The St. Joe Company (NYSE: JOE) — Q2 2022 Form 10-Q
Business context and period: Unaudited quarter and six months ended June 30, 2022. St. Joe is a Northwest Florida real estate development, asset management and operating company, with residential, hospitality and commercial segments. Results are seasonal and can vary with the timing and mix of property sales.
Financial performance
Amounts below are in millions of dollars unless noted.
- Q2 revenue: $68.3, down 5.5% from $72.2 a year earlier. Real estate revenue fell to $28.0 from $41.1; hospitality rose to $29.6 from $22.6; leasing increased to $9.3 from $6.4; timber declined to $1.3 from $2.2.
- Q2 earnings: Operating income was $18.8 versus $30.8; net income attributable to St. Joe was $17.0 versus $24.2; diluted EPS was $0.29 versus $0.41. Lower real estate sales and a less favorable sales mix were key pressures; insurance recovery and other income provided offsets.
- Six-month results: Revenue was $133.1, up 17.2% from $113.5. Operating income was $39.0 versus $36.3; net income attributable to St. Joe was $30.5 versus $27.4; diluted EPS was $0.52 versus $0.47.
- Margins: Consolidated operating margin was approximately 27.6% in Q2 versus 42.6% in Q2 2021, and 29.3% for the first half versus 32.0%. Real estate gross margin was 54.3% for Q2 versus 65.6%; hospitality gross margin was 27.7% versus 31.9%. Hospitality and leasing revenue grew, but pre-opening, staffing, labor and product costs weighed on margins.
- Cash flow: First-half operating cash flow was $29.0 versus $47.2; investing cash outflow was $130.1 versus $137.7; financing cash inflow was $56.4 versus $17.2. Capital expenditures were $157.9, including $69.7 in hospitality and $42.3 in commercial. Cash, cash equivalents and restricted cash ended at $29.6, down from $74.4 at year-end 2021.
- Liquidity and investments: Cash and cash equivalents plus U.S. Treasury Bills were $135.6 at June 30, versus $159.1 at December 31, 2021. Management said existing cash, financing arrangements and operating cash generation should be sufficient for anticipated needs over the next 12 months.
- Debt: Balance-sheet debt, net, increased to $291.5 from $223.0 at year-end. Debt principal outstanding was $297.2; reported debt is separate from $177.7 of Senior Notes held by a consolidated special-purpose entity. Variable-rate debt exposure was material: management estimated a 100-basis-point rate increase would add $1.7 annually to interest expense. The company reported compliance with financial debt covenants.
Material changes and operating developments
- Hospitality revenue grew 31% in Q2, supported by membership growth and the Hilton Garden Inn and Homewood Suites openings. Watersound Club had 2,488 members, up 537 year over year.
- Leasing revenue increased 45% in Q2, reflecting new apartment and senior-living leases. At June 30, approximately 93% of 980,874 square feet of leasable space was leased; 905 of 936 completed multifamily units were leased.
- Residential real estate revenue declined 29% in Q2. The company sold 231 homesites versus 172, but average revenue per homesite excluding residuals fell to about $83,000 from $164,000, largely due to community and transaction mix. First-half residential revenue nevertheless increased 5%.
- Management reported 2,172 residential homesites under contract, expected to generate approximately $167.8 million at closing over several years. The Latitude Margaritaville Watersound joint venture had 605 homes under contract, with estimated sales value of $292.7 million at closing.
- Real estate investment increased to $819.6 from $690.1 at year-end, reflecting ongoing development. The company reported $185.0 of construction and development contractual obligations.
Outlook, risks and unusual items
- Management said demand remained strong across segments and residential backlog was at a record level, with demand exceeding supply. It also noted that supply-chain disruption and cost increases extended some delivery timelines and raised operating costs; delays generally affected revenue timing rather than cancellations.
- No quantified earnings or revenue guidance was provided. The company cautioned that project timing can be delayed and investments may not produce immediate benefits. Capital commitments may be funded through project proceeds, cash, land, partner capital and financing.
- Key risks include inflation, rising interest rates, supply-chain constraints, economic and buyer-sentiment changes, dependence on homebuilders and Northwest Florida growth, hospitality seasonality, construction execution, and exposure to natural disasters and insurance recoveries. The business and land holdings are concentrated in Northwest Florida.
- Q2 included $2.5 of Hurricane Michael insurance recovery; first-half recovery was $3.2. Marina restoration continues, and the timing and amount of additional insurance proceeds are uncertain. Q2 and first-half results also included comparatively small debt-extinguishment and joint-venture contribution items; prior-year periods included a $3.1 gain on land contributed to a joint venture.
- Surety bonds and other financial guarantees totaled $36.8, and standby letters of credit were $23.6. Litigation and environmental matters were described as not expected to materially affect financial position or liquidity, but an adverse outcome could affect a particular period; accrued aggregate liabilities were $0.4.
- The board declared a $0.10-per-share dividend payable September 9, 2022. The company repurchased 4,760 shares for $0.2 during the first half and had $99.8 of repurchase authorization remaining at June 30.
Investor verification priorities
- Track residential contract conversion, homesite deliveries, community-level sales mix, margins and cancellation rates, particularly if market conditions weaken.
- Verify hospitality and leasing ramp-up, occupancy, pre-opening costs and whether cost inflation continues to outpace revenue growth.
- Review development spending, the $185.0 of contractual obligations, debt maturities and variable-rate exposure, including the effect of refinancing or rate changes.
- Assess liquidity using both unrestricted cash and Treasury investments, while distinguishing consolidated project debt and guarantees from the Senior Notes held by the special-purpose entity.
- Monitor Hurricane Michael insurance claims and marina reopening progress, as well as the company’s contingent guarantees, letters of credit and joint-venture exposure.
- Consider governance and ownership concentration: clients of the chairman’s investment adviser, including the chairman, beneficially owned approximately 41.5% of common stock; the adviser receives no compensation for its investment services to the company.