The St. Joe Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. St. Joe is a Florida real estate development and operating company with assets concentrated in Northwest Florida. Its results were transformed by the March 5 sale of approximately 380,000 acres to AgReserves. The filing reports four segments: residential real estate, commercial real estate, resorts, leisure and leasing, and forestry.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $594.1 million | $26.8 million |
| Operating income (loss) | $509.5 million | $(2.2) million |
| Net income (loss) attributable to St. Joe | $403.0 million; $4.37 per share | $(2.5) million; $(0.03) per share |
| Cash provided by operating activities | $352.1 million | $2.3 million |
| Cash and cash equivalents at quarter-end | $237.4 million | $168.7 million |
The AgReserves transaction accounted for $569.7 million of real estate sales revenue and $511.1 million of pretax income. As a result, headline revenue, earnings and operating cash flow are not representative of recurring operations. Income tax expense was $106.9 million (an approximately 21% effective rate); the company used federal and state net operating losses and reversed $89.3 million of valuation allowance.
At March 31, available-for-sale investments were $281.8 million, in addition to cash; investment balances include securities held through the company’s investment account. Total reported debt was $49.4 million, including $26.1 million of defeased debt and $16.8 million of Pier Park North joint-venture debt. Total assets were $1.17 billion, total liabilities $199.3 million, and total equity $969.7 million. Operating cash flow included the effects of the land sale and related transaction accounting; investing activities used $146.9 million, and financing activities provided $10.3 million.
Material changes and operating trends
- Compared with Q1 2013, the AgReserves sale drove the swing from a net loss to substantial profit. The sale consideration was $358.5 million cash, a $200 million 15-year Timber Note and a letter of credit. The related buyer-sponsored entity was consolidated at quarter-end.
- Following the sale, St. Joe expects timber and rural-land sales and forestry revenue to fall substantially; the RockTenn supply agreement transferred to AgReserves. Management expects greater dependence on the cyclical real estate industry.
- Excluding the AgReserves transaction, residential and commercial real estate sales were broadly flat together. Resorts, leisure and leasing revenue fell 9% to $8.2 million; gross margin declined to 1.2% from 7.8%. Timber sales fell 16% to $8.1 million, while reported timber gross margin increased to 51.9% from 38.2%.
- On April 2, 2014, St. Joe sold the RiverTown community for $24.0 million cash, a $19.6 million note, assumption of approximately $11.0 million of CDD obligations and potential impact-fee proceeds. The company expects to record approximately $26 million of pretax earnings in Q2; estimated impact-fee proceeds of $20–$26 million over five years are contingent on development and fee rates.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management said it expects available liquidity and anticipated cash flows to meet working capital, capital expenditure and debt-service needs for the next 12 months. It estimated a further $58 million of 2014 capital expenditures, some discretionary, and expects approximately $70 million of federal income tax payments for 2014.
- In April, a wholly owned special-purpose entity monetized the Timber Note by issuing $180 million of 4.75% senior secured notes due 2029. St. Joe received $165 million net of $15 million in costs and expects $20 million at Timber Note maturity, after payment of the notes and other entity liabilities. St. Joe expects to consolidate this entity and the notes in Q2; the notes are payable solely from the entity’s assets and are non-recourse to St. Joe.
- St. Joe expects pension-plan termination in late 2014 or 2015, subject to regulatory approval. It anticipates receiving $17–$21 million in cash and recognizing estimated pretax losses of $19–$23 million at settlement.
- Risk factors include concentrated Florida real estate exposure, real estate market cyclicality, development and permitting risks, investment-market losses and concentrated holdings in non-investment-grade corporate debt. The company disclosed an ongoing SEC investigation concerning, among other things, impairment practices, reporting obligations, internal controls and financial reporting; it has not accrued a liability because loss probability and amount cannot currently be determined.
- Other exposures include environmental matters, with $0.5 million accrued, and Pier Park North loan guarantees and covenants, including a 33% limit on the principal repayment guarantee and a $25 million minimum-liquidity covenant. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Investor verification priorities
- Reconcile the AgReserves sale proceeds, transaction gain, taxes and Q1 cash flow, and assess the recurring earnings base after the land sale.
- Review the Timber Note securitization, Q2 consolidation and cash received, including the entity’s asset coverage and the non-recourse terms.
- Track RiverTown note repayment, assumed CDD obligations, and whether anticipated impact-fee proceeds materialize.
- Monitor the investment portfolio’s issuer and credit concentration, including the April 21 increase in the permitted single-issuer limit from 10% to 15% with committee approval.
- Follow the SEC investigation, environmental contingencies and pension-plan settlement timing and costs.