The St. Joe Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. St. Joe is a real estate development, asset management and operating company concentrated in Northwest Florida, with residential real estate, resorts and leisure, commercial leasing and sales, and forestry segments.
Financial highlights
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $50.4 million | $30.6 million | $70.3 million | $44.2 million |
| Operating income | $29.3 million | $4.9 million | $28.8 million | $0.3 million |
| Net income attributable to St. Joe | $26.2 million | $10.8 million | $27.0 million | $15.1 million |
| EPS, basic and diluted | $0.41 | $0.15 | $0.42 | $0.21 |
- Q2 revenue rose about 65%; six-month revenue rose about 59%. Q2 operating margin was approximately 58%, compared with 16% a year earlier, with the increase substantially affected by a one-time $23.1 million RiverTown impact-fee payment.
- For the first half, operating cash flow was $37.5 million, down from $45.6 million. Investing activities provided $56.0 million, largely reflecting net investment sales and $5.0 million in asset-disposition proceeds. Financing activities used $67.9 million, mainly for share repurchases.
- Cash and cash equivalents were $215.1 million at June 30, versus $192.1 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $218.0 million.
- Reported debt, net of discounts and issuance costs, was $59.2 million, up from $55.6 million at year-end. The balance sheet also includes $176.7 million of Senior Notes held by a consolidated special purpose entity, associated with assets held by that entity. Total liabilities were $334.2 million.
- Stockholders’ equity was $533.7 million, versus $577.6 million at year-end, including $72.5 million of first-half share repurchases. The company repurchased 4.1 million shares at an average $17.82; $63.8 million remained authorized at June 30. It bought an additional 550,141 shares for $9.9 million through July 30.
Material changes and segment performance
- Residential real estate: Reported segment revenue was $28.8 million in Q2, including the $23.1 million RiverTown payment. Excluding that payment, residential activity benefited from homesite sales; 37 lots were sold in Q2 versus 32. First-half homesite sales were 143 versus 34, but residential homesite gross margin fell to 47.0% from 62.0%, reflecting sales mix.
- Resorts and leisure: Revenue fell 31% in Q2 and 25% in the first half, principally because the company sold its third-party short-term vacation rental management business in December 2017. Management said revenue excluding that prior-year business increased, while gross margin improved to 26.3% in Q2 from 22.8% and to 18.8% for the first half from 13.5%.
- Commercial leasing and sales: Leasing revenue grew 11% in Q2 and 13% in the first half, supported by a newly leased manufacturing facility and other leasing activity. Commercial real estate sales revenue was lower than the prior-year comparison. The portfolio was approximately 809,000 rentable square feet and 89% leased at June 30.
- Forestry: Q2 timber revenue increased 46%, with volumes sold rising to 112,000 tons from 83,000; first-half volumes were 214,000 versus 159,000 tons.
- Investment income: Net investment income declined to $6.0 million in Q2 from $14.3 million and to $9.6 million for the first half from $24.7 million. Prior-year results included realized investment gains of $7.7 million in Q2 and $10.9 million in the first half. First-half 2018 included a $1.1 million realized loss; adoption of new accounting rules also moved equity-security fair-value changes into earnings.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said cash, short-term investments and operating cash generation should cover anticipated working capital, debt service, capital expenditures and authorized repurchases for the next 12 months.
- The 2018 capital expenditure budget was $129.6 million, with $113.0 million remaining at June 30. Management said some spending may shift to 2019 and some is discretionary, dependent on expected risk-adjusted returns.
- Management’s strategy emphasizes developing Northwest Florida land, growing recurring leasing and resort revenue, and maintaining liquidity while considering real estate investments and share repurchases. The filing notes that results can be volatile because builder lot purchases and property sales are irregular, and resort activity is seasonal.
- Key risks include geographic concentration, real estate market and demand cycles, hurricanes and other severe weather, entitlement and construction-financing availability, investment-value and credit risk, and execution of development and joint-venture projects. Cash deposits exceeded FDIC insurance limits; the company also held non-investment-grade corporate debt and preferred securities.
- Pending litigation and other matters were described as not expected to materially harm financial position or liquidity based on current knowledge; accrued liabilities were $1.3 million. Environmental assessments are ongoing, and management could not quantify potential future costs above existing accruals or provide a reasonably estimable loss range. Surety bonds were $8.2 million and standby letters of credit were less than $0.1 million.
- Other notable items include a new HUD-insured $36.6 million apartment-construction loan, of which $5.0 million was drawn by June 30, and a July 2018 sale of the SouthWood golf course. The filing reports no material changes to previously disclosed risk factors and says disclosure controls were effective.
Investor verification priorities
- Verify the sustainability and timing of RiverTown impact-fee receipts; the $23.1 million Q2 payment was a one-time item, and further amounts depend on future development and county fee schedules.
- Reconcile reported profit and operating cash flow to nonrecurring real estate receipts, investment gains or losses, and working-capital movements.
- Review the share-repurchase pace, remaining authorization, resulting reduction in public float, and cash available after the stated capital budget.
- Assess total debt and guarantees across consolidated ventures, including the SPE Senior Notes, CDD obligations, construction loans, and contingent recourse provisions.
- Track leasing occupancy, apartment construction and financing, resort performance after the vacation-rental business sale, and exposure to local economic and weather conditions.