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JOE > SEC Filings for JOE > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for ST JOE CO

Form 10-Q for ST JOE CO


2-Nov-2012

Quarterly Report


Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We own land, timber and resort assets located primarily in Northwest Florida and in and around the Jacksonville and Tallahassee regions of North Florida. We seek higher and better uses for our assets through a range of activities from forestry to strategic land planning and development, infrastructure improvements and promoting economic development in the region where we operate.

We have four operating segments: residential real estate, commercial real estate, rural land sales and forestry. The table below sets forth the relative contribution of these operating segments to our consolidated operating revenues:

                                           Three Months Ended                                Nine Months Ended
                                 September 30,             September 30,           September 30,            September 30,
                                      2012                     2011                     2012                    2011
Segment Operating Revenue:
Residential real estate                     41.8 %                   62.1 %                   45.8 %                  32.5 %
Commercial real estate                       7.3 %                    5.4 %                    9.6 %                   1.9 %
Rural land sales                            33.8 %                    1.9 %                   20.0 %                   2.7 %
Forestry                                    17.1 %                   30.6 %                   24.6 %                  62.9 %

Total                                      100.0 %                  100.0 %                  100.0 %                 100.0 %

Our operations continued to be adversely affected during the first nine months of 2012 by the national real estate downturn, slow economic recovery and other adverse market conditions. This challenging environment continues to impact the demand for real estate in our region.

Residential Real Estate

Our residential real estate segment typically plans and develops mixed-use resort, primary and seasonal residential communities of various sizes, primarily on our existing land. This segment also includes our resort and club operations, the purpose of which is to enhance and promote the desirability of our residential real estate. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and land in and around Jacksonville and Tallahassee.

Our residential real estate segment generates revenues from:

the sale of developed homesites;

the sale of parcels of entitled, undeveloped lots;

the sale of housing units built by us or with partners;

resort and club operations;

rental income; and

fees on transactions.

Our residential real estate segment incurs cost of revenues from:

costs directly associated with the land, development and construction of real estate sold, indirect costs such as development overhead, project administration, warranty, and selling costs;

resort and club personnel costs, cost of goods sold, and management fees paid to third party managers;

operating expenses of rental properties; and

brokerage fees.


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As the number of older adults in retirement communities continues to increase, we believe that our development experience and location in Florida provides us with strategic opportunities in the retirement market. Consequently, we have begun preliminary research and planning into various types of retirement housing that may allow us to capitalize on these demographic trends.

Commercial Real Estate

In our commercial real estate segment, we plan, develop and entitle our land holdings, often in conjunction with strategic partners, for a broad range of retail, office, hotel, industrial and multi-family uses. We lease and sell land for commercial and light industrial uses within large and small-scale commerce parks, as well as for multi-family rental projects. Our commercial real estate segment generates revenues from the lease or sale of developed and undeveloped land for retail, multi-family, office, hotel and industrial uses and rental income. Our commercial real estate segment incurs costs of revenues from costs directly associated with the land, development costs and selling costs and operating costs of rental properties.

Rural Land Sales

Our rural land sales segment sells tracts of land of varying sizes for rural recreational, conservation and timberland uses. Our rural land sales segment generates revenues from the sale of undeveloped land, land with limited development, easements and mitigation bank credits. Our rural land segment incurs costs of revenue from the cost of land sold, minimal development costs and selling costs.

In recent years, our revenue from rural land sales has significantly decreased as a result of our decision to focus our rural land sales on non-strategic parcels and to principally use our rural land resources to create sources of recurring revenue. We may, however, rely on rural land sales as a source of revenues and cash in the future.

Forestry

Our forestry segment focuses on the management and harvesting of our extensive timber holdings. We grow, harvest and sell sawtimber, wood fiber and forest products and provide land management services for conservation properties. Our forestry segment generates revenues from the sale of wood fiber, sawtimber, standing timber and forest products and conservation land management services. Our forestry segment incurs costs of revenues from internal costs of forestry management, external logging costs, and property taxes.

A significant portion of the revenue from our forestry segment is generated pursuant to our supply agreement entered into in November 2010 with RockTenn ("RockTenn Supply Agreement"), under which we sell both stumpage (trees on stumps that the buyer cuts) and delivered wood (trees that we cut and deliver). Under the terms of our prior supply agreement with Smurfit-Stone Container Corporation ("Smurfit-Stone"), the price for timber (both stumpage and delivered wood) was based on the average price of stumpage set forth in an established index. As stumpage is priced lower than delivered wood, the one-index formula underpriced our delivered wood. Under the RockTenn Supply Agreement, the price for timber is based upon the average of the market price for stumpage and the market price for delivered wood, each as set forth in an established index. In addition, pursuant to the RockTenn Supply Agreement, Smurfit-Stone and RockTenn would be liable for any monetary damages as a result of the closure of the mill due to economic reasons for a period of one year. Nevertheless, if the RockTenn mill in Panama City, Florida, were to permanently cease operations, the price for pulpwood may decline, and the cost of delivering logs to alternative customers would increase.

New Real Estate Investment Strategy

In January 2012, we adopted a new real estate investment strategy, which is focused on reducing future capital outlays based on new risk-adjusted investment return criteria for evaluating our properties and future investments in such properties We intend to significantly reduce planned future capital expenditures for infrastructure, amenities and master planned community development and reposition assets to encourage increased absorption of properties in their respective markets. We expect properties may be sold in bulk in undeveloped or developed parcels, or at lower price points and over shorter time periods.


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In order to determine which capital expenditures to reduce, we adopted a threshold internal annual rate of return ("IRR") against which we are evaluating our capital expenditures and investments. The time frame for these expenditures and investments will vary based on the type of project. However, we will only incur such expenditures if our analysis indicates that the project will generate an annual return equal to or greater than the threshold IRR over its life. Based on the IRR analysis conducted for capital expenditures and investments in each of our four segments, we currently anticipate that the majority of our future capital expenditures and investments will be in our residential real estate and commercial real estate segments. Commencing in 2011, we decided to focus our rural land sales on non-strategic parcels of rural land, and, therefore, we do not anticipate that significant investments or capital expenditures will be required in that segment in the near future. In addition, within our forestry segment, after considering the current acreage of land that we currently own, we do not anticipate that significant investments or capital expenditures will be required in the near future.

We anticipate that the amount of future capital expenditures associated with existing projects will be reduced by approximately $190 million, the majority of which would have been spent in the next 10 years. We believe this new investment strategy continues to build upon the successful cost reduction initiatives implemented in 2011 and positions us to i) increase our short and medium-term cash flow, ii) reduce our long-term risk and iii) maintain the strong cash position necessary to best exploit our substantial land resources. Additionally, reducing capital expenditures on existing projects will allow us to focus on opportunities that meet our new investment criteria.

Operational Developments for the first nine months of 2012:

Leased 20 acres of the Port St. Joe facility to a regional ship builder, and commenced recognizing rent August 2012;

Completed construction of a build-to-suit facility for ITT Exelis Corporation within the VentureCrossings Enterprise Centre, and commenced recognizing rent in mid-August 2012;

Recognized a $1.7 million gain related to our claims stemming from the Deepwater Horizon Oil Spill;

Operating and corporate expenses declined $23.4 million as compared to the first nine months of 2011 as a result of a reduction in staff, lower legal fees, decreased pension charges, and reduced stock-based compensation charges;

Closed five commercial property sales in Northwest Florida, consisting of 58.2 acres, for an aggregate of $10.3 million;

Closed nine rural land sales, consisting of 6,221 acres, for an aggregate of $23.3 million;

Entered into a joint venture for the Pier Park North project to develop a retail lifestyle center near Panama City; we will contribute approximately 57 acres of land, with a market value of approximately $6.0 million, and an estimated $9.9 million in cash for the project once construction financing for the project and other conditions are met; and

Prepaid approximately $19.9 million of Community Development District assessment obligations in September 2012, saving an estimated $6.0 million in interest expense over the next four and a half years.

As a result of the Deepwater Horizon oil spill, we have filed claims against those parties we believe are responsible for our damages in the consolidated Multi-District Litigation (MDL) actions presently pending in the United States District Court for the Eastern District of Louisiana. That court has preliminarily approved a proposed class settlement that includes portions of our claims. A final approval hearing is scheduled for November 8, 2012. We previously received payments for a total of $1.7 million from the Gulf Coast Claims Facility which represents a small portion of one of our claims. In addition, St. Joe retains additional damages claims in the MDL that are not included in that settlement, which we intend to continue to pursue.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical experience, available current market information and on various other assumptions that management believes are reasonable under the circumstances. Additionally, we evaluate the results of these estimates on an on-going basis. Management's estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and our accounting estimates are subject to change.

The critical accounting policies that we believe reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements are set forth in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes in these policies during the first nine months of 2012, however there is no assurance that these policies will not change in the future.


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Recently Issued Accounting Standards

See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.

Seasonality

Our residential real estate business, which includes our Northwest Florida residential resort and club communities, is affected by seasonal fluctuations, with the spring and summer months traditionally being the most active time of year for customer traffic and sales.


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Results of Operations

Consolidated Results

Revenues and expenses. The following table sets forth a comparison of revenues
and certain expenses of our operations for the three and nine months ended
September 30, 2012 and 2011:



                                                    Three Months Ended September 30,                          Nine Months Ended September 30,
                                             2012        2011       Difference       % Change        2012        2011         Difference       % Change
                                                              (in millions)                                            (in millions)
Revenues:
Residential real estate                    $    9.6     $  3.9      $       5.7          146.1 %    $  17.4     $   9.0      $        8.4           93.3 %
Commercial real estate                          3.6        1.3              2.3          176.9         10.3         2.1               8.2          390.5
Rural land                                     18.9        0.5             18.4          3,680         23.3         3.3              20.0          606.0
Resort and club revenues                       13.1       12.0              1.1            9.1         34.2        30.1               4.1           13.6
Timber sales                                    9.6        8.2              1.4           17.1         28.8        79.0             (50.2 )        (63.6 )
Other                                           1.1        0.8              0.3           37.5          2.8         2.0               0.8           40.0

Total                                          55.9       26.7             29.2          109.3        116.8       125.5              (8.7 )         (6.9 )

Expenses:
Cost of residential real estate revenues        7.0        2.9              4.1          141.3         11.9         6.9               5.0           72.5
Cost of commercial real estate revenues         3.3        0.7              2.6          371.4          6.8         1.1               5.7          518.1
Cost of rural land sales revenue                4.1         -               4.1            100          6.2         0.1               6.1          6,100
Cost of resort and club revenues               10.9       10.6              0.3            2.8         29.3        28.1               1.2            4.3
Cost of timber sales                            5.5        5.1              0.4            7.8         18.0        17.3               0.7            4.0
Cost of other revenues                          0.7        0.7               -              -           1.9         1.9                -              -
Other operating expenses                        3.4        4.7             (1.3 )        (27.7 )       11.4        18.0              (6.6 )        (36.7 )
Corporate expenses                              3.2        2.8              0.4           14.3         12.5        29.3             (16.8 )        (57.4 )
Depreciation and amortization                   2.4        3.0             (0.6 )        (20.0 )        7.2        13.0              (5.8 )        (44.7 )
Impairment losses                                -          -                -              -            -          2.5              (2.5 )       (100.0 )
Restructuring charges                            -         0.4             (0.4 )       (100.0 )        0.1        10.7             (10.6 )        (99.0 )

Total                                          40.5       30.9              9.6           31.1        105.3       128.9             (23.6 )        (18.3 )

Operating Income (Loss)                    $   15.4     $ (4.2 )    $      19.6          466.7 %    $  11.5     $  (3.4 )    $       14.9          438.2 %

Real Estate Revenues. For the three and nine month periods ended September 30, 2012, real estate sales increased over the same periods ended September 30, 2011 principally due to the following:

Higher volumes of homesite sales resulting in a net increase in residential real estate revenue of approximately $5.7 million and $8.4 million, respectively.

Increased number of acres sold in commercial real estate sales transactions resulting in increased revenue of approximately $2.3 million and $8.2 million, respectively.

Increased number of acres sold in rural land sales transactions resulting in increased revenue of approximately $18.4 million and $20.0 million, respectively.

Resorts and Club Revenues. For the three and nine month periods ended September 30, 2012, the increases in revenues over the same periods in 2011 were driven by increased occupancy, room rate increases implemented earlier in 2012, and improved operating margins.


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Timber Revenues. For the three month period ended September 30, 2012, revenues increased by approximately $1.4 million over the same period in 2011 as a result of higher volumes of timber sales. Excluding the impact of a $54.5 million timber deed transaction in the first quarter of 2011, revenues increased approximately $4.3 million in the nine month period ended September 30, 2012 over the same period in 2011 due to the volume increases, offset by price per ton declines.

Cost of Real Estate Sales. For the three month period ended September 30, 2012, the increase in cost of real estate sales over the same period in 2011 was driven by the $26.4 million increase in real estate revenues with corresponding increases in cost of sales of $4.1 million, $2.6 million and $4.1 million in our residential real estate, commercial real estate and rural land sales segments, respectively. For the nine month period ended September 30, 2012, the increase in cost of real estate sales over the same period in 2011 was driven by the $36.6 million in real estate revenues with corresponding increases in cost of sales of $5.0 million, $5.7 million and $6.1 million in our residential real estate, commercial real estate and rural land sales segments, respectively.

The Company capitalizes costs directly associated with development and construction of identified real estate projects and costs indirectly related to the projects under development or construction. The Company capitalized indirect costs of less than $0.1 million, consisting primarily of marketing expenditures, for the three and nine months ended September 30, 2012. For the three months ended September 30, 2011, the Company capitalized indirect costs $0.1 million, consisting primarily of internal development costs, and a total of $4.9 million, consisting primarily of marketing expenditures ($4.4 million) and internal development costs ($0.5 million), for the nine months ended September 30, 2011. The decrease in capitalized indirect costs in the three and nine months ended September 30, 2012 as compared to the same periods in 2011 is a result of decreased activity in the our development program in 2012.

Other operating and Corporate expenses. The quarter over quarter decline of approximately $0.9 million and $23.4 million for the three and nine months ended September 30, 3012 and 2011, respectively, was driven primarily by the following:

                                                   Three Months                  Nine Months
                                                 Ended September               Ended September
                                                     30, 2012                      30, 2012
                                                                 (in millions)
Decrease (increase) in period over
period expenses:
Pension charges                                  $            3.5              $            6.9
Professional and marketing fees                               2.2                          11.5
Occupancy costs                                               0.6                           1.9
Property taxes and insurance expenses                         0.5                           0.9
Stock-based compensation                                      0.2                           7.6
Employee compensation costs *                                (5.9 )                        (3.7 )
Other                                                        (0.2 )                        (1.7 )

Total decline in other operating and
corporate expenses                               $            0.9              $           23.4

* In the three months ended September 30, 2011, the Company recorded a one-time adjustment reducing compensation expense by $5.5 million as a result of the termination of retiree medical benefits.

Depreciation and amortization. The decline in depreciation and amortization costs in the quarter over quarter and nine month over nine month period was driven by the impairment of our long-lived assets occurring in the fourth quarter of 2011. The reduction in the carrying cost to many of these assets necessarily reduced the amount subject to depreciation in the three and nine month periods ended September 30, 2012 and periods subsequent thereto.

Impairment losses. We incurred minimal impairment charges in the nine month period ended September 30, 2012. Impairment charges for the nine months ended September 30, 2011 were related to the $1.7 million write down of a rural retreat community and the write off of $0.8 million in predevelopment costs related to the construction of the our previously proposed new headquarters.

Restructuring charges. Restructuring charges were limited in the three and nine month periods ended September 30, 2012 as programs commencing in periods prior to 2012 were substantially complete at the beginning of 2012, and we did not introduce any new programs during the period. A substantial portion of restructuring charges incurred in the three and nine month periods ended September 30, 2011 were related to our 2011 restructuring program.


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Segment Results

Residential Real Estate

Our residential real estate segment typically plans and develops mixed-use resort, primary and seasonal residential communities of various sizes, primarily on our existing land. This segment also includes our resort and club operations, the purpose of which is to enhance and promote the desirability of our residential real estate. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and land near Jacksonville and Tallahassee.

We believe our residential sales are showing signs of recovery in many of our Northwest Florida projects. However, with the U.S. and Florida economies still battling the adverse effects of home foreclosures, restrictive credit, significant inventories of unsold homes and weak economic conditions, the timing of a sustainable recovery to all our residential projects remains uncertain.

The table below sets forth the results of continuing operations of our residential real estate segment for the three and nine months ended September 30, 2012 and 2011:

                                       Three Months Ended  September               Nine Months Ended  September
                                                    30,                                        30,
                                       2012                    2011                2012                  2011
                                                                    (in millions)
Revenues:
Real estate sales                  $         9.6           $         3.9        $      17.4          $         9.0
Resort and club revenues                    13.1                    12.0               34.2                   30.1
Other revenues                               0.7                     0.7                1.9                    1.7

Total revenues                              23.4                    16.6               53.5                   40.8

Expenses:
Cost of real estate sales                    7.0                     2.9               11.9                    6.9
Cost of resort and club
revenues                                    10.9                    10.6               29.3                   28.1
Cost of other revenues                       0.5                     0.5                1.4                    1.4
Other operating expenses                     2.2                     2.9                7.5                   11.6
Depreciation and amortization                1.6                     2.2                5.0                    7.1
Impairment losses                             -                       -                  -                     1.7
Restructuring charges                         -                      0.1                 -                     0.3

Total expenses                              22.2                    19.2               55.1                   57.1

Other (expense)                             (0.9 )                  (1.0 )             (1.7 )                 (2.5 )

Income (loss) from operations
before equity in loss of
unconsolidated affiliates          $         0.3           $        (3.6 )      $      (3.3 )        $       (18.8 )

Real estate sales include the sale of homesites. Cost of real estate sales includes direct costs (e.g., development and construction costs), selling costs and other indirect costs (e.g., development and construction overhead, warranty and project administration costs). Resort and club revenues and cost of resort and club revenues include results of operations from the WaterColor Inn, our vacation rental programs and other resort, golf, club and marina operations. Other revenues and cost of other revenues consist primarily of brokerage fees . . .

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