The St. Joe Company: FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; the company also reports fourth-quarter results below. St. Joe is a Florida real estate development, asset management and operating company, with assets concentrated in Northwest Florida across residential real estate, resorts and leisure, commercial leasing and sales, and forestry.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $98.8 million | $95.7 million |
| Operating income | $2.3 million | $2.0 million |
| Net income attributable to St. Joe | $59.6 million | $15.9 million |
| EPS, basic and diluted | $0.84 | $0.21 |
| Cash from operating activities | $55.8 million | $12.9 million |
| Cash and cash equivalents | $192.1 million | $241.1 million |
| Investments, excluding restricted investments and SPE assets | $111.3 million | $175.7 million |
| Total debt, including SPE senior notes | $232.2 million | $231.4 million |
Revenue rose 3.2%. Operating margin remained low, approximately 2.4%, versus 2.0% in 2016. Net income included a $33.5 million tax benefit from remeasuring deferred taxes after federal tax reform, $10.7 million of realized investment gains (partly offset by $2.3 million of investment impairments), and a $9.8 million gain on selling the vacation-rental management business. The reported profit increase therefore substantially exceeded the improvement in operating income.
Operating cash flow increased, including $26.7 million of federal tax refunds. Investing activities provided $44.5 million, while financing activities used $149.2 million, mainly for $147.4 million of share repurchases. The company repurchased 8.45 million shares during 2017. Ordinary debt was $55.6 million; the additional $176.5 million of senior notes is held by a consolidated special-purpose entity and is non-recourse to St. Joe, with recourse limited to specified SPE assets. The Pier Park North loan carries a limited guarantee with potential full-recourse triggers.
Changes and segment developments
- Residential real estate revenue increased to $27.7 million from $23.4 million, but gross profit fell to $12.3 million from $15.4 million, reflecting higher costs and a less favorable sales mix. The company sold 174 homesites and three homes, versus 106 homesites in 2016.
- Resorts and leisure revenue declined 4.3% to $54.8 million; gross profit was nearly flat at $7.0 million. Reduced third-party vacation-rental inventory preceded the December 2017 sale of that management business.
- Leasing revenue increased to $10.6 million from $9.8 million, primarily reflecting two office buildings acquired in April 2017 and new leases. Rentable commercial space grew 35% to approximately 814,000 square feet, 87% leased.
- Timber revenue rose to $5.6 million from $5.2 million as volume increased to 364,000 tons, although average price per ton fell.
- Commercial real estate and leasing operations were combined into a single reporting segment in Q4; prior segment data was reclassified, with no effect on consolidated results.
For Q4 2017, revenue was $21.6 million versus $18.7 million in Q4 2016; operating loss was $1.9 million versus $0.9 million. Net income attributable to St. Joe was $38.5 million versus $2.7 million, primarily reflecting non-operating and tax items rather than quarterly operating performance.
Outlook, risks and unusual items
Management budgeted 2018 capital expenditures of $129.6 million, including $82.7 million for commercial leasing and sales, $36.2 million for residential projects, $9.2 million for resorts and leisure, and $1.5 million for forestry and corporate needs. It expects funding from financing, cash, short-term investments and operating cash flow, and cautions that the full benefits are not expected in 2018. Priorities include expanding recurring-revenue commercial properties, investing selectively in residential communities and resort assets, and pursuing infrastructure initiatives and partnerships. The company harvested 364,000 tons in 2017 and anticipated approximately 330,000 tons in 2018.
Management said available liquidity and expected cash flows should cover anticipated working capital, capital spending, debt service and authorized repurchases for the next 12 months. Key risks include real estate demand and sales volatility, Northwest Florida economic concentration, entitlement and environmental approval delays, hurricanes and other natural disasters, competition, investment-portfolio credit and market risk, and reliance on partners and service providers. The portfolio included non-investment-grade corporate debt and preferred securities; a 100-basis-point rate increase was estimated to reduce available-for-sale securities’ market value by about $2.9 million. Environmental and other litigation contingencies were accrued at $1.3 million; management could not estimate certain future environmental remediation costs.
Other notable items: the BP Deepwater Horizon settlement had $2.7 million payments due in October 2018 and 2019. The company estimated $20 million to $26 million of RiverTown impact fees over five years, mostly expected near April 2019, but actual amounts depend on factors outside its control. Fairholme and related parties collectively beneficially owned approximately 43.95% of outstanding shares at year-end. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile reported earnings to recurring operating performance, especially the tax benefit, investment gains and vacation-rental sale gain.
- Assess the composition, credit quality, liquidity and subsequent performance of cash equivalents and investment securities.
- Track execution, funding and expected returns on the $129.6 million 2018 capital budget, particularly commercial projects.
- Review debt and guarantee terms, including Pier Park North recourse triggers, SPE non-recourse limitations and total CDD obligations.
- Verify leasing occupancy and rent growth, residential lot sales and margins, and the timing and collectability of RiverTown impact fees and BP settlement installments.
- Monitor entitlement, environmental, hurricane-insurance and litigation exposures, as well as Fairholme’s influence over corporate decisions.