The St. Joe Company — Q3 2018 Form 10-Q
Business context and period: The St. Joe Company is a real estate development, asset management and operating company concentrated in Northwest Florida. Its four segments are residential real estate, resorts and leisure, commercial leasing and sales, and forestry. This unaudited filing covers the three and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017.
Key financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $23.7 million (2017: $34.0 million) | $94.0 million (2017: $78.1 million) |
| Operating income | $1.9 million (2017: $4.8 million) | $30.7 million (2017: $5.1 million) |
| Income before taxes | $1.9 million (2017: $8.8 million) | $34.9 million (2017: $31.8 million) |
| Net income attributable to St. Joe | $5.5 million (2017: $5.9 million) | $32.4 million (2017: $21.1 million) |
| Diluted EPS | $0.09 (2017: $0.08) | $0.51 (2017: $0.29) |
Cash flow and liquidity: For the nine months, operating cash flow was $46.0 million, versus $49.4 million; investing cash flow provided $51.2 million, versus $12.6 million; and financing used $85.8 million, versus $136.8 million. Cash, cash equivalents and restricted cash ended at $203.8 million, up from $192.4 million at the start of the period. Cash and cash equivalents alone were $200.9 million. Management said available liquidity and expected cash flows should cover anticipated working capital, capital spending, debt service and authorized repurchases for the next 12 months.
Debt and equity: Balance-sheet debt, net, was $62.3 million, compared with $55.6 million at year-end; this excludes $176.7 million of Senior Notes issued by consolidated special-purpose entities. Those notes are associated with $207.3 million of SPE investments and generally are not recourse to the Company, subject to disclosed covenants and limited guarantees. Total liabilities were $336.5 million and total equity was $534.1 million. The Company repurchased 5.24 million shares for $93.4 million during the nine months and had $42.9 million of remaining repurchase authorization at September 30.
Material changes and operating drivers
- Quarterly revenue declined: Q3 revenue fell about 30%, principally reflecting the December 2017 sale of the short-term vacation rental management business and fewer residential lot sales. Excluding that exited business, resorts and leisure revenue increased, supported by hotel room revenue and club membership.
- Nine-month results included one-time items: Real estate revenue included a $23.1 million RiverTown impact-fee payment, recognized in June, with a 100% gross margin. Commercial real estate revenue also included $2.6 million from the sale of two SouthWood resort and leisure properties, including the golf course. These items materially contributed to the year-over-year increase in operating income.
- Investment income was lower: Net investment income was $12.2 million for the nine months, down from $31.1 million, mainly because 2017 included $10.8 million of realized investment gains and the Company held fewer investments. In Q3 2018, it recorded a $1.7 million credit-related impairment on corporate debt securities.
- Segment trends: Nine-month leasing revenue rose 10.7%, with the start of a long-term lease at a new manufacturing facility and additional leases. Timber revenue rose 12.8% as tons sold increased; Q3 timber revenue declined 10% as volume fell. Resorts and leisure revenue fell year over year due to the rental-management business sale, while reported gross margin improved.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management described a strategy of developing land selectively, increasing recurring revenue, and maintaining investment and cost discipline. About 650 residential lots were under contract at September 30, expected to generate approximately $65.2 million upon closings over several years; timing and completion are not assured. A Kolter agreement covers approximately 466 planned Watersound Origins homes, with lot construction expected to begin in 2019 and homes available in 2020.
- Hurricane Michael struck the Florida Panhandle on October 10, after quarter-end. Most properties had minimal or no damage, but Bay Point and Port St. Joe marinas sustained significant damage and remained closed. An initial assessment estimated damage to about 3% of timber assets, or approximately 234,000 tons. The Company was still assessing losses and insurance claims; proceeds, timing and adequacy are uncertain, and near-term marina and timber results are expected to be affected.
- Key risks include concentration of land and operations in Northwest Florida, volatile and sporadic real estate sales, development and permitting uncertainty, real estate market conditions, investment valuation and credit risk, and exposure to severe weather. Pending litigation and environmental matters had $1.3 million of accrued liabilities; management did not expect a material adverse effect on financial position or liquidity, while noting actual outcomes could affect results or cash flows.
- Q3 net income benefited from a $3.5 million income-tax benefit, primarily from reversing a valuation allowance after management reassessed the realizability of deferred tax assets. The nine-month effective tax rate was 8.0%; management expected future rates to be closer to the statutory rate.
- The Company adopted revenue-recognition guidance in 2018, including earlier recognition of estimated lot residuals and certain fees, and adopted guidance requiring equity investment fair-value changes in earnings. It expects the new lease standard, effective January 1, 2019, primarily to add operating lease right-of-use assets and liabilities to the balance sheet; income-statement impact was not expected to be material.
Important facts for investors to verify
- How much reported 2018 earnings and cash flow depend on the one-time RiverTown impact-fee payment and other real estate sales, versus recurring operations.
- Progress and closings on the approximately 650 contracted residential lots, and the timing and economics of the Kolter development.
- The extent of Hurricane Michael damage, marina restoration timeline, timber salvage or losses, and insurance recoveries.
- Credit quality and valuation of the Company’s investments, including the $1.7 million impairment and preferred-stock holdings.
- Debt, guarantees and project financing obligations, including the distinction between Company debt and consolidated SPE Senior Notes.
- Whether the released tax valuation allowance and management’s expected future tax rate remain supportable.