Overview

Forestar Group Inc. is a residential and mixed-use real estate development company. As of October 5, 2017, we are a majority-owned subsidiary of D.R. Horton, Inc. ("D.R. Horton"). For a discussion of the terms of the D.R. Horton merger (the"Merger"), see "Business - D.R. Horton Merger" in Part I, Item 1 of this annual report on Form 10-K. In our core community development business we own directly or through ventures interests in 49 residential and mixed-use projects located in 11 states and 16 markets. In addition, we own interests in various other assets that have been identified as non-core that we are divesting opportunistically over time. In 2017 , we had revenues of $114.3 million and net income of $50.3 million . Unless the context otherwise requires, references to “we,” “us,” “our” and “Forestar” mean Forestar Group Inc. and its consolidated subsidiaries. Unless otherwise indicated, information is presented as of December 31, 2017 , and references to acreage owned include approximate acres owned by us and ventures regardless of our ownership interest in a venture.

For the past two years we have focused on reducing costs across our entire organization, selling non-core assets, reducing our outstanding debt and reviewing our portfolio of assets and capital allocation to maximize shareholder value. The merger with D.R. Horton provides us an opportunity to grow our core community development business by establishing a strategic relationship to supply finished lots to D.R. Horton at market prices under the Master Supply Agreement. Under the terms of the Master Supply Agreement, both companies will proactively identify land development opportunities to expand our portfolio of assets. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. As of February 23, 2018, we have acquired 13 new projects since the Merger, representing nearly 5,300 planned lots, of which approximately 35 percent are under contract to sell to D.R. Horton and a majority of these remaining lots are also expected to be sold to D.R. Horton in accordance with the Master Supply Agreement between the two companies.

2018 Strategic Initiatives

Our 2018 strategic initiatives include making significant investments in land acquisition and development to expand our community development business into a diversified national platform and finalizing non-core asset sales. On February 8, 2018, we entered into and closed on a Purchase and Sale Agreement with Starwood Land, L.P. ("Starwood") to sell 24 legacy projects for $232,000,000 . This strategic asset sale included projects owned both directly and indirectly through ventures and consisted of approximately 750 developed and under development lots, over 4,000 future undeveloped lots (including all real estate associated with the Cibolo Canyons mixed-use development), 730 unentitled acres in California, an interest in one multifamily operating property and a multifamily development site. This sale helps to further streamline our business and provide additional capital for future growth. We plan to invest the capital principally into new land development projects with goals of improving returns and enhancing value for our shareholders.

Business Segments

We manage our operations through three business segments:

Our real estate segment provided approximately 99  percent of our 2017 consolidated revenues. We are focused on maximizing real estate value through the entitlement and development of strategically located residential and mixed-use communities. We secure entitlements by delivering thoughtful plans and balanced solutions that meet the needs of communities where we operate. Residential development activities target lot sales to local, regional and national home builders who build quality products and have strong and effective marketing and sales programs. We invest in projects across the United States that possess key demographic and growth characteristics that we believe make them attractive real estate investments. In 2016, we announced that multifamily was a non-core business and we have been opportunistically divesting our multifamily assets. At year-end 2017, a multifamily site in Austin was classified within assets held for sale and we owned interests in two multifamily operating properties.

Our mineral resources segment, which is also non-core, provided one percent of our 2017 consolidated revenues. In first quarter 2017, we sold all of the remaining assets for approximately $85,700,000, which generated gains of $82,422,000 in 2017.

Our other segment, all of which is non-core, provided no  material revenues in 2017 . Historically, revenues from this segment were generated by sales of wood fiber from our land, principally in Georgia, and leasing land for recreational uses. At year-end 2017, we did not have any remaining timber holdings or recreational leases. We have non-core water interests in 1.5 million acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama that were classified as assets held for sale at year-end 2017, and 20,000 acres of groundwater leases in central Texas.

Our results of operations, including information regarding our business segments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8, Financial Statements and Supplementary Data.

Real Estate

In our real estate segment, we conduct project planning and management activities related to the acquisition, entitlement, development and sale of real estate, principally residential and mixed-use communities, which we refer to as community development. We own and manage our projects either directly or through ventures, which we may use to achieve a variety of business objectives, including more effective capital deployment, risk management, and leveraging a partner’s local market contacts and expertise.

At year-end 2017, we had 49 entitled, developed or under development projects in 11 states and 16 markets planned for residential and commercial uses. We may sell land at any point when additional time required for entitlement or investment in development will not meet our return criteria or for other strategic reasons.

A summary of our real estate projects in the entitlement process ^(a) classified as assets held for sale at year-end 2017 follows:

Products

The majority of our projects are single-family residential and mixed-use communities. In some cases, commercial land uses within a project enhance the desirability of a community by providing convenient locations for resident support services.

We develop lots for single-family homes on sites we typically purchase in the open market. We sell residential lots primarily to local, regional and national home builders. At year-end 2017, we had interests in 49 entitled, developed or under development projects in 11 states and 16 markets, comprised of land planned for approximately 11,600 residential lots and units. We sold approximately 750 developed and under development lots and over 4,000 future undeveloped lots subsequent to year-end 2017 in a strategic asset sale to Starwood.

Land designated for commercial uses is typically sold to regional and local commercial developers. We had approximately 560 acres of entitled land designated for commercial use at year-end 2017, of which approximately 254 acres were sold subsequent to year-end 2017 in a strategic asset sale to Starwood.

A summary of our projects in the development process, which includes entitled, developed and under development single-family and mixed-use projects, at year-end 2017 follows:

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A summary of our non-core multifamily operating properties at year-end 2017 follows:

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Our net investment in owned and consolidated real estate projects by state at year-end 2017 follows:

Markets

Sales of new single-family homes in December 2017, according to a joint release by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, were at a seasonally adjusted annual rate of 625,000 units. On a year over year basis, U.S. single family home sales were 14.1% higher than reported in December 2016. A total of 608,000 new home sales were reported for the year, the highest annual level reported since 2007. The number of units for sale at the end of December was 295,000, representing a supply of 5.7 months at the current sales rate. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that housing starts for December 2017 registered a seasonally adjusted annual rate of 1,192,000 units, representing an 8.2% drop from the November estimate of 1,299,000 and a 6.0% decrease from prior year. Seasonally adjusted single-family starts in December were 836,000 units, 11.8% below the revised November rate but 3.5% above prior year. For the year, total housing starts were up 2.4% to 1,202,100, compared to 1,173,800 for 2016, the highest annual rate since 2007. Seasonally adjusted housing permits, generally viewed as a precursor for housing starts, registered 1,302,000 in December 2017, 0.1% below the prior month’s revised reading but 2.8% above the December 2016 rate. Homebuilder confidence, as measured by the National Association of Homebuilders/Wells Fargo Housing Market Index, increased in December on expectations for a stronger economy and potential regulatory relief for the business community. The monthly reading of homebuilder sentiment rose 5 points to 74, the highest reading since 1999 and 5 points

higher than a year ago. On a regional basis, the three month moving averages for builders’ confidence increased in all regions with the Midwest registering the highest increase on a percentage basis, followed by the South. The S&P CoreLogic Case-Shiller National Index, which measures home price appreciation for the entire nation, reflected continued price appreciation across the country. On a year over year basis, the S&P Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. Census divisions, reported a 6.2% annual gain in November, up from 6.1% in the previous month.

  Competition

We face significant competition for the acquisition, entitlement, development and sale of real estate in our markets. Our major competitors include other landowners who market and sell undeveloped land and numerous national, regional and local developers, including home builders. In addition, our projects compete with other development projects offering similar amenities, products and/or locations. Competition also exists for investment opportunities, financing, available land, raw materials and labor, with entities that may possess greater financial, marketing and other resources than us. The presence of competition may increase the bargaining power of property owners seeking to sell. These competitive market pressures sometimes make it difficult to acquire, entitle, develop or sell land at prices that meet our return criteria. Some of our real estate competitors are well established and financially strong, may have greater financial resources than we do, or may be larger than us and/or have lower cost of capital and operating costs than we have and expect to have.

The land acquisition and development business is highly fragmented, and we are unaware of any meaningful concentration of market share by any one competitor. Enterprises of varying sizes, from individuals or small companies to large corporations, actively engage in the real estate development business. Many competitors are local, privately-owned companies. We have a few regional competitors and a few national land developer competitors in addition to national home builders that, depending on business cycles and market conditions, may enter or exit the real estate development business in some locations to develop lots on which they construct and sell homes. During periods when access to capital is restricted, participants in a weaker financial condition tend to be less active.

 Discontinued Operations

At year-end 2016, we had divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within our consolidated statements of income (loss) and consolidated balance sheets for all periods presented. In addition, in second quarter 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interests to owned mineral interests.

In third quarter 2017, we sold the common stock of Forestar Petroleum Corporation for $100,000. With the completion of this transaction we have sold all of our oil and gas working interest assets and related entities. This transaction resulted in a significant tax loss with the corresponding tax benefit reported as discontinued operations.

Mineral Resources

In first quarter 2017, we sold our remaining owned mineral assets for approximately $85,700,000. With the completion of this sale we have divested all of our owned mineral assets.

Other

At year-end 2017, we did not have any remaining timber holdings or recreational leases. We had water interests in 1.5 million acres which includes a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama, and 20,000 acres of groundwater leases in central Texas. Our nonparticipating royalty interests are classified as assets held for sale at year-end 2017. We have not received significant revenues or earnings from these interests.

Employees

At year-end 2017, we had 34 employees. None of our employees participate in collective bargaining arrangements. We believe we have a good relationship with our employees.

Environmental Regulations

Our operations are subject to federal, state and local laws, regulations and ordinances relating to protection of public health and the environment. Changes to laws and regulations may adversely affect our ability to develop real estate or withdraw groundwater, or may require us to investigate and remediate contaminated properties. Additionally, these laws may impose liability on property owners or operators for the costs of removal or remediation of hazardous or toxic substances on real property, without regard to whether the owner or operator knew, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may adversely affect the value of a property,

as well as our ability to sell the property or to borrow funds using that property as collateral. Environmental claims generally would not be covered by our insurance programs.

In 2016, we sold all but 25 acres of a 289 acre former paper manufacturing facility near Antioch, California, approximately 80 acres of which had not yet received a certificate of completion under the voluntary environmental remediation program in which we were participating. The buyer of the site assumed responsibility for environmental, remediation and monitoring activities, subject to limited exclusions, and obtained a $20,000,000 , ten year pollution legal liability insurance policy naming us as an additional insured.

D.R. Horton Merger

Merger Transaction

On June 29, 2017, we entered into an Agreement and Plan of Merger with D.R. Horton and a wholly-owned subsidiary of D.R. Horton (“Merger Sub”). At the effective time on October 5, 2017, we merged (the “Merger”) with Merger Sub and we continued as the surviving entity in the Merger. In the Merger, each existing share of our common stock issued and outstanding immediately prior to the effective time (the “Former Forestar Common Stock”) was converted into the right to receive, at the election of the holders of the shares of Former Forestar Common Stock, either an amount in cash equal to $17.75 per share (the “Cash Consideration”) or one new share of our common stock (the “New Forestar Common Stock”), subject to proration procedures applicable to oversubscription and undersubscription for the Cash Consideration as described in the Merger agreement. The aggregate amount of the Cash Consideration paid by D.R. Horton to holders of Former Forestar Common Stock in the Merger was $558,256,000, and D.R. Horton funded the payment of the Cash Consideration with cash on hand. In the Merger, 10,487,873 shares of New Forestar Common Stock (representing 25% of the outstanding shares of New Forestar Common Stock immediately after the effective time) were issued to the holders of our common stock and 31,451,063 shares of New Forestar Common Stock (representing 75% of the outstanding shares of the New Forestar Common Stock immediately after the effective time) were issued to D.R. Horton. As of October 5, 2017, we became a majority-owned subsidiary of D.R. Horton and a controlled company under New York Stock Exchange rules.

Stockholder’s Agreement

In connection with the Merger, we entered into a Stockholder’s Agreement with D.R. Horton that, among other things, provide D.R. Horton with certain board and board committee appointment rights and certain approval rights.

Additional information regarding the Stockholder’s Agreement, including a copy of the Stockholder’s Agreement, can be found in our Current Report on Form 8-K filed with the SEC on June 29, 2017.

Master Supply Agreement

In connection with the Merger, we entered into a Master Supply Agreement with D.R. Horton. The terms of the Master Supply Agreement, unless earlier terminated, continue until the earlier of (a) the date that D.R. Horton and its affiliates beneficially own less than 15% of our voting securities and (b) June 29, 2037. However, we have the right to terminate the Master Supply Agreement at any time that D.R. Horton and its affiliates beneficially own less than 25% of our voting securities.

Under the Master Supply Agreement, we will present to D.R. Horton all single-family residential lot development opportunities (subject to certain exceptions) that we desire to acquire and develop that have been approved or conditionally approved by the Forestar Investment Committee (a “Forestar Sourced Opportunity”); and D.R. Horton has the right, but not the obligation, to present us with lot development opportunities that D.R. Horton desires to acquire for development (if presented to us, a “D.R. Horton Sourced Opportunity”).

We and D.R. Horton will collaborate regarding all Forestar Sourced Opportunities and all D.R. Horton Sourced Opportunities, after considering current and future market conditions and dynamics. If we and D.R. Horton agree to pursue a Forestar Sourced Opportunity or a D.R. Horton Sourced Opportunity, such agreement will be evidenced by a mutually agreed upon written development plan prepared at the direction of the Forestar Investment Committee (a “Development Plan”), addressing, among other things, the number, size, layout and projected price of lots, phasing, timing, amenities and entitlements, and are referred to as either a “Forestar Sourced Development” or a “D.R. Horton Sourced Development”, as the case may be.

D.R. Horton or its affiliates have (a) a right of first offer (“ROFO”) to buy up to 50% of the lots in the first phase (and in any subsequent phase in which D.R. Horton purchased at least 25% of the lots in the previous phase) in each Forestar Sourced Development; and (b) the right to purchase up to 100% of the lots in each D.R. Horton Sourced Development, at the then current fair market price and terms per lot, as mutually agreed to by us and D.R. Horton. All lots in a Forestar Sourced Development in which a D.R. Horton affiliate participates as a buyer will be equitably allocated among D.R. Horton and any other builders in each phase taking into consideration the location, size and other attributes associated with the lots. The agreement evidencing the ROFO for the lots in the Forestar Sourced Development (the “ROFO Agreement”), and the purchase and sale agreement for the lots in the D.R. Horton Sourced Development (the “PSA”), will be negotiated, finalized and executed as a part of the Development Plan, and in all events the Development Plan will be finalized, and the ROFO Agreement will be negotiated, finalized and executed,

prior to the expiration of the feasibility period in any contract to acquire a Forestar Sourced Development. D.R. Horton will assign to us on an “as-is”, “where-is basis” the contract to acquire a D.R. Horton Sourced Development after the finalization of the Development Plan and PSA for such D.R. Horton Sourced Development.

Additional information regarding the Master Supply Agreement, including a copy of the Master Supply Agreement, can be found in our Current Report on Form 8-K filed with the SEC on June 29, 2017.

Shared Services Agreement

On October 6, 2017, we entered into a Shared Services Agreement with D.R. Horton pursuant to which D.R. Horton will provide us certain administrative, compliance, operational and procurement services. Additional information regarding the Shared Services Agreement, including a copy of the Shared Services Agreement, can be found in our Current Report on Form 8-K filed with the SEC on October 10, 2017.

Available Information

Forestar Group Inc. is a Delaware corporation. Our principal executive offices are located at 10700 Pecan Park Blvd., Suite 150, Austin, Texas 78750. Our telephone number is (512) 433-5200.

From our Internet website, http://www.forestargroup.com , you may obtain additional information about us including:

We will also provide printed copies of any of these documents to any stockholder free of charge upon request. In addition, the materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information about the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site ( http://www.sec.gov ) that contains reports, proxy and information statements, and other information that is filed electronically with the SEC.

Executive Officers

The names, ages and titles of our executive officers are: