The St. Joe Company — Q2 2016 Form 10-Q
Business context and reporting period. St. Joe is a real estate development, asset management and operating company focused primarily in Northwest Florida. Its businesses are residential and commercial real estate, resorts and leisure, leasing, and forestry. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $29.6 | $37.8 | $49.8 | $54.9 |
| Operating income | $2.1 | $5.8 | $1.2 | $0.1 |
| Income (loss) attributable to St. Joe | $1.8 | $(0.2) | $10.5 | $(2.0) |
| EPS, basic and diluted | $0.02 | $(0.00) | $0.14 | $(0.02) |
| Operating cash flow | Not separately reported | Not separately reported | $11.9 | $38.0 |
Q2 operating margin was approximately 7.3%, versus 15.4% a year earlier; first-half operating margin was approximately 2.5%, versus 0.2%. First-half net income included a $12.5 million present-value gain from the BP oil-spill settlement. The prior-year comparison included $7.4 million of SEC-investigation expenses, resolved in October 2015.
- Revenue mix and margins: Q2 resorts and leisure revenue was $19.8 million, up 2.5%; real estate sales were $6.7 million, down from $14.0 million; timber sales were $0.7 million, down from $2.3 million. First-half real estate sales gross margin was 65.9%, versus 50.3%, lifted in part by a $3.4 million unimproved land sale with $3.3 million gross profit. Resorts and leisure gross margin fell to 12.3% from 13.3% for the half year.
- Cash and investments: At June 30, cash and cash equivalents were $183.5 million, down from $212.8 million at year-end; investments were $216.3 million and restricted investments $5.7 million. Cash equivalents included $139.1 million of commercial paper. Management considers available-for-sale securities, particularly Treasuries, a source of liquidity.
- Cash flows: First-half operating cash flow was $11.9 million, compared with $38.0 million. Investing activities used $25.9 million, versus providing $261.2 million in 2015; financing activities used $15.2 million, including $14.8 million of share repurchases. Cash declined $29.3 million during the half.
- Debt and balance sheet: Reported debt was $54.2 million, including the Pier Park North loan and Community Development District (CDD) debt. The consolidated balance sheet also included $176.2 million of senior notes issued by a special-purpose entity, alongside $208.5 million of related special-purpose-entity investments. Total assets were $984.4 million, total liabilities $315.6 million, and total equity $668.8 million. CDD assessments outstanding were $22.1 million; the recorded CDD debt was $6.7 million.
Material changes versus the prior period
- Q2 revenue declined $8.3 million, primarily reflecting no commercial real estate sale in 2016 versus $4.7 million in 2015 and lower rural land and timber sales. First-half revenue fell $5.1 million.
- Residential real estate sales rose in both periods; the first-half increase included the high-margin unimproved land sale. Resorts and leasing revenues also increased, while timber sales declined with lower volumes.
- Investment income fell to $5.7 million for the first half from $10.7 million, mainly because the average available-for-sale investment balance was lower. Interest expense increased to $6.2 million from $5.5 million, primarily due to the Pier Park North refinanced loan.
- First-half earnings turned positive, largely due to the BP settlement and the absence of the prior-year SEC-investigation expense; operating income remained modest.
Outlook, risks and unusual items
- Management gave no numerical earnings or revenue guidance. It expected limited commercial real estate sales activity in the second half of 2016 and estimated $21.4 million of remaining 2016 capital expenditures; some spending is discretionary. Management said available liquidity and anticipated cash flows should cover working capital, planned capital expenditures, and debt service for the next 12 months.
- The $13.2 million BP settlement is payable in installments: $5.0 million in October 2016 and $2.7 million annually in October 2017–2019. The company recorded a $12.5 million present-value receivable and recognized that amount as income in the first half.
- Key business risks include Northwest Florida real estate concentration, cyclical and transaction-dependent land sales, uncertain development demand and entitlements, operating-cost pressures, and variable timber volumes. The company’s extensive Bay-Walton Sector Plan entitlements are long-term development potential, not assured future sales or returns.
- Pending litigation and environmental matters were not expected by management to materially harm financial position or liquidity, but adverse outcomes could materially affect results or cash flows in a period. Accrued liabilities for disclosed and other litigation matters were $2.4 million. Management could not quantify future rehabilitation costs for certain neighboring properties near its former paper mill site.
- The Pier Park North loan carries a limited guarantee that can become full recourse in specified circumstances; the company also backs a $6.6 million letter of credit for the joint venture. A hypothetical 100-basis-point rise in interest rates would reduce the market value of available-for-sale securities by about $4.3 million; non-investment-grade holdings and issuer concentration add investment risk.
- Fairholme-managed funds beneficially owned approximately 32.9% of common stock; Fairholme’s managing member is also the company’s board chairman. The company disclosed $8.5 million of Sears-related corporate debt securities and $0.2 million of Sears-related preferred stock.
Important facts for investors to verify
- How much reported first-half profitability is repeatable without the BP settlement, and how operating performance develops after the unusual comparison items.
- Whether real estate sales, resort margins, leasing growth, and timber volumes support management’s outlook and planned discretionary capital spending.
- The liquidity, credit quality, and concentration risks in cash equivalents and investment holdings, including the disclosed Sears exposure and non-investment-grade securities.
- The terms and potential exposure under Pier Park North guarantees, CDD assessments, and the special-purpose-entity senior notes and related investments.
- Developments in environmental matters, litigation, and the timing and collectability of settlement and other receivables.