The St. Joe Company (NYSE: JOE) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. All amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Business context
St. Joe is a real estate development, asset management and operating company focused on Northwest Florida. Its principal segments are residential, hospitality and commercial; approximately 90% of its land holdings are within 15 miles of the Gulf of Mexico. Results can fluctuate with the timing and mix of property sales and seasonal hospitality activity.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total revenue | $128.2 | $68.3 | +87.8% |
| Operating income | $41.8 | $18.8 | +122.5% |
| Income before taxes | $45.3 | $23.0 | +96.8% |
| Net income attributable to St. Joe | $34.7 | $17.0 | +104.1% |
| Diluted earnings per share | $0.60 | $0.29 | +$0.31 |
Q2 revenue growth came from real estate ($69.3 million, up 147.5%), hospitality ($45.1 million, up 52.4%) and leasing ($12.4 million, up 33.3%). Timber revenue was $1.3 million, broadly unchanged.
| Six-month metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $201.2 | $133.1 |
| Operating income | $53.1 | $39.0 |
| Net income attributable to St. Joe | $45.1 | $30.5 |
| Operating cash flow | $52.9 | $29.0 |
| Capital expenditures for operating property and equipment | $82.3 | $109.1 |
Margins: Q2 real estate gross margin was 54.8% versus 54.3% a year earlier. Hospitality gross margin was 26.2% versus 27.7%; leasing gross margin was 47.6% versus 57.0%. For the first half, real estate gross margin declined to 50.7% from 56.6%, hospitality to 19.3% from 20.9%, and leasing to 50.8% from 57.5%.
Balance sheet and debt at June 30: Total assets were $1.522 billion, versus $1.431 billion at year-end 2022. Debt principal was $452.6 million ($446.6 million net of unamortized discount and issuance costs), up from $391.4 million principal. The weighted-average effective debt rate was 5.2%; 67.5% of debt was fixed-rate or swapped, and the weighted-average rate on variable-rate loans was 7.4%. Cash and cash equivalents were $60.6 million and available-for-sale Treasury securities were $27.9 million, totaling $88.6 million. Cash, cash equivalents and restricted cash totaled $75.5 million. The company reported compliance with financial debt covenants.
Six-month investing cash outflow was $70.1 million, while financing cash inflow was $47.4 million. Financing included $109.3 million of borrowings and $47.9 million of principal repayments. Dividends paid were $11.7 million. At June 30, contractual construction and development obligations were $56.7 million.
Material changes and operating developments
- Residential: Q2 consolidated homesite closings rose to 300 from 231. Average base revenue per homesite, excluding residuals, increased to about $153,000 from $83,000, reflecting community sales mix. For the first half, 627 homesites closed versus 412, while average base revenue per homesite decreased to about $105,000 from $113,000. Residential segment pretax income was $39.5 million in Q2 and $55.1 million for the first half; it included $5.9 million and $9.8 million, respectively, of equity income from the Latitude Margaritaville Watersound JV.
- Latitude Margaritaville Watersound JV: It completed 164 home sales in Q2 versus 65 a year earlier, and 313 in the first half versus 83. At June 30, it had 665 homes under contract. The community’s town square amenities opened in June.
- Hospitality: Growth reflected newly opened or acquired properties, including The Pearl Hotel, Embassy Suites Panama City Beach Resort, The Lodge 30A, Home2 Suites Santa Rosa Beach and Hotel Indigo Panama City Marina. New-hotel opening costs weighed on margins. Hospitality segment pretax income was $3.7 million in Q2 versus $5.7 million; first-half pretax income was $0.2 million versus $4.8 million.
- Commercial and leasing: Leasing revenue growth reflected new multifamily, senior-living and other leases. At June 30, approximately 1.016 million of 1.041 million rentable square feet were leased (98%). Commercial segment first-half pretax income fell to $6.5 million from $10.2 million, with higher interest and lower margins on real estate sales and timber.
- Debt and investment: Debt principal increased by $61.1 million from year-end. The Watersound Origins Crossings JV refinanced its loan, increasing principal from about $44 million to $52.9 million and fixing its rate at 5.0%. The company began the process to refinance the North Bay Landing loan, which matures in September 2024.
Outlook, risks and unusual items
Management said demand remained strong across segments and cited Northwest Florida’s growth, amenities and workplace flexibility as supporting demand. It also highlighted inflation, higher interest rates, supply-chain disruption and financial-market uncertainty as headwinds. Supply constraints have extended hospitality and commercial project completion timelines; higher costs and interest rates have pressured operations and buyers’ financing capacity. Management expects liquidity from cash, operations and financing arrangements to meet anticipated needs for the next 12 months, but provided no quantified earnings or revenue guidance.
Key risks include the company’s concentration of land and operations in Northwest Florida; real estate sales and pricing mix volatility; dependence on homebuilders and regional growth; seasonal hospitality demand; construction delays and cost inflation; higher borrowing costs; natural disasters and insurance availability; and obligations under debt guarantees and joint ventures. The company had $34.7 million of surety bonds and other financial guarantees and $2.8 million of standby letters of credit outstanding. It reported $109.5 million as its maximum exposure to loss from unconsolidated JVs. Litigation and environmental matters are ongoing; recorded aggregate liabilities were $0.4 million, and management said potential future environmental costs could not be reasonably quantified. Management did not expect pending matters to materially adversely affect financial position or liquidity, while noting an adverse outcome could affect a particular period’s results or cash flows.
Notable comparisons include $9.7 million of first-half equity income from unconsolidated JVs, largely Latitude Margaritaville, versus $0.9 million a year earlier. Prior-year results included Hurricane Michael insurance recoveries of $3.3 million in the first half; the claim was closed in November 2022. Current-period other income included a $0.5 million timber recovery grant payment. A $0.1 million debt-extinguishment loss followed the Watersound Origins Crossings refinancing. On July 26, 2023, the board declared a $0.12-per-share dividend, payable September 8, 2023.
Important facts for investors to verify
- How sustainable are the Q2 residential revenue and margin gains, given the sizable influence of community mix, homesite residuals and closing timing?
- Can recently opened hotels and expanding leasing assets improve margins as start-up and lease-up costs recede?
- How will higher variable borrowing costs and upcoming maturities, particularly the North Bay Landing loan, affect interest expense and liquidity?
- What are the timing, funding needs and expected returns for the $56.7 million of construction and development obligations and ongoing capital projects?
- What are the company’s actual exposure and potential cash requirements under JV guarantees, surety bonds, environmental matters and other contingencies?
- Does management’s 12-month liquidity assessment remain supported by operating cash generation, financing availability and the timing of planned expenditures?