The St. Joe Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. St. Joe is a real estate development and operating company concentrated in Northwest Florida, with residential and commercial real estate, resorts and leisure, leasing, and forestry segments.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $37.8 million | $68.2 million | $54.9 million | $662.3 million |
| Operating income | $5.8 million | $21.0 million | $0.1 million | $530.5 million |
| Net income (loss) attributable to St. Joe | $(0.2) million | $14.6 million | $(2.0) million | $417.6 million |
| Basic and diluted earnings (loss) per share | $0.00, rounded | $0.16 | $(0.02) | $4.52 |
| Cash provided by operating activities | Not reported separately for the quarter | Not reported separately for the quarter | $38.0 million | $340.6 million |
Q2 resorts and leisure revenue rose 17% to $19.3 million, with gross margin increasing to 23.8% from 20.6%. Leasing revenue grew 29% to $2.2 million. Six-month resorts and leisure gross margin was 13.3%, up from 11.9%; leasing gross margin was 69.0%, unchanged.
At June 30, cash and cash equivalents were $338.0 million, including $256.8 million of commercial paper; investments were $375.5 million. Total assets were $1.319 billion and equity was $979.8 million. Reported debt was $68.3 million, including $36.1 million outstanding on the Pier Park North construction loan. Separately, the balance sheet included $177.4 million of Senior Notes issued by a consolidated special-purpose entity; the filing states these are non-recourse to the Company.
For the six months, investing activities provided $261.2 million, primarily reflecting investment maturities and sales net of purchases. Cash increased by $303.5 million to $338.0 million. Management said cash, short-term investments, operating cash flow, and available construction-loan capacity were expected to cover anticipated working capital, capital spending, and debt service for the next 12 months.
Changes versus the prior comparable period
- Comparisons are heavily affected by 2014 asset sales: the AgReserves timberland sale generated $511.1 million of pretax income, and the RiverTown sale generated $26.0 million. Six-month 2014 revenue included $569.7 million from AgReserves and $43.6 million from RiverTown; neither sale recurred in 2015.
- Excluding those transactions, 2015 revenue was supported by growth in resorts and leisure and leasing, while residential home-site sales were broadly lower. Commercial real estate sales were $4.7 million in the first half, versus $3.4 million in the prior-year period.
- Investment income increased to $10.7 million for the first half from $4.2 million, reflecting larger investment balances and interest income associated with the AgReserves financing structure. Interest expense rose to $5.5 million from $2.9 million.
- Six-month operating cash flow fell to $38.0 million from $340.6 million, principally because of the prior-year asset-sale proceeds and related transactions. The RiverTown note was repaid in June 2015, generating $19.6 million of cash receipts.
- The Company presented leasing operations as a separate reportable segment in 2015 and reclassified prior-period segment information; this did not change consolidated results.
Outlook, risks, contingencies, and unusual items
- Capital spending and strategy: Remaining 2015 capital expenditures were estimated at $25.6 million, including $11.8 million for mixed-use and active adult communities. Some spending was discretionary and dependent on expected risk-adjusted returns. The Bay-Walton County Sector Plan was adopted and found compliant with state law in June 2015; planning for proposed communities continued. The filing gives no earnings or revenue guidance.
- SEC investigation: The Company received a Wells Notice in January 2015 concerning historical accounting, disclosure, and real estate valuations, principally for 2010, 2009, and earlier periods. It was discussing a possible settlement with SEC staff, subject to Commission approval. It accrued and expensed $7.4 million in Q2 and the first half: $3.5 million for a potential settlement and $3.9 million for legal costs following insurer correspondence. A Wells Notice is not a formal finding of wrongdoing.
- Investment and deployment risk: Management intended to seek higher-return uses for substantial liquid assets, potentially including longer-term or illiquid real estate-related investments. The portfolio included $103.9 million of non-investment-grade corporate debt from one issuer and $12.0 million of non-investment-grade preferred stock from one issuer. A 100-basis-point rise in rates was estimated to reduce available-for-sale securities’ market value by about $6.4 million.
- Debt, guarantees, and deferred obligations: The Pier Park North loan matures in February 2016, with a possible two-year extension. St. Joe provided completion, limited principal repayment, and other guarantees, and agreed to minimum liquidity of $25 million and net worth of $350 million. Deferred tax liabilities from installment-sale transactions include $61.8 million due in 2022–2024 and $69.3 million due in 2029.
- Other contingencies: The Company estimated possible RiverTown impact-fee receipts of $20 million–$26 million over five years, but recorded no receivable and could not assure the amount or timing. It also disclosed environmental matters, other litigation, and uncertainty about future rehabilitation costs at a former paper mill site.
- Operating variability: Resort revenue is seasonal; homebuilder purchases can be sporadic, and real estate sales depend on project-specific demand. Management cautioned that the shift toward primary-community home sites and reduced future rural-land sales could affect real estate gross margins. The Company reported no impairment charges for the periods presented.
Most important facts for investors to verify
- Developments and potential costs of the SEC investigation, including settlement approval and insurance coverage for legal expenses.
- How management deploys the large cash and securities portfolio, and the credit, concentration, and liquidity risks of those investments.
- Pier Park North construction progress, refinancing or extension of its loan, guarantee exposure, and compliance with liquidity and net-worth covenants.
- Actual timing and amount of RiverTown impact-fee receipts, and whether proposed mixed-use and active adult projects secure needed entitlements and deliver acceptable returns.
- Underlying operating trends apart from the 2014 asset-sale gains, especially home-site sales, resort profitability, and forestry results after the AgReserves sale.