Forestar Group - 10-Q quarterly report FY2011 Q2

 

 

     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. þ Yes o No

     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). þ Yes o No

     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.

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

     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 Consolidated Financial Statements.

Please read the Notes to Consolidated Financial Statements.

Please read the Notes to Consolidated Financial Statements.

     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 interests in consolidated pass-through entities are 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 distributions 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 cost of sales to real estate, minerals and fiber 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 2010 Annual Report on Form 10-K.

     In 2011, we reclassified $199,000 and $397,000 from cost of income producing properties to operating expenses in second quarter and first six months 2010 to conform to the current year’s presentation.

     In first quarter 2011, we adopted Accounting Standards Update (ASU) 2010-28 — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amountsand ASU 2010-29 — Disclosure of Supplementary Pro Forma Information for Business Combinations. Adoption of these pronouncements did not affect our earnings or financial position.

     Pending ASU 2011-04 — Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and ASU 2011-05 — Comprehensive Income: Presentation of Comprehensive Income will be effective first quarter 2012. Adoption is not anticipated to have a significant effect on our earnings or financial position but will likely result in certain additional disclosures.

     In 2009, we announced our near-term strategic initiatives to enhance shareholder value by generating significant cash flow, principally from the sale of 175,000 acres of higher and better use timberland; reducing debt by $150,000,000; and repurchasing up to 20 percent of our common stock.

     Since announcing these initiatives, we have sold 119,000 acres of timber and timberland in Georgia, Alabama and Texas for $197,381,000 generating combined net proceeds of $191,891,000, which were principally used to reduce debt, pay taxes, reinvest in qualifying real estate and repurchase our common stock. These transactions resulted in a combined gain on sale of assets of $132,654,000. In 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000. The repurchased shares are classified as treasury stock.

     At second quarter-end 2011, assets held for sale includes 65,000 acres of undeveloped land with a carrying value of $18,024,000 and related timber with a carrying value of $7,564,000. We continue to actively market this land. Please read Note 19 for information regarding a sale of 50,000 acres of timberland subsequent to second quarter-end 2011.

     Real estate consists of:

     Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $62,030,000 at second quarter-end 2011 and $59,079,000 at year-end 2010, including $36,552,000 included in both second quarter-end 2011 and year-end 2010 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval and reimbursement. We submitted for reimbursement to these districts $2,336,000 in first six months 2011 and $1,827,000 in first six months 2010. We collected $187,000 from these districts in first six months 2011 and $183,000 in first six months 2010. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.

     Also included in entitled, developed and under development projects is our investment in the resort development owned by third parties at our Cibolo Canyons project. In second quarter 2011, we received $1,603,000 from the Special Improvement District (SID) related to hotel occupancy revenues and other revenues from resort sales collected as taxes by the SID. We currently account for these collections as a reduction of our investment. At second-quarter-end 2011, we have $40,399,000 invested in the resort development.

     Income producing properties principally represents our investment in a 401 unit multifamily property in Houston, Texas and a 413 room hotel in Austin, Texas. In addition, in second quarter 2011, we reclassified $4,555,000 in land from entitled, developed and under development projects to income producing properties as result of commencing construction on a 289 unit multifamily project in Austin, Texas. At second-quarter end 2011, our investment in this project, including land and construction in progress is $5,961,000, with an estimated additional cost to complete construction of $24,579,000.

     We recognized asset impairment charges in second quarter 2011 of $450,000 related to a residential real estate project located near Dallas, Texas and $900,000 in second quarter 2010 related to a residential real estate project located near Salt Lake City, Utah.

     Depreciation expense, primarily related to income producing properties, was $1,760,000 in first six months 2011 and $1,465,000 in first six months 2010 and is included in other operating expenses.

     We own directly or through ventures approximately 201,000 acres of timber, primarily in Georgia. The cost of timber cut and sold was $524,000 in first six months 2011 and $692,000 in first six months 2010.

     A reconciliation of changes in shareholders’ equity at second quarter-end 2011 follows:

     In first six months 2011, we issued 106,160 shares of our common stock as a result of stock option exercises and vesting of equity-settled restricted stock units.

     At second quarter-end 2011, 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 second quarter-end 2011 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 six months 2011, we invested $1,135,000 in these ventures and received $4,354,000 in distributions; in first six months 2010, we invested $1,039,000 in these ventures and received $4,883,000 in distributions. Distributions include both return of investments and distributions of earnings.

     At second quarter-end 2011, other ventures include three partnerships we participate in that have total assets of $51,504,000 and total liabilities of $82,740,000, which includes $67,532,000 of borrowings classified as current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is $2,751,000 at second quarter-end 2011. These three partnerships are variable interest entities. Please read Note 17 for additional information.

     In second quarter and first six months 2011, CL Realty’s earnings include an impairment charge of $500,000 related to a residential real estate project located in Tampa, Florida.

     In second quarter and first six months 2010, other ventures loss includes a $13,061,000 loss on sale of a golf course and country club property in Denton, Texas. This loss did not impact our equity in the earnings (loss) of this venture as we exclude losses that exceed our investment where we are not obligated to provide additional funding.

     We have provided performance bonds and letters of credit on behalf of certain ventures totaling $1,447,000 at second quarter-end 2011. Generally these performance bonds and letters of credit would be drawn on due to lack of performance by us or the ventures, such as failure to timely deliver streets and utilities in accordance with local codes and ordinances.

     Receivables consist of:

     In second quarter 2011, we acquired a non-performing loan from a financial institution for $21,137,000. The original loan commitment was $38,000,000 and the current principal balance outstanding is about $31,600,000. The loan matured in February 2010. The note is secured by a lien on 900 acres of developed and undeveloped real estate located near Houston, Texas designated for single-family residential and commercial development. We are not currently accruing interest and did not record any accretable yield at acquisition due to the non-performing status of the loan. We cannot estimate the anticipated future cash flows because the borrower is in bankruptcy.

     Notes receivable generally are secured by a deed of trust and generally due within three years.

     Receivables and accrued interest principally include miscellaneous operating receivables arising in the normal course of business.

     Debt consists of:

     Our senior credit facility and other debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At second quarter-end 2011, we were in compliance with the financial covenants of these agreements.

     On February 23, 2011, we supplemented our amended and restated senior credit facility to add a new lender to the revolving loan and to the term loan increasing the aggregate commitment by $30,000,000. We incurred fees of $270,000 related to this additional commitment. In addition, on May 6, 2011, we amended our senior secured credit facility to provide us with additional flexibility and to make certain technical and other changes. We incurred fees of $583,500 related to this amendment.

     At second quarter-end 2011, our senior credit facility provides for a $130,000,000 term loan and a $200,000,000 revolving line of credit. The term loan matures August 6, 2015, and the revolving line of credit matures August 6, 2013 (with a one-year extension option to August 6, 2014). The term loan includes a 2 percent prepayment penalty for payments in excess of $25,000,000 prior to August 6, 2011 and 1 percent prepayment penalty prior to February 6, 2012 and no prepayment penalty thereafter. The revolving line of credit may be prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $3,467,000 is outstanding at second quarter-end 2011. Total borrowings under our senior credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At second quarter-end 2011, we had $111,386,000 in net unused borrowing capacity under our senior credit facility.

     At our option, we can borrow at LIBOR plus 4.5 percent (subject to a 2 percent LIBOR floor) or prime plus 2.5 percent. Borrowings under the senior credit facility are secured by (a) all timberland and minerals, (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, to the extent permitted, and (e) negative pledge (without a mortgage) on all other wholly- owned assets. The senior credit facility provides for releases of real estate to be delivered provided that borrowing base compliance is maintained.

     At second quarter-end 2011, directly and through consolidated ventures, we have $7,419,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $1,472,000 in first six months 2011 and $2,882,000 in first six months 2010 and is included in interest expense.

     At second quarter-end 2011, a 401 unit multifamily project located in Houston, Texas with current book value of $47,337,000 is pledged as collateral for and is subject to liens in connection with a $26,500,000 loan. In second quarter 2011, we paid in full a $15,216,000 loan with borrowings from our revolving loan facility. This loan was secured by a 413 guest room hotel located in Austin, Texas.

     At second quarter-end 2011, entitled, developed and under development projects having a book value of $116,492,000 are subject to liens in connection with $53,325,000 of principally non-recourse debt.

     Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets and assets held for sale, which are measured for impairment. In second quarter 2011, a real estate asset was remeasured and reported at fair value due to events or circumstances that indicated 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 asset. As a result, we recognized asset impairment of $450,000 in second quarter 2011. The carrying value of this asset may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

     We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.

     Information about our fixed rate financial instruments not measured at fair value follows:

     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 18 for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.

     As a result of the 2007 spin-offs from Temple-Inland, at second quarter-end 2011, personnel of Temple-Inland and the other spin-off entity held 19,000 awards that will be settled in our common stock and options to purchase 1,130,000 shares of our common stock. Information about these stock options follows:

     Other comprehensive loss consists of:

     Loss attributable to common shareholders and weighted average common shares outstanding used to compute net loss per share were:

     At second quarter-end 2011 and 2010, the effect of 3,182,000 and 3,041,000 stock options, equity-settled awards and unvested shares of restricted stock were not included in the computation of diluted weighted average shares outstanding because they were anti-dilutive.

     Our effective tax rate was a 40 percent benefit in second quarter 2011 and a 37 percent benefit in first six months 2011, which includes a 2 percent non-cash charge for share-based compensation. Our effective tax rate was 6 percent in second quarter 2010 and an 18 percent benefit in first six months 2010, which included a 23 percent benefit attributable to noncontrolling interests. In addition, 2011 and 2010 effective tax rates include the effect of state income taxes, nondeductible items, noncontrolling interests and benefits of percentage depletion.

     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.

     At second quarter-end 2011, our unrecognized tax benefits totaled $7,718,000, of which $6,343,000 would affect our effective tax rate if recognized.

     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 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 former Temple-Inland paper manufacturing operation that are in remediation. We estimate the cost to complete remediation activities will be approximately $1,940,000, which is included in other accrued expenses and will likely be paid in 2011 or 2012. 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 business 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 income producing properties, primarily a hotel and a multifamily property. Mineral resources manages our oil, natural gas and water interests. Fiber resources manages our timber and recreational leases.

     Assets allocated by segment are as follows:

     We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based compensation, gain on sale of assets, interest expense and other non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements. Our revenues are derived from our U.S. operations and all of our assets are located in the U.S. In first six months 2011, no single customer accounted for more than 10 percent of our total revenues.

     Segment revenues and earnings are as follows:

     Second quarter and first six months 2011, general and administrative expense includes $2,730,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of the terms available to us in the capital markets.

     At second quarter-end 2011, we are the primary beneficiary of two VIEs that we consolidate. We have provided the majority of equity to these VIEs, which absent our contributions or advances do not have sufficient equity to fund their operations. We have the

authority to approve project budgets and the issuance of additional debt. At second quarter-end 2011, our consolidated balance sheet includes $14,704,000 in assets, principally real estate and $5,002,000 in liabilities related to these two VIEs. In first six months 2011, we contributed or advanced $2,303,000 to these VIEs. In first six months 2010, real estate assets decreased by $11,865,000, debt decreased by $13,207,000 and other liabilities increased by $1,342,000 due to lender foreclosure of a lien on property owned by one of these VIEs. In second quarter 2011, our earnings benefited from a $1,342,000 reallocation of a previously recognized loss related to foreclosure of a lien on property in the above VIE. Based on our access to new information, we determined this loss and related liability should be allocated from us to the noncontrolling financial interests as we believe the likelihood we will be subject to any potential lender liabilities is remote. We have a nominal general partner interest in this VIE and could be held responsible for certain of its liabilities.

     Also at second quarter-end 2011, we are not the primary beneficiary of three VIEs that we account for using the equity method. The unrelated managing partners oversee the day-to-day operations and guarantee some of the debt of the VIEs while we have the authority to approve project budgets and the issuance of additional debt. Although some of the debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At second quarter-end 2011, these three VIEs have total assets of $51,504,000, substantially all of which represent developed and undeveloped real estate and total liabilities of $82,740,000, which includes $67,532,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method in Note 7. At second quarter-end 2011, our investment in these three VIEs is $2,751,000 and is included in investment in unconsolidated ventures. In first six months 2011, we contributed or advanced $114,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at $36,295,000, which exceeds our investment as we have a nominal general partner interest in two of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.

     Share-based compensation expense consists of:

     Share-based compensation expense is included in:

     In second quarter and first six months 2011, the decrease in share-based compensation expense is primarily due to the impact of stock price changes on vested cash-settled awards.

     The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $654,000 in first six months 2011 and $286,000 in first six months 2010. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $9,519,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first six months 2011 or 2010.

     In first six months 2011, we withheld 64,437 shares having a value of $1,216,000 in connection with vesting of restricted stock awards and exercises of stock options. In first six months 2010, we withheld 2,601 shares having a value of $49,000 in connection with vesting of restricted stock awards and exercises of stock options. These shares are included in treasury stock and are reflected in financing activities in our consolidated statement of cash flows.

     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 generally vest over three 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 restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights 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. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.

     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 cash-settled restricted stock unit awards in first six months 2011:

     The following table summarizes the activity of cash-settled stock appreciation rights in first six months 2011:

     The fair value of awards settled in cash was $184,000 in first six months 2011 and $731,000 in first six months 2010. At second quarter-end 2011, the fair value of vested cash-settled awards is $14,296,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $10,082,000 at second quarter-end 2011 based on a quarter-end stock price of $16.43.

     Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, and beginning first quarter 2011, market-leveraged stock units (MSU), which vest after three years. The following table summarizes the activity of equity-settled awards in first six months 2011:

     In first quarter 2011, we granted 124,700 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of 187,050 shares if our stock price increases by 50 percent or more, to a low of 62,350 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.

     Unrecognized share-based compensation expense related to non-vested equity-settled awards is $2,745,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be three years.

     Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first six months 2011:

     Unrecognized share-based compensation expense related to non-vested restricted stock awards is $3,204,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be two years.

     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 stock option awards in first six months 2011:

     We estimate the fair value of stock options using the Black-Scholes option pricing model and 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. In 2011, the expected stock price volatility was based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. In 2010, 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 and historical trends.

     Unrecognized share-based compensation expense related to non-vested stock options is $3,570,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be three years.

     Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.

     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. A summary of stock option awards outstanding at second quarter-end 2011 follows:

     The intrinsic value of options exercised was $337,000 in first six months 2011 and $553,000 in first six months 2010.

     On August 5, 2011, we completed our previously announced sale of 50,000 acres of timber and timberland in Georgia and Alabama to Plum Creek Timber Company, Inc. for $75,000,000 in a cash transaction.

     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 2010 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of second quarter-end 2011, and references to acreage owned includes 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 risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:

     Other factors, including the risk factors described in Item 1A of our 2010 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.

     Our strategy is:

     In 2009, we announced our near-term strategic initiatives to enhance shareholder value by generating significant cash flow, principally from the sale of 175,000 acres of higher and better use (HBU) timberland; reducing debt by $150,000,000; and repurchasing up to 20 percent of our common stock.

     Since announcing these initiatives, we have sold 119,000 acres of timber and timberland in Georgia, Alabama and Texas for $197,381,000 generating combined net proceeds of $191,891,000, which were principally used to reduce debt, pay taxes, reinvest in qualifying real estate and repurchase our common stock. These transactions resulted in a combined gain on sale of assets of $132,654,000. In addition, in 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000. The repurchased shares are classified as treasury stock.

     At second quarter-end 2011, assets held for sale under these strategic initiatives includes 65,000 acres of undeveloped land with a carrying value of $18,024,000 and related timber with a carrying value of $7,564,000. We continue to actively market this land.

     On August 5, 2011, we completed our previously announced sale of 50,000 acres of timber and timberland in Georgia and Alabama to Plum Creek Timber Company, Inc. for $75,000,000 in a cash transaction.

     A summary of our consolidated results by business segment follows: