The St. Joe Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. St. Joe is a Florida-based real estate developer and manager with approximately 573,000 acres, primarily in Northwest Florida, and operations in residential and commercial real estate, rural land sales, and forestry. Unless noted, financial amounts below are in millions of dollars.
Financial results and liquidity
- Revenue: $30.5, down 58.4% from $73.4. Real estate sales rose to $13.9 from $5.2; resort and club revenue increased to $6.3 from $5.1. Timber sales fell to $9.5 from $62.6, largely because Q1 2011 included a large timber-deed transaction.
- Profitability: Operating loss was $1.6 versus operating income of $21.3. Net loss attributable to the Company was $0.9, or $0.01 per share, versus net income of $14.1, or $0.15 per share. The 2011 comparison included a $50.3 pretax gain on the timber-deed sale. No consolidated gross or operating margin percentage is stated; operating loss was about 5.2% of revenue.
- Segments: Residential real estate reported a $3.8 pretax loss, improved from an $8.8 loss; commercial real estate earned $1.9 versus a $1.9 loss; rural land sales earned $2.1 versus $2.3; forestry earned $2.8 versus $52.8, with the prior period boosted by the timber deed.
- Cash flow: Operating cash flow was $3.6 versus $37.4. The 2011 period included $55.9 of timber-deed proceeds. Investing cash outflow was $0.2; financing cash outflow was $0.2. Cash increased $3.3 during the quarter.
- Balance sheet and debt: Cash and cash equivalents were $165.7 at March 31, up from $162.4 at year-end; total assets were $662.9. Debt was $52.8, down from $53.5, and total equity was $544.3. Debt includes $22.8 of defeased debt backed by pledged Treasury securities; separately, outstanding CDD debt was $56.6, of which $30.0 was recorded as a liability.
- Other measures: The company recorded no impairment losses in Q1 2012, compared with $0.8 in Q1 2011. Stock-based compensation expense declined to $0.5 from $8.5. The company’s $96.2 tax valuation allowance increased from $95.5; it reported federal and state net operating loss carryforwards of approximately $93.4 and $614.1, respectively.
Material changes and management outlook
- On January 25, 2012, the company adopted a strategy to reduce future capital spending, apply new risk-adjusted investment criteria, and reposition assets to increase absorption. It expects to reduce planned future capital expenditures for existing projects by approximately $190, primarily amounts previously expected to be spent over the next 10 years; assets could be sold in bulk, at lower price points, or over shorter periods.
- Management expected approximately $20.9 of capital expenditures during the remainder of 2012, primarily for residential and commercial development and a build-to-suit facility at VentureCrossings. Management said current cash and anticipated cash flows should cover anticipated working capital needs and capital expenditures.
- Management cited continued weakness in real estate markets, slow economic recovery, high resale inventories, depressed prices, and uncertainty about when a sustained recovery will occur. It reported signs of recovery in some Northwest Florida residential projects, but weakness elsewhere.
- First-quarter developments included two commercial property sales totaling $6.0, a 2,855-acre rural land sale for $4.3, and higher homesite closings. Resort and club revenue improved with higher occupancy, rates, and activity. Operating and corporate expenses declined by approximately $17.1 year over year, reflecting lower stock compensation, staffing, legal, and restructuring costs.
- Management identified risks including further real estate weakness and asset write-downs; execution and sale-price risks under the new strategy; possible environmental and litigation liabilities; uncertainty about oil-spill claim recoveries; reliance on RockTenn as a major local timber customer; and possible reductions in airport air service.
Contingencies and unusual items
- The 2011 timber-deed agreement conveyed timber rights on approximately 40,975 acres for $55.9; $54.5 was recognized as revenue in Q1 2011, producing a $50.3 pretax gain. The comparison makes reported revenue and forestry earnings unusually high in that prior period.
- The company reported a $0.6 payment from the Gulf Coast Claims Facility in April 2012, described as a small portion of an oil-spill claim and included as a gain in Q1 2012 “Other, net.” Further recovery and ultimate success of its claims are uncertain.
- A $0.8 standby guarantee liability was recorded for the Southwest Airlines service agreement; no payments had been made. The agreement covers the first three years of service and has no stated maximum payment, although the company may terminate it if specified payment thresholds are exceeded.
- The securities class action was dismissed with prejudice, but the plaintiff appealed. Related shareholder derivative actions remain pending or stayed. The company is also cooperating with an SEC private investigation into matters including real-estate impairment practices, internal controls, books and records, and financial reporting. The company said potential losses could not be estimated.
- Environmental accruals were $1.5. Rehabilitation costs for certain properties adjacent to a former paper mill site could not be quantified. Management said pending matters were not expected to materially affect financial position or liquidity, but acknowledged an adverse outcome could materially affect results or cash flows in a particular period.
- Chief Financial Officer Janna L. Connolly resigned; the company entered into a separation agreement with her on March 23, 2012. The filing reports that Thomas J. Hoyer signed as CFO.
Most important facts for investors to verify
- How much of the $190 expected reduction in future capital spending is achievable, and how it changes project timing, asset values, and future sales.
- Whether operating cash generation can support the stated 2012 capital expenditure plan and other obligations, especially given Q1 operating cash flow of $3.6.
- How much future revenue and profit depend on property closings, asset dispositions, seasonal resort activity, and timber demand; compare results excluding the prior-year timber-deed gain.
- Potential exposure and developments in the SEC investigation, securities appeal, derivative actions, environmental matters, and Southwest Airlines guarantee.
- Whether oil-spill claims produce further recoveries, and the effect of the April $0.6 payment and its Q1 recognition on period-to-period comparability.
- Liquidity and debt details: pledged Treasury securities support $22.8 of defeased debt, while outstanding CDD debt exceeds the amount recorded on the balance sheet.