The St. Joe Company — Q2 2017 Form 10-Q
Business context and reporting period. The company is a Florida real estate development, asset management and operating company concentrated in Northwest Florida, with residential and commercial real estate, resorts and leisure, leasing, and forestry segments. This unaudited filing covers the quarter and six months ended June 30, 2017.
Financial results and liquidity
- Q2 revenue: $30.4 million, up 2.8% from $29.6 million. Six-month revenue: $43.6 million, down 12.5% from $49.8 million.
- Q2 operating income: $4.7 million versus $2.1 million. Six-month operating loss was $0.2 million versus operating income of $1.2 million.
- Net income attributable to the company: Q2 $10.8 million ($0.15 per share), versus $1.8 million ($0.02 per share); six months $15.1 million ($0.21 per share), versus $10.5 million ($0.14 per share).
- Investment income: $14.3 million in Q2 and $24.7 million for six months, including realized investment-sale gains of $7.7 million and $10.9 million, respectively. These gains materially contributed to reported earnings.
- Margins and segment trends: Q2 resorts and leisure gross margin was 22.8%, up from 21.2%; six-month margin was 13.5%, up from 12.3%. Leasing revenue increased 17.4% in Q2, primarily following an office-building acquisition and new leases. Residential real estate revenue fell 53.1% for six months, partly reflecting the prior-year land sale; timber revenue declined 14.3% for six months as average prices fell.
- Cash flow: Six-month operating cash flow was $46.0 million versus $11.9 million, including $26.7 million of federal tax refunds. Investing activities provided $0.1 million; financing activities used $40.0 million, including $40.4 million of share repurchases. Cash and cash equivalents ended at $247.2 million, up from $241.1 million at year-end.
- Assets, debt and equity: Total assets were $1.020 billion at June 30, 2017, versus $1.028 billion at December 31, 2016. Reported debt was $55.5 million, and the balance sheet also included $176.4 million of senior notes issued by a consolidated special-purpose entity. Total equity was $657.9 million, down from $686.8 million.
- Available investments: The company held $167.7 million of investments, in addition to cash equivalents; restricted investments were $4.5 million. Cash equivalents included $207.2 million of commercial paper.
Changes, outlook and risks
- Six-month real estate revenue fell to $8.7 million from $13.8 million. Residential lot closings were 34 versus 45; the prior-year period included a $3.4 million unimproved-land sale with high gross profit. Q2 included two commercial property sales totaling 24 acres for $2.2 million.
- Resorts and leisure revenue declined 3.9% for six months, chiefly due to lower vacation-rental occupancy, partly offset by increased club membership sales. Management cited seasonality and irregular timing of homebuilder and property sales as sources of period-to-period variability.
- Management said current cash, investments and expected operating cash flows should cover anticipated working capital, capital expenditures, debt service and authorized repurchases for the next 12 months. Remaining 2017 capital expenditures were estimated at $35.5 million, with some spending discretionary. No specific earnings or revenue guidance was provided.
- The company repurchased 2.4 million shares for $40.4 million in the first half. After quarter-end, it purchased another 1.5 million shares for $27.0 million; the board had authorized additional repurchases.
- Unusual items included a $3.5 million insurance settlement reimbursement for certain legal expenses, recognized in other income, and a $0.4 million credit-related investment impairment for six months. The 2016 comparison included $12.5 million of Deepwater Horizon settlement income.
- Investment risks include exposure to non-investment-grade corporate debt and preferred securities, concentration in a limited number of issuers, and potential valuation losses. Management estimated that a 100-basis-point increase in interest rates would reduce the market value of available-for-sale securities by approximately $4.4 million.
- The company’s real estate is concentrated in Northwest Florida and is exposed to local property demand, development, weather and regulatory risks. Litigation and environmental matters remain; accrued liabilities for litigation-related matters were $1.2 million. Management did not expect pending matters to materially harm consolidated financial position or liquidity, but noted an adverse outcome could affect results or cash flows in a period.
Key facts for investors to verify
- How much recurring operating performance is being obscured by investment gains and other nonrecurring income, and how the investment portfolio is performing and positioned.
- Whether vacation-rental occupancy, residential closings and timber pricing recover, and whether leasing acquisitions translate into sustained revenue and occupancy.
- Actual timing and returns on the estimated $35.5 million of remaining 2017 capital expenditures, particularly leasing and development projects.
- Liquidity and portfolio credit quality, including non-investment-grade holdings, related-party investment relationships, and the terms and guarantees associated with consolidated-entity debt.
- Subsequent share repurchases, remaining authorization, and the effect of buybacks on cash, share count and capital allocation.
- Developments in environmental rehabilitation, litigation and other contingencies, including any changes to the recorded accruals.