The St. Joe Company (NYSE: JOE) — Q2 2020 Form 10-Q
Business context and reporting period. St. Joe is a Northwest Florida real estate development, asset management and operating company, with residential, hospitality and commercial segments. This unaudited quarterly report covers the three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. The company reorganized its segment reporting in 2020, combining commercial leasing and sales with forestry into the commercial segment; prior periods were reclassified.
Financial performance and position
- Q2 revenue: $36.1 million, up 1.5% from $35.5 million. Real estate revenue rose to $17.6 million from $15.6 million; hospitality revenue fell to $11.6 million from $15.6 million; leasing increased to $4.9 million from $3.7 million; and timber rose to $2.1 million from $0.8 million.
- Q2 earnings: Operating income was $11.1 million versus $10.9 million. Net income attributable to St. Joe was $19.2 million versus $10.4 million, and diluted EPS was $0.33 versus $0.17. The increase in net income was substantially affected by a $15.3 million gain on a land contribution to an unconsolidated joint venture.
- First-half results: Revenue was $54.7 million versus $51.6 million; operating income was $9.8 million versus $8.7 million. Net income attributable to St. Joe was $17.7 million versus $12.4 million, and EPS was $0.30 versus $0.21. First-half results included $19.6 million of gains on land contributions, including $15.3 million for Latitude Margaritaville Watersound and $4.3 million for Sea Sound Apartments.
- Margins and segment trends: Q2 hospitality gross margin decreased to 29.3% from 42.3%; first-half margin was 14.3% versus 29.6%. Q2 leasing gross margin increased to 73.5% from 70.3%; timber margin rose to 90.0% from 71.4%. Residential real estate gross margin was 55.0% in Q2 versus 51.4%.
- Cash flow and investment: First-half operating cash flow was $12.5 million, compared with $12.3 million. Investing cash outflow was $111.6 million versus $14.7 million, including $65.8 million of capital expenditures and $56.9 million of debt-security purchases. Financing provided $20.4 million, including $29.9 million of borrowings; share repurchases used $8.8 million. Cash, cash equivalents and restricted cash declined $78.8 million to $109.9 million.
- Liquidity: June 30 cash and cash equivalents were $106.0 million, including $87.0 million in Treasury money market funds. The company also held $49.9 million of Treasury bills and $2.4 million of preferred-stock investments. Management said available liquidity, financing and operating cash flow were expected to cover anticipated working capital, capital spending, debt service, JV contributions and authorized repurchases for the next 12 months.
- Debt and equity: Debt, net, increased to $120.5 million from $92.5 million at year-end 2019. Separately, $177.2 million of Senior Notes issued by a consolidated special purpose entity was reported as a liability, alongside related SPE investments. Total assets were $966.3 million and total equity was $542.7 million at June 30. The company reported compliance with financial debt covenants.
Material changes and management commentary
- COVID-19 caused temporary closures or reduced operations at hotels, restaurants, retail outlets and beach clubs beginning in mid-March. Hospitality assets gradually reopened in May; management reported a June recovery, while warning of continued disruption and possible renewed closures. Q2 hospitality revenue fell 25.6% year over year.
- Leasing growth reflected new Pier Park Crossings apartment leases and higher rental rates. At June 30, approximately 758,000 of 897,624 leasable square feet were under lease; tenants received $0.1 million of rent abatements and $0.3 million of lease deferrals related to COVID-19.
- Residential homesite sales were 122 in Q2 versus 151 a year earlier, and 141 for the first half versus 182. There were 869 homesites under contract, expected to generate approximately $83.2 million at closings over several years; closings and contract amounts may change.
- Capital spending supported development and recurring-revenue projects. The company reported $134.9 million of construction and development contractual obligations at June 30, with a significant portion expected to be funded through committed financing.
Risks, contingencies and unusual items
- COVID-19’s duration and effects on travel, homebuyer demand, tenants, construction costs and financing remain uncertain; management said the company could experience material declines in one or more segments during 2020.
- Hurricane Michael-damaged Bay Point and Port St. Joe marinas remained closed during restoration. Insurance recovery timing and adequacy are uncertain; no insurance gain was recognized in first-half 2020, compared with $4.1 million in first-half 2019.
- The company had $19.7 million of surety bonds and a $1.9 million standby letter of credit related to project obligations. It also guarantees certain JV debt; no guarantee obligation was recorded, though a $0.1 million credit-loss allowance was recognized for contingent guarantee exposure.
- Accrued liabilities for litigation and other matters were $0.8 million. Management did not expect pending matters to materially affect consolidated financial position or liquidity, but noted that adverse outcomes could affect results or cash flows in a reporting period. Environmental matters remain under assessment and future costs could not be reasonably estimated.
- The $15.3 million Latitude land-contribution gain and $4.3 million Sea Sound contribution gain materially benefited first-half earnings and are not equivalent to recurring operating revenue. First-half investment income also included $4.9 million of unrealized losses on equity securities.
- Share repurchases totaled $8.8 million in the first half. Further repurchases are subject to maintaining $100 million in cash, cash equivalents and/or investments. The company had $77.4 million of remaining authorization at June 30.
- Many loans use LIBOR-based rates. The company identified uncertainty around LIBOR’s discontinuation and the potential terms and effects of replacement rates.
Important facts for investors to verify
- How much of reported earnings growth reflects land-contribution gains and other nonrecurring items, rather than recurring operations?
- Whether hospitality demand and margins recover, and how COVID-19 restrictions or renewed closures affect results and liquidity.
- The timing, funding and expected returns of the $134.9 million development obligations and ongoing capital projects.
- Debt balances, JV guarantees and the distinction between company debt and the separately presented SPE Senior Notes and related assets.
- Whether homesite contracts convert to closings and the expected $83.2 million of revenue over several years.
- The progress and cost of Hurricane Michael marina restoration and the amount and timing of any further insurance proceeds.