UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the Quarterly Period Ended June 30, ~~2019~~2020



☐			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.)

2221 E. Lamar Blvd., Suite 790

Arlington, Texas 76006

(Address of Principal Executive Offices, including Zip Code)

(817) 769-1860

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $1.00 per share

FOR

New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.

Large accelerated filer ¨

☐

Accelerated filer

☒

~~Accelerated filer~~ x

Non-accelerated filer ¨

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.

Common Stock, $1.00 par value -- ~~41,959,866~~48,059,921 shares as of July ~~24, 2019~~22, 2020

Table of Contents

FORESTAR GROUP INC.

TABLE OF CONTENTS

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

FORESTAR GROUP INC.

~~Consolidated Balance Sheets~~CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30, 2019		September 30, 2018			June 30, 2020		September 30, 2019
	(In millions, except share data)					(In millions, except share data)
ASSETS					ASSETS
Cash and cash equivalents	$	223.0	$	318.8	Cash and cash equivalents	$	355.6	$	382.8
Restricted cash	0.2		16.2
Total cash, cash equivalents and restricted cash	223.2		335.0

Real estate	1,049.5		498.0		Real estate	1,287.1		1,028.9
Investment in unconsolidated ventures	7.3		11.7		Investment in unconsolidated ventures	5.5		7.3
Income taxes receivable	3.3		4.4		Income taxes receivable	8.9		3.2
Property and equipment, net	2.4		1.7		Property and equipment, net	1.2		2.4
Deferred tax asset, net	21.0		26.9		Deferred tax asset, net	—		17.4
Other assets	18.5		15.4		Other assets	27.1		13.7
TOTAL ASSETS	$	1,325.2	$	893.1
Total assets					Total assets	$	1,685.4	$	1,455.7
LIABILITIES					LIABILITIES
Accounts payable	$	18.8	$	7.9	Accounts payable	$	26.0	$	16.8
Earnest money deposits on sales contracts	84.8		49.4
Earnest money on sales contracts					Earnest money on sales contracts	98.9		89.9
Accrued expenses and other liabilities	67.4		49.6		Accrued expenses and other liabilities	73.0		79.6
Debt, net	458.9		111.7
TOTAL LIABILITIES	629.9		218.6
COMMITMENTS AND CONTINGENCIES (Note 13)
Debt					Debt	640.6		460.5
Total liabilities					Total liabilities	838.5		646.8
Commitments and contingencies (Note 13)					Commitments and contingencies (Note 13)
EQUITY					EQUITY
Forestar Group Inc. shareholders’ equity:
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 41,959,866 shares issued at June 30, 2019 and 41,939,403 shares issued at September 30, 2018	42.0		41.9
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 48,059,921 and 47,997,366 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively					Common stock, par value $1.00 per share, 200,000,000 authorized shares, 48,059,921 and 47,997,366 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively	48.1		48.0
Additional paid-in capital	507.3		506.3		Additional paid-in capital	603.5		602.2
Retained earnings	145.4		125.1		Retained earnings	194.7		158.1
Total Forestar Group Inc. shareholders’ equity	694.7		673.3
Stockholders' equity					Stockholders' equity	846.3		808.3
Noncontrolling interests	0.6		1.2		Noncontrolling interests	0.6		0.6
TOTAL EQUITY	695.3		674.5
TOTAL LIABILITIES AND EQUITY	$	1,325.2	$	893.1
Total equity					Total equity	846.9		808.9
Total liabilities and equity					Total liabilities and equity	$	1,685.4	$	1,455.7

~~Please read the~~

See accompanying notes to consolidated financial statements.

Table of Contents

FORESTAR GROUP INC.

~~Consolidated Statements of Operations~~CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended
June 30, Nine Months Ended
June 30,
2019 2018 2019 2018
(In millions, except per share amounts)
Revenues $ 88.2
$ 23.6
$ 192.0
$ 77.0
Cost of sales 75.3
10.0
149.6
48.9
Selling, general and administrative expense 7.9
6.5
19.8
36.1
Equity in earnings of unconsolidated ventures —
(1.0 ) (0.5 ) (9.6 )
Gain on sale of assets (1.5 ) (1.3 ) (2.4 ) (4.1 )
Interest expense —
1.6
—
5.8
Interest and other income (1.9 ) (2.6 ) (4.1 ) (4.8 )
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 8.4
10.4
29.6
4.7
Income tax expense 1.5
0.1
6.0
12.6
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 6.9
10.3
23.6
(7.9 )
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES —
—
—
7.2
CONSOLIDATED NET INCOME (LOSS) 6.9
10.3
23.6
(0.7 )
Less: Net income attributable to noncontrolling interests —
0.9
3.3
2.9
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC. $ 6.9
$ 9.4
$ 20.3
$ (3.6 )
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 42.0
41.9
42.0
41.9
Diluted 42.0
42.0
42.0
41.9
NET INCOME (LOSS) PER BASIC SHARE
Continuing operations $ 0.16
$ 0.22
$ 0.48
$ (0.26 )
Discontinued operations $ —
$ —
$ —
$ 0.17
NET INCOME (LOSS) PER BASIC SHARE $ 0.16
$ 0.22
$ 0.48
$ (0.09 )
NET INCOME (LOSS) PER DILUTED SHARE
Continuing operations $ 0.16
$ 0.22
$ 0.48
$ (0.26 )
Discontinued operations $ —
$ —
$ —
$ 0.17
NET INCOME (LOSS) PER DILUTED SHARE $ 0.16
$ 0.22
$ 0.48
$ (0.09 )


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions, except per share amounts)
Revenues	$	177.9	$	88.2	$	584.3	$	192.0
Cost of sales	157.1		75.3		510.3		149.6
Selling, general and administrative expense	11.2		7.9		32.8		19.8
Equity in loss (earnings) of unconsolidated ventures	0.1		—		(0.6)		(0.5)
Gain on sale of assets	—		(1.5)		(0.1)		(2.4)
Interest and other income	(0.8)		(1.9)		(4.2)		(4.1)
Income before income taxes	10.3		8.4		46.1		29.6
Income tax expense	0.2		1.5		8.9		6.0
Net income	10.1		6.9		37.2		23.6
Net income attributable to noncontrolling interests	—		—		0.7		3.3
Net income attributable to Forestar Group Inc.	$	10.1	$	6.9	$	36.5	$	20.3

Basic net income per common share attributable to Forestar Group Inc.	$	0.21	$	0.16	$	0.76	$	0.48
Weighted average number of common shares	48.1		42.0		48.0		42.0

Diluted net income per common share attributable to Forestar Group Inc.	$	0.21	$	0.16	$	0.76	$	0.48
Adjusted weighted average number of common shares	48.1		42.0		48.1		42.0

~~Please read the~~

See accompanying notes to consolidated financial statements.

Table of Contents

FORESTAR GROUP INC.

~~Consolidated Statements of Total Equity~~CONSOLIDATED STATEMENTS OF TOTAL EQUITY

(Unaudited)


	Common Stock		Additional Paid-in Capital		Retained Earnings		Non-controlling Interests		Total Equity
	(In millions, except share data)
Balances at September 30, 2019 (47,997,366 shares)	$	48.0	$	602.2	$	158.1	$	0.6	$	808.9
Net income (loss)	—		—		16.9		(0.1)		16.8
Stock issued under employee benefit plans (27,993 shares)	—		—		—		—		—
Cash paid for shares withheld for taxes	—		(0.2)		—		—		(0.2)
Stock-based compensation expense	—		0.5		—		—		0.5
Distributions to noncontrolling interests	—		—		—		(0.4)		(0.4)
Balances at December 31, 2019 (48,025,359 shares)	$	48.0	$	602.5	$	175.0	$	0.1	$	825.6
Net income	—		—		9.6		0.8		10.4
Stock-based compensation expense	—		0.8		—		—		0.8
Balances at March 31, 2020 (48,025,359 shares)	$	48.0	$	603.3	$	184.6	$	0.9	$	836.8
Net income	—		—		10.1		—		10.1
Stock issued under employee benefit plans (34,562 shares)	0.1		—		—		—		0.1
Cash paid for shares withheld for taxes	—		(0.1)		—		—		(0.1)
Stock-based compensation expense	—		0.3		—		—		0.3
Distributions to noncontrolling interests	—		—		—		(0.3)		(0.3)
Balances at June 30, 2020 (48,059,921 shares)	$	48.1	$	603.5	$	194.7	$	0.6	$	846.9

Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Non-controlling Interests Total Equity
(In millions, except share data)
Balances at September 30, 2018 (41,939,403 shares) $ 41.9
$ 506.3
$ 125.1
$ —
$ 1.2
$ 674.5
Net income —
—
3.3
—
0.6
3.9
Stock issued under employee incentive plans (20,463 shares) 0.1
(0.1 ) —
—
—
—
Stock-based compensation expense —
0.1
—
—
—
0.1
Distributions to noncontrolling interests —
—
—
—
(0.5 ) (0.5 )
Balances at December 31, 2018 (41,959,866 shares) $ 42.0
$ 506.3
$ 128.4
$ —
$ 1.3
$ 678.0
Net income —
—
10.1
—
2.7
12.8
Stock-based compensation expense —
0.1
—
—
—
0.1
Distributions to noncontrolling interests —
—
—
—
(3.1 ) (3.1 )
Balances at March 31, 2019 (41,959,866 shares) $ 42.0
$ 506.4
$ 138.5
$ —
$ 0.9
$ 687.8
Net income —
—
6.9
—
—
6.9
Stock-based compensation expense —
0.9
—
—
—
0.9
Distributions to noncontrolling interests —
—
—
—
(0.3 ) (0.3 )
Balances at June 30, 2019 (41,959,866 shares) $ 42.0
$ 507.3
$ 145.4
$ —
$ 0.6
$ 695.3


	Common Stock		Additional Paid-in Capital		Retained Earnings		Non-controlling Interests		Total Equity
	(In millions, except share data)
Balances at September 30, 2018 (41,939,403 shares)	$	41.9	$	506.3	$	125.1	$	1.2	$	674.5
Net income	—		—		3.3		0.6		3.9
Stock issued under employee benefit plans (20,463 shares)	0.1		—		—		—		0.1
Cash paid for shares withheld for taxes	—		(0.1)		—		—		(0.1)
Stock-based compensation expense	—		0.1		—		—		0.1
Distributions to noncontrolling interests	—		—		—		(0.5)		(0.5)
Balances at December 31, 2018 (41,959,866 shares)	$	42.0	$	506.3	$	128.4	$	1.3	$	678.0
Net income	—		—		10.1		2.7		12.8
Stock-based compensation expense	—		0.1		—		—		0.1
Distributions to noncontrolling interests	—		—		—		(3.1)		(3.1)
Balances at March 31, 2019 (41,959,866 shares)	$	42.0	$	506.4	$	138.5	$	0.9	$	687.8
Net income	—		—		6.9		—		6.9
Stock-based compensation expense	—		0.9		—		—		0.9
Distributions to noncontrolling interests	—		—		—		(0.3)		(0.3)
Balances at June 30, 2019 (41,959,866 shares)	$	42.0	$	507.3	$	145.4	$	0.6	$	695.3

Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Non-controlling Interests Total Equity
(In millions, except share data)
Balances at September 30, 2017 (44,803,603 shares) $ 44.8
$ 549.4
$ 80.4
$ (44.5 ) $ 1.2
$ 631.3
Net income (loss) —
—
(17.6 ) —
2.0
(15.6 )
Settlement of equity awards —
(12.8 ) —
—
—
(12.8 )
Retirement of treasury shares (2,864,667 shares) (2.9 ) (35.1 ) (6.5 ) 44.5
—
—
Stock-based compensation expense —
4.5
—
—
—
4.5
Distributions to noncontrolling interests —
—
—
—
(1.8 ) (1.8 )
Balances at December 31, 2017 (41,938,936 shares) $ 41.9
$ 506.0
$ 56.3
$ —
$ 1.4
$ 605.6
Net income —
—
4.5
—
0.1
4.6
Stock-based compensation expense —
0.1
—
—
—
0.1
Distributions to noncontrolling interests —
—
—
—
(0.3 ) (0.3 )
Balances at March 31, 2018 (41,938,936 shares) $ 41.9
$ 506.1
$ 60.8
$ —
$ 1.2
$ 610.0
Net income —
—
9.4
—
0.9
10.3
Stock-based compensation expense —
0.1
—
—
—
0.1
Distributions to noncontrolling interests —
—
—
—
(0.2 ) (0.2 )
Balances at June 30, 2018 (41,938,936 shares) $ 41.9
$ 506.2
$ 70.2
$ —
$ 1.9
$ 620.2

~~Please read the~~See accompanying notes to consolidated financial statements.

Table of Contents

FORESTAR GROUP INC.

~~Consolidated Statements of Cash Flows~~CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended June 30,
2019 2018
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss) $ 23.6
$ (0.7 )
Adjustments:
Depreciation and amortization 4.8
3.9
Deferred income taxes 5.9
(1.0 )
Equity in earnings of unconsolidated ventures (0.5 ) (9.6 )
Distributions of earnings of unconsolidated ventures 4.9
8.3
Share-based compensation 1.1
4.3
Asset impairments 0.5
9.3
Loss on debt extinguishment, net —
0.6
Gain on sale of assets (2.4 ) (4.1 )
Other 0.9
1.3
Changes in operating assets and liabilities:
Increase in real estate (551.5 ) (274.0 )
Increase in other assets (4.1 ) (2.2 )
Increase in accounts payable and other accrued liabilities 30.2
11.3
Increase in earnest money deposits on sales contracts 35.4
29.7
Decrease in income taxes receivable 1.1
16.9
Net cash used in operating activities (450.1 ) (206.0 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software and other (0.9 ) (0.1 )
Investment in unconsolidated ventures —
(0.1 )
Return of investment in unconsolidated ventures 0.1
7.4
Proceeds from sale of assets —
228.6
Net cash (used in) provided by investing activities (0.8 ) 235.8
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt (85.0 ) (10.6 )
Additions to debt 435.0
1.5
Deferred financing fees (6.9 ) (0.2 )
Distributions to noncontrolling interests, net (3.9 ) (2.2 )
Settlement of equity awards (0.1 ) (12.8 )
Net cash provided by (used in) financing activities 339.1
(24.3 )

Net (decrease) increase in cash, cash equivalents and restricted cash (111.8 ) 5.5
Cash, cash equivalents and restricted cash at beginning of period 335.0
402.2
Cash, cash equivalents and restricted cash at end of period $ 223.2
$ 407.7


	Nine Months Ended June 30,
	2020		2019
	(In millions)
OPERATING ACTIVITIES
Net income	$	37.2	$	23.6
Adjustments:
Depreciation and amortization	4.2		4.8
Deferred income taxes	17.5		5.9
Equity in earnings of unconsolidated ventures	(0.6)		(0.5)
Distributions of earnings of unconsolidated ventures	—		4.9
Stock-based compensation expense	1.6		1.1
Real estate and land option charges	0.5		0.5
Gain on sale of assets	(0.1)		(2.4)
Other	—		0.9
Changes in operating assets and liabilities:
Increase in real estate	(258.8)		(551.5)
Increase in other assets	(4.2)		(4.1)
(Decrease) increase in accounts payable and other accrued liabilities	(0.2)		30.2
Increase in earnest money deposits on sales contracts	2.9		35.4
(Increase) decrease in income taxes receivable	(5.7)		1.1
Net cash used in operating activities	(205.7)		(450.1)
INVESTING ACTIVITIES
Expenditures for property, equipment, software and other	(0.6)		(0.9)
Return of investment in unconsolidated ventures	2.4		0.1
Proceeds from sale of assets	1.3		—
Net cash provided by (used in) investing activities	3.1		(0.8)
FINANCING ACTIVITIES
Additions to debt	300.0		435.0
Repayment of debt	(118.9)		(85.0)
Deferred financing fees	(4.8)		(6.9)
Distributions to noncontrolling interests, net	(0.7)		(3.9)
Cash paid for shares withheld for taxes	(0.2)		(0.1)
Net cash provided by financing activities	175.4		339.1
Net decrease in cash and cash equivalents	(27.2)		(111.8)
Cash and cash equivalents at beginning of period	382.8		335.0
Cash and cash equivalents at end of period	$	355.6	$	223.2

~~Please read the~~

See accompanying notes to consolidated financial statements.

Table of Contents

FORESTAR GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited, consolidated financial statements include the accounts of Forestar Group Inc. (Forestar) and all of its 100% owned, majority-owned and controlled subsidiaries, which are collectively referred to as the ~~"Company," "we," or "our,"~~Company unless the context otherwise requires. The Company accounts for its investment in other entities in which it has significant influence over operations and financial policies using the equity method. ~~The Company eliminates all material~~All intercompany accounts, transactions and ~~transactions.~~balances have been eliminated in consolidation. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes. The transactions included in net income in the consolidated statements of operations are the same as those that would be presented in comprehensive income. Thus, the Company's net income equates to comprehensive income.

The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments considered necessary to fairly state the results for the interim periods shown, including normal recurring accruals and other items. These financial statements, including the consolidated balance sheet as of September 30, ~~2018,~~2019, which was derived from audited financial statements, do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form ~~10-KT~~10-K for the ~~nine months~~fiscal year ended September 30, ~~2018.~~

The Company divested substantially all of its oil and gas working interest properties in 2016 and completed the sale of all oil and gas assets and related entities in 2017. As a result of selling the entities in 2017, the Company recognized a tax benefit during the nine months ended June 30, 2018 that has been recorded as income from discontinued operations. There was no activity related to these discontinued operations during the three and nine months ended June 30, 2019.

The transactions included in net income in the consolidated statements of operations are the same as those that would be presented in comprehensive income. Thus, the Company's net income equates to comprehensive income.

OnIn October 5, 2017, Forestar 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).~~Horton. Immediately following the ~~Merger,~~merger, D.R. Horton owned 75% of the Company's outstanding common stock. In connection with the ~~Merger,~~merger, the Company entered into certain agreements with D.R. Horton including a Stockholder’s Agreement, a Master Supply Agreement, and a Shared Services Agreement. D.R. Horton is considered a related party of Forestar under GAAP. At June 30, 2020, D.R. Horton owned approximately 65% of the Company's outstanding common stock.

~~Changes in Presentation and Reclassifications~~

~~Certain items have been reclassified in the prior year~~Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to ~~conform to~~make estimates and assumptions. These estimates and assumptions affect the ~~presentation~~reported amounts of assets and ~~classifications used in~~liabilities and disclosure of contingent assets and liabilities at the ~~current year. Receivables, prepaid~~date of the financial statements and the reported amounts of revenues and expenses ~~land purchase contract deposits, and intangible assets have been reclassified to other assets in~~during the prior year consolidated balance sheet. Accrued employee compensation and benefits, accrued property taxes, accrued interest, other accrued expenses and other liabilities have been reclassified to accrued expenses and other liabilities in the prior year consolidated balance sheet. Other operating expense and general and administrative expense have been combined into one line item which is titled selling, general and administrative expense in the prior year consolidated statement of operations. In addition, certain items have been reclassifiedreporting period. Actual results could differ materially from selling, general and administrative expenses to cost of sales in the prior year statement of operations to conform to classifications used in the current year. The Company has reclassified the change in earnest money deposits in the prior year statement of cash flows from change in accounts payable and other accrued liabilities to conform to the classifications used in the current year. The Company has reclassified real estate cost of sales, real estate development and acquisition expenditures and reimbursements from utility and improvement districts to change in real estate in the prior year statement of cash flows to conform to classifications used in the current year. The Company has reclassified proceeds from land and lot closings held for the Company’s benefit at title companies in the prior year consolidated balance sheet from receivables to cash and cash equivalents to conform to the classification used in the current year. These reclassifications had no effect on the Company's consolidated operating results, balance sheet or cash flows.those estimates.

In connection with the Company's adoption of Accounting Standards Update (ASU) 2016-18 on October 1, 2018, restricted cash is included with cash and cash equivalents when reconciling beginning and ending cash amounts in the consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current year presentation, resulting in a decrease in cash used in financing activities of $39.7 million for the nine months ended June 30, 2018.

Adoption of New Accounting ~~Standards~~Standard

On October 1, 2018, the Company adopted Accounting Standards Codification 606, "Revenue from Contracts with Customers" (ASC 606), which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company applied the modified retrospective method to contracts that were not completed as of October 1, 2018. Results for the reporting period beginning on October 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and will continue to be reported under the previous accounting standards. Under ASC 606, the Company's performance obligations are typically satisfied at closing. However, there may be instances in which the Company has an unsatisfied remaining performance obligation at the time of closing. In these instances, the Company records contract liabilities and recognizes those revenues over time as the performance obligations are completed. Generally, the Company's unsatisfied remaining performance obligations are expected to have an original duration of less than one year. As of October 1, 2018, the Company established contract liabilities of $6.4 million related to its remaining unsatisfied performance obligations at the time of adoption of ASC 606. There was no impact to the amount or timing of revenues recognized as a result of applying ASC 606 for the three and nine months ended June 30, 2019, and there have not been significant changes to the Company’s business processes, systems, or internal controls as a result of implementing the standard.

~~A summary of items impacted as the result of adopting ASC 606 follows:~~

As of June 30, 2019
As Reported Impact of Adoption As Adjusted
(In millions)
Real estate $ 1,049.5
$ 8.7
$ 1,040.8
Contract liabilities 9.9
9.9
—
Deferred income 9.4
(1.2 ) 10.6

In ~~August~~February 2016, the FASB issued ASU ~~2016-15, Statement of Cash Flows (Topic 230), to address eight specific cash flow issues with~~2016-02, “Leases,” which requires that lease assets and liabilities be recognized on the ~~objective of reducing the existing diversity in practice.~~balance sheet and that key information about leasing arrangements be disclosed. The ~~updated standard is~~guidance was effective for ~~financial statements issued for annual periods~~the Company beginning ~~after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance as of~~ October 1, ~~2018~~2019 and did not have a material impact on ~~the Company's consolidated statements of cash flows.~~

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash,” which requires amounts generally described as restricted cash be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The Company adopted the guidance as of October 1, 2018 on a retrospective basis and made the required changes to its ~~statements of cash flows as described in the “Changes in Presentation and Reclassifications” section above.~~

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting,” which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The adoption of this guidance as of October 1, 2018 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. As a result of the adoption of this standard on October 1, 2019, the Company recorded right of use assets of $2.7 million and lease liabilities of $2.9 million. Lease right of use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheet.

~~Recent~~

Pending Accounting ~~Pronouncements~~Standards

In ~~February 2016,~~December 2019, the FASB issued ASU ~~2016-02,~~ ~~Leases (Topic 842).~~ ~~This ASU requires lessees~~2019-12 related to put most leases on their balance sheets but recognize expenses on their income statements in a manner that is similar to today's accounting. This guidance also eliminates today's real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria andsimplifying the accounting for ~~sales-type and direct financing leases.~~income taxes. The ~~new standard requires a modified retrospective transition approach~~guidance is effective for ~~all leases existing at, or entered into after,~~ the ~~date of initial application, with an option to use certain transition relief.~~Company beginning October 1, 2021, although early adoption is permitted. The Company is currently evaluating the ~~effect the updated standard will have on our financial position, results~~impact of ~~operations~~this guidance, and ~~cash flows. This guidance is effective for the Company on October 1, 2019 and~~it is not expected to have a material impact on its consolidated financial position, results of operations ~~and~~or cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect it to have a material impact on its consolidated financial statements and related disclosures.

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Note 2—Segment Information

~~Historically, the~~The Company ~~managed~~manages its operations through its real estate segment mineral resources segment (previously referred to as oil and gas) and other segment (previously referred to as other natural resources). During the three months ended December 31, 2018, the Company began managing its operations through one real estate segment. As such, the operating results of the Company's real estate segment are consistent with its consolidated operating results and no separate disclosure is required as of and for the three and nine months ended June 30, 2019. The Company's real estate segmentwhich is its core business and ~~is expected to generate~~generates substantially all of ~~the Company’s revenues in fiscal 2019.~~its revenues. The real estate segment primarily acquires land and develops infrastructure for single-family residential ~~communities. The Company's real estate segment generates~~communities and its revenues ~~principally~~generally come from sales of residential single-family finished lots to local, regional and national homebuilders.

The Company has other business activities for which ~~were presented in its other segment in prior periods. The~~the related assets and operating results ~~of operations of these business activities~~ are immaterial, and therefore, are included within the Company's real estate ~~segment in the current periods.~~segment.

Additionally, as of and for the three and nine months ended June 30, 2019, all assets and results of operations have been included in the real estate segment. In prior periods, certain costs and assets were not allocated to the Company’s segments. During the three months ended December 31, 2018, the Company began evaluating the results of operations of its real estate segment based on income from continuing operations before income taxes. As a result, all of the Company’s results of operations have been allocated to the real estate segment for the three and nine months ended June 30, 2019. This change in the measure of segment profit (loss) was adopted prospectively and the prior period segment results have not been adjusted to conform to the current period. In prior periods, segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income and net income (loss) attributable to noncontrolling interests. Items not allocated to segments in prior periods consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of timberland assets, interest expense, and other corporate interest and other income.

~~The accounting policies of the reporting segment is described throughout Note 1 in the Company's annual report on Form 10-KT for the nine months ended September 30, 2018.~~

~~Total assets by segment at September 30, 2018 are as follows:~~

September 30, 2018
Real Estate Other Items Not Allocated Consolidated
(In millions)
Cash and cash equivalents $ —
$ —
$ 318.8
$ 318.8
Restricted cash —
—
16.2
16.2
Real estate 498.0
—
—
498.0
Investment in unconsolidated ventures 11.7
—
—
11.7
Income taxes receivable —
—
4.4
4.4
Property and equipment, net —
1.5
0.2
1.7
Deferred tax asset, net —
—
26.9
26.9
Other assets 12.4
0.4
2.6
15.4
$ 522.1
$ 1.9
$ 369.1
$ 893.1

~~Segment results for the three and nine months ended June 30, 2018 are as follows:~~

Three Months Ended June 30, 2018
Real Estate Other Items Not Allocated Consolidated
(In millions)
Revenues $ 23.6
$ —
$ —
$ 23.6
Cost of sales 9.9
0.1
—
10.0
Selling, general and administrative expense 2.9
—
3.6
6.5
Equity in earnings of unconsolidated ventures (1.0 ) —
—
(1.0 )
Gain on sale of assets (1.3 ) —
—
(1.3 )
Interest expense —
—
1.6
1.6
Interest and other income (1.0 ) —
(1.6 ) (2.6 )
Income (loss) from continuing operations before taxes $ 14.1
$ (0.1 ) $ (3.6 ) $ 10.4
Net income attributable to noncontrolling interests 0.9
—
—
0.9
Income (loss) from continuing operations before taxes attributable to Forestar Group Inc. $ 13.2
$ (0.1 ) $ (3.6 ) $ 9.5

Nine Months Ended June 30, 2018
Real Estate Other Items Not Allocated Consolidated
(In millions)
Revenues $ 77.0
$ —
$ —
$ 77.0
Cost of sales 42.4
6.5
—
48.9
Selling, general and administrative expense 10.3
0.2
25.6
36.1
Equity in earnings of unconsolidated ventures (9.6 ) —
—
(9.6 )
Gain on sale of assets (4.1 ) —
—
(4.1 )
Interest expense —
—
5.8
5.8
Interest and other income (1.8 ) —
(3.0 ) (4.8 )
Income (loss) from continuing operations before taxes $ 39.8
$ (6.7 ) $ (28.4 ) $ 4.7
Net income attributable to noncontrolling interests 2.9
—
—
2.9
Income (loss) from continuing operations before taxes attributable to Forestar Group Inc. $ 36.9
$ (6.7 ) $ (28.4 ) $ 1.8

Note 3—Real Estate

Real estate consists of:


	June 30, 2020		September 30, 2019
	(In millions)
Developed and under development projects	$	1,271.7	$	1,011.8
Undeveloped land	15.4		17.1
	$	1,287.1	$	1,028.9

June 30,
2019 September 30,
2018
(In millions)
Developed and under development projects $ 988.7
$ 463.1
Undeveloped land 60.8
34.9
$ 1,049.5
$ 498.0

In the nine months ended June 30, ~~2019,~~2020, the Company invested ~~$476.9~~$385.3 million for the acquisition of residential real estate and ~~$202.3~~$348.6 million for the development of residential real estate. At June 30, ~~2019~~2020 and September 30, ~~2018,~~2019, undeveloped land primarily consists of undeveloped land which the Company has the contractual right to sell to D.R. Horton within approximately one year of its purchase or, if D.R. Horton elects, at an earlier date, at a sales price equal to the carrying value of the land at the time of sale plus additional consideration ~~which ranges from 12% to~~of 16% per annum.

~~Note 4—Revenues~~

~~On October 1, 2018,~~Each quarter the Company adopted Accounting Standards Codification 606, "Revenue from Contracts with Customers" (ASC 606), which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company applied the modified retrospective method to contracts that were not completed as of October 1, 2018. Results for the reporting period beginning on October 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and will continue to be reported under the previous accounting standards. Under ASC 606 the Company's performance obligations are typically satisfied at closing. However, there may be instances in which the Company has an unsatisfied remaining performance obligation at the time of closing. In these instances, the Company records contract liabilities and recognizes those revenues over time asreviews the performance ~~obligations are completed. Generally, the Company's unsatisfied remaining performance obligations are expected to have an original duration~~and outlook for all of ~~less than one year.~~its real estate for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary. As of October 1, 2018, the Company established contract liabilities of $6.4 million related to its remaining unsatisfied performance obligations at the time of adoption of ASC 606. There was no impact to the amount or timing of revenues recognized as a result of ~~applying ASC 606~~this process, no real estate impairment charges were recorded for any period presented in the consolidated statements of operations. Real estate impairments, if any, and the land option charges discussed below are included in cost of sales in the consolidated statements of operations.

During the three and nine months ended June 30, 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $0.1 million and $0.5 million, respectively, compared to $0.1 million in both periods of fiscal 2019.

During the latter part of March and in April, the impacts of COVID-19 (C-19) and the related widespread reductions in economic activity affected the Company’s business operations and the demand for residential lots. The Company’s lot sales pace declined as homebuilders slowed their purchases of lots to adjust to expected lower levels of home sales orders as a result of the pandemic. However, as economic activity and housing market conditions began to improve during the latter part of the quarter, the lot sales pace increased.

There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S. economy, capital markets and demand for the Company's lots. The extent to which C-19 impacts the Company’s operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on the Company’s customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. If economic and housing market conditions are adversely affected for a prolonged period, the Company may be required to evaluate its real estate for potential impairment. These evaluations could result in impairment charges which could be significant.

Note 4—Revenues

Revenues consist of:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions)
Residential lot sales	$	164.4	$	87.6	$	537.9	$	171.6
Residential tract sales	13.4		—		43.5		—
Commercial tract sales	—		—		2.5		18.5
Other	0.1		0.6		0.4		1.9
	$	177.9	$	88.2	$	584.3	$	192.0

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
(In millions)
Residential lot sales $ 87.6
$ 19.9
$ 171.6
$ 61.3
Residential tract sales —
3.4
—
5.7
Commercial tract sales —
—
18.5
9.2
Other 0.6
0.3
1.9
0.8
$ 88.2
$ 23.6
$ 192.0
$ 77.0

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Note 5—Capitalized Interest

The Company capitalizes interest costs to real estate throughout the development period (active real estate). Capitalized interest is charged to cost of sales as the related real estate is sold to the buyer. During periods in which the Company’s active real estate is lower than its debt level, a portion of the interest incurred is reflected as interest expense in the period incurred. During the first nine months of fiscal 2020 and fiscal year 2019, the Company’s active real estate exceeded its debt level, and all interest incurred was capitalized to real estate.

The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the three and nine months ended June 30, ~~2019 the Company recognized $1.0 million~~2020 and ~~$4.8 million of residential lot sales revenue as a result of its progress towards completion of its remaining unsatisfied performance obligations.~~2019.


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions)
Capitalized interest, beginning of period	$	37.9	$	7.7	$	23.7	$	3.2
Interest incurred	11.4		9.3		32.0		15.0
Interest charged to cost of sales	(4.1)		(1.0)		(10.5)		(2.2)
Capitalized interest, end of period	$	45.2	$	16.0	$	45.2	$	16.0

Note 5—6—Investment in Unconsolidated Ventures

At June 30, ~~2019,~~2020, the Company had ownership interests in ~~four~~4 ventures that it accounted for using the equity method. Combined summarized balance sheet and income statement information for these unconsolidated ventures follows:


	June 30, 2020		September 30, 2019
	(In millions)
Assets:
Cash and cash equivalents	$	1.2	$	1.6
Real estate	9.4		13.6
Other assets	0.2		0.1
Total assets	$	10.8	$	15.3
Liabilities and Equity:
Accounts payable and other liabilities	$	0.2	$	0.3
Equity	10.6		15.0
Total liabilities and equity	$	10.8	$	15.3

Forestar's investment in unconsolidated ventures	$	5.5	$	7.3


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions)
Revenues	$	—	$	0.1	$	3.0	$	1.9
(Loss) earnings	$	(0.1)	$	(0.1)	$	1.9	$	1.3
Forestar's equity in (loss) earnings of unconsolidated ventures	$	(0.1)	$	—	$	0.6	$	0.5

June 30,
2019 September 30,
2018
(In millions)
Assets:
Cash and cash equivalents $ 1.6
$ 10.2
Real estate 13.6
17.2
Other assets 0.1
0.1
Total assets $ 15.3
$ 27.5
Liabilities and Equity:
Accounts payable and other liabilities $ 0.3
$ 0.6
Equity 15.0
26.9
Total liabilities and equity $ 15.3
$ 27.5

Forestar's investment in unconsolidated ventures $ 7.3
$ 11.7

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Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
(In millions)
Revenues $ 0.1
$ 2.8
$ 1.9
$ 14.8
Earnings (0.1 ) 2.7
1.3
24.4
Forestar's equity in earnings of unconsolidated ventures —
1.0
0.5
9.6

In the nine months ended June 30, 2018, a venture in which the Company owned a 30% interest sold a multifamily project in Nashville for $71.7 million and recognized a gain of $19.0 million. The Company's share of earnings from this transaction was $7.8 million.

~~Note 6—Discontinued Operations~~

The Company divested substantially all of its oil and gas working interest properties in 2016 and completed the sale of all oil and gas assets and related entities in 2017. As a result of selling the entities in 2017, the Company recognized a tax benefit of $7.2 million in the nine months ended June 30, 2018 that has been recorded as income from discontinued operations. There was no activity related to these discontinued operations during the nine months ended June 30, 2019.

Note 7—Other Assets, Accrued Expenses and Other Liabilities

The Company's other assets at June 30, ~~2019~~2020 and September 30, ~~2018~~2019 were as follows:


	June 30, 2020		September 30, 2019
	(In millions)
Receivables, net	$	0.8	$	1.1
Earnest money notes receivable on sales contracts	6.5		—
Lease right of use assets	3.2		—
Prepaid expenses	5.3		3.4
Land purchase contract deposits	5.8		5.1
Other assets	5.5		4.1
	$	27.1	$	13.7

June 30,
2019 September 30,
2018
(In millions)
Receivables, net $ 1.4
$ 2.7
Prepaid expenses 4.0
3.1
Land purchase contract deposits 7.4
4.1
Intangible assets —
0.5
Other assets 5.7
5.0
$ 18.5
$ 15.4

The Company's accrued expenses and other liabilities at June 30, ~~2019~~2020 and September 30, ~~2018~~2019 were as follows:


	June 30, 2020		September 30, 2019
	(In millions)
Accrued employee compensation and benefits	$	3.8	$	5.6
Accrued property taxes	2.9		2.1
Lease liabilities	3.4		—
Accrued interest	11.0		13.5
Contract liabilities	0.3		2.5
Deferred income	9.4		9.3
Accrued development costs	32.4		35.4
Other accrued expenses	5.1		8.4
Other liabilities	4.7		2.8
	$	73.0	$	79.6

June 30,
2019 September 30,
2018
(In millions)
Accrued employee compensation and benefits $ 5.6
$ 6.7
Accrued property taxes 1.8
1.7
Accrued interest 7.6
0.4
Contract liabilities 9.9
—
Deferred income 9.4
11.6
Other accrued expenses 30.2
27.2
Other liabilities 2.9
2.0
$ 67.4
$ 49.6

Contract liabilities at June 30, 2019 represents the Company's unsatisfied remaining performance obligations in the development of 382 lots that have been sold to D.R. Horton which will be recognized over time as the performance obligations are completed.

Note 8—Debt

The Company's notes payable at their carrying amounts consist of the following:


	June 30, 2020		September 30, 2019
	(In millions)
Unsecured:
3.75% convertible senior notes due 2020	$	—	$	116.7
8.0% senior notes due 2024 (1)	344.8		343.8
5.0% senior notes due 2028 (1)	295.8		—
Revolving credit facility	—		—
	$	640.6	$	460.5

______________

(1)Debt ~~consists of:~~issuance costs that were deducted from the carrying amounts of the senior notes totaled $9.4 million and $6.2 million at June 30, 2020 and September 30, 2019, respectively.

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June 30,
2019 September 30,
2018
(In millions)
3.75% convertible senior notes due 2020, net of discount and fees $ 115.5
$ 111.7
8.0% senior unsecured notes due 2024, net of fees 343.4
—
Senior unsecured revolving credit facility, maturing 2021 —
—
$ 458.9
$ 111.7

~~Senior Unsecured Revolving~~Bank Credit Facility

~~On August 16, 2018, the~~The Company ~~entered into~~has a $380 million senior unsecured revolving credit facility with an uncommitted ~~$190 million~~ accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base ~~formula~~calculation based on the book value of the Company's real estate assets and unrestricted cash. The maturity date of the facility is August 16, 2021. The maturity date of the revolving credit facility may be extended by up to one year on up to three occasions, subject to approval of lenders holding a majority of the commitments. Letters of credit issued under the facility reduce the available borrowing capacity. ~~Borrowings and repayments under the facility were $85 million each during the nine months ended June 30, 2019.~~ At June 30, ~~2019,~~2020, there were no0 borrowings outstanding and ~~$21.7~~$31.6 million of letters of credit issued under the revolving credit facility, resulting in available ~~borrowing~~ capacity of ~~$358.3~~$348.4 million. There were 0 borrowings or repayments under the facility during the nine months ended June 30, 2020.

In October 2019, the revolving credit facility was amended to extend its maturity date to October 2, 2022. The maturity date may be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require a minimum level of tangible net worth, a minimum level of liquidity, and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At June 30, ~~2019,~~2020, the Company was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

~~3.75% Convertible~~ Senior Notes ~~due 2020~~

~~At June 30, 2019, the principal amount of the 3.75% convertible senior notes due March 2020 was~~ ~~$118.9 million~~ ~~and the unamortized debt discount was~~ ~~$3.1 million. The effective interest rate on the liability component was~~ ~~8.0%~~ ~~and the carrying amount of the equity component was~~ ~~$16.8 million~~. The Company intends to settle the principal amount of these notes in cash in 2020, with any excess conversion value to be settled in shares of its common stock. At June 30, 2019 and September 30, 2018, the Company had $0.3 million and $0.7 million in unamortized deferred financing fees that were deducted from the carrying value of these notes.

~~8.0% Senior Unsecured Notesdue 2024~~

In ~~April 2019,~~February 2020, the Company issued ~~$350~~$300 million principal amount of ~~8.0%~~5.0% senior ~~unsecured~~ notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as ~~amended.~~amended (Securities Act). The notes ~~are due April 15, 2024~~mature March 1, 2028 with interest payable semi-annually and represent ~~the Company's~~ senior unsecured obligations ~~and~~that rank equally ~~with the Company's other~~in right of payment to all existing and future senior unsecured indebtedness. The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. On or after March 1, 2023, the notes may be redeemed at 102.5% of their principal amount plus any accrued and unpaid interest. In accordance with the indenture, the redemption price decreases annually thereafter and the notes can be redeemed at par on or after March 1, 2026 through maturity. The notes are guaranteed by each of the Company's subsidiaries to the extent such subsidiaries guarantee the Company's revolving credit facility. ~~At June 30, 2019, the Company had $6.6 million in unamortized deferred financing fees that were deducted from the carrying value of these notes.~~ The annual effective interest rate of the notes after giving effect to the amortization of financing costs is ~~8.5%~~5.2%. The Company also has $350 million principal amount of 8.0% senior notes due 2024 outstanding.

In March 2020, the Company repaid $118.9 million principal amount of its 3.75% convertible senior notes in cash at maturity.

The ~~indenture~~indentures governing the senior notes ~~requires~~require that, upon the occurrence of both a ~~Change~~change of ~~Control~~control and a ~~Rating Decline~~rating decline (each as defined in the ~~indenture)~~indentures), the Company offer to purchase the notes at 101% of their principal amount. If the Company or its restricted subsidiaries dispose of assets, under certain circumstances, the Company will be required to either invest the net cash proceeds from such asset sales in its business within a specified period of time, repay certain senior secured debt or debt of its non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash

proceeds at a purchase price of 100% of their principal amount. The ~~indenture contains~~indentures contain covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments; incur additional debt or issue mandatorily redeemable equity; incur liens on assets; merge or consolidate with another company or sell or otherwise dispose of all or substantially all of the Company’s assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments. ~~Certain of the covenants will not apply to the notes so long as the notes have investment grade ratings from two specified rating agencies.~~

At June 30, ~~2019,~~2020, the Company was in compliance with all of the limitations and restrictions associated with ~~our~~its senior note obligations.

Effective April 30, 2020, the Board of Directors authorized the repurchase of up to $30 million of the Company’s debt securities. The authorization has no expiration date. All of the $30 million authorization was remaining at June 30, 2020.

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Note 9—Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, the Company uses 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.

The Company elected not to use the fair value option for cash and cash equivalents ~~restricted cash~~ and debt.

For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at June 30, ~~2019~~2020 and September 30, ~~2018.~~2019.


			Fair Value at June 30, 2020
	Carrying Value		Level 1		Level 2		Level 3		Total
	(in millions)
Cash and cash equivalents ^(a)	$	355.6	$	355.6	$	—	$	—	$	355.6
Debt ^(b)	640.6		—		660.4		—		660.4

Fair Value at June 30, 2019
Carrying Value Level 1 Level 2 Level 3 Total
(in millions)
Cash and cash equivalents ^(a)
$ 223.0
$ 223.0
$ —
$ —
$ 223.0
Restricted cash ^(a)
0.2
0.2
—
—
0.2
Debt ^(b)
465.8
—
485.8
—
485.8


			Fair Value at September 30, 2018											Fair Value at September 30, 2019
	Carrying Value		Level 1		Level 2		Level 3		Total			Carrying Value		Level 1		Level 2		Level 3		Total
	(in millions)											(in millions)
Cash and cash equivalents ^(a)	$	318.8	$	318.8	$	—	$	—	$	318.8	Cash and cash equivalents ^(a)	$	382.8	$	382.8	$	—	$	—	$	382.8
Restricted cash ^(a)	16.2		16.2		—		—		16.2
Debt ^(b)	112.4		—		113.2		—		113.2		Debt ^(b)	460.5		—		497.3		—		497.3

_____________________


^(a)	~~The fair values of cash, cash equivalents and restricted cash approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy.~~


^(b)	~~The fair value of the convertible senior notes and the senior unsecured notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.~~

(a) The fair values of cash and cash equivalents approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy.

(b) At June 30, 2020 and September 30, 2019, debt consisted of the Company's senior notes. The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.

Non-financial assets measured at fair value on a non-recurring basis ~~principally~~primarily include real estate assets which ~~are measured for impairment.~~

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

June 30, 2019 September 30, 2018
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
(In millions)
Real estate $ —
$ —
$ —
$ —
$ —
$ 0.2
$ —
$ 0.2

~~At September 30, 2018,~~ the Company ~~based the valuations~~reviews for indicators of ~~its real estate primarily on offers received from third parties.~~potential impairment and performs impairment evaluations when necessary.

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Note 10—~~Net Income~~Earnings per Share

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

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
(In millions, except share data)
Numerator:
Continuing operations
Net income (loss) from continuing operations $ 6.9
$ 10.3
$ 23.6
$ (7.9 )
Less: Net income attributable to noncontrolling interest —
0.9
3.3
2.9
Net income (loss) from continuing operations attributable to Forestar Group Inc. $ 6.9
$ 9.4
$ 20.3
$ (10.8 )

Discontinued operations
Net income from discontinued operations available for diluted earnings per share $ —
$ —
$ —
$ 7.2

Denominator:
Weighted average common shares outstanding — basic 41,959,866
41,938,936
41,957,408
41,945,099
Dilutive effect of share based compensation 50,355
27,377
20,931
—
Total weighted average shares outstanding — diluted 42,010,221
41,966,313
41,978,339
41,945,099
Anti-dilutive awards excluded from diluted weighted average shares —
—
—
28,558


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions, except share and per share amounts)
Numerator:
Net income attributable to Forestar Group Inc.	$	10.1	$	6.9	$	36.5	$	20.3
Denominator:
Weighted average common shares outstanding — basic	48,050,379		41,959,866		48,028,957		41,957,408
Dilutive effect of share based compensation	24,831		50,355		45,903		20,931
Total weighted average shares outstanding — diluted	48,075,210		42,010,221		48,074,860		41,978,339
Anti-dilutive awards excluded from diluted weighted average shares	—		—		—		—

Basic net income per common share attributable to Forestar Group Inc.	$	0.21	$	0.16	$	0.76	$	0.48
Diluted net income per common share attributable to Forestar Group Inc.	$	0.21	$	0.16	$	0.76	$	0.48

~~The~~

In March 2020, the Company ~~intends to settle the~~repaid $118.9 million principal amount of its 3.75% convertible senior notes in cash with any excess conversion value to be settled in shares of its common stock. Therefore, only the amount in excess of the par value of the notes will be included in the calculation of diluted net income per share using the treasury stock method. As such, the notes have no impact on diluted net income per share until the price of the Company's common stock exceeds the conversion price of the notes of $51.42.at maturity. The ~~price of the Company's common stock did not exceed the conversion price so the~~ notes had no impact on diluted net income per share in any of the prior periods presented.

Note 11—Income Taxes

The ~~Company's effective~~Company’s income tax ~~rate from continuing operations was 18% and 20%~~expense for the three and nine months ended June 30, ~~2019.~~2020 was $0.2 million and $8.9 million compared to $1.5 million and $6.0 million in the prior year periods. The ~~Company’s~~ effective tax rate ~~is less than~~was 1.9% and 19.3% for the ~~statutory~~three and nine months ended June 30, 2020 compared to 17.9% and 20.3% in the prior year periods. The effective tax rate ~~primarily~~for the three and nine months ended June 30, 2020 includes a tax benefit of $2.3 million related to the net operating loss (NOL) carryback provisions of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which allows the Company to carryback a portion of its 2018 NOL. The carryback provisions result in the recognition of previously unrecognized tax benefits and the revaluation of deferred tax assets due to the utilization of NOLs at a higher tax ~~benefits for noncontrolling interests.~~rate in the carryback period. The Company's effective tax rate from continuing operations was 1% for the three months ended June 30, 2018, which included the impact of the Tax Cuts and Jobs Act (Tax Act) and a tax benefit from the release of a portion of its valuation allowance as the result of the realization of certain deferred tax assets. The Company’s effective tax rate from continuing operations was 268% for the nine months ended June 30, 2018 which included nondeductible transaction costs related to the Merger, the impairment of nondeductible goodwill related to the Company's oil and gas operations, other adjustments to the Company's valuation allowance as a result of the generation and utilization of its deferred tax assets, and the impact of the Tax Act. The Company’s effective tax rates for all periods ~~include the effect of~~includes an expense for state income taxes and nondeductible ~~items~~expenses and ~~benefits for~~a benefit related to noncontrolling interests.

At June 30, ~~2019~~2020, the Company had deferred tax assets, net of deferred tax liabilities, of $3.2 million. The deferred tax assets were offset by a valuation allowance of $3.3 million, resulting in a net deferred tax liability of $0.1 million, which is included in accrued expenses and other liabilities on its consolidated balance sheets. At September 30, ~~2018,~~2019, deferred tax assets, net of deferred tax liabilities, were ~~$24.3~~$20.7 million, ~~and $30.3 million,~~partially offset by a valuation allowance of $3.3 ~~million and $3.4 million for the portion of the deferred tax assets that the Company has determined is more likely than not to be unrealizable.~~million. The valuation allowance for both periods was recorded because it is more likely than not that a portion of the Company's state deferred tax assets, primarily ~~net operating loss (NOL)~~NOL carryforwards, will not be realized because the Company is no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets. Any reversal of the valuation allowance in future periods will impact the effective tax rate.

On October 5, 2017, D.R. Horton Inc. acquired 75% of the Company’s common stock resulting in an ownership change under Section 382 of the Internal Revenue Code. Section 382 limits the Company’s ability to use certain tax attributes and built-in losses and deductions in a given year. The Company’s tax attributes or built-in losses and deductions that were limited in 2017 or 2018 are expected to be fully utilized in future years with the exception of some state NOL carryforwards.

The ~~Company's~~Company had no unrecognized tax benefits ~~totaled $1.1 million~~ at June 30, ~~2019, all~~2020 as a result of ~~which would affect its~~the recognition of $1.6 million of previously unrecognized tax benefits during the three months ended June 30, 2020. All of the $1.6 million of recognized tax benefits affected the Company’s effective tax rate ifand was attributable to the NOL carryback provisions of the CARES Act allowing previously uncertain tax attributes to be recognized.

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Note ~~12—~~12 — Stockholders' Equity and ~~Stock Based~~Stock-Based Compensation

Stockholders' Equity

The Company has an effective shelf registration statement filed with the Securities and Exchange Commission (SEC) onin September ~~24, 2018, which became effective on October 4,~~ 2018 registering $500 million of equity securities. At June 30, 2020, $394.3 million remains available for issuance under the shelf registration statement.

Restricted Stock Units (RSUs)

The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors. Restricted stock unit awards may be based on performance (performance-based) or on service over a requisite time period (time-based). ~~Performance-based and time-based~~ RSU equity awards represent the contingent right to receive one share of the Company’s common stock per RSU if the vesting conditions and/or performance criteria are ~~satisfied. The RSUs~~satisfied and have no voting rights ~~until vested.~~during the vesting period.

During the ~~three~~nine months ended June 30, ~~2019,~~2020, a total of ~~149,400~~175,325 time-based RSUs were granted. The weighted average grant date fair value of these equity awards was ~~$20.24~~$16.01 per unit, and they vest annually in equal installments over periods of three to five years. ~~Stock based~~Total stock-based compensation expense related to the Company's restricted stock units for the three and nine months ended June 30, 2020 was $0.3 million and $1.6 million, respectively, and the nine month period includes $0.5 million of expense recognized for employees that were retirement eligible on the date of grant. Total stock-based compensation expense for the three and nine months ended June 30, 2019 was $0.9 million and $1.1 million, respectively, and in both periods ~~includes~~include $0.6 million of ~~stock based compensation~~ expense ~~related to~~recognized for employees that were retirement eligible on the date of grant.

Note 13—Commitments and Contingencies

Contractual Obligations and Off-Balance Sheet Arrangements

In support of ~~our~~the Company's residential lot development business, ~~we have~~it issues letters of credit under the revolving credit facility and has a surety bond program that provides financial assurance to beneficiaries related to the execution and performance of certain development obligations. At June 30, ~~2019,~~2020, the Company had ~~$111.4~~outstanding letters of credit of $31.6 million ofunder the revolving credit facility and surety bonds ~~outstanding.~~of $206.2 million, issued by third parties to secure performance under various contracts. The Company expects that its performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When the Company completes its performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving the Company with no continuing obligations. The Company has no material third-party guarantees.

Litigation

The Company is involved in various legal proceedings that arise from time to time in the ordinary course of business and believes that adequate reserves have been established for any probable losses. The Company does not believe that the outcome of any of these proceedings will have a significant adverse effect on its financial position, long-term results of operations or cash flows. It is possible, however, that charges related to these matters could be significant to the Company's results or cash flows in any one accounting period.

Note 14—Related Party Transactions

In October 6, 2017, the Company entered into a Shared Services Agreement with D.R. Horton whereby D.R. Horton provides the Company with certain administrative, compliance, operational and procurement services. During the nine months ended June 30, ~~2019~~2020 and ~~2018,~~2019, the Company paid D.R. Horton ~~$1.6~~$3.8 million and ~~$0.6~~$1.6 million for these shared services and ~~$1.1~~$1.9 million and ~~$0.6~~$1.1 million for the cost of health insurance and other employee benefits. These expenses are included ~~within~~in selling, general and administrative expense in the consolidated ~~statement~~statements of operations.

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Under the terms of the Master Supply Agreement with D.R. Horton, both companies identify land development opportunities to expand Forestar's portfolio of assets. At June 30, 2020 and September 30, 2019, the Company owned or controlled through ~~option~~ purchase contracts approximately ~~37,400~~50,700 and 38,300 residential lots, of which ~~approximately 13,900 are under contract to sell to D.R. Horton. Additionally,~~ D.R. Horton ~~has~~had the right of first offer on approximately 10,200 of these residential lots based on executed purchase and sale agreements. At June 30, 2019 and September 30, 2018, the Company had earnest money deposit liabilities of $83.7 million and $45.3 million related to earnest money deposits from land and lot option purchase contracts with D.R. Horton. following involvement.


	June 30, 2020		September 30, 2019
	(Dollars in millions)
Residential lots under contract to sell to D.R. Horton	14,100		12,800
Residential lots subject to right of first offer with D.R. Horton	15,500		10,600
Earnest money deposits from D.R. Horton for lots under contract	$	91.0	$	88.7
Earnest money notes from D.R. Horton for lots under contract	$	6.5	$	—
Remaining purchase price of lots under contract with D.R. Horton	$	1,016.4	$	953.8

In the three months ended June 30, 2020 and 2019, the ~~Company sold 995~~Company's residential ~~lots to D.R. Horton for $75.2~~lot sales totaled 2,023 and 1,158, and lot sales revenues were $164.4 million and $87.6 million. In the nine months ended June 30, 2020 and 2019, the ~~Company sold 1,903~~Company's residential ~~lots~~lot sales totaled 6,396 and 2,224, and lot sales revenues were $537.9 million and $171.6 million. Lot and land sales to D.R. Horton ~~for $145.4 million.~~ during those periods were as follows.


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in millions)
Residential single-family lots sold to D.R. Horton	1,991		995		6,287		1,903
Residential lot sales revenues from sales to D.R. Horton	$	159.3	$	75.2	$	526.0	$	145.4
Residential tract acres sold to D.R. Horton	30		—		66		—
Residential tract sales revenues from sales to D.R. Horton	$	13.4	$	—	$	20.6	$	—

In ~~the three months ended June 30, 2018, the Company sold 141 residential lots~~addition, a decrease in contract liabilities increased revenues on lot sales to D.R. Horton ~~for $10.1~~by $2.8 million and ~~79 residential tract acres to D.R. Horton for $2.0 million. In~~$2.1 million in the three and nine months ended June 30, ~~2018, the Company sold 324 residential lots to D.R. Horton for $18.6 million~~2020 and ~~79 residential tract acres to D.R. Horton for $2.0 million. In addition, the net impact of the change~~an increase in contract liabilities ~~or revenue deferrals~~ decreased revenues on lot sales to D.R. Horton by $2.0 million and $3.6 million in the three and nine months ended June 30, ~~2019 and $3.2 million in both~~2019.

During the three and nine months ended June 30, ~~2018. At June 30, 2019,~~2020, the Company ~~had contract liabilities of $9.9~~reimbursed D.R. Horton approximately $7.0 million and $23.2 million for previously paid earnest money and $12.9 million and $26.2 million for pre-acquisition and other due diligence and development costs related to ~~its unsatisfied remaining performance obligations in the development of 382 lots that have been sold to~~land purchase contracts whereby D.R. Horton ~~which will be recognized over time as~~assigned its rights under these land purchase contracts to the ~~performance obligations are completed.~~

Company. During the three and nine months ended June 30, 2019, the Company reimbursed D.R. Horton approximately $10.8 million and $27.6 million for previously paid earnest money and $4.7 million and $8.4 million for pre-acquisition and other due diligence and development costs related to land purchase contracts whereby D.R. Horton assigned its rights under these land purchase contracts to the Company. During the three and nine months ended June 30, 2018, the Company reimbursed D.R. Horton approximately $2.9 million and $16.9 million for previously paid earnest money and $4.6 million and $12.8 million for pre-acquisition and other due diligence and development costs.

During the three and nine months ended June 30, ~~2019,~~2020, the Company paid D.R. Horton $1.0 million and $3.9 million for land development services compared to $0.6 million and $1.4 million for ~~land development services and $0.1 million for~~ these services in ~~both~~the prior year periods. These amounts are included in cost of sales in the Company’s consolidated statements of operations.

At June 30, ~~2019~~2020 and September 30, ~~2018,~~2019, undeveloped land was ~~$60.8~~$15.4 million and ~~$34.9~~$17.1 million. Undeveloped land primarily consists of undeveloped land which the Company has the contractual right to sell to D.R. Horton within approximately one year of its purchase or, if D.R. Horton elects, at an earlier date, at a sales price equal to the carrying value of the land at the time of sale plus additional consideration ~~which ranges from 12% to~~of 16% per annum.

At June 30, ~~2019~~2020 and September 30, ~~2018,~~2019, accrued expenses and other liabilities on the Company's consolidated balance sheets included ~~$0.7~~$3.0 million and ~~$3.3~~$2.2 million owed to D.R. Horton for any accrued and unpaid shared service charges, land purchase contract deposits and due diligence and other development cost reimbursements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Management’s Discussion~~

The following discussion and ~~Analysis~~analysis of ~~Financial Condition~~our financial condition and ~~Results~~results of ~~Operations~~operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended September 30, 2019. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the “Forward-Looking Statements” section following this discussion.

Our Operations

We are a residential lot development company with operations in 51 markets in 22 states as of June 30, 2020. In October 2017, we became a majority-owned subsidiary of D.R. Horton, Inc. Our alignment with and support from D.R. Horton provides us an opportunity to grow our business into a national, well-capitalized residential lot developer selling lots to D.R. Horton and other homebuilders. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business across a geographically diversified national platform. We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders. This strategy is a unique, lower-risk business model that we expect will produce more consistent returns than other public and private land developers. We also make short term investments in finished lots (lot banking) and undeveloped land with the intent to sell these assets within a short time period, primarily to D.R. Horton, utilizing available capital prior to its deployment into longer term lot development projects.

COVID-19

During the latter part of March 2020, the impacts of the COVID-19 pandemic (C-19) and the related widespread reductions in economic activity began affecting our business operations and the demand for our residential lots.

However, residential construction is designated an essential business as part of critical infrastructure in almost all municipalities across the U.S. where we operate. We have implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

Our lot sales pace declined throughout late March and April as homebuilders slowed their purchases of lots to adjust to expected lower levels of home sales orders as a result of the pandemic. However, as economic activity and housing market conditions began to improve during the latter part of the quarter our lot sales pace increased. Although our lot sales pace has improved, we remain cautious as to the impact C-19 may have on our operations and on the overall economy in the future. There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S. economy, capital markets and demand for our lots. The extent to which C-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

We believe we are well positioned to effectively operate during changing economic conditions due to our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R. Horton.

Business Segment

We manage our operations through our real estate segment which is our core business and generates substantially all of our revenues. The real estate segment primarily acquires land and develops infrastructure for single-family residential communities and its revenues generally come from sales of residential single-family finished lots to local, regional and national homebuilders. We have other business activities for which the related assets and operating results are immaterial, and therefore, are included in our real estate segment.

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Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the three and nine months ended June 30, 2020 and 2019.

Operating Results

Components of pre-tax income were as follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions)
Revenues	$	177.9	$	88.2	$	584.3	$	192.0
Cost of sales	157.1		75.3		510.3		149.6
Selling, general and administrative expense	11.2		7.9		32.8		19.8
Equity in loss (earnings) of unconsolidated ventures	0.1		—		(0.6)		(0.5)
Gain on sale of assets	—		(1.5)		(0.1)		(2.4)
Interest and other income	(0.8)		(1.9)		(4.2)		(4.1)
Income before income taxes	$	10.3	$	8.4	$	46.1	$	29.6

Lot Sales

Residential lots sold consist of:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
Development projects	1,556		723		4,234		1,597
Lot banking projects	467		435		2,162		627
	2,023		1,158		6,396		2,224

Average sales price per lot ^(a)	$	79,900	$	77,400	$	83,800	$	78,800

_______________

(a) Excludes any impact from change in contract liabilities.

Revenues

Revenues consist of:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(In millions)
Residential lot sales:
Development projects	$	124.5	$	59.0	$	340.8	$	129.7
Lot banking projects	37.1		30.6		195.0		45.5
Decrease (increase) in contract liabilities	2.8		(2.0)		2.1		(3.6)
	164.4		87.6		537.9		171.6
Residential tract sales	13.4		—		43.5		—
Commercial tract sales	—		—		2.5		18.5
Other	0.1		0.6		0.4		1.9
	$	177.9	$	88.2	$	584.3	$	192.0

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Residential lots sold and residential lot sales revenues have increased as we have grown our business primarily through our strategic relationship with D.R. Horton. In the three months ended June 30, 2020, we sold 1,991 residential lots to D.R. Horton for $159.3 million, compared to 995 residential lots sold to D.R. Horton for $75.2 million in the prior year period. In the nine months ended June 30, 2020, we sold 6,287 residential lots to D.R. Horton for $526.0 million, compared to 1,903 residential lots sold to D.R. Horton for $145.4 million in the prior year period. At June 30, 2020, our lot position consisted of 50,700 residential lots, of which approximately 38,300 were owned and 12,400 were controlled through purchase contracts. Of our owned lots, approximately 14,100 are under contract to sell to D.R. Horton. Additionally, D.R. Horton has the right of first offer on approximately 15,500 lots based on executed purchase and sale agreements. At June 30, 2020, lots owned included approximately 6,000 that are fully developed, of which approximately 2,100 are related to lot banking. At June 30, 2020, we had approximately 200 lots under contract to sell to builders other than D.R. Horton.

Residential tract sales in the three months ended June 30, 2020 consist of 30 residential tract acres sold to D.R. Horton for $13.4 million. Residential tract sales in the nine months ended June 30, 2020 consist of 580 residential tract acres sold to third parties for $22.8 million and 66 residential tract acres to D.R. Horton for $20.6 million.

Commercial tract sales in the nine months ended June 30, 2020 consist of 8 commercial tract acres sold to a third party for $2.5 million. Commercial tract sales in the nine months ended June 30, 2019 primarily consist of the sale of 44 commercial tract acres from a consolidated joint venture for $14.8 million.

Cost of sales in the three and nine months ended June 30, 2020 increased as compared to the prior year periods primarily due to the increases in the number of lots sold. Cost of sales related to residential and commercial tract sales in the three and nine months ended June 30, 2020 was $12.8 million and $36.7 million, respectively.

Selling, General and Administrative (SG&A) Expense and Other Income Statement Items

SG&A expense in the three and nine months ended June 30, 2020 was $11.2 million and $32.8 million, respectively, compared to $7.9 million and $19.8 million in the prior year periods. Our SG&A expense primarily consists of employee compensation and related costs. Our business operations employed 128 and 63 employees at June 30, 2020 and 2019, respectively.

Interest and other income primarily represents interest earned on our cash deposits.

Income Taxes

Our income tax expense for the three and nine months ended June 30, 2020 was $0.2 million and $8.9 million compared to $1.5 million and $6.0 million in the prior year periods. Our effective tax rate was 1.9% and 19.3% for the three and nine months ended June 30, 2020 compared to 17.9% and 20.3% in the prior year periods. Our effective tax rate for the three and nine months ended June 30, 2020 includes a tax benefit of $2.3 million related to the NOL carryback provisions of the recently enacted CARES Act, which allows us to carryback a portion of our 2018 NOL. The carryback provisions result in the recognition of previously unrecognized tax benefits and the revaluation of deferred tax assets due to the utilization of NOLs at a higher tax rate in the carryback period. Our effective tax rate for all periods includes an expense for state income taxes and nondeductible expenses and a benefit related to noncontrolling interests.

At June 30, 2020, we had deferred tax assets, net of deferred tax liabilities, of $3.2 million. The deferred tax assets were offset by a valuation allowance of $3.3 million, resulting in a net deferred tax liability of $0.1 million, which is included in accrued expenses and other liabilities on our consolidated balance sheets. At September 30, 2019, deferred tax assets, net of deferred tax liabilities, were $20.7 million, partially offset by a valuation allowance of $3.3 million. The valuation allowance for both periods was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily NOL carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets. Any reversal of the valuation allowance in future periods will impact our effective tax rate.

We had no unrecognized tax benefits at June 30, 2020 as a result of the recognition of $1.6 million of previously unrecognized tax benefits during the three months ended June 30, 2020. All of the $1.6 million of recognized tax benefits affected our tax rate and was attributable to the NOL carryback provisions of the CARES Act allowing previously uncertain tax attributes to be recognized.

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Liquidity and Capital Resources

Our strategic relationship with D.R. Horton has provided us with an opportunity for substantial growth. Since our merger with D.R. Horton, we have funded our growth with available cash, borrowings under our revolving credit facility and the issuance of senior unsecured notes and common stock. At June 30, 2020, we had $355.6 million of cash and cash equivalents and $348.4 million of available borrowing capacity on our revolving credit facility. We have no senior note maturities until fiscal 2024. We believe we are well positioned to effectively operate during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R. Horton. During late March and April, homebuilders slowed their purchases of lots to adjust to expected lower levels of new home demand. However, as economic activity and housing market conditions began to improve during the latter part of the quarter our lot sales pace increased.

The extent to which C-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. If economic and housing market conditions are adversely affected for a prolonged period and there is decreased demand for our lots, we may need to amend the terms of existing lot sale contracts with homebuilders to adjust to current market conditions. These amendments could include changes in the timing, amount and pricing of lots to be purchased, the amount of earnest money deposits, and other payment terms. Such amendments, if significant, could adversely impact our future results of operations and liquidity position.

At June 30, 2020, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 43.1% compared to 36.3% at September 30, 2019 and 39.8% at June 30, 2019. Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 25.2% compared to 8.8% at September 30, 2019 and 25.3% at June 30, 2019. Over the long term, we intend to maintain our ratio of net debt to total capital at or below 40%. We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations.

We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs and debt obligations. Our ability to achieve our long-term growth objectives will depend on our ability to obtain financing in sufficient amounts. 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 preparing for the purchase or sale of our debt securities, the sale of our common stock or a combination thereof. However, due to the current economic uncertainties related to C-19, we may be limited in accessing the capital markets or the cost of accessing these markets could become more expensive.

Bank Credit Facility

We have a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of our real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. At June 30, 2020, there were no borrowings outstanding and $31.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $348.4 million. There were no borrowings or repayments under the facility during the nine months ended June 30, 2020.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require a minimum level of tangible net worth, a minimum level of liquidity, and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At June 30, 2020, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

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Senior Notes

In February 2020, we issued $300 million principal amount of 5.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act. The notes mature March 1, 2028 with interest payable semi-annually and represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness. The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. On or after March 1, 2023, the notes may be redeemed at 102.5% of their principal amount plus any accrued and unpaid interest. In accordance with the indenture, the redemption price decreases annually thereafter and the notes can be redeemed at par on or after March 1, 2026 through maturity. The notes are guaranteed by each of our subsidiaries to the extent such subsidiaries guarantee our revolving credit facility. The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 5.2%. We also have $350 million principal amount of 8.0% senior notes due 2024 outstanding.

In March 2020, we repaid $118.9 million principal amount of our 3.75% convertible senior notes in cash at maturity.

The indentures governing the senior notes require that, upon the occurrence of both a change of control and a rating decline (each as defined in the indenture), we offer to purchase the notes at 101% of their principal amount. If we or our restricted subsidiaries dispose of assets, under certain circumstances, we will be required to either invest the net cash proceeds from such asset sales in our business within a specified period of time, repay certain senior secured debt or debt of our non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash proceeds at a purchase price of 100% of their principal amount. The indentures contain covenants that, among other things, restrict the ability of us and our restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments; incur additional debt or issue mandatorily redeemable equity; incur liens on assets; merge or consolidate with another company or sell or otherwise dispose of all or substantially all of our assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments. At June 30, 2020, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

Effective April 30, 2020, our Board of Directors authorized the repurchase of up to $30 million of our debt securities. The authorization has no expiration date. All of the $30 million authorization was remaining at June 30, 2020.

Shelf Registration Statement

In September 2018, we filed a shelf registration statement with the SEC registering $500 million of equity securities. At June 30, 2020, $394.3 million remains available for issuance under the shelf registration statement.

Contractual Obligations and Off-Balance Sheet Arrangements

In support of our residential lot development business, we issue letters of credit under our revolving credit facility and we have a surety bond program that provides financial assurance to beneficiaries related to the execution and performance of certain development obligations. At June 30, 2020, we had outstanding letters of credit of $31.6 million under the revolving credit facility and surety bonds of $206.2 million, issued by third parties to secure performance under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees.

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Operating Cash Flow Activities

In the nine months ended June 30, 2020, net cash used in operating activities was $205.7 million compared to $450.1 million in the nine months ended June 30, 2019. The net cash used in operating activities in both periods reflects our strategy of continuing to grow our land development operations.

Investing Cash Flow Activities

In the nine months ended June 30, 2020, net cash provided by investing activities was $3.1 million compared to $0.8 million used in investing activities in the nine months ended June 30, 2019. The cash provided by investing activities in the current year is primarily the result of distributions received from our unconsolidated ventures.

Financing Cash Flow Activities

In the nine months ended June 30, 2020, net cash provided by financing activities was $175.4 million, consisting primarily of proceeds from the issuance of $300 million principal amount of 5.0% senior notes, partially offset by the repayment of $118.9 million principal amount of our 3.75% convertible senior notes at maturity. In the nine months ended June 30, 2019, net cash provided by financing activities was $339.1 million, consisting primarily of proceeds from the issuance of $350 million principal amount of 8.0% senior notes, while amounts drawn and repaid on the revolving credit facility totaled $85 million each.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2019 Annual Report on Form ~~10-KT.~~10-K.

New and Pending Accounting Pronouncements

Please read Note 1—Basis of Presentation to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

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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:

•the impact of C-19 on the economy and our business;

•the effect of D.R. ~~Horton, Inc.’s (D.R. Horton)~~Horton's controlling level of ownership on us and ~~our stockholders and~~the holders of ~~notes;~~our securities;

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

•the effect of our strategic relationship with D.R. Horton on our ability to maintain relationships with our vendors and customers;

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

•competitive actions by other companies;

•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;

•our ability to comply with our debt covenants, restrictions and limitations;

•our ability to hire and retain key personnel;

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

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

•our ability to achieve our strategic initiatives;

•our ability to obtain future entitlement and development approvals;

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

•our ability to obtain or the availability of surety bonds to secure our performance related to construction and development activities and the pricing of bonds;

•obtaining reimbursements and other payments from ~~special improvement~~governmental districts and other agencies and timing of such payments;

•the levels of resale housing inventory in our ~~development~~ projects and the regions in which they are located;

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

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

•the strength of our information technology systems and the risk of cybersecurity breaches; and

•the conditions of the capital markets and our ability to raise capital to fund expected ~~growth; and~~growth.

~~our ability to comply with our debt covenants, restrictions and limitations.~~

Other factors, including the risk factors described in Item 1A of our ~~2018~~2019 Annual Report on Form ~~10-KT and in~~10-K, as supplemented by Part II, Item 1A ofin our Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2019,~~2020 and in this 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 lot development company with operations in 50 markets in 20 states as of June 30, 2019. In October 2017, we became a majority-owned subsidiary of D.R. Horton. Our alignment with and support from D.R. Horton provides us an opportunity to grow our business into a national, well-capitalized residential lot developer selling lots to D.R. Horton and other homebuilders. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business into a geographically diversified national platform. We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders. This strategy is a unique, lower-risk business model that we expect will produce more consistent returns than other public and private land developers.

~~Discontinued Operations~~

We divested substantially all of our oil and gas working interest properties in 2016 and completed the sale of all oil and gas assets and related entities in 2017. As a result of selling the entities in 2017, we recognized a tax benefit of $7.2 million in the nine months ended June 30, 2018 that has been recorded as income from discontinued operations. There was no activity related to these discontinued operations during the three and nine months ended June 30, 2019.

~~Business Segments~~

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). During the three months ended December 31, 2018, we began managing our operations through one real estate segment. As such, the operating results of our real estate segment are consistent with our consolidated operating results and no separate disclosure is required as of and for the three and nine months ended June 30, 2019. Our real estate segment is our core business and is expected to generate all of our revenues in fiscal 2019. The real estate segment primarily acquires land and develops infrastructure for single-family residential communities. Our real estate segment generates its revenues principally from sales of residential single-family finished lots to local, regional and national homebuilders.

We have other business activities which were presented in our other segment in prior periods. The assets and results of operations of these business activities are immaterial and are included in our real estate segment in the current periods.

Additionally, as of and for the three and nine months ended June 30, 2019, all assets and results of operations have been included in the real estate segment. In prior periods, certain costs and assets were not allocated to the segments. During the three months ended December 31, 2018, we began evaluating the results of operations of our real estate segment based on income from continuing operations before income taxes. As a result, all of our results of operations have been allocated to the real estate segment for the three and nine months ended June 30, 2019. This change in the measure of segment profit (loss) has been adopted prospectively and the prior period segment results have not been adjusted to conform to the current period. In prior periods, segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income and net income (loss) attributable to noncontrolling interests. Items not allocated to segments in prior periods consist of general and administrative expense, share-based and long-term incentive compensation, gain on sale of timberland assets, interest expense, and other corporate interest and other income.

~~Results of Operations~~

~~Real estate segment results for the three and nine months ended June 30, 2019 were:~~

Three Months Ended
June 30, 2019 Nine Months Ended
June 30, 2019
(In millions)
Revenues $ 88.2
$ 192.0
Cost of sales 75.3
149.6
Selling, general and administrative expense 7.9
19.8
Equity in earnings of unconsolidated ventures —
(0.5 )
Gain on sale of assets (1.5 ) (2.4 )
Interest expense —
—
Interest and other income (1.9 ) (4.1 )
Income from continuing operations before taxes $ 8.4
$ 29.6

~~Segment results for the three and nine months ended June 30, 2018 were:~~

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~~Real Estate~~

We are a residential lot development company with operations in 50 markets and 20 states as of June 30, 2019. Our real estate segment primarily acquires land and develops infrastructure for single-family residential communities. Our real estate segment revenues are principally derived from the sales of residential single-family lots that we have developed. Our real estate segment also makes short term investments in finished lots (lot banking) and undeveloped land with the intent to sell these assets within a short time period, primarily to D.R. Horton, utilizing available capital prior to its deployment into longer term lot development projects.

~~Residential lots sold consist of:~~

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
Development projects 723
294
1,597
767
Lot banking projects 435
3
627
89
1,158
297
2,224
856

Average sales price per lot ^(a)
$ 77,400
$ 77,900
$ 78,800
$ 75,300

~~_____________________~~

^(a)~~Excludes any impact from change in contract liabilities or deferred revenue.~~

~~Revenues consist of:~~

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
(In millions)
Residential lot sales:
Development projects $ 59.0
$ 23.0
$ 129.7
$ 61.8
Lot banking projects 30.6
0.1
45.5
2.7
Change in contract liabilities or deferred revenue (2.0 ) (3.2 ) (3.6 ) (3.2 )
87.6
19.9
171.6
61.3
Residential tract sales —
3.4
—
5.7
Commercial tract sales —
—
18.5
9.2
Other 0.6
0.3
1.9
0.8
$ 88.2
$ 23.6
$ 192.0
$ 77.0

Residential lots sold and residential lot sales revenues have increased in all periods presented primarily due to our strategic relationship with D.R. Horton. In the three months ended June 30, 2019, we sold 995 residential lots to D.R. Horton for $75.2 million. In the nine months ended June 30, 2019, we sold 1,903 residential lots to D.R. Horton for ~~$145.4 million~~. In the three months ended June 30, 2018, we sold 141 residential lots to D.R. Horton for $10.1 million. In the nine months ended June 30, 2018, we sold 324 residential lots to D.R. Horton for $18.6 million. At June 30, 2019, our lot position consisted of 37,400 residential lots, of which approximately 28,800 were owned and 8,600 were controlled through option purchase contracts. Of our total owned and controlled lots, approximately 13,900 are under contract to sell to D.R. Horton. Additionally, D.R. Horton has the right of first offer on approximately 10,200 of these residential lots based on executed purchase and sale agreements. At June 30, 2019, lots owned included approximately 4,500 that are fully developed, of which approximately 3,000 are related to lot banking. At June 30, 2019, we have approximately 200 lots under contract to sell to builders other than D.R. Horton.

~~Residential tract sales for the three and nine months ended June 30, 2018 includes the sale of 79 residential tract acres to D.R. Horton for $2.0 million.~~

Commercial tract sales 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 tract sales revenues in the nine months ended June 30, 2019 relate primarily to the sale of 49 acres from a consolidated venture for $17.7 million.~~

~~Cost of sales in the three and nine months ended June 30, 2019 increased as compared to the prior year periods primarily due to the increases in the number of lots sold.~~

~~Consolidated selling, general and administrative expense in the nine months ended June 30, 2018 includes $18.1 million in costs incurred as a result of the Merger.~~

Equity in earnings from unconsolidated ventures in the nine months ended June 30, 2018 includes $7.8 million which represents our share of a gain from the sale of a multifamily project in Nashville from a venture in which we owned a 30% interest.

Gain on sale of assets in the three months ended June 30, 2019 and June 30, 2018 primarily consists of gains associated with the reduction of our remaining obligation in connection with the Cibolo Canyons Special Improvement District (CCSID) issuance of bonds in 2014. As our obligation expires over time, deferred gains are recognized. Gain on sale of assets in the nine months ended June 30, 2019 also includes a gain of $0.9 million of excess hotel occupancy and sales and use tax revenues from CCSID. Gain on sale of assets in the nine months ended June 30, 2018 also includes a gain of $2.0 million related to the sale of our interest in a venture and a gain of $0.7 million related to our strategic sale of assets.

The decrease in interest expense in the three and nine months ended June 30, 2019 compared to the three and nine months ended June 30, 2018, is due to an increase in our active real estate development projects which resulted in the capitalization of all interest costs to real estate inventory in the current year periods.

~~Interest and other income principally represents interest earned on our cash deposits.~~

~~Other~~

~~In the nine months ended June 30, 2018, we recorded a non-cash impairment charge of $5.8 million primarily related to our central Texas water assets which is included within cost of sales.~~

~~Income Taxes~~

Our effective tax rate from continuing operations was 18% and 20% for the three and nine months ended June 30, 2019. Our effective tax rate is less than the statutory tax rate primarily due to tax benefits for noncontrolling interests. Our effective tax rate from continuing operations was 1% for the three months ended June 30, 2018, which included the impact of the Tax Cuts and Jobs Act (Tax Act) and a tax benefit from the release of a portion of our valuation allowance as the result of the realization of certain deferred tax assets. Our effective tax rate from continuing operations was 268% for the nine months ended June 30, 2018 which included nondeductible transaction costs related to the Merger, the impairment of nondeductible goodwill related to our oil and gas operations, other adjustments to our valuation allowance as a result of the generation and utilization of our deferred tax assets, and the impact of the Tax Act. The effective tax rates for all periods include the effect of state income taxes, nondeductible items and benefits for noncontrolling interests.

At June 30, 2019 and September 30, 2018, deferred tax assets, net of deferred tax liabilities, were $24.3 million and $30.3 million, offset by a valuation allowance of $3.3 million and $3.4 million for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable. The valuation allowance was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets. Any reversal of the valuation allowance in future periods will impact our effective tax rate.

On October 5, 2017, D.R. Horton Inc. acquired 75% of our common stock resulting in an ownership change under Section 382 of the Internal Revenue Code. Section 382 limits our ability to use certain tax attributes and built-in losses and deductions in a given year. Our tax attributes or built-in losses and deductions that were limited in 2017 or 2018 are expected to be fully utilized in future years with the exception of some state NOL carryforwards.

~~Our unrecognized tax benefits totaled $1.1 million at June 30, 2019, all of which would affect our effective tax rate, if recognized.~~

~~Liquidity and Capital Resources~~

~~Liquidity~~

The Merger and strategic relationship with D.R. Horton has provided us with an opportunity for substantial growth. Since the Merger, we have funded our growth with available cash, borrowings under our revolving credit facility and the issuance of senior unsecured notes. In August 2018, we entered into a ~~$380 million~~ senior unsecured revolving credit facility, in September 2018 we filed a shelf registration statement with the SEC registering $500 million of equity securities and in April 2019 we issued $350 million principal amount of 8.0% senior unsecured notes. At June 30, 2019, our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 25.3%. Over the long term, we intend to maintain our ratio of net debt to total capital at or below 40%. We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations.

Our ability to achieve our long-term growth objectives will depend on our ability to obtain financing in sufficient capacities. 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. As market conditions permit, we may, at any time, be considering or preparing for the purchase or sale of our common stock, debt securities, convertible securities or a combination thereof.

~~Senior Unsecured Revolving Credit Facility~~

On ~~August 16, 2018, we entered into a~~ ~~$380 million~~ ~~senior unsecured revolving credit facility with an uncommitted~~ ~~$190 million~~ ~~accordion feature that could increase the size of the facility to~~ ~~$570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to~~ ~~50%~~ of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base formula based on the book value of our real estate and unrestricted cash. The maturity date of the facility is ~~August 16, 2021~~. The maturity date of the revolving credit facility may be extended by up to one year on up to three occasions, subject to approval of lenders holding a majority of the commitments. Letters of credit issued under the facility reduce the available borrowing capacity. Borrowings and repayments under the facility were $85 million each during the nine months ended June 30, 2019. At June 30, 2019, there were no borrowings outstanding and $21.7 million of letters of credit issued under the revolving credit facility, resulting in available borrowing capacity of $358.3 million.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require a minimum level of tangible net worth, a minimum level of liquidity, and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At June 30, 2019, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

~~3.75% Convertible Senior Notes due 2020~~

~~At June 30, 2019, the principal amount of the 3.75% convertible senior notes due March 2020 was~~ ~~$118.9 million~~ ~~and the unamortized debt discount was~~ ~~$3.1 million. The effective interest rate on the liability component was~~ ~~8.0%~~ ~~and the carrying amount of the equity component was~~ ~~$16.8 million~~. We intend to settle the principal amount of these notes in cash in 2020, with any excess conversion value to be settled in shares of our common stock. At June 30, 2019 and September 30, 2018, we had $0.3 million and $0.7 million in unamortized deferred financing fees that were deducted from the carrying value of these notes.

~~8.0% Senior Unsecured Notes due 2024~~

In April 2019, we issued $350 million principal amount of 8.0% senior unsecured notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes are due April 15, 2024 with interest payable semi-annually and represent our senior unsecured obligations and rank equally with our other existing and future senior unsecured consolidated indebtedness. The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. The notes are guaranteed by each of the Company's subsidiaries to the extent such subsidiaries guarantee the Company's revolving credit facility. At June 30, 2019, we had $6.6 million in unamortized deferred financing fees that were deducted from the carrying value of these notes. The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 8.5%.

The indenture governing the notes requires that, upon the occurrence of both a Change of Control and a Rating Decline (each as defined in the indenture), the Company offer to purchase the notes at 101% of their principal amount. If the Company or its restricted subsidiaries dispose of assets, under certain circumstances, the Company will be required to either invest the net cash proceeds from such asset sales in its business within a specified period of time, repay certain senior secured debt or debt of its non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash proceeds at a purchase price of 100% of their principal amount. The indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments; incur additional debt or issue mandatorily redeemable equity; incur liens on assets; merge or consolidate with another company or sell or otherwise dispose of all or substantially all of the Company’s assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments. Certain of the covenants will not apply to the notes so long as the notes have investment grade ratings from two specified rating agencies.

~~At June 30, 2019, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.~~

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

In support of our residential lot development business, we have a surety bond program that provides financial assurance to beneficiaries related to the execution and performance of our business. At June 30, 2019, we had $111.4 million of surety bonds outstanding.

~~Cash Flows from Operating Activities~~

In the nine months ended June 30, 2019, net cash used in operating activities was $450.1 million compared to $206.0 million in the nine months ended June 30, 2018. The increase in net cash used in operating activities year over year was principally due to higher real estate acquisition and development expenditures as a result of our strategy to grow our company into a national lot developer.

~~Cash Flows from Investing Activities~~

In the nine months ended June 30, 2019, we used $0.8 million of net cash in investing activities compared to $235.8 million in net cash provided by investing activities in the nine months ended June 30, 2018, which was principally the result of the proceeds from the strategic sale of assets.

~~Cash Flows from Financing Activities~~

In the nine months ended June 30, 2019, net cash provided by financing activities was $339.1 million compared to $24.3 million in net cash used in financing activities in the nine months ended June 30, 2018. The net cash provided in the current year period was principally due to the issuance of $350 million principal amount of 8.0% senior notes due April 2024. The net cash used in the prior year was principally due to $10.6 million of debt payments and $12.8 million of payments to settle share-based awards related to the Merger.

~~Critical Accounting Policies and Estimates~~

~~There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2018 Annual Report on Form 10-KT.~~

~~New and Pending Accounting Pronouncements~~

~~Please read~~ ~~Note 1—Basis of Presentation~~ ~~to the consolidated financial statements included in this Quarterly Report on Form 10-Q.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate ~~Sensitivity~~Risk

We are subject to interest rate risk on our ~~long-term debt.~~senior debt and revolving credit facility. We monitor our exposure to changes in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect our future earnings and cash flows. Except in very limited circumstances, we do not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on our cash flows related to our fixed-rate debt until such time as we are required to refinance, repurchase or repay such debt.

Our fixed rate debt consists of ~~$118.9 million principal amount of 3.75% convertible senior notes due March 2020 and~~ $350 million principal amount of 8.0% senior notes due April ~~2024.~~2024 and $300 million principal amount of 5.0% senior notes due March 2028. Our variable rate debt consists of a $380 million senior unsecured revolving credit ~~facility due August 2021.~~facility. At June 30, ~~2019,~~2020, we had no borrowings outstanding under the revolving credit facility.

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~~controls and ~~Procedures~~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~~(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~~were 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~~internal control over ~~Financial Reporting~~financial reporting

~~During~~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 ~~three months~~Exchange Act) during the quarter ended June 30, ~~2019, the Company implemented a new general ledger and accounts payable system~~2020 that have materially affected, or are reasonably likely to ~~standardize accounting systems with D.R. Horton and improve management~~materially affect, our internal control over financial reporting. ~~As a result~~

Table of this implementation we have updated our control activities impacted by the change. Pre-implementation testing and post-implementation reviews were conducted by management to ensure that internal controls surrounding the system implementation process, the application, and the closing process were properly designed to prevent material financial statement errors. Such procedures included the review of required documents, user acceptance testing, change management procedures, assessment of access controls, data migration processes and reconciliations.Contents

PART II—OTHER INFORMATION

Item 1.Legal Proceedings

We are involved in various legal proceedings that arise from time to time in the ordinary course of our 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 charges related to these matters could be significant to our results of operations or cash flow in any single accounting period.

Item 1A.Risk Factors

~~There are no material changes~~

In addition to the risk factors ~~disclosed~~previously identified in our ~~2018~~ Annual Report on Form ~~10-KT, as supplemented by~~10-K for the ~~risk factors disclosed in~~fiscal year ended September 30, 2019 and our Quarterly Report on Form 10-Q for the ~~quarterly period~~quarter ended March 31, ~~2019.~~2020, we have updated the following risk factor related to public health issues.

Public health issues such as a major epidemic or pandemic could adversely affect our business or financial results.

The U.S. and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public health and public perception of health risk. In December 2019, a novel coronavirus (C-19) emerged in the Wuhan region of China and has subsequently spread worldwide. The World Health Organization has declared C-19 a pandemic, resulting in federal, state and local governments and private entities mandating various restrictions requiring closure of non-essential businesses for a period of time. In almost all municipalities across the U.S. where we operate, residential construction has been deemed an essential business as part of critical infrastructure and we have continued our lot development operations in those markets where allowed in order to supply homebuilders with finished lots for residential construction. We have implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence and consumer confidence. There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S. economy, capital markets and the demand for our lots. The extent to which C-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of the outbreak and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. If C-19 has a significant negative impact on economic conditions over a prolonged period of time, our results of operations and financial condition could be adversely impacted.

Table of Contents

Item 6.Exhibits


Exhibit		Description

~~Exhibit~~31.1*		~~Description~~

~~4.1~~	Indenture, dated as of April 12, 2019, by and among Forestar Group Inc., the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2019).
10.1†*	~~Form of Restricted Stock Unit Award Agreement (Employee) pursuant to the Company's 2018 Stock Incentive Plan.~~
10.2†*	~~Form of Restricted Stock Unit Award Agreement (Director) pursuant to the Company'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~~Ch ief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1101.INS*		~~The following materials from Forestar’s Quarterly Report on Form 10-Q for~~XBRL Instance Document - the ~~quarter ended June 30, 2019, formatted~~instance document does not appear in the Interactive Data File because its XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Total Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.tags are embedded within the Inline XBRL document.

101.SCH**						Inline XBRL Taxonomy Extension Schema Document.
101.CAL**						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**						Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104**						Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101).

*						Filed or furnished herewith.


**						Submitted electronically herewith.


†	~~Management contract or compensatory plan or arrangement.~~

Table of Contents

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: July 29, 2020		~~FORESTAR GROUP INC.~~By:	/s/ James D. Allen
			James D. Allen, on behalf of Forestar Group Inc.
~~Date: July 30, 2019~~		~~By:~~	~~/s/ Charles D. Jehl~~
	~~Charles D. Jehl~~
	as Executive Vice President and Chief Financial Officer
			(Principal Financial and Principal Accounting Officer)


			Page
PART I — FINANCIAL INFORMATION			3
Item 1. Financial Statements (Unaudited)			3
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statements of Total Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2116
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2823
Item 4. Controls and Procedures			2923
PART II — OTHER INFORMATION			30
Item 1. Legal Proceedings			3024
Item 1A. Risk Factors			3024
Item 6. Exhibits			3125
SIGNATURE			3226



	Nine Months Ended June 30,
	2019			2018
	(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)	$	23.6		$	(0.7	)
Adjustments:
Depreciation and amortization	4.8			3.9
Deferred income taxes	5.9			(1.0		)
Equity in earnings of unconsolidated ventures	(0.5		)	(9.6		)
Distributions of earnings of unconsolidated ventures	4.9			8.3
Share-based compensation	1.1			4.3
Asset impairments	0.5			9.3
Loss on debt extinguishment, net	—			0.6
Gain on sale of assets	(2.4		)	(4.1		)
Other	0.9			1.3
Changes in operating assets and liabilities:
Increase in real estate	(551.5		)	(274.0		)
Increase in other assets	(4.1		)	(2.2		)
Increase in accounts payable and other accrued liabilities	30.2			11.3
Increase in earnest money deposits on sales contracts	35.4			29.7
Decrease in income taxes receivable	1.1			16.9
Net cash used in operating activities	(450.1		)	(206.0		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software and other	(0.9		)	(0.1		)
Investment in unconsolidated ventures	—			(0.1		)
Return of investment in unconsolidated ventures	0.1			7.4
Proceeds from sale of assets	—			228.6
Net cash (used in) provided by investing activities	(0.8		)	235.8
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt	(85.0		)	(10.6		)
Additions to debt	435.0			1.5
Deferred financing fees	(6.9		)	(0.2		)
Distributions to noncontrolling interests, net	(3.9		)	(2.2		)
Settlement of equity awards	(0.1		)	(12.8		)
Net cash provided by (used in) financing activities	339.1			(24.3		)

Net (decrease) increase in cash, cash equivalents and restricted cash	(111.8		)	5.5
Cash, cash equivalents and restricted cash at beginning of period	335.0			402.2
Cash, cash equivalents and restricted cash at end of period	$	223.2		$	407.7



	As of June 30, 2019
	As Reported		Impact of Adoption			As Adjusted
	(In millions)
Real estate	$	1,049.5	$	8.7		$	1,040.8
Contract liabilities	9.9		9.9			—
Deferred income	9.4		(1.2		)	10.6



	September 30, 2018
	Real Estate		Other		Items Not Allocated		Consolidated
	(In millions)
Cash and cash equivalents	$	—	$	—	$	318.8	$	318.8
Restricted cash	—		—		16.2		16.2
Real estate	498.0		—		—		498.0
Investment in unconsolidated ventures	11.7		—		—		11.7
Income taxes receivable	—		—		4.4		4.4
Property and equipment, net	—		1.5		0.2		1.7
Deferred tax asset, net	—		—		26.9		26.9
Other assets	12.4		0.4		2.6		15.4
	$	522.1	$	1.9	$	369.1	$	893.1



	Three Months Ended June 30, 2018
	Real Estate			Other			Items Not Allocated			Consolidated
	(In millions)
Revenues	$	23.6		$	—		$	—		$	23.6
Cost of sales	9.9			0.1			—			10.0
Selling, general and administrative expense	2.9			—			3.6			6.5
Equity in earnings of unconsolidated ventures	(1.0		)	—			—			(1.0		)
Gain on sale of assets	(1.3		)	—			—			(1.3		)
Interest expense	—			—			1.6			1.6
Interest and other income	(1.0		)	—			(1.6		)	(2.6		)
Income (loss) from continuing operations before taxes	$	14.1		$	(0.1	)	$	(3.6	)	$	10.4
Net income attributable to noncontrolling interests	0.9			—			—			0.9
Income (loss) from continuing operations before taxes attributable to Forestar Group Inc.	$	13.2		$	(0.1	)	$	(3.6	)	$	9.5



	Nine Months Ended June 30, 2018
	Real Estate			Other			Items Not Allocated			Consolidated
	(In millions)
Revenues	$	77.0		$	—		$	—		$	77.0
Cost of sales	42.4			6.5			—			48.9
Selling, general and administrative expense	10.3			0.2			25.6			36.1
Equity in earnings of unconsolidated ventures	(9.6		)	—			—			(9.6		)
Gain on sale of assets	(4.1		)	—			—			(4.1		)
Interest expense	—			—			5.8			5.8
Interest and other income	(1.8		)	—			(3.0		)	(4.8		)
Income (loss) from continuing operations before taxes	$	39.8		$	(6.7	)	$	(28.4	)	$	4.7
Net income attributable to noncontrolling interests	2.9			—			—			2.9
Income (loss) from continuing operations before taxes attributable to Forestar Group Inc.	$	36.9		$	(6.7	)	$	(28.4	)	$	1.8



			Fair Value at June 30, 2019
	Carrying Value		Level 1		Level 2		Level 3		Total
	(in millions)
Cash and cash equivalents ^(a)	$	223.0	$	223.0	$	—	$	—	$	223.0
Restricted cash ^(a)	0.2		0.2		—		—		0.2
Debt ^(b)	465.8		—		485.8		—		485.8



	June 30, 2019								September 30, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In millions)
Real estate	$	—	$	—	$	—	$	—	$	—	$	0.2	$	—	$	0.2



	Three Months Ended June 30, 2019			Nine Months Ended June 30, 2019
	(In millions)
Revenues	$	88.2		$	192.0
Cost of sales	75.3			149.6
Selling, general and administrative expense	7.9			19.8
Equity in earnings of unconsolidated ventures	—			(0.5		)
Gain on sale of assets	(1.5		)	(2.4		)
Interest expense	—			—
Interest and other income	(1.9		)	(4.1		)
Income from continuing operations before taxes	$	8.4		$	29.6