Forestar Group - 10-Q quarterly report FY

 

     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):

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

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

Please read the notes to the consolidated financial statements.

Please read the notes to the consolidated financial statements.

Please read the notes to the consolidated financial statements.

     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.

     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.

     Beginning January 2009, we adopted the following new accounting pronouncements:

     In April 2009, the FASB issued the following to provide additional guidance and disclosures regarding fair value measurements and impairments of securities:

     On February 11, 2009, we announced the following strategic initiatives to enhance shareholder value:

     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.

     Real estate consists of:

     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.

     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.

     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:

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

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

     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.

     Debt consists of:

     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

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.

     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.

     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:

     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.

     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:

     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.

     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:

     Other comprehensive loss consists of:

     Our basic and diluted weighted average common shares outstanding used to compute net loss per share are as follows:

     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.

     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.

     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.

     Assets allocated by segment are as follows:

     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:

     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.

     A summary of the awards granted under our 2007 Stock Incentive Plan follows.

     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:

     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.

     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 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:

     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 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:

     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:

     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.

     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 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:

     In first three months 2009, we paid $394,000 to settle vested cash awards.

     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:

     No options were exercised in first three months 2009.

     Share-based compensation expense for post-spin and pre-spin awards consists of:

     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:

     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.

     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.

     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.

     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.

     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.

     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:

     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.

     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.

     Our strategy is to maximize and grow long-term shareholder value through:

     On February 11, 2009, we announced the following strategic initiatives to enhance shareholder value:

     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.

     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.

     A summary of our consolidated results follows:

     Significant aspects of our results of operations follow:

     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.

     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.

     We manage our operations through three business segments:

     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.

     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:

     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.

     Revenues in our owned and consolidated ventures consist of:

     Units sold in our owned and consolidated ventures consist of:

     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.

     Information about our real estate projects and our real estate ventures follows:

     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:

     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.

     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:

     Additional information about our royalties ^(a) follows:

     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: