Earnings Transcript for JOE - Q4 Fiscal Year 2013

Executives: Park Brady - Chief Executive Officer Marek Bakun - Chief Financial Officer

Analysts: Buck Horne - Raymond James Aaron Scully - Janus Capital Sheila McGrath - Evercore

Operator: Good day, ladies and gentlemen, and welcome to The St. Joe Company Full Year and Fourth Quarter 2013 Earnings Results Call. At this time, all participants are in a listen-only mode. Later, we will 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, Park Brady, Chief Executive Officer. Please go ahead.

Park Brady - Chief Executive Officer: Hello, everyone and welcome to the St. Joe earnings call for the full year and fourth quarter ending December 31, 2013. This is Park Brady and joining me on the call is Marek Bakun, our new CFO. Before we get started, Marek will cover the forward-looking statements. Marek?

Marek Bakun - Chief Financial Officer: Thank you, Park. Some of the information we will discuss in this call is forward-looking. This 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 maybe 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 today’s morning’s press release and our SEC filings, which documents are publicly available. Our statement as of today, February 27, 2014, we have no obligation to update any forward-looking statements that we may make. Now, I will turn it back over to Park for some opening comments, after which I will review the fourth quarter 2013 results.

Park Brady - Chief Executive Officer: Thanks, Marek. The company took a number of important steps in the overall strategy development in 2013. We put approximately 383,000 acres of Timberland under contract with AgReserves, which is expected to close next week. Although the closing is subject to a number of conditions, including approval by the company’s shareholders on Tuesday, the transaction is proceeding as planned. The acreage in the transaction is substantially all of our land designated for forestry operations, as well as other lands that are not utilized in our residential and commercial real estate segments for our resorts, leisure or leasing segments or is not part of our development plans. Next, the RiverTown project in Jacksonville is also under contract. This project as we have said before is outside of our core area of Northwest Florida. The St. Joe Club & Resorts, a private membership club was launched at the start of this year. This club consolidates two marinas, three golf clubs, the WaterColor Inn Beach Club, all of these under one umbrella. St. Joe Club & Resorts will give us significant advantage as we compete to increase our share of vacation rentals in the area, as well as incentives to new homebuyers in our projects. We are off to a strong start in the membership sign-ups this year. In 2013, we also commenced the process to update and expand the previously approved West Bay sector plan to establish a long-term land use master plan for active lifestyle adult community that will be based on value health in the environment. Pier Park North is a joint venture to construct a 330,000 square foot retail lifestyle center in Panama City Beach. The anchored tenant Dicks Sporting Goods is planning to open in the next two weeks with more tenants to follow over the coming months. Lastly, we will have and continue to explore new and existing commercial and industrial uses around the airport, residential development opportunities in our port of St. Joe. I will turn it back over to Marek for a full review of our full year and fourth quarter 2013 financials.

Marek Bakun - Chief Financial Officer: I will make some brief comments about the full year and fourth quarter 2013 results before we open up for your questions. Revenue in the fourth quarter of 2013 increased 50% over the fourth quarter of 2012. The increase was the result of timing in real estate sales, which increased to $17.2 million in the fourth quarter of 2013 as compared to only $4.6 million in the fourth quarter of 2012. For the full year 2013, revenue ended at $131.2 million as compared to $139.4 million in 2012. In 2012, revenue included $23.4 million which came from rural land sales primarily from two transactions which are not easily repeated. In 2013, we recorded an impairment charge of $5.1 million related to assets primarily in our resorts, leisure and leasing operations segments that we operate. In 2012 we incurred an impairment charge of $2.6 million related to parking facility which we agreed to seize operating as a parking facility for a period of time. Even with the $5.1 million impairment charge the net income for the fourth quarter was $0.5 million compared to a loss of $8.6 million or $0.09 per share in the fourth quarter of 2012. For the full year 2013, net income was $5 million compared to $6 million in 2012. As with revenue, rural land sales in 2012 accounted for $16.8 million of the total of the $6 million in net income. For the full year 2013 revenues and gross margins increased in the company’s residential real estate business, commercial real estate business and resorts, leisure and leasing business, while revenues decreased in the forestry segment. There were no significant transactions in the company’s rural land segment in 2013. Going into each business segment, in our residential real estate business the number of lots sold in 2013 as well as the margins increased substantially as compared to the prior year. The increase was broad based, but largest volume occurring in two communities. 62 home sites were sold in our – to a homebuilder in our WaterSound Community and 87 home sites in Breakfast Point community. Margins increased from 31% in 2012 to 42% in 2013. The net income for the segment was $4.5 million compared to loss in 2012 of $6.8 million. Commercial real estate business increased from $10.4 million in 2012 to $10.9 million in 2013. During 2013 there were eight commercial real estate sales as compared to six in 2012. Two of the commercial real estate sales in 2013 totaled – totaling $6 million are build-to-suit commercial operating properties that were constructed and we are leasing under long-term leases totaling $400,000 in annual rental income. The net income for the segment was $3.3 million in 2013 as compared to net loss of $0.2 million in 2012. The resorts, leisure and leasing operation had a solid year. This segment is comprised of all recurring revenue streams including vacation resorts, golf club and marinas as well as retail and commercial leasing operations. Revenue increased 15% to $50.8 million. The increase came from increased number of homes in our vacation rental program, high average room rates and positive impact of our commercial lease that commenced in 2012. $4.9 million impairment came from this segment. Our timber segment revenue decreased by $3.6 million in 2013 compared to prior year, the volume of timber delivered was down by approximately 255,000 tons as a result of unusual higher amounts of rain over the summer month which impacted the harvesting and harvesting limits included an ag reserve sale agreement which affected the fourth quarter of 2013. Although the volume was down by 17%, the average price was 10% higher. Net income for the forestry segment was $13.3 million compared to net income of $13.5 million in 2012. Rural land revenues vary drastically. During 2013 there were no significant transactions in the company’s rural land segment as compared to nine land sales were $23.4 million during 2012. We ended the year with approximately $22 million in cash and $147 million in investments for a total of $169 million. Our debt increased by $8 million primarily due to the Pier Park North project which ended the year with $6.4 million in debt. The remainder of the debt on the balance sheet relates to in substance to seize debt secured and pace by treasure security and the company fixed term – the terminable portion of the CDD debt in four of our projects. We expect to increase our debt as we build out the Pier Park North project over the next few quarters. Our capital expenditures increased in 2014 to $42 million as compared to $23 million in 2012. The increase was mostly related to the Pier Park North development and development costs for increased volume of residential lots. Our operating and corporate expenses declined by $1.9 million in 2013 compared to 2012 primarily due to reductions in employee costs and lower real estate caring costs. In summary, the increase in revenue and margins in our residential real estate, commercial real estate, resorts, leisure and leasing as well as reduced operating costs contributed to bottom line results. Now Park would like to make some closing comments.

Park Brady - Chief Executive Officer: As a wrap up, I can tell you we are pleased with the quarter and the year. The increased revenue and margins in residential real estate, commercial real estate and the resorts, leisure and leasing operations all contributed to the bottom line. We will continue a cost and investment discipline to ensure bottom line performance in all environments to increase value our shareholders. As for the Timberland transaction the sale would allow the company to concentrate on our core businesses. These are the resorts and lodging, the development of our remaining land portfolio, the port, and an active adult community. After this deal is closed the Board and management will work together to explore a full spectrum of options for the company’s capital. These options include but are not limited to dividends, stock buybacks, acquisitions, diversifications and other capital allocations. As we have said in the past, we are taking our time and we will keep you posted as we make progress. Operator, let’s open it up for comments and questions.

Operator: Thank you. (Operator Instructions) And our first question comes from the line of Buck Horne with Raymond James. Your line is open.

Buck Horne - Raymond James: I guess to start with do you guys have any better idea of how you want to structure any installment sale of notes and how are you going to use that to bring cash back into the company and how quickly will any cash be coming back to St. Joe and say in the next 12 to 24 months?

Park Brady: We are currently anticipating a portion of the transaction to be in timber notes. We will make the determination based on the market conditions at time that deal will close.

Buck Horne - Raymond James: Okay, that’s all you want to say about that? Okay, can we talk a little bit about the approval process for the land use plan and kind of what – where is – what kind of status you are in with that and describe the process of getting that entitlements for that expansion in Walton County done?

Park Brady: Yes, this is Park speaking. This is again a long-term project that we have been working on for two years. We have an existing sector plan which is approved 10 years ago when we are did the West Bay sector plan which included the airport development. What we are going through now is and we have been planning this for about two years. We will make a final application – first real official application by the middle of March. And that is under a sector planning process as well. That sector planning application will take the existing 70,000 acres and add a new 40,000 acres to it. And with very little modification of the original fees there will be some minor corrections based on the timing and the fact that that was done 10 years ago, we expect that the process will take us over a year. It will involve the local counties of Walton and Bay County and as well as some state entities. We have had open houses to get input from the community and in anticipation of some of the concerns that might be addressed we have shown them some tentative plans. But our application which is very extensive will come out in March, middle of March. We will actually be making official application. Did that answer your question?

Buck Horne - Raymond James: Yes, that’s very helpful. I appreciate that.

Park Brady: Okay.

Buck Horne - Raymond James: And I guess to that end, we are – I think you made a comment on the previous call just that you are and it’s mentioned in your press release that you are still exploring the possibility of a very large scale adult targeted residential project. And when we are talking about potentially over 100,000 acres that could be allocated to that type of project, I think it’s a little hard for some people to get their arms around fully? So I mean are we talking about trying to take the template from say the villages and import it into Northwest Florida? Can you explain a little bit about the concept you guys are thinking about and how you are going to appeal to that quantity of migrating retirees?

Park Brady: We feel that we have done a lot of study about the demographics and with people retiring we know that the numbers are there. We feel like that we are a little closer to the where people are migrating from in the north. We have a lot of natural features on that 100,000 acres of land. We have got dune lakes, we have got bays, we have got rivers, we have 15 miles of intercoastal. And our project is not going to be – it’s going to have lots of open space when we come out. And then we feel like this is going to be a very – it won’t be a template of the villages, but the villages has been very successful. We think that people now would also if we can add to that template things like environmental concerns learning, health and as well as the active piece of retirement community. We feel like we can add to what’s already – that template that’s already out there and has been very successful.

Buck Horne - Raymond James: Okay, that’s helpful. I will drop out of the queue and let the other guys ask a few and I will maybe jump back in. Thanks guys.

Operator: Our next question comes from the line of Aaron Scully with Janus Capital. Your line is open.

Aaron Scully - Janus Capital: Hey guys.

Park Brady: Hey Aaron.

Aaron Scully - Janus Capital: Just curious on that the comment of going from 70,000 acres to 110,000 acres, is there like an added cost to converting that 40,000 acres to I guess more entitled like if there are additional taxes or I mean outside of just your time and money to change those 40,000 acres, is there like any annual cost for going from 70,000 to 110,000?

Park Brady: Aaron, it’s the 110,000 would be treated just like the 70,000 today. It’s – it has the entitlements on it, but until we change the use, the cost doesn’t change. We still have – we still timber that land. We still treat is as agricultural, if that’s what it’s used for, that’s what it is. It’s when we clad it that it actually becomes a taxable piece of land.

Aaron Scully - Janus Capital: And I guess just a follow on to that is, is there a difference in your mind in the value of that land between that 70,000 and 40,000 today, I mean, it would seem that there would be some difference in value just in entitling it, but just curious how you guys think about that?

Park Brady: Obviously to have some entitlement is more valuable than not having it, but what it does when we looked at the overall piece is it takes land. It’s a little further away from where things are today. There is not grocery stores near it. There is not shopping near it. It’s further removed. By adding this 40,000 to it, we actually start in places where we are close to where there is lots of things already in place.

Aaron Scully - Janus Capital: I see.

Park Brady: Our golf, three golf courses that are already there, the grocery stores that are right down the street, the hospital is down the road. Pier Park North, which has now – the whole Pier Park area which has been a very successful shopping area, lots of big box shopping which is not available in other retirement communities that are right next to us. So it makes more sense especially when we think about the adult community piece of it, Aaron.

Aaron Scully - Janus Capital: Okay, that’s helpful. And you mentioned Pier Park North and apologies if you already addressed this, I got on the call a little late, but could you give an update kind of where you are with the project in terms of pre-leasing and opening date and then how are you guys thinking today about kind of the cash-on-cash yields roughly in year one or how you see that evolving over the next few years?

Marek Bakun: Aaron, it’s Marek. Pier Park as Park mentioned the first store which is the anchor store is slated to open in the next couple of weeks. So the project is well in process of the 330,000 square feet, it’s being built in two phases. So the first phase is currently under construction. We anticipate to continue to increase the leases, but they have been on target and have exceeded our expectations through this date. It is, as Park mentioned, a location that’s becoming a center for commercial activity, retail activity in this area. So it has been a good project that’s progressing as planned.

Aaron Scully - Janus Capital: Alright, it sounds good. And just one last question from me and just the port and may be an update on where you are with the dredging and any other initiatives there?

Park Brady: We have gone through our – we funded a study. We are part of funding the state came up and assisted with that through the port authority. That study has been done. We are now going out for pricing on it. The state has said that they would if we can prime and prove a user which we think that we have good opportunities to do that, that they will help fund the dredging piece of it. There is a lot of pieces to put it together, Aaron, but we feel that the port still has lots of potential and we are putting time and energy into it.

Aaron Scully - Janus Capital: Great, thanks.

Operator: Our next question comes from the line of Sheila McGrath with Evercore. Your line is open.

Sheila McGrath - Evercore: Thank you. Good afternoon. I wanted to get a little clarification. At your end, it looks like you have about $169 million of cash and investments or liquid investments, does that include proceeds from RiverTown already or is that to close in first quarter?

Park Brady: That does not include the proceeds RiverTown. RiverTown is a real estate transaction that’s currently going through the due diligence is under contract, but has not yet closed.

Sheila McGrath - Evercore: Okay. And then RiverTown, once RiverTown and the Timber sale close, what do you think the cash balance is the level it would go to including both of those transactions?

Park Brady: Yes. As we released the timber transaction subject to changes is $565 million. We are looking at the split between notes and actual cash, but our intention would be that if we do have some notes, we will look at options to monetize majority of that. The RiverTown is $43.6 million at closing plus some subsequent items. So if you add those numbers, it’s in the scale of $600 million in total. Clearly, we have some tax obligation that we may have to deal with as part of those transactions, but that’s the kind of scale of numbers we are talking about.

Sheila McGrath - Evercore: Okay. And have you – is it in the 10-K or what you think the tax obligations will be?

Park Brady: Again, the transaction is not yet closed. So we are looking at opportunities. The 10-K has closed our federal net operating losses that we have as of December 31. Clearly, we have an opportunity to utilize those and we will look at other means such as the installment notes to see how we can minimize those taxes.

Sheila McGrath - Evercore: Okay, great. And then just moving to the adult community, I think in the past that you may have mentioned that it might require better access via other locations to the airport, I am just wondering for such a project of this scale is it’s going to entail the introduction of other airlines to the airport or how do you view air access now and the scope of the adult community?

Park Brady: I would say that it’s almost like a chicken or egg shield. As people realize the scale and scope of this, they wanted to serve the people that are there. And as it grows, there will be more demand for our passenger seats. You said earlier about having restricted access or needing better access to the airport. We really had great access today. I mean we are 20 that – this property runs through and around airport, but at its furthest reaches you about 20 minutes from the airport.

Sheila McGrath - Evercore: No, no. Park I meant like where direct flights are coming in, yes sorry?

Park Brady: You said no like you said the airport as well the community has been working actively to try and get other more options into the airport. The airport has been successful. I think in today’s paper it came out that the traffic was a little bit down this year because of the bad winter and all of the canceled flights coming out of other areas. But yes we all acknowledge that we would like to have some more seats coming in I think that this community will actually drive some of that happening.

Sheila McGrath - Evercore: Okay. And then just moving towards you mentioned, Park, the re-launch or launch of St. Joe Club & Resorts, I am just wondering if you could give us a little bit more detail on the new strategy that you are introducing to the Club & Resorts operations?

Park Brady: Well, what we did Sheila was when we looked at the clubs and resorts, we actually saw that we were allowing competitor’s guests and owners of other – that were using competitors in the vacation rental business they have access to our facilities. And we said no what we really need to do because we have – we have got the world class facilities that are here, the Beach Club, the three golf courses that we have and we said let’s combine those all and to what we are calling the St. Joe Club & Resorts. Let’s use that to leverage and to a best advantage to us. And so now you in an order to use those facilities if you are for example on a vacation rental side of the business you need to be managed by us, if you want to use the club or if you want your guests to do that. We also are using it as a driver for the real estate is that the everyone if you recall The WaterSound North project, which we are now calling WaterSound Origins by the way is that WaterSound Origins we opened up this last summer to move forward with the conventional project and is 1300 units in it and so we are giving our buyers in there no initiation fees and reduced dues as part of incentive to get into that real estate. So it’s two fold for us, it’s to grow our resorts and lodging and vacation rental business as well as an incentive for our real estate side. And will in the future be an incentive for the adult community.

Sheila McGrath - Evercore: Okay, great. One last quick question, do you think that you could characterize homebuilder interest is it at WaterSound Origins and Breakfast Point or has anything picked up at the previously kind of very quiet RiverCamps and other projects?

Park Brady: RiverCamps is still quiet. We are going have to push to get lots in place to meet the demand for Breakfast Point and WaterSound.

Sheila McGrath - Evercore: Okay, great, thank you.

Park Brady: Okay.

Operator: (Operator Instructions) Our next question is a follow-up question from line of Buck Horne, Raymond James. Your line is open.

Buck Horne - Raymond James: Hi, thanks. Just a couple of clarification points, when you guys mentioned 52 sites sold in WaterSound and 87 sold in Breakfast Point was that for the full year, or was that for the quarter?

Marek Bakun: That’s for the full year.

Buck Horne - Raymond James: For the full year, do you have those numbers or what would you sold to other neighborhoods for the quarter?

Park Brady: I will – we took – we only had 140 completed lots in the WaterSound Origins piece. And Marek is looking for the numbers exactly right know. But and – we released 62 of those I mean we didn’t – we were holding that community back as we anticipated we might use it to start our adult last year but when we decided to open up, we will have sold those 62 lots. We are looking for the numbers right now. So we hadn’t marketed it on March 15 is our first open house an announcement of the project. We wanted to make sure that we are ready for – to advance it. So we hadn’t really pushed that project at all, the old WaterSound North, which is WaterSound Origins now and they have done no marketing on it until two weeks from now in March when we do the major rollout.

Buck Horne - Raymond James: Okay.

Marek Bakun: There were 62 lots in the WaterSound North, Origins project. They closed in the third quarter, so there were no transactions in fourth quarter as one contract. And as far as Breakfast Point, there were transactions in each of the quarters with 45 of the 87 lots closing in the fourth quarter.

Buck Horne - Raymond James: Thanks. That’s helpful. And were are you seeing pricing power, I mean, is it – is the pricing power in Breakfast Point accelerating now that you are getting some velocity and what other communities are you pushing pricing in?

Marek Bakun: Yes. We are looking at every community and making the determination. Real estate is local and each community has its own attributes. We are noticing pricing power. And we also have some back end participants in some of these contracts. Some of the margins that we just I mentioned increased to 42% as a result of pushing pricing.

Buck Horne - Raymond James: Yes. And last one, just could you help me understand the impairment charge a little bit more in the $5.1 million exactly, where did that come from and how did that need to be taken?

Marek Bakun: Accounting literature has very specific rules that are used when reviewing long-lived assets as the recoverability of the basis on undiscounted cash flow. And so this asset came from the resorts, leisure and leasing operation. And there was a triggering event resulting in a need for a evaluation of the fair value to assets.

Buck Horne - Raymond James: Can you tell us which asset and why it was triggered?

Marek Bakun: We don’t want to speak to the specific asset, because as we go out into the communities, it’s from a PR standpoint, we just don’t want to speak to that asset, because it maybe have a incorrect perception. I hope you understand that.

Buck Horne - Raymond James: Okay, that’s fair. Okay, thanks guys.

Operator: And I am not showing any further questions in the queue at this time. I would like to turn the call back over to management for closing remarks.

Park Brady - Chief Executive Officer: I think that’s me, isn’t it? Okay, alright. I mean, it sounds like we have answered all the questions. So thank you for your questions and for listening. We will talk to you in the next call.

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 good day.