ST JOE Co quarterly report, Q3 FY2013

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The St. Joe Company — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. St. Joe is a Florida real estate developer and manager with land, forestry, residential and commercial development, resort, leisure and leasing operations, primarily in Northwest Florida. It reported five operating segments: residential real estate, commercial real estate, rural land, resorts, leisure and leasing, and forestry.

Financial results and condition

  • Revenue: Q3 revenue was $36.8 million, down 34% from $55.9 million. Nine-month revenue was $97.4 million, down 17% from $116.8 million.
  • Earnings: Q3 operating income was $3.4 million versus $15.4 million; net income attributable to St. Joe was $4.2 million, or $0.05 per share, versus $15.3 million, or $0.17 per share. For nine months, operating income was $2.7 million versus $11.4 million; attributable net income was $4.4 million, or $0.05 per share, versus $14.6 million, or $0.16 per share.
  • Revenue mix and changes: Real estate sales fell to $12.8 million in Q3 from $32.2 million, chiefly because the prior-year quarter included substantial rural and commercial land sales. Nine-month real estate sales fell to $27.9 million from $51.3 million for the same reason. Resorts, leisure and leasing revenue rose 15% in Q3 to $16.3 million and 16% for nine months to $42.4 million, supported by vacation rentals, room rates and food and beverage sales. Timber revenue fell 20% in Q3 and 6% for nine months, with unusually heavy rain limiting harvest volumes.
  • Margins and segments: Residential real estate segment income improved to $2.4 million in Q3 from a $0.6 million loss and to $2.6 million for nine months from a $4.9 million loss. Residential homesite gross margin was 42.9% in Q3 versus 27.1%, and 41.1% for nine months versus 31.6%. Resorts, leisure and leasing segment income rose to $3.1 million in Q3 and $5.7 million for nine months. Forestry segment income was $2.8 million in Q3 versus $3.7 million, and $10.0 million for nine months versus $9.6 million.
  • Cash flow: Nine-month operating cash flow was $13.7 million, down from $29.7 million. Investing cash outflow was $159.6 million, largely reflecting purchases of investments; financing provided $2.8 million. Cash declined by $143.1 million to $22.8 million.
  • Liquidity, assets and debt: At September 30, cash was $22.8 million and available-for-sale investments were $146.1 million, primarily U.S. Treasuries. Total assets were $667.1 million; debt was $37.8 million, versus $36.1 million at year-end 2012. Debt included $26.4 million of in-substance defeased debt and $11.4 million of Community Development District debt; total outstanding CDD assessments were $33.7 million.
  • Other financial items: Corporate debt securities were non-investment-grade and had $1.7 million of unrealized losses, which the company did not consider other-than-temporary. No real estate impairment charges were recorded in the periods presented.

Outlook, material developments and risks

  • Proposed land sale after quarter-end: On November 6, 2013, St. Joe agreed to sell approximately 382,834 acres and related assets to AgReserves for $565 million, subject to adjustments. The assets had a reported carrying amount of approximately $54 million as of October 31. St. Joe expects to retain about 184,000 acres. The transaction requires shareholder and regulatory approvals and other conditions; the filing’s September 30 financial statements do not reflect the proposed sale.
  • Sale-related contingencies: The agreement provides for a $37.5 million purchaser deposit. Under specified termination circumstances, St. Joe could owe an approximately $21 million termination fee or certain transaction expenses. Completion is not assured.
  • Capital needs and liquidity covenant: Management expected approximately $6.3 million of remaining 2013 residential development capital expenditures and a further $3.9 million cash contribution to Pier Park North. That joint venture had a $40.5 million construction loan commitment with no borrowings at September 30; St. Joe provided guarantees and covenants, including a minimum of $25 million in unencumbered, unrestricted cash or cash equivalents. Reported cash and cash equivalents were $22.8 million; the filing does not clearly reconcile that balance to covenant compliance. Management said expected cash and cash flows would cover anticipated needs and expenditures for the next 12 months.
  • Pension plan: The plan was frozen pending regulatory approvals for termination. Management expected to receive $18 million to $21 million in 2014 or 2015, but timing was uncertain, and estimated future termination-related losses of $20 million to $24 million could significantly affect earnings.
  • Legal, environmental and operating risks: The company continued to cooperate with an SEC investigation concerning, among other matters, real estate impairment practices, reporting and internal controls; it recorded no liability because loss probability and amount could not be determined. Environmental-related accruals were $1.5 million, and management said additional future costs could not be quantified. Florida real estate concentration, timber demand and the RockTenn mill, weather-related harvesting disruptions, marketable-security values and litigation are additional risks. Two shareholder derivative suits were dismissed without prejudice in 2013.
  • Guidance and controls: The filing provides no specific revenue or earnings guidance. It describes expected capital expenditures, liquidity needs and the proposed sale. Management reported disclosure controls were effective and no material changes in internal controls during the quarter.

Investor verification priorities

  1. Track shareholder and regulatory approvals, acreage adjustments, closing conditions, sale proceeds and any termination or indemnification exposure under the AgReserves agreement.
  2. Clarify compliance with the Pier Park North $25 million minimum-liquidity covenant given reported cash and cash equivalents of $22.8 million, and confirm the treatment of investments under the covenant.
  3. Assess whether operating cash generation can support planned development spending and the remaining Pier Park North contribution.
  4. Monitor pension termination approvals, timing of expected cash proceeds and the estimated $20 million to $24 million loss.
  5. Review developments in the SEC investigation, environmental matters and the valuation and credit risk of non-investment-grade corporate securities.