The St. Joe Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. St. Joe is a Florida real estate development and operating company. On March 5, 2014, it sold approximately 380,000 acres to AgReserves, materially changing its business mix and reducing forestry operations.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $23.9 million | $36.8 million | $686.2 million | $97.4 million |
| Operating income (loss) | $(1.3) million | $3.4 million | $529.2 million | $2.7 million |
| Net income (loss) attributable to St. Joe | $(0.05) million | $4.2 million | $417.6 million | $4.4 million |
| Reported earnings per share | $— | $0.05 | $4.52 | $0.05 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $322.9 million | $13.7 million |
The nine-month results include $511.1 million of pretax income from the AgReserves sale and $26.0 million of pretax earnings from the RiverTown sale. Excluding both sales, nine-month real estate gross profit was $9.1 million, compared with $12.2 million in 2013. Q3 revenue and operating performance declined mainly as real estate and timber sales fell.
- Q3 operating trends: Resorts, leisure and leasing revenue rose 17% to $19.0 million; gross margin was 24.2%, versus 23.3%. Timber revenue fell 86% to $1.1 million. Residential real estate revenue fell 65% to $3.7 million.
- Nine-month segment context: Resorts, leisure and leasing revenue increased 7% to $45.4 million, with a 20.0% gross margin versus 21.0%. Timber revenue declined 62% to $10.3 million, primarily following the land sale.
- Cash flow: Investing activities used $480.9 million, including substantial purchases of investments and $20.4 million for Pier Park North. Financing activities provided $197.6 million, including proceeds from the special-purpose-entity notes.
- Balance sheet at September 30: Cash and cash equivalents were $61.6 million; available-for-sale investments were $596.0 million; total assets were $1.319 billion; total equity was $984.4 million.
- Debt: Reported debt was $60.7 million, up from $44.2 million at year-end 2013. The balance sheet also included $177.3 million of Senior Notes issued by a consolidated special purpose entity; the filing says these are payable solely from that entity’s assets and are non-recourse to St. Joe. Pier Park North’s construction loan balance was $28.9 million.
Material changes and transactions
- AgReserves sale: Consideration was $562 million, including $358.5 million cash, a $200 million 15-year Timber Note and a letter of credit. The note was monetized through $180 million of 4.75% Senior Secured Notes due 2029; St. Joe received $165 million net cash from the monetization after stated costs. The sale generated most of the reported nine-month profit and substantially reduced forestry assets and revenue.
- RiverTown sale: St. Joe sold approximately 4,057 acres for $24 million cash, a $19.6 million secured note due June 2015, assumption of $11 million in CDD assessments, and contingent impact-fee-credit payments. Management estimated possible impact-fee receipts of $20–$26 million over five years, but said amount and timing were uncertain.
- Investment portfolio: Investments grew significantly following the sales and related investment activity. The portfolio included $97.4 million in corporate debt securities from one non-investment-grade issuer and non-investment-grade preferred stock. St. Joe recorded a $1.3 million credit-related impairment charge on corporate debt securities.
- Operating strategy: St. Joe Club & Resorts launched in January 2014, restricting public access at certain facilities. Management expects this could support vacation-rental growth, but reported lower club revenue and margins for the first nine months. Pier Park North leasing revenue began as tenants occupied retail space.
Outlook, risks and unusual items
- Management said cash, investments and anticipated cash flows should cover working capital, planned capital expenditures and debt service for the next 12 months. It estimated approximately $12 million of additional capital expenditures for the final three months of 2014, some discretionary, and expected approximately $71 million in federal income taxes for 2014.
- St. Joe expected pension-plan settlement losses of approximately $18–$21 million pretax and estimated $17–$20 million of assets could revert to the company in late 2014 or early 2015; timing and amounts were uncertain.
- The company cautioned that residential sales may be more volatile as sales shift toward homebuilders and that future margins may be affected by sales mix and the loss of higher-margin timberland sales. Real estate demand, seasonality, development approvals and investment values are key uncertainties.
- A 100-basis-point increase in interest rates was estimated to reduce the market value of available-for-sale securities by approximately $7.5 million. Further credit deterioration could require additional impairment charges.
- The SEC was conducting a private investigation covering, among other matters, real estate impairment practices, internal controls and reporting. St. Joe said it was cooperating, had recorded no liability, and could not estimate the likelihood or amount of any loss.
- Other contingencies include environmental matters and litigation. Management did not expect pending matters to materially affect consolidated financial position or liquidity, but acknowledged an adverse outcome could materially affect results or cash flows in a particular period. No formal earnings guidance was provided.
Important facts for investors to verify
- How much of reported earnings and operating cash flow is attributable to completed land sales versus recurring operations, and how results develop after the AgReserves sale.
- The quality, issuer concentration, valuation and impairment exposure of the investment portfolio, especially the non-investment-grade securities.
- The terms, asset backing and non-recourse status of the $177.3 million special-purpose-entity notes, and St. Joe’s separate guarantees and liquidity covenants for Pier Park North.
- Actual collections and timing for the RiverTown note and contingent impact-fee credits, and the final pension-plan settlement costs and distributions.
- Developments in the SEC investigation, environmental matters and other contingencies, as well as the company’s ability to meet its stated liquidity and tax expectations.