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The St. Joe Company (NYSE:JOE)

Q3 2013 Earnings Conference Call

November 7, 2013 05:00 PM ET

Executives

Park Brady - Chief Executive Officer

Marek Bakun - Chief Financial Officer

Analysts

Sheila McGrath - Evercore

Buck Horne - Raymond James

Aaron Scully - Janus Capital

Operator

Good day, ladies and gentlemen, and welcome to The St. Joe Company Quarter Three 2013 Earnings Conference Call. At this time, participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Park Brady. You may begin.

Park Brady

Thank you. Sorry everyone we had a little technical glitch in the beginning, so sorry to keep you waiting and listening to the music. I’d like to say hello to everyone and welcome you to St. Joe earnings call for the period ending September 30, 2013. I am Park Brady and joining me on the call is Marek Bakun, our new CFO. Before we get started, Marek will cover the forward looking statement. Marek?

Marek Bakun

Thanks, Park. Some of the information we will discuss on this call is forward-looking. The information includes statements that are preceded by or include the words, believe, expect, intend, anticipate, will, may, could or similar expressions. These forward-looking statements may be affected by the risks and uncertainties of our business, and actual results may differ materially from the forward-looking statements.

Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in this morning’s press release and our SEC filings, which documents are publicly available. Our statements are as of today, November 7, 2013. We have no obligation to update any forward-looking statements that we may make.

Now I’ll turn it back over to Park for some opening comments and after which I’ll review the third quarter results.

Park Brady

Thank you Marek. I would like to start with a brief comment that we’ll provide some context to our discussion today. In our 8-K filed this morning we announced that we entered into an agreement to sell approximately 383 acres of our timberland. With this sale of non-strategic land it leaves us with approximately 180,000 acres of core real estates in Northwest Florida as well as an additional 4,000 plus acres in the remaining Florida areas. It is a strong step forward in the development of our strategy the closing of the transaction is subject to a number of conditions, including the approval by the company’s shareholders. Based on the terms, we expect the closings to occur in the first half of 2014.

This transaction will help the company concentrate on its core business activity of real estate development in Northwest Florida. The proceeds from the sales will provide the company with significant liquidity and numerous opportunities to create long term value for our shareholders. The form 8-K provides a copy of agreement and a summary of the material terms. In addition we are shortly be filing preliminary and then definitive proxy statement with the SEC that will provide additional information regarding this proposed transaction. It will be important for all shareholders to read these definitive documents.

I will turn it back over to Marek for a review of our third quarter financials.

Marek Bakun

I will make some brief comments about the third quarter results before we open up for your questions. We reported revenue of $36.8 million in the third quarter of this year, compared to $55.9 million in the third quarter of last year. Of the $55.9 million in third quarter 2012 revenue, $18.9 million came from rural land sales primarily from two transactions.

Excluding rural land sales, the revenue from the third quarter of last year was approximately $37 million. Net income for third quarter was $4.2 million or $0.05 per share compared to $15.3 million and $0.17 per share in the third quarter of last year. As with revenue, rural land sales in the third quarter of 2012 accounted for $14.7 million of $15.3 million in net income. As such the net income for the third quarter of 2012 was $0.6 million excluding the rural land transactions.

In our residential real estate businesses the number of lots sold in the third quarter increased as compared to prior year. Increase was a result of 62 lot transactions in the WaterSound community. The net income for this segment was $2.4 million compared to a net loss in the third quarter of last year $0.6 million.

The resorts, leisure and leasing operations had a strong third quarter. This segment is comprised of all the recurring revenue streams including vacation resorts, golf clubs and marinas, as well as the retail and commercial leasing operations. Revenue in the segment, which include a $2.1 million in sales of specific operating properties in the third quarter was up 30% as compared to third quarter of last year. Of the 30% increase, approximately half came from the asset sales. The remaining 15% increase was related to revenue from the increased number of homes in our vacation rental program, higher average room rates and positive impact of our commercial leases.

Our timber segment revenue decreased by $1.9 million in the third quarter of this year compared to the third quarter of last year. The volume of timber delivered was down by approximately 100,000 tons, as a result of unusually high amounts of rain over to summer months which impacted the harvesting. Although the volume was down by 27%, the average price per ton was up 9%.

Net income for forestry segment was $2.8 million compared to net income of $3.7 million in the third quarter of last year. Commercial and rural land revenues were minimal in the third quarter as compared to $22.5 million in the third quarter of last year. As stated earlier, two specific transactions made up the majority of that revenue.

We ended the quarter with approximately $23 million in cash and $146 million in investments for a total of approximately $169 million from liquid investments. Our debt remained flat at $48 million over the past quarter.

Now Park would like to make some closing comments.

Park Brady

As a wrap up, I can tell you that we're pleased with the quarter. The increased occupancy rates our vocational rental program as well as the progress made on our overall cost management and impact it is having on our bottom-line. As announced last quarter, for a continuing, the slow political process of entitling our active adult project, you’ll find more information in our earnings release which was released earlier today and in our 10-Q which we're filing probably as we speak.

And for the timberland transaction, we know the first thing everyone will ask is what will Joe will do with the money. This is a real estate transaction and it is not closed yet. This is not the time to have that discussion. After this deal is closed the Board and management will work together to explore a full spectrum of options. As we've said in the past we're taking our time and we’ll keep you posted as we make progress. Operator, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Ms. Sheila McGrath with Evercore. Your line is now open.

Sheila McGrath - Evercore

Yes. Park, I was wondering if you could talk about how we should think about tax implications of the potential sale, are you able to use any deferred tax asset or NOLs to offset potential tax liability?

Park Brady

We have some tax NOLs that we can use, but Sheila if you’ll look at and spend some time, I know the 8-K was a little long because the contracts in there, you’ll see that we have a provision there which allows us to choose an instalment sale if we wish.

Sheila McGrath - Evercore

Okay. And then just on land that you’re selling, I am just trying to figure out, did that also include the land you, the acreage that you pre-sold timber harvest on to that, is that in?

Park Brady

Yes, it also included the timber deed property.

Sheila McGrath - Evercore

Okay. Sorry about that. And then could you just give us a little color in terms of how long this process took, were there many bidders, just a little bit more detail on that?

Park Brady

Sheila, we announced in our 8-K back in the spring that we were exploring this option. We work with numerous potential buyers on this transaction. And we feel very, we’re happy with the pricing of the transaction.

Sheila McGrath - Evercore

Okay. And last question, in the earnings release you mentioned, in the resort segment that there was sale of operating properties. Could you discuss what exactly you sold?

Park Brady

Yes. There was one commercial property that was sold for about $1.9 million. It was the [Hardy’s] that we had done builder suit on, Sheila.

Sheila McGrath - Evercore

Okay.

Park Brady

It wasn’t any resort operations it’s just we carry that in that, then we, in that segment because they operate the businesses.

Sheila McGrath - Evercore

Okay. All right, thanks a lot.

Park Brady

Yeah.

Operator

Thank you. (Operator Instructions). Our next question comes from Mr. Buck Horne. Your line is now open.

Buck Horne - Raymond James

Hey, good afternoon guys. Park I’m little confused why you think now is not a good time to discuss what thing you would like to do with the cash from the potential timber transaction. How would you answer shareholders when they want to understand what the plans are before they approve the transaction? I mean can you discuss what the intent of the cash is do whether it’s buybacks or a dividend or reinvestment in the active adult project?

Park Brady

This is a real estate transaction. As I said, it’s not closed yet. And because of that we are not, we don’t have any plans for the cash at present. We are going to work on that and it will be the management and board get together and decide what this does it gives us a strong balance sheet, it gives us a lots of flexibility, this is land that we’re selling at a price that we are happy with and land that will have no development potential for us for generations to come. So we’re not prepared to discuss what we are going to do with the cash.

Buck Horne - Raymond James

Okay. Well let’s talk about potentially post deal we have about a 184,000 acres, can you help us determine how St. Joe now categorizes the different buckets of land in the remaining portfolio in terms of what’s entitled residential acreage, commercial un-entitled kind of higher and better used land and what you need to set aside for future mitigation and a conservation efforts. I mean can you give us a little bit flavor on the updated land use analysis?

Park Brady

Yeah. Let me just, first of all let me put 184,000 acres in perspective is that it’s 287 square miles, it’s four times the size of the Miami Fort Lauderdale area. It’s over twice the size of the Atlanta region. So it’s a very large piece of land that we still have. We spend a lot of the time in the last two years working on the highest and best value on each of our individual parcels including and what’s in this mainly acreage.

We feel we have got an excellent grass for the best value proposition for each fees. As an example, we are in the process of entitling 110,000 acres next to the Panama City Airport for a very large adult-oriented community. We still have a large commercial area (Jason) Airport, as well as thousands of other important development acres in Northwest Florida that we feel have great potential for our core business in real estate development.

In addition to the development land we are continuing to grow our resorts and lodging business. And we are working on getting report operations. This sale allows us to concentrate on each of these.

Buck Horne - Raymond James

Okay. One more quickly if I can, speaking of the port can you get a quick update on where we’re at with that with engineering reports, anything on the next step, do we have a timeline for dredging the port in hand?

Park Brady

Remember it’s a federally permitted port, so it can be dredged once the funds are found to do that. It is, we’re in the process now, we have already started and funded the engineering process, it will take us a few months to get that done. From that we’ll actually know what the cost in the dredging is going to be. We have two, as we’ve announced we’ve got two letters of intent for users of the port. We continue to constantly talk with other people who are interested in that port facility. The [sick] was going to be getting a dredged and getting it essentially useable today. We have a user there in place, but it needs to be, the key is going to be getting dredging done.

Buck Horne - Raymond James

Okay. I’ll jump back in the queue. Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from Mr. Aaron Scully with Janus. Your line is now open.

Aaron Scully - Janus Capital

Hey guys.

Park Brady

Hey.

Aaron Scully - Janus Capital

Just a quick question on the cash strategy you are looking at receiving cash in the instalments. What are the attributes of receiving the proceeds in instalment?

Park Brady

Go ahead.

Marek Bakun

Yeah. As we disclosed in the 8-K in the supporting contract, we do have the flexibility to get cash on instalment sale. We are evaluating our options and if I want to make the decision, the most advantageous rate for the company take into consideration both cost and benefits of any structure.

Park Brady

It's very complicated, Aaron, the instalment sale process and it's addressing the contracts, our ability to choose to do it or not to do it. I don't think this is a place to get into that much of detail.

Aaron Scully - Janus Capital

No, that's fair. I guess just curious on the duration and apologies if it’s stated in there, but I think we have talked in the past about maybe 10, 15 years. How long potentially could it be that you see these instalments?

Marek Bakun

What we have learned is that instalment sales can go from 10 years to 30 years. And so I think 15 years is a good expectation.

Aaron Scully - Janus Capital

Okay. That's helpful. And then I guess I appreciate that you don't want to get into too much detail on potential impact, if you do see that still goes through. But just theoretically that just seem that the deal goes through. Does that the sale alter or accelerate your strategy in terms of the other growth strategies for the company?

Marek Bakun

What it does is it clears the way for us to concentrate on those things that we had started on. And we've said we've been working on our strategy and we're taking our time to do it. What this does is allow us a lot more flexibility to concentrate on the remaining pieces of Joe.

Aaron Scully - Janus Capital

And just one last question from me, I know in terms of residential development it may have slowed a bit just in terms of the CFO transition I know that at times book lot sales or would be consider potentially, but I think you wanted American place. Just curious on how we should or how you think about residential sales and [bulk] lot sales going forward, should we expect kind of a reacceleration there?

Park Brady

We just opened up WaterSound North and made a [dwell]. We've pulled, held that in advance because we were looking at it as being part of the adult community, but we've now put it out as a conventional product, so we see that accelerating that was part of the 62 lot sale that Marek mentioned. We're seeing Breakfast Point a lot of interest there. It continues to move RiverTown. And yes we will continue, we will still have many acres that we can continue on in the residential single-family lot development.

Aaron Scully - Janus Capital

Great, thanks. I appreciate it.

Operator

Thank you. And our next question comes from Mr. Buck Horne with Raymond James. Your line is now open.

Buck Horne - Raymond James

Hey thanks. Just a quick follow-on to that, I was wondering, can we just get a little bit additional color on how traffic or activity is in terms of demand or pricing for the primary communities in Breakfast Point and RiverTown projects or anything else relative to the resort community, how is demand holding up in a interest level in future lot sales for the primary versus resort type communities?

Park Brady

In the primary communities, we've seen the same philosophy that we've experienced over the last year is that we see no change. In the resort development piece as you know we said that has surprised us about how fast that's going. Our inventory in the resort development that you’ve visited and seen here, are going much faster than we thought. Maybe what we need to do is Marek and I will work together to provide you some additional color the next time around.

Buck Horne - Raymond James

Okay. Yeah, that would be great if we can just get a little bit more detail on kind of what selling and what the pricing trends are looking like in these communities? And I guess the last one I have is, just understanding any kinds of life for potential commercial activity, whether it’s interest in retail, hospitality, office type product, any life in the Commerce Parks right now?

Park Brady

No, that's business as usual for us, it still hasn’t come back. Our project is doing well, it’s leased out above expectations and we feel if that one is going to be a really good one for us, but no in the Commerce Parks the activity has been slow.

Buck Horne - Raymond James

Okay, perfect. Thanks guys.

Operator

(Operator Instructions). At this time, I am not showing any further questions please proceed with any further remarks.

Park Brady

I don’t think we had any other remarks. It sounds like we've answered all the questions. We want to thank everybody for participating in the call and Marek will be available for questions by phone for the next two weeks regarding the documents that are put out. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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