e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2009
OR
     
o   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   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)
(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Title of Each Class   Number of Shares Outstanding as of
May 1, 2009
     
Common Stock, par value $1.00 per share   35,856,419
 
 

 


 

FORESTAR GROUP INC.
TABLE OF CONTENTS
     
   
   
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Certification of CEO Pursuant to Section 302
   
Certification of CFO Pursuant to Section 302
   
Certification of CEO Pursuant to Section 906
   
Certification of CFO Pursuant to Section 906
   
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FORESTAR GROUP INC.
Consolidated Balance Sheets
                 
    (Unaudited)        
    March 31,     December 31,  
    2009     2008  
    (In thousands)  
ASSETS
               
Cash and cash equivalents
  $ 8,464     $ 8,127  
Real estate
    559,588       610,586  
Assets held for sale
    76,139        
Investment in unconsolidated ventures
    116,107       117,554  
Timber
    25,194       50,989  
Receivables, net
    3,730       4,262  
Prepaid expense
    1,961       2,425  
Property and equipment, net
    6,103       6,211  
Deferred tax asset
    20,913       17,184  
Other assets
    16,240       17,238  
 
           
TOTAL ASSETS
  $ 834,439     $ 834,576  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Accounts payable
  $ 4,945     $ 7,438  
Accrued employee compensation and benefits
    1,034       3,389  
Accrued property taxes
    3,203       6,808  
Accrued interest
    1,033       1,199  
Other accrued expenses
    10,569       11,448  
Other liabilities
    14,001       12,940  
Debt
    349,183       337,402  
 
           
TOTAL LIABILITIES
    383,968       380,624  
 
               
COMMITMENTS AND CONTINGENCIES
               
 
               
EQUITY
               
Forestar Group Inc. shareholders’ equity:
               
Preferred stock, par value $0.01 per share, 25,000,000 authorized shares, none issued
           
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 35,950,127 issued at March 31, 2009 and 35,839,390 issued at December 31, 2008
    35,950       35,839  
Additional paid-in capital
    378,628       377,810  
Retained earnings
    32,877       36,769  
Accumulated other comprehensive loss
    (1,099 )     (1,260 )
Treasury stock, at cost, 93,708 shares at March 31, 2009 and 90,819 at December 31, 2008
    (1,884 )     (1,866 )
 
           
Total Forestar Group Inc. shareholders’ equity
    444,472       447,292  
Noncontrolling interests
    5,999       6,660  
 
           
TOTAL EQUITY
    450,471       453,952  
 
           
 
               
TOTAL LIABILITIES AND EQUITY
  $ 834,439     $ 834,576  
 
           
Please read the notes to the consolidated financial statements.

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FORESTAR GROUP INC.
Consolidated Statements of Income
(Unaudited)
                 
    First Quarter  
    2009     2008  
    (In thousands, except per share data)  
REVENUES
               
Real estate sales
  $ 14,059     $ 22,790  
Commercial operating properties and other
    4,728       5,653  
 
           
Real estate
    18,787       28,443  
Mineral resources
    5,921       6,268  
Fiber resources and other
    4,369       2,512  
 
           
 
    29,077       37,223  
EXPENSES
               
Cost of real estate sales
    (4,742 )     (13,507 )
Cost of commercial operating properties and other
    (3,816 )     (3,865 )
Cost of mineral resources
    (76 )      
Cost of fiber resources
    (833 )     (546 )
Other operating
    (10,472 )     (8,301 )
General and administrative
    (8,815 )     (6,837 )
 
           
 
    (28,754 )     (33,056 )
 
           
OPERATING INCOME
    323       4,167  
Equity in (loss) earnings of unconsolidated ventures
    (572 )     1,534  
Interest expense
    (5,166 )     (5,666 )
Other non-operating income
    51       82  
 
           
(LOSS) INCOME BEFORE TAXES
    (5,364 )     117  
Income tax benefit
    2,315       145  
 
           
CONSOLIDATED NET (LOSS) INCOME
    (3,049 )     262  
Less: Net income attributable to noncontrolling interests
    (843 )     (500 )
 
           
NET LOSS ATTRIBUTABLE TO FORESTAR GROUP INC.
  $ (3,892 )   $ (238 )
 
           
 
               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
               
Basic
    35,681       35,362  
Diluted
    35,681       35,362  
NET LOSS PER COMMON SHARE
               
Basic
  $ (0.11 )   $ (0.01 )
Diluted
  $ (0.11 )   $ (0.01 )
Please read the notes to the consolidated financial statements.

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FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited)
                 
    First Quarter  
    2009     2008  
    (In thousands)  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Consolidated net (loss) income
  $ (3,049 )   $ 262  
Adjustments:
               
Depreciation and amortization
    2,111       1,793  
Deferred income taxes
    (3,816 )     3  
Equity in loss (earnings) of unconsolidated ventures
    572       (1,534 )
Distributions of earnings of unconsolidated ventures
    23       784  
Distributions of earnings to noncontrolling interests
    (1,495 )     (2,318 )
Share-based compensation
    1,706       2,681  
Non-cash real estate cost of sales
    4,770       12,852  
Real estate development and acquisition expenditures
    (7,602 )     (20,583 )
Reimbursements from utility or improvement districts
    1,731        
Other changes in real estate
    280       (210 )
Gain on termination of timber lease
    (185 )     (1,376 )
Cost of timber cut
    796       547  
Deferred income
    930       569  
Asset impairments
    600        
Other
    28       (584 )
Changes in:
               
Receivables
    (32 )     26  
Prepaid and other
    74       (1,829 )
Accounts payable and other accrued liabilities
    (7,951 )     (5,133 )
 
           
Net cash used in operating activities
    (10,509 )     (14,050 )
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property, equipment, software and reforestation
    (1,557 )     (529 )
Investment in unconsolidated ventures
    (830 )     (4,263 )
Return of investment in unconsolidated ventures
    1,614       2,650  
 
           
Net cash used in investing activities
    (773 )     (2,142 )
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments of debt
    (14,977 )     (14,665 )
Additions to debt
    26,758       33,540  
Deferred financing fees
          (1,037 )
Return of investment to noncontrolling interests
    (170 )      
Exercise of stock options
    1       812  
Payroll taxes on restricted stock and stock options
    (17 )     (1,816 )
Tax benefit from share-based compensation
          77  
Other
    24       114  
 
           
Net cash provided by financing activities
    11,619       17,025  
 
           
 
               
Net increase in cash and cash equivalents
    337       833  
Cash and cash equivalents at beginning of period
    8,127       7,520  
 
           
Cash and cash equivalents at end of period
  $ 8,464     $ 8,353  
 
           
Please read the notes to the consolidated financial statements.

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FORESTAR GROUP INC.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 — Background
     Prior to December 28, 2007, we were a wholly-owned subsidiary of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributed all of the issued and outstanding shares of our common stock to its shareholders in a transaction commonly referred to as a spin-off.
Note 2 — Basis of Presentation
     Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest, and variable interest entities of which we are the primary beneficiary. We eliminate all material intercompany accounts and transactions. Noncontrolling interest in consolidated pass-through entities is recognized before income taxes. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any preferential returns and treat distributions as a reduction of our investment). We account for our investment in other entities in which we do not have significant influence over operations and financial policies using the cost method (we recognize as income distribution of accumulated earnings).
     We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those related to allocating costs to real estate and measuring assets for impairment. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2008 Annual Report on Form 10-K.
     Certain prior year items have been reclassified to conform to the current year’s presentation.
Note 3 — New Accounting Pronouncements
     Beginning January 2009, we adopted the following new accounting pronouncements:
    FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement 157 — This FSP delayed the effective date of Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, for certain nonfinancial assets and nonfinancial liabilities. Adoption of this FSP did not significantly affect how we determine fair value but has resulted in certain additional disclosures. Please read Note 10 for additional disclosures.
 
    FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities — This staff position specifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. Adoption of this FSP did not have an impact on our earnings per share.
 
    SFAS No. 141(R), Business Combinations — This standard requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at full fair value. The standard also changes the approach to determining the purchase price; the accounting for acquisition cost; and several acquisition related accounting practices. Adoption of this pronouncement did not have a significant effect on our earnings or financial position.
 
    SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements — This standard specifies that noncontrolling interests be reported as a part of equity, not as a liability or other item outside of equity. Upon adoption, we reclassified $6,660,000 of noncontrolling interest to shareholders’ equity at year-end 2008 and we reclassified $500,000 of minority interest expense to net income attributable to noncontrolling interest for first three months 2008. The following table presents a reconciliation of the changes in shareholders’ equity during the quarter ended March 31, 2009 (in thousands):
                         
    Forestar     Noncontrolling        
    Group Inc.     Interests     Total  
Balance as of December 31, 2008
  $ 447,292     $ 6,660     $ 453,952  
Net (loss) income
    (3,892 )     843       (3,049 )
Unrealized gain
    161             161  
Distributions to noncontrolling interests
          (1,665 )     (1,665 )
Contributions from noncontrolling interest
          161       161  
Other (primarily share-based compensation)
    911             911  
 
                 
Balance as of March 31, 2009
  $ 444,472     $ 5,999     $ 450,471  
 
                 
 
    SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 — This standard requires enhanced disclosures about derivative instruments including how and why they are used; how they are accounted for; and how they affect an entity’s financial position, financial performance and cash flows. Adoption of this pronouncement did not have a significant effect on our earnings or financial position.
     In April 2009, the FASB issued the following to provide additional guidance and disclosures regarding fair value measurements and impairments of securities:
    FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. Based on our current understanding, we do not expect that the adoption of this pronouncement will have a significant effect on our earnings or financial position.

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    FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which changes the requirements for recognizing other-than-temporary impairments for debt securities. Based on our current understanding, we do not expect that the adoption of this pronouncement will have a significant effect on our earnings or financial position.
 
    FSP FAS 107-1 and Accounting Principles Board (APB) Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments, which require an entity to provide disclosures about fair value of financial instruments in interim financial and summarized financial information. Based on our current understanding, we do not expect that the adoption of this pronouncement will have a significant effect on our earnings or financial position.
 
      These are effective for interim and annual periods ending after June 15, 2009.
Note 4 — Strategic Initiatives and Assets Held for Sale
     On February 11, 2009, we announced the following strategic initiatives to enhance shareholder value:
    Generate significant cash flow, principally from the sale of approximately 175,000 acres of higher and better use (HBU) timberland;
 
    Reduce debt by approximately $150 million; and
 
    Repurchase up to 20% of our common stock.
     Debt reduction and share repurchases will be funded by proceeds from the sale of the HBU timberland. Share repurchases will be accomplished from time to time through open market or privately negotiated transactions, subject to market conditions and other factors.
     In first quarter 2009, we have reclassified to assets held for sale about 171,000 acres of undeveloped land principally located in Alabama and Georgia with a carrying value of $51,390,000 and related timber with a carrying value of $24,749,000. These assets are being actively marketed.
Note 5 — Real Estate
     Real estate consists of:
                 
    March 31,     December 31,  
    2009     2008  
    (In thousands)  
Entitled, developed and under development projects
  $ 446,283     $ 445,394  
Undeveloped land
    91,467       143,749  
Commercial operating properties
    44,828       43,987  
 
           
 
    582,578       633,130  
Accumulated depreciation
    (22,990 )     (22,544 )
 
           
 
  $ 559,588     $ 610,586  
 
           
     Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility or improvement districts of $75,388,000 at first quarter-end 2009 and $76,173,000 at year-end 2008, including $49,529,000 at first quarter-end 2009 and year-end 2008 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets for which the utility or improvement districts have agreed to reimburse us. In first three months 2009, we did not bill these districts. In first three months 2008, we billed these districts $12,011,000. In first three months 2009, we collected $1,731,000 from these districts. In first three months 2008, we did not collect from these districts. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.
     We recognized asset impairment charges of $600,000 in first three months 2009 related to a condominium project in Texas. We did not recognize any asset impairment charges in first three months 2008. Asset impairment charges are included in cost of real estate sales.
     Depreciation expense primarily related to commercial operating properties was $446,000 in first three months 2009 and $400,000 in first three months 2008 and is included in other operating expense.

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Note 6 — Timber
     We have over 338,000 acres of timber, primarily in Georgia. The cost of timber cut was $796,000 in first three months 2009 and $547,000 in first three months 2008.
Note 7 — Investment in Unconsolidated Ventures
     At first quarter-end 2009, we had ownership interests ranging from 25 to 50 percent in 10 ventures that we account for using the equity method. We have no real estate ventures that are accounted for using the cost method. Our three largest ventures at first quarter-end 2009 are CL Realty, Temco and Palisades West. We own a 50 percent interest in both CL Realty and Temco, and Cousins Real Estate Corporation owns the other 50 percent interest. We own a 25 percent interest in Palisades West, Cousins Properties Incorporated owns a 50 percent interest and Dimensional Fund Advisors LP owns the remaining 25 percent interest. Information regarding these ventures follows:
    CL Realty, L.L.C. was formed in 2002 for the purpose of developing residential and mixed-use communities in Texas and across the southeastern United States. At first quarter-end 2009, the venture had 15 residential and mixed-use communities, of which 10 are in Texas, 3 are in Florida and 2 are in Georgia, representing about 7,600 residential lots and 560 commercial acres.
 
    Temco Associates, LLC was formed in 1991 for the purpose of acquiring and developing residential real estate sites in Georgia. At first quarter-end 2009, the venture had 5 residential and mixed-use communities, representing about 1,560 residential lots, all of which are located in Paulding County, Georgia. The venture also owns approximately 5,600 acres of undeveloped land in Paulding County, Georgia.
 
    Palisades West LLC was formed in 2006 for the purpose of constructing a commercial office park in Austin, Texas. The project includes two office buildings totaling approximately 375,000 square feet and an accompanying parking garage. Construction of the project was completed in fourth quarter 2008 and is approximately 68% leased. Our remaining commitment for investment in this venture as of first quarter-end 2009 is $2,686,000. We have entered into a 10-year operating lease for approximately 32,000 square feet that we occupy as our corporate headquarters effective in fourth quarter 2008.
     Combined summarized balance sheet information for our ventures accounted for using the equity method follows:
                                                                                 
    March 31, 2009     December 31, 2008  
    CL             Palisades     Other             CL             Palisades     Other        
    Realty     Temco     West     Ventures     Total     Realty     Temco     West     Ventures     Total  
    (in thousands)  
Real estate
  $ 122,660     $ 60,377     $ 125,180     $ 92,198     $ 400,415     $ 124,417     $ 60,791     $ 120,953     $ 94,094     $ 400,255  
Total assets
    125,234       61,852       128,815       102,114       418,015       126,726       61,832       123,290       102,930       414,778  
Borrowings, principally non-recourse (a)
    4,968       3,168             75,966       84,102       4,901       3,198             75,638       83,737  
Total liabilities
    7,077       3,853       54,687       88,124       153,741       8,683       3,570       50,548       89,580       152,381  
Equity
    118,157       57,999       74,128       13,990       264,274       118,043       58,262       72,742       13,350       262,397  
 
                                                                               
Our investment in real estate ventures:
                                                                               
Our share of their equity(b)
    59,078       29,000       18,148       17,554       123,780       59,022       29,131       18,779       18,295       125,227  
Unrecognized deferred gain(c)
    (7,059 )                 (614 )     (7,673 )     (7,059 )                 (614 )     (7,673 )
 
                                                           
 
                                                                               
Investment in real estate ventures
  $ 52,019     $ 29,000     $ 18,148     $ 16,940     $ 116,107     $ 51,963     $ 29,131     $ 18,779     $ 17,681     $ 117,554  
 
                                                           

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     Combined summarized income statement information for our ventures accounted for using the equity method follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Revenues:
               
CL Realty
  $ 1,600     $ 3,085  
Temco
    857       677  
Palisades West
    1,729       54  
Other ventures
    2,163       3,196  
 
           
Total
  $ 6,349     $ 7,012  
 
           
 
               
Earnings:
               
CL Realty
  $ 504     $ 2,313  
Temco
    (420 )     (279 )
Palisades West
    148       38  
Other ventures
    1,195       (299 )
 
           
Total
  $ 1,427     $ 1,773  
 
           
 
               
Our equity in their earnings:
               
CL Realty(c)
  $ 252     $ 1,143  
Temco
    (210 )     (141 )
Palisades West
    37       9  
Other ventures(b)
    (651 )     523  
Recognition of deferred gain(c)
           
 
           
Total
  $ (572 )   $ 1,534  
 
           
 
(a)   Total includes current maturities of $15,971,000 at first quarter-end 2009 and $21,150,000 at year-end 2008.
 
(b)   Our share of the equity in other ventures reflects our ownership interests ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses.
 
(c)   In 2003, we contributed real estate with a $13,800,000 carrying value to CL Realty in exchange for $13,800,000 cash and a 50 percent interest in the partnership. We deferred the $14,587,000 gain on the sale and are recognizing it as the partnership sells the real estate to third parties. The deferred gain is reflected as an offset to our investment in unconsolidated ventures.
     In first three months 2009, we invested $830,000 in these ventures and received $1,637,000 in distributions; in first three months 2008, we invested $4,263,000 in these ventures and received $3,434,000 in distributions. Distributions include both return of investments and distributions of earnings.
Note 8 — Debt
     Debt consists of:
                 
    March 31,     December 31,  
    2009     2008  
    (In thousands)  
Term loan facility — average interest rate of 4.54% at first quarter-end 2009 and 4.77% at year-end 2008
  $ 175,000     $ 175,000  
Revolving loan facility — average interest rate of 4.56% at first quarter-end 2009 and 5.12% at year-end 2008
    69,700       59,900  
Secured promissory note — interest rate of 3.02% at first quarter-end 2009 and 3.01% at year-end 2008
    19,716       16,000  
Other indebtedness due through 2011 at variable interest rates based on prime (3.25% at first quarter-end 2009 and year-end 2008) and fixed interest rates ranging from 6.00% to 9.50%)
    84,767       86,502  
 
           
 
  $ 349,183     $ 337,402  
 
           
     Our senior credit facility and other debt agreements contain terms, conditions and financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At first quarter-end 2009, we were in compliance with the terms, conditions and financial covenants of these agreements.
     Our senior credit facility provides for a $175,000,000 term loan and a $290,000,000 revolving line of credit. The revolving line of

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credit may be prepaid at any time without penalty. The term loan may be prepaid at any time; however, repayment prior to June 1, 2009 requires a fee of 1.00% of the principal amount. There is no prepayment fee for the term loan on or after June 1, 2009. The senior credit facility matures December 1, 2010. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $13,071,000 was outstanding at first quarter-end 2009. Total borrowings under our senior credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula, and include a $35,000,000 minimum liquidity requirement at each quarter-end. At first quarter-end 2009, we had $172,000,000 in net unused borrowing capacity under our senior credit facility.
     At our option, we can borrow at LIBOR plus 4 percent or Prime plus 2 percent. All borrowings under the senior credit facility are secured by (a) an initial pledge of approximately 250,000 acres of undeveloped land, (b) assignments of current and future leases, rents and contracts, including our mineral leases, (c) a security interest in our primary operating account, (d) pledge of the equity interests in current and future material operating subsidiaries or joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) negative pledge (without a mortgage) on all other wholly-owned assets. The senior credit facility provides for releases of real estate provided that borrowing base compliance is maintained.
     We incurred origination and other fees related to our credit facility of $10,573,000, of which $6,045,000 is unamortized at first quarter-end 2009 and is included in other assets. Amortization of deferred financing fees in connection with our senior credit facility was $883,000 in first three months 2009 and $855,000 in first three months 2008.
     At first quarter-end 2009, commercial operating properties having a book value of $21,476,000 were subject to liens in connection with $19,716,000 of debt.
     At first quarter-end 2009, entitled, developed and under development projects having a book value of $161,290,000 were subject to liens in connection with $84,767,000 of principally non-recourse debt.
Note 9 — Derivative Instruments
     We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks including interest rate, liquidity and credit risk by managing the amount, sources, and duration of our debt funding and through the use of derivative instruments. Specifically, we may enter into derivative instruments to mitigate the risk inherent in interest rate fluctuations.
Cash Flow Hedges
     Our objective for using interest rate derivatives is to manage exposure to significant movements in interest rates. To accomplish this objective, we use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our fixed-rate payment over the life of the agreements without exchange of the underlying notional amount.
     As of March 31, 2009, our $100,000,000 notional amount interest rate swap agreement, which matures in 2010, requires that we pay a fixed interest rate of 6.57 percent and receive a floating interest rate of one month LIBOR plus 4 percent (4.50 percent at first quarter-end 2009).
     We defer and include in other comprehensive income the effective portion of changes in the fair value of our cash flow hedge. We recognize the ineffective portion of the hedge as income or loss. The effectiveness of the hedge relationship is periodically assessed by comparing the present value of the cumulative change in the expected future cash flows on the variable leg of the swap with the present value of the cumulative change in the expected future hedged cash flows. In first three months 2009 and 2008, there was no hedge ineffectiveness.
     The table below presents the fair value of our derivative instrument as well as its classification on the consolidated balance sheets as of March 31, 2009 and December 31, 2008:
                                     
    Liability Derivatives
    March 31, 2009   December 31, 2008
    Balance Sheet   Fair   Balance Sheet   Fair
    Location   Value   Location   Value
            (in thousands)                
Derivatives designated as hedging instruments under SFAS 133:
                                   
Interest Rate Swap
    Other liabilities     $1,691       Other liabilities         $1,939  
     The change in fair value of our interest rate swap recognized in other comprehensive income was a gain of $161,000 in first three months 2009 and a loss of $330,000 in first three months 2008. No amounts were reclassified from other comprehensive income into income in first three months 2009 or first three months 2008.
     See Note 10 — Fair Value for a description of how the above derivative instrument is valued in accordance with SFAS No. 157.
Note 10 — Fair Value
     SFAS 157, Fair Value Measurements, provides a framework for measuring fair value and expands disclosures required about fair value measurements. This pronouncement establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
    Level 1 Inputs — Unadjusted quoted prices for identical assets or liabilities in active markets;
 
    Level 2 Inputs — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
 
    Level 3 Inputs — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Such inputs typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

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    Fair Value Measurements
    Level 1   Level 2   Level 3   March 31,
    Inputs   Inputs   Inputs   2009
    (In thousands)
Financial Assets and Liabilities:
                               
Interest Rate Swap Agreement
  $ (1,691 )   $     $     $ (1,691 )
 
                               
Non-Financial Assets and Liabilities:
                               
Real estate
  $     $     $ 15,164     $ 15,164  
     Financial liabilities measured at fair value on a recurring basis include our interest rate swap agreement. The fair value of the interest rate swap agreement was determined using quoted prices in active markets for identical assets. In first three months 2009, the fair value of our interest rate swap increased, and as a result, we recognized an after-tax gain of $161,000 in accumulated other comprehensive income.
     Non-financial assets measured at fair value on a non-recurring basis include real estate assets measured for impairment. In first three months 2009, certain assets were remeasured and reported at fair value due to events or circumstances that indicated that the carrying value may not be recoverable. We determined estimated fair value based on the present value of future probability weighted cash flows expected from the sale of the long-lived assets. As a result, we recognized asset impairment of $600,000 in first three months 2009.
Note 11 — Capital Stock
     Pursuant to our shareholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our shareholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.
     Please read Note 16 for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.
     As a result of our spin-off from Temple-Inland, all of Temple-Inland’s outstanding share-based compensation awards were equitably adjusted into separate awards: one related to our common stock, one related to Temple-Inland common stock and one related to Guaranty Financial Group, Inc. common stock. Guaranty was another wholly-owned subsidiary of Temple-Inland that was spun off on December 28, 2007. All awards issued as part of this adjustment are subject to their original vesting schedules.
     At first quarter-end 2009, Temple-Inland and Guaranty directors and employees held 27,000 equity-settled restricted stock awards on our stock.
     The following table summarizes outstanding stock option awards on our stock held by Temple-Inland and Guaranty directors and employees at first quarter-end 2009:
                                 
                    Weighted   Aggregate
            Weighted   Average   Intrinsic Value
            Average   Remaining   (Current Value
            Exercise Price   Contractual   Less Exercise
    Shares   per Share   Term   Price)
    (In thousands)           (In years)   (In thousands)
Outstanding
    1,749     $ 19.30       5     $ 8  
Exercisable
    1,571     $ 18.76       5     $ 8  

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Note 12 — Other Comprehensive Loss
     Other comprehensive loss consists of:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Consolidated net (loss) income
  $ (3,049 )   $ 262  
Change in fair value of interest rate swap agreement, net of taxes
    161       (330 )
 
           
Other comprehensive loss
    (2,888 )     (68 )
Less: Comprehensive income attributable to noncontrolling interest
    (843 )     (500 )
 
           
Other comprehensive loss attributable to Forestar Group Inc.
  $ (3,731 )   $ (568 )
 
           
Note 13 — Net Loss per Share
     Our basic and diluted weighted average common shares outstanding used to compute net loss per share are as follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Weighted average common shares outstanding — basic
    35,681       35,362  
Dilutive effect of stock options
           
Dilutive effect of restricted stock and restricted stock units
           
 
           
Weighted average common shares outstanding — diluted
    35,681       35,362  
 
           
     At first quarter-end 2009, the effect of 3,047,000 stock options and unvested shares of restricted stock were not included in the computation of diluted weighted average shares outstanding because their impact would have been anti-dilutive as a result of our net loss.
     At first quarter-end 2008, the effect of 2,664,000 stock options and unvested shares of restricted stock were not included in the computation of diluted weighted average shares outstanding because their impact would have been anti-dilutive as a result of our net loss.
Note 14— Commitments and Contingencies
     Litigation
     We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash flows. It is possible, however, that charges related to these matters could be significant to our results or cash flows in any one accounting period.
     Environmental
     Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses. We own 288 acres near Antioch, California, portions of which were sites of a Temple-Inland paper manufacturing operation that are in remediation. In 2008, we increased our reserves for environmental remediation by about $2,900,000. We estimate the cost to complete remediation activities will be about $3,200,000, which is included in other accrued expenses and will likely be paid in 2009. Our estimate requires us to make assumptions regarding the scope of required remediation, the effectiveness of planned remediation activities, and approvals by regulatory authorities. Our estimate is subject to revision as new information becomes available.
Note 15 — Segment Information
     We manage our operations through three segments: real estate, mineral resources and fiber resources. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities and manages our undeveloped land and commercial operating properties. Mineral resources manages our oil and gas mineral interests. Fiber resources manages our timber and recreational leases.

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     Assets allocated by segment are as follows:
                 
    March 31,     December 31,  
    2009     2008  
    (In thousands)  
Real estate
  $ 730,815     $ 732,401  
Mineral resources
    416       376  
Fiber resources
    50,262       51,321  
Assets not allocated to segments
    52,946       50,478  
 
           
Total assets
  $ 834,439     $ 834,576  
 
           
     We evaluate performance based on segment earnings before unallocated items and income taxes. Segment earnings consist of operating income, equity in earnings of unconsolidated ventures and net income attributable to noncontrolling interest. Unallocated items consist of general and administrative expense, share-based compensation, other non-operating income and expense and interest expense. All our revenues are derived from U.S. operations and all our assets are located in the U.S. For first three months 2009, revenues from one customer of our real estate segment and one customer of our fiber resources segment exceeded 10% of our total revenues.
     Segment revenues and earnings are as follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Revenues:
               
Real estate
  $ 18,787     $ 28,443  
Mineral resources
    5,921       6,268  
Fiber resources
    4,369       2,512  
 
           
Total revenues
  $ 29,077     $ 37,223  
 
           
 
               
Segment earnings:
               
Real estate
  $ 542     $ 3,543  
Mineral resources
    4,782       6,505  
Fiber resources
    2,909       2,840  
 
           
Total segment earnings
    8,233       12,888  
 
               
Items not allocated to segments(a)
    (14,440 )     (13,271 )
 
           
 
               
Income before taxes
  $ (6,207 )   $ (383 )
 
           
 
(a)   Items not allocated to segments consists of:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
General and administrative expense
  $ (7,619 )   $ (5,006 )
Share-based compensation expense
    (1,706 )     (2,681 )
Interest expense
    (5,166 )     (5,666 )
Other non-operating income
    51       82  
 
           
 
  $ (14,440 )   $ (13,271 )
 
           
     In first three months 2009, general and administrative expense includes $3,180,000 paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal.
Note 16 — Share-Based Compensation
Post-Spin Awards
     A summary of the awards granted under our 2007 Stock Incentive Plan follows.

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Cash-settled awards
     Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights vest over two to four years from the date of grant and generally provide for accelerated vesting upon death, disability or if there is a change in control. Vesting for some awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period.
     Cash-settled awards granted to our directors in the form of restricted stock units are fully vested at the time of grant and payable upon retirement.
     The following table summarizes the activity of awards granted under our plan for first three months 2009:
                 
            Weighted  
            Average  
            Grant  
    Equivalent     Date Fair  
    Units     Value Per Unit  
    (In thousands)          
Non-vested as of December 31, 2008
    5     $ 28.85  
Granted
    1,106       5.72  
Vested
    (105 )     9.71  
Forfeited
    (1 )     28.85  
 
           
Non-vested as of March 31, 2009
    1,005     $ 5.41  
 
           
     In first three months 2009, we paid $22,000 to settle vested cash awards. The aggregate current value of non-vested awards as of March 31, 2009 is $2,055,000.
Equity-settled awards
     There were no equity-settled awards in the form of restricted stock units granted in first three months 2009, and there were no unvested equity-settled restricted stock unit awards at first quarter-end 2009.
Restricted stock
     Restricted stock awards vest after three years if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of awards granted under our plan for first three months 2009:
                 
            Weighted  
            Average  
            Grant  
    Restricted     Date Fair  
    Shares     Value Per Share  
    (In thousands)          
Non-vested as of December 31, 2008
    207     $ 21.89  
Granted
    110       9.29  
Vested
           
Forfeited
    (1 )     28.85  
 
           
Non-vested as of March 31, 2009
    316     $ 17.45  
 
           
     The aggregate current value of non-vested awards as of first quarter-end 2009 is $2,416,000, or $7.65 per share.
Stock options
     Stock options have a ten-year term, generally become exercisable ratably over three to four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of awards granted under our plan for first three months 2009:

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            Weighted     Weighted  
            Average     Average  
            Exercise     Remaining  
    Options     Price per     Contractual  
    Outstanding     Share     Term  
    (In thousands)             (In years)  
Balance as of December 31, 2008
    622     $ 28.85       9  
Granted
    161       9.29          
Exercised
                   
Forfeited
    (3 )     28.85          
 
                   
Balance as of March 31, 2009
    780     $ 24.80       9  
 
                   
 
       
Options Exercisable as of March 31, 2009
    183     $ 28.85       9  
     There was no aggregate intrinsic value for stock options outstanding or exercisable at first quarter-end 2009.
     Stock options are valued based upon the Black-Scholes option pricing model. Awards granted in first three months 2009 were valued based upon the following assumptions:
         
Expected dividend yield
    0.0 %
Expected stock price volatility
    41.8 %
Risk-free interest rate
    1.8 %
Expected life of options (years)
    6  
Weighted average estimated fair value of options granted
  $ 3.94  
     We have limited historical experience as a stand alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. The expected stock price volatility was based on historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity.
Pre-Spin Awards
     Prior to the spin-off, we participated in Temple-Inland’s share-based compensation plans, and as a result, certain of our directors and employees received share-based compensation in the form of restricted or performance stock units, restricted stock, or options to purchase shares of Temple-Inland’s common stock. Concurrent with Temple-Inland’s distribution of our common stock, all outstanding Temple-Inland awards were adjusted into three separate awards: one related to Forestar common stock, one related to Guaranty common stock and one related to Temple-Inland common stock.
Cash-settled awards
     Cash-settled awards generally vest and are paid after three years from the date of grant or the attainment of defined performance goals, generally measured over a three-year period. A summary of cash-settled awards outstanding to our directors and employees at first quarter-end 2009, following the adjustments described previously, follows:
                 
            Aggregate  
    Equivalent     Current  
    Units     Value  
    (In thousands)
Awards on Forestar stock
    24     $ 182  
Awards on Guaranty stock
    24       25  
Awards on Temple-Inland stock
    72       384  
 
             
 
          $ 591  
 
             
     In first three months 2009, we paid $394,000 to settle vested cash awards.

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Stock options
     Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of Temple-Inland common stock on the date of grant. A summary of stock option awards outstanding to our directors and employees at first quarter-end 2009, following the adjustments described previously, follows:
                                 
                            Aggregate  
            Weighted     Weighted     Value  
            Average     Average     (Current  
            Exercise     Remaining     Value Less  
            Price     Contractual     Exercise  
    Shares     per Share     Term     Price)  
    (In thousands)             (In years)     (In thousands)  
Outstanding on Forestar stock
    86     $ 21.12       6     $  
Outstanding on Guaranty stock
    86       13.55       6        
Outstanding on Temple-Inland stock
    255       16.89       6        
 
                             
 
                          $  
 
                             
 
                               
Exercisable on Forestar stock
    70     $ 19.34       5     $  
Exercisable on Guaranty stock
    70       12.41       5        
Exercisable on Temple-Inland stock
    209       15.47       5        
 
                             
 
                          $  
 
                             
     No options were exercised in first three months 2009.
Share-Based Compensation Expense
     Share-based compensation expense for post-spin and pre-spin awards consists of:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Cash-settled awards
  $ 780     $ 140  
Equity-settled awards
          750  
Restricted stock
    344       189  
Stock options
    582       1,602  
 
           
Pre-tax share-based compensation expense
    1,706       2,681  
Income tax benefit
    (631 )     (1,019 )
 
           
 
  $ 1,075     $ 1,662  
 
           
     The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $135,000 in first three months 2009 and $1,321,000 in first three months 2008.
     Pre-tax share-based compensation expense is included in:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
General and administrative expense
  $ 1,196     $ 1,831  
Other operating expense
    510       850  
 
           
 
  $ 1,706     $ 2,681  
 
           
     We did not capitalize any share-based compensation in first three months 2009 or 2008.
     Unrecognized share-based compensation for post-spin awards not vested was $7,953,000 at first quarter-end 2009. The weighted average period over which this amount will be recognized is estimated to be 2.5 years. Unrecognized share-based compensation for pre-spin awards not vested was $396,000 at first quarter-end 2009. The weighted average period over which this amount will be recognized is estimated to be 1.3 years.

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     In connection with restricted stock vested and stock options exercised, we withheld shares having a value of $17,000 for payment of payroll taxes in first three months 2009. These shares are accounted for as treasury stock. Payroll taxes on restricted stock and stock options are reflected in financing activities in our consolidated statement of cash flows.
Note 17 — Income Taxes
     Our effective tax rate was a benefit of 43% in the first three months 2009 of which 6% is attributable to noncontrolling interests, and a benefit of 124% in the first three months 2008 of which 86% is attributable to noncontrolling interests. As a result of our adoption of SFAS No. 160, income (loss) before income taxes includes income from pass-through entities allocable to noncontrolling interests for which there is no income tax provided.
     We anticipate that our effective tax rate in 2009 will be about 37% of which less than one percent will be attributable to noncontrolling interests.
     We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future periods.
Note 18 — Subsequent Event
     In accordance with our strategic initiatives, effective May 2, 2009, we entered into a definitive agreement with the Hancock Timber Resource Group division of Hancock Natural Resource Group, Inc., acting on behalf of its investor clients, to sell about 75,000 acres of timberland in Georgia and Alabama for $120,000,000 in a cash transaction. The transaction is expected to close in second quarter 2009, subject to customary closing conditions. We intend to use the after-tax cash proceeds from this sale to reduce our outstanding debt.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of March 31, 2009, and references to acreage owned include all acres owned by ventures regardless of our ownership interest in a venture.
Forward-Looking Statements
     This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risk and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
    general economic, market or business conditions;
 
    economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;
 
    the opportunities (or lack thereof) that may be presented to us and that we may pursue;
 
    future residential or commercial entitlements;
 
    expected development timetables and projected timing for sales of lots or other parcels of land;
 
    development approvals and the ability to obtain such approvals;
 
    the anticipated price ranges of lots in our developments;
 
    the number, price and timing of land sales or acquisitions;
 
    absorption rates and expected gains on land and lot sales;
 
    the levels of resale inventory in our development projects and the regions in which they are located;
 
    the development of relationships with strategic partners;
 
    fluctuations in costs and expenses;
 
    demand for new housing, which can be affected by the availability of mortgage credit;
 
    government energy policies;
 
    demand for oil and gas;
 
    fluctuations in oil and gas prices;
 
    competitive actions by other companies;
 
    changes in laws or regulations and actions or restrictions of regulatory agencies;
 
    the results of financing efforts, including our ability to obtain financing with favorable terms;
 
    our partners’ ability to fund their capital commitments;
 
    the ability to complete merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of a merger, acquisition or divestiture; and the success of the business following a merger, acquisition or divestiture;

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    the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to our business; and
 
    our customers may be unwilling or unable to meet lot takedown commitments due to liquidity limitations or slowing market conditions.
     Other factors, including the risk factors described in Item 1A of our 2008 Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
     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.
Background
     Prior to December 28, 2007, we were a wholly-owned subsidiary of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributed all our issued and outstanding shares of common stock to its shareholders in a transaction commonly referred to as a spin-off. In 2008, we operated our first full year as a stand-alone public company and the following discussion and analysis reflect the post-spin results of operations and the effect on our financial condition.
Strategy
     Our strategy is to maximize and grow long-term shareholder value through:
    Entitlement and development of real estate;
 
    Realization of value from minerals, water and fiber resources; and
 
    Strategic and disciplined investment in our business.
     On February 11, 2009, we announced the following strategic initiatives to enhance shareholder value:
    Generate significant cash flow, principally from the sale of approximately 175,000 acres of higher and better use (HBU) timberland;
 
    Reduce debt by approximately $150 million; and
 
    Repurchase up to 20% of our common stock.
     Debt reduction and share repurchases will be funded by proceeds from the sale of the HBU timberland. Share repurchases will be accomplished from time to time through open market or privately negotiated transactions, subject to market conditions and other factors.
     In first quarter 2009, we have reclassified to assets held for sale about 171,000 acres of undeveloped land principally located in Alabama and Georgia with a carrying value of $51,390,000 and related timber with a carrying value of $24,749,000. These assets are being actively marketed.
     In accordance with our strategic initiatives, effective May 2, 2009, we entered into a definitive agreement with the Hancock Timber Resource Group division of Hancock Natural Resource Group, Inc., acting on behalf of its investor clients, to sell about 75,000 acres of timberland in Georgia and Alabama for $120,000,000 in a cash transaction. The transaction is expected to close in second quarter 2009, subject to customary closing conditions. We intend to use the after-tax cash proceeds from this sale to reduce our outstanding debt.
Results of Operations
     Net loss was $(3,892,000) or $(0.11) per basic and diluted share, in first three months 2009, compared with $(238,000), or $(0.01) per basic and diluted share, in first three months 2008.

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     A summary of our consolidated results follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Revenues:
               
Real estate
  $ 18,787     $ 28,443  
Mineral resources
    5,921       6,268  
Fiber resources
    4,369       2,512  
 
           
Total revenues
  $ 29,077     $ 37,223  
 
           
 
               
Segment earnings:
               
Real estate
  $ 542     $ 3,543  
Mineral resources
    4,782       6,505  
Fiber resources
    2,909       2,840  
 
           
Total segment earnings
    8,233       12,888  
 
               
Items not allocated to segments:
               
General and administrative expense
    (7,619 )     (5,006 )
Share-based compensation expense
    (1,706 )     (2,681 )
Interest expense
    (5,166 )     (5,666 )
Other non-operating income
    51       82  
 
           
Loss before taxes
    (6,207 )     (383 )
Income tax benefit
    2,315       145  
 
           
Net loss attributable to Forestar Group Inc.
  $ (3,892 )   $ (238 )
 
           
     Significant aspects of our results of operations follow:
First Three Months 2009 and 2008
    Real Estate segment earnings declined principally due to a continued decrease in the sales of residential real estate, decreased commercial sales activity and increased costs associated with asset impairments and legal reserves.
 
    Mineral Resources segment earnings declined principally due to lower lease bonus revenues, lower oil prices and increased costs associated with developing and staffing our mineral resources organization.
 
    Fiber Resources segment revenues increased as result of increased prices related to a higher mix of larger pine sawtimber sold. In first three months 2008, segment earnings included a gain from partial termination of a timber lease.
 
    In first three months 2009, general and administrative expense includes $3,180,000 paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal.
 
    In first three months 2009, share-based compensation included $135,000 related to accelerated expense recognition in conjunction with awards granted to retirement-eligible employees compared to $1,321,000 in first three months 2008.
Current Market Conditions
     Current market conditions in the residential development industry are extremely difficult due to the oversupply of housing, diminished sales volume and sales prices for existing and new homes and a significant tightening of mortgage credit. Consumer confidence is near or at an all time low. Many home builders are experiencing liquidity shortfalls and are unwilling or unable to close lot purchases. All geographic markets and products have not been affected to the same extent or with equal severity, but most have experienced declines. It is likely these conditions will continue throughout 2009.
     Current market conditions in the oil and gas industry have declined as oil and gas commodity prices have decreased from recent highs. Exploration and production companies have reduced capital expenditures for lease acquisition and production due to lower world wide demand and higher inventories resulting in lower oil and gas commodity prices. These conditions may impact the demand for new mineral leases, new exploration activity and the amount of royalty revenues we receive.

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     Pulpwood demand in our markets has declined as a result of weak demand for these products due to temporary mill curtailments. Sawtimber prices have declined due to the decrease in demand for lumber products consistent with the decline in the housing industry.
Business Segments
     We manage our operations through three business segments:
    Real estate,
 
    Mineral resources, and
 
    Fiber resources.
     We evaluate performance based on earnings before unallocated items and income taxes. Segment earnings consist of operating income and equity in earnings of unconsolidated ventures, less net income attributable to noncontrolling interest. Unallocated items consist of general and administrative expense, share-based compensation, other non-operating income and expense, and interest expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.
     We operate in cyclical industries. Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, consumer sentiment, new housing starts, real estate values, employment levels, changes in the market prices for oil, gas, and timber, and the overall strength or weakness of the U.S. economy.
Real Estate
     We own directly or through ventures over 363,000 acres of real estate located in nine states and 12 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own about 297,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in our strategic growth corridors, regions of accelerated growth across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential single-family lots, undeveloped land sales and commercial real estate and to a lesser degree from the operation of commercial properties, primarily a hotel.
     A summary of our real estate results follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Revenues
  $ 18,787     $ 28,443  
Cost of sales
    (8,558 )     (17,372 )
Operating expenses
    (8,165 )     (7,778 )
 
           
 
    2,064       3,293  
Equity in earnings of unconsolidated ventures
    (679 )     750  
Less: Net income attributable to noncontrolling interest
    (843 )     (500 )
 
           
Segment earnings
  $ 542     $ 3,543  
 
           
     In first three months 2009, operating expenses principally consist of $2,826,000 in property taxes, $1,802,000 in employee compensation and benefits, $650,000 related to legal reserves for probable losses, $639,000 in professional services, $528,000 in depreciation expense and $191,000 related to marketing and advertising. In first three months 2008, operating expenses principally consist of $2,733,000 in property taxes, $1,967,000 in employee compensation and benefits, $944,000 in professional services, $459,000 in depreciation expense and $416,000 related to marketing and advertising.

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     Revenues in our owned and consolidated ventures consist of:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Residential real estate
  $ 5,612     $ 14,670  
Commercial real estate
    143       1,863  
Undeveloped land
    8,304       6,257  
Commercial operating properties
    4,592       5,155  
Other
    136       498  
 
           
Total revenues
  $ 18,787     $ 28,443  
 
           
     Units sold in our owned and consolidated ventures consist of:
                 
    First Quarter
    2009   2008
     
Residential real estate:
               
Lots sold
    78       324  
Revenue per lot sold
  $ 71,928     $ 43,593  
Commercial real estate:
               
Acres sold
    0.3       22  
Revenue per acre sold
  $ 424,696     $ 85,000  
Undeveloped land:
               
Acres sold
    2,192       1,349  
Revenue per acre sold
  $ 3,789     $ 4,639  
     Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In first three months 2009, residential real estate revenues continued to decline as result of decreased demand for single-family lots due to the overall decline in the housing industry. We expect difficult housing markets and credit conditions throughout 2009. In first three months 2008, residential lots sold includes the sale of 192 high density lots for approximately $24,300 per lot at a mixed-use venture located near Houston, Texas.
     In first three months 2009, we sold 2,192 acres of undeveloped land from our owned and consolidated ventures at an average price of $3,789 per acre, generating $8,304,000 in revenue. In first three months 2008, we sold 1,349 acres from our owned and consolidated ventures at an average price of $4,639 per acre, generating $6,257,000 in revenue.

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     Information about our real estate projects and our real estate ventures follows:
                 
    First Quarter-End
    2009   2008
Owned and consolidated ventures:
               
Entitled, developed and under development projects
               
Number of projects
    54       54  
Residential lots remaining
    20,467       19,985  
Commercial acres remaining
    1,704       1,385  
Undeveloped land and land in the entitlement process
               
Number of projects
    22       21  
Acres in entitlement process
    32,520       30,200  
Acres undeveloped (a)
    307,093       320,749  
Ventures accounted for using the equity method:
               
Ventures’ lot sales (for first three months)
               
Lots sold
    29       64  
Revenue per lot sold
  $ 73,647     $ 59,242  
Ventures’ entitled, developed and under development projects
               
Number of projects
    21       21  
Residential lots remaining
    9,298       9,319  
Commercial acres sold (for first three months)
    4       22  
Revenue per acre sold
  $ 196,996     $ 85,000  
Commercial acres remaining
    645       697  
Ventures’ undeveloped land and land in the entitlement process
               
Number of projects
    2       2  
Acres in entitlement process
    1,080       870  
Acres sold (for first three months)
           
Revenue per acre sold
  $     $  
Acres undeveloped
    5,641       6,127  
 
(a)   Includes 171,000 acres classified as assets held for sale.
Mineral Resources
     We own directly or through ventures about 622,000 net acres of oil and gas mineral interests. Our mineral resources segment is focused on maximizing the value from royalties and other lease revenues from our oil and gas mineral interests located in Texas, Louisiana, Alabama and Georgia. At first quarter-end 2009, we have about 120,000 net acres under lease and about 26,000 net acres held by production.
     A summary of our mineral resources results follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Revenues
  $ 5,921     $ 6,268  
Cost of sales
    (76 )      
Operating expenses
    (1,170 )     (547 )
 
           
 
    4,675       5,721  
Equity in earnings of unconsolidated ventures
    107       784  
 
           
Segment earnings
  $ 4,782     $ 6,505  
 
           
     In first three months 2009, operating expenses principally consist of $443,000 in employee compensation and benefits, $268,000 related to oil and gas production severance taxes, $188,000 in professional services and $66,000 in property taxes. Cost of sales represents our share of costs related to our non-operating working interests. In first three months 2008, operating expenses principally consist of $343,000 in professional services as we resourced our operations with a contract workforce while recruiting our mineral resources team.

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     In first three months 2009, equity in earnings of unconsolidated ventures includes our share of royalty revenue as a result of new production activity from a new well in a venture located within the Barnett Shale natural gas formation. In first three months 2008, equity in earnings of consolidated ventures includes our share of a lease bonus payment as a result of leasing 241 net mineral acres for $1,568,000.
     Revenues consist of:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Royalties
  $ 3,478     $ 3,338  
Other lease revenues
    2,443       2,930  
 
           
Total revenues
  $ 5,921     $ 6,268  
 
           
     Additional information about our royalties (a) follows:
                 
    First Quarter
    2009   2008
Oil production (barrels)
    26,200       19,400  
Average price per barrel
  $ 47.24     $ 83.57  
Natural gas production (millions of cubic feet)
    394.7       255.9  
Average price per thousand cubic feet
  $ 6.16     $ 6.38  
 
(a)   Includes ventures.
     In first three months 2009, other lease revenues include $2,121,000 in lease bonus payments as a result of leasing over 6,100 net mineral acres and $322,000 related to delay rental payments. In first three months 2008, other lease revenues include $2,021,000 in lease bonus payments as a result of leasing over 5,000 net mineral acres and $695,000 related to delay rental payments.
     A summary of our oil and gas mineral interests (a) at first quarter-end 2009 follows:
                                 
                    Held By        
State   Unleased(b)     Leased(c)     Production(d)     Total(e)  
    (Net acres)  
Texas
    124,000       101,000       19,000       244,000  
Louisiana
    104,000       10,000       7,000       121,000  
Alabama
    48,000       9,000             57,000  
Georgia
    200,000                   200,000  
 
                       
 
    476,000       120,000       26,000       622,000  
 
                       
 
(a)   Includes ventures.
 
(b)   Includes approximately 11,200 net acres subject to lease option.
 
(c)   Includes leases in primary lease term only.
 
(d)   Acres being held by production are producing oil or gas in paying quantities.
 
(e)   Texas and Louisiana net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling.
     We also have a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1.38 million acres in Texas, Louisiana, Georgia and Alabama. We have not received any income from this interest.
Fiber Resources
     Our fiber resources segment focuses principally on the management of our timber holdings. We have over 338,000 acres of timber, primarily in Georgia, and about 18,000 acres of timber under lease. We sell wood fiber from our land and lease land for hunting and other recreational uses.

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     A summary of our fiber resources results follows:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Revenues
  $ 4,369     $ 2,512  
Cost of sales
    (833 )     (546 )
Operating expenses
    (812 )     (502 )
 
           
 
    2,724       1,464  
Other operating income
    185       1,376  
 
           
Segment earnings
  $ 2,909     $ 2,840  
 
           
     In first three months 2009, operating expenses principally consist of $387,000 in employee compensation and benefits, $152,000 related to professional services and $66,000 related to timber severance taxes. In first three months 2008, operating expenses principally consist of $317,000 in employee compensation and benefits and $30,000 in professional services.
     In first three months 2008, other operating income principally reflects a gain from partial termination of a timber lease.
     Revenues consist of:
                 
    First Quarter  
    2009     2008  
    (In thousands)  
Fiber
  $ 3,755     $ 2,037  
Recreational leases and other
    614       475  
 
           
Total revenues
  $ 4,369     $ 2,512  
 
           
     Fiber sold consists of:
                 
    First Quarter
    2009   2008
Pulpwood tons sold
    206,600       173,800  
Average pulpwood price per ton
  $ 8.15     $ 7.83  
Sawtimber tons sold
    90,700       35,400  
Average sawtimber price per ton
  $ 22.84     $ 19.11  
Total tons sold
    297,300       209,200  
Average price per ton
  $ 12.63     $ 9.73  
     In first three months 2009, total price per ton increased because we harvested and sold a higher mix of larger pine sawtimber. The majority of our sales were to Temple-Inland at market prices.
Items Not Allocated to Segments
     Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, other non-operating income and expense and interest expense.
     General and administrative expense principally consists of accounting and finance, tax, legal, human resources, internal audit, information technology and our Board of Directors. These functions support all of our business segments and are not allocated. In first three months 2009, general and administrative expense principally consists of $1,725,000 in employee compensation and benefits, $432,000 in depreciation expense, $316,000 related to insurance costs, $283,000 in occupancy, $264,000 in board of director fees and $3,873,000 in professional services of which $3,180,000 was paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal.
Income Taxes
     Our effective tax rate was a benefit of 43% in the first three months 2009 of which 6% is attributable to noncontrolling interests, and a benefit of 124% in the first three months 2008 of which 86% is attributable to noncontrolling interests. As a result of our adoption of SFAS No. 160, income (loss) before income taxes includes income from pass-through entities allocable to noncontrolling interests for which there is no income tax provided.

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     We anticipate that our effective tax rate in 2009 will be about 37% of which less than one percent will be attributable to noncontrolling interests.
     We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future periods.
Capital Resources and Liquidity
Sources and Uses of Cash
     We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal operating cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, taxes, interest, and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from minerals and commercial operating properties, and borrowings. Operating cash flows are affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements, and availability of utilities. Working capital is subject to operating needs, the timing of sales of real estate and timber, the timing of collection of mineral royalties or mineral lease payments, collection of receivables, reimbursement from utility or improvement districts, and the payment of payables and expenses.
Cash Flows from Operating Activities
     Cash flows from our real estate development activities, undeveloped land sales, timber sales, and mineral and recreational leases are classified as operating cash flows.
     In first three months 2009, net cash used for operating activities was $10,509,000 as expenditures for real estate development exceeded non-cash cost of sales due to our development of existing real estate projects, principally in the major markets of Texas where sales activity supports investment in development. We invested $3,433,000 in our Cibolo Canyons mixed-use project near San Antonio, Texas. In first three months 2008, net cash used in operating activities was $14,050,000 as expenditures for real estate development and acquisitions exceeded non-cash cost of sales principally due to our continued development of existing real estate projects, principally in the major markets of Texas. We invested $5,562,000 in Cibolo Canyons in first three months 2008.
Cash Flows from Investing Activities
     Capital contributions to and capital distributions from unconsolidated ventures are classified as investing activities. In addition, expenditures related to reforestation activities in our fiber resources segment are classified as investing activities.
     In first three months 2009, net cash used in investing activities was $773,000 as property, equipment and software costs exceeded our net distributions from our unconsolidated ventures. In first three months 2008, net cash used in investing activities was $2,142,000 as capital contributions to our unconsolidated ventures exceeded our capital distributions.
Cash Flows from Financing Activities
     In first three months 2009, net cash provided by financing activities was $11,619,000. In first three months 2008, net cash provided by financing activities was $17,025,000. In first three months 2009 and 2008, the increase in our debt funded our expenditures for real estate development, principally in the major markets of Texas.
Liquidity, Contractual Obligations and Off-Balance Sheet Arrangements
     There have been no significant changes in our liquidity, contractual obligations and off-balance sheet arrangements since year-end 2008.
Senior Credit Facility
     Our senior credit facility and other debt agreements contain terms, conditions and financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At first quarter-end 2009, we were in compliance with the terms, conditions and financial covenants of these agreements. The following table details our compliance with the financial covenants of these agreements:

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            March 31,   December 31,
Financial Covenant   Requirement   2009   2008
Interest Coverage Ratio(a)
    ³1.50:1.0       2.41:1.0       2.68:1.0  
Revenues/Capital Expenditures Ratio(b)
    ³0.80:1.0       1.62:1.0       1.47:1.0  
Total Leverage Ratio(c)
    <40 %     25.5 %     23.7 %
Minimum Liquidity(d)
  >$35 million   $211 million   $223 million
Net Worth(e)
  >$356 million(e)   $450 million   $447 million
 
(a)   Calculated as EBITDA (earnings before interest, taxes, depreciation and amortization) plus all non-cash compensation expenses plus other non-cash expenses, divided by interest expense. This covenant is applied at the end of each quarter on a rolling four quarter basis, and the requirement increases to 2.0:1.0 in second quarter 2009.
 
(b)   Calculated as total gross revenues plus our pro rata share of the operating revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures. This covenant is applied at the end of each quarter on a rolling four quarter basis, and the requirement increases to 1.0:1.0 after third quarter 2009.
 
(c)   Calculated as total funded debt divided by adjusted asset value. Total funded debt includes all indebtedness for borrowed funds, all secured liabilities, and all reimbursement obligations with respect to letters of credit or similar instruments. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business, and all other real estate owned at book value without regard to any indebtedness, and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter.
 
(d)   Calculated as the amount available for drawing under the revolving commitment, plus unrestricted cash, plus cash equivalents which are not pledged or encumbered and the use of which is not restricted by the terms of any agreement. This covenant is applied at the end of each quarter.
 
(e)   Calculated as the amount by which consolidated total assets exceeds consolidated total liabilities. At first quarter-end 2009, the requirement is $356 million, computed as: $350 million, plus eighty five percent of the aggregate net proceeds received by us from any equity offering, plus fifty percent of all positive net income, on a cumulative basis. This covenant is applied at the end of each quarter.
     Based on our current operating projections, we believe that we will remain in compliance with our senior credit facility covenants in the future. However, if market conditions continue to deteriorate or continue for an extended period, we may be unable to comply with our financial covenants and may need to seek amendments, waivers or forbearance of our senior credit facility, or may need to refinance. There can be no assurance that we will be able to obtain any amendments, waivers or forbearance when, as and if needed, or if the lenders would be willing to refinance on terms acceptable to us, or at all. Any amended facilities could be on terms that are both more expensive and more restrictive than our current senior credit facility.
     There can be no assurance that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities. A breach of any of these covenants or our inability to maintain the required financial ratios could result in a default of the senior credit facility. If a default occurs, the affected lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable.
Cibolo Canyons — San Antonio, Texas

Mixed-Use Development / Resort Hotel, Spa and Golf
     The Cibolo Canyons mixed-use development consists of 2,100 acres planned to include 1,749 residential lots and 145 commercial acres designated for multifamily and retail uses, of which 554 lots and 64 commercial acres have been sold at first quarter-end 2009. We have $66,577,000 invested in the development at first quarter-end 2009.
     In 2007, we entered into agreements to facilitate third-party construction and ownership of the JW Marriott ® San Antonio Hill Country Resort & Spa, planned to include a 1,002 room destination resort and two PGA Tour ® Tournament Players Club ® golf courses. Under these agreements, we transferred to the third-party owners about 700 acres of undeveloped land and we agreed to provide about $38,500,000. In exchange, the third-party owners assigned to us certain rights under an Economic Development Agreement, including the right to receive 9% of hotel occupancy revenues and 1.5% of sales generated within the resort through 2034. At first quarter-end 2009, we have provided $26,862,000 and expect to fund our remaining commitment of $11,638,000 by year-end 2009. If the resort hotel is not open and operating on July 1, 2011, the City of San Antonio could terminate the Special Purpose Improvement District (SPID) and there would be no source of revenue to fund payments under the Economic Development Agreement.

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The resort hotel is under construction and is currently scheduled to open well before July 1, 2011.
     Until the SPID achieves an adequate tax base to support issuance of bonds, the proceeds of which will be used by the SPID to reimburse us for qualified infrastructure costs, we will not include the estimated reimbursements as a reduction of our real estate cost of sales. At first quarter-end 2009, we have billed the SPID $49,529,000 for qualified infrastructure costs. These costs have been audited by the SPID and approved for payment, and are included in our investment in the mixed-use development. The construction and opening of the resort hotel will satisfy a condition to our right to obtain reimbursement of infrastructure costs related to the mixed-use development under an Ad Valorem Tax and Non Resort Sales and Use Tax Public Improvement Financing Agreement between us and the SPID. If the resort hotel is not open and operating on July 1, 2011, the City of San Antonio could terminate the SPID and we would have no payor for reimbursement of qualified infrastructure costs.
Critical Accounting Policies and Estimates
     There have been no significant changes in our critical accounting policies or estimates in first three months 2009 from those disclosed in our 2008 Annual Report on Form 10-K.
Recent Accounting Standards
     Please read Note 3 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

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Statistical and Other Data
     A summary of our real estate projects in the entitlement process (a) at March 31, 2009 follows:
                 
            Project  
Project   County   Market   Acres(b)  
California
               
Hidden Creek Estates
  Los Angeles   Los Angeles     700  
Terrace at Hidden Hills
  Los Angeles   Los Angeles     30  
Georgia
               
Ball Ground
  Cherokee   Atlanta     500  
Burt Creek
  Dawson   Atlanta     970  
Creekview
  Troup   Atlanta     470  
Crossing
  Coweta   Atlanta     230  
Dallas Highway
  Haralson   Atlanta     1,060  
Fincher Road
  Cherokee   Atlanta     3,950  
Fox Hall
  Coweta   Atlanta     960  
Garland Mountain
  Cherokee/Bartow   Atlanta     350  
Home Place
  Coweta   Atlanta     1,510  
Hutchinson Mill
  Troup   Atlanta     880  
Jackson Park
  Jackson   Atlanta     700  
Martin’s Bridge
  Banks   Atlanta     970  
Mill Creek
  Coweta   Atlanta     770  
Serenity
  Carroll   Atlanta     440  
Three Creeks
  Troup   Atlanta     740  
Waleska
  Cherokee   Atlanta     150  
Wolf Creek
  Carroll/Douglas   Atlanta     12,230  
Yellow Creek
  Cherokee   Atlanta     1,060  
Texas
               
Lake Houston
  Harris/Liberty   Houston     3,700  
San Jacinto
  Montgomery   Houston     150  
Entrada(c)
  Travis   Austin     240  
Woodlake Village(c)
  Montgomery   Houston     840  
 
             
Total
            33,600  
 
             
 
(a)   A project is deemed to be in the entitlement process when customary steps necessary for the preparation and submittal of an application, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.
 
(b)   Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.
 
(c)   We own a 50 percent interest in these projects.

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     A summary of activity within our projects in the development process, which includes entitled (a), developed and under development real estate projects, at March 31, 2009 follows:
                                                 
                    Residential Lots(c)   Commercial Acres(d)
                    Lots Sold           Acres Sold    
            Interest   Since   Lots   Since   Acres
Project   County   Market   Owned(b)   Inception   Remaining   Inception   Remaining
Projects we own
                                               
California
                                               
San Joaquin River
  Contra Costa/   Oakland     100 %                       288  
 
  Sacramento                                            
Colorado
                                               
Buffalo Highlands
  Weld   Denver     100 %           164              
Johnstown Farms
  Weld   Denver     100 %     115       493       2       8  
Pinery West
  Douglas   Denver     100 %                       115  
Stonebraker
  Weld   Denver     100 %           603             13  
Westlake Highlands
  Jefferson   Denver     100 %           21              
Texas
                                               
Arrowhead Ranch
  Hays   Austin     100 %           232             6  
Caruth Lakes
  Rockwall   Dallas/Fort Worth     100 %     245       404              
Cibolo Canyons
  Bexar   San Antonio     100 %     554       1,193       64       81  
Harbor Lakes
  Hood   Dallas/Fort Worth     100 %     199       250             14  
Harbor Mist
  Calhoun   Corpus Christi     100 %           200              
Hunter’s Crossing
  Bastrop   Austin     100 %     308       183       38       68  
La Conterra
  Williamson   Austin     100 %     34       475             60  
Maxwell Creek
  Collin   Dallas/Fort Worth     100 %     650       361       10        
Oak Creek Estates
  Comal   San Antonio     100 %     9       639       13        
The Colony
  Bastrop   Austin     100 %     409       2,236       22       49  
The Gables at North Hill
  Collin   Dallas/Fort Worth     100 %     195       88              
The Preserve at Pecan Creek
  Denton   Dallas/Fort Worth     100 %     209       609             9  
The Ridge at Ribelin Ranch
  Travis   Austin     100 %                 179       16  
Westside at Buttercup Creek
  Williamson   Austin     100 %     1,281       240       66        
Other projects (7)
  Various   Various     100 %     1,544       25       197       23  
Georgia
                                               
Towne West
  Bartow   Atlanta     100 %           2,674             121  
Other projects (14)
  Various   Atlanta     100 %           2,836             705  
Missouri and Utah
                                               
Other projects (2)
  Various   Various     100 %     400       364              
 
                                               
 
                                               
 
                    6,152       14,290       591       1,576  
 
                                               
 
                                               
Projects in entities we consolidate
                                               
Texas
                                               
City Park
  Harris   Houston     75 %     1,099       212       50       105  
Lantana
  Denton   Dallas/Fort Worth     55 % (e)     414       1,867              
Light Farms
  Collin   Dallas/Fort Worth     65 %           2,517              
Stoney Creek
  Dallas   Dallas/Fort Worth     90 %     59       695              
Timber Creek
  Collin   Dallas/Fort Worth     88 %           614              
Other projects (5)
  Various   Various   Various     935       272       24       23  
 
                                               
 
                                               
 
                    2,507       6,177       74       128  
 
                                               
 
                                               
Total owned and consolidated
                    8,659       20,467       665       1,704  
Projects in ventures that we account for using the equity method
                                               
Georgia
                                               
Seven Hills
  Paulding   Atlanta     50 %     634       446       26        
The Georgian
  Paulding   Atlanta     38 %     288       1,097              
Other projects (5)
  Various   Atlanta   Various     1,845       249       3        
Texas
                                               
Bar C Ranch
  Tarrant   Dallas/Fort Worth     50 %     176       1,023              
Fannin Farms West
  Tarrant   Dallas/Fort Worth     50 %     265       115             15  

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                    Residential Lots(c)   Commercial Acres(d)
                    Lots Sold           Acres Sold    
            Interest   Since   Lots   Since   Acres
Project   County   Market   Owned(b)   Inception   Remaining   Inception   Remaining
Lantana
  Denton   Dallas/Fort Worth   Various (e)     1,427       43       14       75  
Long Meadow Farms
  Fort Bend   Houston     19 %     604       1,502       72       138  
Southern Trails
  Brazoria   Houston     40 %     326       736              
Stonewall Estates
  Bexar   San Antonio     25 %     180       201              
Summer Creek Ranch
  Tarrant   Dallas/Fort Worth     50 %     796       1,772             363  
Summer Lakes
  Fort Bend   Houston     50 %     325       798       56        
Village Park
  Collin   Dallas/Fort Worth     50 %     339       221       3       2  
Waterford Park
  Fort Bend   Houston     50 %           493             37  
Other projects (2)
  Various   Various   Various     294       230             15  
Florida
                                               
Other projects (3)
  Various   Tampa   Various     473       372              
 
                                               
 
                                               
Total in ventures
                    7,972       9,298       174       645  
 
                                               
 
                                               
Combined total
                    16,631       29,765       839       2,349  
 
                                               
 
(a)   A project is deemed entitled when all major discretionary land-use approvals have been received. Some projects may require additional permits for development.
 
(b)   Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated, and/or accounted for using the equity method.
 
(c)   Lots are for the total project, regardless of our ownership interest.
 
(d)   Commercial acres are for the total project, regardless of our ownership interest, and are net developable acres, which may be fewer than the gross acres available in the project.
 
(e)   The Lantana project consists of a series of 15 partnerships in which our voting interests range from 25 percent to 55 percent. We account for three of these partnerships using the equity method and we consolidate the remaining partnerships.
     A summary of our commercial operating properties, commercial projects and condominium projects at March 31, 2009 follows:
                     
            Interest        
Project   County   Market   Owned(a)   Type   Description
Radisson Hotel
  Travis   Austin   100 %   Hotel   413 guest rooms and suites
Palisades West
  Travis   Austin   25 %   Office   375,000 square feet
Presidio at Judge’s Hill
  Travis   Austin   60 %   Condominium   45 units
Las Brisas
  Williamson   Austin   49 %   Multi-Family   414 unit luxury apartment
Harbor Lakes Golf Club
  Hood   Dallas/Fort Worth   100 %   Golf Club   18 hole golf course and club
Gulf Coast Apartments
  Various   Various   2 %   Multi-Family   9 apartment communities
 
(a)   Interest owned reflects our net equity interest in the project, whether owned directly or indirectly.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
     Our interest rate risk is principally related to our variable-rate debt. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable-rate debt, which was $230,559,000 at first quarter-end 2009 and $229,030,000 at year-end 2008.
     The following table illustrates the estimated effect on our pre-tax income of immediate, parallel and sustained shifts in interest rates for the next 12 months at first quarter-end 2009, with comparative year-end 2008 information. This estimate assumes that debt reductions from contractual payments will be replaced with short-term, variable-rate debt; however, that may not be the financing alternative we would choose.
                 
    March 31,   December 31,
Change in Interest Rates   2009   2008
    (In thousands)
+2%
  $ (4,611 )   $ (4,581 )
+1%
    (2,306 )     (2,290 )
-1%
    2,306       2,290  
-2%
    4,611       4,581  
     Changes in interest rates affect the value of our interest rate swap agreement ($100,000,000 notional amount at first quarter-end 2009). We believe any change in the value of this agreement would not be significant.
Foreign Currency Risk
     We have no exposure to foreign currency fluctuations.
Commodity Price Risk
     We have no significant exposure to commodity price fluctuations.
Item 4. Controls and Procedures
     (a) Disclosure Controls and Procedures
     Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
     (b) Changes in Internal Control over Financial Reporting
     There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during first quarter 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     We are involved directly or through ventures in various legal proceedings that arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses and that the outcome of any of the proceedings should not have a material adverse effect on our financial position, long-term results of operations or cash flows. It is possible, however, that circumstances beyond our control or significant subsequent developments could result in additional charges related to these matters that could be significant to results of operations or cash flow in any single accounting period.
Item 1A. Risk Factors
     There are no material changes from the risk factors disclosed in our 2008 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     In first three months 2009, a total of 1,589 restricted shares of our common stock were withheld (all in February 2009) to pay taxes due in connection with vesting of restricted stock awards. The terms of the awards provide that the value of the restricted shares withheld will be based on the closing price per share of our common stock on the vesting date, as reported on the New York Stock Exchange. The price was $10.50.
     On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock, to be funded principally from the sale of approximately 175,000 acres of higher and better use timberland. We have not purchased any shares under this authorization, which has no expiration date, and no repurchases will be made under this repurchase authorization until after completion of the asset sales. We have no repurchase plans or programs that expired during the first quarter 2009 and no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
Item 3. Defaults Upon Senior Securities
     None.
Item 4. Submission of Matters to a Vote of Security Holders
     None.
Item 5. Other Information
     None.
Item 6. Exhibits
     
10.1
  Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2009).
 
10.2   Form of Restricted Stock Units Agreement for senior executives (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2009).
 
31.1*
  Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2*
  Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1*
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2*
  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
* Filed herewith.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
FORESTAR GROUP INC.
 
 
Date: May 7, 2009  By:   /s/ Christopher L. Nines    
    Christopher L. Nines   
    Chief Financial Officer   
 
     
  By:   /s/ Charles D. Jehl  
    Charles D. Jehl   
    Chief Accounting Officer   

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