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Executives

David Childers - VP, Finance

Bill McCalmont - CFO

Britton Greene - President and CEO

Analysts

Sheila McGrath - KBW

Buck Horne - Raymond James

The St. Joe Company. (JOE) Q4 2008 Earnings Call February 24, 2009 10:30 AM ET

Operator

Good day and welcome to the St. Joe Company Fourth Quarter Earnings Release Conference Call. This call is being recorded. Currently all participants are in a listen-only mode. You will be given a chance later to ask a question.

At this time, I would like to turn the call over to the Vice President of Finance, Mr. David Childers. Please go ahead sir.

David Childers

Good morning and welcome to the St. Joe Company's conference call for 2008 fourth quarter and full-year results. I'm David Childers, Vice President of Finance and Investor Relations. On the call this morning are Britt Greene, our President and CEO; and our Executive Vice President and CFO, Bill McCalmont.

Before we start, let me remind you that matters discussed on this conference call that are not historical facts are forward-looking statements that are based on our current expectation. Actual results may differ materially. Forward-looking statements are subject to certain risks and uncertainties that are described in today's earnings release, and in our SEC filings. These filings are on our website at joe.com. Bill?

Bill McCalmont

Thanks, David. This morning, we announced a net loss for the fourth quarter 2008 of $27.9 million or $0.31 per share. This compares to net income of $1 million or $0.01 per share for the fourth quarter of 2007. Revenues in the quarter were impacted by the global economic slowdown and the ever widening effect of the credit crisis.

Consequently, we experienced softening prices for our residential units and limited demand for both our residential unit and our commercial parcels. Demand for our rural land parcels remain steady, although we are carefully watching any impact that the credit crises may have on pricing or overall demand.

The difficult economic conditions caused us to incur significant non-cash impairment charges in the fourth quarter, totaling $55.8 million pre-tax or $0.34 per share after tax.

These non-cash impairment charges were primarily related to three items. First, we made a decision to reduce prices on the majority of our existing housing inventory to reflect current market conditions, facilitate sales, and eliminate continuing carrying costs. These charges affected 114 homes and totaled $8.2 million pre-tax.

Second, we incurred $28.3 million impairment charge related to the write-down of our SevenShores condominium development and Perico Marina project. SevenShores is a condominium project, which started in 1998 on non-legacy land in Bradenton, Florida, North of Sarasota. As has been reported frequently, there is virtually no demand for condominium projects in this market at this time. It is also important to note that we have not commenced vertical construction.

This condominium development project was written-down to approximate the current fair market value of land entitled for 278 condominium units. This write-down was necessary, because we elected not to invest additional capital or acquire additional land for the project under an existing option agreement.

We had previously incurred certain costs for the project with the expectation that the project would include 686 units. Given the reduced potential scope of the project, we do not believe that those costs are now recoverable. Finally, we wrote-off the goodwill associated with the 1997 acquisition of Arvida's real estate business. Arvida was a master developer and homebuilder that we bought in 1997.

Given the condition in the residential market, our reduced emphasis on residential development and our previous exit from the homebuilding business, we determine that our existing residential projects could no longer support the carrying value of Arvida's goodwill and we recorded a $19 million pre-tax write-off. There is no remaining goodwill associated with the Arvida acquisition.

For the full year of 2008, we had a net loss of $35.9 million, or $0.40 per share compared to net income of $39.2 million or $0.53 per share in 2007. You will find more details of fourth quarter and full-year results in this morning's release and our 10-K including more detail regarding the impact of certain charges in both periods.

In these unprecedented economic times, our primary focus has been and remains the preservation of our unique asset base while identifying capitalizing our future growth opportunities. We believe that we have a very solid balance sheet with virtually no debt and enviable cash position and valuable real-estate assets. Although we are not able to forecast the duration and severity of this continuing recession, we believe the strength of our balance sheet should position us well to weather this economic crisis.

At December 31, 2008, we had cash and pledged treasury securities of $144.4 million compared to debt of $49.6 million. As noted in the release, total debt includes $28.9 million of defeased debt. We also have a fully committed $100 million revolving credit facility. We have not drawn on this facility and we have no current plans to do so.

Because of our current balance sheet strength and the accomplishments of the past year, we are able to focus on the future with the reconstituted business model. During 2008, we greatly reduced capital expenditures and operating costs. We are continuing to intensely review CapEx spending to make certain that each expense is prudent in this environment.

For 2008, our capital expenditures were approximately $35 million, down from approximately $247 million in 2007 and $608 million in 2006. At this time, we expect our 2009 CapEx expenditures to be consistent with our CapEx expenditures in 2008.

We also continue to focus on reducing SG&A. As a result of our restructuring efforts and focus on cost, our total cash overhead, the combination of corporate overhead, field overhead and capitalized overhead declined about $9 million, or 35% during the quarter compared to the fourth quarter a year ago.

We have also included a new table on the 8-K filed today that provides further detail on the make up of this SG&A and breaks it down between employee-related costs, real estate holding costs and other SG&A-related categories. As we move through 2009 in this cycle, we believe it is critical that we continue to carefully mange our assets and maintain our financial and operational flexibility, while not losing sight of future value creation opportunities.

With that I will turn it over to Britt to discuss our activities leading to these value creation opportunities. Britt?

Britt Greene

Thank you, Bill. As Bill noted, our primary focus is preserving Joe’s unique asset base while identifying and capitalizing our future growth options. We have benefited greatly from our successful cost management and asset preservation initiatives. And as we look forward, we are also committing significant resources to the opportunities presented by the opening of the new international airport in Panama City still projected for May 2010.

The year 2008 will long be remembered for the unprecedented decline of global financial and real estate markets. Florida's economy, long linked to estate cycles has suffered even more significantly. We will continue managing the business to maintain our strong cash position. We believe that that approach will provide the widest range of options, to that end we are fully committed to managing our costs.

We have also stepped up efforts to move our standing home and home side inventory by reducing prices at several of our larger communities. As we look forward, let's remember that Florida is still one of the strongest brands in the world. While it remains a place where people want to visit, live and own real estate, Florida will need to aggressively compete for economic development and job creation to maintain the promise of the brand.

We recognize that the world is undergoing structural change. We are evaluating our unique competitive position and how it may have shifted in the midst of this change. There is any number of possible outcomes and there is any number of possible business opportunities available to us. That’s the good news. As a result, we enter 2009 with the ability to explore the most favorable options for our shareholders.

A key part of our strategy going forward is connectivity. We along with others in Northwest Florida are committed to becoming more connected to the global economy. Over the past decade, more than $1 billion in new infrastructure investment has come to Northwest Florida. This includes dollars spent on roads and highways, port and rail improvements, healthcare, education and the arts, as well as the much anticipated new Panama City-Bay County International Airport.

Construction in new airport began in late 2007 and almost half of the site infrastructure work including over 75% of the primary runway is now complete. This new airport is a key component of our global connectivity strategy. By combining the new airport with an underutilized deepwater seaport and rail system, Northwest Florida can connect with the global network and create a unique competitive advantage for businesses locating there.

Looking ahead in 2009 and beyond, we will continue to work with regional officials to stimulate more investments from global businesses and entrepreneurs as well as federal and state municipal government. We're leveraging the new airport as we pursue several opportunities in the 75,000 acre WestBay. Our team is focused on recruiting businesses in the economic clusters that already have a presence in Northwest Florida and have significant growth potential. This is a long-term process, but what we can accomplish now will better position the region and Joe for the future.

We are targeting four economic clusters. First, healthcare as it gained focus from the new national agenda. Second, international trade transportation and logistics with oil trade still expected to grow over the long-term. Third, alternative energy and environment driven by renewable energy and environmental mandates, and fourth, defense and aerospace, which is expected to remain a top-level growth business.

In fact, according to the economic research firm SRI International, this last cluster of defense and aerospace alone currently accounts for more than 30,000 workers at 1900 companies and government establishments in Northwest Florida alone.

During the fourth quarter, Joe also entered into three agreements designed to stimulate economic growth and job creation in Northwest Florida. The first with the Port Authority of Port St. Joe clears the way for the reopening of a deepwater seaport in Port St. Joe. The second, an agreement with Genesee in Wyoming, links that port with the national rail system. The third provides workforce training so important to building a region through a public-private agreement with the state agency Workforce Florida, Gulf Coast Community College, and the Gulf Power Company.

The region is also committed to making Northwest Florida an even more desirable national and international destination for visitors and real estate owners. Our regional brand through the CV 3000 organization has been created to promote the area and its 125 miles of white-sand beaches considered some of the best in America. This is an important building block to attract new airline service to the region.

In summary, we believe that beyond the current economic crisis, these kinds of initiatives will accelerate the demand for our real estate and hence increase revenues and asset value for Joe's shareholders.

Thank you. And we are happy to respond to your questions.

Question-and-Answer Question

Operator

(Operator Instructions) We will take our first question from Sheila McGrath with KBW. Please go ahead.

Sheila McGrath - KBW

Hi, good morning. My first question is on liquidity. Looking at the cash balances of over $115 million, and then notes receivable, could you just walk through, are you going to continue selling rural acreage this year? And also, I thought that there was a tax receivable and I just wanted to know income tax receivable -- the status of that as well?

Bill McCalmont

Thanks, Sheila. I guess yeah, we got a $115 million of cash, a $100 million un-drawn on our credit facility as we noted. And we have notes receivables of approximately $50 million. The income tax receivable at the end of the year was about $32 million. So those are our sources of primary liquidity during 2009, and we would expect to receive that income tax receivable in cash during 2009.

As we look forward in 2009 for our current business plan, I think you will see us moderate our Rural Land Sales, and not focus as heavily on driving cash generation from those land sales and being prudent in managing our inventory from that perspective.

Sheila McGrath - KBW

Okay, great. And then on the transportation, or on the economic stimulus packages, I was just wondering if Northwest Florida is due to benefit from any of those transportation dollars?

Britton Greene

Well, we certainly have our eye on it, Sheila, and we expect that we would have our fair crack just like the rest of the state and opportunity there from a road or infrastructure improvement standpoint. So, I think the state is getting enough there that it can be split among the state, and Northwest Florida will get its fair share as a result.

Bill McCalmont

It's obvious that we are active in promoting our interest in Northwest Florida though and that’s safe to say.

Sheila McGrath - KBW

Okay. And then last question, just on commercial joint-ventures in general and also more specifically on the retail on JV that you've mentioned in the past. Could you just give us an update on that?

Britton Greene

Sure, the venture we are still there, we are still partners. The property is still there, still entitled. But given the nature of the retail marketplace, it has certainly slowed. And while we still aggressively pursue the opportunity for a lease, obviously in this market, we think our original guestimate of when that might come to pass is probably going to be delayed further out. But we still expect that it's a viable and well-placed opportunity with that retail center.

It's just going to take a little bit to get the retailers more comfortable.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. And then just on your thoughts on other commercial JVs, or on land sale. Should we just look for that sector to be a little bit quite in '09 or are you going to have commercial land sales, or you are just pursuing the JVs at this point?

Britton Greene

Well, no. There are still some small commercial opportunities in each of the counties, but it's going to be slow. I think the expect is going to be anything dramatically different than '08, I think would be a push, so we expect that we will still have a commercial sales, we still are having conversations with respect to opportunities and joint-venture, but I have to say, I think the reality is 2009 given the commercial industry as a whole is just going to be tough.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. Thank you.

Britton Greene

Thank you, Sheila.

Operator

We will take our next question from Buck Horne with Raymond James. Please go ahead.

Buck Horne - Raymond James

Hi. Good morning, guys.

Britton Greene

Good morning.

Buck Horne - Raymond James

I just wondering if you could talk maybe a little bit more about SevenShores and kind of exactly what was written off in terms of the cost there, and how much of your original investment is now written off and maybe your thoughts on and would it be better just to sell that property now and focus more on your core Northwest Florida markets?

Bill McCalmont

Sure. Buck I guess, we are considering all alternatives for that project at this point in time, what we don't intend to do is, invest more capital on that project. And as I mentioned in my introductory remarks that, that project was started about a decade ago, it was designed to encompass 686 condominium units in towers on a 193 acres with 119 wet slip marina and 30,000 square feet of commercial.

And the way the agreement with the land seller was documented, we had several takedown options. And at the end of 2008, we elected not to continue exercising those options, not committing further capital to the project which limited the scope for the project to the 278 units that I mentioned in my remarks.

And so, that caused us to write the project down to the current estimated share market value of 278 entitled units for development on that site. But, as I said, we are continuing to review all our alternatives. But don't expect us to invest additional capital at this time.

Buck Horne - Raymond James

Okay. On the $8 million charge for standing inventory, I guess, you mentioned the 114 homes were impaired. Does that represent your entire remaining inventory of finished homes or is there anything else still under active construction?

Bill McCalmont

Nothing is under active construction. Our total standing inventories are 160 homes.

Buck Horne - Raymond James

Okay.

Bill McCalmont

And so, we impaired 114, I mentioned.

Buck Horne - Raymond James

Okay, great. And one further one, I guess, I just noticed the prepaid pension asset in the balance sheet seem to fall pretty dramatically from September. I just wondered if you could add a little color on what's going on with the pension funding and if there is any need to potentially contribute additional cash to that plan if the funding status continues to fall?

Bill McCalmont

Well, our funded ratio is still 1.33 times, the projected benefit obligations.

Buck Horne - Raymond James

Okay.

Bill McCalmont

It did fall as a result of return on assets. Obviously, the pension fund had a percentage of its assets invested in equities, and so the overall decline in the asset value of the fund was down 22% for the year. As far as our expectation going forward, at this point we do not expect to require any funding, but market conditions will dictate that and we are prudently managing that asset going forward.

Buck Horne - Raymond James

Thanks, Gentlemen.

Britton Greene

Thank you, Buck.

Operator

And gentlemen at this time there are no further questions. Mr. Greene I would turn the conference back over to you for closing comments.

Britton Greene

Thank you, Cynthia. I appreciate it. As we go forward obviously, we are in tough times. As we said, we will continue to manage ourselves prudently in these times. And look towards the future and the opportunity to start to create and continue to create opportunities for the shareholders.

If you have any questions, please feel free to give Bill or David Childers a call, and for that we would look forward to talking to you in about 90 days and hope that you have a great day. Thank you.

Bill McCalmont

Thank you.

Operator

Ladies and gentlemen, this will conclude the St. Joe Company's fourth quarter earnings release conference call. We thank you for your participation. And you may disconnect at this time.

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