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JOE > SEC Filings for JOE > Form 10-K on 28-Feb-2014All Recent SEC Filings

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Form 10-K for ST JOE CO


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview
We are a Florida real estate development and operating company that as of December 31, 2013, owned approximately 567,000 acres of land concentrated primarily between Tallahassee and Destin, Florida. We have significant residential and commercial land-use entitlements in hand or in process. We seek higher and better uses for our assets through a range of activities from strategic land planning and development, infrastructure improvements and promoting economic development in the regions where we operate. We may explore the sale of such assets opportunistically or when we believe they have reached their highest and best use.

AgReserves Sale

On November 6, 2013, we entered into a purchase and sale agreement with AgReserves for the sale of approximately 382,834 acres of land located in Northwest Florida owned by us along with certain other assets and inventory and rights under certain continuing leases and contracts, for $565 million subject to adjustment as set forth in the AgReserves Sale Agreement. The acreage to be included in the AgReserves Sale includes substantially all of our land designated for forestry operations as well as other land (i) that is not utilized in our residential or commercial real estate segments or its resorts, leisure and leasing segment or (ii) that is not part of our development plans. The acreage to be included in the AgReserves Sale is subject to limited adjustments based on title and environmental diligence and casualty events between signing and closing. As of December 31, 2013, the estimated carrying amount of the assets to be included in the AgReserves Sale were $56.4 million and the carrying amount of the liabilities to be included in the AgReserves Sale were $12.6 million, which includes approximately $11 million of deferred revenue related to a 2006 rural land sale, where title has not yet transferred to the buyer. As part of the AgReserves Sale Agreement, this land is expected to be transferred to AgReserves to ultimately transfer title to the buyer. AgReserves has delivered a deposit of $37.5 million for the AgReserves Sale and the remaining purchase price is payable at closing in cash or, at our option, a combination of cash and timber installment notes.

The closing of the AgReserves Sale is subject to a number of conditions, including among others: (i) approval by our shareholders (a shareholders' meeting for this purpose is presently scheduled for March 4, 2014), (ii) the expiration or termination of all waiting periods under regulatory law applicable to the AgReserves Sale, and (iii) the purchase price not being reduced by more than $40 million as a result of any reduced acreage.

The AgReserves Sale Agreement contains certain termination rights, including if it is not completed on or before May 1, 2014 or if the approval of our shareholders is not obtained. If the AgReserves Sale is terminated under certain circumstances, we may be required to pay AgReserves certain fees and expenses, including: (i) a termination fee of approximately $21 million if (a) in certain cases, our shareholders' do not approve the AgReserves Sale, (b) we enter into a definitive transaction agreement providing for the consummation of the transaction contemplated by a Superior Proposal (as defined in the AgReserves Sale Agreement), or (c) our Board makes a Recommendation Change (as defined in the AgReserves Sale Agreement) or fails to recommend that our shareholders approve the AgReserves Sale; or (ii) AgReserves's transaction costs and expenses which in some cases are limited to $1.5 million. Except in certain limited cases as set forth in the AgReserves Sale agreement, we are required to return the deposit to AgReserves if the AgReserves Sale Agreement is terminated.

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RiverTown Sale

On December 31, 2013, we entered into a purchase and sale agreement with Mattamy to sell our RiverTown Community for $43.6 million subject to adjustments and prorations as set forth in the RiverTown Sale Agreement. The closing is subject to customary real estate closing conditions. As of December 31, 2013, the estimated net carrying amount of the assets and liabilities to be included in the RiverTown Sale were $16.7 million.
Additionally, pursuant to the RiverTown Sale Agreement, Mattamy will be required to:
(i) purchase certain RiverTown Community related impact fee credits from us following the closing as the RiverTown Community is developed, and
(ii) assume our Rivers Edge CDD obligations. As of December 31, 2013, our total outstanding Rivers Edge CDD assessment was $11.1 million, of which $5.6 million is recorded as a liability for the Rivers Edge CDD assessments associated with platted property. Based on Mattamy's current development plans and St. Johns County's current costs for impact fees, we estimate that we may receive $20 million to $26 million for the impact fees over the five-year period following the closing (most of which, we could receive at the end of that five-year period). However, the actual additional consideration received for the impact fees will be based on Mattamy's actual development of the RiverTown Community, the timing of Mattamy's development of the RiverTown Community and the cost for impact fees at the time of such development (as determined by St. Johns County's then current impact fee cost schedule), which are all factors beyond our control. We cannot provide any assurance as to the amount or timing of any payments we may receive for the impact fees.

Mattamy has delivered an initial refundable deposit of $0.1 million, and the balance of the deposit, $1.9 million, which may at Mattamy's election be paid in the form of a letter of credit, will be due within three business days of the conclusion of the inspection period. The remaining balance of the purchase price is payable at closing in cash.

The RiverTown Sale Agreement contains certain termination rights, including Mattamy's right to terminate the RiverTown Sale Agreement, in its sole and absolute discretion, at any time before the expiration of the inspection period and receive a full refund of the deposit then paid. Additionally, the RiverTown Sale Agreement provides that the closing shall occur no later than March 30, 2014. Except in certain limited cases as set forth in the RiverTown Sale Agreement, we are required to return the deposit to Mattamy if the RiverTown Sale Agreement is terminated.

Subject to the terms and conditions set forth in the RiverTown Sale Agreement, we have agreed to indemnify Mattamy from certain losses, including for any pre-closing defaults under certain contracts. Additionally, subject to the terms and conditions set forth in the RiverTown Sale Agreement, Mattamy is entitled to seek all available remedies against us for any material misrepresentation made by us in our representations and warranties and any default by us as to any of its agreements or matters that are to be performed under the RiverTown Sale Agreement, as well as, specific performance in certain circumstances.

Following the consummation of the AgReserves Sale and the RiverTown Sale, we expect to continue to be the owner of approximately 180,000 acres of land concentrated primarily in Northwest Florida, which we predominantly use or intend to use for, or in connection with, our various residential or commercial real estate developments or our resorts, leisure and leasing operations or our forestry operations on a limited basis.

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As of December 31, 2013, we have five operating segments: residential real
estate, commercial real estate, rural land, resorts, leisure and leasing
operations and forestry. The table below sets forth the relative contribution of
these operating segments to our consolidated operating revenues:
                                         2013      2012      2011
Segment Operating Revenues
Residential real estate                  25.7 %    15.9 %     8.7 %
Commercial real estate                    8.3 %     7.5 %     2.6 %
Rural land                                0.1 %    16.8 %     2.4 %
Resorts, leisure and leasing operations  38.7 %    31.8 %    26.3 %
Forestry                                 27.0 %    28.0 %    59.7 %
Other                                     0.2 %       - %     0.3 %
Consolidated operating revenues         100.0 %   100.0 %   100.0 %

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.
Our residential real estate segment generates revenues primarily from:
• the sale of developed homesites and homes;

• the sale of parcels of entitled, undeveloped lots;

•         a lot residual on homebuilder sales that provides us a percentage of
          the sale price of the completed home if the home price exceeds a
          negotiated threshold; and

• fees on certain transactions.

Our residential real estate segment incurs cost of revenues primarily from costs directly associated with the land, development and construction of real estate sold and indirect costs such as development overhead, capitalized interest, marketing, project administration, and selling costs.

Commercial Real Estate
In our commercial real estate segment we plan, develop and entitle our land holdings for a variety of uses including a broad range of retail, office, hotel and industrial uses. We sell land for commercial and light industrial uses. From time to time, our commercial real estate segment also sells certain resorts, leisure and operating properties.

Our commercial real estate segment generates revenues from the sale of developed and undeveloped land for retail, office, hotel and industrial uses, from the sale of undeveloped land or land with limited development and easements and the sale of commercial operating properties. Our commercial real estate segment incurs costs of revenues from costs directly associated with the land, development, construction and selling costs.

Rural Land
Our rural land segment markets and sells tracts of land of varying sizes for rural recreational, conservation and timberland uses. Our rural land segment generates revenues from the sale of undeveloped land, land with limited development and easements. Our rural land segment incurs costs of revenue from the cost of land, minimal development costs and selling costs. Revenues can vary drastically in our rural land segment.

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Resorts, Leisure and Leasing Operations
Our resorts, leisure and leasing operations segment generates revenues from our recurring revenue streams, which primarily include the WaterColor Inn and vacation rentals, golf courses, marinas and leasing operations. WaterColor Inn and Vacation Rentals - Our resorts and leisure operations generate revenues from the WaterColor Inn and Resort, the WaterSound Beach club and our vacation rental businesses in WaterColor, WaterSound Beach and surrounding communities . The WaterColor Inn incurs expenses from the cost of services and goods provided, personnel costs and third party management fees. Our vacation rental business generates revenues from the rental of private homes. The vacation rental business incurs expenses from marketing, personnel and general maintenance for the homeowner. Also included in the vacations rental business' costs are amounts owed to the homeowner for their percentage of rental revenue.
Golf Courses - Our golf courses generate revenues from memberships, daily play, merchandise sales and food and beverage sales and incur expenses from the services provided, maintenance of the golf course facilities, personnel costs and third party management fees.
Marinas - Our marinas generate revenues from boat slip rentals and fuel sales, and incur expenses from cost of services provided, maintenance of the marina facilities and personnel costs.
Leasing Operations - Our leasing operations generate revenues from leasing retail and commercial property and incur expenses primarily from maintenance of the properties and personnel costs.

Our forestry segment focuses on the management and harvesting of our 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 RockTenn Supply Agreement, under which we sell delivered wood (trees that we cut and deliver). Under the terms of 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 Container Corporation 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 from the date of closure. 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 could increase. As part of the AgReserves Sale, the RockTenn Supply Agreement will be assumed by AgReserves.

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.

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Investment in Real Estate and Cost of Real Estate Sales. Costs associated with a specific real estate project are capitalized during the development period. We capitalize costs directly associated with development and construction of identified real estate projects. Indirect costs that clearly relate to a specific project under development, such as project administration, may also be capitalized. We capitalize interest (up to total interest expense) based on the amount of underlying expenditures and real estate taxes on real estate projects under development.
Real estate inventory costs also include land and common development costs (such as roads, sewers and amenities), capitalized property taxes, capitalized interest and certain indirect costs. A portion of real estate inventory costs and estimates for costs to complete are allocated to each unit based on the relative sales value of each unit as compared to the estimated sales value of the total project. These estimates are reevaluated at least annually and more frequently if warranted by market conditions or other factors, with any adjustments being allocated prospectively to the remaining units available for sale.
The capitalization period relating to direct and indirect project costs is the period in which activities necessary to ready a property for its intended use are in progress. The period begins when such activities commence, typically when we begin the entitlement processes for land already owned, and ends when the asset is substantially complete and ready for its intended use. Determination of when construction of a project is substantially complete and ready for its intended use requires judgment. We determine when the capitalization period begins and ends through communication with project and other managers responsible for the tracking and oversight of individual projects. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. If we determine not to complete a project, any previously capitalized costs are expensed in the period in which the determination is made and recovery is not deemed reasonable.
Our investments in real estate are carried at cost, net of depreciation and timber depletion, unless circumstances indicate that the carrying value of the assets may not be recoverable. If we determine that an impairment exists due to the inability to recover an asset's carrying value, an impairment charge is recorded to the extent that the carrying value exceeds estimated fair value. If such assets were held for sale, the provision for loss would be recorded to the extent that the carrying value exceeds estimated fair value less costs to sell. Long-Lived Assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets include our investments in operating, development, investment property and property and equipment, net. Some of the events or changes in circumstances that we consider as indicators of potential impairment include:

• a prolonged decrease in the fair value or demand for the properties;

• a change in the expected use or development plans for the properties;

• continuing operating or cash flow losses for an operating property; and

• an accumulation of costs in a development property that significantly exceeds its historical basis in property held long-term.

We use varying methods to determine if impairment exists, such as (i) considering indicators of potential impairment, (ii) analyzing expected future cash flows and comparing the expected future undiscounted cash flows of the property to the carrying value, or (iii) determining market resale values. The accounting estimate related to real estate impairment evaluation is susceptible to change due to the use of assumptions about future sales proceeds and future expenditures. For projects under development, an estimate of future cash flows on an undiscounted basis is performed using estimated future expenditures necessary to maintain the existing project and using management's best estimates about future sales prices and planned holding periods. Based on our risk-adjusted investment return criteria for evaluating our projects under development or undeveloped, management's assumptions used in the projection of undiscounted cash flows include:

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• the projected pace of sales of homesites based on estimated market conditions and our development plans;

• estimated pricing and projected price appreciation over time, which can range from 0 to 5% annually;

•the amount and trajectory of price appreciation over the estimate selling period;
• the length of the estimated development and selling periods, which can differ depending on the size of the development and the number of phases to be developed;

• the amount of remaining development costs, including the extent of infrastructure or amenities included in such development costs;

• holding costs to be incurred over the selling period;

• for bulk land sales of undeveloped and developed parcels future pricing is based upon estimated developed lot pricing less estimated development costs and estimated developer profit at 20%;

• for commercial development property, future pricing is based on sales of comparable property in similar markets; and

• whether liquidity is available to fund continued development.

For operating properties, an estimate of undiscounted cash flows requires management to make similar assumptions about the use and eventual disposition of such properties. Some of the significant assumptions that are used to develop the undiscounted cash flows include:
• for investments in inns and rental condominium units, average occupancy and room rates, revenues from food and beverage and other amenity operations, operating expenses and capital expenditures, and eventual disposition of such properties as private residence vacation units or condominiums, based on current prices for similar units appreciated to the expected sale date;

• for investments in commercial or retail property, future occupancy and rental rates and the amount of proceeds to be realized upon eventual disposition of such property at a terminal capitalization rate; and

• for investments in golf courses, future memberships, rounds and greens fees, operating expenses and capital expenditures, and the amount of proceeds to be realized upon eventual disposition of such properties at a multiple of terminal year cash flows.

Other properties that management does not intend to sell in the near term under current market conditions and has the ability to hold are evaluated for impairment based on management's best estimate of the long-term use and eventual disposition of the property.

The results of impairment analysis for development and operating properties are particularly dependent on the estimated holding and selling period for each asset group. As a result of our adoption of our risk-adjusted investment return criteria, these future holding periods were reduced. As we have new projects or developments, we will use specific holding periods for these new projects or developments, which may include longer holding periods.
If a property is considered impaired, the impairment charge is determined by the amount the property's carrying value exceeds its fair value. We use varying methods to determine fair value, such as (i) analyzing expected future cash flows, (ii) determining resale values by market, (iii) applying a capitalization rate to net operating income using prevailing rates in a given market or (iv) applying a multiple to revenues using prevailing rates in a given market. The fair value of a property may be derived either from discounting projected cash flows at an appropriate discount rate (10% to 20%), through appraisals of the underlying property, or a combination thereof.
We classify the assets and liabilities of a long-lived asset as held-for-sale when management approves and commits to a formal plan of sale and it is probable that a sale will be completed. The carrying value of the assets held-for-sale are then recorded at the lower of their carrying value or fair value less costs to sell.

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Investments. During 2013, we invested $149.1 million of our cash and cash equivalents in U.S. treasury securities and corporate debt securities. We have classified these investments as available-for-sale securities and record the investments at fair value, which is based on quoted market prices. Accordingly, unrealized gains and temporary losses on investments, net of tax, are recorded in Other comprehensive income. Realized gains and losses are determined using the specific identification method.
We evaluate investments with unrealized losses to determine if they experienced an other-than-temporary impairment. This evaluation is based on various factors, including length of time securities were in a loss position, ability and intent to hold investments until unrealized losses are recovered or they mature, investee's industry and amount of the unrealized loss. Based on these factors, the unrealized losses related to our corporate debt securities of $2.2 million were determined to be temporary at December 31, 2013.
Retained interest investments. We have recorded retained interest with respect to the monetization of certain installment notes through the use of qualified special purpose entities, which is recorded in Other assets in our Consolidated Balance Sheets. At the time of monetization the initial retained interest recorded was an estimate based on the present value of future excess cash flows expected to be received over the life of the notes, using management's best estimate of underlying assumptions, including credit risk and discount rates. We recognize investment income over the life of the retained interest using the effective yield method with rates ranging from 3.7%-12.5% based on expected future cash flows. We continue to update the expectation of cash flows to be collected over the life of the retained interest. Changes to the previously projected cash flows are accounted for prospectively, unless based on management's assessment of current information and events, it is determined that there is an other-than-temporary impairment. We have not recorded an other-than-temporary impairment related to our retained interest investments in 2013, 2012 and 2011.

Pension plan. In November 2012, our Board of Directors approved the termination of our cash balance defined-benefit pension plan covering a majority of our employees ("Pension Plan"). The accounting for pension benefits is determined by accounting and actuarial methods using numerous estimates, including discount rates, expected long-term investment returns on plan assets, and mortality and retirement ages. Changes in these key assumptions can have a significant effect on the Pension Plan's impact on our financial statements; however, due to the termination of the Pension Plan a 1% change in the assumed long-term rate of return on pension assets or discount rate would have resulted in an insignificant change in pre-tax income. Changes in the funded status of the Pension Plan are initially recognized in Other comprehensive income (loss) and are typically amortized into net income (loss) over a period of time or recognized at the time of a specific event, such as a curtailment of benefit plan obligations. Actuarial loss amounts not yet reflected in net periodic pension cost and included in accumulated other comprehensive loss are $5.4 million at December 31, 2013. As of December 31, 2013, our Pension Plan was in a net overfunded position of $35.1 million and the ratio of plan assets to projected benefit obligation was 249%.

We anticipate receiving between $18 million to $21 million in cash in 2014 or 2015 upon the termination of our pension plan, which is overfunded. However, we cannot provide any assurance as to this timing as regulatory approval for the termination of the pension plan is required before the cash will be released to us. In addition, we currently expect to recognize future estimated losses before income taxes of approximately $20 million to $23 million as a result of terminating our pension plan.
Income Taxes. In preparing our Consolidated Financial Statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We recorded a valuation allowance against our . . .

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