Note ~~7 —~~ 7—Investment in Unconsolidated Ventures

At ~~third~~first quarter-end ~~2011,~~2012, we had ownership interests generally ranging from 25 to 50 percent in 1011 ventures that we account for using the equity method. We have no real estate ventures that are accounted for using the cost method. ~~Our three largest ventures at third quarter-end 2011 are CL Realty, Temco and Palisades West. We own a 50 percent interest in both~~

In first quarter 2012, we acquired from CL Realty and Temco their interest in 17 residential and ~~Cousins Real Estate Corporation owns the other 50 percent interest. We own a~~mixed-use projects for $47,000,000, principally representing $31,891,000 in real estate and $14,236,000 in investment in unconsolidated ventures. Please readNote 3 for additional information. Also in first quarter 2012, we sold our 25 percent interest in Palisades West ~~Cousins Properties Incorporated~~LLC, which owns ~~a 50 percent interest~~two office buildings and an accompanying parking garage in Austin, to Dimensional Fund Advisors, LP ~~owns~~for $32,095,000, resulting in a gain on sale of $11,675,000.

Summary information regarding our ventures at first quarter-end 2012 follows:

CL Realty’s remaining assets consist of one commercial development site located on the Texas gulf coast and about 900 net mineral acres leased in the Fort Worth Basin with about 23 wells currently producing from the Barnett Shale natural gas formation.

Temco’s remaining ~~25 percent interest. Information regarding~~assets consist of about 5,700 acres of undeveloped land and a golf course and country club property, both located in Paulding County, Georgia.

Other ventures include three investments in unconsolidated ventures acquired from CL Realty and our net share of the equity in these ventures ~~follows:~~is $14,660,000 at first quarter-end 2012. These investments represent residential and mixed-use projects located in Houston and San Antonio.

	•		CL Realty, L.L.C. was formed in 2002 for the purpose of developing residential and mixed-use communities in Texas and across the southeastern United States. At third quarter-end 2011, the venture has 14 residential and mixed-use communities, of which 10 are in Texas, three are in Florida and one is in Georgia, representing approximately 5,100 planned residential lots and 290 commercial acres.

	•		Temco Associates, LLC was formed in 1991 for the purpose of acquiring and developing residential real estate sites in Georgia. At third quarter-end 2011, the venture has four residential and mixed-use communities, representing approximately 1,560 planned residential lots, all of which are located in Paulding County, Georgia. The venture also owns 5,712 acres of undeveloped land in Paulding County, Georgia.

	•		Palisades West LLC was formed in 2006 for the purpose of constructing a commercial office park in Austin, Texas. The project includes two office buildings totaling approximately 375,000 square feet and an accompanying parking garage. At third quarter-end 2011, the buildings are approximately 99 percent leased. Our remaining commitment for investment in this venture as of third quarter-end 2011 is $1,532,000. Effective fourth quarter 2008, we entered into a 10-year operating lease for approximately 32,000 square feet that we occupy as our corporate headquarters. In third quarter and first nine months 2011, rents paid under this operating lease were $304,000 and $864,000 and are included in general and administrative and other operating expenses. In third quarter and first nine months 2010, rents paid were $296,000 and $889,000 and are included in general and administrative expenses.

Combined summarized balance sheet information for our ventures accounted for using the equity method follows:

Third Quarter-End 2011 Year-End 2010
CL Palisades Other CL Palisades Other
Realty Temco West Ventures Total Realty Temco West Ventures Total
(In thousands)
Real estate $ 81,844 $ 59,641 $ 120,474 $ 66,634 $ 328,593 $ 85,436 $ 60,454 $ 124,696 $ 69,612 $ 340,198
Total assets 82,357 60,259 125,089 77,679 345,384 86,657 60,609 129,378 78,060 354,704
Borrowings^(a)
1,047 2,824 — 75,330 79,201 2,664 2,929 — 74,605 80,198
Total liabilities 3,306 3,357 44,869 ^(b) 90,096 141,628 4,124 3,133 48,612 ^(b) 87,145 143,014
Equity 79,051 56,902 80,220 (12,417 ) 203,756 82,533 57,476 80,766 (9,085 ) 211,690
Our investment in real estate ventures:
Our share of their equity^(c)
39,525 28,451 20,055 13,221 101,252 41,267 28,738 20,191 14,075 104,271
Unrecognized deferred gain^(d)
(2,164 ) — — (999 ) (3,163 ) (2,190 ) — — (915 ) (3,105 )

Investment in real estate ventures $ 37,361 $ 28,451 $ 20,055 $ 12,222 $ 98,089 $ 39,077 $ 28,738 $ 20,191 $ 13,160 $ 101,166

      First Quarter-End 2012 Year-End 2011
      CL
Realty    Temco    Palisades
West    Other
Ventures Total CL
Realty    Temco    Palisades
West Other
Ventures Total
   (In thousands)
Real estate
   $ 7,546    $ 12,967    $ —         $ 97,404 $ 117,917 $ 50,050    $ 18,741    $ 119,017    $ 71,842 $ 259,650
Total assets
   8,193    13,408    —         113,662 135,263 51,096    18,922    124,588    75,060 269,666
Borrowings^(a)
   —         2,750    —         73,968 76,718 1,056    2,787    —      70,975 74,818
Total liabilities
   209    2,974    —         91,343 94,526 2,488    3,026    42,953 ^(b) 85,704 134,171
Equity
   7,984    10,434    —         22,319 40,737 48,608    15,896    81,635    (10,644 ) 135,495
Our share of their equity^{(c )}
   3,992    5,217    —         26,977 36,186 24,304    7,948    20,412    12,495 65,159
Unrecognized deferred gain^(d)
   —         —         —         (926 ) (926 ) —         —         —      (936 ) (936 )












Investment in real estate ventures
   $ 3,992    $ 5,217    $ —         $ 26,051 $ 35,260 $ 24,304    $ 7,948    $ 20,412    $ 11,559 $ 64,223












Combined summarized income statement information for our ventures accounted for using the equity method follows:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Revenues:
CL Realty $ 2,290 $ 1,120 $ 5,808 $ 5,332
Temco 89 233 435 2,110
Palisades West 4,142 3,414 12,256 10,145
Other ventures 2,678 1,549 8,343 9,769

Total $ 9,199 $ 6,316 $ 26,842 $ 27,356

Earnings (Loss):
CL Realty $ 1,091 $ 964 $ 2,481 $ 2,184
Temco (366 ) (382 ) (782 ) 430
Palisades West 1,461 1,124 4,372 3,406
Other ventures (612 ) (524 ) (2,744 ) (16,807 )

Total $ 1,574 $ 1,182 $ 3,327 $ (10,787 )

Our equity in their earnings (loss):
CL Realty $ 545 $ 482 $ 1,240 $ 1,092
Temco (183 ) (191 ) (391 ) 215
Palisades West 365 281 1,093 850
Other ventures^(c)
(105 ) (490 ) (336 ) (1,417 )
Amortization of deferred gain 26 — 26 —

Total $ 648 $ 82 $ 1,632 $ 740

   First Quarter
   2012 2011
   (In thousands)
Revenues:

CL Realty
   $ 1,667 $ 1,869
Temco
   440 58
Palisades West
   —      4,030
Other ventures
   4,678 1,549


Total
   $ 6,785 $ 7,506


Earnings (Loss):

CL Realty
   $ 552 $ 656
Temco
   (58 ) (204 )
Palisades West
   —      1,456
Other ventures
   541 (870 )


Total
   $ 1,035 $ 1,038


Our equity in their earnings (loss):

CL Realty
   $ 276 $ 328
Temco
   (29 ) (102 )
Palisades West
   —      364
Other ventures^{(c )}
   467 (8 )
Amortization of deferred gain
   10 —


Total
   $ 724 $ 582


^(a)
Total includes current maturities of ~~$71,920,000~~$73,146,000 at ~~third~~first quarter-end ~~2011,~~2012, of which ~~$43,169,000~~$44,062,000 is non-recourse to us, and ~~$75,121,000~~$71,816,000 at year-end ~~2010,~~2011, of which ~~$43,166,000~~$43,144,000 is non-recourse to us.
^(b) ~~Includes $42,792,000 of~~
Principally included deferred income from leasehold improvements funded by tenants in excess of leasehold improvement allowances. These amounts ~~are~~were recognized as rental income over the lease term and ~~are~~were offset by depreciation expense related to these tenant improvements. There iswas no effect on venture net income.
^(c)
Our share of the equity in other ventures reflects our ownership interests generally ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses.
^(d)
Represents deferred gains on real estate contributed by us to ventures. We are recognizing income as real estate is sold to third parties. The deferred gains are reflected as a reduction to our investment in unconsolidated ventures.
In first ~~nine months 2011,~~quarter 2012, we invested ~~$1,350,000~~$117,000 in these ventures and received ~~$5,995,000~~$266,000 in distributions; in first ~~nine months 2010,~~quarter 2011, we invested ~~$1,538,000~~$673,000 in these ventures and received ~~$5,974,000~~$3,044,000 in distributions. Distributions include both return of investments and distributions of earnings.
At ~~third~~first quarter-end ~~2011,~~2012, other ventures include three partnerships we participate in that have total assets of ~~$51,301,000~~$48,967,000 and total liabilities of ~~$83,575,000,~~$79,335,000, which includes ~~$67,557,000~~$63,463,000 of borrowings classified as current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is ~~$2,362,000~~$1,884,000 at ~~third~~first quarter-end ~~2011.~~2012. These three partnerships are variable interest entities. Please readNote 1716for additional information.
     ~~In first nine months 2011, CL Realty’s earnings include an impairment charge of $500,000 related to a residential real estate project located in Tampa, Florida.~~
     In first nine months 2010, other ventures loss includes a $13,061,000 loss on sale of a golf course and country club property in Denton, Texas. This loss did not impact our equity in the earnings (loss) of this venture as we exclude losses that exceed our investment where we are not obligated to provide additional funding.
We have provided performance bonds and letters of credit on behalf of certain ventures totaling ~~$1,387,000~~$310,000 at ~~third~~first quarter-end ~~2011.~~2012. Generally these performance bonds and letters of credit would be drawn on due to lack of performance by us or the ventures, such as failure to timely deliver streets and utilities in accordance with local codes and ordinances.
9
Note 8—Receivables
Receivables consists of:
~~Note 8 — Receivables~~
     ~~Receivables consist of:~~

Third
Quarter-End Year-End
2011 2010
(In thousands)
Non-performing loan $ 20,666 $ —
Notes receivable, average interest rates of 7.73% at third quarter-end 2011 and 7.93% at year-end 2010 2,720 1,057
Due from qualified intermediary — 1,347
Receivables and accrued interest 1,052 615

24,438 3,019
Allowance for bad debts (62 ) (144 )

$ 24,376 $ 2,875

     ~~In second quarter 2011,~~
   First
Quarter-
End
2012 Year-End
2011
   (In thousands)
Non-performing loan
   $ 20,666 $ 20,666
Notes receivable, average interest rates of 7.50% at first quarter-end 2012 and 7.16% at year-end 2011
   1,594 1,817
Receivables and accrued interest
   2,258 860


   24,518 23,343
Allowance for bad debts
   (62 ) (62 )


   $ 24,456 $ 23,281


At first quarter-end 2012, we ~~acquired~~have $20,666,000 invested in a non-performing loan acquired from a financial institution ~~for $21,137,000.~~in 2011. The ~~original~~ loan ~~commitment was $38,000,000~~matured in February 2010 and the outstanding balance is about ~~$34,087,000.~~$35,464,000 at first quarter-end 2012. The loan ~~matured in February 2010. The note~~ is secured by a lien on 900 acres of developed and undeveloped real estate located near Houston ~~Texas~~ designated for single-family residential and
commercial development. ~~We are not currently accruing interest and~~Through first quarter-end 2012, we have not recorded any accretable yield due to the non-performing status of the ~~loan. We cannot~~loan and our inability to estimate ~~the anticipated~~ future cash flows ~~because~~as the borrower ishas been in bankruptcy. ~~In third quarter 2011, we received $471,000 in payments and accounted for these receipts as~~On March 13, 2012, the bankruptcy court approved a ~~reduction~~plan of reorganization of the ~~carrying value~~borrower which became effective in second quarter 2012. The reorganization established a principal amount of $33,800,000 maturing in April 2017. Interest will accrue at 9 percent the ~~non-performing loan.~~
first three years escalating to 10 percent in year four and 12 percent in year five, subject to interest rate reductions if the loan is prepaid by certain dates.
Notes receivable generally are secured by a deed of trust and generally due within three years.
Receivables and accrued interest principally include miscellaneous operating receivables arising in the normal course of business.

Note ~~9 —~~ 9—Debt
Debt consists of:

Third
Quarter-End Year-End
2011 2010
(In thousands)
Senior secured credit facility
Term loan facility — average interest rate of 6.50% at third quarter-end 2011 and year-end 2010 $ 130,000 $ 125,000
Revolving line of credit — —
Secured promissory notes — average interest rate of 4.31% at third quarter-end 2011 and 4.51% at year-end 2010 41,900 41,716
Other indebtedness due through 2017 at variable and fixed interest rates ranging from 5.00% to 8.00% 51,797 54,873

$ 223,697 $ 221,589

   First
Quarter-End
2012    Year-End
2011
   (In thousands)
Senior secured credit facility

Term loan facility — average interest rate of 6.50% at first quarter-end 2012 and year-end 2011
   $ 130,000    $ 130,000
Revolving line of credit — average interest rate of 7.50% at first quarter-end 2012
   6,000    —
Secured promissory notes — average interest rate of 4.32% at first quarter-end 2012 and 4.34% at year-end 2011
   41,900    41,900
Other indebtedness due through 2017 at variable and fixed interest rates ranging from 5.00% to 8.00%
   49,965    49,687




   $ 227,865    $ 221,587




Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At ~~third~~first quarter-end ~~2011,~~2012, we were in compliance with the financial covenants of these agreements.
At various times in 2011, we supplemented and amended our senior secured credit facility to provide us with, among other matters, additional flexibility with respect to the borrowing base, collateral coverage and leverage requirements. As a result, in third quarter 2011 we increased our unused borrowing capacity by over $70,000,000 and extended the maturity of our revolving line of credit by one year, to August 6, 2014.
     ~~At third~~first quarter-end ~~2011,~~2012, our senior secured credit facility provides for a $130,000,000 term loan maturing August 6, 2015 and a $200,000,000 revolving line of credit maturing August 6, 2014. The term loan ~~includes a 1 percent prepayment penalty for payments in excess of $25,000,000 prior to February 6, 2012~~ and ~~no prepayment penalty thereafter. The~~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 ~~$984,000~~$2,467,000 is outstanding at ~~third~~first quarter-end ~~2011.~~2012. 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~~first quarter-end ~~2011,~~2012, we had ~~$176,337,000~~$154,878,000 in net unused borrowing capacity under our senior secured credit facility.
At our option, we can borrow at LIBOR plus 4.5 percent (subject to a 2 percent LIBOR floor) or prime plus 2.5 percent. Borrowings under the senior secured credit facility are secured by (a) all timberland, land in entitlement process, minerals and certain raw entitled land, (b) assignments of current and future leases, rents and contracts, including our mineral leases, (c) a security interest in our primary operating account, (d) pledge of the equity interests in current and future material operating subsidiaries or joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, to the extent permitted, and (e) negative pledge (without a mortgage) on all other wholly-owned assets. The senior secured credit facility provides for releases of real estate provided that borrowing base compliance is maintained.
10
At ~~third~~first quarter-end ~~2011,~~2012, secured promissory notes include a $26,500,000 non-recourse loan collateralized by a 401 unit multifamily project located in Houston ~~Texas~~ with a carrying value of ~~$46,998,000. In addition, in third quarter 2011, we borrowed~~$46,344,000. This secured promissory note includes a prepayment penalty for payments prior to July 1, 2017 and no prepayment penalty thereafter. The prepayment penalty is based on the difference between the fixed annual note rate of 4.94 percent and the assumed reinvestment rate based on the five year treasury constant maturity rate. Secured promissory notes also include a $15,400,000 ~~which is secured~~loan collateralized by a 413 guest room hotel located in Austin ~~Texas~~ with a carrying value of ~~$21,569,000. This financing replaced debt retired in second quarter 2011.~~
$20,844,000 at first quarter-end 2012.
At ~~third~~first quarter-end ~~2011,~~2012, other indebtedness, ~~primarily~~principally non-recourse, is collateralized by entitled, developed and under development projects with a carrying value of ~~$116,602,000.~~
$112,437,000.
At ~~third~~first quarter-end ~~2011,~~2012, we have ~~$9,101,000~~$7,654,000 in unamortized deferred financing fees ~~including $3,746,000 incurred in 2011 principally related to our senior secured credit facility,~~ which are included in other assets. Amortization of deferred financing fees was ~~$2,161,000~~$740,000 in first ~~nine months 2011~~quarter 2012 and ~~$3,747,000~~$604,000 in first ~~nine months 2010~~quarter 2011 and is included in interest expense.

Note ~~10 —~~ 10—Fair Value
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, ~~and~~ assets held for sale, goodwill and other intangible assets, which are measured for impairment. In ~~second~~first quarter 2012 and 2011, ~~a real estate asset was~~no non-financial assets were remeasured ~~and reported~~ at fair value due to events or circumstances that indicated the carrying value may not be recoverable. We determined estimated fair value based on the present value of future probability weighted cash flows expected from the sale of the long-lived asset. As a result, we recognized asset impairment of $450,000 in second quarter 2011. The carrying value of this asset may have subsequently increased or decreased from the fair value due to activity that has occurred since the measurement date.

Third
Fair Value Measurements Quarter-End
Level 1 Level 2 Level 3 2011
(In thousands)
Non-Financial Assets

Real estate $ — $ — $ 1,725 $ 1,725
value.
We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.
Information about our fixed rate financial instruments not measured at fair value follows:

Third Quarter-End 2011 Year-End 2010
Carrying Fair Carrying Fair Valuation
Amount Value Amount Value Technique
(In thousands)
Fixed rate debt $ (29,931 ) $ (32,431 ) $ (29,931 ) $ (30,164 ) Level 2

   First Quarter-End 2012 Year-End 2011
   Carrying
Amount Fair
Value Carrying
Amount Fair
Value Valuation
Technique
   (In thousands)
Fixed rate debt
   $ (29,931 ) $ (32,017 ) $ (29,931 ) $ (32,478 ) Level 2
Note ~~11 —~~ 11—Capital Stock
Pursuant to our stockholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our stockholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.
Please readNote 1817for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
11
As a result of the 2007 spin-offs from Temple-Inland, at ~~third~~first quarter-end ~~2011,~~2012, personnel of Temple-Inland and the other spin-off entity held ~~19,000 awards that will be settled in our common stock and~~ options to purchase ~~1,123,000~~986,000 shares of our common stock. The options have a weighted average exercise price of ~~$21.51~~$22.45 and a weighted average remaining contractual term of three years. At ~~third~~first quarter-end ~~2011,~~2012, the options have an aggregate intrinsic value of ~~$231,000.~~
$770,000.
Note ~~12 — Other Comprehensive~~12—Net Income
     ~~Other comprehensive income consists of:~~

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Consolidated net income $ 36,965 $ 9,086 $ 30,935 $ 3,005
Change in fair value of interest rate swap agreement — — — 393
Income tax effect of change in fair value — — — (137 )

Other comprehensive income 36,965 9,086 30,935 3,261
Less: Comprehensive income attributable to noncontrolling interests (537 ) (164 ) (901 ) (328 )

Other comprehensive income attributable to Forestar Group Inc. $ 36,428 $ 8,922 $ 30,034 $ 2,933

~~Note 13 — Earnings~~ per Share
Earnings attributable to common shareholders and weighted average common shares outstanding used to compute earnings per share were:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Earnings available to common shareholders:
Consolidated net income $ 36,965 $ 9,086 $ 30,935 $ 3,005
Less: Net income attributable to noncontrolling interest (537 ) (164 ) (901 ) (328 )

Net income attributable to Forestar Group Inc. $ 36,428 $ 8,922 $ 30,034 $ 2,677

Weighted average common shares outstanding — basic 35,514 35,934 35,482 36,109
Dilutive effect of stock options 84 154 163 224
Dilutive effect of restricted stock and equity-settled awards 198 291 232 262

Weighted average common shares outstanding — diluted 35,796 36,379 35,877 36,595

Anti-dilutive awards excluded from diluted weighted average shares outstanding 2,250 1,602 1,998 1,574

   First Quarter
   2012 2011
   (In thousands)
Earnings available to common shareholders:

Consolidated net income (loss)
   $ 3,497 $ (1,704 )
Less: Net income attributable to noncontrolling interest
   (695 ) (769 )


Net income (loss) attributable to Forestar Group Inc.
   $ 2,802 $ (2,473 )


Weighted average common shares outstanding — basic
   34,855 35,406
Dilutive effect of stock options
   118 —
Dilutive effect of restricted stock and equity-settled awards
   196 —


Weighted average common shares outstanding — diluted
   35,169 35,406


Anti-dilutive awards excluded from diluted weighted average shares outstanding
   2,283 3,186


Note ~~14 —~~ 13—Income Taxes
Our effective tax rate was ~~35 percent in third quarter 2011 and 34~~32 percent in first ~~nine months 2011,~~quarter 2012, which includes a 14 percent benefit for noncontrolling ~~interests and 1 percent non-cash charge for share-based compensation.~~interests. Our effective tax rate was ~~24 percent in third quarter 2010 and 33~~a benefit of 29 percent in first ~~nine months 2010,~~quarter 2011, which included a 413 percent ~~benefit attributable to noncontrolling interests.~~non-cash charge for share–based compensation. In addition, ~~2011~~2012 and ~~2010~~2011 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage depletion and the 2011 rate includes the effect of charitable contributions related to timberland conservation.
We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future periods.
At ~~third~~first quarter-end ~~2011,~~2012, our unrecognized tax benefits totaled ~~$7,767,000,~~$6,138,000, all of which ~~$6,391,000~~ would affect our effective tax rate if recognized.

Note ~~15 —~~ 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. It is ~~possible;~~possible, however, that charges related to these matters could be significant to our results or cash flows in any one accounting period.
12
Environmental
Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that we can reasonably estimate. We own 288 acres near Antioch, California, portions of which were sites of a former Temple-Inland paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 ~~acres,~~acre tract, a portion of which includes subsurface contamination. ~~In third quarter 2011, we increased our reserves for environmental remediation by $2,500,000 due to additional testing and remediation requirements by the state regulatory agencies.~~ We estimate the cost to complete remediation activities will be approximately ~~$3,500,000,~~$2,372,000, which is included in other accrued expenses. It is possible that remediation or monitoring activities could be required in addition to those included within our estimate, but we are unable to determine the scope, timing or extent of such activities.

Note ~~16 —~~ 15—Segment Information
We manage our operations through three business segments: real estate, mineral resources and fiber resources. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land, commercial and income producing properties, primarily a hotel and a multifamily property. Mineral resources manages our oil, natural gas and water interests. Fiber resources manages our timber and recreational leases.
Assets allocated by segment are as follows:

Third
Quarter-End Year-End
2011 2010
(In thousands)
Real estate $ 713,867 $ 669,363
Mineral resources 15,653 13,399
Fiber resources 15,856 18,258
Assets not allocated to segments 101,320 88,304

Total assets $ 846,696 $ 789,324

   First
Quarter-End
2012    Year-End
2011
   (In thousands)
Real estate
   $ 668,599    $ 657,661
Mineral resources
   21,705    19,130
Fiber resources
   14,123    14,444
Assets not allocated to segments
   93,344    103,622




Total assets
   $ 797,771    $ 794,857




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 and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based compensation, gain on sale of ~~assets,~~strategic timberland, interest expense and other 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. Our revenues are derived from our U.S. operations and all of our assets are located in the U.S. In first ~~nine months 2011,~~quarter 2012, no single customer accounted for more than 10 percent of our total revenues.
Segment revenues and earnings are as follows:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Revenues:
Real estate $ 19,060 $ 15,139 $ 59,814 $ 53,936
Mineral resources 5,871 6,654 17,784 18,387
Fiber resources 1,310 2,220 3,968 6,185

Total revenues $ 26,241 $ 24,013 $ 81,566 $ 78,508

Segment earnings (loss):
Real estate $ (4,266 ) $ (1,883 ) $ (684 ) $ 883
Mineral resources 3,592 6,196 12,292 16,640
Fiber resources 446 1,372 1,790 3,900

Total segment earnings (loss) (228 ) 5,685 13,398 21,423
Items not allocated to segments^(a)
56,265 6,097 32,705 (17,239 )

Income before taxes attributable to Forestar Group Inc. $ 56,037 $ 11,782 $ 46,103 $ 4,184

   First Quarter
   2012 2011
   (In thousands)
Revenues:

Real estate
   $ 17,922 $ 21,139
Mineral resources
   9,426 7,333
Fiber resources
   744 1,368


Total revenues
   $ 28,092 $ 29,840


Segment earnings:

Real estate
   $ 11,577 $ 2,575
Mineral resources
   5,875 5,598
Fiber resources
   390 640


Total segment earnings
   17,842 8,813
Items not allocated to segments^(a)
   (13,420 ) (11,998 )


Income (loss) before taxes attributable to Forestar Group Inc.
   $ 4,422 $ (3,185 )


^(a)
Items not allocated to segments consist of:
13
   First Quarter
   2012 2011
   (In thousands)
General and administrative expense
   $ (4,362 ) $ (3,916 )
Shared-based compensation expense
   (5,231 ) (4,100 )
Interest expense
   (3,891 ) (4,009 )
Other non-operating income
   64 27


   $ (13,420 ) $ (11,998 )


Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
General and administrative expense $ (4,827 ) $ (3,860 ) $ (15,824 ) $ (13,438 )
Share-based compensation expense 3,553 (1,817 ) (399 ) (7,370 )
Gain on sale of assets 61,784 15,441 61,784 15,441
Interest expense (4,271 ) (3,913 ) (12,933 ) (12,562 )
Other non-operating income 26 246 77 690

$ 56,265 $ 6,097 $ 32,705 $ (17,239 )

     ~~In third quarter 2011, gain on sale of assets represents the sale of 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000 in accordance with our strategic initiatives.~~
     ~~Third quarter and first nine months 2011 share-based compensation decreased as a result of a decline in our stock price and its impact on vested cash-settled awards.~~
     In third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of the terms available to us in the capital markets.
Note ~~17 —~~ 16—Variable Interest Entities
At ~~third~~first quarter-end ~~2011,~~2012, we are the primary beneficiary of two VIEs that we consolidate. We have provided the majority of equity to these VIEs, which absent our contributions or advances do not have sufficient equity to fund their operations. We have the authority to approve project budgets and the issuance of additional debt. At ~~third~~first quarter-end ~~2011,~~2012, our consolidated balance sheet includes ~~$14,687,000~~$15,687,000 in assets, principally real estate, ~~assets~~ and ~~$4,605,000~~$2,920,000 in liabilities related to these two VIEs. In first ~~nine months 2011,~~quarter 2012, we contributed or advanced ~~$2,826,000~~$559,000 to these VIEs. In first nine months 2010, real estate assets decreased by $11,865,000, debt decreased by $13,207,000 and other liabilities increased by $1,342,000 due to lender foreclosure of a lien on property owned by one of these VIEs. In second quarter 2011, our earnings benefited from a $1,342,000 reallocation of a previously recognized loss related to foreclosure of a lien on property in the above VIE. Based on our access to new information, we determined this loss and related liability should be allocated from us to the noncontrolling financial interests as we believe the likelihood we will be subject to any potential lender liabilities is remote. We have a nominal general partner interest in this VIE and could be held responsible for certain of its liabilities.
Also at ~~third~~first quarter-end ~~2011,~~2012, we are not the primary beneficiary of three VIEs that we account for using the equity method. The unrelated managing partners oversee ~~the~~ day-to-day operations and guarantee some of the debt of the VIEs while we have the authority to approve project budgets and the issuance of additional debt. Although some of the debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At ~~third~~first quarter-end ~~2011,~~2012, these three VIEs have total assets of ~~$51,301,000,~~$48,967,000, substantially all of which represent developed and undeveloped real estate and total liabilities of ~~$83,575,000,~~$79,335,000, which includes ~~$67,557,000~~$63,463,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method inNote 7. At ~~third~~first quarter-end ~~2011,~~2012, our investment in these three VIEs is ~~$2,362,000~~$1,884,000 and is included in investment in unconsolidated ventures. In first ~~nine~~three months ~~2011,~~2012, we contributed or advanced ~~$151,000~~$37,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at ~~$36,037,000,~~$34,695,000, which exceeds our investment as we have a nominal general partner interest in two of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.
Note ~~18 —~~ 17—Share-Based Compensation
Share-based compensation expense ~~(income)~~ consists of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Cash-settled awards $ (4,893 ) $ 422 $ (4,212 ) $ 3,187
Equity-settled awards 265 — 676 —
Restricted stock 612 923 1,882 2,538
Stock options 463 472 2,053 1,645

$ (3,553 ) $ 1,817 $ 399 $ 7,370

14
   First Quarter
   2012    2011
   (In thousands)
Cash-settled awards
   $ 2,082    $ 2,169
Equity-settled awards
   1,274    149
Restricted stock
   614    663
Stock options
   1,261    1,119




   $ 5,231    $ 4,100




Share-based compensation expense ~~(income)~~ is included in:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
General and administrative expense $ (2,057 ) $ 937 $ (234 ) $ 3,055
Other operating expense (1,496 ) 880 633 4,315

$ (3,553 ) $ 1,817 $ 399 $ 7,370

     ~~Third quarter and first nine months 2011 share-based~~
   First Quarter
   2012    2011
   (In thousands)
General and administrative expense
   $ 2,601    $ 2,055
Other operating expense
   2,630    2,045




   $ 5,231    $ 4,100




Share-based compensation ~~decreased~~increased principally as a result of ~~a decline~~new awards granted in first quarter 2012 and an increase in our expected stock price volatility rate assumptions used in valuing new awards and ~~its impact on vested cash-settled~~existing awards.
The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $595,000 in first quarter 2012 and $654,000 in first ~~nine months 2011 and $286,000 in first nine months 2010.~~quarter 2011. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is ~~$8,424,000~~$12,899,000 at ~~third~~first quarter-end ~~2011.~~2012. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first ~~nine months 2011~~quarter 2012 or ~~2010.~~
2011.
In first ~~nine months 2011,~~quarter 2012, we withheld ~~70,539~~70,894 shares having a value of ~~$1,290,000~~$1,148,000 in connection with vesting of restricted stock awards and exercises of stock options. In first ~~nine months 2010,~~quarter 2011, we withheld ~~2,601~~63,000 shares having a value of ~~$49,000~~$1,190,000 in connection with vesting of restricted stock awards and exercises of stock options. These shares are included in treasury stock and are reflected in financing activities in our consolidated statement of cash flows.
A summary of ~~the~~ awards granted under our 2007 Stock Incentive Plan follows:
Cash-settled awards
Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally vest over three to four years from the date of grant and generally provide for accelerated vesting upon death, disability or if there is a change in control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.
Cash-settled awards granted to our directors in the form of restricted stock units are fully vested at the time of grant and payable upon retirement.
The following table summarizes the activity of cash-settled restricted stock unit awards in the first ~~nine months 2011:~~

Weighted
Equivalent Average Grant
Units Date Fair Value
(In thousands) (Per unit)
Non-vested at beginning of period 376 $ 11.88
Granted 159 18.10
Vested (77 ) 17.53
Forfeited — —

Non-vested at end of period 458 $ 13.10

quarter 2012:
      Equivalent
Units Weighted
Average Grant
Date Fair Value
   (In thousands) (Per unit)
Non-vested at beginning of period
   449 $ 13.13
Granted
   187 16.11
Vested
   (286 ) 10.32
Forfeited
   —      —


Non-vested at end of period
   350 $ 17.03


The following table summarizes the activity of cash-settled stock appreciation rights in first ~~nine months 2011:~~

Weighted Aggregate
Average Intrinsic Value
Weighted Remaining (Current
Rights Average Contractual Value Less
Outstanding Exercise Price Term Exercise Price)
(In thousands) (Per share) (In years) (In thousands)
Balance at beginning of period 909 $ 11.28 8 $ 7,289
Granted — —
Exercised (12 ) 9.29
Forfeited — —

Balance at end of period 897 $ 11.30 8 $ 1,109

Exercisable at end of period 380 $ 10.48 8 $ 529
15
quarter 2012:
      Rights
Outstanding Weighted
Average
Exercise Price    Weighted
Average
Remaining
Contractual
Term    Aggregate
Intrinsic Value
(Current
Value Less
Exercise Price)
   (In thousands) (Per share)    (In years)    (In thousands)
Balance at beginning of period
   895 $ 11.31    7    $ 3,986
Granted
   —      —
Exercised
   (4 ) 9.29
Forfeited
   —      —



Balance at end of period
   891 $ 11.32    7    $ 4,137
Exercisable at end of period
   613 $ 10.79    7    $ 3,084
The fair value of awards settled in cash was $4,671,000 in first quarter 2012 and $184,000 in first ~~nine months 2011 and $731,000 in~~quarter 2011. At first ~~nine months 2010. At third~~ quarter-end ~~2011,~~2012, the fair value of vested cash-settled awards is ~~$9,567,000~~$14,927,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is ~~$5,577,000~~$6,432,000 at ~~third~~first quarter-end ~~2011~~2012 based on a quarter-end stock price of ~~$10.91.~~
$15.39.
Equity-settled awards
Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, and ~~beginning first quarter 2011,~~ market-leveraged stock units (MSU), which vest after three years. Equity settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and payable upon retirement. The following table summarizes the activity of equity-settled awards in first ~~nine months 2011:~~

Weighted
Equivalent Average Grant
Units Date Fair Value
(In thousands) (Per share)
Non-vested at beginning of period — $ —
Granted 160 20.73
Vested — —
Forfeited — —

Non-vested at end of period 160 $ 20.73

quarter 2012:
      Equivalent
Units Weighted
Average Grant
Date Fair Value
   (In thousands) (Per share)
Non-vested at beginning of period
   159 $ 20.74
Granted
   278 17.56
Vested
   (68 ) 16.11
Forfeited
   —      —


Non-vested at end of period
   369 $ 19.20


In first quarter ~~2011,~~2012, we granted ~~124,700~~154,900 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of ~~187,050~~232,370 shares if our stock price increases by 50 percent or more, to a low of ~~62,350~~77,460 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.
Unrecognized share-based compensation expense related to non-vested equity-settled awards is ~~$2,480,000~~$5,221,000 at ~~third~~first quarter-end ~~2011.~~2012. The weighted average period over which this amount will be recognized is estimated to be two years.
Restricted stock
Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first ~~nine months 2011:~~

Weighted
Restricted Average Grant
Shares Date Fair Value
(In thousands) (Per share)
Non-vested at beginning of period 636 $ 17.56
Granted 20 12.74
Vested (223 ) 24.23
Forfeited — —

Non-vested at end of period 433 $ 13.91

quarter 2012:
      Restricted
Shares Weighted
Average Grant
Date Fair Value
   (In thousands) (Per share)
Non-vested at beginning of period
   399 $ 15.02
Granted
   —      —
Vested
   (183 ) 12.65
Forfeited
   —      —


Non-vested at end of period
   216 $ 17.03


Unrecognized share-based compensation expense related to non-vested restricted stock awards is ~~$2,848,000~~$2,147,000 at ~~third~~first quarter-end ~~2011.~~2012. The weighted average period over which this amount will be recognized is estimated to be one year.
16
Stock options
Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option awards in first ~~nine months 2011:~~

Weighted Aggregate
Average Intrinsic Value
Weighted Remaining (Current
Options Average Contractual Value Less
Outstanding Exercise Price Term Exercise Price)
(In thousands) (Per share) (In years) (In thousands)
Balance at beginning of period 957 $ 23.45 8 $ 1,890
Granted 327 18.59
Exercised — —
Forfeited — —

Balance at end of period 1,284 $ 22.22 8 $ 262

Exercisable at end of period 642 $ 25.61 7 $ 131
quarter 2012:
      Options
Outstanding    Weighted
Average
Exercise Price    Weighted
Average
Remaining
Contractual
Term    Aggregate
Intrinsic Value
(Current
Value Less
Exercise Price)
   (In thousands)    (Per share)    (In years)    (In thousands)
Balance at beginning of period
   1,284    $ 22.22    7    $ 944
Granted
   453    16.11
Exercised
   —         —
Forfeited
   —         —





Balance at end of period
   1,737    $ 20.62    8    $ 986
Exercisable at end of period
   910    $ 24.20    7    $ 740
We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:

First Nine Months
2011 2010
Expected dividend yield 0.0 % 0.0 %
Expected stock price volatility 56.2 % 51.0 %
Risk-free interest rate 2.4 % 2.3 %
Expected life of options (years) 6 6
Weighted average estimated fair value of options granted $ 10.11 $ 8.98
   First Quarter
   2012 2011
Expected dividend yield
   0 % 0 %
Expected stock price volatility
   61.8 % 56.2 %
Risk-free interest rate
   1.4 % 2.4 %
Expected life of options (years)
   6 6
Weighted average estimated fair value of options granted
   $ 9.32 $ 10.11
We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. ~~In 2011, the~~Our expected stock price volatility ~~was~~is based on a blended rate utilizing our historical volatility and ~~historical prices of our peers’ common stock for a period corresponding to the expected life of the options. In 2010, the expected stock price volatility was based on~~ historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.
Unrecognized share-based compensation expense related to non-vested stock options is ~~$3,096,000~~$5,531,000 at ~~third~~first quarter-end ~~2011.~~2012. The weighted average period over which this amount will be recognized is estimated to be ~~two~~three years.
Pre-Spin Awards
Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.
     ~~Stock options~~ As result of Temple-Inland’s merger with International Paper’s in first quarter 2012, all outstanding awards on Temple-Inland stock were settled with an intrinsic value of $1,132,000.
Pre-Spin stock option awards to our employees to purchase our common stock have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. ~~A summary of stock option~~At first quarter-end 2012, there were 69,000 awards outstanding ~~at third quarter-end 2011 follows:~~

Weighted Aggregate
Average Intrinsic Value
Weighted Remaining (Current
Options Average Contractual Value Less
Outstanding Exercise Price Term Exercise Price)
(In thousands) (Per share) (In years) (In thousands)
Outstanding and exercisable on Forestar stock 77 $ 22.08 4 $ 21
Outstanding and exercisable on Temple-Inland stock 108 20.95 4 1,126

$ 1,147

     ~~The~~and exercisable on our stock with a weighted average exercise price of $23.17, weighted average remaining term of three years and aggregate intrinsic value of ~~options exercised was $706,000~~$69,000.
Note 18—Subsequent Events
On April 20, 2012, Forestar/RPG Land Company LLC, a consolidated venture, sold approximately 800 acres near Dallas, Texas (Light Farms real estate project) for $56,000,000 total consideration. We received $25,000,000 in ~~first nine months 2011~~distributable cash from the venture, reduced our consolidated debt by approximately $31,000,000, and ~~$553,000 in first nine months 2010.~~
17recognized a gain on sale of approximately $3,400,000.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~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 ~~2010~~2011 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of ~~third~~first quarter-end ~~2011,~~2012, 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;
• ~~general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;~~
• ~~the opportunities (or lack thereof) that may be presented to us and that we may pursue;~~
• ~~significant customer concentration;~~
• ~~future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;~~
• accuracy of estimates and other assumptions related to investment in real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation and oil and natural gas reserves;
• ~~the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects and the regions in which they are located;~~
• ~~the development of relationships with strategic partners;~~
• ~~fluctuations in costs and expenses;~~
• ~~demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;~~
• ~~supply of and demand for oil and natural gas and fluctuations in oil and natural gas prices;~~
• ~~competitive actions by other companies;~~
• ~~changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;~~
• ~~government regulation of exploration and production technology, including hydraulic fracturing;~~
• ~~the results of financing efforts, including our ability to obtain financing with favorable terms;~~
• ~~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;~~
• water withdrawal or usage may be subject to state and local laws, regulations or permit requirements, and there is no assurance that all our water interests or rights will be available for withdrawal or use; and
• ~~the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.~~
our ability to achieve some or all of our strategic initiatives;
the opportunities (or lack thereof) that may be presented to us and that we may pursue;
significant customer concentration;
future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;
obtaining approvals of reimbursements and other payments from special improvement districts and the timing of such payments
accuracy of estimates and other assumptions related to investment in real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation and oil and natural gas reserves;
the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects and the regions in which they are located;
fluctuations in costs and expenses;
demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;
competitive actions by other companies;
changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies, including regulation of hydraulic fracturing;
government regulation of exploration and production technology, including hydraulic fracturing;
the results of financing efforts, including our ability to obtain financing with favorable terms;
our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;
Inability to obtain permits for, or changes in laws, governmental policies or regulations effecting, water withdrawal or usage and
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 ~~2010~~2011 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.
18
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Strategy
Our strategy is:
Recognizing and responsibly delivering the greatest value from every acre; and
• ~~Recognizing and responsibly delivering the greatest value from every acre; and~~
• ~~Growing through strategic and disciplined investments.~~
Growing through strategic and disciplined investments.
2012 Strategic Initiatives
In ~~2009,~~2012, we announced ~~our near-term~~Triple in FOR, new strategic initiatives designed to further enhance shareholder value by: ~~generating significant cash flow, principally from the sale of 175,000 acres of higher and better use timberland; reducing debt by $150,000,000; and repurchasing up to 20 percent~~
Accelerating value realization of our ~~common stock.~~
     ~~In third quarter 2011, we sold 50,000 acres of timberland in Georgia~~real estate and ~~Alabama to Plum Creek Timberlands, L.P. for $74,722,000~~natural resources by increasing total residential lots sales, oil and 7,000 acres in Texas to The Conservation Fund for $12,339,000. These transactions generated net proceeds of $86,018,000, which were principally used to reduce debt. These transactions resulted in gains of $61,784,000. We also repurchased 172,435 shares of our common stock for $2,126,000, which are classified as treasury stock.gas production, and total segment earnings.
     ~~At third quarter-end 2011, we have completed our strategic initiatives~~
Optimizing transparency and disclosure by expanding reported oil and natural gas resources, providing additional information related to ~~the sale of higher~~groundwater interests, and ~~better use timberland~~establishing a progress report on corporate responsibility efforts.
Raising our net asset value through strategic and ~~reduction of debt. Since announcing these initiatives, we have sold 176,000 acres of timberland in Georgia, Alabama~~disciplined investments by pursuing growth opportunities which help prove up our asset value and Texas for $284,442,000 in eleven transactions. These transactions generated net proceeds of $277,909,000 and resulted in gains of $194,438,000. We used the proceeds principally to reduce debt, pay income taxes, reinvest in ourmeet return expectations, developing a low-capital, high-return multifamily business, and ~~repurchase stock. Our total debt has been reduced by $151,986,000 since first quarter-end 2009, excluding $26,500,000~~accelerating investment in ~~non-recourse borrowings secured by a 401 unit multifamily property we acquired in fourth quarter 2010. In addition, we have repurchased 1,173,422 shares of our common stock for $17,304,000.~~lower-risk oil and natural gas opportunities.

Results of Operations
A summary of our consolidated results by business segment follows:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Revenues:
Real estate $ 19,060 $ 15,139 $ 59,814 $ 53,936
Mineral resources 5,871 6,654 17,784 18,387
Fiber resources 1,310 2,220 3,968 6,185

Total revenues $ 26,241 $ 24,013 $ 81,566 $ 78,508

Segment earnings (loss):
Real estate $ (4,266 ) $ (1,883 ) $ (684 ) $ 883
Mineral resources 3,592 6,196 12,292 16,640
Fiber resources 446 1,372 1,790 3,900

Total segment earnings (228 ) 5,685 13,398 21,423
Items not allocated to segments:
General and administrative expense (4,827 ) (3,860 ) (15,824 ) (13,438 )
Share-based compensation expense 3,553 (1,817 ) (399 ) (7,370 )
Gain on sale of assets 61,784 15,441 61,784 15,441
Interest expense (4,271 ) (3,913 ) (12,933 ) (12,562 )
Other non-operating income 26 246 77 690

Income before taxes 56,037 11,782 46,103 4,184
Income tax expense (19,609 ) (2,860 ) (16,069 ) (1,507 )

Net income attributable to Forestar Group Inc. $ 36,428 $ 8,922 $ 30,034 $ 2,677

   First Quarter
   2012 2011
   (In thousands)
Revenues:

Real estate
   $ 17,922 $ 21,139
Mineral resources
   9,426 7,333
Fiber resources
   744 1,368


Total revenues
   $ 28,092 $ 29,840


Segment earnings :

Real estate
   $ 11,577 $ 2,575
Mineral resources
   5,875 5,598
Fiber resources
   390 640


Total segment earnings
   17,842 8,813
Items not allocated to segments:

General and administrative expense
   (4,362 ) (3,916 )
Share-based compensation expense
   (5,231 ) (4,100 )
Interest expense
   (3,891 ) (4,009 )
Other non-operating income
   64 27


Income (loss) before taxes
   4,422 (3,185 )
Income tax (expense) benefit
   (1,620 ) 712


Net income (loss) attributable to Forestar Group Inc.
   $ 2,802 $ (2,473 )


Significant aspects of our results of operations follow:
~~Third~~First Quarter ~~and First Nine Months 2011~~2012
Real estate segment earnings benefited from a $11,675,000 gain from the sale of our 25 percent interest in Palisades West LLC to Dimensional Fund Advisors L.P. for $32,095,000. Segment earnings were negatively impacted by lower undeveloped land sales ~~volume~~from our retail sales program.
Mineral resources segment earnings benefited from increased oil production volumes and ~~prices~~higher average oil prices. This increase was partially offset by a decrease in lease bonus payments and increased costs from additional oil and natural gas personnel and professional services associated with our water initiatives.
Fiber resources segment earnings continued to decrease principally due to lower harvest volume as a result of ~~current market conditions. In addition, we recognized a $2,500,000 charge related~~selling over 217,000 acres of timberland since year-end 2008.
Share-based compensation increased principally as result of new awards granted in first quarter 2012 and an increase in our expected stock price volatility rate assumptions used in valuing new and existing awards.
First Quarter 2011
Real estate segment earnings were positively impacted by higher undeveloped land sales volume and price from our retail sales program and improved sales activity within our single-family residential and mixed-use communities.
Mineral resources segment earnings declined due to ~~environmental remediation activities. These items were partially offset by~~ increased ~~residential sales activity.~~
costs associated with developing our water resources initiatives.
19
Fiber resources segment earnings decreased principally due to reduced harvest activity resulting from the sale of approximately 30,000 acres of timberland in 2010.
• Mineral resources segment earnings declined primarily due to lower lease bonus revenues and increased costs associated with developing our water resources initiatives. These items were partially offset by increased oil production volumes and prices.
• Fiber resources segment earnings decreased principally due to reduction in volume as a result of selling about 30,000 acres of timberland in 2010 and postponing harvest plans on acres previously classified as held for sale.
• In third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of terms available to us in the credit markets.
• ~~Share-based compensation decreased as a result of a decline in our stock price and its impact on vested cash-settled awards.~~
• ~~In third quarter 2011, gain on sale of assets represents the gain from selling 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000.~~
~~Third Quarter and First Nine Months 2010~~
• Real estate segment earnings declined principally due to lower undeveloped land sales as a result of current market conditions significantly influenced by low consumer confidence and alternate investment options to buyers in the marketplace.
• Mineral resources segment earnings declined principally due to decreased lease bonus revenues as a result of reduced leasing activity by exploration and production companies that are concentrating on drilling activities rather than leasing new mineral interests in our area of operations. This decrease in earnings was partially offset by increased oil production and higher oil prices.
• Fiber resources segment earnings decreased principally due to reduction in volume as a result of selling over 113,000 acres of timberland in 2009 and postponing harvest plans on acres classified as held for sale.
• ~~In third quarter 2010, share-based compensation expense decreased as a result of a decline in our stock price and its impact on cash-settled awards.~~
• ~~In third quarter 2010, gain on sale of assets represents the gain from selling about 14,100 acres of timber and timberland in Georgia and Alabama for $22,621,000.~~
• ~~Interest expense decreased as a result of lower debt levels.~~
Current Market Conditions
Current U.S. market conditions in the single-family residential industry continue to be challenging, characterized by high unemployment rates, ~~low consumer confidence,~~ depressed sales volumes and prices, difficult financing environment for purchasers and competition from foreclosure inventory. ~~While all markets are being negatively affected by overall poor economic conditions, not all geographic areas and products have been affected to the same extent or with equal severity.~~ It is difficult to predict when and at what rate these broader negative conditions will ~~improve, or when~~improve. We have seen signs of stability in certain markets, where declining finished lot inventories and lack of real estate development is increasing demand for our developed lots, principally in the ~~homebuilding industry will experience a sustained recovery.~~Texas markets. Multifamily market conditions are improving, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven primarily by limited new construction activity, reduced single-family mortgage credit availability, and the increased propensity to rent among the ~~millennial generation~~18 to 34 year old demographic of the U.S. population.
Oil prices have increased principally due to supply uncertainty, demand growth from emerging markets and ongoing political unrest in oil-producing regions. Natural gas prices have remained ~~soft~~depressed due to increased levels of production and ~~high~~record levels of ~~inventory.~~inventory due to mild temperatures. Shale resource drilling and production remains strong and working natural gas inventories are expected to remain relatively high. In the East Texas Basin, exploration and production companies continue to focus drilling on natural gas prospects in order to extend and hold existing mineral leases. In the Gulf Coast Basin, in Louisiana, activity has increased as operators have shifted exploration efforts to oil and high liquid natural gas plays. These conditions may impact the demand for new mineral leases, new exploration activity and the amount of royalty revenues we receive.
     ~~Pulpwood and~~ Pine sawtimber ~~sales are depressed because dry weather conditions in our areas of operations~~prices continue to ~~increase access~~be depressed due to ~~supply~~weak demand driven by the overall slowdown in residential construction activity, while ~~market~~pine pulpwood demand remains ~~low.~~
steady and pricing is relatively flat.
Business Segments
We manage our operations through three business segments:
Real estate,
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Mineral resources, and
Fiber resources.
• ~~Mineral resources, and~~
• ~~Fiber resources.~~
We evaluate performance based on earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expenses, share-based compensation, gain on sale of ~~assets,~~strategic timberland, interest expense and other non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.
We operate in cyclical industries. Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, consumer and home builder sentiment, new housing starts, real estate values, employment levels, changes in the market prices for oil, natural gas, and timber, and the overall strength or weakness of the U.S. economy.
Real Estate
We own directly or through ventures over ~~159,000~~146,000 acres of real estate located in nine states and 12 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own ~~114,000~~104,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in our strategic growth corridors, regions across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential single-family lots and tracts, undeveloped land and commercial real estate and from the operation of commercial and income producing properties, primarily a hotel and a multifamily property.
A summary of our real estate results follows:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Revenues $ 19,060 $ 15,139 $ 59,814 $ 53,936
Cost of sales (12,367 ) (8,114 ) (32,894 ) (29,992 )
Operating expenses (10,717 ) (8,313 ) (27,064 ) (22,164 )

(4,024 ) (1,288 ) (144 ) 1,780
Equity in earnings (loss) of unconsolidated ventures 295 (431 ) 361 (569 )
Less: Net income attributable to noncontrolling interests (537 ) (164 ) (901 ) (328 )

Segment earnings (loss) $ (4,266 ) $ (1,883 ) $ (684 ) $ 883

     In third quarter 2011, cost of sales includes an $857,000 charge related to an obligation for future road improvements near a mixed-use project located in Austin, Texas and, in first nine months 2011, includes a $450,000 non-cash impairment charge related to a residential real estate project located near Dallas, Texas. In first nine months 2010, cost of sales includes a $900,000 non-cash impairment charge related to a residential real estate project located near Salt Lake City, Utah.
     In first nine months 2011, segment earnings include a benefit of $1,342,000 associated with reallocation of a previously recognized loss related to foreclosure of a lien on a property owned by a consolidated venture. Based on new information, we determined this loss should be allocated from us to the noncontrolling financial interests as we believe the likelihood we will be subject to any potential lender liabilities is remote.
   First Quarter
   2012 2011
   (In thousands)
Revenues
   $ 17,922 $ 21,139
Cost of sales
   (10,331 ) (10,170 )
Operating expenses
   (7,544 ) (7,714 )


   47 3,255
Gain on sale of venture interest
   11,675 —
Equity in earnings of unconsolidated ventures
   550 89
Less: Net income attributable to noncontrolling interests
   (695 ) (769 )


Segment earnings
   $ 11,577 $ 2,575


Revenues in our owned and consolidated ventures consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Residential real estate $ 10,276 $ 5,615 $ 27,503 $ 19,443
Commercial real estate — — 736 157
Undeveloped land 1,526 4,385 10,096 17,295
Income producing properties 6,653 4,987 20,400 16,220
Other 605 152 1,079 821

Total revenues $ 19,060 $ 15,139 $ 59,814 $ 53,936

   First Quarter
   2012    2011
   (In thousands)
Residential real estate
   $ 8,498    $ 7,867
Undeveloped land
   733    6,090
Commercial and Income producing properties
   7,278    6,935
Other
   1,413    247




Total revenues
   $ 17,922    $ 21,139




Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In ~~third~~first quarter ~~and first nine months 2011,~~2012, residential real estate revenues increased principally as a result of increased lot sales volume due to demand for finished lot inventory by homebuilders in markets where supply has diminished.
In ~~addition, in third~~first quarter ~~2011, we~~
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sold 25 entitled acres from our Gables at North Hill project located near Dallas, Texas for $1,930,000 which generated $387,000 in segment earnings. This was the final tract available for sale in this project and represented approximately 80 undeveloped lots.
     ~~In third quarter and first nine months 2011,~~2012, undeveloped land sales decreased due to lower volume ~~and prices~~ from our retail land sales program as a result of current market conditions primarily resulting from limited credit availability ~~low consumer confidence~~ and alternate investment options to buyers in the marketplace.
In ~~third~~first quarter 2012, commercial and ~~first nine months 2011,~~ income producing properties revenue ~~principally~~ increased as a result of higher occupancy levels and revenue per available room from our ~~fourth quarter 2010 acquisition of a~~413 guest room hotel in Austin and rent growth from our 401 unit multifamily property located in ~~Houston, Texas.~~
Houston.
In first quarter 2012, other revenues include $1,047,000 as result of selling seven acres of impervious cover entitlement credits to a national homebuilder. This sale generated segment earnings of approximately $920,000.
Units sold in our owned and consolidated ventures consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
Residential real estate:
Lots sold 155 105 458 356
Revenue per lot sold $ 52,197 $ 52,342 $ 55,277 $ 54,091
Commercial real estate:
Acres sold — — 4.0 1.3
Revenue per acre sold $ — $ — $ 185,344 $ 121,705
Undeveloped land:
Acres sold 548 1,153 3,938 4,713
Revenue per acre sold $ 2,786 $ 3,803 $ 2,564 $ 3,669
   First Quarter
   2012    2011
Residential real estate:

Lots sold
   137    145
Revenue per lot sold
   $ 62,023    $ 54,257
Commercial real estate:

Acres sold
   —         —
Revenue per acre sold
   $ —         $ —
Undeveloped land:

Acres sold
   320    2,629
Revenue per acre sold
   $ 2,293    $ 2,316
Operating expenses consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Property taxes $ 2,023 $ 1,878 $ 6,484 $ 6,460
Employee compensation and benefits 1,893 1,543 5,730 4,674
Professional services 1,174 1,646 3,405 3,080
Depreciation and amortization 1,344 641 3,938 2,187
Environmental 2,527 37 2,607 108
Other 1,756 2,568 4,900 5,655

Total operating expenses $ 10,717 $ 8,313 $ 27,064 $ 22,164

     Employee compensation and benefits and professional services increased principally due to developing and staffing our multifamily organization. Depreciation and amortization increased primarily as a result of the acquisition of a 401 unit multifamily property in fourth quarter 2010. In third quarter 2011, environmental costs increased as a result of a $2,500,000 charge related to environmental remediation activities at our Antioch, California project.
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   First Quarter
   2012    2011
   (In thousands)
Employee compensation and benefits
   $ 2,125    $ 1,941
Property taxes
   1,943    2,184
Professional services
   1,257    966
Depreciation and amortization
   1,047    1,281
Other
   1,172    1,342




Total operating expenses
   $ 7,544    $ 7,714




Information about our real estate projects and our real estate ventures follows:

Third Quarter-End
2011 2010
Owned and consolidated ventures:

Entitled, developed and under development projects
Number of projects 54 54
Residential lots remaining 18,679 17,811
Commercial acres remaining 1,808 1,775
Undeveloped land and land in the entitlement process
Number of projects 16 18
Acres in entitlement process 27,590 29,670
Acres undeveloped 110,115 179,736
Ventures accounted for using the equity method:

Ventures’ lot sales (for first nine months)
Lots sold 350 261
Average price per lot sold $ 40,592 $ 43,402
Ventures’ entitled, developed and under development projects
Number of projects 21 22
Residential lots remaining 9,295 11,369
Commercial acres sold (for first nine months) 20.0 15.4
Average price per acre sold $ 152,460 $ 81,318
Commercial acres remaining 538 829
Ventures’ undeveloped land and land in the entitlement process
Number of projects — —
Acres in entitlement process — —
Acres sold (for first nine months) 19.2 —
Average price per acre sold $ 3,000 $ —
Acres undeveloped 5,712 5,517
   First Quarter-End
   2012    2011
Owned and consolidated ventures:

Entitled, developed and under development projects

Number of projects
   66    52
Residential lots remaining
   22,830    17,635
Commercial acres remaining
   2,123    1,774
Undeveloped land and land in the entitlement process

Number of projects
   16    18
Acres in entitlement process
   27,590    29,620
Acres undeveloped
   96,606    167,387
Ventures accounted for using the equity method:

Ventures’ lot sales (for first three months)

Lots sold
   148    69
Average price per lot sold
   $ 44,570    $ 35,473
Ventures’ entitled, developed and under development projects

Number of projects
   7    21
Residential lots remaining
   4,093    9,582
Commercial acres sold (for first three months)
   —         20
Average price per acre sold
   $ —         $ 152,460
Commercial acres remaining
   333    570
Ventures’ undeveloped land and land in the entitlement process

Acres sold (for first three months)
   135    —
Average price per acre sold
   $ 2,600    $ —
Acres undeveloped
   5,655    5,731
In first quarter 2012, we acquired from CL Realty and Temco, 14 entitled, developed and under development projects and interests in three ventures accounted for using the equity method. The acquired assets represent approximately 1,130 fully developed lots, 4,900 planned lots, and over 460 commercial acres, principally in the major markets of Texas.
We underwrite development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of ~~lot~~ sales and ~~commercial parcels,~~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.
     ~~In third quarter 2011, we acquired 180 fully developed lots~~
Our net investment in Houston, Texas for $8,950,000, which includes the right to receive about $4,000,000 in reimbursements, excluding interest, under a development agreement with the City of Houston. We also acquired two multifamily development sites located in Austinowned and ~~Dallas for $8,672,000.~~
consolidated real estate by geographic location follows:
$xxxxxxxxx $xxxxxxxxx $xxxxxxxxx $xxxxxxxxx
State
   Entitled,
Developed,
and Under
Development
Projects    Undeveloped
Land    Commercial
and Income
Producing
Properties    Total
   (In thousands)
Texas
   $ 352,553    $ 9,615    $ 101,007    $ 463,175
Georgia
   21,912    56,515    —         78,427
Colorado
   22,465    —         8,873    31,338
California
   8,795    14,440    —         23,235
Other
   9,108    —         —         9,108








Total
   $ 414,833    $ 80,570    $ 109,880    $ 605,283








Mineral Resources
We own directly or through ventures ~~602,000~~about 594,000 net acres of mineral interests. Our mineral resources segment revenues are principally derived from ~~royalties and other revenues from our~~ oil and natural gas royalties, non-operating working interests and other lease revenues from our mineral interests located principally in Texas, Louisiana, Georgia and Alabama. At ~~third~~first quarter-end ~~2011,~~2012, we have ~~59,000~~about 49,000 net acres under lease and ~~30,000~~about 32,000 net acres held by ~~production from 510 oil and natural gas wells owned and operated by exploration and production companies.~~
production.
A summary of our mineral resources results follows:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Revenues $ 5,871 $ 6,654 $ 17,784 $ 18,387
Cost of sales (597 ) (223 ) (1,829 ) (852 )
Operating expenses (2,030 ) (748 ) (4,918 ) (2,204 )

3,244 5,683 11,037 15,331
Equity in earnings of unconsolidated ventures 348 513 1,255 1,309

Segment earnings $ 3,592 $ 6,196 $ 12,292 $ 16,640

   First Quarter
   2012 2011
   (In thousands)
Revenues
   $ 9,426 $ 7,333
Cost of sales
   (1,375 ) (794 )
Operating expenses
   (2,344 ) (1,429 )


   5,707 5,110
Equity in earnings of unconsolidated ventures
   168 488


Segment earnings
   $ 5,875 $ 5,598


Cost of sales represents our share of oil and natural gas production severance taxes, which are calculated based on a percentage of oil and natural gas produced, costs related to our oil and natural gas non-operating working interests and delay rental payments related to ground water leases in central Texas.
Equity in earnings of unconsolidated ventures includes our share of royalty revenue from 23 producing wells in the Barnett Shale natural gas formation.
23
Revenues consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Royalties $ 5,424 $ 3,217 $ 13,056 $ 10,542
Other revenues 447 3,437 4,728 7,845

Total revenues $ 5,871 $ 6,654 $ 17,784 $ 18,387

   First Quarter
   2012    2011
   (In thousands)
Royalties
   $ 7,027    $ 3,676
Non-operating working interests
   915    129
Other revenues
   1,484    3,528




Total revenues
   $ 9,426    $ 7,333




In ~~third~~first quarter ~~and first nine months 2011,~~2012, royalty revenues increased principally as a result of increased oil production and higher oil prices ~~and increased oil production partially offset by decreases~~ in ~~natural gas production in~~our owned and consolidated properties. ~~In third~~Increased oil production contributed about $3,071,000 and increased oil prices contributed about $1,043,000 as compared with first quarter ~~2011, increases in net oil and~~2011. Increased natural gas production contributed about $204,000 but was essentially offset by decreased natural gas prices ~~contributed $1,172,000 and changes in net oil and gas production contributed $1,035,000~~of $181,000 as compared ~~to third~~with first quarter ~~2010.~~ 2011.
In first ~~nine months 2011, changes in net oil and natural gas prices contributed $1,878,000 and changes in net oil and gas production contributed $636,000 as compared to first nine months 2010.~~
     ~~In third~~ quarter ~~2011,~~2012, other revenues includes $1,115,000 in delay rental payments principally ~~includes $100,000~~related to extending the lease term on approximately 4,300 net mineral acres and $287,000 in lease bonus payments as a result of leasing about ~~380~~800 net mineral acres for an average of ~~$265~~about $360 per ~~acre and $253,000 related to delay rental payments.~~acre. In ~~third~~first quarter ~~2010,~~2011, other ~~lease~~ revenues include ~~$2,549,000~~$1,657,000 in lease bonus payments as a result of leasing about ~~9,600~~4,800 net mineral acres for an average of ~~$266 per acre and $890,000 related to delay rental payments.~~
     ~~In first nine months 2011, other revenues include $2,232,000 in lease bonus payments as a result of leasing 7,700 net mineral acres for an average of $288~~about $340 per acre, $1,555,000 related to mineral seismic exploration ~~agreement~~ associated with 31,100 acres in Louisiana and ~~$479,000~~$156,000 related to delay rental payments. In first nine months 2010, other lease revenues include $5,733,000 in lease bonus payments as a result of leasing over 11,700 net mineral acres for an average of $490 per acre and $2,084,000 related to delay rental payments.
Oil and natural gas produced and average unit prices related to our royalty interests follows:

Third Quarter First Nine Months
2011 2010 2011 2010
Consolidated entities:

Oil production (barrels) 42,300 27,700 102,200 87,600
Average price per barrel $ 97.83 $ 71.41 $ 94.23 $ 72.53
Natural gas production (millions of cubic feet) 295.9 298.5 850.1 946.0
Average price per thousand cubic feet $ 4.33 $ 4.15 $ 4.03 $ 4.43
Our share of ventures accounted for using the equity method:

Natural gas production (millions of cubic feet) 112.1 138.1 398.3 345.6
Average price per thousand cubic feet $ 4.10 $ 4.02 $ 3.80 $ 4.25
Total consolidated and our share of equity method ventures:

Oil production (barrels) 42,300 27,700 102,200 87,600
Average price per barrel $ 97.83 $ 71.41 $ 94.23 $ 72.53
Natural gas production (millions of cubic feet) 408.0 436.6 1,248.4 1,291.6
Average price per thousand cubic feet $ 4.27 $ 4.11 $ 3.96 $ 4.38
   First Quarter
   2012    2011
Consolidated entities:

Oil production (barrels)
   69,200    32,000
Average price per barrel
   $ 97.57    $ 82.49
Natural gas production (millions of cubic feet)
   362.1    308.2
Average price per thousand cubic feet
   $ 3.29    $ 3.79
Our share of ventures accounted for using the equity method:

Natural gas production (millions of cubic feet)
   90.1    158.6
Average price per thousand cubic feet
   $ 2.99    $ 3.57
Total consolidated and our share of equity method ventures:

Oil production (barrels)
   69,200    32,000
Average price per barrel
   $ 97.57    $ 82.49
Natural gas production (millions of cubic feet)
   452.2    466.8
Average price per thousand cubic feet
   $ 3.23    $ 3.72
At ~~third~~first quarter-end ~~2011,~~2012, there were ~~510 active~~534 productive wells ~~owned and~~ operated by others on our leased mineral acres compared to ~~491~~496 productive wells at ~~third~~first quarter-end ~~2010.~~
     ~~In first nine months 2011, our share of ventures natural gas production increased as a result of 16 wells that began producing from the Barnett Shale natural gas formation in 2010.~~
2011.
Operating expenses consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Professional and consulting services $ 792 $ 115 $ 2,086 $ 351
Employee compensation and benefits 614 307 1,495 888
Property taxes 78 78 228 225
Other 546 248 1,109 740

Total operating expenses $ 2,030 $ 748 $ 4,918 $ 2,204

   First Quarter
   2012    2011
   (In thousands)
Employee compensation and benefits
   $ 1,037    $ 453
Professional and consulting services
   722    644
Property taxes
   71    76
Other
   514    256




Total operating expenses
   $ 2,344    $ 1,429




In first quarter 2012, employee compensation and benefits increased principally as result of incremental staffing to support our oil, natural gas and water interests. Professional and consulting services ~~increased~~includes $429,000 in ~~third~~first quarter 2012 and ~~$1,286,000 in first nine months~~ 2011 ~~primarily~~ due to non-cash amortization of contingent consideration paid to the seller of a water resources company acquired in ~~fourth quarter~~ 2010. These costs are being amortized ratably over the performance period assuming certain milestones are achieved by July 2014. ~~Employee compensation and benefits increased in third quarter and first nine months 2011 as a result of incremental staffing to support our oil, gas and water interests.~~
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In addition, we have water interests in ~~1,600,000~~1,550,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1,400,000 acres in Texas, Louisiana, Georgia and Alabama and 17,800 acres of ground water leases in central Texas. We have not received significant ~~income~~revenue or earnings from these interests.
Fiber Resources
Our fiber resources segment focuses principally on the management of our timber holdings and recreational leases. We have about 130,000 acres of timber we own directly or through ventures, ~~over 143,000 acres of timber,~~ primarily in Georgia, and about 17,000 acres of timber under lease. Our fiber resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. We have sold over ~~204,000~~217,000 acres of ~~undeveloped land~~timberland since year-end ~~2008 through our retail land sales program and as a result of our strategic initiatives.~~2008. As a result of the reduced acreage from ~~executing these~~ land sales, future segment revenues and earnings are anticipated to be lower.
A summary of our fiber resources results follows:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Revenues $ 1,310 $ 2,220 $ 3,968 $ 6,185
Cost of sales (349 ) (466 ) (881 ) (1,208 )
Operating expenses (520 ) (502 ) (1,494 ) (1,694 )

441 1,252 1,593 3,283
Other operating income — 120 181 617
Equity in earnings of unconsolidated ventures 5 — 16 —

Segment earnings $ 446 $ 1,372 $ 1,790 $ 3,900

     ~~Other operating income represents gains from partial termination of timber leases.~~
$xxx,xxx $xxx,xxx
   First Quarter
   2012 2011
   (In thousands)
Revenues
   $ 744 $ 1,368
Cost of sales
   (128 ) (247 )
Operating expenses
   (466 ) (486 )


   150 635
Other operating income, principally gain on termination of timber leases
   234 —
Equity in earnings of unconsolidated ventures
   6 5


Segment earnings
   $ 390 $ 640


Revenues consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Fiber $ 978 $ 1,767 $ 2,695 $ 4,797
Recreational leases and other 332 453 1,273 1,388

Total revenues $ 1,310 $ 2,220 $ 3,968 $ 6,185

$xxx,xxx $xxx,xxx
   First Quarter
   2012    2011
   (In thousands)
Fiber
   $ 334    $ 865
Recreational leases and other
   410    503




Total revenues
   $ 744    $ 1,368




Fiber sold consists of:

Third Quarter First Nine Months
2011 2010 2011 2010
Pulpwood tons sold 85,800 116,900 222,100 295,600
Average pulpwood price per ton $ 7.57 $ 9.41 $ 8.57 $ 10.31
Sawtimber tons sold 22,900 37,500 51,200 90,900
Average sawtimber price per ton $ 14.33 $ 17.79 $ 15.47 $ 19.23
Total tons sold 108,700 154,400 273,300 386,500
Average price per ton $ 8.99 $ 11.45 $ 9.86 $ 12.41
   First Quarter
   2012    2011
Pulpwood tons sold
   24,400    65,600
Average pulpwood price per ton
   $ 10.18    $ 9.18
Sawtimber tons sold
   4,400    15,500
Average sawtimber price per ton
   $ 19.48    $ 16.98
Total tons sold
   28,800    81,100
Average price per ton
   $ 11.59    $ 10.67
In ~~third~~first quarter ~~and first nine months 2011,~~2012, total fiber tons sold decreased principally due to the sale of about ~~30,000~~74,000 acres of timberland in ~~2010 and postponing harvest plans on acres previously classified as held for sale.~~2011. The majority of our fiber sales were to ~~Temple-Inland~~International Paper at market prices.
Information about our recreational leases follows:

Third Quarter First Nine Months
2011 2010 2011 2010
Average recreational acres leased 164,600 205,900 185,300 209,900
Average price per leased acre $ 8.28 $ 8.60 $ 8.84 $ 8.33
25
   First Quarter
   2012    2011
Average recreational acres leased
   130,900    200,000
Average price per leased acre
   $ 8.80    $ 8.91
Operating expenses consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Employee compensation and benefits $ 229 $ 224 $ 696 $ 909
Facility and long-term timber lease costs 109 116 337 306
Other 182 162 461 479

Total operating expenses $ 520 $ 502 $ 1,494 $ 1,694

     ~~In first nine months 2010, $197,000 in employee compensation and benefits related to employee severance costs.~~
$xxx,xxx $xxx,xxx
   First Quarter
   2012    2011
   (In thousands)
Employee compensation and benefits
   $ 244    $ 237
Facility and long-term timber lease costs
   121    119
Other
   101    130




Total operating expenses
   $ 466    $ 486




Items Not Allocated to Segments
Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, gain on sale of ~~assets,~~strategic timberland, interest expense and other non-operating income and expense. General and administrative expenses principally consist of accounting and finance, tax, legal, human resources, internal audit, information technology and our board of directors. These functions support all of our business segments and are not allocated.
General and administrative expenses consist of:

Third Quarter First Nine Months
2011 2010 2011 2010
(In thousands)
Professional services $ 1,600 $ 583 $ 6,025 $ 2,665
Employee compensation and benefits 1,394 1,410 4,221 4,145
Depreciation and amortization 347 371 1,050 1,113
Insurance costs 276 295 809 936
Facility costs 210 301 594 912
Other 1,000 900 3,125 3,667

Total general and administrative expenses $ 4,827 $ 3,860 $ 15,824 $ 13,438

     In third quarter and first nine months 2011, professional services includes $459,000 and $3,187,000 of expenses associated with proposed private debt offerings that we withdrew as a result of deterioration in terms available to us in the capital markets.
$xxx,xxx $xxx,xxx
   First Quarter
   2012    2011
   (In thousands)
Professional services
   $ 842    $ 680
Employee compensation and benefits
   1,576    1,454
Depreciation and amortization
   299    351
Insurance costs
   269    244
Facility costs
   198    211
Other
   1,178    976




Total general and administrative expenses
   $ 4,362    $ 3,916




Income Taxes
Our effective tax rate was ~~35 percent in third quarter 2011 and 34~~32 percent in first ~~nine months 2011,~~quarter 2012, which includes a 14 percent benefit for noncontrolling ~~interests and 1 percent non-cash charge for share-based compensation.~~interests. Our effective tax rate was ~~24 percent in third quarter 2010 and 33~~a benefit of 29 percent in first ~~nine months 2010,~~quarter 2011, which included a 413 percent ~~benefit attributable to noncontrolling interests.~~non-cash charge for share–based compensation. In addition, ~~2011~~2012 and ~~2010~~2011 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage depletion and the 2011 rate includes the effect of charitable contributions related to timberland conservation.
We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future ~~periods.~~
periods based on considerations including taxable income in prior carryback years, future reversals of existing temporary differences, tax planning strategies and future taxable income. If these sources of income are not sufficient in future periods, we may be required to provide a valuation allowance for our deferred tax asset.
Capital Resources and Liquidity
Sources and Uses of Cash
We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal operating cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, taxes, interest and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from minerals and income producing properties, borrowings, and reimbursements from utility and improvement districts. Operating cash flows are affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements and availability of utilities, and by the timing of oil and natural gas leasing and production activities. Working capital is subject to operating needs, the timing of sales of real estate and timber, the timing of collection of mineral royalties or mineral lease payments, collection of receivables, reimbursement from utility and improvement districts and the payment of payables and expenses.
Cash Flows from Operating Activities
Cash flows from our real estate development activities, undeveloped land sales, commercial and income producing properties, timber sales, mineral and recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.
26
In first ~~nine months~~quarter 2012, net cash (used for) operating activities was ($47,514,000) as expenditures for real estate development and acquisitions significantly exceeded non-cash real estate cost of sales, principally as result of acquiring real estate assets from CL Realty and Temco for $47,000,000. Subsequent to closing of this acquisition, we received $23,370,000 from the ventures, representing our pro-rata share of distributable cash. Also, we invested an additional $7,765,000 in a 289 unit multifamily property currently under construction in Austin and we paid $8,451,000 in federal and state taxes, net of refunds. In first quarter 2011, net cash ~~provided by~~(used for) operating activities was ~~$32,816,000~~($6,406,000) as ~~proceeds from the sale of 57,000 acres of timberland in accordance with our strategic initiatives generated net proceeds of $86,018,000. Expenditures~~expenditures for real estate development and acquisitions exceeded non-cash real estate cost of sales principally due to our ~~acquisition~~investment of ~~a non-performing loan secured by a lien on 900 acres of developed and~~$7,900,000 in undeveloped land ~~near Houston,~~in San Antonio, Texas ~~for $21,137,000, $25,481,000 in four real estate acquisitions located in various Texas markets~~ and our payment of ~~$7,956,000~~$3,446,000 in federal and state ~~income~~ taxes net of refunds. ~~In first nine months 2010, net cash (used for) operating activities was ($13,701,000) as we funded a $10,000,000 loan to a third-party equity investor in the JW Marriott~~^® ~~San Antonio Hill Country Resort & Spa and paid income taxes of $11,031,000.~~
Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures and ~~business acquisitions~~investment in oil and natural 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~~quarter 2012, net cash provided by investing activities was $29,413,000 principally due to proceeds from the sale of our 25 percent interest in Palisades West LLC to Dimensional Fund Advisors L.P. for $32,095,000. In addition, we invested $1,968,000 in oil and natural gas properties and equipment associated with our non-operating working interests. In first quarter 2011, net cash (used for) investing activities was ($~~5,149,000)~~1,171,000) and is principally related to ~~$3,414,000 invested in oil and gas properties as non-operating working interests, $662,000 in net~~ contributions to unconsolidated ventures and ~~$1,466,000~~investment in property, equipment, software and reforestation. In first nine months 2010, net cash provided by investing activities was $3,572,000 principally due to net distributions from unconsolidated ventures of $3,252,000. We invested $2,282,000 in property, equipment, software and reforestation offset by $2,602,000 in proceeds related to the sale of our undivided interest in corporate aircraft.
Cash Flows from Financing Activities
In first ~~nine months 2011,~~quarter 2012, net cash ~~(used for)~~provided by financing activities was ($3,912,000) and is principally related to the payment of $3,746,000 in deferred financing fees primarily related to supplementing and amending our senior secured credit facility and $2,126,000 related to repurchasing 172,435 shares of our common stock. This was partially offset by a net$6,619,000. The increase in our debt of ~~$2,108,000.~~$6,278,000 was principally used to fund our real estate development and acquisition activities. In first ~~nine months 2010,~~quarter 2011, net cash ~~(used for)~~provided by financing activities was ~~($6,439,000) as we repurchased 1,000,987 shares of our common stock for $15,178,000 and incurred $5,969,000 in deferred financing fees primarily related~~$7,819,000 due to ~~our amendment and extension of our senior secured credit facility, which was partially offset by a net increase~~increases in our debt of ~~$14,147,000.~~
$9,011,000 principally to fund our expenditures for real estate development and acquisitions.
Liquidity
At various times in 2011, we supplemented and amended our senior secured credit facility to provide us with, among other matters, additional flexibility with respect to the borrowing base, collateral coverage and leverage requirements. As a result, in third quarter 2011 we increased our unused borrowing capacity by over $70,000,000 and extended the maturity of our revolving line of credit by one year, to August 6, 2014.
     ~~At third~~first quarter-end ~~2011,~~2012, our senior secured credit facility provides for a $130,000,000 term loan maturing August 6, 2015 and a $200,000,000 revolving line of credit maturing August 6, 2014. The term loan ~~includes a 1 percent prepayment penalty for payments in excess of $25,000,000 prior to February 6, 2012~~ and ~~no prepayment penalty thereafter. The~~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 ~~$984,000~~$2,467,000 is outstanding at ~~third~~first quarter-end ~~2011.~~2012. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. Our borrowing base availability is calculated on a monthly basis by applying advance rates of between 35 – 60 percent against base asset values which include timberland, high-value timberland (land in the entitlement process), raw entitled land, land under development, and minerals. All assets included in the borrowing base must be wholly-owned and unencumbered. At ~~third~~first quarter-end ~~2011, we had $176,337,000 in~~2012, net unused borrowing capacity under our senior secured credit ~~facility.~~ facility is calculated as follows:
   Senior Credit
Facility
   (In thousands)
Borrowing base availability
   $ 293,345
Less: borrowings
   (136,000 )
Less: letters of credit
   (2,467 )


Unused borrowing capacity
   $ 154,878


Our unused borrowing capacity ~~during~~in first ~~nine months 2011~~quarter 2012 ranged from a high of ~~$176,337,000~~$154,878,000 to a low of ~~$94,872,000.~~$149,618,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential real estate sales, undeveloped land sales, mineral lease bonus payments, timber sales, payment of payables and expenses and capital expenditures.
     In third quarter 2011, we borrowed $15,400,000 which is collateralized by a 413 guest room hotel located in Austin, Texas with a carrying value of $21,569,000. This financing replaced debt retired in second quarter 2011.
Our senior secured credit facility and other debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At ~~third~~first quarter-end ~~2011,~~2012, 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 ~~secured~~ credit facility:
Requirement First
Quarter-End
2012
Financial Covenant
Interest Coverage Ratio^(a)
³1.05:1.0    6.93:1.0
Revenues/Capital Expenditures Ratio^(b)
³1.00:1.0    1.63:1.0
Total Leverage Ratio^{(c )}
£40 % 25 %
Net Worth^(d)
> $ 441 million $ 510 million
Collateral Value to Loan Commitment Ratio^{(e )}
³1.50:1.0    ~~Third~~
~~Quarter-End~~
~~Financial Covenant~~ ~~Requirement~~ ~~2011~~
~~Interest Coverage Ratio~~^(a)
~~≥ 1.05:1.0~~ ~~6.59:1.0~~
~~Revenues/Capital Expenditures Ratio~~^(b)
~~≥ 1.00:1.0~~ ~~2.20:1.0~~
~~Total Leverage Ratio~~^(c)
~~≤ 40~~ % 23 %
~~Net Worth~~^(d)
~~> $439 million~~ ~~$536 million~~
~~Collateral Value to Loan Commitment Ratio~~^(e)
~~≥ 1.50:1.0~~ ~~1.82~~1.73 :1.0
27
^(a)
Calculated as EBITDA (earnings before interest, taxes, depreciation and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is applied at the end of each quarter on a rolling four quarter basis.
^(b)
Calculated as total gross revenues, plus our pro rata share of the operating revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures. This covenant is applied at the end of each quarter on a rolling four quarter basis.
^(c)
Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities and reimbursement obligations with respect to letters of credit or similar instruments. 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, other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.
^(d)
Calculated as the amount by which consolidated total assets exceeds consolidated total liabilities. At ~~third~~first quarter-end ~~2011,~~2012, the requirement is ~~$439,000,000,~~$441,000,000, computed as: ~~$411,000,000,~~$439,000,000, plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis. This covenant is applied at the end of each quarter.
^(e)
Calculated as the total collateral value of timberland, high value timberland and our minerals business, divided by total aggregate loan commitment. This covenant is applied at the end of each quarter.
To make additional investments, acquisitions, or distributions, we must maintain available liquidity of equal to the lesser of $35,000,000 or 10% of the aggregate commitments in place. At ~~third~~first quarter-end ~~2011,~~2012, the minimum liquidity requirement was $33,000,000, resulting in ~~$203,852,000~~$160,993,000 in 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.
Contractual Obligations and Off-Balance Sheet Arrangements
In ~~second quarter~~ 2011, we began construction on a 289 unit multifamily project in Austin, Texas in which the estimated cost at completion, including land, is approximately $30,536,000. At ~~third quarter-end 2011,~~first-quarter end 2012, our investment in this project including land and construction in progress is ~~$9,394,000 and the~~$21,193,000 with an estimated cost to complete construction ~~is $21,142,000.~~
of $9,343,000.
At ~~third~~first quarter-end ~~2011,~~2012, we participate in three partnerships that have total assets of ~~$51,301,000~~$48,967,000 and total liabilities of ~~$83,575,000,~~$79,335,000, which includes ~~$67,557,000~~$63,463,000 of borrowings classified as current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings are guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is ~~$2,362,000~~$1,884,000 at ~~third~~first quarter-end ~~2011.~~2012. These three partnerships are variable interest entities.

Cibolo Canyons — San Antonio, Texas
Cibolo Canyons consists of the JW Marriott^® San Antonio Hill Country Resort & Spa development owned by third parties and a mixed-use development we own. We have ~~$86,637,000~~$80,186,000 invested in Cibolo Canyons at ~~third~~first quarter-end ~~2011.~~
2012.
Resort Hotel, Spa and Golf Development
In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott^® San Antonio Hill Country Resort & Spa, which includes a 1,002 room destination resort and two PGA Tour^® Tournament Players Club^® (TPC) golf courses. Under these agreements, we agreed to transfer to third party owners 700 acres of undeveloped land, to provide $30,000,000 cash and to provide $12,700,000 of other consideration principally consisting of golf course construction materials, substantially all of which has been provided.
In exchange for our commitment to the resort, the third party owners assigned to us certain rights under an agreement between the third party owners and a legislatively created Special Improvement District (SID). This agreement includes the right to receive from the SID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by the SID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by the SID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service, if any, on bonds issued by the SID collateralized by hotel occupancy tax and other resort sales tax through 2034.
The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the resort and the amount of any applicable debt service incurred by the SID. As a result, there is significant uncertainty as to the amount and timing of collections under this agreement. Until these uncertainties are clarified, amounts collected
28
under the agreement will be accounted for as a reduction of our investment in the resort development. The resort began operations on January 22, 2010.
     ~~In third~~
We did not receive any reimbursements in first quarter ~~2011, we received $480,000 from the SID.~~2012. Since inception, we have received ~~$3,083,000~~$7,906,000 in reimbursements and have accounted for this as a reduction of our investment. At ~~third~~first quarter-end ~~2011,~~2012, we have ~~$39,918,000~~$35,368,000 invested in the resort development.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include approximately ~~1,420~~1,475 residential lots and ~~220~~150 commercial acres designated for multifamily and retail uses, of which ~~694~~705 lots and 68 commercial acres have been sold through ~~third~~first quarter-end ~~2011.~~
2012.
In 2007, we entered into an agreement with the SID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by the SID and unreimbursed amounts accrue interest at 9.75 percent. The SID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses. Through ~~third~~first quarter-end ~~2011,~~2012, we have submitted and received approval for reimbursement of approximately $57,322,000 of infrastructure costs and have received reimbursements totaling ~~$20,770,000.~~$22,520,000. We did not receive any reimbursements in first quarter 2012. At ~~third~~first quarter-end ~~2011,~~2012, we have ~~$36,552,000~~$34,802,000 in approved and pending reimbursements, excluding interest.
Since the amount of each reimbursement is dependent on several factors, including timing of SID approval and the SID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.
At ~~third~~first quarter-end ~~2011,~~2012, we have ~~$46,719,000~~$44,818,000 invested in the mixed-use development.

Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies or estimates from those disclosed in our ~~2010~~2011 Annual Report on Form 10-K.

Recent Accounting Standards
Please readNote 2 to the Consolidated Financial Statements ~~contained~~included in this Quarterly Report on Form 10-Q.
29
Statistical and Other Data
A summary of our real estate projects in the entitlement process^(a) at ~~third~~first quarter-end ~~2011~~2012 follows:
         Project
Project
   County    Market    Acres^(b)^(b)
California

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

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

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


Total
         27,590


^(a)
A project is deemed to be in the entitlement process when customary steps necessary for the preparation of an application for governmental land-use approvals, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.
^(b)
Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.
30
A summary of activity within our projects in the development process, which includes entitled^(a), developed and under development real estate projects, at ~~third~~first quarter-end ~~2011~~2012 follows:

Residential Lots^(c) Commercial Acres^(d)
Lots Sold Acres Sold
Interest Since Lots Since Acres
Project County Market Owned^(b) Inception Remaining Inception Remaining
Projects we own

California

San Joaquin River Contra Costa/ Sacramento Oakland 100 % — — — 288
Colorado

Buffalo Highlands Weld Denver 100 % — 164 — —
Johnstown Farms Weld Denver 100 % 115 497 2 7
Pinery West Douglas Denver 100 % — — — 115
Stonebraker Weld Denver 100 % — 603 — 13
Texas

Arrowhead Ranch Hays Austin 100 % — 259 — 6
Barrington Kingwood Harris Houston 100 % — 180 — —
Caruth Lakes Rockwall Dallas/Fort Worth 100 % 362 287 — —
Cibolo Canyons Bexar San Antonio 100 % 694 721 68 153
Harbor Lakes Hood Dallas/Fort Worth 100 % 202 247 2 12
Hunter’s Crossing Bastrop Austin 100 % 378 112 38 71
La Conterra Williamson Austin 100 % 78 422 — 58
Maxwell Creek Collin Dallas/Fort Worth 100 % 719 280 10 —
Oak Creek Estates Comal San Antonio 100 % 90 557 13 —
The Colony Bastrop Austin 100 % 418 729 22 31
The Gables at North Hill Collin Dallas/Fort Worth 100 % 203 — — —
The Preserve at Pecan Creek Denton Dallas/Fort Worth 100 % 329 465 — 7
The Ridge at Ribelin Ranch Travis Austin 100 % — — 195 —
Westside at Buttercup Creek Williamson Austin 100 % 1,369 145 66 —
Other projects (9) Various Various 100 % 1,557 16 197 24
Georgia

The Villages at Burt Creek Dawson Atlanta 100 % — 1,715 — 57
Towne West Bartow Atlanta 100 % — 2,674 — 121
Other projects (13) Various Atlanta 100 % — 2,834 — 705
Missouri and Utah

Other projects (2) Various Various 100 % 466 88 — —

6,980 12,995 613 1,668

Projects in entities we consolidate

Texas

City Park Harris Houston 75 % 1,176 135 50 115
Lantana Denton Dallas/Fort Worth 55 %^(e) 723 1,537 — —
Light Farms Collin Dallas/Fort Worth 65 % — 2,501 — —
Stoney Creek Dallas Dallas/Fort Worth 90 % 110 644 — —
Timber Creek Collin Dallas/Fort Worth 88 % — 614 — —
Other projects (4) Various Various Various 710 253 26 25

2,719 5,684 76 140

Total owned and consolidated
9,699 18,679 689 1,808

Projects in ventures that we account for using the equity method

Georgia

Seven Hills Paulding Atlanta 50 % 641 452 26 113
The Georgian Paulding Atlanta 38 % 289 1,095 — —
Other projects (3) Various Atlanta Various 1,710 77 3 —
Texas

Bar C Ranch Tarrant Dallas/Fort Worth 50 % 269 930 — —
Entrada Travis Austin 50 % — 821 — 3
Fannin Farms West Tarrant Dallas/Fort Worth 50 % 323 58 — 15
Harper’s Preserve Montgomery Houston 50 % 42 1,683 — 72
Lantana Denton Dallas/Fort Worth Various^(e) 1,438 94 14 44
Long Meadow Farms Fort Bend Houston 19 % 838 1,245 107 113
Southern Trails Brazoria Houston 40 % 475 552 — —
Stonewall Estates Bexar San Antonio 25 % 280 108 — —
Summer Creek Ranch Tarrant Dallas/Fort Worth 50 % 806 468 — 71
Summer Lakes Fort Bend Houston 50 % 382 748 56 —
Village Park Collin Dallas/Fort Worth 50 % 368 203 3 2
Waterford Park Fort Bend Houston 50 % — 210 — 90
Other projects (2) Various Various Various 298 226 — 15
Florida

Other projects (3) Various Tampa Various 520 325 — —

Total in ventures
8,679 9,295 209 538

Combined total
18,378 27,974 898 2,346

31
         Residential Lots^{( c)} Commercial Acres^(d)
         Lots Sold    Acres
Sold
         Interest Since    Lots Since    Acres
Project

County

Market
   Owned ^(b) Inception    Remaining Inception    Remaining^(f)
Projects we own

California

San Joaquin River
   Contra Costa/Sacramento    Oakland    100 %   —         —      —         288
Colorado

Buffalo Highlands
   Weld    Denver    100 %   —         164    —         —
Johnstown Farms
   Weld    Denver    100 %   115    497    2    7
Pinery West
   Douglas    Denver    100 %   —         —      —         111
Stonebraker
   Weld    Denver    100 %   —         603    —         —
Texas

Arrowhead Ranch
   Hays    Austin    100 %   —         259    —         6
Bar C Ranch
   Tarrant    Dallas/Fort Worth    100 %   291    908    —         —
Barrington Kingwood
   Harris    Houston    100 %   12    168    —         —
Cibolo Canyons
   Bexar    San Antonio    100 %   705    770    68    82
Harbor Lakes
   Hood    Dallas/Fort Worth    100 %   203    246    2    19
Hunter’s Crossing
   Bastrop    Austin    100 %   382    108    38    71
La Conterra
   Williamson    Austin    100 %   88    412    —         58
Maxwell Creek
   Collin    Dallas/Fort Worth    100 %   747    252    10    —
Oak Creek Estates
   Comal    San Antonio    100 %   113    534    13    —
Summer Creek Ranch
   Tarrant    Dallas/Fort Worth    100 %   807    467    —         79
Summer Lakes
   Fort Bend    Houston    100 %   418    712    56    —
The Colony
   Bastrop    Austin    100 %   428    721    22    31
The Preserve at Pecan Creek
   Denton    Dallas/Fort Worth    100 %   349    445    —         7
Village Park
   Collin    Dallas/Fort Worth    100 %   461    299    3    2
Waterford Park
   Fort Bend    Houston    100 %   —         210    10    80
Westside at Buttercup Creek
   Williamson    Austin    100 %   1,372    124    66    —
Other projects (11)
   Various    Various    100 %   2,490    173    207    23
Georgia

Seven Hills
   Paulding    Atlanta    100 %   645    442    26    113
The Villages at Burt Creek
   Dawson    Atlanta    100 %   —         1,715    —         57
Towne West
   Bartow    Atlanta    100 %   —         2,674    —         121
Other projects (17)
   Various    Atlanta    100 %   1,712    2,987    3    705
Florida

Other projects (3)
   Various    Tampa    100 % 599    246    —         —
Missouri and Utah

Other projects (2)
   Various    Various    100 % 470    84    —         —






         12,407    16,220    526    1,860







Projects in entities we consolidate

Texas

City Park
   Harris    Houston    75 %    1,185    126    50    115
Lantana
   Denton    Dallas/Fort Worth    55 % ^(e)    821    1,471    —         —
Light Farms
   Collin    Dallas/Fort Worth    65 % ^(g)    —         2,501    —         —
Stoney Creek
   Dallas    Dallas/Fort Worth    90 %    111    643    —         —
Timber Creek
   Collin    Dallas/Fort Worth    88 %    —         614    —         —
Other projects (3)
   Various    Various    Various       6    203    16    148
Georgia

The Georgian
   Paulding    Atlanta    75 %    289    1,052    —         —






            2,412    6,610    66    263






Total owned and consolidated
            14,819    22,830    592    2,123
Projects in ventures that we account for using the equity method

Texas

Entrada
   Travis    Austin    50 %    —         821    —         —
Fannin Farms West
   Tarrant    Dallas/Fort Worth    50 %    323    58    —         12
Harper’s Preserve
   Montgomery    Houston    50 %    96    1,629    —         72
Lantana
   Denton    Dallas/Fort Worth    Various ^(e)    1,449    83    16    42
Long Meadow Farms
   Fort Bend    Houston    37 %    913    882    107    192
Southern Trails
   Brazoria    Houston    80 %    521    515    —         —
Stonewall Estates
   Bexar    San Antonio    50 %    286    105    —         —
Other projects (1)
   Nueces    Corpus Christi    50 %    —         —      —         15






Total in ventures
            3,588    4,093    123    333






Combined total
            18,407    26,923    715    2,456






^(a)
A project is deemed entitled when all major discretionary governmental land-use approvals have been received. Some projects may require additional permits and/or non-governmental authorizations for development.
^(b)
Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated or accounted for using the equity method.
^(c)
Lots are for the total project, regardless of our ownership interest. Lots remaining represent vacant developed lots, lots under development and future planned lots and are subject to change based on business plan revisions.
^(d)
Commercial acres are for the total project, regardless of our ownership interest, and are net developable acres, which may be fewer than the gross acres available in the project.
^(e)
The Lantana project consists of a series of 2224 partnerships in which our voting interests range from 25 percent to 55 percent. We account for three of these partnerships using the equity method and we consolidate the remaining partnerships.
^(f)
Excludes acres associated with commercial and income producing properties.
^(g)
In second quarter 2012, the consolidated venture sold 800 real estate acres, representing about 2,500 planned residential lots.
A summary of our significant commercial and income producing properties at ~~third~~first quarter-end ~~2011~~2012 follows:

Interest
Project County Market Owned^(a) Type Acres Description
Broadstone Memorial Harris Houston 100 % Multifamily 9 401 unit luxury apartment
Radisson Hotel Travis Austin 100 % Hotel 2 413 guest rooms and suites
Palisades West Travis Austin 25 % Office 22 375,000 square feet
Las Brisas Williamson Austin 59 % Multifamily 30 414 unit luxury apartment
Promesa^(b)
Travis Austin 100 % Multifamily 16 289 unit luxury apartment (construction in progress)
         Interest
Project
   County    Market    Owned ^(a) Type    Acres
Description
Broadstone Memorial
   Harris    Houston    100 % Multifamily    9    401 unit luxury apartment
Radisson Hotel
   Travis    Austin    100 % Hotel    2    413 guest rooms and suites
Las Brisas
   Williamson    Austin    59 % Multifamily    30    414 unit luxury apartment
Promesa^(b)
   Travis    Austin    100 % Multifamily    16    289 unit luxury apartment
               (construction in progress)
^(a)
Interest owned reflects our total interest in the project, whether owned directly or indirectly.
^(b)
Formerly marketed as Ridge at Ribelin Ranch.
A summary of our oil and natural gas mineral interests^(a) at ~~third~~first quarter-end ~~2011~~2012 follows:

Held By
State Unleased Leased^(b) Production^(c) Total^(d)
(Net acres)
Texas 191,000 36,000 25,000 252,000
Louisiana 116,000 23,000 5,000 144,000
Georgia 164,000 — — 164,000
Alabama 40,000 — — 40,000
California 1,000 — — 1,000
Indiana 1,000 — — 1,000

513,000 59,000 30,000 602,000

         Held By
State
   Unleased    Leased ^(b)    Production ^{(c )}    Total^(d)
      (Net acres)
Texas
   195,000    30,000       27,000       252,000
Louisiana
   120,000    19,000       5,000       144,000
Georgia
   156,000    —         —         156,000
Alabama
   40,000    —         —         40,000
California
   1,000    —         —         1,000
Indiana
   1,000    —         —         1,000








   513,000    49,000       32,000       594,000








^(a)
Includes ventures.
^(b)
Includes leases in primary lease term or for which a delay rental payment has been received. In the ordinary course of business, leases covering a significant portion of leased net mineral acres may expire from time to time in a single reporting period.
^(c)
Acres being held by production are producing oil or natural gas in paying quantities.
^(d)
Texas, Louisiana, California and Indiana net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Georgia and Alabama net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling. Excludes 477 net mineral acres located in Colorado including 379 acres leased and 29 acres held by production.
32
A summary of our Texas and Louisiana mineral acres^(a) by county or parish at ~~third~~first quarter-end ~~2011~~2012 follows:
Texas

Louisiana

County
   Net Acres
Parish
   Net Acres
Trinity
   46,000    Beauregard    79,000
Angelina
   42,000    Vernon    39,000
Houston
   29,000    Calcasieu    17,000
Anderson
   25,000    Allen    7,000
Cherokee
   24,000    Rapides    1,000
Sabine
   23,000    Other    1,000


Red River
   14,000       144,000


Newton
   13,000
San Augustine
   13,000
Jasper
   12,000
Other
   11,000



   252,000



^(a)
Includes ventures.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our interest rate risk is principally related to our variable-rate debt. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable-rate debt, which is ~~$193,766,000~~$197,934,000 at ~~third~~first quarter-end ~~2011~~2012 and ~~$191,658,000~~$191,656,000 at year-end ~~2010.~~
2011.
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~~first quarter-end ~~2011,~~2012, with comparative year-end ~~2010~~2011 information. This estimate assumes that debt reductions from contractual payments will be replaced with short-term, variable-rate debt; however, that may not be the financing alternative we choose.

Third
Quarter-End Year-End
Change in Interest Rates 2011 2010
(In thousands)
+2% $ (3,307 ) $ (3,728 )
+1% (1,938 ) (1,917 )
-1% 1,938 1,917
-2% 3,875 3,833

Change in Interest Rates
   First
Quarter-End
2012 Year-End
2011
   (In thousands)
+2%
   $ (3,410 ) $ (3,296 )
+1%
   (1,979 ) (1,917 )
-1%
   1,979 1,917
-2%
   3,959 3,833
Foreign Currency Risk
We have no exposure to foreign currency fluctuations.

Commodity Price Risk
We have no significant exposure to commodity price fluctuations.
Item 4.Controls and Procedures
(a) Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure
controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
33
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings
We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of any of the proceedings should not have a material adverse effect on our financial position, long-term results of operations or cash flows. It is possible, however, that circumstances beyond our control or significant subsequent developments could result in additional charges related to these matters that could be significant to results of operations or cash flow in any single accounting period.
Item 1A.Risk Factors
There are no material changes from the risk factors disclosed in our ~~2010~~2011 Annual Report on Form ~~10-K, except as follows:~~
~~If the Temple-Inland mill complex in Rome, Georgia were to permanently cease operations, the price~~~~we receive for our wood fiber may decline, and the cost of delivering logs to alternative customers could increase.~~
     Prior to our 2007 spin-off from Temple-Inland Inc. (“Temple-Inland”), we entered into an agreement to sell wood fiber to Temple-Inland at market prices, primarily for use at Temple-Inland’s Rome, Georgia mill complex. The agreement expires in 2013, although the purchase and sale commitments (including the sale price) are established annually based on our annual harvest plan. A significant portion of our fiber resources revenues are generated though this agreement. The Temple-Inland Rome mill complex is a significant consumer of wood fiber within the immediate area in which a substantial portion of our Georgia timberlands are located. If Temple-Inland was to permanently cease operations at its Rome, Georgia mill complex (although we have no indication that it intends to do so), was not willing to pay for wood fiber at a price we deem acceptable or was to cease purchasing wood fiber from us after the expiration of our agreement in 2013, we may not be able to enter into agreements with alternative customers for the wood fiber, any agreements with alternative customers we do enter into may be for lower rates than we currently receive from Temple-Inland and the cost of delivering wood fiber to such alternative customers could increase.
~~Our ability to harvest and deliver timber may be affected by our sales of timberland and may be~~~~subject to other limitations, which could adversely affect our operations.~~
     We have sold 176,000 acres of our timberland in accordance with our near-term strategic initiatives announced in 2009, and we now own directly or through ventures about 143,000 acres of timberland. Sales of our timberland reduce the amount of timber that we have available for harvest.
     In addition, weather conditions, timber growth cycles, access limitations, availability of contract loggers and haulers, and regulatory requirements associated with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including damage by fire, insect infestation, disease, prolonged drought, flooding and other natural disasters. Although damage from such natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain insurance coverage with respect to damage to our timberlands.
     The revenues, income and cash flow from operations for our fiber resources segment are dependent to a significant extent on the pricing of our products and our continued ability to harvest timber at adequate levels.
34
10-K.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities^(a)^(a)

Maximum
Total Number Number of
of Shares Shares That
Purchased as May Yet be
Total Average Part of Publicly Purchased
Number of Price Announced Under the
Shares Paid per Plans or Plans
Period Purchased^(b) Share Programs or Programs
Month 1 (7/1/2011 — 7/31/2011) — $ — — 5,999,013
Month 2 (8/1/2011 — 8/31/2011) 178,511 $ 12.33 172,435 5,826,578
Month 3 (9/1/2011 — 9/30/2011) 26 $ 10.91 — 5,826,578

Total 178,537 $ 12.33 172,435

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 (1/1/2012 — 1/31/2012)
   16,708    $ 15.66    —         5,092,305
Month 2 (2/1/2012 — 2/29/2012)
   54,186    $ 16.36    —         5,092,305
Month 3 (3/1/2012 — 3/31/2012)
   —      $ —         —         5,092,305





Total
   70,894    $ 16.20    —





^(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 ~~1,173,422~~1,907,695 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~~
Represents shares withheld to pay taxes in connection with vesting of restricted stock awards and exercises of stock options.
Item 3.Defaults Upon Senior Securities
None.
Item 4.~~(Removed and Reserved)~~Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
Item 6.Exhibits
10.1 ~~Purchase~~Assignment and ~~Sale Agreement~~Assumption of Membership Interest dated ~~July 6, 2011,~~January 20, 2012, by and among Forestar (USA) Real Estate Group Inc., as seller, Plum Creek Timberlands, L.P., as purchaser, and First American Title Insurance Company, as escrow agent, as amended by First Amendment to Purchase and Sale Agreement dated July 29, 2011, by and among Forestar (USA) Real Estate Group Inc., Plum Creek Timberlands, L.P., and First American Title Insurance Company.
~~10.2~~ ~~Second Amendment to Amended and Restated Revolving and Term Credit Agreement, dated as of September 30, 2011, by and among the Company,~~between Forestar (USA) Real Estate Group Inc. and ~~its wholly-owned subsidiaries signatory thereto, KeyBank National Association, as administrative agent, and the lenders party thereto~~Dimensional Fund Advisors LP (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on ~~October 3, 2011)~~January 24, 2012).
~~10.3~~10.2 ~~Exercise of option to extend revolving credit maturity date under Amended~~Purchase and ~~Restated Revolving and Term Credit~~Sale Agreement dated ~~September 30, 2011,~~February 20, 2012, by and among Forestar (USA) Real Estate Group Inc., CL Realty, L.L.C., and Cousins Real Estate Corporation.
10.3 Purchase and Sale Agreement dated February 20, 2012, by and among Forestar Realty Inc., Temco Associates, LLC, and Cousins Real Estate Corporation.
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, 2011,~~March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.
35
SIGNATURES
~~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: May 10, 2012

~~Date: November 3, 2011~~ By: ~~By:~~ /s/ Christopher L. Nines

Christopher L. Nines
Chief Financial Officer

By: /s/ Charles D. Jehl

Charles D. Jehl

Chief Accounting Officer
36
40


Delaware
~~Delaware~~		26-1336998
*(State or Other Jurisdiction of*		~~(I.R.S. Employer~~
*Incorporation or Organization)*		*(I.R.S. Employer* *Identification No.)*


Large accelerated filer	¨	Accelerated filer	þ
~~Large accelerated~~
Non-accelerated filero	~~Accelerated filer~~þ¨	~~Non-accelerated filer~~o~~(Do~~ (Do not check if a smaller reporting company)	Smaller reporting companyo	¨


		Number of Shares Outstanding as of
Title of Each Class		~~October 31, 2011~~ May 4, 2012
Common Stock, par value $1.00 per share		~~35,333,846~~34,660,815


PART I — FINANCIAL INFORMATION			3
Item 1.Financial Statements			3
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.Quantitative and Qualitative Disclosures About Market Risk			3337
Item 4.Controls and Procedures			3337
PART II — OTHER INFORMATION			3438
Item 1.Legal Proceedings			3438
Item 1A.Risk Factors			3438
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds			3538
Item 3.Defaults Upon Senior Securities			3539
Item 4.~~(Removed and Reserved)~~Mine Safety Disclosures			3539
Item 5.Other Information			3539
Item 6.Exhibits			3539
SIGNATURES			3640
~~EX-10.1~~
~~EX-10.3~~
~~EX-31.1~~
~~EX-31.2~~
~~EX-32.1~~
~~EX-32.2~~
~~EX-101 INSTANCE DOCUMENT~~
~~EX-101 SCHEMA DOCUMENT~~
~~EX-101 CALCULATION LINKBASE DOCUMENT~~
~~EX-101 LABELS LINKBASE DOCUMENT~~
~~EX-101 PRESENTATION LINKBASE DOCUMENT~~


	(Unaudited)
	Third
	Quarter-End			Year-End
	2011			2010
	(In thousands)
ASSETS
Cash and cash equivalents	$	29,121		$	5,366
Real estate		587,226			562,192
Assets held for sale		—			21,122
Investment in unconsolidated ventures		98,089			101,166
Timber		15,656			17,959
Receivables, net		24,376			2,875
Prepaid expenses		2,409			2,034
Property and equipment, net		5,362			5,577
Oil and gas properties and equipment, net		3,713			322
Deferred tax asset		58,154			47,141
Goodwill and other intangible assets		5,720			6,527
Other assets		16,870			17,043

TOTAL ASSETS	$	846,696		$	789,324


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	5,733		$	4,214
Accrued employee compensation and benefits		784			994
Accrued property taxes		6,996			3,662
Accrued interest		946			1,061
Income taxes payable		22,423			3,293
Other accrued expenses		10,713			8,168
Other liabilities		30,753			32,064
Debt		223,697			221,589

TOTAL LIABILITIES		302,045			275,045

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Forestar Group Inc. shareholders’ equity:
Preferred stock, par value $0.01 per share, 25,000,000 authorized shares, none issued		—			—
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,793,467 issued at third quarter-end 2011 and 36,667,210 issued at year-end 2010		36,793			36,667
Additional paid-in capital		396,898			391,352
Retained earnings		131,035			101,001
Treasury stock, at cost, 1,459,621 shares at third quarter-end 2011 and 1,216,647 shares at year-end 2010		(22,873	)		(19,456	)

Total Forestar Group Inc. shareholders’ equity		541,853			509,564
Noncontrolling interests		2,798			4,715

TOTAL SHAREHOLDERS’ EQUITY		544,651			514,279

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	846,696		$	789,324

x
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	(Unaudited)
	First
	Quarter-End			Year-End
	2012			2011
	(In thousands)
ASSETS
Cash and cash equivalents	$	6,801		$	18,283
Real estate		605,283			565,367
Investment in unconsolidated ventures		35,260			64,223
Timber		14,078			14,240
Receivables, net		24,456			23,281
Prepaid expenses		3,358			2,931
Property and equipment, net		5,080			5,178
Oil and natural gas properties and equipment, net		6,218			4,561
Deferred tax asset		74,406			72,942
Goodwill and other intangible assets		5,451			5,451
Other assets		17,380			18,400

TOTAL ASSETS	$	797,771		$	794,857


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	5,721		$	5,044
Accrued employee compensation and benefits		691			1,421
Accrued property taxes		2,659			4,986
Accrued interest		1,152			1,086
Income taxes payable		2,707			8,501
Other accrued expenses		7,652			7,716
Other liabilities		32,407			33,304
Debt		227,865			221,587

TOTAL LIABILITIES		280,854			283,645

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Forestar Group Inc. shareholders’ equity:
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,942,804 issued at first quarter-end 2012 and 36,835,732 issued at year-end 2011		36,943			36,836
Additional paid-in capital		402,237			398,517
Retained earnings		110,957			108,155
Treasury stock, at cost, 2,283,770 shares at first quarter-end 2012 and 2,212,876 shares at year-end 2011		(35,130	)		(33,982	)

Total Forestar Group Inc. shareholders’ equity		515,007			509,526
Noncontrolling interests		1,910			1,686

TOTAL SHAREHOLDERS’ EQUITY		516,917			511,212

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	797,771		$	794,857


	Third Quarter						First Nine Months
	2011			2010			2011			2010
	(In thousands, except per share amounts)
REVENUES
Real estate sales	$	11,802		$	10,000		$	38,335		$	36,895
Income producing properties and other		7,258			5,139			21,479			17,041

Real estate		19,060			15,139			59,814			53,936
Mineral resources		5,871			6,654			17,784			18,387
Fiber resources and other		1,310			2,220			3,968			6,185

		26,241			24,013			81,566			78,508
COSTS AND EXPENSES
Cost of real estate sales		(7,760	)		(4,183	)		(19,396	)		(17,312	)
Cost of income producing properties and other		(4,607	)		(3,931	)		(13,498	)		(12,680	)
Cost of mineral resources		(597	)		(223	)		(1,829	)		(852	)
Cost of fiber resources and other		(349	)		(466	)		(881	)		(1,208	)
Other operating		(11,771	)		(10,323	)		(33,928	)		(29,760	)
General and administrative		(2,770	)		(4,797	)		(15,590	)		(16,493	)
Gain on sale of assets		61,784			15,441			61,784			15,441

		33,930			(8,482	)		(23,338	)		(62,864	)

OPERATING INCOME		60,171			15,531			58,228			15,644
Equity in earnings of unconsolidated ventures		648			82			1,632			740
Interest expense		(4,271	)		(3,913	)		(12,933	)		(12,562	)
Other non-operating income		26			246			77			690

INCOME BEFORE TAXES		56,574			11,946			47,004			4,512
Income tax expense		(19,609	)		(2,860	)		(16,069	)		(1,507	)

CONSOLIDATED NET INCOME		36,965			9,086			30,935			3,005
Less: Net income attributable to noncontrolling interests		(537	)		(164	)		(901	)		(328	)

NET INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.	$	36,428		$	8,922		$	30,034		$	2,677


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		35,514			35,934			35,482			36,109
Diluted		35,796			36,379			35,877			36,595
NET INCOME PER COMMON SHARE
Basic	$	1.03		$	0.25		$	0.85		$	0.07
Diluted	$	1.02		$	0.25		$	0.84		$	0.07


	First Quarter
	2012			2011
	(In thousands, except per share amounts)
REVENUES
Real estate sales and other	$	10,644		$	14,204
Commercial and income producing properties		7,278			6,935

Real estate		17,922			21,139
Mineral resources		9,426			7,333
Fiber resources and other		744			1,368

		28,092			29,840
COSTS AND EXPENSES
Cost of real estate sales and other		(5,774	)		(5,658	)
Cost of commercial and income producing properties		(4,557	)		(4,512	)
Cost of mineral resources		(1,375	)		(794	)
Cost of fiber resources and other		(128	)		(247	)
Other operating		(12,750	)		(11,674	)
General and administrative		(6,963	)		(5,971	)
Gain on sale		11,675			—

		(19,872	)		(28,856	)

OPERATING INCOME		8,220			984
Equity in earnings of unconsolidated ventures		724			582
Interest expense		(3,891	)		(4,009	)
Other non-operating income		64			27

INCOME (LOSS) BEFORE TAXES		5,117			(2,416	)
Income tax (expense) benefit		(1,620	)		712

CONSOLIDATED NET INCOME (LOSS)		3,497			(1,704	)
Less: Net income attributable to noncontrolling interests		(695	)		(769	)

NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.	$	2,802		$	(2,473	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		34,855			35,406
Diluted		35,169			35,406
NET INCOME PER COMMON SHARE
Basic	$	0.08		$	(0.07	)
Diluted	$	0.08		$	(0.07	)

OTHER COMPREHENSIVE INCOME (LOSS)	$	2,802		$	(2,473	)


	First Quarter-End 2012			Year-End 2011
	(In thousands)
Entitled, developed and under development projects	$	414,325		$	383,026
Undeveloped land		81,078			80,076
Commercial and income producing properties
Carrying value		137,716			129,220
Accumulated depreciation		(27,836	)		(26,955	)

Net carrying value		109,880			102,265

	$	605,283		$	565,367


	Forestar		Noncontrolling
	Group Inc.		Interests			Total
			(In thousands)
Balance at year-end 2010	$	509,564	$	4,715		$	514,279
Net income		30,034		901			30,935
Distributions to noncontrolling interests		—		(2,901	)		(2,901	)
Contributions from noncontrolling interests		—		83			83
Other (primarily share-based compensation)		2,255		—			2,255

Balance at third quarter-end 2011	$	541,853	$	2,798		$	544,651


	Forestar- Group Inc.		Noncontrolling Interests			Total
	(In thousands)
Balance at year-end 2011	$	509,526	$	1,686		$	511,212
Net income		2,802		695			3,497
Distributions to noncontrolling interests				(676	)		(676	)
Contributions from noncontrolling interests				205			205
Other (primarily share-based compensation)		2,679					2,679

Balance at first quarter-end 2012	$	515,007	$	1,910		$	516,917


	Third Quarter-End 2011														Year-End 2010
	CL					Palisades			Other						CL					Palisades			Other
	Realty			Temco		West			Ventures			Total			Realty			Temco		West			Ventures			Total
												(In thousands)
Real estate	$	81,844		$	59,641	$	120,474		$	66,634		$	328,593		$	85,436		$	60,454	$	124,696		$	69,612		$	340,198
Total assets		82,357			60,259		125,089			77,679			345,384			86,657			60,609		129,378			78,060			354,704
Borrowings^(a)		1,047			2,824		—			75,330			79,201			2,664			2,929		—			74,605			80,198
Total liabilities		3,306			3,357		44,869	^(b)		90,096			141,628			4,124			3,133		48,612	^(b)		87,145			143,014
Equity		79,051			56,902		80,220			(12,417	)		203,756			82,533			57,476		80,766			(9,085	)		211,690
Our investment in real estate ventures:
Our share of their equity^(c)		39,525			28,451		20,055			13,221			101,252			41,267			28,738		20,191			14,075			104,271
Unrecognized deferred gain^(d)		(2,164	)		—		—			(999	)		(3,163	)		(2,190	)		—		—			(915	)		(3,105	)

Investment in real estate ventures	$	37,361		$	28,451	$	20,055		$	12,222		$	98,089		$	39,077		$	28,738	$	20,191		$	13,160		$	101,166


	First Quarter-End 2012												Year-End 2011
	CL Realty		Temco		Palisades West		Other Ventures			Total			CL Realty		Temco		Palisades West			Other Ventures			Total
	(In thousands)
Real estate	$	7,546	$	12,967	$	—	$	97,404		$	117,917		$	50,050	$	18,741	$	119,017		$	71,842		$	259,650
Total assets		8,193		13,408		—		113,662			135,263			51,096		18,922		124,588			75,060			269,666
Borrowings^(a)		—		2,750		—		73,968			76,718			1,056		2,787		—			70,975			74,818
Total liabilities		209		2,974		—		91,343			94,526			2,488		3,026		42,953	^(b)		85,704			134,171
Equity		7,984		10,434		—		22,319			40,737			48,608		15,896		81,635			(10,644	)		135,495
Our share of their equity^{(c )}		3,992		5,217		—		26,977			36,186			24,304		7,948		20,412			12,495			65,159
Unrecognized deferred gain^(d)		—		—		—		(926	)		(926	)		—		—		—			(936	)		(936	)

Investment in real estate ventures	$	3,992	$	5,217	$	—	$	26,051		$	35,260		$	24,304	$	7,948	$	20,412		$	11,559		$	64,223


^(a)		Total includes current maturities of ~~$71,920,000~~$73,146,000 at ~~third~~first quarter-end ~~2011,~~2012, of which ~~$43,169,000~~$44,062,000 is non-recourse to us, and ~~$75,121,000~~$71,816,000 at year-end ~~2010,~~2011, of which ~~$43,166,000~~$43,144,000 is non-recourse to us.


^(b)		~~Includes $42,792,000 of~~ Principally included deferred income from leasehold improvements funded by tenants in excess of leasehold improvement allowances. These amounts ~~are~~were recognized as rental income over the lease term and ~~are~~were offset by depreciation expense related to these tenant improvements. There iswas no effect on venture net income.


^(c)		Our share of the equity in other ventures reflects our ownership interests generally ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses.


^(d)		Represents deferred gains on real estate contributed by us to ventures. We are recognizing income as real estate is sold to third parties. The deferred gains are reflected as a reduction to our investment in unconsolidated ventures.


	First Quarter- End 2012			Year-End 2011
	(In thousands)
Non-performing loan	$	20,666		$	20,666
Notes receivable, average interest rates of 7.50% at first quarter-end 2012 and 7.16% at year-end 2011		1,594			1,817
Receivables and accrued interest		2,258			860

		24,518			23,343
Allowance for bad debts		(62	)		(62	)

	$	24,456		$	23,281


							Third
	Fair Value Measurements						Quarter-End
	Level 1		Level 2		Level 3		2011
			(In thousands)
Non-Financial Assets
Real estate	$	—	$	—	$	1,725	$	1,725


	Third Quarter-End 2011						Year-End 2010
	Carrying			Fair			Carrying			Fair			Valuation
	Amount			Value			Amount			Value			Technique
				(In thousands)
Fixed rate debt	$	(29,931	)	$	(32,431	)	$	(29,931	)	$	(30,164	)	Level 2


	First Quarter-End 2012						Year-End 2011
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Valuation Technique
	(In thousands)
Fixed rate debt	$	(29,931	)	$	(32,017	)	$	(29,931	)	$	(32,478	)		Level 2


				Weighted
	Equivalent			Average Grant
	Units			Date Fair Value
	(In thousands)			(Per unit)
Non-vested at beginning of period		376		$	11.88
Granted		159			18.10
Vested		(77	)		17.53
Forfeited		—			—

Non-vested at end of period		458		$	13.10


	Equivalent Units			Weighted Average Grant Date Fair Value
	(In thousands)			(Per unit)
Non-vested at beginning of period		449		$	13.13
Granted		187			16.11
Vested		(286	)		10.32
Forfeited		—			—

Non-vested at end of period		350		$	17.03


						Weighted		Aggregate
						Average		Intrinsic Value
				Weighted		Remaining		(Current
	Rights			Average		Contractual		Value Less
	Outstanding			Exercise Price		Term		Exercise Price)
	(In thousands)			(Per share)		(In years)		(In thousands)
Balance at beginning of period		909		$	11.28		8	$	7,289
Granted		—			—
Exercised		(12	)		9.29
Forfeited		—			—

Balance at end of period		897		$	11.30		8	$	1,109

Exercisable at end of period		380		$	10.48		8	$	529


	Rights Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current Value Less Exercise Price)
	(In thousands)			(Per share)		(In years)		(In thousands)
Balance at beginning of period		895		$	11.31		7	$	3,986
Granted		—			—
Exercised		(4	)		9.29
Forfeited		—			—

Balance at end of period		891		$	11.32		7	$	4,137

Exercisable at end of period		613		$	10.79		7	$	3,084


				Weighted
	Restricted			Average Grant
	Shares			Date Fair Value
	(In thousands)			(Per share)
Non-vested at beginning of period		636		$	17.56
Granted		20			12.74
Vested		(223	)		24.23
Forfeited		—			—

Non-vested at end of period		433		$	13.91


	Restricted Shares			Weighted Average Grant Date Fair Value
	(In thousands)			(Per share)
Non-vested at beginning of period		399		$	15.02
Granted		—			—
Vested		(183	)		12.65
Forfeited		—			—

Non-vested at end of period		216		$	17.03


	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current Value Less Exercise Price)
	(In thousands)		(Per share)		(In years)		(In thousands)
Balance at beginning of period		1,284	$	22.22		7	$	944
Granted		453		16.11
Exercised		—		—
Forfeited		—		—

Balance at end of period		1,737	$	20.62		8	$	986

Exercisable at end of period		910	$	24.20		7	$	740

	•		~~general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;~~

	•		~~the opportunities (or lack thereof) that may be presented to us and that we may pursue;~~

	•		~~significant customer concentration;~~

	•		~~future residential, multifamily or commercial entitlements, development approvals and the ability to obtain such approvals;~~

	•		accuracy of estimates and other assumptions related to investment in real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation and oil and natural gas reserves;

	•		~~the levels of resale housing inventory and potential impact of foreclosures in our mixed-use development projects and the regions in which they are located;~~

	•		~~the development of relationships with strategic partners;~~

	•		~~fluctuations in costs and expenses;~~

	•		~~demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;~~

	•		~~supply of and demand for oil and natural gas and fluctuations in oil and natural gas prices;~~

	•		~~competitive actions by other companies;~~

	•		~~changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;~~

	•		~~government regulation of exploration and production technology, including hydraulic fracturing;~~

	•		~~the results of financing efforts, including our ability to obtain financing with favorable terms;~~

	•		~~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;~~

	•		water withdrawal or usage may be subject to state and local laws, regulations or permit requirements, and there is no assurance that all our water interests or rights will be available for withdrawal or use; and

	•		~~the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.~~

	•		~~Recognizing and responsibly delivering the greatest value from every acre; and~~

	•		~~Growing through strategic and disciplined investments.~~

	•		Mineral resources segment earnings declined primarily due to lower lease bonus revenues and increased costs associated with developing our water resources initiatives. These items were partially offset by increased oil production volumes and prices.

	•		Fiber resources segment earnings decreased principally due to reduction in volume as a result of selling about 30,000 acres of timberland in 2010 and postponing harvest plans on acres previously classified as held for sale.

	•		In third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of terms available to us in the credit markets.

	•		~~Share-based compensation decreased as a result of a decline in our stock price and its impact on vested cash-settled awards.~~

	•		~~In third quarter 2011, gain on sale of assets represents the gain from selling 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000.~~

	•		Real estate segment earnings declined principally due to lower undeveloped land sales as a result of current market conditions significantly influenced by low consumer confidence and alternate investment options to buyers in the marketplace.

	•		Mineral resources segment earnings declined principally due to decreased lease bonus revenues as a result of reduced leasing activity by exploration and production companies that are concentrating on drilling activities rather than leasing new mineral interests in our area of operations. This decrease in earnings was partially offset by increased oil production and higher oil prices.

	•		Fiber resources segment earnings decreased principally due to reduction in volume as a result of selling over 113,000 acres of timberland in 2009 and postponing harvest plans on acres classified as held for sale.

	•		~~In third quarter 2010, share-based compensation expense decreased as a result of a decline in our stock price and its impact on cash-settled awards.~~

	•		~~In third quarter 2010, gain on sale of assets represents the gain from selling about 14,100 acres of timber and timberland in Georgia and Alabama for $22,621,000.~~

	•		~~Interest expense decreased as a result of lower debt levels.~~


	Third Quarter-End
	2011		2010
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects		54		54
Residential lots remaining		18,679		17,811
Commercial acres remaining		1,808		1,775
Undeveloped land and land in the entitlement process
Number of projects		16		18
Acres in entitlement process		27,590		29,670
Acres undeveloped		110,115		179,736
Ventures accounted for using the equity method:
Ventures’ lot sales (for first nine months)
Lots sold		350		261
Average price per lot sold	$	40,592	$	43,402
Ventures’ entitled, developed and under development projects
Number of projects		21		22
Residential lots remaining		9,295		11,369
Commercial acres sold (for first nine months)		20.0		15.4
Average price per acre sold	$	152,460	$	81,318
Commercial acres remaining		538		829
Ventures’ undeveloped land and land in the entitlement process
Number of projects		—		—
Acres in entitlement process		—		—
Acres sold (for first nine months)		19.2		—
Average price per acre sold	$	3,000	$	—
Acres undeveloped		5,712		5,517