The St. Joe Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. St. Joe is a Florida-based real estate developer and manager with approximately 567,000 acres, primarily in Northwest Florida. Its businesses span residential and commercial real estate, rural land, resorts/leisure/leasing, and forestry.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $33.8m | $30.4m | $60.6m | $60.9m |
| Operating income (loss) | $1.6m | ($2.4m) | ($0.6m) | ($4.0m) |
| Net income (loss) attributable to St. Joe | $2.7m | $0.2m | $0.2m | ($0.7m) |
| Operating cash flow | Not separately reported | Not separately reported | $9.0m | $7.8m |
- Q2 revenue increased about 11%, while first-half revenue was nearly flat. First-half real estate sales fell 21% to $15.0m, mainly because there were no significant rural-land sales and fewer commercial transactions than in 2012.
- Resorts, leisure and leasing revenue rose 9% in Q2 and 16% in the first half, supported by higher room rates, food and beverage sales, and more vacation-rental homes. Forestry revenue was broadly stable; higher timber prices offset lower volumes.
- Q2 returned to operating profitability. First-half operating losses narrowed year over year. Other income was lower than in 2012, when it included Deepwater Horizon claim proceeds, reversal of a Southwest Airlines guarantee liability, and fixed-asset gains.
- Q2 residential homesite gross margin was 42.6%, versus 45.2% a year earlier. First-half residential gross margin was 39.2%, versus 39.7%. Forestry gross margin improved to 40.8% for Q2 and 39.5% for the first half, from 36.1% and 34.9%, respectively.
Financial position, cash flow and liquidity
- At June 30, cash and cash equivalents were $54.2m, investments were $114.5m, total assets were $662.5m, and total debt was $38.2m. Cash had been $166.0m at year-end 2012; much of the decline reflected moving funds into investments.
- Investments included $85.0m of U.S. Treasuries and $29.5m of corporate debt securities, which were non-investment grade and had $0.9m of unrealized losses. Money market funds of $34.3m were included in cash and cash equivalents. Management did not consider the corporate-security losses other-than-temporary.
- First-half investing cash outflow was $122.2m, primarily from purchases of securities, plus $4.9m of Pier Park North joint-venture expenditures. Financing cash inflow was $1.4m, including a $1.7m partner contribution; debt repayments were $0.3m.
- Debt included $26.5m of in-substance defeased debt backed by pledged Treasury securities and $11.7m of recorded Community Development District (CDD) debt. Total outstanding CDD assessments were $33.9m.
- Stockholders’ equity was $554.2m; total equity, including non-controlling interest, was $556.2m. No impairment charges were recorded in the periods presented.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said residential sales showed signs of recovery in some Northwest Florida projects, while emphasizing that a sustained recovery remained uncertain.
- Management expected approximately $15.6m of residential development capital expenditures for the remainder of 2013, plus $6.5m of expected cash contributions to Pier Park North. It said cash and expected cash flows should cover anticipated working capital and capital needs.
- Pier Park North has a $40.5m construction loan, with no amount drawn at June 30. St. Joe guarantees completion, repayment up to 33% of outstanding principal, and certain operating deficits and interest. Loan covenants require at least $25m of unrestricted, unencumbered cash or equivalents and $350m of net worth.
- The pension plan was frozen pending termination and regulatory approvals. St. Joe expected to receive $18m–$21m of cash in 2014 or 2015, but also anticipated $20m–$24m of future termination-related losses; timing and amounts remain uncertain.
- On July 29, 2013, St. Joe said it was exploring potential sales of non-strategic timberland, rural land, and/or timber rights; no transaction was assured.
- Risks include Florida real estate values and market recovery, investment-market losses, reliance on the RockTenn mill as a local timber customer, development and financing execution, environmental liabilities, and the Pier Park North guarantees. The SEC’s private investigation into historical matters, including impairment practices, remained ongoing. The securities class action dismissal was affirmed and the deadline to seek Supreme Court review expired July 29, 2013; related derivative cases remained pending or stayed.
- Environmental-related accruals were $1.5m. Management said pending matters were not expected to materially affect financial position or liquidity, but an adverse outcome could materially affect results or cash flows in a particular period.
Important facts for investors to verify
- Whether residential sales recovery and resort growth persist, and whether land-sale activity improves from the weak first-half commercial and rural comparisons.
- The credit quality, valuation and liquidity of the non-investment-grade corporate securities managed under the Fairholme agreement; Fairholme owns approximately 27.1% of St. Joe and receives no advisory compensation.
- Progress, funding requirements and potential guarantee exposure at Pier Park North, including compliance with minimum liquidity and net-worth covenants.
- Final pension termination approvals, cash proceeds and the timing and magnitude of the expected losses.
- Developments in the SEC investigation, derivative litigation and environmental matters, and whether any asset-sale exploration results in a completed transaction.