10-Q: Forestar Q1 2026: Revenue Up, Net Income Dips Amid Market Headwinds

Forestar Group Inc. reported a 9% increase in Q1 2026 revenues to $273.0 million, though net income slightly decreased to $15.4 million, reflecting ongoing market affordability constraints.

Summary

• Revenues increased 9% to $273.0 million for the three months ended December 31, 2025, compared to $250.4 million in the prior year period.
• Net income decreased to $15.4 million from $16.5 million in the prior year period.
• Diluted earnings per share was $0.30, down from $0.32 in the prior year.
• Total residential lots sold decreased by 17% to 1,944 lots, while the average sales price per lot increased 15% to $121,000.
• Pre-tax income was $20.8 million, down from $21.9 million, with pre-tax operating margin at 7.6% (down from 8.7%).
• Cash and cash equivalents stood at $211.7 million at December 31, 2025, down from $379.2 million at September 30, 2025.
• Total lot position increased to 101,000 residential lots (65,600 owned, 35,400 controlled) at December 31, 2025.
• The company maintains a low net leverage ratio of 24.6% and strong liquidity.

Sentiment

Score: 5

Explanation: While revenue increased and the company maintains a strong financial position with low leverage, profitability metrics (net income, EPS, operating margin) and lot sales volume declined. The market faces ongoing affordability constraints and cautious consumer sentiment, which are headwinds. The legal proceedings also introduce uncertainty.

Positives

• Total revenues increased by 9% to $273.0 million for the three months ended December 31, 2025.
• Average sales price per lot increased by 15% to $121,000.
• Selling, general and administrative (SG&A) expense as a percentage of revenues improved to 13.4% from 14.4% in the prior year period.
• Total lot position expanded to 101,000 residential lots (65,600 owned and 35,400 controlled), indicating future growth potential.
• Strong liquidity with $211.7 million in cash and cash equivalents and $607.6 million available borrowing capacity on the revolving credit facility at December 31, 2025.
• Low net debt to total capital ratio of 24.6% at December 31, 2025, which is well below the long-term target of 40% or less.
• No senior note maturities until 2028.
• Net cash used in operating activities significantly reduced to $157.0 million from $450.0 million in the prior year period.

Negatives

• Net income decreased to $15.4 million from $16.5 million in the prior year period.
• Diluted earnings per share decreased to $0.30 from $0.32.
• Pre-tax income decreased to $20.8 million from $21.9 million.
• Pre-tax operating margin declined to 7.6% from 8.7%.
• Total residential lots sold decreased by 17% to 1,944 lots.
• Cash and cash equivalents decreased by $167.5 million during the quarter.
• Interest incurred increased to $12.5 million from $8.3 million in the prior year period.
• New home demand continues to be impacted by ongoing affordability constraints and cautious consumer sentiment.

Risks

• The effect of D.R. Horton's controlling level of ownership (approximately 62%) on the company and its security holders.
• The ability to realize the potential benefits of the strategic relationship with D.R. Horton.
• The effect of the strategic relationship with D.R. Horton on the ability to maintain relationships with other customers.
• The cyclical nature of the homebuilding and lot development industries and changes in economic, real estate, and other conditions.
• The impact of significant inflation, higher interest rates, or deflation.
• Supply shortages and other risks of acquiring land, construction materials, and skilled labor.
• The effects of public health issues such as a major epidemic or pandemic on the economy and the business.
• The impacts of weather conditions and natural disasters.
• Health and safety incidents relating to operations.
• The ability to obtain or the availability of surety bonds to secure performance related to construction and development activities and the pricing of bonds.
• The effects of information technology failures, cybersecurity incidents, and the failure to satisfy privacy and data protection laws and regulations.
• The impact of governmental policies, laws or regulations and actions or restrictions of regulatory agencies.
• The effects of changes in income tax and securities laws.
• The ability to achieve strategic initiatives.
• Continuing liabilities related to assets that have been sold.
• The cost and availability of property suitable for residential lot development.
• General economic, market or business conditions where real estate activities are concentrated.
• Dependence on relationships with national, regional and local homebuilders.
• Competitive conditions in the industry.
• Obtaining reimbursements and other payments from governmental districts and other agencies and timing of such payments.
• The ability to succeed in new markets.
• The conditions of the capital markets and the ability to raise capital to fund expected growth.
• The ability to manage and service debt and comply with debt covenants, restrictions and limitations.
• The volatility of the market price and trading volume of common stock.
• The ability to hire and retain key personnel.
• A derivative complaint filed by a verified stockholder on April 29, 2025, against D.R. Horton, the Executive Chairman, and certain directors for breach of fiduciary duty arising from lot sale transactions. The outcome is uncertain, and the company cannot estimate a possible loss or range of loss.
• A lawsuit filed by the Maryland Department of Environment (MDE) on September 6, 2024, regarding alleged stormwater compliance issues and violations at a project from 2022 through 2024, seeking injunctive relief and civil penalties. The company does not believe this will have a material effect.
• Land purchase contracts include non-refundable deposits if the company elects to terminate the contract. At December 31, 2025, total deposits were $34.1 million related to contracts with a remaining purchase price of approximately $695.4 million.

Future Outlook

The company intends to maintain its ratio of net debt to total capital at approximately 40% or less over the long term. It believes existing cash resources and the revolving credit facility will provide sufficient liquidity for near-term working capital needs, though long-term growth objectives depend on obtaining sufficient financing. The company will continue to evaluate alternatives for managing its capital structure and liquidity profile and may consider or prepare for the purchase or sale of debt securities or common stock. Management plans to remain disciplined when investing in land opportunities and focused on managing lot sales pace and pricing to optimize returns. The company is also evaluating the impact of new FASB accounting standards ASU 2023-09 (effective fiscal 2026) and ASU 2024-03 (effective fiscal 2028/2029) on its disclosures.

Management Comments

• Our ongoing focus is primarily to develop lots for homes at affordable price points.
• We believe we are well-positioned to consolidate market share in the highly fragmented lot development industry because of our national footprint and strong local teams, our low net leverage and strong liquidity position, lower overhead model, geographically diverse lot portfolio that is focused on affordable price points and strategic relationship with D.R. Horton.
• We plan to remain disciplined when investing in land opportunities and to remain focused on managing our lot sales pace and lot pricing at each community to optimize the return on our investments.
• We attempt to offset cost increases in one component with savings in another, and we increase our land and lot sales prices when market conditions permit. However, if market conditions are challenging, we may have to reduce selling prices or may not be able to offset cost increases with higher selling prices.

Industry Context

New home demand continues to be impacted by ongoing affordability constraints and cautious consumer sentiment, leading homebuilders to offer elevated sales incentives like mortgage rate buydowns. While supply chain disruptions and labor market tightness have largely subsided, delays in municipal approvals are still extending development cycle times and keeping development costs elevated. The lot development industry remains highly fragmented, presenting opportunities for consolidation by well-capitalized companies with national footprints. The company's focus on entry-level, first-time move-up, and active adult homes targets the largest segments of the new home market.

Legal Proceedings

• A derivative complaint was filed on April 29, 2025, by Mississippi Public Employees Retirement System against D.R. Horton, the company's Executive Chairman, and certain directors, alleging breach of fiduciary duty related to lot sale transactions. The complaint seeks damages and legal fees. The company disputes the allegations and cannot estimate a possible loss or material adverse effect.
• The Maryland Department of Environment (MDE) filed suit on September 6, 2024, regarding alleged stormwater compliance issues and violations at a project in Maryland dating from 2022 through 2024, seeking injunctive relief and civil penalties. The company has enhanced practices and procedures and is seeking to resolve the matters, not believing it will result in a material adverse effect.

Related Party Transactions

• D.R. Horton, Inc. is a majority-owned subsidiary, owning approximately 62% of the company's outstanding common stock as of December 31, 2025.
• Under a Shared Services Agreement, the company incurred $1.8 million for administrative, compliance, operational, and procurement services from D.R. Horton, $4.2 million reimbursed for health insurance and employee benefits, and $0.5 million for other corporate and administrative expenses paid by D.R. Horton in the three months ended December 31, 2025.
• Under a Master Supply Agreement, the company had 22,600 residential lots under contract to sell to D.R. Horton and 18,100 owned lots subject to a right of first offer with D.R. Horton at December 31, 2025.
• Earnest money deposits from D.R. Horton for lots under contract totaled $203.1 million at December 31, 2025.
• The remaining sales price of lots under contract with D.R. Horton was $2,022.4 million at December 31, 2025.
• Residential lots sold to D.R. Horton totaled 1,627, generating $183.8 million in revenues for the three months ended December 31, 2025.
• Tract sales and other revenues from D.R. Horton amounted to $5.3 million for the three months ended December 31, 2025.
• The company reimbursed D.R. Horton approximately $7.8 million for pre-acquisition and other due diligence and development costs and $1.7 million for previously paid earnest money in the three months ended December 31, 2025.
• The company paid D.R. Horton $0.2 million for land development services in the three months ended December 31, 2025.
• Land held for future development primarily consists of undeveloped land under contract to sell to D.R. Horton at carrying value plus additional consideration of 12% to 16% per annum.
• Accrued expenses and other liabilities included $6.3 million owed to D.R. Horton at December 31, 2025.

Stakeholder Impact

• Shareholders: Mixed financial results (revenue up, profit down) could lead to short-term price volatility. The derivative lawsuit against D.R. Horton and company directors introduces uncertainty. The potential for future equity offerings could dilute existing shares.
• Employees: Employee compensation and benefits are a primary component of SG&A. Stock-based compensation plans are in place. Employee numbers remained relatively stable (415 at Dec 31, 2025 vs 427 at Dec 31, 2024).
• Customers (Homebuilders): Experienced decreased lot sales volume but increased average sales price. The company's focus on affordable price points and strategic relationship with D.R. Horton (a major customer) are key to customer relations.
• Suppliers/Creditors: Strong liquidity and low leverage position are favorable for creditors. Compliance with debt covenants is maintained. Delays in municipal approvals could impact project timelines for suppliers.
• Regulatory Authorities: Involved in a lawsuit with the Maryland Department of Environment regarding stormwater compliance, indicating ongoing regulatory scrutiny.

Next Steps

• Continue evaluating the impact of ASU 2023-09 (Income Taxes Improvements to Income Tax Disclosures) on disclosures, effective fiscal 2026.
• Continue evaluating the impact of ASU 2024-03 (Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures) on disclosures, effective fiscal 2028/2029.
• Seek to resolve stormwater compliance issues with the Maryland Department of Environment through further discussions.
• Continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on deferred tax assets.
• Remain disciplined when investing in land opportunities.
• Focus on managing lot sales pace and lot pricing at each community to optimize the return on investments.

Key Dates

Recommendation

While Forestar Group Inc. demonstrated revenue growth and maintains a robust balance sheet with low leverage and ample liquidity, the decline in net income, diluted EPS, and lot sales volume is concerning. The ongoing market challenges, including affordability constraints and cautious consumer sentiment, coupled with the derivative lawsuit alleging breach of fiduciary duty, introduce significant uncertainty. The strategic relationship with D.R. Horton is a double-edged sword, providing a stable customer base but also raising governance questions. Given the mixed performance and legal overhang, a 'hold' recommendation is appropriate, advising investors to monitor market conditions, the resolution of legal issues, and the company's ability to translate its strong lot position into improved profitability.

Keywords

Residential lot development, Homebuilding industry, Real estate, SEC 10-Q, Financial results, D.R. Horton, Land acquisition, Corporate governance, Market conditions, Debt management, Affordability