UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________

FORM 10-Q

_________________________________________________________



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

For the quarterly period ended ~~September 30, 2017~~March 31, 2018



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

For the transition period from to

Commission File Number: 001-33662

_________________________________________________________

FORESTAR GROUP INC.

(Exact Name of Registrant as Specified in Its Charter)

_________________________________________________________



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

~~6300 Bee Cave Road, Building Two,~~10700 Pecan Park Blvd., Suite ~~500,~~150, Austin, Texas ~~78746~~78750

(Address of Principal Executive Offices, Including Zip Code)

(512) 433-5200

(Registrant’s Telephone Number, Including Area Code)

_________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨x		Accelerated filer	x
¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)		Smaller reporting company¨	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Title of Each Class		Number of Shares Outstanding as of ~~October 31, 2017~~May 4, 2018
Common Stock, par value $1.00 per share		41,938,936

FORESTAR GROUP INC.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FORESTAR GROUP INC.

Consolidated Balance Sheets

(Unaudited)


	Third Quarter-End			Year-End
	2017			2016			March 31, 2018		December 31, 2017
	(In thousands, except share data)						(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	395,359		$	265,798		$	436,401	$	321,783
Restricted cash							40,013		40,017
Real estate	267,251			293,003			261,707		130,380
Assets of discontinued operations	—			14
Assets held for sale	14,453			30,377			1,360		181,607
Investment in unconsolidated ventures	72,920			77,611			17,284		64,579
Receivables, net	13,004			8,931			4,560		6,307
Income taxes receivable	23,818			10,867			7,244		6,674
Prepaid expenses	2,641			2,000			5,962		3,118
Property and equipment, net	1,046			3,116			1,828		2,003
Deferred tax asset, net	269			323			1,367		2,028
Goodwill	—			37,900
Intangible assets							448		448
Other assets	2,772			3,268			2,924		2,968
TOTAL ASSETS	$	793,533		$	733,208		$	781,098	$	761,912
LIABILITIES AND EQUITY
Accounts payable	$	3,972		$	4,804		$	2,073	$	2,382
Accrued employee compensation and benefits	2,556			4,126			4,674		8,994
Accrued property taxes	2,280			2,008			653		2,153
Accrued interest	533			1,585			376		1,489
Earnest money deposits	11,946			10,511			26,418		11,940
Other accrued expenses	7,203			12,598			12,166		5,942
Liabilities of discontinued operations	—			5,295
Liabilities held for sale	—			103			—		1,017
Other liabilities	18,275			19,702			14,907		13,934
Debt, net	115,505			110,358			109,825		108,429
TOTAL LIABILITIES	162,270			171,090			171,092		156,280
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES (Note 13)
EQUITY
Forestar Group Inc. shareholders’ equity:
Preferred stock, par value $0.01 per share, 200,000 authorized shares at third quarter-end 2017 and none at year-end 2016, none issued	—			—
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 44,803,603 issued at third quarter-end 2017 and year-end 2016	44,804			44,804
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 41,938,936 issued at March 31, 2018 and at December 31, 2017							41,939		41,939
Additional paid-in capital	549,382			553,005			506,071		505,977
Retained earnings	80,430			12,602			60,830		56,296
Treasury stock, at cost, 2,864,667 shares at third quarter-end 2017 and 3,187,253 shares at year-end 2016	(44,532		)	(49,760		)
Total Forestar Group Inc. shareholders’ equity	630,084			560,651			608,840		604,212
Noncontrolling interests	1,179			1,467			1,166		1,420
TOTAL EQUITY	631,263			562,118			610,006		605,632
TOTAL LIABILITIES AND EQUITY	$	793,533		$	733,208		$	781,098	$	761,912

Please read the notes to consolidated financial statements.

FORESTAR GROUP INC.

Consolidated Statements of ~~Income (Loss) and Comprehensive Income (Loss)~~Operations

(Unaudited)


	Third Quarter						First Nine Months						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(In thousands, except per share amounts)												(In thousands, except per share amounts)
REVENUES
Real estate sales and other	$	33,136		$	45,285		$	81,789		$	114,711
Commercial and income producing properties	—			12			91			13,065
Real estate	33,136			45,297			81,880			127,776
Mineral resources	—			1,423			1,502			3,842
Real estate sales													$	22,575		$	20,752
Other	—			487			74			1,199			24			1,553
	33,136			47,207			83,456			132,817			22,599			22,305
COSTS AND EXPENSES
Cost of real estate sales and other	(21,762		)	(24,884		)	(50,142		)	(105,023		)
Cost of commercial and income producing properties	(14		)	(4,375		)	(3		)	(15,326		)
Cost of mineral resources	—			(182		)	(38,315		)	(572		)
Cost of real estate sales													(15,575		)	(11,896		)
Cost of other	(109		)	(363		)	(518		)	(867		)	(536		)	(38,616		)
Other operating expenses	(3,220		)	(6,471		)	(13,905		)	(26,879		)	(1,888		)	(5,082		)
General and administrative	(5,340		)	(5,177		)	(38,403		)	(16,508		)	(3,745		)	(4,691		)
	(30,445		)	(41,452		)	(141,286		)	(165,175		)	(21,744		)	(60,285		)
GAIN ON SALE OF ASSETS	9,690			501			113,411			121,732			2,746			74,215
OPERATING INCOME	12,381			6,256			55,581			89,374			3,601			36,235
Equity in earnings of unconsolidated ventures	1,764			3,637			10,873			3,872			1,529			6,362
Interest expense	(2,038		)	(3,369		)	(6,439		)	(17,926		)	(2,136		)	(2,235		)
Loss on extinguishment of debt, net	—			—			—			(35,864		)
Other non-operating income	1,140			1,249			2,438			1,620
Interest and other income													1,652			676
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES	13,247			7,773			62,453			41,076			4,646			41,038
Income tax (expense) benefit	(5,214		)	9,666			(33,353		)	(7,415		)
Income tax expense													(66		)	(16,211		)
NET INCOME FROM CONTINUING OPERATIONS	8,033			17,439			29,100			33,661			4,580			24,827
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES	37,193			(7,164		)	38,840			(17,428		)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES													—			418
CONSOLIDATED NET INCOME	45,226			10,275			67,940			16,233			4,580			25,245
Less: Net (income) attributable to noncontrolling interests	(24		)	(610		)	(112		)	(1,330		)
Less: Net income attributable to noncontrolling interests													(46		)	(40		)
NET INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.	$	45,202		$	9,665		$	67,828		$	14,903		$	4,534		$	25,205
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	42,270			34,099			42,204			34,234			41,939			42,097
Diluted	42,626			42,260			42,512			42,334			41,966			42,406
NET INCOME (LOSS) PER BASIC SHARE
NET INCOME PER BASIC SHARE
Continuing operations	$	0.19		$	0.40		$	0.69		$	0.77		$	0.11		$	0.59
Discontinued operations	$	0.88		$	(0.17	)	$	0.92		$	(0.42	)	$	—		$	0.01
NET INCOME (LOSS) PER BASIC SHARE	$	1.07		$	0.23		$	1.61		$	0.35
NET INCOME (LOSS) PER DILUTED SHARE
NET INCOME PER BASIC SHARE													$	0.11		$	0.60
NET INCOME PER DILUTED SHARE
Continuing operations	$	0.19		$	0.40		$	0.68		$	0.76		$	0.11		$	0.58
Discontinued operations	$	0.87		$	(0.17	)	$	0.91		$	(0.41	)	$	—		$	0.01
NET INCOME (LOSS) PER DILUTED SHARE	$	1.06		$	0.23		$	1.59		$	0.35
TOTAL COMPREHENSIVE INCOME (LOSS)	$	45,202		$	9,665		$	67,828		$	14,903
NET INCOME PER DILUTED SHARE													$	0.11		$	0.59

Please read the notes to consolidated financial statements.

FORESTAR GROUP INC.

Consolidated Statements of Cash Flows

(Unaudited)


	First Nine Months						Three Months Ended March 31,
	2017			2016			2018			2017
	(In thousands)						(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income	$	67,940		$	16,233		$	4,580		$	25,245
Adjustments:
Depreciation, depletion and amortization	4,121			9,885
Depreciation and amortization							1,296			1,485
Change in deferred income taxes	54			(16		)	661			29
Equity in earnings of unconsolidated ventures	(10,873		)	(3,872		)	(1,529		)	(6,362		)
Distributions of earnings of unconsolidated ventures	14,745			4,793			—			4,974
Share-based compensation	2,567			2,665			94			843
Real estate cost of sales	50,547			56,817			15,309			12,240
Real estate development and acquisition expenditures, net	(38,355		)	(56,552		)	(149,052		)	(13,740		)
Reimbursements from utility and improvement districts	9,841			13,698			—			1,180
Asset impairments	37,900			57,065			—			37,900
Loss on debt extinguishment, net	—			35,864
Gain on sale of assets	(113,214		)	(108,114		)	(2,746		)	(74,215		)
Other	2,346			3,639			1,588			945
Changes in:
Notes and accounts receivable	(4,011		)	20,734			1,197			(1,925		)
Prepaid expenses and other	(428		)	1,536			(3,614		)	(647		)
Accounts payable and other accrued liabilities	(9,235		)	(13,556		)	(365		)	(8,556		)
Earnest money deposits							19,152			2,792
Income taxes	(12,951		)	(11,012		)	(570		)	15,433
Net cash provided by operating activities	994			29,807
Net cash used in operating activities							(113,999		)	(2,379		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software and other	(46		)	(5,902		)	(36		)	(17		)
Oil and gas properties and equipment	(2,400		)	(579		)	—			(2,400		)
Investment in unconsolidated ventures	(4,462		)	(5,615		)	—			(1,915		)
Proceeds from sales of assets	130,146			319,351			228,555			77,510
Return of investment in unconsolidated ventures	4,452			3,948			187			1,511
Net cash provided by investing activities	127,690			311,203			228,706			74,689
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt	—			(311,724		)
Additions to debt	1,789			2,749			207			304
Deferred financing fees	(148		)	—
Change in restricted cash							4			—
Distributions to noncontrolling interests, net	(400		)	(2,378		)	(300		)	—
Exercise of stock options	616			—
Repurchases of common stock	—			(3,537		)
Payroll taxes on issuance of stock-based awards	(980		)	(221		)
Other	—			(211		)
Net cash provided by (used for) financing activities	877			(315,322		)
Payroll taxes on restricted stock and stock options							—			(980		)
Net cash used in financing activities							(89		)	(676		)

Net increase in cash and cash equivalents	129,561			25,688			114,618			71,634
Cash and cash equivalents at beginning of period	265,798			96,442			321,783			265,798
Cash and cash equivalents at end of period	$	395,359		$	122,130		$	436,401		$	337,432

Please read the notes to consolidated financial statements.

FORESTAR GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—Basis of Presentation

Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.

We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently ~~estimate including those principally related to allocating costs to real estate and measuring long-lived assets for impairment.~~estimate. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our ~~2016~~2017 Annual Report on Form 10-K.

~~At year-end 2016, we had~~

We divested of substantially all of our oil and gas working interest ~~properties. As~~properties in 2016, and as a result ~~of this significant change in our operations,~~ we have reported the results of operations ~~and financial position of these assets~~ as discontinued operations ~~within~~for the three months ended March 31, 2017. There was no significant activity related to these operations during the three months ended March 31, 2018.

The transactions included in our net income in the consolidated statements of operations are the same as those that would be presented in other comprehensive income. Thus, our net income ~~(loss)~~equates to other comprehensive income.

On October 5, 2017, we became a majority-owned subsidiary of D.R. Horton, Inc. ("D.R. Horton") by virtue of a merger with a wholly-owned subsidiary of D.R. Horton (the "Merger"). Immediately following the Merger, D.R. Horton owned approximately 75 percent of our outstanding common stock. In connection with the Merger, we entered into certain agreements with D.R. Horton including a Stockholder’s Agreement, a Master Supply Agreement, and ~~comprehensive income (loss)~~a Shared Services Agreement. For a discussion of the terms of the Merger and for additional information regarding these agreements, see "Business - D.R. Horton Merger" in Part I, Item 1 of our 2017 Annual Report on Form 10-K. D.R. Horton is considered a related party of Forestar under U.S. GAAP.

We are evaluating the impact of any potential changes in our accounting policies and related party transactions with D.R. Horton post-merger and will update our disclosures accordingly in future periods.

Reclassifications

Certain items have been reclassified from other operating expenses to cost of real estate sales and other in the prior year financial statements to conform to classifications used in the current year. These reclassifications had no effect on our consolidated operating results or balance ~~sheets for all periods presented.~~sheet.

Change in Fiscal Year

As a result of the Merger, we changed our fiscal year-end from December 31 to September 30, effective January 1, 2018. This change aligns our fiscal year-end reporting calendar with D.R. Horton.

Note 2—New and Pending Accounting Pronouncements

~~Adoption of New Accounting Standards~~

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~, as part of its simplification initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The updated standard is effective for annual and interim periods beginning after December 31, 2016. Effective first quarter 2017, stock-based compensation (SBC) excess tax benefits or deficiencies are reflected in the consolidated statements of income (loss) and comprehensive income (loss) as a component of the provision for income taxes, whereas they previously were recognized in equity to the extent additional paid-in capital pool was available. Additionally, our consolidated statements of cash flows will now present excess tax benefits as an operating activity, if applicable. Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result of the adoption of ASU 2016-09 in first nine months 2017, there were no material impacts to our consolidated financial statements.

Pending Accounting Standards

In May 2014, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The updated standard becomes effective for annual and interim periods beginning after December 15, 2017. Due to our change in fiscal year-end, this standard is effective for us beginning October 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative

effect initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using the cumulative catch-up transition method. We anticipate this standard will not have ~~reached conclusions~~a material impact on our ~~key accounting assessments~~consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we expect revenue related to ~~the standard and are finalizing our accounting policies. Based on our initial assessment, we believe the timing of revenue recognition for our primary revenue stream,~~ residential lot and tract sales will not materially change. We are still finalizing our accounting policies and assessing disclosure requirements. Upon adopting FASB ASC Topic 606, we will provide additional disclosures in the notes to ~~our consolidated financial statements.~~remain substantially unchanged. Due to the complexity of certain of our real estate sale transactions, the revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in ~~limited circumstances~~some instances from recognition at the time of the sale closing.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ,This ASU requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in ~~order~~a manner that is similar to ~~provide increased transparency~~today's accounting. This guidance also eliminates today's real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and ~~comparability among organizations by recognizing lease assets~~the accounting for sales-type and ~~lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated standard~~direct financing leases. This guidance is effective for ~~financial statements issued for annual periods~~

~~beginning after December 15,~~us October 1, 2019 and ~~interim periods within fiscal years beginning after December 31, 2020 with~~ early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the effect ~~that~~ the updated standard will have on our ~~earnings,~~ financial position and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), ~~in order~~ to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those fiscal ~~years with early adoption permitted.~~years. Due to our change in fiscal year-end, this standard is effective for us beginning October 1, 2018. We are currently evaluating the effect ofthat the updated standard will have on our earnings, financial position and disclosures, but we do not expect it to have a material effect on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230). This ASU requires that a statement of cash flow explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash investments. ~~This~~The updated standard is effective for ~~fiscal years~~financial statements issued for annual periods beginning after December 15, ~~2017.~~2017 and interim periods within those fiscal years. Due to our change in fiscal year-end, this standard is effective for us beginning October 1, 2018. The adoption of ASU 2016-18 will modify our current disclosures and reclassifications relating to the consolidated statements of cash flows, but we do not expect it to have a material effect on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718), ~~in order~~ to provide guidance about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The updated standard is effective for financial statements issued for annual periods beginning after December 15, ~~2017.~~2017 and interim periods within those fiscal years. Due to our change in fiscal year-end, this standard is effective for us beginning October 1, 2018. We are currently evaluating the effect that the updated standard will have on our earnings, financial position and disclosures, but we do not expect it to have a material effect on our consolidated financial statements.

Note 3—~~Merger~~Segment Information

~~On June 29,~~During the three months ended March 31, 2018, we began managing our operations through two business segments, real estate and other. Historically, we managed our operations through our real estate segment, mineral resources segment (previously referred to as oil and gas) and other segment (previously referred to as other natural resources).

Our real estate segment is our core business and acquires land and developed lots, secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities. Our other segment consists of non-core water interests in 1.5 million acres, including a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama that are classified as assets held for sale at March 31, 2018 and December 31, 2017, ~~we entered into an Agreement~~ and ~~Plan~~20,000 acres of ~~Merger with D.R. Horton, Inc. ("D.R. Horton") pursuant~~groundwater leases in central Texas.

We divested substantially all of our oil and gas working interest properties in 2016 and sold all of our remaining owned mineral assets and related entities in 2017. We have reclassified the results of operations from our mineral resources segment for the three months ended March 31, 2017 to ~~which D.R. Horton would acquire~~ ~~75 percent~~our other segment. There was no significant activity for these operations during three months ended March 31, 2018.

The accounting policies of the ~~Company's common stock, par value $1.00 per share ("Our Common Stock")~~reporting segments are described throughout Note 1 included in our Annual Report on Form 10-K for ~~$17.75~~ ~~per share (the “Merger Agreement”). The Merger Agreement was unanimously approved~~the fiscal year ended December 31, 2017. Total assets allocated by segment are as follows:



	March 31, 2018		December 31, 2017
	(In thousands)
Real estate	$	291,307	$	386,222
Other	3,331		3,346
Assets not allocated to segments ^(a)	486,460		372,344
	$	781,098	$	761,912

_________________________


^(a)	Assets not allocated to segments at March 31, 2018 principally consist of cash and cash equivalents of $436,401,000 and restricted cash of $40,013,000. Assets not allocated to segments at December 31, 2017 principally consist of cash and cash equivalents of $321,783,000 and restricted cash of $40,017,000.

~~Subject to the terms and conditions of the Merger Agreement, at the effective time of the merger (the "Merger"), all of Our Common Stock would be converted into the right to receive, either~~

~~(i) an amount in cash per share of Our Common Stock equal to~~ ~~$17.75~~ ~~(the “Cash Consideration”); or~~

~~(ii) one share of Our Common Stock,~~

in each case at the election of the holder of such share of Our Common Stock, subject to proration procedures applicable to oversubscription and undersubscription for Cash Consideration by stockholders.

~~Please see~~ ~~Note 19—Subsequent Events~~ ~~for information regarding consummation of the merger with D.R. Horton on October 5, 2017, and related matters.~~

~~In connection with merger activities, in first nine months 2017, we paid a~~ ~~$20,000,000~~ ~~merger agreement termination fee to Starwood Capital Group and incurred~~ ~~$5,624,000~~ ~~in professional fees and other costs related to proposed merger transactions, all of which are included in~~ general and administrative ~~expenses.~~expense, share-based and long-term incentive compensation, interest expense, and other corporate interest and other income. Our revenues are derived from our U.S. operations and all of our assets are located in the U.S.

Segment revenues and earnings are as follows:

~~Note 4—Held for Sale~~



	Three Months Ended March 31,
	2018			2017
	(In thousands)
Revenues:
Real estate	$	22,575		$	20,752
Other	24			1,553
Total revenues	$	22,599		$	22,305
Segment earnings (loss):
Real estate	$	9,703		$	10,473
Other	(553		)	37,429
Total segment earnings	9,150			47,902
Items not allocated to segments	(4,550		)	(6,904		)
Income from continuing operations before taxes attributable to Forestar Group Inc.	$	4,600		$	40,998

In ~~first quarter~~the three months ended March 31, 2017, we sold all of our remaining owned mineral assets for approximately ~~$85,700,000. We generated $82,422,000~~$85,700,000 which resulted in ~~total gains related to~~the recognition of a gain on the sale of ~~our mineral~~these assets ~~in first nine months 2017~~ of $74,215,000 which ~~$8,200,000 was recognized in third quarter 2017 as~~is reflected within other segment earnings. As a result of this sale we recognized a non-cash goodwill impairment charge of $37,900,000 in the ~~expiration of a title review period.~~three months ended March 31, 2017 which is reflected within other segment earnings.

In second quarter 2017, we sold approximately 19,000 acres of timberland and undeveloped land in Georgia and Texas for $46,197,000 in three transactions generating combined net proceeds of $45,396,000. We generated combined gains of $28,674,000 in first nine months 2017 of which $625,000 was recognized in third quarter 2017 upon receipt of certain regulatory approvals and release of funds held in escrow.Items not allocated to segments consist of:

At third quarter-end 2017, assets held for sale principally includes a multifamily site in Austin, central Texas groundwater assets, and water wells related to our nonparticipating royalty interests in water rights located in east Texas.



	Three Months Ended March 31,
	2018			2017
	(In thousands)
General and administrative expense	$	(3,653	)	$	(4,028	)
Share-based and long-term incentive compensation expense	(136		)	(895		)
Interest expense	(2,136		)	(2,235		)
Other corporate interest and other income	1,375			254
	$	(4,550	)	$	(6,904	)

Note 4—Held for Sale

The major classes of assets and liabilities held for sale are as follows:

Third
Quarter-End Year-End
2017 2016
(In thousands)
Assets Held for Sale:
Real estate $ 5,743
$ 19,931
Timber —
1,682
Other intangible assets ^(a)
1,681
1,681
Oil and gas properties and equipment, net —
782
Property and equipment, net ^(b)
7,029
6,301
$ 14,453
$ 30,377

Liabilities Held for Sale:
Other liabilities —
103
$ —
$ 103



	March 31, 2018		December 31, 2017
	(In thousands)
Assets Held for Sale:
Real estate	$	—	$	180,247
Property and equipment, net	1,360		1,360
	$	1,360	$	181,607

Liabilities Held for Sale:
Accounts payable	$	—	$	1,017

~~___________________~~

^(a) ~~Related~~On February 8, 2018, we entered into and closed on a Purchase and Sale Agreement with Starwood Land, L.P. ("Starwood") to ~~indefinite lived groundwater leases~~sell 24 legacy projects for $232,000,000. This strategic asset sale included projects owned both directly and indirectly through ventures and consisted of approximately 750 developed and under development residential lots, over 4,000 future undeveloped residential lots (including all real estate associated with ~~our central Texas water assets.~~

^(b) ~~Related~~the Cibolo Canyons mixed-use development), 730 unentitled acres in California, an interest in one multifamily operating property and a multifamily development site. The agreement contains representations, warranties and indemnities customary for a real estate industry asset sale and includes certain adjustment provisions to ~~water wells~~the purchase price. The total net proceeds after certain purchase price adjustments, closing costs and other costs associated with selling these assets was $217,506,000. The net proceeds are classified as investing activities in our ~~Texas water assets.~~

consolidated statements of cash flows due to the strategic nature of the transaction and bulk sale of primarily undeveloped future residential lots to a strategic buyer which is not in the normal course of our business operations of developing and selling residential lots to homebuilders. The transaction resulted in a gain on sale of assets of $716,000 and is included in our consolidated statement of operations for the three months ended March 31, 2018.

Note 5—Real Estate

Real estate consists of:


	Third Quarter-End		Year-End
	2017		2016		March 31, 2018		December 31, 2017
	(In thousands)				(In thousands)
Entitled, developed and under development projects	$	237,064	$	263,859	$	258,873	$	127,442
Land in the entitlement process and other	30,187		29,144
Other real estate costs					2,834		2,938
	$	267,251	$	293,003	$	261,707	$	130,380

~~Our estimated costs of assets~~

During the three months ended March 31, 2018, we acquired 14 new projects for ~~which~~$130,487,000 representing nearly 5,500 planned residential lots. At March 31, 2018, we ~~expect to be reimbursed by utility~~owned or controlled through land and improvement districts were $45,253,000 at third quarter-end 2017 and $45,157,000 at year-end 2016, including $13,892,000 at third quarter-end 2017 and $14,749,000 at year-end 2016 related to our Cibolo Canyons project near San Antonio, Texas. In first nine months 2017, we have collected $9,376,000 in reimbursements that were previously submitted to these districts. At third quarter-end 2017, our inception-to-date submitted reimbursements for the Cibolo Canyons project were $56,750,000,lot option purchase contracts 13,600 residential lots, of which ~~$52,337,000~~3,300 are under contract to sell to D.R. Horton. Additionally, D.R. Horton has the right of first offer on 5,400 of these residential lots based on executed purchase and sale agreements. At March 31, 2018, we also have ~~been approved, and we have collected $46,567,000. These costs are principally for water, sewer and~~500 lots under contract to sell to other infrastructure assets that we have incurred and submitted or will submit to utility or improvement districts for approval and reimbursement. We expect to be reimbursed by utility and improvement districts when these districts achieve adequate tax basis or otherwise have funds available to support payment.builders.

Note 6—Investment in Unconsolidated Ventures

We ~~participate~~have participated in real estate ventures for the purpose of acquiring and developing residential, multifamily and mixed-use communities in which we may or may not have a controlling financial interest. U.S. GAAP requires consolidation of Variable Interest Entities (VIEs) in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic ~~performance;~~performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether a venture is a VIE and whether we are the primary ~~beneficiary and must consolidate a VIE.~~beneficiary. We perform this review initially at the time we enter into venture agreements and reassess upon reconsideration events.

AtOn February 8, 2018, we sold our ownership interest in 8 of our unconsolidated ventures to Starwood as part of a strategic asset sale. (See ~~third quarter-end~~Note 4—Held for Sale~~2017~~). During the three months ended March 31, 2018, we also sold our interest in a venture, generating $11,049,000 in net proceeds and recognizing gain of $2,030,000 which is included in gain on sale of assets. At March 31, 2018, we had ownership interests in 156 ventures that we accounted for using the equity method, none of which ~~are~~were a VIE.

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

Venture Assets
Venture Borrowings^(a)
Venture Equity Our Investment
Third
Quarter-End Year-End Third
Quarter-End Year-End Third
Quarter-End Year-End Third
Quarter-End Year-End
2017 2016 2017 2016 2017 2016 2017 2016
(In thousands)
242, LLC ^(b)
$ 19,600
$ 26,503
$ —
$ 1,107
$ 19,376
$ 23,136
$ 9,140
$ 10,934
CL Ashton Woods, LP 581
2,653
—
—
558
2,198
446
1,107
CL Realty, LLC 8,287
8,048
—
—
8,156
7,899
4,078
3,950
CREA FMF Nashville LLC ^(b)
53,986
56,081
35,676
37,446
17,162
17,091
4,803
4,923
Elan 99, LLC 49,003
49,652
36,373
36,238
11,283
13,100
10,155
11,790
FMF Littleton LLC 68,536
70,282
46,006
44,446
21,745
23,798
5,508
6,128
FMF Peakview LLC —
—
—
—
—
—
—
—
FOR/SR Forsyth LLC 11,566
10,672
1,548
1,568
9,985
8,990
8,986
8,091
HM Stonewall Estates, Ltd —
852
—
—
—
852
—
477
LM Land Holdings, LP ^(c)
22,816
25,538
906
3,477
13,771
20,945
6,619
9,685
MRECV DT Holdings LLC 3,573
4,155
—
—
3,573
4,144
3,216
3,729
MRECV Edelweiss LLC/MRECV Lender VIII LLC 7,824
3,484
—
—
7,824
3,484
7,042
3,358
MRECV Juniper Ridge LLC 3,784
4,156
—
—
3,784
4,156
3,405
3,741
MRECV Meadow Crossing II LLC 3,103
2,492
—
—
3,103
2,491
2,793
2,242
Miramonte Boulder Pass, LLC 7,488
10,738
1,391
4,006
4,775
5,265
4,567
5,330
Temco Associates, LLC 4,426
4,368
—
—
4,323
4,253
2,162
2,126
Other ventures —
—
—
—
—
—
—
—
$ 264,573
$ 279,674
$ 121,900
$ 128,288
$ 129,418
$ 141,802
$ 72,920
$ 77,611



	March 31, 2018		December 31, 2017
	(In thousands)
Assets:
Cash and cash equivalents	$	6,359	$	13,119
Real estate	88,805		168,914
Other assets	1,353		21,721
Total assets	$	96,517	$	203,754
Liabilities and Equity:
Accounts payable and other liabilities	$	5,208	$	13,101
Debt ^(a)	45,761		85,133
Equity	45,548		105,520
Total liabilities and equity	$	96,517	$	203,754

Forestar's investment in unconsolidated ventures	$	17,284	$	64,579

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

Venture Revenues Venture Earnings (Loss) Our Share of Earnings (Loss)
Third Quarter First Nine Months Third Quarter First Nine Months Third Quarter First Nine Months
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
(In thousands)
242, LLC ^(b)
$ —
$ 937
$ 13,073
$ 937
$ (342 ) $ 15
$ 8,040
$ (449 ) $ (171 ) $ 14
$ 4,106
$ (218 )
CL Ashton Woods, LP 451
288
3,079
1,977
262
83
1,360
601
307
129
1,739
892
CL Realty, LLC 300
140
499
386
256
72
2,657
136
128
37
1,328
68
CREA FMF Nashville LLC ^(b)
1,410
1,291
4,280
3,273
(159 ) (145 ) (479 ) (1,214 ) (47 ) 1,484
(144 ) 1,164
Elan 99, LLC 1,188
461
3,116
628
(562 ) (867 ) (1,816 ) (2,211 ) (506 ) (779 ) (1,635 ) (1,989 )
FMF Littleton LLC 1,702
944
4,713
1,791
227
(183 ) 47
(531 ) 57
(47 ) 12
(133 )
FMF Peakview LLC —
—
—
939
—
—
—
(248 ) —
—
—
(50 )
FOR/SR Forsyth LLC —
—
—
—
(42 ) (21 ) (110 ) (38 ) (38 ) (19 ) (99 ) (34 )
HM Stonewall Estates, Ltd —
822
496
1,948
—
280
243
794
—
120
103
347
LM Land Holdings, LP ^(c)
2,703
3,505
19,636
6,531
2,110
2,502
8,327
4,557
757
836
2,746
1,481
MRECV DT Holdings LLC 351
162
939
379
337
157
923
372
303
141
831
334
MRECV Edelweiss LLC/MRECV Lender VIII LLC 293
106
716
287
291
106
713
280
262
96
642
252
MRECV Juniper Ridge LLC 413
151
1,023
356
412
151
1,022
357
371
135
920
321
MRECV Meadow Crossing II LLC 253
112
612
141
254
112
612
94
229
101
551
84
Miramonte Boulder Pass, LLC 2,312
1,015
4,848
1,678
105
(126 ) 109
(285 ) 101
(63 ) (262 ) (142 )
Temco Associates, LLC 48
77
144
224
21
32
70
111
11
16
35
56
Other ventures —
6,520
—
6,520
—
2,166
—
2,109
—
1,436
—
1,439
$ 11,424
$ 16,531
$ 57,174
$ 27,995
$ 3,170
$ 4,334
$ 21,718
$ 4,435
$ 1,764
$ 3,637
$ 10,873
$ 3,872



	Three Months Ended March 31,
	2018		2017
	(In thousands)
Revenues	$	3,381	$	22,301
Earnings	$	4,280	$	12,221
Forestar's equity in earnings of unconsolidated ventures	$	1,529	$	6,362

~~_____________________~~_________________________


^(a)	~~Total~~As of March 31, 2018 and December 31, 2017, total debt outstanding includes ~~current maturities of $86,206,000 at third quarter-end 2017, of~~$4,576,000 and $4,584,000 which ~~$81,531,000~~ is ~~non-recourse to us, and $89,756,000 at year-end 2016, of which $78,557,000 is non-recourse~~recourse to us.


^(b)	Includes unamortized deferred gains on real estate we contributed to ventures. We recognize deferred gains as income as the real estate is sold to third parties. Deferred gains of $1,372,000 are reflected as a reduction to our investment in unconsolidated ventures at third quarter-end 2017.


^(c)	Includes unrecognized basis difference of $496,000 which is reflected as an increase of our investment in unconsolidated ventures at third quarter-end 2017. The difference will be amortized as expense over the life of the investment and included in our share of earnings (loss) from the respective venture.

In first nine months 2017, we invested $4,462,000 in these ventures and received $19,197,000 in distributions. In first nine months 2016, we invested $5,615,000 in these ventures and received $8,741,000 in distributions. Distributions include both return of investments and distribution of earnings.

The increase in our share of earnings from our unconsolidated ventures in first nine months 2017 compared with first nine months 2016 is primarily due to higher lot sale activity and earnings from LM Land Holdings, LP which benefited from the sale of 42 commercial acres for $13,600,000 generating venture earnings of $10,683,000, of which $6,321,000 was deferred and will be recognized as development is completed. Based on our 37.5% interest in this venture, our pro-rata share of the earnings associated with this sale was $1,636,000 and our pro-rata share of the distributable cash was $4,411,000. Venture earnings from 242, LLC also benefited from the sale of 46 commercial acres for $9,719,000 generating $6,612,000 in earnings to the venture. Based on our 50% interest in the venture, our pro-rata share of the earnings associated with this sale was $3,306,000 and our pro-rata share of the total distributable cash was $4,348,000. CL Realty, LLC, a venture in which we own a 50% interest, sold certain mineral assets to us for $2,400,000. Subsequent to closing of this transaction, we received $1,200,000 from the venture, representing our pro-rata share of distributable cash.

~~In first quarter 2016, we sold our interest in FMF Peakview LLC (360~~⁰~~), a 304-unit multifamily joint venture project near Denver, generating $13,167,000 in net proceeds and we recognized a gain of $10,363,000 which is included in gain on sale of assets.~~

Note 7—~~Goodwill~~

~~Carrying value of goodwill follows:~~

Third
Quarter-End Year-End
2017 2016
(In thousands)
Goodwill $ —
$ 37,900

Goodwill related to our owned mineral assets was $0 at third quarter-end 2017 and $37,900,000 at year-end 2016. In first nine months 2017, we recognized a non-cash impairment charge of $37,900,000 related to goodwill attributable to our mineral resources reporting unit. This impairment was a result of selling our remaining owned mineral assets for approximately $85,700,000 in first quarter 2017. Impairment charge is included in cost of mineral resources on our consolidated statements of income (loss) and comprehensive income (loss).

~~Note 8—~~Discontinued Operations

~~At year-end 2016, we had~~We have divested ~~of substantially~~ all of our oil and gas working interest properties. As a result of this significant change in ~~our~~ operations, we have reported the results of operations ~~and financial position of these assets~~ as discontinued operations ~~within~~for the ~~consolidated statements of income (loss) and comprehensive income (loss) and consolidated balance sheets for all periods presented.~~three months ended March 31, 2017. There was no significant activity related to these operations during the three months ended March 31, 2018.

Summarized results from discontinued operations were as follows:

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Revenues $ 2
$ 180
$ 15
$ 5,827
Cost of sales (42 ) (108 ) (52 ) (6,593 )
Other operating expenses (763 ) (3,318 ) 226
(5,707 )
Income (loss) from discontinued operations before income taxes $ (803 ) $ (3,246 ) $ 189
$ (6,473 )
Gain (loss) on sale of assets before income taxes (297 ) 955
(197 ) (13,618 )
Income tax benefit (expense) 38,293
(4,873 ) 38,848
2,663
Income (loss) from discontinued operations, net of taxes $ 37,193
$ (7,164 ) $ 38,840
$ (17,428 )



	Three Months Ended March 31,
	2018		2017
	(In thousands)
Revenues	$	—	$	9
Cost of oil and gas producing activities	—		(6		)
Other operating expenses	—		(54		)
Loss from discontinued operations before income taxes	$	—	$	(51	)
Income tax benefit	—		469
Income from discontinued operations, net of taxes	$	—	$	418

In first nine months 2017, other operating expenses include a benefit of $1,043,000 due to a reduction of an accrual resulting from a change in estimate related to potential environmental liabilities to plug and abandon certain oil and gas wells in Wyoming. Other operating expenses in third quarter 2016 include loss contingency charges of $1,100,000 related to litigation and $1,155,000 related to potential environmental liabilities to plug and abandon certain oil and gas wells in Wyoming.

On September 22, 2017, in accordance with our previously announced initiative to sell non-core assets, we sold the common stock of Forestar Petroleum Corporation for $100,000. With the completion of this transaction we have now sold all of our oil and gas assets and related entities. This transaction resulted in a significant tax loss. The corresponding tax benefit is reported in discontinued operations as a discrete event in third quarter 2017.

In first nine months 2016, we recorded a net loss of $13,618,000 on the sale of nearly 199,263 net mineral acres leased from others and 379 gross (95 net) producing oil and gas working interest wells in Nebraska, Kansas, Oklahoma and North Dakota for total sales proceeds of $80,084,000, which includes $3,269,000 in reimbursement of capital costs incurred on in-progress wells that were assumed by the buyer. A significant portion of the net loss on sale, $7,244,000, is related to write-off of allocated goodwill to sold producing oil and gas properties.

~~The major classes of assets and liabilities of discontinued operations at third quarter-end 2017 and year-end 2016 are as follows:~~

Third
Quarter-End Year-End
2017 2016
(In thousands)
Assets of Discontinued Operations:
Receivables, net of allowance for bad debt $ —
$ 6
Prepaid expenses —
8
$ —
$ 14

Liabilities of Discontinued Operations:
Accounts payable $ —
$ 67
Other accrued expenses —
5,228
$ —
$ 5,295

Significant operating ~~activities and investing~~ activities of discontinued operations included in our consolidated statements of cash flows ~~are~~were as follows:

First Nine Months
2017 2016
(In thousands)
Operating activities:
Asset impairments $ —
$ 612
Accounts payable and other accrued liabilities (3,000 ) —
Loss on sale of assets 197
13,618
Depreciation, depletion and amortization —
2,202
$ (2,803 ) $ 16,432

Investing activities:
Oil and gas properties and equipment $ —
$ (579 )
Proceeds from sales of assets 200
76,815
$ 200
$ 76,236



	Three Months Ended March 31,
	2018		2017
	(In thousands)
Operating activities:
Accounts payable and other accrued liabilities	$	—	$	(3,000	)
	$	—	$	(3,000	)

Note 9—8—Receivables

Receivables consist of:

Third
Quarter-End Year-End
2017 2016
(In thousands)
Other receivables and accrued interest 6,958
1,505
Other loans secured by real estate, average interest rates of 5.13% at third quarter-end 2017 and 4.94% at year-end 2016 6,072
7,452
13,030
8,957
Allowance for bad debts (26 ) (26 )
$ 13,004
$ 8,931



	March 31, 2018			December 31, 2017
	(In thousands)
Other receivables and accrued interest	$	1,416		$	2,557
Loans secured by real estate, average interest rate of 5.40% at March 31, 2018 and at December 31, 2017	3,170			3,776
	4,586			6,333
Allowance for bad debts	(26		)	(26		)
	$	4,560		$	6,307

Note ~~10—Equity~~

~~A reconciliation of changes in equity at~~ ~~third quarter-end2017~~ ~~follows:~~

Forestar
Group Inc.

Noncontrolling
Interests
Total
(In thousands)
Balance at year-end 2016 $ 560,651
$ 1,467
$ 562,118
Net income 67,828
112
67,940
Distributions to noncontrolling interests —
(400 ) (400 )
Other (primarily share-based compensation) 1,605
—
1,605

$ 630,084
$ 1,179
$ 631,263

~~Note 11—~~9—Debt, net

Debt consists of:


	Third Quarter-End		Year-End		March 31, 2018		December 31, 2017
	2017		2016		(In thousands)
	(In thousands)
8.50% senior secured notes due 2022, net	$	5,216	$	5,200
3.75% convertible senior notes due 2020, net of discount	108,014		104,673		$	109,327	$	108,139
Other indebtedness — 5.50% interest rate	2,275		485		498		290
	$	115,505	$	110,358	$	109,825	$	108,429

~~At third quarter-end~~Secured Letter of Credit Agreement

On October 5, 2017, ~~our senior secured credit facility provided a line of credit commitment of $50,000,000, none of which was drawn, and included a $50,000,000 sublimit for letters of credit, of which~~ ~~$14,267,000~~ ~~was outstanding. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) were limited by a borrowing base formula. At~~ ~~third quarter-end2017~~, we ~~had $14,810,000 in net unused borrowing capacity under our senior secured credit facility.~~

At third quarter-end 2017, the proposed Merger was expected to constitute a “fundamental change” under our 3.75% convertible senior notes, which would provide holders with the right to convert their notes or sell their notes to us at par, subject to certain conditions.

~~Please see~~ ~~Note 19—Subsequent Events~~ ~~for information regarding consummation of the merger with D.R. Horton and related matters, including (a) termination of our senior secured credit facility, (b) entry~~entered into a ~~new~~Letter of Credit Facility Agreement with lenders providing for a $30,000,000 secured standby letter of credit facility ~~(c) entry into~~(the "LC Facility"). The LC Facility is secured by $30,000,000 in cash deposited with the administrative agent. In addition, we have $10,000,000 on deposit with a ~~supplemental indenture in regard to~~participating lender. These deposits are classified as restricted cash on our consolidated balance sheets. At March 31, 2018, $21,003,000 was outstanding under the LC Facility.

Public Unsecured Debt

On October 5, 2017, we had $120,000,000 aggregate principal amount of 3.75% convertible senior notes due 2020 ~~and (d) redemption~~("Convertible Notes"). The completion of the ~~8.50% senior secured~~Merger constituted a fundamental change in the indenture governing the Convertible Notes and, as a result, we offered to purchase all or any part of every holder’s Convertible Notes for a price in cash equal to 100% of the aggregate principal amount of the Convertible Notes, plus accrued and unpaid interest, if any, to the date of repurchase. As a result, we purchased $1,077,000 of the aggregate principal amount of the Convertible Notes in November 2017. Also, prior to the Merger, upon conversion of the Convertible Notes each holder was entitled to receive 40.8351 shares of former Forestar common stock per $1,000 principal amount of notes ~~due 2022.~~surrendered for conversion. In connection with the Merger, the conversion ratio was adjusted in accordance with the indenture governing the Convertible Notes such that each holder is now entitled to receive $579.77062 in cash and 8.17192 shares of new Forestar common stock per $1,000 principal amount of notes surrendered for conversion. At March 31, 2018, the principal amount of the Convertible Notes was $118,923,000 and the unamortized debt discount was $8,657,000. The effective interest rate on the liability component was 8% and the carrying amount of the equity component was $16,847,000. We intend to settle the principal amount of the Convertible Notes in cash upon conversion, with any excess conversion value to be settled in shares of our common stock.

Deferred Fees

At ~~third quarter-end~~March 31, 2018 and December 31, 2017, ~~and year-end 2016,~~ we had ~~$1,273,000~~$939,000 and ~~$1,633,000~~$1,058,000 in unamortized deferred financing fees which were deducted from our debt. ~~In addition, at third quarter-end 2017 and year-end 2016, unamortized deferred financing fees related to our senior secured credit facility included in other assets were $91,000 and $314,000.~~ Amortization of deferred financing fees ~~were $731,000~~was $119,000 and ~~$3,253,000~~$330,000 in ~~first nine~~the three months ended March 31, 2018 and 2017 and ~~2016 and were~~was included in interest expense.

Note ~~12—~~10—Fair Value

Fair value is the exchange price that would be ~~the amount~~ received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities;

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, oil and gas properties, assets held for sale, goodwill and other intangible assets, which are measured for impairment.

In first nine months 2017, we recognized a non-cash impairment charge of $37,900,000 related to goodwill attributable to our mineral resources reporting unit. The impairment was a result of selling all of our remaining owned mineral assets in first quarter 2017 for approximately $85,700,000.

We elected not to use the fair value option for cash and cash equivalents, restricted cash, accounts and notes 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 2017 Year-End 2016

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Valuation
Technique
(In thousands)
Fixed rate debt $ (114,502 ) $ (119,246 ) $ (111,506 ) $ (109,789 ) Level 2



	March 31, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Valuation Technique
	(In thousands)
Fixed rate debt	(110,266	)	(112,514	)	(109,197	)	(109,114	)	Level 2

Non-financial assets measured at fair value on a non-recurring basis include real estate assets, assets held for sale, and intangible assets, which are measured for impairment.

Non-financial assets measured at fair value on a non-recurring basis are as follows:



	March 31, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Non-financial Assets and Liabilities:
Real estate held for sale	$	—	$	—	$	—	$	—	$	—	$	180,247	$	—	$	180,247
Central Texas water assets	$	—	$	—	$	—	$	—	$	—	$	—	$	1,987	$	1,987

At December 31, 2017 we based the valuations of our real estate held for sale primarily on offers received from third parties and we based the valuations of our water assets primarily on past and current negotiations with expected buyers.

Note ~~13—Capital Stock~~

Pursuant to our tax benefits preservation plan ("Plan") adopted January 5, 2017, as amended on April 13, 2017 and June 29, 2017, each share of common stock outstanding at third quarter-end 2017 is coupled with one preferred stock purchase right ("Right"). Each Right entitles our stockholders to purchase, under certain conditions, one one-thousandth of a share ("Unit") of newly issued Series B Junior Participating Preferred Stock at a purchase price of $50 per Unit, subject to adjustment. Rights will be exercisable only if someone becomes a five-percent stockholder after adoption of the Plan without meeting certain customary exceptions. Stockholders owning five percent or more of our outstanding stock at the time of adoption of the Plan are grandfathered and will cause Rights to be distributed and become exercisable only if they acquire an additional one percent of our outstanding shares. Our board of directors has the discretion to exempt certain transactions and persons from the coverage of the Plan, and the Plan has been amended to exempt the Merger Agreement from the coverage of the Plan.

~~Please see~~ ~~Note 19—Subsequent Events~~ ~~for information regarding expiration of the Plan.~~

~~Note 14—~~11—Net Income ~~(Loss)~~ per Share

Basic and diluted earnings per share are computed using the treasury stock method for third quarter and first nine months 2017 and the two-class method for third quarter and first nine months 2016. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security. We previously determined that our 6.00% tangible equity units issued in 2013 were participating securities. In December 2016, we issued 7,857,000 shares of our common stock upon the mandatory settlement of the stock purchase contract related to the 6.00% tangible equity units. Per share amounts are computed by dividing earnings available to common shareholders by the weighted average shares outstanding during each period. In periods with a net loss, no such adjustment is made to earnings as the holders of the participating securities have no obligation to fund losses.

The computations of basic and diluted earnings per share are as follows:

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Numerator:
Continuing operations
Net income (loss) from continuing operations $ 8,033
$ 17,439
$ 29,100
$ 33,661
Less: Net (income) attributable to noncontrolling interest (24 ) (610 ) (112 ) (1,330 )
Earnings (loss) available for diluted earnings per share $ 8,009
$ 16,829
$ 28,988
$ 32,331
Less: Undistributed net income from continuing operations allocated to participating securities —
(3,152 ) —
(6,035 )
Earnings (loss) from continuing operations available to common shareholders for basic earnings per share $ 8,009
$ 13,677
$ 28,988
$ 26,296

Discontinued operations
Net income (loss) from discontinued operations available for diluted earnings per share $ 37,193
$ (7,164 ) $ 38,840
$ (17,428 )
Less: Undistributed net income from discontinued operations allocated to participating securities —
1,342
—
3,253
Earnings (loss) from discontinued operations available to common shareholders for basic earnings per share $ 37,193
$ (5,822 ) $ 38,840
$ (14,175 )
Denominator:
Weighted average common shares outstanding — basic 42,270
34,099
42,204
34,234
Weighted average common shares upon conversion of participating securities —
7,857
—
7,857
Dilutive effect of stock options, restricted stock and equity-settled awards 356
304
308
243
Total weighted average shares outstanding — diluted 42,626
42,260
42,512
42,334
Anti-dilutive awards excluded from diluted weighted average shares 1,048
2,001
1,458
2,146



	Three Months Ended March 31,
	2018			2017
	(In thousands)
Numerator:
Continuing operations
Net income from continuing operations	$	4,580		$	24,827
Less: Net income attributable to noncontrolling interest	(46		)	(40		)
Earnings available for diluted earnings per share	$	4,534		$	24,787

Discontinued operations
Net income from discontinued operations available for diluted earnings per share	$	—		$	418
Denominator:
Weighted average common shares outstanding — basic	41,939			42,097
Dilutive effect of stock options, restricted stock and equity-settled awards	27			309
Total weighted average shares outstanding — diluted	41,966			42,406
Anti-dilutive awards excluded from diluted weighted average shares	—			1,808

We intend to settle the ~~remaining~~ principal amount of ~~our 3.75% convertible senior notes due in 2020 (Convertible Notes)~~the Convertible Notes in cash upon conversion with ~~only the amount in~~any excess ~~of par~~conversion value ~~of the Convertible Notes~~ to be settled in shares of our common stock. Therefore, only the amount in excess of the par value of the Convertible Notes will be included in our calculation of diluted net income per share ~~includes only~~using the ~~amount, if any, in excess of par value of the Convertible Notes.~~treasury stock method. As such, the Convertible Notes have no impact on diluted net income per share until the price of our common stock exceeds the ~~$24.49~~conversion price of the Convertible ~~Notes.~~Notes of $51.42. The ~~average~~ price of our common stock in ~~third quarter2017~~ did not exceed the conversion price ~~which resulted~~so the Convertible Notes had no impact on diluted net income per share in ~~no additional diluted outstanding shares.~~the three months ended March 31, 2018.

Note ~~15—~~12—Income Taxes

Our effective tax rate from continuing operations was 39one percent in ~~third quarter 2017~~the three months ended March 31, 2018, which includes the impact of the Tax Cuts and ~~53 percent for first nine months 2017. Our effective~~Jobs Act ("Tax Act") and a tax ~~rate~~benefit from ~~continuing operations for first nine months 2017 exceeded~~ the ~~statutory rate due to~~release of a ~~change in~~portion of our valuation allowance ~~due to current year transaction costs (termination fee and other costs) associated with our Merger. In addition, our effective tax rate from continuing operations for first nine months 2017 exceeded~~as the ~~statutory rate due to goodwill impairment associated with our first quarter 2017 sale~~result of ~~owned mineral assets and a benefit from a valuation allowance decrease due to net decreases in our~~the realization of certain deferred tax assets.

Our effective tax rate from continuing operations was 40 percent in the three months ended March 31, 2017, which included a tax benefit from the release of ~~124 percent in third quarter 2016~~a portion of our valuation allowance as the result of the realization of certain deferred tax assets and a tax expense ~~of 18 percent for first nine~~associated with a non-cash impairment related to goodwill associated with our owned mineral assets which were sold in the three months ~~2016.~~ended March 31, 2017. Our effective tax rate ~~from continuing operations~~ for first nine months 2016 of 18 percent differs from the statutory rate of 35 percent primarily due to a benefit from decrease in our valuation allowance related to decrease in our deferred tax assets. In addition, 2017 and 2016 effective tax rates from continuing operations includeboth periods also includes the effect of state income taxes, nondeductible items and benefits ~~of percentage depletion.~~from noncontrolling interests.

At ~~third quarter-end~~March 31, 2018 and December 31, 2017, ~~and year-end 2016, we have a valuation allowance for~~ our deferred tax assets, net of ~~$66,461,000~~deferred tax liabilities, were $39,911,000 and ~~$73,405,000~~$41,606,000, offset by a valuation allowance of $38,544,000 and $39,578,000 for the portion of the deferred tax assets that we have determined is more likely than not to be ~~unrealizable under U.S. GAAP.~~unrealizable.

In determining our valuation allowance, we assessed available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax ~~assets under U.S. GAAP.~~asset. A significant piece of objective evidence evaluated was the cumulative loss incurred over the three-year period ended ~~September 30, 2017,~~March 31, 2018, principally driven by impairments of oil and gas and real estate properties in prior years. Such evidence limits our ability to consider other subjective evidence, such as our projected future taxable income.

The amount of ~~the~~ deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.

The Tax Act, which was enacted on December 22, 2017, reduced the federal corporate tax rate from 35 percent to 21 percent for all corporations effective January 1, 2018. ASC 740 requires companies to reflect the effects of a tax law change in the period in which the law is enacted. Accordingly, we remeasured our deferred tax assets and liabilities along with the corresponding valuation allowance as of the 2017 enactment date. This remeasurement resulted in no additional tax expense or benefit except for the release of a portion of the valuation allowance for AMT Credits which became refundable as a result of the tax law change. The initial remeasurement was our best estimate based on the information available at the time and may change as additional information, such as regulatory guidance, becomes available. Any required adjustment will be reflected as a discrete expense or benefit in the quarter that it is identified, as allowed by SEC Staff Accounting Bulletin No. 118. For the three months ended March 31, 2018, no adjustments to the remeasurement of our deferred tax accounts were recognized.

On October 5, 2017, D.R. Horton acquired 75 percent of our common stock resulting in an ownership change under Section 382. Section 382 limits our ability to use certain tax attributes and built-in losses and deductions in a given year. Any tax attributes or built-in losses and deductions that were limited in 2017 or are limited in 2018 are expected to be fully utilized in future years.

Our unrecognized tax benefits totaled ~~approximately $442,000~~$441,000 at ~~third quarter-end 2017,~~March 31, 2018, all of which would affect our effective tax rate, if recognized.

Note ~~16—~~13—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 we believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings ~~should~~will have a significant adverse effect on our financial position, long-term results of operations or cash flows. ~~However, it~~It is possible, however, that charges related to these matters could be significant to our results or cash flows in any one accounting period.

Environmental

Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses that we can be reasonably estimated. With the sale of our remaining oil and gas entities in third quarter 2017 we no longer have asset retirement obligations related to the abandonment and site restoration requirements that result from the acquisition, construction and development of oil and gas properties. Prior to the sale, we recorded the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset retirement cost is included in cost of oil and gas producing activities of discontinued operations. At third quarter-end 2017 and year-end 2016, our estimated asset retirement obligation was $0 and $1,258,000, of which $0 and $1,155,000 is included in liabilities of discontinued operations and the remaining balance at year-end 2016 was in liabilities held for sale. In first nine months 2017, we reduced our accrual related to potential environmental liabilities to plug and abandon certain oil and gas wells in Wyoming by $1,043,000 due to a change in estimate of our potential exposure. In connection with our sale of the stock of Forestar Petroleum on September 22, 2017, the buyer assumed substantially all liabilities of Forestar Petroleum including the obligation to plug and abandon certain oil and gas wells in Wyoming.

~~Note 17—Segment Information~~

~~We manage our operations through~~ ~~three~~ segments: real estate, mineral resources and other. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land and commercial and income producing properties, which consists of three multifamily projects and one site. Mineral resources manages our owned mineral interests. Other manages our timber, recreational leases and water resource initiatives.

~~Total assets allocated by segment are as follows:~~

Third
Quarter-End Year-End
2017 2016
(In thousands)
Real estate $ 363,395
$ 403,062
Mineral resources —
38,907
Other 9,196
11,531
Assets of discontinued operations —
14
Assets not allocated to segments ^(a)
420,942
279,694
$ 793,533
$ 733,208

~~_________________________~~


^(a)	~~Assets not allocated to segments at~~ ~~third quarter-end2017~~ ~~principally consist of cash and cash equivalents of~~ ~~$395,359,000~~ ~~and an income tax receivable of $23,818,000. Assets not allocated to segments at year-end~~ ~~2016~~ ~~principally consist of cash and cash equivalents of~~ ~~$265,798,000~~ ~~and an income tax receivable of $10,867,000.~~

We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of strategic timberland and undeveloped land, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in ~~Note 1—Basis of Presentation. Our revenues are derived from U.S. operations and all of our assets are located in the U.S.~~

~~Segment revenues and earnings are as follows:~~

~~_________________________~~


^(a)	~~Items not allocated to segments consist of:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
General and administrative expense $ (4,979 ) $ (4,505 ) $ (36,556 ) $ (13,992 )
Shared-based and long-term incentive compensation expense (424 ) (1,024 ) (2,767 ) (2,980 )
Gain on sale of assets 625
—
28,674
—
Interest expense (2,038 ) (3,369 ) (6,439 ) (17,926 )
Loss on extinguishment of debt, net —
—
—
(35,864 )
Other corporate non-operating income 361
58
956
283
$ (6,455 ) $ (8,840 ) $ (16,132 ) $ (70,479 )

estimate.

Note ~~18—Share-Based and Long-Term Incentive Compensation~~

~~Share-based and long-term incentive compensation expense consists of:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Cash-settled awards $ (66 ) $ (43 ) $ 1,047
$ 82
Equity-settled awards 268
765
1,171
1,869
Restricted stock —
10
—
22
Stock options 106
217
349
692
Total share-based compensation 308
949
2,567
2,665
Deferred cash 116
75
200
315
$ 424
$ 1,024
$ 2,767
$ 2,980

~~Share-based and long-term incentive compensation expense is included in:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
General and administrative expense $ 361
$ 672
$ 1,847
$ 2,516
Other operating expense 63
352
920
464
$ 424
$ 1,024
$ 2,767
$ 2,980

~~Share-Based Compensation~~

~~We did not grant any new equity-settled or cash-settled awards to employees in first nine months 2017.~~

In first nine months 2017, we granted 66,037 restricted stock units to our board of directors, of which 34,746 were annual restricted stock units which vest 25 percent at grant date and 25 percent at each subsequent quarterly board meeting. Expense associated with annual restricted stock units is included in share-based compensation expense.

Excluded from share-based compensation expense in the table above are fees earned by our board of directors in the amount of $135,000 and $169,000 in third quarter of 2017 and 2016 and $449,000 and $596,000 in the first nine months of 2017 and 2016 for which they elected to defer payment until retirement in the form of share-settled units. These expenses are included in general and administrative expense.

~~The fair value of awards granted to retirement eligible employees expensed at the date of grant was~~ ~~$600,000~~ ~~in first nine months~~ ~~2016. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $864,000 at~~ ~~third quarter-end2017~~.

~~In first nine months~~ ~~2017~~ ~~and~~ ~~2016, we issued 322,586 and 263,371 shares out of our treasury stock associated with vesting of stock-based awards or exercise of stock options, net of~~ ~~75,870~~ ~~and~~ ~~25,026~~ ~~shares withheld having a value of~~ ~~$980,000~~ ~~and~~ ~~$221,000~~ ~~for payroll taxes in connection with vesting of stock-based awards or exercise of stock options.~~

~~Long-Term Incentive Compensation~~

In first nine months 2017 and 2016, we granted $1,180,000 and $620,000 of long-term incentive compensation to employees in the form of deferred cash awards. The 2017 deferred cash awards vest annually over three years and the 2016 awards vest annually over two years. Expense associated with deferred cash awards is recognized ratably over the vesting period.

~~Please see~~ ~~Note 19—Subsequent Events~~ ~~for information regarding consummation of the merger with D.R. Horton and related matters, including settlement of outstanding awards denominated in shares of stock.~~

~~Note 19—Subsequent Events~~

~~Completion of Merger~~

On June 29, 2017, we entered into the Merger Agreement with D.R. Horton and Force Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of D.R. Horton. At the effective time on October 5, 2017, we merged with Merger Sub and we continued as the surviving entity in the Merger. In the Merger, each existing share of our common stock issued and outstanding immediately prior to the effective time (the “Former Forestar Common Stock”) (except for shares of our common stock that were held by us as treasury shares or by us or D.R. Horton or our or their respective subsidiaries) were converted into the right to receive, at the election of the holders of such shares of Former Forestar Common Stock, either an amount in cash equal to the Cash Consideration ($17.75 per share) or one new share of our common stock (the “New Forestar Common Stock”), subject to proration procedures applicable to oversubscription and undersubscription for the Cash Consideration described in the Merger Agreement. The aggregate amount of Cash Consideration paid by D.R. Horton to holders of Former Forestar Common Stock in the Merger was ~~$558,256,000~~. In the Merger, 10,487,873 shares of New Forestar Common Stock (representing 25% of the outstanding shares of New Forestar Common Stock immediately after the effective time) were issued to the holders of our common stock and 31,451,063 shares of New Forestar Common Stock (representing 75% of the outstanding share of the New Forestar Common Stock immediately after the effective time) were issued to D.R. Horton.

Subject to the terms of the Merger Agreement, at the effective time, each equity award made or otherwise denominated in shares of Former Forestar Common Stock that was outstanding immediately prior to the effective time under our equity compensation plans was cancelled and of no further force or effect as of the effective time. In exchange for the cancellation of the equity awards, each holder of such an equity award received from us the Cash Consideration for each share of Former Forestar Common Stock underlying such equity award (and in the case of equity awards that were stock options or stock appreciation rights, less the applicable exercise or strike price, but not less than $0), whether or not otherwise vested as of the effective time. With respect to any of our market-leveraged stock units, the number of shares of Former Forestar Common Stock subject to such equity awards were determined pursuant to the terms set forth in the applicable award agreements and based on a per share value equal to $17.75.

We paid our financial advisor a transaction fee of $5,595,000 which was expensed upon closing of the Merger. New Forestar Common Stock continues to be listed and traded on the New York Stock Exchange under the ticker symbol, “FOR.”

As of October 5, 2017, we are a majority-owned subsidiary of D.R. Horton, the largest homebuilder by volume in the United States for fifteen consecutive years. We are evaluating the impact of any potential changes in our accounting policies and related party transactions with D.R. Horton post merger and will update our disclosures accordingly in future periods. The merger will be accounted for under the acquisition method in accordance with U.S. GAAP. D.R. Horton is the acquirer for accounting purposes and our consolidated financial statements will continue to be stated at historical cost.

~~Letter of Credit Facility~~

14—Related Party Transactions

On October 5,6, 2017, we entered into a ~~Letter~~Shared Services Agreement with D.R. Horton whereby D.R. Horton will provide us with certain administrative, compliance, operational and procurement services. During the three months ended March 31, 2018, we paid D.R. Horton $262,000 for these shared services and $417,000 for the cost of ~~Credit Facility Agreement (the “LC Facility Agreement”) providing for a $30,000,000 secured standby letter of credit facility (the “LC Facility”) with Keybank National Association~~health insurance and other ~~lenders party thereto, as banks, Keybank National Association, as letter of credit issuer~~employee benefits. These expenses are included within other operating expenses and general and administrative ~~agent, and Keybanc Capital Markets, as sole arranger and sole bookrunner.~~in our consolidated statement of operations.

~~The LC Facility is secured by $30,000,000 in cash deposited with~~Under the ~~administrative agent. We are required to pay a letter of credit fee of 1.25% per annum on the outstanding face amount~~terms of the ~~letters~~Master Supply Agreement with D.R. Horton, both companies are proactively identifying land development opportunities to expand our portfolio of ~~credit issued~~assets. At March 31, 2018, we owned or controlled through land and lot option purchase contracts 13,600 residential lots, of which 3,300 are under contract to sell to D.R. Horton. Additionally, D.R. Horton has the ~~LC Facility, as well as other customary fees~~right of first offer on 5,400 of these residential lots based on executed purchase and ~~expenses. We also are required~~sale agreements. At March 31, 2018 and December 31, 2017, we had earnest money deposit liabilities of $21,418,000 and $1,201,000 related to ~~pay an unused facility fee~~earnest money deposits made by D.R. Horton in respect of ~~0.15% per annum, in each case on~~land and lot option purchase contracts for lots to be sold to D.R. Horton. During the ~~daily amount by which~~three months ended March 31, 2018, we sold 183 residential lots to D.R. Horton for $8,498,000 generating segment earnings of $1,821,000.

During the ~~aggregate commitments exceed the sum of the outstanding letters of credit during each fiscal quarter or portion thereof.~~

~~The LC Facility Agreement includes customary representations~~three months ended March 31, 2018, we reimbursed D.R. Horton approximately $11,752,000 for previously paid earnest money and ~~warranties, affirmative and negative covenants~~$5,892,000 for pre-acquisition and other ~~undertakings. The LC Facility Agreement also contains customary events of default. If an event of default occurs, all or a portion of the commitments~~due diligence costs related to land purchase contracts whereby D.R. Horton assigned their rights under ~~the LC Facility may be terminated and/or~~these land purchase contracts to us.

At March 31, 2018, other ~~rights held by the banks under~~accrued expenses on our consolidated balance sheet included $1,567,000 owed to D.R. Horton for any ~~of the related facility documents (including against the collateral) may be exercised, subject to certain limitations.~~

~~Termination of Senior Credit Facility~~

On October 5, 2017, in connection with entry into the LC Facility, we terminated our existing senior credit facility (the “Prior Credit Facility”). The Prior Credit Facility provided for a $50,000,000 revolving line of credit that was scheduled to mature on May 15, 2018. This Prior Credit Facility could be prepaid at any time without penalty and included a $50,000,000

~~sublimit for letters of credit, of which $14,267,000 were outstanding at the time of termination and were transferred to the new LC Facility.~~

~~3.75% Convertible Senior Notes~~

On October 5, 2017, in connection with the consummation of the Merger, we entered into a Third Supplemental Indenture (together with the base indenture and the prior supplemental indentures, the "Indenture") to the Indenture relating to our 3.75% Convertible Senior Notes due 2020 (the “Convertible Notes”).

Pursuant to the Third Supplemental Indenture, the Convertible Notes are no longer convertible into shares of Former Forestar Common Stock and instead are convertible into cash and shares of New Forestar Common Stock based on the per-share weighted average of the cash and shares of New Forestar Common Stock received by our stockholders that affirmatively made an election in connection with the Merger. As a result of such elections, for each share of Former Forestar Common Stock a holder of Convertible Notes was previously entitled to receive upon conversion of Convertible Notes, such holder is instead entitled to receive $14.19785 in cash and 0.20012 of a share of New Forestar Common Stock.

The completion of the Merger constituted a Fundamental Change, as defined in the Indenture. On October 12, 2017, in accordance with the Indenture, we gave notice of the Fundamental Change to holders of the Convertible Notes and made an offer to purchase (a “Fundamental Change Offer”) all or any part (equal to $1,000 or an integral multiple of $1,000) of every holder’s Convertible Notes pursuant to the Fundamental Change Offer on the terms set forth in the Indenture. In the Fundamental Change Offer, we offered to repurchase the Convertible Notes for a price in cash equal to 100% of the aggregate principal amount of Convertible Notes, plus accrued and unpaid ~~interest, if any,~~shared services, due diligence cost reimbursements and other development cost reimbursements. We had no material amounts due to ~~the date~~or from D.R. Horton as of ~~repurchase.~~December 31, 2017.

~~Expiration of Tax Benefits Preservation Plan~~

On October 5, 2017 immediately prior to the effective time of the merger, our Tax Benefit Preservation Plan expired pursuant to its terms and all Rights previously distributed to the holders of our common stock pursuant to the Plan expired.

~~8.50% Senior Secured Notes~~

On October 30, 2017 (the “Redemption Date”), we redeemed the remaining $5,315,000 aggregate principal amount of outstanding 8.50% Senior Secured Notes due 2022 (the “Notes”). Pursuant to the indenture governing the Notes, the Notes were redeemed for $5,928,063, which was the sum of (a) the present value of 104.250% of the outstanding principal amount of the Notes and the scheduled payments of interest thereon through June 1, 2018 discounted as set forth in such indenture to the Redemption Date, plus (b) accrued and unpaid interest to but not including the Redemption Date.

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 ~~2016~~2017 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of ~~third quarter-end2017~~,March 31, 2018, 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,~~ where our real estate activities are ~~concentrated, or on a national or global scale;~~concentrated;

our ability to achieve ~~some or all of~~ our ~~key~~2018 strategic initiatives;

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

our ability to hire and retain key personnel;

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

obtaining ~~approvals of~~ reimbursements and other payments from special improvement districts and ~~the~~ timing of such payments;

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

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

fluctuations in costs and expenses, including impacts from shortages in materials or labor;

demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in ~~commodity prices;~~interest rates;

competitive actions by other companies;

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

our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;

~~inability to obtain permits for, or changes in laws, governmental policies or regulations affecting, water withdrawal or usage;~~

the effect of D.R. Horton's controlling level of ownership on us and our stockholders;

our ability to realize the potential benefits of the strategic relationship with D.R. Horton;

the effect of our ~~merger~~strategic relationship with D.R. Horton on our ability to maintain relationships with our vendors and customers; 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 ~~2016~~2017 Annual Report on Form 10-K, ~~in Item 1A of our first and second quarter 2017 Quarterly Reports on Form 10-Q, and in Item 1A of this third quarter 2017 Quarterly Report on Form 10-Q,~~ may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Our Operations

We are a residential and mixed-use real estate development ~~company with operations in 14 markets in 10 states, where~~company. On October 5, 2017, we became a majority-owned subsidiary of D.R. Horton. In our community development business we own directly or through ~~joint~~ ventures interests in 4442 residential and mixed-use ~~projects. As of October 5, 2017,~~projects located in 10 states and 18 markets. In addition, we own interests in other assets that have been identified as non-core that we are ~~a majority-owned subsidiary of D.R. Horton, Inc. ("D.R. Horton"), the largest homebuilder by volume in the United States for fifteen consecutive years.~~

~~Merger~~divesting opportunistically over time.

~~Key Initiatives~~

For the past two years we have focused on ~~our key initiatives to reduce~~reducing costs across our entire organization, ~~review~~selling non-core assets, reducing our outstanding debt and reviewing our portfolio of assets and ~~complete non-core asset sales and review our~~ capital ~~structure to allocate capital~~allocation to maximize shareholder value. The ~~merger with D.R Horton~~Merger provides us an opportunity to ~~substantially~~ grow our ~~core~~ community development business ~~in the future~~ by establishing a strategic relationship to supply finished residential lots to ~~D. R.~~D.R. Horton at market ~~prices~~terms under ~~a master supply agreement.~~the Master Supply Agreement. Under the terms of the ~~master supply agreement,~~Master Supply Agreement with D.R. Horton, both companies ~~will~~are proactively ~~identify~~identifying land development opportunities to expand our portfolio of assets. As of March 31, 2018, we have acquired 20 new projects since the Merger, representing nearly 8,200 planned residential lots, of which approximately 36% are under contract to sell to D.R. Horton and a majority of the remaining lots from which are also expected to be sold to D.R. Horton in accordance with the Master Supply Agreement.

2018 Strategic Initiatives

Our 2018 strategic initiatives include making significant investments in land acquisition and development to expand our community development business into a diversified national platform and finalizing non-core asset sales. On February 8, 2018, we entered into and closed on a Purchase and Sale Agreement with Starwood Land, L.P. ("Starwood") to sell 24 legacy projects for $232,000,000. This strategic asset sale included projects owned both directly and indirectly through ventures and consisted of approximately 750 developed and under development residential lots, over 4,000 future undeveloped residential lots (including all real estate associated with the Cibolo Canyons mixed-use development), 730 unentitled acres in California, an interest in one multifamily operating property and a multifamily development site. The agreement contains representations, warranties and indemnities customary for a real estate industry asset sale and includes certain adjustment provisions to the purchase price. The total net proceeds after certain purchase price adjustments, closing costs and other costs associated with selling these projects was $217,506,000, and a gain on the sale of these assets of $716,000 is included in our consolidated statement of operations for the three months ended March 31, 2018. This sale helps to further streamline our business and provide additional capital for future growth. We plan to invest the capital principally in new land development projects with goals of improving returns and enhancing value for our shareholders.

Discontinued Operations

~~At year-end 2016, we had~~We have divested ~~of substantially~~ all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations ~~and financial position of these assets~~ as discontinued operations for ~~all periods presented. The discussion of our results of~~the three months ended March 31, 2017. There was no significant activity related to these operations ~~is based on~~during the ~~results from our continuing operations unless otherwise indicated.~~

three months ended March 31, 2018.

Business Segments

~~Results of Operations~~

~~A summary of~~During the three months ended March 31, 2018, we began managing our ~~consolidated results by~~operations through two business ~~segment follows:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Revenues:
Real estate $ 33,136
$ 45,297
$ 81,880
$ 127,776
Mineral resources —
1,423
1,502
3,842
Other —
487
74
1,199
Total revenues $ 33,136
$ 47,207
$ 83,456
$ 132,817
Segment earnings (loss):
Real estate $ 11,309
$ 15,017
$ 33,327
$ 108,531
Mineral resources 8,112
1,182
45,580
2,668
Other 257
(196 ) (434 ) (974 )
Total segment earnings 19,678
16,003
78,473
110,225
Items not allocated to segments:
General and administrative expense (4,979 ) (4,505 ) (36,556 ) (13,992 )
Share-based and long-term incentive compensation expense (424 ) (1,024 ) (2,767 ) (2,980 )
Gain on sale of assets 625
—
28,674
—
Interest expense (2,038 ) (3,369 ) (6,439 ) (17,926 )
Loss on extinguishment of debt, net —
—
—
(35,864 )
Other corporate non-operating income 361
58
956
283
Income from continuing operations before taxes attributable to Forestar Group Inc. 13,223
7,163
62,341
39,746
Income tax (expense) benefit (5,214 ) 9,666
(33,353 ) (7,415 )
Net income from continuing operations attributable to Forestar Group Inc. $ 8,009
$ 16,829
$ 28,988
$ 32,331

~~Significant aspects of~~segments, real estate and other. Historically, we managed our ~~results of~~ operations ~~follow:~~

~~Third Quarter~~ ~~and First Nine Months 2017~~

~~Third quarter 2017,~~through our real estate segment, ~~earnings decreased compared with third quarter 2016 due~~mineral resources segment (previously referred to ~~$12,810,000 in~~as oil and gas) and other segment ~~earnings from retail land sales, partially offset by non-cash impairment charges of $7,627,000 in third quarter 2016. First nine months 2017,~~(previously referred to as other natural resources).

Our real estate segment ~~earnings decreased compared with first nine months 2016 primarily due to gains~~is our core business and acquires land and developed lots, secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities. Our other segment consists of ~~$121,732,000~~non-core water interests in ~~2016~~1.5 million acres, including a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama that are classified as ~~a result~~assets held for sale at March 31, 2018 and December 31, 2017, and 20,000 acres of ~~executing our key initiative to opportunistically sell non-core assets. In addition, we generated segment earnings of $27,688,000~~groundwater leases in first nine months 2016 from retail land sales. These items were partially offset by non-cash impairment charges of $56,453,000 related to six non-core community development projects and two multifamily sites in first nine months 2016. Segment earnings in 2017 reflect higher equity in earnings of unconsolidated ventures as a result of an increase in commercial tract and residential lot sales within these ventures in first nine months 2017 compared with first nine months 2016. We had no retail land sales in third quarter or first nine months 2017.central Texas.

~~In first quarter 2017, we~~We sold all of our remaining owned mineral assets ~~for approximately $85,700,000.~~in 2017. We ~~generated $82,422,000 in gains related to~~have reclassified the ~~sale~~results of operations from our mineral ~~assets in first nine~~resources segment for the three months ended March 31, 2017 ~~of which $8,200,000~~to our other segment. There was recognized in third quarter 2017 as a result of the expiration of a title review period. In addition, as a result of selling our remaining mineral assets in first quarter 2017, we recognized a non-cash impairment charge of $37,900,000 in first nine months 2017 related to the mineral resources reporting unit goodwill.

~~First nine months 2017 general and administrative expense increased compared to first nine months 2016 primarily due to a merger agreement termination fee of $20,000,000 and~~ ~~$5,624,000~~ ~~in professional fees and other costs incurred associated with proposed merger transactions.~~

Third quarter and first nine months 2017 gain on sale of assets increased compared to third quarter and first nine months 2016 due to the sale of approximately 19,000 acres of timberland and undeveloped land in Georgia and Texasno significant activity for $46,197,000 in three transactions generating combined proceeds of $45,396,000. We generated combined gains of $28,674,000 in first nine months 2017 of which $625,000 was recognized in third quarter 2017 upon receipt of certain regulatory approvals and release of funds from escrow.

~~Third quarter and first nine months 2017 interest expense decreased primarily due to reducing our debt outstanding by $277,790,000 in 2016.~~

~~Loss on extinguishment of debt in first nine months 2016 represents the cash tender offer of our 8.5% senior secured notes and other open market purchases of debt securities.~~

~~Current Market Conditions~~

Sales of new U.S. single-family homes in September 2017, according to a joint release by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, were at a seasonally adjusted annual rate of 667,000 units, representing the highest reading since October 2007. The reading registered 18.9% above the revised August rate of 561,000 and 17% above the September 2016 rate. The report reflected strength in new residential home sales in all regions of the country, with particular strength reportedthese operations in the South. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that housing starts for September 2017 registered a seasonally adjusted annual rate of 1,127,000 units, representing a 4.7% drop from the August estimate of 1,183,000 units but 6.1% above prior year. The housing start decrease during the period was partially attributed to hurricanes disrupting construction activity in the South. Single-family permits, generally viewed as a precursor to housing starts, registered 1,215,000 in September 2017, reflecting a 4.5% decrease from the revised August rate of 1,272,000 and a 4.3% decrease from prior year. Homebuilder confidence, as measured by the National Association of Homebuilders/Wells Fargo Housing Market Index, declined three points in September to a reading of 64 from a downwardly revised reading of 67 in August. The decline reflected builders’ concerns about near term labor availability and increases in building material costs in certain markets due to the recent hurricane activity. On a regional basis, the three month moving averages for builders’ confidence registered the highest in the West followed by the South. The S&P CoreLogic Case-Shiller National Index, which measures home price appreciation for the entire nation, reflected continued price appreciation across the country. On a year over year basis, the S&P Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. Census divisions, reported a 5.9% annual gain in July, up from 5.8% in the previous month. In the 20-City Composite, Seattle, Portland and Las Vegas reported the highest year over year gains with twelve cities within the Composite reporting greater price increases in the year ending July 2017 versus the year ending June 2017.

~~Business Segments~~

~~We manage our operations through three business segments:~~

•~~Real estate;~~

•~~Mineral resources; and~~

•~~Other~~months ended March 31, 2018.

We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income ~~on loans secured by real estate~~ and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based and long-term incentive compensation, ~~gain on sale of strategic timberland and undeveloped land,~~ interest expense, and other corporate ~~non-operating income~~interest and ~~expense. The accounting policies~~other income. Our revenues are derived from our U.S. operations and all of ~~the segments~~our assets are ~~the same as those described~~located in the ~~accounting policy note to the consolidated financial statements.~~U.S.

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~~homebuilder sentiment, new housing starts, real estate values, employment levels, and the overall strength or weakness of the U.S. economy.

Results of Operations

A summary of our consolidated results by business segment follows:



	Three Months Ended March 31,
	2018			2017
	(In thousands)
Revenues:
Real estate	$	22,575		$	20,752
Other	24			1,553
Total revenues	$	22,599		$	22,305
Segment earnings (loss):
Real estate	$	9,703		$	10,473
Other	(553		)	37,429
Total segment earnings	9,150			47,902
Items not allocated to segments:
General and administrative expense	(3,653		)	(4,028		)
Share-based and long-term incentive compensation expense	(136		)	(895		)
Interest expense	(2,136		)	(2,235		)
Interest and other income	1,375			254
Income from continuing operations before taxes attributable to Forestar Group Inc.	4,600			40,998
Income tax expense	(66		)	(16,211		)
Net income from continuing operations attributable to Forestar Group Inc.	$	4,534		$	24,787

Real Estate

We own directly or through ventures interests in 4442 residential and mixed-use projects ~~comprised of approximately 4,000 acres of real estate~~ located in 10 states and 1418 markets. Our real estate segment acquires land and developed lots, secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. ~~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.

At March 31, 2018, we owned or controlled through land and lot option purchase contracts 13,600 residential lots, of which 3,300 are under contract to sell to D.R. Horton. Additionally, D.R. Horton has the right of first offer on 5,400 of these residential lots based on executed purchase and sale agreements. At March 31, 2018, we also have 500 lots under contract to sell to other builders.

A summary of our real estate results follows:


	Third Quarter						First Nine Months						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(In thousands)												(In thousands)
Revenues	$	33,136		$	45,297		$	81,880		$	127,776		$	22,575		$	20,752
Cost of sales	(21,776		)	(29,259		)	(50,145		)	(120,349		)
Cost of real estate sales													(15,575		)	(11,896		)
Operating expenses	(2,885		)	(5,671		)	(11,168		)	(24,382		)	(1,803		)	(3,879		)
	8,475			10,367			20,567			(16,955		)	5,197			4,977
Interest income	779			1,191			1,482			1,337			277			422
Gain on sale of assets	465			501			1,915			121,732			2,746			—
Equity in earnings of unconsolidated ventures	1,614			3,568			9,475			3,747			1,529			5,114
Less: Net (income) attributable to noncontrolling interests	(24		)	(610		)	(112		)	(1,330		)
Less: Net income attributable to noncontrolling interests													(46		)	(40		)
Segment earnings	$	11,309		$	15,017		$	33,327		$	108,531		$	9,703		$	10,473

Revenues in our owned and consolidated ventures consist of:


	Third Quarter				First Nine Months				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
	(In thousands)								(In thousands)
Residential real estate	$	30,320	$	18,963	$	75,106	$	66,126	$	20,348	$	20,048
Commercial real estate	2,595		7,000		5,862		9,655		2,000		447
Undeveloped land	—		15,667		—		34,184
Commercial and income producing properties	—		12		91		13,065
Other	221		3,655		821		4,746		227		257
	$	33,136	$	45,297	$	81,880	$	127,776	$	22,575	$	20,752

Units sold consist of:



	Three Months Ended March 31,
	2018		2017
Owned and consolidated ventures:
Residential lots sold	304		190
Revenue per lot sold	$	66,735	$	88,850
Commercial acres sold	25		4
Revenue per commercial acre sold	$	80,678	$	121,718
Ventures accounted for using the equity method:
Residential lots sold	21		107
Revenue per lot sold	$	70,205	$	72,001
Commercial acres sold	—		46
Revenue per commercial acre sold	$	—	$	212,352

Residential real estate revenues principally consist of the sale of residential single-family lots to local, regional and national homebuilders. Owned and consolidated venture residential lot sales volume increased to 304 residential lots sold in ~~third quarter and first nine~~the three months ended March 31, 2018, compared to 190 residential lots sold in the three months ended March 31, 2017, ~~declined~~principally as ~~compared with third quarter and first nine~~a result of commencing lot sales to D.R. Horton during the three months ~~2016, however,~~ended March 31, 2018. The average

price per residential lot ~~sold increased 40~~decreased 25 percent ~~in third quarter and 36 percent in first nine months 2017~~ due to mix of product sold. ~~Residential real estate revenues also included~~During the ~~sale of approximately 41~~three months ended March 31, 2018, we sold 183 residential ~~tract acres from one project in Arizona~~lots to D.R. Horton for ~~$6,796,000~~$8,498,000 generating segment earnings of ~~$715,000 in third quarter 2017.~~$1,821,000. In ~~first nine~~the three months ended March 31, 2017, ~~we sold~~residential real estate revenues included sale of approximately ~~189~~96 residential tract acres ~~from two projects in Texas and one project in Arizona~~ for ~~$12,546,000~~$4,000,000 generating segment earnings of ~~$3,843,000.~~$2,191,000. We did not sell any residential tract acres in the three months ended March 31, 2018.

Commercial real estate revenues principally consist of the sale of tracts to commercial developers that specialize in the construction and operation of income producing properties such as apartments, retail centers, or office buildings. The commercial real estate revenues in ~~third quarter 2017~~the three months ended March 31, 2018 relate to the sale of 46the remaining 25 acres from ~~two projects~~a wholly-owned project in ~~Texas~~Antioch for ~~$2,595,000,~~$2,000,000, generating $210,000 in segment earnings, compared with sales in the three months ended March 31, 2017 of 4 acres from a wholly-owned project in Houston for $447,000, which generated segment earnings of $2,097,000. The commercial real estate revenues in first nine months 2017 relate primarily to the sale of 65 acres from six projects in Texas, generating segment earnings of $3,876,000. The commercial real estate revenues in third quarter and first nine months 2016 relate primarily to the sale of 108 acres from our San Joaquin River project in Antioch, California for $7,000,000 which provided approximately $37,400,000 in income tax losses to offset tax gains.

We did not sell any retail land in third quarter or first nine months 2017. In third quarter 2016, we sold approximately 6,500 acres of retail land for $15,667,000, or approximately $2,410 per acre, generating $12,810,000 in segment earnings. In first nine months 2016, we sold 13,898 acres of retail land for $34,184,000, or approximately $2,460 per acre, generating approximately $27,688,000 in segment earnings.

Commercial and income producing properties revenue includes revenues from hotel room sales and other guest services, rental revenues from our operating multifamily properties and reimbursement for costs paid to subcontractors plus development and construction fees from certain multifamily projects. The decrease in commercial and income producing properties revenues in third quarter and first nine months 2017 when compared with third quarter and first nine months 2016 was primarily due to the sale of Radisson Hotel & Suites and one multifamily property in 2016 as a result of our key initiative to sell non-core assets.

~~Units sold consist of:~~

Third Quarter First Nine Months
2017 2016 2017 2016
Owned and consolidated ventures:
Residential lots sold 240
272
682
975
Revenue per lot sold $ 96,638
$ 69,131
$ 91,831
$ 67,301
Commercial acres sold 46
108
66
116
Revenue per commercial acre sold $ 56,230
$ 64,923
$ 88,312
$ 83,347
Undeveloped acres sold —
6,501
—
13,898
Revenue per acre sold $ —
$ 2,410
$ —
$ 2,460
Ventures accounted for using the equity method:
Residential lots sold 70
60
236
130
Revenue per lot sold $ 68,069
$ 73,773
$ 69,573
$ 78,108
Commercial acres sold —
2
88
4
Revenue per commercial acre sold $ —
$ 750,902
$ 263,674
$ 527,152
Undeveloped acres sold —
—
—
—
Revenue per acre sold $ —
$ —
$ —
$ —
$401,000.

Cost of sales in ~~third quarter and first nine~~the three months ~~2017 decreased when~~ended March 31, 2018 increased as compared ~~with third quarter and first nine months 2016~~to the prior year period primarily due to ~~non-cash impairment charges of $7,627,000~~the increase in residential lots and $56,453,000 associated with six non-core community development projects and two multifamily sites in 2016, lower lot sale activity from our owned and consolidated projects and no undeveloped land sales in third quarter and first nine months 2017.commercial tract acres sold.

Operating expenses consist of:


	Third Quarter				First Nine Months				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
	(In thousands)								(In thousands)
Employee compensation and benefits	$	871	$	1,940	$	3,440	$	7,686	$	718	$	1,328
Property taxes	413		792		2,657		5,107		384		891
Professional services	720		1,513		2,208		4,244		223		830
Depreciation and amortization	33		39		100		937		27		35
Other	848		1,387		2,763		6,408		451		795
	$	2,885	$	5,671	$	11,168	$	24,382	$	1,803	$	3,879

The decrease in employee compensation and benefits expense in ~~third quarter and first nine~~the three months ~~2017~~ended March 31, 2018 compared to the prior year period is principally related to cost reductions ~~in personnel~~ resulting from our key initiatives to reduce costs across our entire ~~organization and~~organization. However, in 2018 we anticipate hiring additional staff to support our ~~plan to sell non-core assets.~~2018 strategic initiatives. The decrease in property taxes and ~~depreciation and amortization~~professional services is primarily due to the sale of ~~Radisson Hotel & Suites and one wholly-owned multifamily property~~non-core assets, including the sale to Starwood in ~~2016. The decrease in other operating expenses is primarily due to $1,605,000 of pre-acquisition and development costs in first nine~~the three months 2016 associated with multifamily and mitigation projects that we no longer intended to pursue, operating cost savings from non-core community development projects sold in 2016 and other cost reductions across the organization.ended March 31, 2018.

Interest income principally represents interest received on reimbursements from utility and improvement districts.

First nine months 2017 gain on sale of assets consists primarily of $465,000 received from the Cibolo Canyons Special Improvement District (CCSID) funded by hotel occupancy and sales and use tax revenues and $1,318,000 associated with the reduction of a surety bond in connection with our credit support of a 2014 CCSID bond issuance. As the CCSID bond principal decreases, our credit support obligation is reduced and certain deferred gains associated with our receipt of proceeds from CCSID funded by its 2014 bond issuance will be recognized.

Gain on sale of assets in first ~~nine months 2016~~quarter 2018 includes a gain of ~~$95,336,000~~$2,030,000 related to ~~sale of~~ the Radisson Hotel & Suites, a gain of $9,116,000 related to sale of the Eleven multifamily project, a gain of $1,229,000 associated with sale of the Dillon multifamily project, a gain of $10,363,000 related to sale of our interest in ~~the 360° multifamily~~a venture and a gain of ~~$3,968,000 associated with the~~$716,000 related to our strategic sale of the Music Row multifamily project, a gain of $1,219,000 associated with the reduction of a surety bond supporting the 2014 CCSID bond issuance and $501,000 from CCSID funded by hotel occupancy and sales and use tax collections.

assets to Starwood.

The ~~increase~~decrease in equity in earnings from our unconsolidated ventures in ~~first nine~~the three months ~~2017~~ended March 31, 2018 compared ~~with first nine months 2016~~to the prior year period is primarily due to ~~higher~~lower residential lot ~~sale~~and commercial real estate sales activity ~~and earnings~~ from ~~LM Land Holdings, LP which benefited from~~our ventures. Commercial sales activity in the ~~sale of 42~~three months ended March 31, 2017 includes 46 commercial acres sold from an unconsolidated venture project in Houston for ~~$13,600,000, generating~~$9,719,000, which generated venture earnings of $10,683,000, of which $6,321,000 was deferred and will be recognized as development is completed. Based on our 37.5% interest in this venture, our pro-rata share of the earnings associated with this sale was $1,636,000. Venture earnings from 242, LLC also benefited from the sale of 46 commercial acres for $9,719,000 generating $6,612,000 in earnings to the venture.$6,612,000. Based on our 50% interest, ~~in the venture,~~ our pro-rata share of ~~the~~these earnings ~~associated with this sale~~ was $3,306,000.

We underwrite real estate development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment ~~charge for such project.~~

~~Our net investment in owned and consolidated real estate by geographic location as of third quarter-end 2017 follows:~~

State
Entitled,
Developed,
and Under
Development
Projects

Land
in Entitlement Process and Other
Total
(In thousands)
Texas $ 151,857
$ 2,778
$ 154,635
Georgia 6,656
416
7,072
California 1,667
26,813
28,480
North & South Carolina 30,097
45
30,142
Colorado 29,939
—
29,939
Tennessee 16,848
135
16,983
$ 237,064
$ 30,187
$ 267,251

~~Mineral Resources~~

In first quarter 2017, we sold our remaining owned mineral assets for a total purchase price of approximately $85,700,000. We generated total gains of $82,422,000 in first nine months 2017 of which $8,200,000 was recognized in third quarter 2017 as a result of the expiration of a title review period. With the completion of this sale we have divested of substantially all of our oil and gas assets.

~~A summary of our mineral resources results follows:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Revenues $ —
$ 1,423
$ 1,502
$ 3,842
Cost of mineral resources —
(182 ) (38,315 ) (572 )
Operating expenses (238 ) (114 ) (1,424 ) (713 )
(238 ) 1,127
(38,237 ) 2,557
Gain on sale of assets 8,200
—
82,422
—
Equity in earnings of unconsolidated ventures 150
55
1,395
111
Segment earnings (loss) $ 8,112
$ 1,182
$ 45,580
$ 2,668

~~Revenues consist of:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Oil royalties ^(a)
$ —
$ 883
$ 900
$ 2,174
Gas royalties —
330
487
929
Other (principally lease bonus and delay rentals) —
210
115
739
$ —
$ 1,423
$ 1,502
$ 3,842

~~_________________________~~


^(a)	~~Oil royalties include revenues from oil, condensate and natural gas liquids (NGLs).~~

~~In third quarter and first nine months 2017, royalty revenues decreased principally due to the sale of our remaining owned mineral assets.~~

Cost of mineral resources principally includes a non-cash impairment charge of $37,900,000 in first nine months 2017 associated with goodwill related to the sale of our owned mineral assets in first quarter 2017.

Operating expenses principally consist of employee compensation and benefits, legal and professional services, property taxes and rent expense. The increase in operating expenses in third quarter and first nine months 2017 compared with third quarter and first nine months 2016 is primarily due to incentive compensation and legal expenses associated with the sale of our owned mineral assets.

In first nine months 2017, equity in earnings of unconsolidated ventures represents $1,245,000 in earnings from a venture in which we own a 50% interest. These earnings were principally a result of our purchase of certain mineral assets from the venture. We purchased these assets from the venture for $2,400,000 and subsequently received our pro-rata share of the earnings and distributable cash of $1,200,000 from the venture.

~~Oil and gas produced and average unit prices related to our royalty interests follows:~~

Third Quarter First Nine Months
2017 2016 2017 2016
Consolidated entities:
Oil production (barrels) —
19,400
17,400
54,800
Average oil price per barrel $ —
$ 44.64
$ 50.20
$ 38.08
NGL production (barrels) —
1,000
600
7,600
Average NGL price per barrel $ —
$ 16.78
$ 22.99
$ 11.40
Total oil production (barrels), including NGLs —
20,400
18,000
62,400
Average total oil price per barrel, including NGLs $ —
$ 43.23
$ 49.38
$ 34.82
Gas production (millions of cubic feet) —
170.0
159.9
488.8
Average price per thousand cubic feet $ —
$ 1.94
$ 3.05
$ 1.90
Our share of ventures accounted for using the equity method:
Gas production (millions of cubic feet) —
35.5
33.4
108.7
Average price per thousand cubic feet $ —
$ 1.97
$ 2.98
$ 1.78
Total consolidated and our share of equity method ventures:
Oil production (barrels) —
19,400
17,400
54,800
Average oil price per barrel $ —
$ 44.64
$ 50.20
$ 38.08
NGL production (barrels) —
1,000
600
7,600
Average NGL price per barrel $ —
$ 16.78
$ 22.99
$ 11.40
Total oil production (barrels), including NGLs —
20,400
18,000
62,400
Average total oil price per barrel, including NGLs $ —
$ 43.23
$ 49.38
$ 34.82
Gas production (millions of cubic feet) —
205.5
193.3
597.5
Average price per thousand cubic feet $ —
$ 1.95
$ 3.03
$ 1.88
Total BOE (barrel of oil equivalent) ^(a)
—
54,700
50,200
162,000
Average price per barrel of oil equivalent $ —
$ 23.47
$ 29.36
$ 20.34

~~_________________________~~


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

charge.

Other

Our other segment ~~all~~consists of ~~which is~~ non-core manages our timber holdings, recreational leases and water resource initiatives. Our other segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. At third quarter-end 2017, we did not have any remaining timber holdings or recreational leases, and we had water interests in ~~approximately~~ 1.5 million acres, including a ~~45 percent~~45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama that are classified as assets held for sale at March 31, 2018 and ~~approximately~~December 31, 2017, and 20,000 acres of groundwater leases in central Texas. ~~All~~

We sold all of our ~~water interests were classified as~~remaining owned mineral assets ~~held~~in 2017. We have reclassified the results of operations from our mineral resources segment for ~~sale at third quarter-end 2017.~~the three months ended March 31, 2017 to our other segment. There was no significant activity for these operations in the current period.

A summary of our other results follows:

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Revenues $ —
$ 487
$ 74
$ 1,199
Cost of sales (109 ) (363 ) (518 ) (867 )
Operating expenses (34 ) (334 ) (393 ) (1,320 )
(143 ) (210 ) (837 ) (988 )
Gain on sale of assets 400
—
400
—
Equity in earnings of unconsolidated ventures —
14
3
14
Segment earnings (loss) $ 257
$ (196 ) $ (434 ) $ (974 )

~~Revenues consist of:~~

Third Quarter First Nine Months
2017 2016 2017 2016
(In thousands)
Fiber $ —
$ 318
$ —
$ 509
Water —
—
9
24
Recreational leases and other —
169
65
666
$ —
$ 487
$ 74
$ 1,199



	Three Months Ended March 31,
	2018			2017
	(In thousands)
Revenues	$	24		$	1,553
Cost of other	(536		)	(38,616		)
Operating expenses	(41		)	(971		)
	(553		)	(38,034		)
Gain on sale of assets	—			74,215
Equity in earnings of unconsolidated ventures	—			1,248
Segment earnings (loss)	$	(553	)	$	37,429

In ~~third quarter and first nine~~the three months ended March 31, 2017, ~~revenues decreased principally due~~cost of other includes a non-cash impairment charge of $37,900,000 associated with goodwill related to our owned mineral assets. In the ~~sale of~~three months ended March 31, 2017, we sold our remaining ~~undeveloped land containing our timber holdings and recreational leases.~~mineral assets for $85,700,000, which generated gains of $74,215,000.

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

The decrease in operating expenses in third quarter and first nine months 2017 when compared with third quarter and first nine months 2016 is primarily due to our key initiatives to sell non-core assets and reduce costs across the organization. Operating expenses associated with our water resources initiatives for first nine months 2017 and 2016 were $321,000 and $703,000.

Gain on sale of assets represents nonrefundable earnest money forfeited by a buyer that terminated a contract to purchase our 20,000 acres of groundwater leases in central Texas. As of third quarter-end 2017, we continued to market this asset for sale and evaluate the long term use and ultimate disposition of this asset.

Items Not Allocated to Segments

Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based and long-term incentive compensation, ~~gain on sale of strategic timberland and undeveloped land,~~ interest expense, and interest and other ~~corporate non-operating income and expense.~~income. General and administrative expenses principally consist of costs and expenses related to accounting and finance, tax, legal, human resources, internal audit, information technology, executive officers and our board of directors. These functions support all of our business ~~segments and are not allocated.~~

segments.

General and administrative expense

General and administrative expenses consist of:


	Third Quarter				First Nine Months				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
	(In thousands)								(In thousands)
Employee compensation and benefits	$	1,502	$	2,128	$	5,765	$	6,859	$	1,746	$	2,033
Professional and consulting services	2,508		1,336		7,863		3,401		982		978
Facility costs	210		157		645		592		201		212
Depreciation and amortization	68		95		239		314		24		87
Insurance costs	162		179		489		546		132		162
Other	529		610		21,555		2,280		568		556
	$	4,979	$	4,505	$	36,556	$	13,992	$	3,653	$	4,028

The ~~increase~~decrease in ~~general~~employee compensation and ~~administrative~~benefits expense in ~~first nine~~the three months ~~2017 when~~ended March 31, 2018 compared ~~with first nine months 2016~~to the prior year period is primarily due to ~~a $20,000,000 merger agreement termination fee and $5,624,000~~the reduction in ~~professional fees and other~~personnel resulting from our key initiative to reduce costs ~~associated with proposed merger transactions. Employee compensation and benefits includes $652,000 and $486,000 in severance costs incurred in first nine months 2017 and 2016.~~across our entire organization.

Share-based compensation and long-term incentive compensation expense

~~Our share-based compensation expense fluctuates principally due to a portion of our awards being cash-settled and as a result they are affected by changes in the market price of our common stock.~~ The decrease in share-based compensation and long-term incentive compensation expense in ~~third quarter and first nine~~the three months ~~2017 when compared with third quarter and first nine months 2016~~ended March 31, 2018 is ~~primarily~~principally due to ~~no new share-based~~the acceleration and settlement of awards ~~granted to employees~~upon closing of the Merger in ~~first nine~~2017, which resulted in fewer awards outstanding during the three months ~~2017.~~

~~Gain on Sale of Assets~~

~~Third quarter and first nine months 2017 gain on sale of assets increased~~ended March 31, 2018 compared to ~~third quarter and first nine~~the three months 2016 due to sale of approximately 19,000 acres of timberland and undeveloped land in Georgia and Texas for $46,197,000 in three transactions generating combined proceeds of $45,396,000. These transactions generated combined gains of $28,674,000 in first nine months 2017 of which $625,000 was recognized in third quarter 2017 upon receipt of certain regulatory approvals and release of funds from escrow.ended March 31, 2017.

Interest expense

Interest expense consists principally of the interest and amortization of debt discount on our 3.75% Convertible Senior Notes due 2020.

Interest and other income

The ~~decrease~~increase in interest ~~expense~~and other income in ~~third quarter and first nine~~the three months ~~2017 when compared with third quarter and first nine months 2016~~ended March 31, 2018 is principally due to ~~a reduction of~~ our ~~debt outstanding by $277,790,000 in 2016.~~

~~Loss~~higher cash balances and the interest earned on ~~Extinguishment of Debt~~

~~Loss on extinguishment of debt in first nine~~those deposits during the three months ~~2016 resulted from retirement of debt pursuant~~ended March 31, 2018 compared to the ~~cash tender offer on our 8.5% senior secured notes and other open market purchases of debt securities.~~three months ended March 31, 2017.

Income Taxes

At ~~third quarter-end~~March 31, 2018 and December 31, 2017, ~~and year-end 2016, we have a valuation allowance for~~ our deferred tax assets, net of ~~$66,461,000~~

deferred tax liabilities, were $39,911,000 and ~~$73,405,000~~$41,606,000, offset by a valuation allowance of $38,544,000 and $39,578,000 for the portion of the deferred tax assets that we have determined is more likely than not to be ~~unrealizable under U.S. GAAP.~~unrealizable.

The Tax Act which was enacted on December 22, 2017, reduced the federal corporate tax rate from 35 percent to 21 percent for all corporations effective January 1, 2018. ASC 740 requires companies to reflect the effects of a tax law change in the period in which the law is enacted. Accordingly, we remeasured our deferred tax assets and liabilities along with the corresponding valuation allowance as of the 2017 enactment date. This remeasurement resulted in no additional tax expense or benefit except for the release of a portion of the valuation allowance for AMT Credits which became refundable as a result of the tax law change. The initial remeasurement was our best estimate based on the information available at the time and may change as additional information, such as regulatory guidance, becomes available. Any required adjustment will be reflected as a discrete expense or benefit in the quarter that it is identified, as allowed by SEC Staff Accounting Bulletin No. 118. For the three months ended March 31, 2018, no adjustments to the remeasurement of our deferred tax accounts were recognized.

On October 5, 2017, D.R. Horton acquired 75% of our common stock resulting in an ownership change under Section 382. Section 382 limits our ability to use certain tax attributes and built-in losses and deductions in a given year. Any tax attributes or built-in losses and deductions that were limited in 2017 or are limited in 2018 are expected to be fully utilized in future years.

Our unrecognized tax benefits totaled ~~approximately $442,000~~$441,000 at ~~third quarter-end 2017,~~March 31, 2018, all of which would affect our effective tax rate, if recognized.

Liquidity and Capital Resources

Liquidity

We have significantly reduced our outstanding debt in recent years and have also generated significant available cash for reinvestment in our community development business as a result of selling non-core assets over the past two years. We believe that the Merger provides us with an opportunity to substantially grow our business in the future by establishing a strategic relationship to supply finished residential lots to D.R. Horton at market terms under the Master Supply Agreement that we entered into with D.R. Horton in connection with the Merger. We plan to fund our growth initially with available cash on our balance sheet, and we are also evaluating our longer-term capital structure, projected future liquidity and working capital requirements. We plan to pursue a new credit facility to support our growth and will also consider other alternatives to raise additional capital in the future, such as issuing debt or equity securities, as we expand our business with the goal of being a leading national land developer.

On ~~September 22,~~February 8, 2018, we entered into and closed on a Purchase and Sale Agreement with Starwood to sell 24 legacy projects for $232,000,000 which generated $217,506,000 in net proceeds to us after certain purchase price adjustments, closing costs and other costs associated with selling these projects. At March 31, 2018, we had cash and cash equivalents of $436,401,000, which is expected to be sufficient to fund our growth objectives and working capital needs in the near-term. Our liquidity and ability to achieve longer-term growth objectives will depend on our ability to generate cash from operations and to obtain sufficient financing to support our growth initiatives.

Secured Letter of Credit Agreement

On October 5, 2017, we entered into a Letter of Credit Facility Agreement with lenders providing for a $30,000,000 secured standby letter of credit facility (the "LC Facility"). The LC Facility is secured by $30,000,000 in cash deposited with the administrative agent. In addition, we have $10,000,000 on deposit with a participating lender. These deposits are classified as restricted cash on our consolidated balance sheets. At March 31, 2018, $21,003,000 was outstanding under the LC Facility.

Public Unsecured Debt

On October 5, 2017, we had $120,000,000 aggregate principal amount of 3.75% convertible senior notes due 2020 ("Convertible Notes"). The completion of the Merger constituted a fundamental change in the indenture governing the Convertible Notes and, as a result, we offered to purchase all or any part of every holder’s Convertible Notes for a price in cash equal to 100% of the aggregate principal amount of the Convertible Notes, plus accrued and unpaid interest, if any, to the date of repurchase. As a result, we purchased $1,077,000 of the aggregate principal amount of the Convertible Notes in November 2017. Also, prior to the Merger, upon conversion of the Convertible Notes each holder was entitled to receive 40.8351 shares of former Forestar common stock per $1,000 principal amount of notes surrendered for conversion. In connection with the Merger, the conversion ratio was adjusted in accordance with ~~our previously announced initiative~~the indenture governing the Convertible Notes such that each holder is now entitled to ~~sell non-core assets, we sold the~~receive $579.77062 in cash and 8.17192 shares of new Forestar common stock per $1,000 principal amount of ~~Forestar Petroleum Corporation~~notes surrendered for ~~$100,000. With~~conversion. At March 31, 2018, the principal amount of the Convertible Notes was $118,923,000 and the unamortized debt discount was $8,657,000. The effective interest rate on the liability component was 8% and the carrying amount of the equity component was $16,847,000. We intend to settle the principal amount of the Convertible Notes in cash upon conversion, with any excess conversion value to be settled in shares of our common stock.

Contractual Obligations and Off-Balance Sheet Arrangements

In 2014, FMF Littleton LLC, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $46,384,000 to develop a 385-unit multifamily project located in Littleton, Colorado. The outstanding balance was $45,780,000 at March 31, 2018. We provided the lender with a guaranty of completion of ~~this transaction~~the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out guaranty. At September 30, 2017, the principal guaranty was reduced from 25 percent to 10 percent of principal due to achievement of certain conditions.

In support of our community development business, we have ~~now sold all~~a $40,000,000 surety bond program that provides financial assurance to beneficiaries related to execution and performance of our oil and gas assets and related entities. This transaction resulted in a significant tax loss. The corresponding tax benefit is reported in discontinued operations as a discrete event in third quarter 2017.land development business. At March 31, 2018, there was $26,598,000 outstanding under this program.

~~Capital Resources and Liquidity~~

Sources and Uses of Cash

The consolidated ~~statements~~statement of cash flows for ~~first nine~~the three months ended March 31, 2017 ~~and 2016 reflect~~reflects cash flows from both continuing and discontinued operations. The consolidated statement of cash flows for the three months ended March 31, 2018 reflects only cash flows from continuing operations as there were no discontinued operations for the three months ended March 31, 2018. We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal sources of cash are proceeds from the sale of real estate, ~~the cash flows from our mineral resources and income producing properties,~~ borrowings and reimbursements from utility and improvement districts. Our principal cash requirements are for the acquisition and development of real estate, ~~either directly or indirectly through ventures,~~and the payment of taxes, interest and compensation. Operating cash flows are affected by the timing of the payment of ~~real estate~~land acquisition costs and 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. Working capital varies based on a variety of factors, including the timing of sales of real estate, ~~collection of receivables,~~ reimbursement from utility and improvement districts and the payment of payables and expenses.

We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. We may, at any time, be considering or be in discussions with respect to the purchase or sale of our common stock, debt securities, convertible securities or a combination thereof.

Cash Flows from Operating Activities

Cash flows from our real estate acquisition and development activities ~~undeveloped land sales, commercial and income producing properties, timber sales, income from oil and gas properties, recreational leases~~ and reimbursements from utility and improvement districts are classified as operating cash flows.

In ~~first nine~~the three months ~~2017~~,ended March 31, 2018, net cash ~~provided by~~used for operating activities was ~~$994,000~~$113,999,000 compared to ~~$29,807,000~~$2,379,000 in net cash ~~provided by~~used for operating activities in ~~first nine~~the three months ~~2016.~~ended March 31, 2017. The ~~decrease~~increase in cash ~~provided by~~used for operating activities year over year was ~~primarily~~principally due to the payment of a $20,000,000 merger agreement termination fee and $5,624,000 of professional fees and other costs related to proposed merger transactions, no retail land sales in 2017, $14,703,000 in funds received in first quarter 2016 that were previously held by a qualified intermediary for an intended like-kind exchange that was not completed related to a 2015 sale of undeveloped land and payment of $3,000,000 related to a legal settlement in first nine months 2017. These items were partially offset by an increase in ~~distributions~~land acquisition expenditures of ~~earnings of unconsolidated ventures in first nine months 2017.~~$130,487,000.

Cash Flows from Investing Activities

Capital contributions to and capital distributions from unconsolidated ventures, ~~costs incurred to acquire, develop and construct multifamily projects that will be held as commercial operating properties upon stabilization as investment property,~~ business acquisitions, proceeds from the strategic sale of assets, and ~~investment in oil and gas properties~~the sale of property and equipment are classified as investing activities.

In ~~addition, proceeds from~~ the ~~sale of property and equipment and software costs are also classified as investing activities.~~

~~In first nine~~three months ~~2017~~,ended March 31, 2018, net cash provided by investing activities was $~~127,690,000~~$228,706,000 principally as a result of ~~sales proceeds of $130,146,000 from~~ the ~~execution of our key initiative to opportunistically sell non-core assets, which includes~~

~~$85,240,000 from the~~strategic sale of assets to Starwood which generated $217,506,000 in net proceeds and $11,049,000 in net proceeds as a result of selling our ~~owned mineral assets and working~~ interest ~~assets and $45,396,000 from~~in a venture in Atlanta. In the ~~sale of our remaining timberland and undeveloped land in Georgia and Texas. In first nine~~three months ~~2016~~,ended March 31, 2017, net cash provided by investing activities was ~~$311,203,000~~$74,689,000 principally as a result of ~~sales proceeds of $319,351,000 from the execution of our key initiative to opportunistically sell non-core assets, which includes $128,764,000 from~~ the sale of ~~Radisson Hotel & Suites, $113,772,000 from the sale of multifamily properties and $76,815,000 from sale of~~our remaining oil and gas properties.

Cash Flows from Financing Activities

In ~~first nine~~the three months ~~2017,~~ended March 31, 2018, net cash ~~provided by~~used for financing activities was ~~$877,000~~$89,000 principally due to distributions to noncontrolling interests which was partially offset by an increase in debt from a consolidated venture ~~project which was partially offset by payroll taxes in excess of proceeds related to issuance of stock based awards. In first nine months 2016, net~~project. Net cash used ~~for~~in financing activities in the prior year period was $315,322,000 principally due to retirement of $225,245,000 of our 8.5% senior secured notes, $5,000,000 of our 3.75% convertible senior notes, $6,750,000 of payments related to amortizing notes associated with our tangible equity units and payment in full of $39,336,000 loans secured by the Radisson Hotel & Suites and the Eleven multifamily property, both of which were sold in second quarter 2016.$676,000.

Real Estate Acquisition and Development Activities

We acquire land, secure entitlements and develop infrastructure, primarily for single family residential and mixed-use communities.

We categorize real estate development and acquisition expenditures as operating activities on the statement of cash flows. These development and acquisition expenditures include costs for development of residential lots and mixed-use communities.

Real estate development and acquisition expenditures were ~~$38,355,000~~$149,052,000 and ~~$56,552,000 in first nine months 2017 and 2016.~~

~~Liquidity~~

~~Prior to Completion of the Merger~~

At third quarter-end 2017, our senior secured credit facility provided a line of credit commitment of $50,000,000, none of which was drawn, and included a $50,000,000 sublimit for letters of credit, of which ~~$14,267,000~~ ~~was outstanding. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) were limited by a borrowing base formula. At~~ ~~third quarter-end2017, we had $14,810,000 in net unused borrowing capacity under our senior secured credit facility.~~

~~At third quarter-end 2017, net unused borrowing capacity under our senior secured credit facility is calculated as follows:~~

Senior Credit
Facility
(In thousands)
Borrowing base availability $ 29,077
Less: borrowings —
Less: letters of credit (14,267 )
$ 14,810

~~Our net unused borrowing capacity during third quarter 2017 ranged from a high of $14,810,000 to a low of $14,239,000.~~

Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At third quarter-end 2017, we were in compliance with the financial covenants of these agreements.

~~The following table details our compliance with the financial covenants calculated as provided~~$13,740,000 in the ~~senior secured credit facility:~~



~~Financial Covenant~~	~~Requirement~~	~~Third Quarter-End 2017~~
~~Interest Coverage Ratio~~ ^(a)	~~≥2.50:1.0~~	~~23.41:1.0~~
~~Total Leverage Ratio~~ ^(b)	~~≤50%~~	~~25.6~~	%
~~Tangible Net Worth~~ ^(c)	~~≥$479.1 million~~	~~$616.4 million~~

~~___________________________________~~


^(a)	~~Calculated as EBITDA (earnings before interest, taxes, depreciation, depletion~~three month periods ending March 31, 2018 and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense excluding loan fees. This covenant is applied at the end of each quarter on a rolling four quarter basis.

^(b)

Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities, reimbursement obligations with respect to letters of credit or similar instruments, and our pro-rata share of joint venture debt outstanding. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, high value timberlands, raw entitled lands, entitled land under development, special improvement district reimbursements (SIDR) value and other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.

^(c)

Calculated as the amount by which consolidated total assets exceed consolidated total liabilities. At third quarter-end 2017, the requirement is $479,117,000 computed as: $379,044,000 plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis since third quarter-end 2015. This covenant is applied at the end of each quarter.

To make additional discretionary investments, acquisitions, or distributions, we must maintain available liquidity equal to 10 percent of the aggregate commitments in place. At third quarter-end 2017, the minimum liquidity requirement was $5,000,000, compared with $404,852,000 in actual available liquidity based on the unused borrowing capacity under our senior secured credit facility plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility.

Discretionary investments in community development may be restricted in the event that the revenue/capital expenditure ratio is less than or equal to 1.0x. At third quarter-end 2017, our revenue/capital expenditure ratio was 2.6x. Revenue is defined as total gross revenues (excluding revenues attributed to Credo and multifamily properties), plus our pro rata share of the operating revenues from unconsolidated ventures. Capital expenditures are defined as consolidated development and acquisition expenditures (excluding investments related to Credo and multifamily properties), plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures.

We may elect to make distributions to our stockholders so long as the total leverage ratio is less than 40 percent, the interest coverage ratio is greater than 3.0:1.0 and available liquidity is not less than $125,000,000, all of which were satisfied at third quarter-end 2017. Regardless of whether the foregoing conditions are satisfied, we may make distributions in an aggregate amount not to exceed $50,000,000 to be funded from up to 65 percent of the net proceeds from sales of multifamily properties and non-core assets, such as the Radisson Hotel & Suites in Austin, and any oil and gas properties.

~~Following Completion of the Merger~~

~~Letter of Credit Facility~~

On October 5, 2017, we entered into a Letter of Credit Facility Agreement (the “LC Facility Agreement”) providing for a $30,000,000 secured standby letter of credit facility (the “LC Facility”) with Keybank National Association and other lenders party thereto, as banks, Keybank National Association, as letter of credit issuer and administrative agent, and Keybanc Capital Markets, as sole arranger and sole bookrunner.

The LC Facility is secured by $30,000,000 in cash deposited with the administrative agent. We are required to pay a letter of credit fee of 1.25% per annum on the outstanding face amount of the letters of credit issued under the LC Facility, as well as other customary fees and expenses. We also are required to pay an unused facility fee of 0.15% per annum, in each case on the daily amount by which the aggregate commitments exceed the sum of the outstanding letters of credit during each fiscal quarter or portion thereof.

The LC Facility Agreement includes customary representations and warranties, affirmative and negative covenants and other undertakings. The LC Facility Agreement also contains customary events of default. If an event of default occurs, all or a portion of the commitments under the LC Facility may be terminated and/or other rights held by the banks under any of the related facility documents (including against the collateral) may be exercised, subject to certain limitations.

~~Termination of Senior Credit Facility~~

~~sublimit for letters of credit, of which $14,267,000 were outstanding at the time of termination and were transferred to the new LC Facility.~~

~~3.75% Convertible Senior Notes~~

~~8.50% Senior Secured Notes~~

A~~vailable Cash and New Credit Facility~~

We have significantly reduced our outstanding debt since 2015 and have also generated significant available cash for reinvestment in our core community development business as a result of execution of our key initiatives over the past two years. The merger with D.R Horton provides us an opportunity to substantially grow our business in the future by establishing a strategic relationship to supply finished lots to D. R. Horton at market prices under a master supply agreement. We will fund our growth initially with available cash on our balance sheet, and we are also evaluating our longer-term capital structure, projected future liquidity and working capital requirements. We will pursue a new credit facility to support our growth and will also consider other alternatives to raise additional capital in the future, such as issuing debt or equity securities, as we expand our business with the goal of being a leading national land developer.

~~Contractual Obligations and Off-Balance Sheet Arrangements~~

In 2014, FMF Littleton LLC, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $46,384,000 to develop a 385-unit multifamily project located in Littleton, Colorado. The outstanding balance was $46,064,000 at third quarter-end 2017. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out guaranty. In third quarter 2017, the principal guaranty was reduced from 25 percent to 10 percent of principal due to achievement of certain conditions.

In 2014, CREA FMF Nashville LLC, an equity method venture in which we own a 30 percent interest, obtained a senior secured construction loan in the amount of $51,950,000 to develop a 320-unit multifamily project located in Nashville, Tennessee. The outstanding balance at third quarter-end 2017 was $35,778,000. We provided the lender with a guaranty of completion of the improvements; a guaranty for repayment of 25 percent of the principal balance and unpaid accrued interest; and a standard nonrecourse carve-out guaranty. The principal guaranty will reduce from 25 percent of principal to zero percent upon achievement of certain conditions. In first quarter 2017, the principal guaranty was reduced from 25 percent to 15 percent of principal due to achievement of certain conditions.

~~Cibolo Canyons—San Antonio, Texas~~

~~Cibolo Canyons consists of the JW Marriott~~ ^® San Antonio Hill Country Resort & Spa development owned by third parties and a mixed-use development we own. Our net investment in Cibolo Canyons is $43,299,000 at third quarter-end 2017, all of which is related to the mixed-use development.

~~Mixed-Use Development~~

The mixed-use development we own consists of 2,100 acres planned to include approximately 2,000 residential lots and 133 commercial acres designated for multifamily and retail uses, of which 1,208 lots and 97 commercial acres have been sold through third quarter-end 2017.

In 2007, we entered into an agreement with CCSID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by CCSID and unreimbursed amounts accrue interest at 9.75 percent per annum. CCSID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses.

Because the amount of each reimbursement is dependent on several factors, including timing of CCSID approval and CCSID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from CCSID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.

Through third quarter-end 2017, our inception-to-date submitted reimbursements for the Cibolo Canyons project were $56,750,000, of which $52,337,000 have been approved, and we have collected $46,567,000, of which $1,435,000 was received in first nine months 2017. At third quarter-end 2017, we have $10,183,000 in pending submitted reimbursements, excluding interest.

~~Resort Hotel, Spa and Golf Development~~

~~In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott~~ ^® ~~San Antonio Hill Country Resort & Spa (the Resort), which includes a 1,002 room destination resort and two PGA Tour~~ ^® ~~Tournament Players Club~~ ^® ~~(TPC) golf courses.~~

In exchange for our commitment to the Resort, the third party owners assigned to us certain rights under an agreement between the third party owners and CCSID. This agreement includes the right to receive from CCSID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by CCSID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by CCSID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service on bonds issued by CCSID collateralized by hotel occupancy tax (HOT) and other resort sales tax through 2034. The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the Resort and the amount of debt service incurred by CCSID.

In 2014, we received $50,550,000 from CCSID principally related to its issuance of $48,900,000 HOT and Sales and Use Tax Revenue Bonds, resulting in recovery of our full Resort investment. These bonds are obligations solely of CCSID and are payable from HOT and sales and use taxes levied on the Resort by CCSID. To facilitate the issuance of the bonds, we provided a $6,846,000 letter of credit to the bond trustee as security for certain debt service fund obligations in the event CCSID tax collections are not sufficient to support payment of the bonds in accordance with their terms. The letter of credit must be maintained until the earlier of redemption of the bonds or scheduled bond maturity in 2034. We also entered into an agreement with the owner of the Resort to assign its senior rights to us in exchange for consideration provided by us, including a surety bond to be drawn if CCSID tax collections are not sufficient to support ad valorem tax rebates payable. The surety bond has a balance of $5,312,000 at third quarter-end 2017. The surety bond decreases as CCSID makes annual ad valorem tax rebate payments, which obligation is scheduled to be retired in full by 2020. All future receipts are expected to be recognized as gains in the period collected. We received $465,000 in first nine months 2017.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our ~~2016~~2017 Annual Report on Form 10-K.

New and Pending Accounting Pronouncements

Please read Note 2—New and Pending Accounting Pronouncements to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

~~Statistical and Other Data~~

~~A summary of our real estate projects in the entitlement process~~^(a) at ~~third quarter-end2017~~ ~~follows:~~



~~Project~~	~~County~~	~~Market~~	~~Project Acres~~ ^(b)
~~California~~
~~Hidden Creek Estates~~	~~Los Angeles~~	~~Los Angeles~~	~~700~~
~~Terrace at Hidden Hills~~	~~Los Angeles~~	~~Los Angeles~~	30
~~Total~~			~~730~~

~~_________________________~~

^(a)

A project is deemed to be in the entitlement process when customary steps necessary for the preparation of an application for governmental land-use approvals, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.


^(b)	~~Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.~~

~~A summary of activity within our active projects in the development process, which includes entitled, developed and under development real estate projects, at third quarter-end 2017 follows:~~

Residential Lots/Units Commercial Acres
Project County
Interest
Owned ^(a)
Lots/Units Sold
Since
Inception Lots/Units
Remaining Acres Sold
Since
Inception Acres
Remaining

Texas
Austin
Arrowhead Ranch Hays 100 % 26
358
—
19
Hunter's Crossing Bastrop 100 % 510
—
66
39
536
358
66
58
Corpus Christi
Padre Island ^(b)
Nueces 50 % —
—
—
13
—
—
—
13
Dallas-Ft. Worth
Bar C Ranch Tarrant 100 % 487
660
—
—
Lakes of Prosper Collin 100 % 271
16
4
—
Lantana Denton 100 % 3,778
326
44
—
Parkside Collin 100 % 174
26
—
—
The Preserve at Pecan Creek Denton 100 % 645
137
—
7
River's Edge Denton 100 % —
217
—
—
Stoney Creek Dallas 100 % 347
316
—
—
Summer Creek Ranch Tarrant 100 % 983
245
79
—
Timber Creek Collin 88 % 144
453
—
—
Village Park Collin 100 % 567
—
5
—
7,396
2,396
132
7
Houston
Barrington Kingwood Harris 100 % 176
4
—
—
City Park Harris 75 % 1,468
—
58
103
Harper's Preserve ^(b)
Montgomery 50 % 634
1,189
76
1
Imperial Forest Harris 100 % 84
347
—
—
Long Meadow Farms ^(b)
Fort Bend 38 % 1,734
62
237
60
Southern Trails ^(b)
Brazoria 80 % 995
—
1
—
Spring Lakes Harris 100 % 348
—
29
—
Summer Lakes Fort Bend 100 % 811
251
58
1
Summer Park Fort Bend 100 % 135
64
36
65
Willow Creek Farms II Waller / Fort Bend 90 % 154
111
—
—
6,539
2,028
495
230
San Antonio
Cibolo Canyons Bexar 100 % 1,208
790
97
36
Oak Creek Estates Comal 100 % 352
—
13
—
Olympia Hills Bexar 100 % 754
—
10
—
Stonewall Estates Bexar 100 % 386
—
—
—
2,700
790
120
36
17,171
5,572
813
344

Residential Lots/Units Commercial Acres
Project County
Interest
Owned ^(a)
Lots/Units Sold
Since
Inception Lots/Units
Remaining Acres Sold
Since
Inception Acres
Remaining
Colorado
Denver
Buffalo Highlands Weld 100 % —
164
—
—
Cielo Douglas 100 % —
343
—
—
Johnstown Farms Weld 100 % 281
355
2
—
Pinery West Douglas 100 % 86
—
20
104
Stonebraker Weld 100 % —
603
—
—
367
1,465
22
104
Georgia
Atlanta
Harris Place Paulding 100 % 24
3
—
—
Montebello ^(b)
Forsyth 90 % —
223
—
—
Seven Hills Paulding 100 % 939
313
26
113
West Oaks Cobb 100 % 19
37
—
—
982
576
26
113
North & South Carolina
Charlotte
Ansley Park Lancaster 100 % —
307
—
—
Habersham York 100 % 127
60
1
5
Moss Creek Cabarrus 100 % —
84
—
—
Walden Mecklenburg 100 % —
384
—
—
127
835
1
5
Raleigh
Beaver Creek ^(b)
Wake 90 % 90
103
—
—
90
103
—
—
217
938
1
5
Tennessee
Nashville
Beckwith Crossing Wilson 100 % 49
50
—
—
Morgan Farms Williamson 100 % 147
26
—
—
Scales Farmstead Williamson 100 % 72
125
—
—
Weatherford Estates Williamson 100 % 16
1
—
—
284
202
—
—
Wisconsin
Madison
Juniper Ridge/Hawks Woods ^{(b) (d)}
Dane 90 % 56
158
—
—
Meadow Crossing II ^{(b) (c)}
Dane 90 % 31
141
—
—
87
299
—
—
Arizona, California, Utah
Tucson
Boulder Pass ^{(b) (d)}
Pima 50 % 38
50
—
—
Dove Mountain Pima 100 % —
—
—
—
38
50
—
—
Oakland
San Joaquin River Contra Costa/Sacramento 100 % —
—
264
25
—
—
264
25
Salt Lake City
Suncrest ^{(b) (d)}
Salt Lake 90 % 1
173
—
—
1
173
—
—
39
223
264
25

Total 19,147
9,275
1,126
591

~~_________________________~~


^(a)	~~Interest owned reflects our total interest in the project, whether owned directly or indirectly, which may be different than our economic interest in the project.~~


^(b)	~~Projects in ventures that we account for using equity method.~~


^(c)	~~Venture project that develops and sells homes.~~


^(d)	~~Venture project that develops and sells lots and homes.~~

~~A summary of our non-core multifamily operating properties at third quarter-end 2017 follows:~~

Project Market
Interest
Owned ^(a)
Type Acres Description
Elan 99 Houston 90 % Multifamily 17
360-unit luxury apartment
Acklen Nashville 30 % Multifamily 4
320-unit luxury apartment
HiLine Denver 25 % Multifamily 18
385-unit luxury apartment

~~_________________________~~


^(a)	~~Interest owned reflects our total interest in the project, whether owned directly or indirectly, which may be different than our economic interest in the project.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We have no significant exposure to interest rate risk.

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 were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of any of the proceedings should not have a material adverse effect on our financial position or 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 2016 Annual Report on Form 10-K and our first and second quarter 2017 Quarterly Reports on Form 10-Q except as follows:~~

So long as D.R. Horton controls us, our other stockholders will have limited ability to influence matters requiring stockholder approval, and D.R. Horton's interest may conflict with the interests of our other stockholders.

D.R. Horton beneficially owns approximately 75% of our common stock. As a result, until such time as D.R. Horton and its controlled affiliates hold shares representing less than a majority of the votes entitled to be cast by our stockholders at a stockholder meeting, D.R. Horton generally will have the ability to control the outcome of any matter submitted for the vote of our stockholders, except in certain circumstances set forth in the our new certificate of incorporation or bylaws. In addition, under the terms of a stockholder's agreement with D.R. Horton, so long as D.R. Horton or its affiliates own 35% or more of our voting securities, we may not take certain actions without D.R. Horton's approval, including certain actions with respect to equity issuances, indebtedness, acquisitions and executive hiring, termination and compensation.

In addition, pursuant to the stockholder's agreement with D.R. Horton, we are subject to certain requirements and limitations regarding the composition of our Board. However, many of those requirements and limitations expire in January 2019 (15 months after the merger). Thereafter, for so long as D.R. Horton and its controlled affiliates hold shares of our common stock representing at least a majority of the votes entitled to be cast by our stockholders at a stockholder meeting, D.R. Horton will be able to nominate and elect all the members of our Board, subject to a requirement that we and D.R. Horton use reasonable best efforts to cause at least three directors to qualify as "independent directors," as such term is defined in the NYSE listing rules, and applicable law. The directors elected by D.R. Horton will have the authority to make decisions affecting our capital structure, including the issuance of additional capital stock or options, the incurrence of additional indebtedness, the implementation of stock repurchase programs and the declaration of dividends.

The interests of D.R. Horton may not coincide with the interests of our other stockholders. D.R. Horton's ability, subject to the limitations in the stockholder's agreement and our new certificate of incorporation and bylaws, to control matters submitted to our stockholders for approval will limit the ability of other stockholders to influence corporate matters, which may cause us to take actions that our stockholders do not view as beneficial to them. In such circumstances, the market price of our common stock could be adversely affected. In addition, the existence of a controlling stockholder may have the effect of making it more difficult for a third party to acquire us, or may discourage a third party from seeking to acquire us. A third party would be required to negotiate any such transaction with D.R. Horton, and the interests of D.R. Horton with respect to such transaction may be different from the interests of our other stockholders.

Subject to limitations in the stockholder's agreement and the our new certificate of incorporation that limit D.R. Horton's ability to take advantage of certain corporate opportunities, D.R. Horton is not restricted from competing with us or otherwise taking for itself or its other affiliates certain corporate opportunities that may be attractive to us.

~~Any inability to resolve favorably any disputes that may arise between us and D.R. Horton may result in a significant reduction of our revenues and earnings.~~

~~Disputes may arise between D.R. Horton and us in a number of areas, including:~~

~~business combinations involving us;~~

~~sales or dispositions by D.R. Horton of all or any portion of its ownership interest in us;~~

~~performance under a master supply agreement between D.R. Horton and us;~~

~~arrangements with third parties that are exclusionary to D.R. Horton or us; and~~

~~business opportunities that may be attractive to both D.R. Horton and us.~~

~~We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.~~

New agreements may be entered into between us and D.R. Horton, and agreements we enter into with D.R. Horton may be amended upon agreement between the parties. Because we are controlled by D.R. Horton, we may not have the leverage to negotiate these agreements, or amendments thereto if required, on terms as favorable to us as those that we would negotiate with an unaffiliated third party.

~~D.R. Horton's ability to control our Board may make it difficult for us to recruit independent directors.~~

So long as D.R. Horton and its controlled affiliates hold shares of our common stock representing at least a majority of the votes entitled to be cast by our stockholders at a stockholders' meeting, D.R. Horton will be able to elect all of the members of our Board, subject to the requirement to nominate one individual from the pre-merger Board at our 2018 annual meeting of stockholders. Further, the interests of D.R. Horton and our other stockholders may diverge. Under these circumstances, persons who might otherwise accept an invitation to join our Board may decline.

We qualify as a "controlled company" within the meaning of the NYSE rules and, as a result, may elect to rely on exemptions from certain corporate governance requirements that provide protection to stockholders of companies that are not "controlled companies."

So long as D.R. Horton owns more than 50% of the total voting power of our common stock, we qualify as a "controlled company" under the NYSE corporate governance standards. As a controlled company, we may under the NYSE rules elect to be exempt from obligations to comply with certain NYSE corporate governance requirements, including the requirements:

~~that a majority of our Board consist of independent directors;~~

~~that we have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities;~~

~~that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and~~

~~that an annual performance evaluation of the nominating and governance committee and compensation committee be performed.~~

We have not elected to utilize the “controlled company” exemptions at this time. However, if we elect to use the "controlled company" exemptions, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

~~We may not realize potential benefits of the strategic relationship with D.R. Horton, including the transactions contemplated by a master supply agreement with D.R. Horton.~~

A master supply agreement establishes a strategic relationship between us and D.R. Horton for the supply of developed lots. Under the master supply agreement, we will, and D.R. Horton may, present lot development opportunities that it desires to develop to the other party, subject to certain exceptions. The parties will collaborate with respect to such opportunities and, if they elect to develop such opportunities, D.R. Horton will have a right of first refusal to acquire some or all of the lots developed by us, as set forth in the master supply agreement, on market terms as determined by the parties. There are numerous uncertainties associated with our relationship with D.R. Horton, including the risk that the parties will be unable to negotiate mutually acceptable terms for lot development opportunities and the fact that D.R. Horton is not obligated to present lot development opportunities to us. As a result, we may not realize potential growth or other benefits from the strategic relationship with D.R. Horton, which may affect our financial condition or results of operations following completion of the merger.

~~D.R. Horton's control of us or the strategic relationship between D.R. Horton and us may negatively affect our business relationships with other builder customers.~~

So long as D.R. Horton controls us or the strategic relationship between D.R. Horton and us remains in place, our business relationships with other builder customers may be negatively affected, including as a result of the risk that such other builder customers may believe that we will favor D.R. Horton over our other customers. In addition, we have in the past relied on builder referrals as a source for land development opportunities, and there is a risk that builders may refer such opportunities to land developers other than us as a result of our close alignment with D.R. Horton.

~~Item 2.Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Issuer Purchases of Equity Securities~~ ^(a)

~~Period~~

~~Total~~

~~Number of~~

~~Shares~~

~~Purchased~~

~~Average~~

~~Price~~

~~Paid per~~

~~Share~~

~~Total Number~~

~~of Shares~~

~~Purchased as~~

~~Part of Publicly~~

~~Announced~~

~~Plans or~~

~~Programs~~

~~Maximum~~

~~Number of~~

~~Shares That~~

~~May Yet be~~

~~Purchased~~

~~Under the~~

~~Plans or~~

~~Programs~~

~~Month 1 (7/1/2017 — 7/31/2017)~~

—

~~3,222,692~~

~~Month 2 (8/1/2017 — 8/31/2017)~~

—

~~3,222,692~~

~~Month 3 (9/1/2017 — 9/30/2017)~~

—

~~3,222,692~~

—

~~_________________________~~


^(a)	On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have purchased 3,777,308 shares under this authorization, which has no expiration date. The foregoing purchase authorization is deemed to have terminated upon closing of our merger with D.R. Horton on October 5, 2017.

~~Item 3.Defaults Upon Senior Securities~~

~~None.~~

~~Item 4.Mine Safety Disclosures~~

~~Not applicable.~~

~~Item 5.Other Information~~

~~None.~~

Item 6. Exhibits



Exhibit		Description

3.1		First Amendment to the Second Amended and Restated ~~Certificate of Incorporation~~Bylaws of Forestar Group Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on ~~October 10, 2017)~~January 30, 2018).
~~3.2~~10.1		~~Amended~~Agreement of Purchase and ~~Restated Bylaws~~Sale, dated February 8, 2018, by and between certain subsidiaries of Forestar Group Inc. and Starwood Land, L.P. (incorporated by reference to Exhibit ~~3.2 to~~2.1 of the ~~Company’s~~Company's Current Report on Form 8-K filed with the Commission on ~~October 10, 2017)~~February 8, 2018).
~~3.3~~10.2†*		~~Certificate of Elimination of Series B Junior Participating Preferred Stock of~~ Forestar Group Inc. ~~(incorporated by reference to Exhibit 3.13 to the Company’s Registration Statement on Form 8-A/A filed with the Commission on October 5, 2017).~~2018 Stock Incentive Plan.
~~4.1~~		Third Supplemental Indenture, dated October 5, 2017, between Forestar Group Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 10, 2017).
~~10.1~~		Letter of Credit Facility Agreement, dated October 5, 2017, among Forestar Group Inc., Keybank National Association, as lender and administrative agent, and Keybanc Capital Markets, as sole arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 10, 2017).
~~10.2~~		Shared Services Agreement, dated October 6, 2017, between Forestar Group Inc. and D.R. Horton, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on October 10, 2017).
~~10.3~~10.3†*		Form of ~~Indemnification~~Restricted Stock Unit Agreement ~~(incorporated by reference~~(Employees) pursuant to ~~Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on October 10, 2017).~~
~~10.4~~		~~First Amendment to Employment Agreement, dated as of August 25, 2017, by and between~~ Forestar Group Inc. ~~and Phillip J. Weber (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 28, 2017).~~’s 2018 Stock Incentive Plan.
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, 2017,~~March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of ~~Income (Loss) and Comprehensive Income (Loss),~~Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.

~~SIGNATURES~~



*	Filed herewith.



†	Management contract or compensatory plan or arrangement.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	FORESTAR GROUP INC.

Date: ~~November 2, 2017~~May 9, 2018	By:	/s/ Charles D. Jehl
		Charles D. Jehl
		Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

4528



PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements (Unaudited) ~~(Unaudited)~~	3
Consolidated Balance Sheets	3
Consolidated Statements of ~~Income (Loss) and Comprehensive Income (Loss)~~Operations	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	2116
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4026
Item 4. Controls and Procedures	4026
PART II — OTHER INFORMATION	4127
Item 1. Legal Proceedings	41
~~Item 1A. Risk Factors~~	41
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~	43
~~Item 3. Defaults Upon Senior Securities~~	43
~~Item 4. Mine Safety Disclosures~~	43
~~Item 5. Other Information~~	4327
Item 6. Exhibits	4427
~~SIGNATURES~~SIGNATURE	4528



	Venture Assets				Venture Borrowings^(a)				Venture Equity				Our Investment
	Third Quarter-End		Year-End		Third Quarter-End		Year-End		Third Quarter-End		Year-End		Third Quarter-End		Year-End
	2017		2016		2017		2016		2017		2016		2017		2016
	(In thousands)
242, LLC ^(b)	$	19,600	$	26,503	$	—	$	1,107	$	19,376	$	23,136	$	9,140	$	10,934
CL Ashton Woods, LP	581		2,653		—		—		558		2,198		446		1,107
CL Realty, LLC	8,287		8,048		—		—		8,156		7,899		4,078		3,950
CREA FMF Nashville LLC ^(b)	53,986		56,081		35,676		37,446		17,162		17,091		4,803		4,923
Elan 99, LLC	49,003		49,652		36,373		36,238		11,283		13,100		10,155		11,790
FMF Littleton LLC	68,536		70,282		46,006		44,446		21,745		23,798		5,508		6,128
FMF Peakview LLC	—		—		—		—		—		—		—		—
FOR/SR Forsyth LLC	11,566		10,672		1,548		1,568		9,985		8,990		8,986		8,091
HM Stonewall Estates, Ltd	—		852		—		—		—		852		—		477
LM Land Holdings, LP ^(c)	22,816		25,538		906		3,477		13,771		20,945		6,619		9,685
MRECV DT Holdings LLC	3,573		4,155		—		—		3,573		4,144		3,216		3,729
MRECV Edelweiss LLC/MRECV Lender VIII LLC	7,824		3,484		—		—		7,824		3,484		7,042		3,358
MRECV Juniper Ridge LLC	3,784		4,156		—		—		3,784		4,156		3,405		3,741
MRECV Meadow Crossing II LLC	3,103		2,492		—		—		3,103		2,491		2,793		2,242
Miramonte Boulder Pass, LLC	7,488		10,738		1,391		4,006		4,775		5,265		4,567		5,330
Temco Associates, LLC	4,426		4,368		—		—		4,323		4,253		2,162		2,126
Other ventures	—		—		—		—		—		—		—		—
	$	264,573	$	279,674	$	121,900	$	128,288	$	129,418	$	141,802	$	72,920	$	77,611



	Venture Revenues								Venture Earnings (Loss)												Our Share of Earnings (Loss)
	Third Quarter				First Nine Months				Third Quarter						First Nine Months						Third Quarter						First Nine Months
	2017		2016		2017		2016		2017			2016			2017			2016			2017			2016			2017			2016
	(In thousands)
242, LLC ^(b)	$	—	$	937	$	13,073	$	937	$	(342	)	$	15		$	8,040		$	(449	)	$	(171	)	$	14		$	4,106		$	(218	)
CL Ashton Woods, LP	451		288		3,079		1,977		262			83			1,360			601			307			129			1,739			892
CL Realty, LLC	300		140		499		386		256			72			2,657			136			128			37			1,328			68
CREA FMF Nashville LLC ^(b)	1,410		1,291		4,280		3,273		(159		)	(145		)	(479		)	(1,214		)	(47		)	1,484			(144		)	1,164
Elan 99, LLC	1,188		461		3,116		628		(562		)	(867		)	(1,816		)	(2,211		)	(506		)	(779		)	(1,635		)	(1,989		)
FMF Littleton LLC	1,702		944		4,713		1,791		227			(183		)	47			(531		)	57			(47		)	12			(133		)
FMF Peakview LLC	—		—		—		939		—			—			—			(248		)	—			—			—			(50		)
FOR/SR Forsyth LLC	—		—		—		—		(42		)	(21		)	(110		)	(38		)	(38		)	(19		)	(99		)	(34		)
HM Stonewall Estates, Ltd	—		822		496		1,948		—			280			243			794			—			120			103			347
LM Land Holdings, LP ^(c)	2,703		3,505		19,636		6,531		2,110			2,502			8,327			4,557			757			836			2,746			1,481
MRECV DT Holdings LLC	351		162		939		379		337			157			923			372			303			141			831			334
MRECV Edelweiss LLC/MRECV Lender VIII LLC	293		106		716		287		291			106			713			280			262			96			642			252
MRECV Juniper Ridge LLC	413		151		1,023		356		412			151			1,022			357			371			135			920			321
MRECV Meadow Crossing II LLC	253		112		612		141		254			112			612			94			229			101			551			84
Miramonte Boulder Pass, LLC	2,312		1,015		4,848		1,678		105			(126		)	109			(285		)	101			(63		)	(262		)	(142		)
Temco Associates, LLC	48		77		144		224		21			32			70			111			11			16			35			56
Other ventures	—		6,520		—		6,520		—			2,166			—			2,109			—			1,436			—			1,439
	$	11,424	$	16,531	$	57,174	$	27,995	$	3,170		$	4,334		$	21,718		$	4,435		$	1,764		$	3,637		$	10,873		$	3,872



	Forestar Group Inc.		Noncontrolling Interests			Total
	(In thousands)
Balance at year-end 2016	$	560,651	$	1,467		$	562,118
Net income	67,828		112			67,940
Distributions to noncontrolling interests	—		(400		)	(400		)
Other (primarily share-based compensation)	1,605		—			1,605
	$	630,084	$	1,179		$	631,263



	Third Quarter-End 2017						Year-End 2016
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Valuation Technique
	(In thousands)
Fixed rate debt	$	(114,502	)	$	(119,246	)	$	(111,506	)	$	(109,789	)	Level 2



State	Entitled, Developed, and Under Development Projects		Land in Entitlement Process and Other		Total
	(In thousands)
Texas	$	151,857	$	2,778	$	154,635
Georgia	6,656		416		7,072
California	1,667		26,813		28,480
North & South Carolina	30,097		45		30,142
Colorado	29,939		—		29,939
Tennessee	16,848		135		16,983
	$	237,064	$	30,187	$	267,251



	Senior Credit Facility
	(In thousands)
Borrowing base availability	$	29,077
Less: borrowings	—
Less: letters of credit	(14,267		)
	$	14,810



				Residential Lots/Units		Commercial Acres
Project	County	Interest Owned ^(a)		Lots/Units Sold Since Inception	Lots/Units Remaining	Acres Sold Since Inception	Acres Remaining

Texas
Austin
Arrowhead Ranch	Hays	100	%	26	358	—	19
Hunter's Crossing	Bastrop	100	%	510	—	66	39
				536	358	66	58
Corpus Christi
Padre Island ^(b)	Nueces	50	%	—	—	—	13
				—	—	—	13
Dallas-Ft. Worth
Bar C Ranch	Tarrant	100	%	487	660	—	—
Lakes of Prosper	Collin	100	%	271	16	4	—
Lantana	Denton	100	%	3,778	326	44	—
Parkside	Collin	100	%	174	26	—	—
The Preserve at Pecan Creek	Denton	100	%	645	137	—	7
River's Edge	Denton	100	%	—	217	—	—
Stoney Creek	Dallas	100	%	347	316	—	—
Summer Creek Ranch	Tarrant	100	%	983	245	79	—
Timber Creek	Collin	88	%	144	453	—	—
Village Park	Collin	100	%	567	—	5	—
				7,396	2,396	132	7
Houston
Barrington Kingwood	Harris	100	%	176	4	—	—
City Park	Harris	75	%	1,468	—	58	103
Harper's Preserve ^(b)	Montgomery	50	%	634	1,189	76	1
Imperial Forest	Harris	100	%	84	347	—	—
Long Meadow Farms ^(b)	Fort Bend	38	%	1,734	62	237	60
Southern Trails ^(b)	Brazoria	80	%	995	—	1	—
Spring Lakes	Harris	100	%	348	—	29	—
Summer Lakes	Fort Bend	100	%	811	251	58	1
Summer Park	Fort Bend	100	%	135	64	36	65
Willow Creek Farms II	Waller / Fort Bend	90	%	154	111	—	—
				6,539	2,028	495	230
San Antonio
Cibolo Canyons	Bexar	100	%	1,208	790	97	36
Oak Creek Estates	Comal	100	%	352	—	13	—
Olympia Hills	Bexar	100	%	754	—	10	—
Stonewall Estates	Bexar	100	%	386	—	—	—
				2,700	790	120	36
				17,171	5,572	813	344