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JOE > SEC Filings for JOE > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ST JOE CO

Form 10-Q for ST JOE CO


8-Aug-2014

Quarterly Report


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

Business Overview
We are a Florida real estate development and operating company with real estate assets concentrated primarily between Tallahassee and Destin, 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. 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 assets opportunistically or when we believe they have reached their highest and best use.

AgReserves Sale
On March 5, 2014, we completed our previously announced sale to AgReserves, Inc. ("AgReserves") of approximately 380,000 acres of land located in Northwest Florida along with certain other assets, inventory and rights under certain continuing leases and contracts (the "AgReserves Sale") for $562 million and recorded pre-tax income of $511.1 million for the AgReserves Sale, which includes $1.2 million of severance costs recorded in Other operating expenses, during the six months ended June 30, 2014. As a result of certain adjustments to the purchase price, consideration received for the AgReserves Sale was (1) $358.5 million in cash, (2) a $200 million fifteen year installment note (the "Timber Note") issued by Panama City Timber Finance Company, LLC, a buyer-sponsored special purpose entity (the "Buyer SPE") and (3) an Irrevocable Standby Letter of Credit issued by JPMorgan Chase Bank, N.A. (the "Letter of Credit") at the request of the Buyer SPE, in favor of us. The Buyer SPE was created by AgReserves with financial instruments with an aggregate principal balance of $203.5 million that secure the Letter of Credit.
In April 2014, we contributed the Timber Note and assigned our rights as a beneficiary under the Letter of Credit to Northwest Florida Timber Finance, LLC, a bankruptcy-remote, qualified special purpose entity wholly owned by us ("NFTF"). NFTF monetized the Timber Note by issuing $180 million aggregate principal amount of its 4.750% Senior Secured Notes due 2029 (the "Senior Notes") at an issue price of 98.483% of the face value to third party investors. The Senior Notes are payable only from the property of NFTF, which consists solely of (i) the Timber Note, (ii) the Letter of Credit, (iii) any cash, securities and other property in certain NFTF accounts, (iv) the rights of NFTF under the contribution agreement with us (which was solely to contribute the Timber Note and the Letter of Credit), and (v) any proceeds relating to the property listed in (i) through (iv) above. The investors holding the Senior Notes of NFTF have no recourse against us for payment of the Senior Notes or the related interest expense.
We received $165.0 million in cash, net of $15.0 million in costs, from the monetization and expect to receive the remaining $20.0 million in fifteen years upon maturity of the Timber Note and after payment of the Senior Notes and any other liabilities of NFTF. The $15.0 million of costs from the monetization include (1) a total of $4.3 million for the discount and issuance costs for the Senior Notes, which will be amortized over the term of the Senior Notes, (2) $7.0 million for U.S. Treasury securities and cash that we contributed to NFTF to be used for interest and operating expenses over the fifteen year period and which are recorded in Investments held by special purpose entities on our Condensed Consolidated Balance Sheets and (3) $3.7 million of costs related to the monetization that were expensed during the three and six months ended June 30, 2014 and are recorded in Administrative costs associated with special purpose entities on our Condensed Consolidated Statements of Operations. We own the equity interest in NFTF, but no equity interest in the Buyer SPE. Both the Buyer SPE and NFTF are distinct legal entities and the assets of the Buyer SPE and NFTF are not available to satisfy our liabilities or obligations and the liabilities of the Buyer SPE and NFTF are not our liabilities or obligations. In the event that proceeds from the financial instruments are insufficient to settle all of the liabilities of the Buyer SPE or NFTF, we are not obligated to contribute any funds to either the Buyer SPE or NFTF.


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We have determined that we are the primary beneficiary of the Buyer SPE and NFTF, and therefore, the Buyer SPE's and NFTF's assets and liabilities are consolidated in our financial statements as of June 30, 2014. The carrying amounts of the Buyer SPE's and NFTF's assets and non-recourse liabilities were $213.9 million and $179.5 million, respectively, as of June 30, 2014. The consolidated assets of the Buyer SPE and NFTF consist of a $200 million time deposit that subsequent to April 2, 2014 pays interest at 4.006% and matures in March 2029, accrued interest of $2.0 million on the time deposit, U.S. Treasuries of $9.6 million, cash of $0.8 million and deferred issuance costs of $1.5 million for the Senior Notes. The consolidated liabilities include the Senior Notes issued by NFTF of $177.3 million, net of the $2.8 million discount and $2.2 million accrued interest expense on the Senior Notes. We have recorded $2.0 million of interest income on the time deposit and amortization of the discount on the U.S. Treasuries in Investment income, net on our Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2014. We recorded $2.1 million of interest expense for the Senior Notes, amortization of the discount and issuance costs during the three and six months ended June 30, 2014.

RiverTown Sale
On April 2, 2014, we completed the previously announced sale to an affiliate of Mattamy (Jacksonville) Partnership d/b/a Mattamy Homes ("Mattamy") of approximately 4,057 acres of real property, which constitutes the RiverTown community in St. Johns County, Florida, along with all of the Company's related development or developer rights, founder's rights and certain tangible and intangible personal property in exchange for (1) $24.0 million in cash, (2) $19.6 million in the form of a purchase money note (the "RiverTown Note"), (3) the assumption of our Rivers Edge Community Development District ("Rivers Edge CDD") assessments and (4) the obligation to purchase certain RiverTown community related impact fee credits from us as the RiverTown community is developed (the "RiverTown Sale").
The RiverTown Note bears interest at 5.25% per annum, matures on June 30, 2015 and is payable as follows: (i) accrued interest on September 30, 2014, (ii) accrued interest plus $1.0 million of principal on March 30, 2015 and (iii) all accrued interest and remaining principal on June 30, 2015. The RiverTown Note is secured by a mortgage imposing a first priority security lien on the real property included the RiverTown Sale.
Based on Mattamy's current development plans and St. Johns County's current costs for impact fees, we may receive approximately $20 million to $26 million for the impact fees over the five-year period following the closing (most of which, we expect to 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 impact fee rates at the time of such development (as determined by St. Johns County's then current impact fee rate schedule), which are all factors beyond our control. We cannot provide any assurance as to the amount or timing of any payments it may receive for the impact fees.

We recorded net earnings of $26.0 million before income taxes for the RiverTown Sale during the second quarter of 2014. Mattamy also assumed our total outstanding Rivers Edge CDD assessments, which were $11.0 million, of which $5.4 million was recorded on our Condensed Consolidated Balance Sheets as of March 31, 2014.


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Segments
We currently conduct primarily all of our business in the following four
reportable operating segments: 1) residential real estate, 2) commercial real
estate, 3) resorts, leisure and leasing operations and 4) forestry.
The following table sets forth the relative contribution of these operating
segments to our consolidated operating revenues, excluding revenues of $570.9
million related to the AgReserves Sale, during the six months ended June 30,
2014 and excluding revenue of $43.6 million related to the RiverTown Sale,
during the three and six months ended June 30, 2014.
                                           Three Months Ended         Six Months Ended
                                                 June 30,                  June 30,
                                           2014           2013         2014        2013
Segment Operating Revenues
Residential real estate                     16.8 %         16.3 %      20.6 %      22.0 %
Commercial real estate                       4.2 %          3.5 %       6.9 %       2.2 %
Resorts, leisure and leasing operations     74.1 %         50.5 %      55.3 %      43.1 %
Forestry                                     4.5 %         29.0 %      17.0 %      32.1 %
Other                                        0.4 %          0.7 %       0.2 %       0.6 %
Consolidated operating revenues            100.0 %        100.0 %     100.0 %     100.0 %

For more information regarding our operating segments, see Note 15, Segment information of our unaudited condensed consolidated financial statements included in this quarterly report.

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;

the sale of impact fee credits; and

other 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.


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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, our restaurants 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.
Clubs and Resorts - Our clubs and resorts include our golf courses and resort facilities that generate revenues from memberships, daily play at those golf courses that are not part of our St. Joe Club & Resorts, 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.
St. Joe Club & Resorts is our private membership club that provides participating homeowners and their rental guests access to our clubs. We launched St. Joe Club & Resorts in January 2014, and as a result of this initiative, certain of our clubs are no longer available to the public. While we expect revenues generated from these facilities to decline, we expect that revenues from our higher margin vacation rental business will increase in the future as we believe that the St. Joe Club & Resorts will provide us a competitive advantage in this business.
In May 2014, St. Joe Club & Resorts began managing The Pearl, a fifty-five room resort hotel in Rosemary Beach, Florida. Revenues generated for our management services of The Pearl include a management fee, fifty percent of resort fees and a percentage of The Pearl's gross operating profit. Expenses incurred include primarily internal personnel costs.
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, personnel costs and third party management fees.
Leasing Operations - Our leasing operations generate revenues from leasing retail and commercial property, including properties located in our consolidated joint venture at Pier Park North, and incur expenses primarily from maintenance of these properties and personnel costs.

Forestry
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.
Our forestry segment may also generate revenues from the sale of our timber holdings, undeveloped land or land with limited development and easements. Costs incurred as part of a sale of these lands may include the cost of timber, land, minimal development costs and selling costs.
Prior to the AgReserves Sale, a significant portion of the revenue from our forestry segment was generated pursuant to our RockTenn Supply Agreement, under which we sold delivered wood (trees that we cut and deliver). As part of the AgReserves Sale, the RockTenn Supply Agreement was assumed by AgReserves. Subsequent to the AgReserves Sale, revenue from our forestry segment has decreased substantially and be primarily from open market sales of timber.


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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, 2013. There have been no significant changes in these policies during the first six months of 2014, however we cannot assure you that these policies will not change in the future.

Recently Adopted and Issued Accounting Pronouncements See Note 1 to our unaudited condensed consolidated financial statements included in this report for recently issued or adopted accounting standards, including the date of adoption and effect on our condensed consolidated financial statements.

Seasonality
Our residential real estate business and our resorts, leisure and leasing operations businesses are affected by seasonal fluctuations. Revenues from our resorts, leisure and leasing operations businesses are typically higher in the second and third quarters; however, they can vary depending on the timing of holidays and school breaks, including spring break. Historically, our residential real estate business revenues have been higher in the second and third quarters due to increased customer traffic and sales; however, we have begun to see a shift away from seasonality as we sell more lots directly to homebuilders.
Following the AgReserves Sale, our business is more dependent upon the real estate industry and resorts, leisure and leasing businesses as income from our forestry operations has been reduced. Therefore, the cyclical nature of our real estate operations could become more apparent in our quarterly or annual results of operations and cash flows.


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Results of Operations
Consolidated Results
The following table sets forth a comparison of the results of our operations for
the three and six months ended June 30, 2014 and 2013. Our consolidated results
of operations are not necessarily comparable from period to period due to the
impact of the AgReserves Sale and the RiverTown Sale.
                                              Three Months Ended             Six Months Ended
                                                    June 30,                      June 30,
                                              2014            2013           2014          2013
                                                                In millions
Revenues:
Real estate sales                         $     48.9       $     7.0     $    626.6     $   15.0
Resorts, leisure and leasing revenues           18.2            17.0           26.4         26.1
Timber sales                                     1.1             9.8            9.2         19.5
Total                                           68.2            33.8          662.2         60.6
Expenses:
Cost of real estate sales                       20.4             3.7           82.4          8.7
Cost of resorts, leisure and leasing
revenues                                        13.6            12.7           21.8         20.9
Cost of timber sales                             0.2             5.8            4.1         11.8
Other operating expenses                         2.8             3.2            7.2          6.1
Corporate expenses                               4.4             4.5            8.5          9.0
Administrative costs associated with
special purpose entities (Note 4)                3.7               -            3.7            -
Depreciation, depletion and amortization         2.0             2.3            4.0          4.7
Total                                           47.1            32.2          131.7         61.2
Operating income (loss)                         21.1             1.6          530.5         (0.6 )
Other income (expense):
Investment income, net                           3.9             0.3            4.2          0.4
Interest expense                                (2.2 )          (0.3 )         (2.9 )       (0.9 )
Other, net                                       0.5             1.1            1.4          1.3
Total other income                               2.2             1.1            2.7          0.8
Income before equity in loss from
unconsolidated affiliates and income
taxes                                           23.3             2.7          533.2          0.2
Income tax expense                              (8.7 )             -         (115.6 )          -
Net income                                $     14.6       $     2.7     $    417.6     $    0.2


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Real Estate Sales and Gross Margin.
                                      Three Months Ended June 30,                  Six Months Ended June 30,
                                  2014        % (1)      2013      % (1)      2014       % (1)      2013      % (1)
                                                               Dollars in millions
Revenues:
Residential real estate sales $    4.2         8.6 %   $  5.5      78.6 %   $   9.9       1.6 %   $ 13.3      88.7 %
RiverTown Sale                    43.6        89.2 %        -         - %      43.6       7.0 %        -         - %
Commercial real estate sales       1.0         2.0 %      1.2      17.1 %       3.4       0.5 %      1.4       9.3 %
AgReserves Sale and other          0.1         0.2 %      0.3       4.3 %     569.7      90.9 %      0.3       2.0 %
Real estate sales             $   48.9       100.0 %   $  7.0     100.0 %   $ 626.6     100.0 %   $ 15.0     100.0 %

Gross profit:
Residential real estate sales $    1.7        40.5 %   $  2.4      43.6 %   $   4.7      47.5 %   $  5.4      40.6 %
RiverTown Sale                    26.0        59.6 %        -         - %      26.0      59.6 %        -         - %
Commercial real estate sales       0.7        70.0 %      0.6      50.0 %       2.3      67.6 %      0.6      42.9 %
AgReserves Sale and other          0.1       100.0 %      0.3     100.0 %     511.2      89.7 %      0.3     100.0 %
Gross profit                  $   28.5        58.3 %   $  3.3      47.1 %   $ 544.2      86.8 %   $  6.3      42.0 %

Calculated percentage of total real estate sales and the respective gross (1 ) profit percentage.

Real Estate Sales. During the three months ended June 30, 2014, real estate sales increased $41.9 million primarily due to the RiverTown Sale. As a result of the RiverTown Sale, we recorded $43.6 million in revenues from residential real estate sales. Excluding the RiverTown Sale, residential real estate sales decreased $1.3 million, or 24%, to $4.2 million during the three months ended June 30, 2014, as compared to $5.5 million during the same period in 2013. This decrease is primarily due to a decrease in available homesites for sale in our resort communities during the three months ended June 30, 2014, as compared to the same period in 2013. Commercial real estate sales decreased $0.2 million during the three months ended June 30, 2014, as compared to the same period in 2013.

During the six months ended June 30, 2014, real estate sales increased $611.6 million primarily due to the AgReserves Sale and the RiverTown Sale. As part of the AgReserves Sale and the RiverTown Sale, we recorded $569.7 million and $43.6 million, respectively, in revenues from real estate sales. Real estate sales for the AgReserves Sales, included the recognition of $11.0 million of revenue, which had been previously recorded as deferred revenue in connection with a 2006 agreement with the Florida Department of Transportation (the "FDOT") pursuant to which we agreed to sell approximately 3,900 acres of rural land to the FDOT. As part of the AgReserves Sale, we transferred approximately 800 acres that are subject to the 2006 agreement to AgReserves who has agreed to transfer title to the FDOT.

Excluding the RiverTown Sale, residential real estate sales decreased $3.4 million, or 26%, to $9.9 million during the six months ended June 30, 2014, as compared to $13.3 million during the same period in 2013. This decrease is primarily due to a decrease in available homesites for sale in our resort communities during the six months ended June 30, 2014, as compared to the same period in 2013. The decrease in residential sales is partially offset by an increase of $2.0 million in commercial real estate sales during the six months ended June 30, 2014, as compared to the same period in 2013.

Real Estate Sales Gross Profit. During the three months ended June 30, 2014, we recorded gross profit of $26.0 million, or 59.6%, for the RiverTown Sale. Excluding the RiverTown Sale, gross profit was $2.5 million, or 47.2%, during the three months ended June 30, 2014, as compared to $3.3 million, or 47.1%, during the same period in 2013.


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During the six months ended June 30, 2014, we recorded gross profit of $511.2 million, or 89.7%, for the AgReserves Sale and $26.0 million, or 59.6%, for the RiverTown Sale. Excluding the AgReserves Sale and the RiverTown Sale, gross profit was $7.0 million, or 52.6%, during the six months ended June 30, 2014, as compared to $6.3 million or 42.0% during the same period in 2013. The increase in gross profit, excluding the AgReserves Sale and the RiverTown Sale, is primarily due to the increase in commercial sales, which typically have higher gross profit margins as compared to residential real estate sales, and increases in prices in our residential resort communities and the lot residual received which has no related cost.

As a result of the AgReserves Sale, we do not expect to have substantial revenues from sales of our timber or rural lands in the future, which typically yield higher gross profit margins than residential and commercial real estate sales, thus also potentially decreasing future gross profit margins. Resorts, Leisure and Leasing Revenues and Gross Profit.

                                                                                       Six Months Ended
                                               Three Months Ended June 30,                  June 30,
                                                2014                 2013             2014           2013
                                                                  Dollars in millions
Resorts, leisure and leasing revenues     $        18.2         $        17.0     $     26.4      $    26.1
Gross profit                              $         4.6         $         4.3     $      4.6      $     5.2
Gross profit margin                                25.3 %                25.3 %         17.4 %         19.9 %
. . .
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