compared with third quarter and first nine months 2015 was primarily due to the sale of Radisson Hotel & Suites in second quarter 2016.
The increase in other revenues in third quarter and first nine months 2016 when compared to third quarter and first nine months 2015 is primarily associated with mitigation credit revenues associated with our undeveloped land.
Units sold consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
Owned and consolidated ventures:
 
 
 
 
 
 
 
Residential lots sold
272

 
186

 
975

 
699

Revenue per lot sold
$
69,131

 
$
76,232

 
$
67,301

 
$
73,287

Commercial acres sold
108

 
2

 
116

 
27

Revenue per commercial acre sold
$
64,923

 
$
28,037

 
$
83,347

 
$
109,802

Undeveloped acres sold
6,501

 
744

 
13,898

 
2,378

Revenue per acre sold
$
2,410

 
$
2,900

 
$
2,460

 
$
2,911

Ventures accounted for using the equity method:
 
 
 
 
 
 
 
Residential lots sold
60

 
115

 
130

 
410

Revenue per lot sold
$
73,773

 
$
77,256

 
$
78,108

 
$
77,973

Commercial acres sold
2

 

 
4

 
29

Revenue per commercial acre sold
$
750,902

 
$

 
$
527,152

 
$
311,995

Undeveloped acres sold

 
3,872

 

 
4,217

Revenue per acre sold
$

 
$
2,053

 
$

 
$
2,129

Cost of sales in third quarter and first nine months 2016 included non-cash impairment charges of $7,627,000 and $56,453,000 associated with six non-core community development projects and two multifamily sites compared with $729,000 of non-cash impairment charges in first nine months 2015. The non-cash impairments were a result of our key initiative to review our entire portfolio of assets which resulted in business plan changes, inclusive of cash tax savings considerations, to market these properties for sale. Multifamily construction contract costs we incurred as general contractor and paid to subcontractors were $592,000 in first nine months 2016 compared with $7,209,000 in first nine months 2015. The decrease is associated with completion of our development of a multifamily venture property near Denver in first quarter 2016. Included in multifamily construction contract costs are charges of $392,000 and $1,206,000 in first nine months 2016 and 2015 reflecting estimated cost increases associated with our fixed fee contracts as general contractor.
Operating expenses consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
1,940

 
$
2,166

 
$
7,686

 
$
6,492

Property taxes
792

 
2,154

 
5,107

 
6,991

Professional services
1,513

 
1,093

 
4,244

 
3,629

Depreciation and amortization
39

 
2,125

 
937

 
5,854

Other
1,387

 
2,293

 
6,408

 
6,141

 
$
5,671

 
$
9,831

 
$
24,382

 
$
29,107

The increase in employee compensation and benefits expense in first nine months 2016 is principally related to $1,422,000 of severance costs incurred as a result of our key initiatives to reduce costs across our entire organization and our plan to divest non-core assets. The decrease in depreciation and amortization in first nine months 2016 is primarily due to the fourth quarter 2015 sale of the Midtown Cedar Hill multifamily project, full amortization of in-place leases associated with the Eleven multifamily project in 2015, sale of the Eleven multifamily property in second quarter 2016 and discontinuing

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depreciation of the Radisson Hotel & Suites and the Eleven multifamily project as a result of selling these assets. Other operating expense in first nine months 2016 includes $1,605,000 of costs related to projects that we no longer intend to pursue.
Interest income principally represents interest received on reimbursements from utility and improvement districts.
Gain on sale of assets in first nine months 2016 includes a gain of $95,336,000 related to sale of the Radisson Hotel & Suites, a gain of $9,116,000 related to sale of Eleven, a gain of $1,229,000 associated with sale of Dillon, a gain of $10,363,000 related to sale of our interest in 360°, a gain of $3,968,000 associated with the sale of Music Row, a gain of $1,219,000 associated with the reduction of a surety bond supporting the 2014 Cibolo Canyons Special Improvement District (CCSID) bond offering and $501,000 of excess hotel occupancy and sales and use tax revenues from CCSID. First nine months 2015 gain on sale of assets of $1,585,000 includes $1,160,000 associated with the reduction of a surety bond supporting the 2014 Cibolo Canyons Special Improvement District (CCSID) bond offering and $425,000 of excess hotel occupancy and sales and use tax revenues from CCSID.
The decrease in equity in earnings from our unconsolidated ventures in first nine months 2016 compared with first nine months 2015 is primarily due to lower residential lot and commercial real estate sales activity and no undeveloped land sales in our unconsolidated ventures.
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.
Our net investment in owned and consolidated real estate by geographic location as of third quarter-end 2016 follows:
State
Entitled,
Developed,
and Under
Development
Projects
 
Undeveloped
Land and Land
in Entitlement Process
 
Total
 
(In thousands)
Texas
$
208,222

 
$
2,921

 
$
211,143

Georgia
6,284

 
64,590

 
70,874

California
1,943

 
25,654

 
27,597

North & South Carolina
24,813

 
294

 
25,107

Colorado
23,079

 

 
23,079

Tennessee
22,148

 
21

 
22,169

Other
6,867

 
238

 
7,105

 
$
293,356

 
$
93,718

 
$
387,074

Mineral Resources
Our mineral resources segment is focused on maximizing the value from our owned oil and gas mineral interests through promoting exploration, development and production activities by increasing acreage leased, lease rates and royalty 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.
 







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A summary of our mineral resources results follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues
$
1,423

 
$
2,502

 
$
3,842

 
$
7,616

Cost of mineral resources
(182
)
 
(2,119
)
 
(572
)
 
(2,774
)
Operating expenses
(114
)
 
(373
)
 
(713
)
 
(1,847
)
 
1,127

 
10

 
2,557

 
2,995

Equity in earnings of unconsolidated ventures
55

 
67

 
111

 
220

Segment earnings (loss)
$
1,182

 
$
77

 
$
2,668

 
$
3,215


Revenues consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Oil royalties (a)
$
883

 
$
1,391

 
$
2,174

 
$
4,686

Gas royalties
330

 
491

 
929

 
1,719

Other (principally lease bonus and delay rentals)
210

 
620

 
739

 
1,211

 
$
1,423

 
$
2,502

 
$
3,842

 
$
7,616

 _________________________
(a) 
Oil royalties include revenues from oil, condensate and natural gas liquids (NGLs).
In third quarter and first nine months 2016, royalty revenues declined principally due to lower oil and gas production volumes and prices.
Other revenues in first nine months 2016 include $348,000 in lease bonuses received from leasing 1,673 net mineral acres owned in Texas and Louisiana compared with $996,000 lease bonus revenues received from leasing 3,300 net mineral acres in Texas and Louisiana in first nine months 2015.
Cost of mineral resources principally represents our share of oil and gas production severance taxes, which are calculated based on a percentage of oil and gas produced. Cost of mineral resources in third quarter and first nine months 2015 included non-cash impairment charges of $1,802,000 associated with proved oil and gas properties on owned mineral acres.
Operating expenses principally consist of employee compensation and benefits, professional services, property taxes and rent expense. The decrease in operating expenses in first nine months 2016 compared with first nine months 2015 is primarily due to our key initiative to reduce costs across our entire organization.


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Oil and gas produced and average unit prices related to our royalty interests follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
Consolidated entities:
 
 
 
 
 
 
 
Oil production (barrels)
19,400

 
24,500

 
54,800

 
84,200

Average oil price per barrel
$
44.64

 
$
53.05

 
$
38.08

 
$
52.20

NGL production (barrels)
1,000

 
5,600

 
7,600

 
17,000

Average NGL price per barrel
$
16.78

 
$
15.80

 
$
11.40

 
$
16.99

Total oil production (barrels), including NGLs
20,400

 
30,100

 
62,400

 
101,200

Average total oil price per barrel, including NGLs
$
43.23

 
$
46.16

 
$
34.82

 
$
46.29

Gas production (millions of cubic feet)
170.0

 
195.7

 
488.8

 
597.5

Average price per thousand cubic feet
$
1.94

 
$
2.51

 
$
1.90

 
$
2.88

Our share of ventures accounted for using the equity method:
 
 
 
 
 
 
 
Gas production (millions of cubic feet)
35.5

 
46.8

 
108.7

 
129.1

Average price per thousand cubic feet
$
1.97

 
$
2.19

 
$
1.78

 
$
2.61

Total consolidated and our share of equity method ventures:
 
 
 
 
 
 
 
Oil production (barrels)
19,400

 
24,500

 
54,800

 
84,200

Average oil price per barrel
$
44.64

 
$
53.05

 
$
38.08

 
$
52.20

NGL production (barrels)
1,000

 
5,600

 
7,600

 
17,000

Average NGL price per barrel
$
16.78

 
$
15.80

 
$
11.40

 
$
16.99

Total oil production (barrels), including NGLs
20,400

 
30,100

 
62,400

 
101,200

Average total oil price per barrel, including NGLs
$
43.23

 
$
46.16

 
$
34.82

 
$
46.29

Gas production (millions of cubic feet)
205.5

 
242.5

 
597.5

 
726.6

Average price per thousand cubic feet
$
1.95

 
$
2.45

 
$
1.88

 
$
2.83

Total BOE (barrel of oil equivalent) (a)
54,700

 
70,500

 
162,000

 
222,300

Average price per barrel of oil equivalent
$
23.47

 
$
28.13

 
$
20.34

 
$
30.33

 _________________________
(a) 
Gas is converted to barrels of oil equivalent (BOE) using a conversion of six Mcf to one barrel of oil.


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Other
Our other segment manages our timber holdings, recreational leases and water resource initiatives. At third quarter-end 2016, we had approximately 75,000 real estate acres with timber we own directly or through ventures, primarily in Georgia and Texas. Historically, our other segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. At third quarter-end 2016, we had water interests in approximately 1.5 million acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama, and approximately 20,000 acres of groundwater leases in central Texas.

A summary of our other results follows:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues
$
487

 
$
1,726

 
$
1,199

 
$
5,372

Cost of sales
(363
)
 
(819
)
 
(867
)
 
(2,599
)
Operating expenses
(334
)
 
(994
)
 
(1,320
)
 
(3,303
)
 
(210
)
 
(87
)
 
(988
)
 
(530
)
Equity in earnings of unconsolidated ventures
14

 
10

 
14

 
19

Segment earnings (loss)
$
(196
)
 
$
(77
)
 
$
(974
)
 
$
(511
)
Revenues consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Fiber
$
318

 
$
1,403

 
$
509

 
$
4,039

Water

 
100

 
24

 
400

Recreational leases and other
169

 
223

 
666

 
933

 
$
487

 
$
1,726

 
$
1,199

 
$
5,372


In third quarter and first nine months 2016, fiber revenues have decreased due to deferral of timber harvest activity in support of our key initiative to divest our non-core timberland and undeveloped land.
Water revenues for first nine months 2016 are related to groundwater royalties from our 45 percent nonparticipating royalty interests in groundwater produced or withdrawn for commercial purposes. Water revenues for first nine months 2015 are associated with a groundwater reservation agreement with Hays County, Texas, which commenced in 2013 and was terminated in second quarter 2015.
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. In third quarter and first nine months 2016, cost of sales have decreased due to deferral of timber harvest activity.

The decrease in operating expenses in third quarter and first nine months 2016 when compared with third quarter and first nine months 2015 is primarily due to our key initiative to reduce costs across entire organization and corresponding reduction in our workforce. Employee compensation and benefits includes $164,000 in severance costs incurred in first nine months 2016. Operating expenses associated with our water resources initiatives for first nine months 2016 and 2015 were $703,000 and $1,792,000.
Items Not Allocated to Segments
Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based and long-term incentive compensation, interest expense, loss on extinguishment of debt 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.

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General and administrative expense
General and administrative expenses consist of:
 
Third Quarter
 
First Nine Months
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Employee compensation and benefits
$
2,128

 
$
5,385

 
$
6,859

 
$
9,582

Professional and consulting services
1,336

 
1,346

 
3,401

 
4,595

Facility costs
157

 
216

 
592

 
670

Depreciation and amortization
95

 
133

 
314

 
464

Insurance costs
179

 
178

 
546

 
493

Other
610

 
1,085

 
2,280

 
3,736

 
$
4,505

 
$
8,343

 
$
13,992

 
$
19,540


The decrease in general and administrative expense in third quarter and first nine months 2016 when compared with third quarter and first nine months 2015 is primarily due to our key initiative to reduce costs across our entire organization. Employee compensation and benefits includes $486,000 and $3,314,000 in severance costs incurred in first nine months 2016 and first nine months 2015.
Share-based and long-term incentive compensation expense

Our share-based compensation expense fluctuates principally due to a portion of our awards being cash-settled and as a result they are affected by changes in the market price of our common stock. The decrease in share-based compensation expense in first nine months 2016 when compared with first nine months 2015 is primarily due to decrease in new grants awarded to employees, decrease in annual restricted stock grants to our Board of Directors and decrease in the value of cash-settled awards paid in first nine months 2016 due to a decrease in the market price of our common stock by over 20 percent from year-end 2015 to the settlement date. These decreases were somewhat offset by an increase of about 7 percent in our stock price since year-end 2015 and its impact on cash-settled awards.
Interest expense

The decrease in interest expense in third quarter and first nine months 2016 when compared with third quarter and first nine months 2015 is due to reducing our debt outstanding by $321,179,000 since third quarter-end 2015. First nine months 2016 debt retirement of portions of our 8.50% Senior Secured Notes due 2022 and 3.75% Convertible Senior Notes due 2020 resulted in a net loss on debt extinguishment of $35,864,000, which includes write-off of unamortized debt issuance costs of $5,489,000 and $1,301,000 in other costs related to tender offer advisory services.
Income Taxes
Our effective tax rate from continuing operations was a tax benefit of 124 percent in third quarter 2016, and a tax expense of 18 percent for first nine months 2016. The year to date tax expense of 18 percent differs from the statutory rate of 35 percent primarily due to a benefit for decrease in our valuation allowance related to decrease in our deferred tax assets. Our effective tax rate from continuing operations was 315 percent in third quarter 2015 and 225 percent in first nine months 2015, which was attributable almost entirely to a valuation allowance recorded against our net deferred tax assets. In addition, 2016 and 2015 effective tax rates from continuing operations include the effect of state income taxes, nondeductible items and benefits of percentage depletion.
We assessed available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit recognition of the existing deferred tax assets under U.S. GAAP. A significant piece of objective evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2016, principally driven by impairments of oil and gas properties in 2015. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.
On the basis of this evaluation, at third quarter-end 2016 and year-end 2015, we have a valuation allowance for our deferred tax assets of $88,773,000 and $97,068,000 for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable under U.S. GAAP.
The amount of the deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.

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Capital Resources and Liquidity
Sources and Uses of Cash
The consolidated statements of cash flows for first nine months 2016 and 2015 reflects cash flows from both continuing and discontinued operations. We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal sources of cash are proceeds from the sale of real estate, the cash flows from our mineral resources and income producing properties, borrowings and reimbursements from utility and improvement districts. Our principal cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, taxes, interest and compensation. Operating cash flows are affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements and availability of utilities, and by the timing of oil and gas leasing and production activities. Working capital varies based on a variety of factors, including the timing of sales of real estate and timber, oil and gas leasing and production activities, collection of receivables, reimbursement from utility and improvement districts and the payment of payables and expenses.
We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. We may, at any time, be considering or be in discussions with respect to the purchase or sale of our common stock, debt securities, convertible securities or a combination thereof.
Cash Flows from Operating Activities
Cash flows from our real estate acquisition and development activities, undeveloped land sales, commercial and income producing properties, timber sales, income from oil and gas properties, recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.
In first nine months 2016, net cash provided by operating activities was $29,807,000. The increase in cash provided by operating activities year over year is primarily due to lower real estate development and acquisition expenditures of $56,552,000 and higher undeveloped land sales activity and lot sales from owned and consolidated ventures. In first nine months 2015, net cash used for operating activities was $15,040,000 principally due to lower residential lot and undeveloped land sales activity and $81,055,000 in real estate development and acquisition expenditures exceeding $33,575,000 of real estate cost of sales.

Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures, costs incurred to acquire, develop and construct multifamily projects that will be held as commercial operating properties upon stabilization as investment property, business acquisitions and investment in oil and gas properties and equipment are classified as investing activities. In addition, proceeds from the sale of property and equipment, software costs and expenditures related to reforestation activities are also classified as investing activities.
In first nine months 2016, net cash provided by investing activities was $311,203,000 principally a result of net sales proceeds of $319,351,000 from the execution of our key initiative to opportunistically divest non-core assets, which principally includes $128,764,000 from sale of Radisson Hotel & Suites, $76,815,000 from sale of certain oil and gas properties, $59,719,000 from sale of Eleven, $25,433,000 from sale of Dillon, $13,917,000 from sale of our interest in 3600 and $14,703,000 from sale of Music Row. In first nine months 2015, net cash used for investing activities was $60,479,000 principally due to investment of $47,043,000 in oil and gas properties and equipment associated with previously committed exploration and production operations.
Cash Flows from Financing Activities
In first nine months 2016, net cash used for financing activities was $315,322,000 principally due to retirement of $225,245,000 of our 8.5% senior secured notes, $5,000,000 of our 3.75% convertible senior notes, $6,750,000 of payments related to amortizing notes associated with our tangible equity units and our payment in full of $39,336,000 loans secured by Radisson Hotel & Suites and Eleven multifamily property, which we sold in second quarter 2016. In first nine months 2015, net cash used for financing activities was $1,968,000 principally due to payroll taxes on share-settled equity awards and distributions to noncontrolling interests.



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Table of Contents

Real Estate Acquisition and Development Activities
We secure entitlements and develop infrastructure, primarily for single family residential and mixed-use communities.
We categorize real estate development and acquisition expenditures as operating activities on the statement of cash flows. These development and acquisition expenditures include costs for development of residential lots and mixed-use communities.
In first nine months 2016, real estate development and acquisition expenditures were $56,552,000, including one community development site acquisition.
Liquidity
Effective September 2, 2016, we reduced the revolving commitment provided by our senior secured credit facility, which matures on May 15, 2017 (with two one year extension options), from $300,000,000 to $125,000,000, none of which was drawn as of third quarter-end 2016. As a result of this reduction, we expensed $831,000 in unamortized debt issuance costs in third quarter 2016. 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 $13,679,000 was outstanding at third quarter-end 2016. 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 2016, net unused borrowing capacity under our senior secured credit facility is calculated as follows:
 
Senior Credit
Facility
 
(In thousands)
Borrowing base availability
$
125,000

Less: borrowings

Less: letters of credit
(13,679
)
 
$
111,321

Our net unused borrowing capacity during third quarter 2016 ranged from a high of $204,042,000 to a low of $111,321,000. Certain non-core assets support the borrowing base under our senior secured credit facility so we expect our borrowing capacity to be reduced as non-core assets are sold over time. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential and commercial real estate sales, undeveloped land sales, oil and gas leasing, exploration and production activities and mineral lease bonus payments received, timber sales, reimbursements from utility and improvement districts, payment of payables and expenses and capital expenditures.
Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2016, 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:
Financial Covenant
Requirement
 
Third Quarter-End 2016
Interest Coverage Ratio (a)
≥2.50:1.0
 
8.17:1.0

Total Leverage Ratio (b)
≤50%
 
23.0
%
Tangible Net Worth (c)
≥$393.5 million
 
$495.4 million

 ___________________________________
(a) 
Calculated as EBITDA (earnings before interest, taxes, depreciation, depletion and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is applied at the end of each quarter on a rolling four quarter basis.
(b) 
Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities, reimbursement obligations with respect to letters of credit or similar instruments, and our pro-rata share of joint venture debt outstanding. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business, Credo asset value, special improvement district receipts (SIDR) reimbursements value and other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.
(c) 
Calculated as the amount by which consolidated total assets (excluding Credo acquisition goodwill over $50,000,000) exceed consolidated total liabilities. At third quarter-end 2016, the requirement is $393,503,000 computed as:

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$379,044,000 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 since third quarter-end 2015. This covenant is applied at the end of each quarter.
To make additional discretionary investments, acquisitions, or distributions, we must maintain available liquidity equal to 10 percent of the aggregate commitments in place. At third quarter-end 2016, the minimum liquidity requirement was $12,500,000, compared with $226,862,000 in actual available liquidity based on the unused borrowing capacity under our senior secured credit facility plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility.
Discretionary investments in community development may be restricted in the event that the revenue/capital expenditure ratio is less than or equal to 1.0x. At third quarter-end 2016, the revenue/capital expenditure ratio was 2.5x. Revenue is defined as total gross revenues (excluding revenues attributed to Credo and multifamily properties), plus our pro rata share of the operating revenues from unconsolidated ventures. Capital expenditures are defined as consolidated development and acquisition expenditures (excluding investments related to Credo and multifamily properties), plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures.
We may elect to make distributions to stockholders so long as the total leverage ratio is less than 40 percent, the interest coverage ratio is greater than 3.0:1.0 and available liquidity is not less than $125,000,000, all of which were satisfied at third quarter-end 2016. Regardless of whether the foregoing conditions are satisfied, we may make distributions in an aggregate amount not to exceed $50,000,000 to be funded from up to 65% of the net proceeds from sales of multifamily properties and non-core assets, such as the Radisson Hotel & Suites in Austin, and any oil and gas properties.
In second quarter 2016, we completed a cash tender offer for our 8.50% Senior Secured Notes due 2022 (Notes), pursuant to which we purchased $215,495,000 principal amount (representing approximately 97.6% outstanding) of the Notes. Total consideration paid was $245,604,000, which included $29,091,000 in premium at 113.5% and $1,018,000 in accrued and unpaid interest. In addition, we received consent from holders of the Notes to eliminate or modify certain covenants, events of default and other provisions contained in the indenture governing the the Notes, and to release the subsidiary guarantees and collateral securing the Notes. We also purchased $1,150,000 principal amount of Notes at 99.95% of face value in open market transactions. The second quarter 2016 tender offer and open market purchases resulted in a $35,583,000 loss on extinguishment of debt, which includes the premium paid to repurchase the Notes, write-off of unamortized debt issuance costs of $5,191,000 and $1,301,000 in other costs related to tender offer advisory services. In first quarter 2016, we purchased $8,600,000 principal amount of the Notes at 99% of face value in the open market transactions, resulting in a $127,000 gain on the early extinguishment of the Notes offset by the write-off of unamortized debt issuance costs of $225,000.
In second quarter 2016, we purchased $5,000,000 of 3.75% Convertible Senior Notes due 2020 at 93.25% of face value in open market transactions for $4,662,500 and we allocated $4,452,000 to extinguish the debt and $211,000 to reacquire the equity component within the convertible notes based on the fair value of the debt component. We recognized a $110,000 loss on extinguishment of debt based on the difference between the fair value of the debt component prior to conversion and the carrying value of the debt component. Total loss on extinguishment of debt, including write-off of debt issuance costs allocated to the repurchased notes was $183,000.
In second quarter 2016, a secured promissory note of $15,400,000 was paid in full in connection with sale of the Radisson Hotel & Suites, a 413 guest room hotel located in Austin, for $130,000,000.
In second quarter 2016, other indebtedness decreased principally as result of selling Eleven, a 257-unit multifamily project in Austin, for $60,150,000 and paying in full the associated debt of $23,936,000.
Contractual Obligations and Off-Balance Sheet Arrangements
In 2014, FMF Littleton LLC, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $46,384,000 to develop a 385-unit multifamily project located in Littleton, Colorado. The outstanding balance was $42,083,000 at third quarter-end 2016. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent of principal to ten percent upon achievement of certain conditions.
In 2014, CREA FMF Nashville LLC, an equity method venture with Massachusetts Mutual Life Insurance Co. (MassMutual) in which we own a 30 percent interest, obtained a senior secured construction loan in the amount of $51,950,000 to develop a 320-unit multifamily project located in Nashville, Tennessee. The outstanding balance at third quarter-end 2016 was $37,192,000. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent of principal to zero percent upon achievement of certain conditions.

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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. Our net investment in Cibolo Canyons is $54,645,000 at third quarter-end 2016, all of which is related to the mixed-use development.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include approximately 1,830 residential lots and 150 commercial acres designated for multifamily and retail uses, of which 1,104 lots and 97 commercial acres have been sold through third quarter-end 2016.
In 2007, we entered into an agreement with the Cibolo Canyons Special Improvement District ("CCSID") providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by CCSID and unreimbursed amounts accrue interest at 9.75 percent per annum. CCSID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses.
Because the amount of each reimbursement is dependent on several factors, including CCSID approval and CCSID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from CCSID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.
Through third quarter-end 2016, we have submitted and were approved for reimbursement of approximately $54,376,000 of infrastructure costs, of which we have received reimbursements totaling $36,109,000, of which $1,406,000 was received in third quarter 2016. At third quarter-end 2016, we have $18,267,000 in pending reimbursements, excluding interest.
Resort Hotel, Spa and Golf Development
In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott ® San Antonio Hill Country Resort & Spa (the Resort), which includes a 1,002 room destination resort and two PGA Tour ® Tournament Players Club ® (TPC) golf courses.
In exchange for our commitment to the Resort, the third party owners assigned to us certain rights under an agreement between the third party owners and CCSID. This agreement includes the right to receive from CCSID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by CCSID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by CCSID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service on bonds issued by CCSID collateralized by hotel occupancy tax (HOT) and other resort sales tax through 2034.
The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the Resort and the amount of debt service incurred by CCSID.
In 2014, we received $50,550,000 from CCSID principally related to its issuance of $48,900,000 HOT and Sales and Use Tax Revenue Bonds, resulting in recovery of our full Resort investment. These bonds are obligations solely of CCSID and are payable from HOT and sales and use taxes levied on the Resort by CCSID. To facilitate the issuance of the bonds, we provided a $6,846,000 letter of credit to the bond trustee as security for certain debt service fund obligations in the event CCSID tax collections are not sufficient to support payment of the bonds in accordance with their terms. The letter of credit must be maintained until the earlier of redemption of the bonds or scheduled bond maturity in 2034. We also entered into an agreement with the owner of the Resort to assign its senior rights to us in exchange for consideration provided by us, including a surety bond to be drawn if CCSID tax collections are not sufficient to support ad valorem tax rebates payable. The surety bond has a balance of $6,631,000 at third quarter-end 2016. The surety bond decreases as CCSID makes annual ad valorem tax rebate payments, which obligation is scheduled to be retired in full by 2020. All future receipts are expected to be recognized as gains in the period collected. We received $501,000 in third quarter 2016.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2015 Annual Report on Form 10-K.


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New and Pending Accounting Pronouncements
Please read Note 2—New and Pending Accounting Pronouncements to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Statistical and Other Data
A summary of our real estate projects in the entitlement process (a) at third quarter-end 2016 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

Texas
 
 
 
 
 
Lake Houston
Harris/Liberty
 
Houston
 
3,700

Total
 
 
 
 
4,430

 _________________________
(a) 
A project is deemed to be in the entitlement process when customary steps necessary for the preparation of an application for governmental land-use approvals, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.
(b) 
Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.

A summary of our non-core timberland and undeveloped land at third quarter-end 2016 follows:
 
 
Acres
Timberland
 
 
Alabama
 
1,900

Georgia
 
44,300

Texas
 
4,400

Higher and Better Use Timberland
 
 
Georgia
 
18,900

Entitled Undeveloped Land
 
 
Georgia
 
5,100

Total
 
74,600



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Table of Contents

A summary of activity within our active projects in the development process, which includes entitled, developed and under development real estate projects, at third quarter-end 2016 follows:
 
 
 
 
 
 
Residential Lots/Units
 
Commercial Acres
Project
 
County
 
Interest
Owned
(a)
 
Lots/Units Sold
Since
Inception
 
Lots/Units
Remaining
 
Acres Sold
Since
Inception
 
Acres
   Remaining
 
Texas
 
 
 
 
 
 
 
 
 
 
 
 
Austin
 
 
 
 
 
 
 
 
 
 
 
 
Arrowhead Ranch
 
Hays
 
100
%
 
2

 
382

 

 
19

The Colony
 
Bastrop
 
100
%
 
475

 
1,448

 
22

 
5

Double Horn Creek
 
Burnet
 
100
%
 
167

 

 

 

Hunter's Crossing
 
Bastrop
 
100
%
 
510

 

 
54

 
51

La Conterra
 
Williamson
 
100
%
 
202

 

 
3

 

Westside at Buttercup Creek
 
Williamson
 
100
%
 
1,497

 

 
66

 

 
 
 
 
 
 
2,853

 
1,830

 
145

 
75

Corpus Christi
 
 
 
 
 
 
 
 
 
 
 
 
Caracol
 
Calhoun
 
75
%
 
16

 
58

 

 
14

Padre Island (b)
 
Nueces
 
50
%
 

 

 

 
15

Tortuga Dunes
 
Nueces
 
75
%
 

 
134

 

 
4

 
 
 
 
 
 
16

 
192

 

 
33

Dallas-Ft. Worth
 
 
 
 
 
 
 
 
 
 
 
 
Bar C Ranch
 
Tarrant
 
100
%
 
448

 
673

 

 

Keller
 
Tarrant
 
100
%
 

 

 
1

 

Lakes of Prosper
 
Collin
 
100
%
 
165

 
122

 
4

 

Lantana
 
Denton
 
100
%
 
3,617

 
484

 
44

 

Maxwell Creek
 
Collin
 
100
%
 
982

 
19

 
10

 

Parkside
 
Collin
 
100
%
 
60

 
140

 

 

The Preserve at Pecan Creek
 
Denton
 
100
%
 
619

 
163

 

 
7

River's Edge
 
Denton
 
100
%
 

 
202

 

 

Stoney Creek
 
Dallas
 
100
%
 
292

 
404

 

 

Summer Creek Ranch
 
Tarrant
 
100
%
 
983

 
246

 
35

 
44

Timber Creek
 
Collin
 
88
%
 
61

 
540

 

 

Village Park
 
Collin
 
100
%
 
567

 

 
3

 
2

 
 
 
 
 
 
7,794

 
2,993

 
97

 
53

Houston
 
 
 
 
 
 
 
 
 
 
 
 
Barrington Kingwood
 
Harris
 
100
%
 
176

 
4

 

 

City Park
 
Harris
 
75
%
 
1,468

 

 
58

 
104

Harper's Preserve (b)
 
Montgomery
 
50
%
 
522

 
1,160

 
30

 
49

Imperial Forest
 
Harris
 
100
%
 
74

 
354

 

 

Long Meadow Farms (b)
 
Fort Bend
 
38
%
 
1,611

 
186

 
194

 
99

Southern Trails (b)
 
Brazoria
 
80
%
 
942

 
53

 
1

 

Spring Lakes
 
Harris
 
100
%
 
348

 

 
25

 
4

Summer Lakes
 
Fort Bend
 
100
%
 
744

 
323

 
56

 

Summer Park
 
Fort Bend
 
100
%
 
119

 
80

 
34

 
62

Willow Creek Farms II
 
Waller / Fort Bend
 
90
%
 
154

 
111

 

 

 
 
 
 
 
 
6,158

 
2,271

 
398

 
318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

36

Table of Contents

 
 
 
 
 
 
Residential Lots/Units
 
Commercial Acres
Project
 
County
 
Interest
Owned
(a)
 
Lots/Units Sold
Since
Inception
 
Lots/Units
Remaining
 
Acres Sold
Since
Inception
 
Acres
   Remaining
San Antonio
 
 
 
 
 
 
 
 
 
 
 
 
Cibolo Canyons
 
Bexar
 
100
%
 
1,104

 
721

 
97

 
58

Oak Creek Estates
 
Comal
 
100
%
 
313

 
240

 
13

 

Olympia Hills
 
Bexar
 
100
%
 
743

 
11

 
10

 

Stonewall Estates (b)
 
Bexar
 
50
%
 
377

 
9

 

 

 
 
 
 
 
 
2,537

 
981

 
120

 
58

Total Texas
 
 
 
 
 
19,358

 
8,267

 
760

 
537

Colorado
 
 
 
 
 
 
 
 
 
 
 
 
Denver
 
 
 
 
 
 
 
 
 
 
 
 
Buffalo Highlands
 
Weld
 
100
%
 

 
164

 

 

Cielo
 
Douglas
 
100
%
 

 
343

 

 

Johnstown Farms
 
Weld
 
100
%
 
281

 
335

 
2

 

Pinery West
 
Douglas
 
100
%
 
86

 

 
20

 
106

Stonebraker
 
Weld
 
100
%
 

 
603

 

 

 
 
 
 
 
 
367

 
1,445

 
22

 
106

Georgia
 
 
 
 
 
 
 
 
 
 
 
 
Atlanta
 
 
 
 
 
 
 
 
 
 
 
 
Harris Place
 
Paulding
 
100
%
 
22

 
5

 

 

Montebello (b) 
 
Forsyth
 
90
%
 

 
224

 

 

Seven Hills
 
Paulding
 
100
%
 
889

 
189

 
26

 
113

West Oaks
 
Cobb
 
100
%
 
6

 
50

 

 

 
 
 
 
 
 
917

 
468

 
26

 
113

North & South Carolina
 
 
 
 
 
 
 
 
 
 
 
 
Charlotte
 
 
 
 
 
 
 
 
 
 
 
 
Ansley Park
 
Lancaster
 
100
%
 

 
307

 

 

Habersham
 
York
 
100
%
 
76

 
111

 

 
6

Walden
 
Mecklenburg
 
100
%
 

 
384

 

 

 
 
 
 
 
 
76

 
802

 

 
6

Raleigh
 
 
 
 
 
 
 
 
 
 
 
 
Beaver Creek (b)
 
Wake
 
90
%
 
24

 
169

 

 

 
 
 
 
 
 
24

 
169

 

 

 
 
 
 
 
 
100

 
971

 

 
6

Tennessee
 
 
 
 
 
 
 
 
 
 
 
 
Nashville
 
 
 
 
 
 
 
 
 
 
 
 
Beckwith Crossing
 
Wilson
 
100
%
 
24

 
75

 

 

Morgan Farms
 
Williamson
 
100
%
 
125

 
48

 

 

Scales Farmstead
 
Williamson
 
100
%
 

 
197

 

 

Weatherford Estates
 
Williamson
 
100
%
 
8

 
9

 

 

 
 
 
 
 
 
157

 
329

 

 

Wisconsin
 
 
 
 
 
 
 
 
 
 
 
 
Madison
 
 
 
 
 
 
 
 
 
 
 
 
Juniper Ridge/Hawks Woods (b) (d)
 
Dane
 
90
%
 
8

 
206

 

 

Meadow Crossing II (b) (c)
 
Dane
 
90
%
 
3

 
169

 

 

 
 
 
 
 
 
11

 
375

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

37

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Lots/Units
 
Commercial Acres
Project
 
County
 
Interest
Owned
(a)
 
Lots/Units Sold
Since
Inception
 
Lots/Units
Remaining
 
Acres Sold
Since
Inception
 
Acres
   Remaining
Arizona, California, Missouri, Utah
 
 
 
 
 
 
 
 
 
 
 
 
Tucson
 
 
 
 
 
 
 
 
 
 
 
 
Boulder Pass (b) (c)
 
Pima
 
50
%
 
3

 
85

 

 

Dove Mountain
 
Pima
 
100
%
 

 
98

 

 

Oakland
 
 
 
 
 
 
 
 
 
 
 
 
San Joaquin River
 
Contra Costa/Sacramento
 
100
%
 

 

 
108

 
180

Kansas City
 
 
 
 
 
 
 
 
 
 
 
 
Somerbrook
 
Clay
 
100
%
 
173

 
222

 

 

Salt Lake City
 
 
 
 
 
 
 
 
 
 
 
 
Suncrest (b) (c)
 
Salt Lake
 
90
%
 

 
171

 

 

 
 
 
 
 
 
176

 
576

 
108

 
180

Total
 
 
 
 
 
21,086

 
12,431

 
916

 
942

 _________________________
(a) 
Interest owned reflects our total interest in the project, whether owned directly or indirectly, which may be different than our economic interest in the project.
(b) 
Projects in ventures that we account for using equity method.
(c)
Venture project that develops and sells homes.
(d)
Venture project that develops and sells lots and homes.
A summary of our non-core multifamily properties, excluding two multifamily sites classified as held for sale, at third quarter-end 2016 follows:
Project
 
Market
 
Interest
    Owned (a)
 
Type
 
Acres
 
Description
Elan 99
 
Houston
 
90
%
 
Multifamily
 
17

 
360-unit luxury apartment
Acklen
 
Nashville
 
30
%
 
Multifamily
 
4

 
320-unit luxury apartment
HiLine
 
Denver
 
25
%
 
Multifamily
 
18

 
385-unit luxury apartment
 _________________________
(a) 
Interest owned reflects our total interest in the project, whether owned directly or indirectly, which may be different than our economic interest in the project.


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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 2016 follows:
State
Unleased
 
Leased (b)
 
Held By
Production (c)
 
Total (d)
 
 
 
(Net acres)
Texas
209,000

 
10,000

 
33,000

 
252,000

Louisiana
130,000

 
4,000

 
10,000

 
144,000

Georgia
152,000

 

 

 
152,000

Alabama
40,000

 

 

 
40,000

California
1,000

 

 

 
1,000

Indiana
1,000

 

 

 
1,000

 
533,000

 
14,000

 
43,000

 
590,000

 _________________________
(a) 
Includes ventures.
(b) 
Includes leases in primary lease term or for which a delay rental payment has been received. In the ordinary course of business, leases covering a significant portion of leased net mineral acres may expire from time to time in a single reporting period.
(c) 
Acres being held by production are producing oil or gas in paying quantities.
(d) 
Texas, Louisiana, California and Indiana net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Georgia and Alabama net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling.

A summary of our Texas and Louisiana owned mineral acres (a) by county or parish at third quarter-end 2016 follows:
Texas
 
Louisiana (b)
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. These owned mineral acre interests contain numerous oil and gas producing formations consisting of conventional, unconventional, and tight sand reservoirs. Of these reservoirs, we have mineral interests in and around production trends in the Wilcox, Frio, Cockfield, James Lime, Petet, Travis Peak, Cotton Valley, Austin Chalk, Haynesville Shale, Barnett Shale and Bossier formations.
(b) 
A significant portion of our Louisiana net acres was severed from the surface estate shortly before our 2007 spin-off. Under Louisiana law, a mineral servitude that is not producing minerals or which has not been the subject of good-faith drilling operations will cease to burden the property upon the tenth anniversary of the date of its creation. The total number of net acres subject to prescription can fluctuate based on oil and gas development and production activities. Some or all of approximately 70,000 of our Louisiana net acres may revert to the surface owner unless drilling operations or production commences prior to October 2017.

 

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
Our interest rate risk is principally related to our variable-rate debt. Interest rate changes impact earnings due to the resulting increase or decrease in our variable-rate debt, which was $1,306,000 at third quarter-end 2016.
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 2016. 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.
 
Third
Quarter-End
Change in Interest Rates
2016
 
(In thousands)
2%
$
(16
)
1%
$
(3
)
(1)%
$

(2)%
$

Foreign Currency Risk
We have no exposure to foreign currency fluctuations.
Commodity Price Risk
We have no significant exposure to commodity price fluctuations as it relates to our royalty revenues, lease bonus and cash flows from owned mineral resource activities. However, significant decrease in commodity pricing may have an impact on future leasing activities of our owned mineral interests and therefore the carrying value of our owned mineral resources may not be recoverable.
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 were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of any of the proceedings should not have a material adverse effect on our financial position, long-term results of operations or cash flows. It is possible, however, that circumstances beyond our control or significant subsequent developments could result in additional charges related to these matters that could be significant to results of operations or cash flow in any single accounting period.

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Table of Contents

Item 1A. Risk Factors
There are no material changes from the risk factors disclosed in our 2015 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 1 (7/1/2016 — 7/31/2016)

 
$

 

 
3,222,692

Month 2 (8/1/2016 — 8/31/2016)
1,167

 
$
12.08

 

 
3,222,692

Month 3 (9/1/2016 — 9/30/2016)
168

 
$
11.71

 

 
3,222,692

 
1,335

 
$
12.03

 

 
 
 _________________________
(a) 
On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have purchased 3,777,308 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) 
Includes shares withheld to pay taxes in connection with vesting of restricted stock awards.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.

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Table of Contents

Item 6. Exhibits
Exhibit
 
Description
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.1
 
The following materials from Forestar’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.

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Table of Contents

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 9, 2016
By:
/s/ Charles D. Jehl
 
 
Charles D. Jehl
 
 
Chief Financial Officer
 
 
 
 
By:
/s/ Sabita C. Reddy
 
 
Sabita C. Reddy
 
 
Principal Accounting Officer

43