Florida residential and commercial real estate developer St. Joe (JOE -0.02%) released a second-quarter earnings report that showed a 6% decrease in revenue and a 30% decline in net income. Shares tumbled after the report, but a deeper dive paints a rosier long-term picture for St. Joe.
Snowbirds headed South
While investors may fear rising mortgage rates will price some potential homebuyers out of the market, St. Joe is charging ahead. Though revenue from selling newly constructed homes fell by 32% to $28 million in the quarter, it wasn't because of slowing sales. The company actually sold 34% more units than in last year's second quarter.
Chief Executive Officer Jorge Gonzalez told investors that the slump in new-home revenue was due to supply chain constraints that delayed construction and delayed closings, when St. Joe collects revenue from sales, to the second half of 2022. He added that its residential backlog is growing because demand continues to outstrip supply.
In its hospitality portfolio, St. Joe primarily operates hotels located within resort communities. In addition, it runs golf courses and marinas. The hospitality segment looked promising, with revenue up by 31% to $29.6 million.
St. Joe's leasing business includes over 1,000 multifamily and senior-living apartments, which reported a 93% occupancy rate. The company's commercial leasing portfolio consists of almost 1 million square feet of space, which is also 93% occupied. Segment revenue increased 45% to $9.3 million. Both are filling as fast as they're being completed.
St. Joe's long-term plans are ambitious: By 2024, it plans to increase home sales to 2,000 per year, up from 853 in 2021. Beyond home sales, St. Joe plans to add more recurring income from its hospitality and leasing segments. Its 2024 plans include expanding leasable commercial square footage to 1.5 million and apartment units to 2,500.
The company reports cash generated for distribution or investment (CGFDI), which is much like free cash flow. This non-GAAP (generally accepted accounting principles) measure excludes capital expenditures and real estate development costs. As new-home sales slipped to the next quarter and St. Joe continued to spend on development, CGFDI per share fell 23% to $0.50 in the quarter.
What does it mean for investors?
St. Joe is not your average homebuilder. The company is developing 170,000 acres of destination-based land between Destin and Panama City on Florida's Panhandle coast. Florida is already a destination for retirees, and with the new work-from-home normal, permanent residents have flocked to St. Joe's communities from all over the U.S and Canada.
The stock is down more than 20% this year, likely due to rising mortgage rates, which could slow the general real estate market. However, that concern may be overblown. For instance, mortgage rates have bounced up to about 5% recently, which is up dramatically from average rates over the past decade.
Taking a step back, the average mortgage rate since 1971 is just shy of 8%. That leaves plenty of room for mortgage rates to rise until they reach the longer-term average. Long-term investors may see value in the fast-growing resort community developer that owns a prime swath of desirable land.