The St. Joe Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. St. Joe is a real estate development, asset management and operating company with assets concentrated in Northwest Florida. Its five reportable segments are residential real estate, commercial real estate, resorts and leisure, leasing, and forestry.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $20.3 | $17.1 |
| Operating loss | $(0.9) | $(5.7) |
| Income (loss) before tax | $11.8 | $(2.8) |
| Net income (loss) attributable to St. Joe | $8.7 | $(1.7) |
| Basic and diluted EPS | $0.12 | $(0.02) |
| Cash provided by operating activities | $4.4 | $1.1 |
- Revenue rose about 18.5%. Operating loss narrowed, but Q1 2016 net income chiefly reflects a $12.5 million BP Deepwater Horizon settlement gain.
- Real estate sales were $7.1 million versus $5.4 million; gross profit increased to $5.3 million from $2.3 million. A $3.4 million unimproved-land sale generated $3.3 million gross profit. Residential sales were also affected by the mix of homesites sold.
- Resorts and leisure revenue rose 11.5% to $8.8 million, while the segment still recorded a $0.6 million gross deficit; seasonality contributes to first-quarter losses. Leasing revenue rose 14.3% to $2.4 million, primarily from new Pier Park North stores. Timber revenue rose 16.7% to $2.1 million as tons sold increased to 106,000 from 96,000.
- Investment income fell to $2.7 million from $5.2 million, mainly because income from available-for-sale securities declined. Interest expense was $3.0 million versus $2.9 million. The effective tax rate was 27.2%, compared with a tax benefit in Q1 2015.
Balance sheet, liquidity and cash flows
- At March 31, 2016, cash and cash equivalents were $201.3 million, investments were $193.5 million, and restricted investments were $5.7 million. Cash was down from $212.8 million at year-end 2015.
- Total assets were $979.0 million; total equity was $667.1 million. Investment in real estate, net, was $311.7 million.
- Reported debt was $54.6 million, including the Pier Park North loan and Community Development District debt. Separately, the consolidated balance sheet includes $176.1 million of Senior Notes held by a special purpose entity. Those notes relate to a special purpose financing structure backed by associated assets; the filing describes limits on recourse, subject to specified guarantees and covenants.
- Operating cash flow was $4.4 million. Investing activities used $1.0 million, versus $251.9 million provided in Q1 2015, when investment maturities and sales generated substantial proceeds. Financing activities used $14.9 million, mainly for share repurchases. Cash declined by $11.4 million during the quarter.
- Management said available cash, investments and expected operating cash flows should cover anticipated working capital, capital spending and debt service for the next 12 months. Remaining 2016 capital expenditures were estimated at $21.3 million, some of which was discretionary.
Material changes, outlook and risks
- BP settlement: The company agreed to release Deepwater Horizon-related claims for $13.2 million, with $12.5 million recorded as a receivable and other income after discounting. Payments are scheduled as $5.0 million in October 2016 and $2.7 million annually in October 2017, 2018 and 2019; BP North America provided a payment guaranty. A large portion is intended to reimburse expenses.
- Share repurchases: St. Joe repurchased 995,650 shares for $14.8 million at an average $14.88 per share. $190.9 million remained authorized at March 31; future repurchases may be started, suspended or changed at the board’s discretion.
- Outlook: No specific earnings or revenue guidance is provided. Management expected limited commercial real estate sales activity in the second half of 2016. It cautioned that residential sales may remain uneven as homebuilders buy in larger but more sporadic transactions; homesite mix can also affect margins. Resort revenue is typically stronger in the second and third quarters.
- Development opportunity and uncertainty: The Bay-Walton Sector Plan provides entitlements for extensive future residential and commercial uses, but actual development depends on further planning, market demand, returns and capital availability. The company also cited potential RiverTown impact-fee receipts of $20 million to $26 million over five years, subject to factors outside its control.
- Risks and contingencies: Real estate values and demand are concentrated in Northwest Florida. Other risks include real estate cycles, entitlement and financing approvals, development costs, investment values and litigation or environmental liabilities. Accrued liabilities for litigation and related matters were $2.5 million; management could not quantify future rehabilitation costs for certain neighboring properties above existing accruals or estimate a loss range.
- Investment exposure: The portfolio included $8.4 million of non-investment-grade Sears Holdings Corp. or affiliate corporate debt and $0.2 million of preferred stock. Management considered unrealized losses temporary and did not record impairment. Fairholme-managed funds beneficially owned about 32.3% of St. Joe’s common stock; Fairholme advises on the investment account without compensation, and its managing member chairs the board.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company noted that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of Q1’s reported profit was attributable to the one-time BP settlement, and when will the scheduled settlement cash payments be received?
- Whether recurring operations can improve profitability, particularly resorts and leisure, and how seasonality affects full-year results.
- Progress, leasing and cash generation at Pier Park North, along with the joint venture loan guarantees, letter of credit and financial covenant.
- Actual 2016 capital expenditures and whether management proceeds with discretionary development spending while continuing share repurchases.
- Performance and credit quality of the investment portfolio, especially the non-investment-grade Sears-related securities, and the relationship between special-purpose-entity assets and Senior Notes.
- Developments in environmental matters, litigation and the company’s ability to realize deferred tax assets and future RiverTown impact fees.