The St. Joe Company (NYSE: JOE) — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. St. Joe is a Florida real estate development, asset-management and operating company concentrated in Northwest Florida, with residential, hospitality, commercial leasing and sales, and forestry segments. Approximately 90% of its land holdings are within 15 miles of the Gulf of Mexico.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $110.3 million | $100.0 million |
| Operating income | $29.4 million | $3.6 million |
| Net income attributable to St. Joe | $32.4 million | $59.6 million |
| Diluted EPS | $0.52 | $0.84 |
| Operating cash flow | $41.4 million | $53.6 million |
| Capital expenditures | $45.2 million | $39.9 million |
| Cash and cash equivalents at year-end | $195.2 million | $192.1 million |
Revenue rose 10.2%, while operating income improved substantially. FY2018 included a $23.1 million one-time RiverTown impact-fee receipt, recognized as residential real estate revenue with no associated cost. Excluding that receipt, reported residential real estate revenue was $19.7 million, down 8.8% from 2017. Net income and EPS declined despite higher operating income, as investment income fell to $12.2 million from $35.4 million; 2017 also included a $9.8 million gain on the sale of the vacation-rental management business and a $33.5 million tax benefit from the Tax Act.
Segment developments included 202 homesites sold versus 174 in 2017; hospitality revenue fell to $38.8 million from $53.2 million, largely because the third-party vacation-rental management business was sold in 2017. Excluding that business’s 2017 revenue, hospitality revenue increased. Commercial leasing revenue rose to $13.7 million from $12.9 million, and the portfolio was 93% leased at year-end versus 87% a year earlier. Timber revenue decreased to $5.6 million from $6.2 million, partly reflecting Hurricane Michael’s impact on timber markets.
Operating cash flow declined year over year. Investing activities provided $44.1 million, while financing activities used $79.9 million, including $93.4 million of share repurchases. Cash, cash equivalents and restricted cash totaled $198.1 million at year-end. Management stated current liquidity and anticipated cash flows should be sufficient for expected working capital, capital expenditures, debt service and authorized repurchases over the next 12 months.
Reported debt, net was $69.4 million; separately, $176.8 million of senior notes were held by a consolidated special-purpose entity, bringing reported total debt to $246.1 million. The senior notes are nonrecourse to St. Joe, with recourse limited to specified SPE assets. Debt includes JV and other project financing; St. Joe has limited or project-related guarantees. Interest expense was $11.8 million. The filing reports no cash dividends in 2018 or 2017.
Quarterly and material period comparisons
For Q4 2018, revenue was $16.3 million, operating loss was $1.3 million, and net loss attributable to St. Joe was $66,000 (reported EPS rounded to $0.00). Q4 2017 revenue was $21.9 million, operating loss was $1.6 million, and attributable net income was $38.5 million, including the vacation-rental sale gain.
FY2018 operating income benefited from the RiverTown fee receipt; reported revenue and profit therefore do not represent recurring run-rate results. Investment income included a $3.0 million unrealized loss on preferred-stock investments and a $2.3 million credit impairment on corporate debt securities. Share repurchases reduced shares outstanding: 5.24 million shares were repurchased for $93.4 million in 2018, following 8.45 million shares for $147.4 million in 2017.
Outlook, commentary and risks
Management’s strategy is to deploy land, cash and investments to expand recurring revenue and build long-term shareholder value, particularly through commercial, residential, hospitality, industrial and multifamily development. The 2019 capital-expenditure budget was expected to exceed 2018 spending; management did not expect the full benefits of new investments during 2019. Funding could include cash, operating cash flow, short-term investments, new financing and joint ventures. No quantified revenue or earnings guidance was provided.
Plans included new residential phases and commercial and hospitality projects, many proposed as joint ventures and dependent on definitive agreements, permitting, financing and market conditions. St. Joe had approximately 684 residential homesites under contract for estimated gross proceeds of $67.9 million at closing over several years. The company cautioned that timing of projects and closings may be delayed or uncertain.
Hurricane Michael made landfall on October 10, 2018. The Bay Point and Port St. Joe marinas sustained significant damage and remained closed for long-term restoration. St. Joe recorded $7.3 million of asset-disposal losses and $7.2 million of insurance proceeds considered probable of receipt; $6.7 million was receivable at year-end, and $6.1 million was received after year-end through February 25, 2019. Insurance recovery timing and sufficiency remain uncertain. Timber assets are uninsured; the initial assessment estimated about 3% of timber assets were affected.
Key risks include concentration in Northwest Florida and exposure to real estate, tourism and local economic cycles; hurricanes and other disasters; permitting, environmental and land-use constraints; construction costs and delays; dependence on homebuilders, tenants and JV partners; investment-security valuation and credit risk; and illiquidity of land holdings. Fairholme-related entities and clients beneficially owned 43.76% of outstanding shares collectively, creating significant shareholder influence. The company disclosed a limited guarantee on Pier Park North JV debt that can become full recourse in specified circumstances. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Separate recurring operating performance from the $23.1 million RiverTown impact-fee item and other nonrecurring gains, impairments and hurricane effects.
- Track the timing and collectability of the $67.9 million of homesite contracts and any additional RiverTown impact fees.
- Confirm insurance recoveries, marina reconstruction costs and reopening timelines following Hurricane Michael.
- Assess the planned 2019 capital spending, project returns and execution risk, including projects dependent on JV agreements and approvals.
- Review the debt structure, SPE nonrecourse terms, JV guarantees, CDD obligations and remaining share-repurchase authorization.
- Monitor investment portfolio performance, credit quality and fair-value changes, as well as the effect of further share repurchases on liquidity and public float.