The St. Joe Company — Form 10-Q Summary
Business context and period: Florida-focused real estate development and land company with residential real estate, commercial real estate, rural land sales and forestry segments. This unaudited filing covers the quarter and nine months ended September 30, 2010; comparisons are with the same 2009 periods. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $27.1 | $41.9 | $62.4 | $101.1 |
| Operating loss | $(18.0) | $(27.4) | $(50.3) | $(122.5) |
| Net loss attributable to St. Joe | $(13.1) | $(14.5) | $(33.2) | $(71.4) |
| Loss per share, basic and diluted | $(0.14) | $(0.16) | $(0.36) | $(0.78) |
- Revenue mix and trends: Q3 real estate sales were $10.9 million, down 55% year over year; nine-month real estate sales were $15.5 million, down 71%. Residential real estate drove the decline. Timber revenue was broadly stable; commercial real estate revenue increased from a small base.
- Cash flow: Operating activities provided $29.5 million in the first nine months, versus $44.7 million in 2009. The 2010 amount included $67.7 million of tax refunds, principally related to loss carrybacks. Investing activities used $0.7 million; financing activities provided $3.8 million. Cash increased to $196.4 million from $163.8 million at year-end 2009.
- Liquidity and debt: Total debt was $38.3 million, including $25.8 million of non-recourse defeased debt and $12.6 million of Community Development District debt. The company had a $125 million revolving credit facility, undrawn according to management, expiring September 2012. Management reported compliance with its covenants. The filing’s covenant table appears to show an unencumbered leverage ratio of 98.5x against a 2.0x limit; this value is unclear or inconsistent with the stated compliance and merits verification.
- Balance sheet: Total assets were $1,058.9 million and total equity was $873.3 million at September 30, 2010. Investment in real estate was $746.8 million. Total liabilities were $185.7 million.
- Margins: The filing does not provide a clear consolidated gross-margin measure. For residential home and homesite sales, reported gross margin was 23% in Q3 2010 versus 9% in Q3 2009; for the first nine months it was 26% versus 10%, on substantially lower sales volume.
Changes versus the prior comparable period
- Revenue fell 35% in Q3 and 38% for the first nine months, primarily because of sharply lower residential real estate sales. Nine-month home and homesite closings fell to 44 from 100.
- Net loss narrowed, but comparisons benefited from substantial 2009 charges: $44.7 million pension settlement charge and $32.6 million of impairment losses for the first nine months of 2009. 2010 included $0.6 million of impairment charges.
- Q3 2010 included a litigation-related reserve, restructuring expense and Deepwater Horizon-related costs. Corporate expense rose year over year, including $2.6 million of oil-spill legal and cleanup costs and higher pension expense.
- Operating cash flow declined year over year despite the tax refund inflow. Cash balances rose, while debt decreased modestly from $39.5 million at December 31, 2009.
Outlook, commentary, risks and unusual items
- Management said residential sales remained weak amid oversupply, depressed Florida prices, economic conditions and the Gulf oil spill, and did not expect significant near-term improvement. No numerical earnings or revenue guidance was provided.
- The Deepwater Horizon spill was described as adversely affecting properties, operations and the stock price. St. Joe filed lawsuits seeking damages; the amount and success of any recovery are uncertain. Reported Q3 legal and cleanup costs were $2.6 million.
- The company agreed to reimburse Southwest Airlines for certain losses on service to the new airport during its first three years. No reimbursement was required in Q3; a carryover profit was to be applied in the Q4 calculation. The company recorded a $0.8 million standby guarantee liability; potential payments depend on airline performance and estimates including fuel costs and passenger demand.
- The company planned to relocate and consolidate offices near the Northwest Florida Beaches International Airport, with completion expected in 2011. Estimated relocation costs were $5.5 million and termination benefits $2.2 million, pre-tax; $2.0 million and $1.8 million, respectively, had been recorded in the first nine months. It also purchased an executive’s home for $1.9 million in Q3.
- The filing reports an $8.8 million reserve for an adverse trial-court decision in a contract dispute involving the former Victoria Park community; the company appealed. Elsewhere, management describes a $4.9 million litigation reserve and $4.1 million related interest expense. The relationship among these disclosed amounts is not clear from the filing text.
- Other risks include further Florida real estate weakness and impairment charges, collectability of real estate-related notes, environmental claims, and uncertainty around the oil-spill impact. Environmental accruals were $1.6 million; surety bonds were $15.7 million and standby letters of credit $1.4 million. Management said litigation and governmental matters were not expected to have a material adverse effect, but actual liabilities could be material.
- A prior-period error involving $2.6 million of stock compensation expense ($1.6 million net of tax) was corrected in the 2009 balance sheet and comparative statements; management deemed the correction immaterial to prior-period financial statements.
Important facts for investors to verify
- Reconcile the covenant table’s reported 98.5x unencumbered leverage ratio with the stated 2.0x limit and management’s assertion of compliance.
- Clarify the accounting and presentation of the Victoria Park litigation reserve, including the disclosed $8.8 million reserve, $4.9 million reserve and $4.1 million interest expense.
- Assess how much of operating cash flow depends on nonrecurring tax refunds and the expected availability of future operating cash.
- Monitor the Southwest Airlines guarantee exposure, including Q4 carryover treatment and the remaining term of the agreement.
- Track residential sales, Florida market conditions, oil-spill effects and potential further impairment of real estate or notes receivable.