The St. Joe Company — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. St. Joe is a real estate development, asset management and operating company concentrated in Northwest Florida, with residential and commercial real estate, resorts and leisure, leasing, and forestry businesses.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $27.2 million | $27.8 million | $77.0 million | $82.8 million |
| Operating income (loss) | $1.6 million | ($2.4 million) | $2.8 million | ($2.3 million) |
| Net income attributable to St. Joe | $2.7 million | $2.8 million | $13.2 million | $0.8 million |
| Basic and diluted EPS | $0.04 | $0.03 | $0.18 | $0.01 |
| Operating cash flow | Not separately stated | Not separately stated | $10.6 million | $35.6 million |
Operating margins were approximately 5.9% for Q3 and 3.7% for the nine-month period, compared with negative 8.6% and negative 2.7%, respectively, in 2015. Nine-month net income included a $12.5 million BP oil-spill settlement gain. Investment income declined to $10.4 million from $19.8 million for the nine months, including the absence of $5.3 million in realized investment gains recorded in 2015. The prior-year period included $7.9 million of SEC investigation expenses; the investigation was resolved in October 2015.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $165.3 million, investments were $236.7 million, and restricted investments were $5.6 million. Cash and cash equivalents included $139.5 million of commercial paper. Available-for-sale investments included $99.7 million of Treasuries, $113.7 million of corporate debt securities and $23.2 million of preferred stock.
- Total assets were $986.4 million; total liabilities were $313.3 million; and total equity was $673.2 million.
- Reported debt was $54.2 million, including the Pier Park North loan and Community Development District debt. Separately, the consolidated special-purpose entity had $176.3 million of Senior Notes, supported by related SPE investments. The filing describes limited recourse and guarantees for certain joint-venture obligations.
- Management stated that cash, short-term investments and anticipated operating cash flows were expected to cover working capital, planned capital spending, and debt service for the next 12 months.
- Operating cash flow was $10.6 million, down from $35.6 million, primarily because the 2015 period included $19.6 million received on the RiverTown note. Cash decreased by $47.5 million during the first nine months, ending at $165.3 million.
Material changes and operating drivers
- Nine-month revenue fell 7.0% year over year, largely reflecting lower rural-land and timber sales. Resorts and leasing revenue increased, while residential revenue rose overall but included a $3.4 million unimproved-land sale.
- Q3 resorts and leisure revenue increased 2.7%, but gross margin declined to 18.9% from 20.5%; management cited higher vacation-rental costs and contract labor. Nine-month margin declined to 15.1% from 16.4%.
- Timber revenue declined 33.3% for the nine months as tons sold fell to 229,000 from 338,000. Leasing revenue increased 8.8%, supported by new Pier Park North store openings and other leases.
- Other operating and corporate expenses fell 28.3% for the nine months, primarily due to lower personnel costs, professional fees and other expenses.
- St. Joe repurchased 995,650 shares for $14.8 million during the nine months at an average $14.88 per share; $190.9 million of program authorization remained. It also retired 17,998,658 treasury shares in July.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management noted that results can be volatile due to seasonal resort demand, sporadic homebuilder purchases, one-off land transactions, and changing property-sale mix. Resorts revenue is typically higher in the second and third quarters.
- Effective November 1, 2016, the Fairholme investment-management guidelines were amended: the minimum cash and cash-equivalent allocation fell from 50% to 25%; common-equity investments were permitted subject to issuer, portfolio and ownership limits. Fairholme-managed funds owned approximately 32.3% of St. Joe, and Fairholme-affiliated directors include the board chairman.
- Investment risk is significant: the portfolio included non-investment-grade corporate debt and preferred stock. A hypothetical 100-basis-point rise in interest rates was estimated to reduce available-for-sale securities’ market value by approximately $6.3 million. Management considered $0.7 million of unrealized losses temporary at quarter-end.
- The BP settlement receivable was $12.7 million at September 30; the company received the first $5.0 million installment on October 3, with further scheduled payments of $2.7 million in each of October 2017, 2018 and 2019.
- Accrued litigation-related liabilities were $2.3 million. Environmental rehabilitation obligations remain under assessment for neighboring properties near the former paper mill site; management could not quantify future costs above existing accruals or provide a reasonably estimable range. The company cautioned that adverse outcomes could affect a particular period’s results or cash flows.
- Remaining budgeted 2016 capital expenditures were estimated at $11.6 million, some of which management said was discretionary. The Pier Park North loan guarantee may become fully recourse under specified circumstances.
Important facts for investors to verify
- How much of reported nine-month earnings reflects the BP settlement and other nonrecurring items, and what recurring operating profitability looks like.
- The credit quality, concentration and fair-value sensitivity of the investment portfolio, including the effect of the amended investment mandate and related-party governance.
- Cash conversion and operating cash flow after accounting for the RiverTown comparison, capital spending and share repurchases.
- Progress in leasing occupancy and resort margins, and the pace and mix of residential, commercial and timber sales.
- Potential environmental, litigation, CDD assessment and joint-venture guarantee exposures, including whether costs or payment schedules change.