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 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. All intercompany accounts, transactions and 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, 2021, 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-K for the fiscal year ended September 30, 2021.

In October 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. Immediately following the merger, D.R. Horton owned 75% of the Company's outstanding common stock. In connection with the 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 March 31,June 30, 2022, D.R. Horton owned approximately 63% of the Company's outstanding common stock.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

The Company reclassified the change in accrued development costs from the change in accounts payable and other liabilities to the change in accrued development costs in the prior year statement of cash flows to conform to the current year presentation. This reclassification had no net effect on the Company's consolidated operating results, financial position or cash flows.

In March 2020, the Financial Accounting Standards Board (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. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform - Scope,” which clarified the scope and application of the original guidance. The Company will adopt these standards when LIBOR is discontinued and does not expect such standards to have a material impact on its consolidated financial statements and related disclosures.

In October 2021, the FASB issued ASU 2021-08, which requires application of ASC 606, “Revenue from Contracts with Customers,” to recognize and measure contract assets and liabilities from contracts with customers acquired in a business combination. ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805 and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date. The guidance is effective for the Company beginning October 1, 2023, with early adoption permitted. The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.

The Company manages its operations through its real estate segment which is its core business and generates substantially all of its revenues. The real estate segment primarily acquires land and develops infrastructure for single-family residential communities, and its revenues generallyprimarily come from sales of residential single-family finished lots to local, regional and national homebuilders. The Company has other business activities for which the related assets and operating results are immaterial, and therefore, are included within the Company's real estate segment.

In the sixnine months ended March 31,June 30, 2022, the Company invested $220.4$299.0 million for the acquisition of residential real estate and $495.4$784.7 million for the development of residential real estate. At March 31,June 30, 2022 and September 30, 2021, undeveloped land primarily consistedconsists of undeveloped land which the Company has the contractual right to sell to D.R. Horton at a sales price equal to the carrying value of the land at the time of sale plus additional consideration of 12% to 16% per annum.

Each quarter, the Company reviews the performance and outlook for all of its real estate projects for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary. As a result of March 31, 2022, the Company performed detailed impairment evaluations of one real estate project with a carrying value of $8.8 million and recordedthis process, no impairment charges of $3.8 millionwere recorded during the three months ended March 31,June 30, 2022. During the nine months ended June 30, 2022, to reduce the carrying value of the impaired real estate project to fair value.impairment charges totaled $3.8 million. There were no0 impairment charges recorded in the prior year periods.

In the three and sixnine months ended March 31,June 30, 2022, and 2021, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $1.6$1.0 million and $2.2$3.2 million, respectively, compared to $0.6$0.7 million and $0.9$1.6 million in the prior year periods. These land option charges and the impairment discussed above are included in cost of sales in the consolidated statements of operations.

In the three and six months ended March 31,June 30, 2022, deferred development lot sales represent 787include 67 undeveloped and partially developed lots that were sold to a customer other than D.R. Horton for a total transaction price of $54.7$9.4 million. TheAs part of the transaction, the Company willis obligated to complete the development of these lots as part of the transaction.lots. The Company received $26.0$4.6 million in cash at closing with the remainder due as development of the lots is completed. InDuring the three and six months ended March 31,June 30, 2022, the Company recognized revenue of $12.5$1.1 million related to this transaction.transaction and revenue of $6.8 million related to previous deferred development lot sales.

In the nine months ended June 30, 2022, deferred development lot sales include 854 undeveloped and partially developed lots that were sold to customers other than D.R. Horton for a cumulative transaction price of $64.1 million. As part of these transactions, the Company is obligated to complete the development of the lots. In the nine months ended June 30, 2022, the Company received $33.6 million in cash related to deferred development transactions with the remainder due as development of the lots is completed. In the nine months ended June 30, 2022, the Company recognized revenue of $20.4 million related to deferred development transactions. The remaining revenue will be recognized over time as the Company’s development obligations are completed, which is anticipated to be within one year from contract inception.the inception of each respective contract.

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. In the first sixnine months of fiscal 2022 and fiscal 2021, the Company’s active real estate exceeded its debt level, and all interest incurred was capitalized to real estate.

Contract liabilities at March 31,June 30, 2022 include $13.5$13.2 million related to the Company's remaining unsatisfied performance obligations on 787 deferred development lots that were sold in the period.lots.

The Company has a $410 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $600 million, subject to certain conditions and availability of additional bank commitments. The maturity date of the facility is April 16, 2025. 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 the Company's real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. There were no borrowings or repayments under the facility in the sixnine months ended March 31,June 30, 2022. At March 31,June 30, 2022, there were no borrowings outstanding and $60.5$56.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.5$354.0 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 March 31,June 30, 2022, the Company was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

The Company has outstanding senior notes as described below that were issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness and may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreements. The notes are guaranteed by each of the Company's subsidiaries to the extent such subsidiaries guarantee the Company's revolving credit facility.

The Company's $400 million principal amount of 3.85% senior notes (the "2026 notes") mature May 15, 2026 with interest payable semi-annually. On or after May 15, 2023, the 2026 notes may be redeemed at 101.925% of their principal amount plus any accrued and unpaid interest. In accordance with the indenture, the redemption price decreases annually thereafter and the 2026 notes can be redeemed at par on or after May 15, 2025 through maturity. The annual effective interest rate of the 2026 notes after giving effect to the amortization of financing costs is 4.1%.

The Company's $300 million principal amount of 5.0% senior notes (the "2028 notes") mature March 1, 2028 with interest payable semi-annually. On or after March 1, 2023, the 2028 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 2028 notes can be redeemed at par on or after March 1, 2026 through maturity. The annual effective interest rate of the 2028 notes after giving effect to the amortization of financing costs is 5.2%.

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 respective 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 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. At March 31,June 30, 2022, the Company was in compliance with all of the limitations and restrictions associated with 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 March 31,June 30, 2022.

The Company's other note payable of $12.5 million was issued as part of a transaction to acquire real estate for development. The note is non-recourse and is secured by the underlying real estate, accrues interest at 4.0% per annum and matures in October 2023.

The Company’s income tax expense for the three and sixnine months ended March 31,June 30, 2022 was $15.4$13.0 million and $28.4$41.4 million compared to $9.2$5.2 million and $16.3$21.5 million in the prior year periods. The effective tax rate was 24.4%24.7% and 24.3%24.4% for the three and sixnine months ended March 31,June 30, 2022 compared to 24.5%24.6% and 24.4%24.5% in the prior year periods. The effective tax rate for all periods includes an expense for state income taxes and nondeductible expenses and a benefit related to noncontrolling interests.

At March 31,June 30, 2022, the Company had deferred tax liabilities, net of deferred tax assets, of $21.9$24.5 million. The deferred tax assets were partially offset by a valuation allowance of $1.1 million, resulting in a net deferred tax liability of $23.0$25.6 million. At September 30, 2021, deferred tax liabilities, net of deferred tax assets, were $23.2 million. The deferred tax assets were partially offset by a valuation allowance of $1.2 million, resulting in a net deferred tax liability of $24.4 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) 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.

The Company has an effective shelf registration statement, filed with the Securities and Exchange Commission in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under its at-the-market equity offering program that became effective in November 2021. The Company issued no shares of common stock under its at-the-market equity offering program in the three months ended June 30, 2022. In the sixnine months ended March 31,June 30, 2022, the Company issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of $1.7 million, net of commissions and other issuance costs totaling $0.1 million. The Company issued no shares of common stock under its at-the-market equity offering program in the three months ended March 31, 2022. At March 31,June 30, 2022, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 million was reserved for sales under the at-the-market equity offering program.

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). 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 have no voting rights until vested.

In the sixnine months ended March 31,June 30, 2022, a total of 394,786 time-based RSUs were granted. The weighted average grant date fair value of these equity awards was $17.76 per unit, and they vest annually in equal installments over periods of three to five years. Total stock-based compensation expense related to the Company's restricted stock unitsRSUs for the three and sixnine months ended March 31,June 30, 2022 was $1.6$0.8 million and $2.0$2.8 million compared to $0.9$0.8 million and $1.2$2.0 million in the prior year periods. Stock-based compensation expense in the sixnine months ended March 31,June 30, 2022 and 2021 includedincludes $1.2 million and $0.7 million, respectively, of expense recognized for employees that were retirement eligible on the date of grant.

In support of the Company's residential lot development business, 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 March 31,June 30, 2022, the Company had outstanding letters of credit of $60.5$56.0 million under the revolving credit facility and surety bonds of $570.8$596.6 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.

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.

The Company has a Shared Services Agreement with D.R. Horton whereby D.R. Horton provides the Company with certain administrative, compliance, operational and procurement services. In the sixnine months ended March 31,June 30, 2022, selling, general and administrative expense in the consolidated statements of operations includes $2.0$3.1 million for these shared services, $3.3$5.5 million for the cost of health insurance and other employee benefits and $1.4$5.6 million for other corporate and administrative expenses paid by D.R. Horton on behalf of the Company. In the sixnine months ended March 31,June 30, 2021, shared services expenses were $2.0$2.9 million, the cost of health insurance and other employee benefits was $1.8$3.4 million and other corporate and administrative expenses paid by D.R. Horton on behalf of the Company were $1.4$5.5 million.

Under the terms of the Master Supply Agreement with D.R. Horton, both companies identify land development opportunities to expand the Company's portfolio of assets. At March 31,June 30, 2022 and September 30, 2021, the Company owned approximately 64,20065,300 and 64,400 residential lots, respectively, of which D.R. Horton had the following involvement.

In addition, the net impact of the change in contract liabilities decreasedincreased revenues on lot sales to D.R. Horton by $0.5 million and $0.2$2.1 million in the three and nine months ended March 31,June 30, 2022 and 2021, respectively, and increaseddecreased revenues on lot sales to D.R. Horton by $1.6$3.9 million in both the sixthree and nine months ended March 31, 2022.June 30, 2021.

In the three and sixnine months ended March 31,June 30, 2022, the Company reimbursed D.R. Horton approximately $2.7$4.2 million and $5.4$9.6 million for previously paid earnest money and $16.2$18.3 million and $37.8$56.1 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. In the three and sixnine months ended March 31,June 30, 2021, the Company reimbursed D.R. Horton approximately $8.0$3.5 million and $24.2$27.7 million for previously paid earnest money and $7.3$14.9 million and $28.2$43.1 million for pre-acquisition and other due diligence and development costs.

In the three and sixnine months ended March 31,June 30, 2022, and 2021, the Company paid D.R. Horton $0.7$0.4 million and $1.6$2.0 million for land development services compared to $1.2$1.3 million and $2.9$4.2 million for these services in the prior year periods. Additionally, in the three months ended June 30, 2022, the Company paid D.R. Horton a commission of $0.2 million related to a tract sale to a third party. These amounts are included in cost of sales in the Company’s consolidated statements of operations.

At March 31,June 30, 2022 and September 30, 2021, accrued expenses and other liabilities on the Company's consolidated balance sheets included $6.6includes $1.1 million and $6.7 million, respectively, 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.

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

The following discussion and analysis of our financial condition and results of 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, 2021. 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.

We are a residential lot development company with operations in 5352 markets in 2322 states as of March 31,June 30, 2022. In October 2017, we became a majority-owned subsidiary of D.R. Horton. Through our alignment with and support from D.R. Horton, we have grown our business into a national, well-capitalized residential lot developer selling lots to D.R. Horton and other homebuilders.customers. 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 diversifieddiverse national platform andwhile consolidating market share in the fragmented U.S. lot development industry. We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders.projects. 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 strategic 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.

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 generates revenues 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.

The following tables and related discussion set forth key operating and financial data as of and for the three and sixnine months ended March 31,June 30, 2022 and 2021.