The St. Joe Company — Q2 2014 Form 10-Q
Business context and period: Florida real estate development and operating company, with assets concentrated in Northwest Florida. This filing covers the quarter and six months ended June 30, 2014. Results are substantially affected by two asset sales: the March sale of approximately 380,000 acres to AgReserves and the April sale of the RiverTown community to Mattamy Homes.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $68.2 million | $33.8 million | $662.3 million | $60.6 million |
| Operating income | $21.0 million | $1.6 million | $530.5 million | $(0.6) million |
| Net income attributable to St. Joe | $14.6 million | $2.7 million | $417.6 million | $0.2 million |
| Diluted EPS | $0.16 | $0.03 | $4.52 | Less than $0.01 |
| Operating cash flow | Not separately presented | Not separately presented | $340.6 million | $9.0 million |
Key drivers and margins: Six-month revenue includes $569.7 million from the AgReserves transaction and $43.6 million from RiverTown. The AgReserves sale generated $511.1 million of pretax income; RiverTown generated $26.0 million of pretax earnings. Without these transactions, six-month residential and commercial real estate sales were substantially smaller. Q2 real estate gross profit margin was 58.3%, including RiverTown; excluding that sale it was 47.2%. Resorts, leisure and leasing gross margin was 25.3% in Q2 and 17.4% for the first half, versus 19.9% in the prior-year first half. Forestry revenue fell sharply following the AgReserves sale.
Cash flow and liquidity: First-half operating cash flow was $340.6 million, primarily reflecting the land sales. Investing activities used $502.8 million, including substantial purchases of marketable securities; financing activities provided $191.2 million, principally from the special-purpose issuer’s notes and the Pier Park North construction loan. Cash and cash equivalents were $50.9 million at June 30, 2014, and available-for-sale investments were $628.5 million. Management said existing cash and expected cash flows should cover working capital, anticipated capital spending and debt service for the next 12 months.
Balance sheet and debt: Total assets were $1.341 billion and total equity was $985.2 million at June 30, 2014. Reported debt was $54.3 million, compared with $44.2 million at year-end 2013. Separately, consolidated special-purpose entities reported $177.3 million of Senior Notes; the notes are payable solely from those entities’ assets and are described as non-recourse to St. Joe. The company reported a $40.1 million net deferred tax liability, versus a $12.9 million net deferred tax asset at year-end.
Material changes and management commentary
- The AgReserves sale materially changed the company’s asset base and earnings profile. Management expects timber and rural-land sales and related forestry revenue to decline substantially; the company is more dependent on real estate and resort operations.
- Residential real estate sales, excluding RiverTown, declined year over year in the first half, primarily because fewer homesites were available in resort communities. Management cited higher prices and lot residuals as contributors to improved underlying gross margins.
- The St. Joe Club & Resorts launched in January 2014, restricting public access at certain golf and resort facilities. Management expects this strategy to support vacation rentals over time, but reported lower club revenue and margins so far.
- Pier Park North began generating leasing revenue as tenants occupied retail space. The joint venture had $22.4 million outstanding on its construction loan at quarter-end.
- Management estimated approximately $36 million of capital expenditures for the remainder of 2014, some discretionary, and approximately $70 million of federal income taxes for 2014. It also anticipated receiving $17 million to $20 million from termination of its overfunded pension plan in late 2014 or 2015, subject to regulatory approval, and expected pretax termination losses of approximately $19 million to $22 million.
Risks, contingencies and unusual items
- The SEC investigation into, among other matters, real estate impairment policies, internal controls, reporting and certain shareholders’ disclosures remained pending. The company was cooperating, had not accrued a liability, and said loss likelihood and amount could not be determined.
- The company’s real estate is concentrated in Florida and exposed to property-market cycles, demand, development approvals and costs. The company also noted seasonal effects in residential and resort operations.
- At June 30, the investment portfolio included $100.2 million in corporate debt securities from one non-investment-grade issuer. Management estimated that a hypothetical 100-basis-point interest-rate increase would reduce the market value of available-for-sale securities by about $7.2 million.
- Environmental matters and other litigation were pending. Environmental-related accruals were $0.5 million; management said outcomes were not expected to materially affect consolidated financial condition, while acknowledging a particular period’s results or cash flows could be affected.
- The Pier Park North construction loan includes company guarantees and covenants, including minimum liquidity of $25 million and minimum net worth of $350 million. The company also disclosed $13.4 million of surety bonds for infrastructure obligations.
- There was no formal earnings guidance in the filing. The company’s forward-looking statements are subject to risks, and its RiverTown impact-fee receipts—estimated at $20 million to $26 million over five years—depend on Mattamy’s development pace and future fee rates.
Important facts for investors to verify
- Separate recurring operating performance from the AgReserves and RiverTown sale gains when assessing earnings and margins.
- Track the use, return and risk profile of the enlarged investment portfolio, especially the concentrated non-investment-grade corporate holding.
- Confirm collection and timing of the RiverTown note, future impact fees, and the expected residual proceeds from the Timber Note structure.
- Monitor progress and potential costs of the SEC investigation, environmental matters and pension-plan termination.
- Assess whether post-sale cash flows and planned capital spending support management’s liquidity outlook and compliance with Pier Park North covenants.