The St. Joe Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The interim financial statements are unaudited. St. Joe is a Florida real estate development, asset management and operating company, with operations concentrated in Northwest Florida across residential and commercial real estate, resorts and leisure, leasing, and forestry.
Financial performance
Dollar amounts below are in millions except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $33.7 | $27.2 | $77.2 | $77.0 |
| Operating income | $4.5 | $1.6 | $4.2 | $2.8 |
| Income before tax | $8.8 | $3.6 | $31.8 | $18.0 |
| Net income attributable to St. Joe | $5.9 | $2.7 | $21.1 | $13.2 |
| Diluted earnings per share | $0.08 | $0.04 | $0.29 | $0.18 |
- Q3 revenue rose about 24%, led by real estate revenue, while nine-month revenue was essentially flat. Operating margin was about 13.2% in Q3 versus 5.9%; for nine months it was about 5.5% versus 3.7%.
- Q3 real estate revenue increased to $10.7 million from $4.2 million, including 88 residential lot sales versus 34. Nine-month residential real estate gross margin fell to 46.1% from 63.5%, in part because 2016 included a high-margin $3.4 million unimproved land sale.
- Resorts and leisure revenue declined 4.2% in both the quarter and nine-month period as the company reduced vacation-rental inventory to emphasize higher-yielding homes. Segment gross margin improved to 20.3% for Q3 and 16.2% for nine months, supported by club membership revenue and expense control.
- Nine-month leasing revenue increased 6.8%, primarily reflecting two office buildings acquired in April and new leases. Leasing space was approximately 85% leased at quarter-end. Timber revenue increased 7.5% for nine months as higher sales volume offset lower average prices.
Cash flow, liquidity and debt
- Cash and cash equivalents were $166.8 million at September 30, 2017, down from $241.1 million at December 31, 2016. Available-for-sale investments totaled $145.2 million; restricted investments were $4.5 million. Cash equivalents included $141.6 million of commercial paper.
- Nine-month operating cash flow was $49.8 million, compared with $10.6 million a year earlier. The 2017 amount included $26.7 million of federal tax refunds, including a $21.9 million refund related to a prior-year carryback.
- Investing activities provided $12.6 million, mainly reflecting $144.3 million of investment sales and $104.0 million of purchases. Financing activities used $136.8 million, principally for $136.0 million of share repurchases. Cash decreased $74.3 million over the period.
- Reported debt was $55.7 million, compared with $55.0 million at year-end. Separately, the balance sheet included $176.5 million of senior notes issued by a consolidated special-purpose entity; related SPE investments were $207.9 million. The senior notes are due 2029 and bear a 4.8% coupon. Total liabilities were $352.9 million.
- St. Joe repurchased 7.8 million shares for $136.0 million in the first nine months, at an average $17.42 per share. At September 30, $147.7 million remained authorized for repurchases.
Material changes, outlook and risks
- Nine-month investment income rose to $31.1 million from $10.4 million, including $10.8 million of realized investment gains and higher interest and dividend income. Other income included a $3.5 million insurance recovery of legal costs. By contrast, the 2016 comparison included $12.5 million of Deepwater Horizon claim-settlement income.
- Management stated that cash, investments and anticipated operating cash flows should be sufficient for expected working capital, capital expenditures, debt service and authorized repurchases over the next 12 months. This is management’s outlook, not a guarantee.
- Remaining expected 2017 capital expenditures were $16.6 million, of which management said a portion was discretionary. The company expected limited commercial real estate sales activity for the remainder of 2017 and expected construction of its 240-unit Pier Park Crossings apartment project to begin in Q1 2018. No earnings or revenue guidance was provided.
- Investment risk is notable: the portfolio included $101.5 million of non-investment-grade corporate debt and $33.7 million of non-investment-grade preferred stock. A hypothetical 100-basis-point rate increase was estimated to reduce available-for-sale investment market value by about $3.6 million. The filing also describes investment-adviser and board affiliations, including securities linked to Sears Holdings.
- Other risks include the concentration of real estate in Northwest Florida, volatile and transaction-dependent land sales, development and entitlement uncertainty, exposure to weather and natural disasters, and environmental matters. Litigation and environmental proceedings were not expected by management to materially harm consolidated financial position or liquidity, but an adverse outcome could affect a particular period. Accrued liabilities for the described and other litigation matters were $1.2 million; some environmental exposure could not be reasonably quantified.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus investment gains, the insurance recovery, and the prior-year claim-settlement comparison.
- The credit quality, concentration, valuation and potential related-party conflicts in the investment portfolio, particularly non-investment-grade holdings.
- Whether operating cash flow remains adequate after excluding the $26.7 million tax refunds, and how planned capital spending and further buybacks affect liquidity.
- Progress and returns from leasing acquisitions, the Pier Park Crossings apartment development, and other development projects; also monitor occupancy and residential lot-sale margins.
- Potential obligations under debt guarantees, community development district debt, surety bonds, letters of credit, litigation and environmental contingencies.