The St. Joe Co JOE
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/28/2013

Operator: Good day ladies and gentlemen and welcome to the St. Joe Earnings Conference Call for the period ending December 31, 2012. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. Tom Hoyer, Chief Financial Officer at St. Joe.

Thomas Hoyer - CFO: Thank you. Hello everyone and welcome to the St. Joe earnings call for the period ending December 31, 2012. My name is Tom Hoyer. I am the Chief Financial Officer at St. Joe and I'll be the person representation the Company on the call today.

Some of the information we will discuss on 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 may be affected by the risks and certainties in 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 afternoon's press release and our SEC filings, which documents are publicly available. Our statements are as of today, February 28, 2013. We have no obligation to update the forward-looking statements that we may make.

Let's move on to the fourth quarter and full year results. I'll make some brief comments and then I'll open it up for your questions. We recorded revenue of $22.6 million in the fourth quarter of this year compared to $19.8 million in the fourth quarter of last year, which is a 14% increase. Most of that increase came from our forestry operations where sales volume was higher due to strong demand. The year-over-year ongoing results are even better. But in order to give you a reasonable comparison, I have to make some adjustments for unusual transactions in both 2012 and 2011.

Let's start with the reported numbers. We reported $139.4 million of revenue for 2012 compared to $145.3 million in 2011. However, as I've mentioned in our previous calls, we had a couple of unusual rural land sales in 2012 which totaled $18.3 million in total revenue, if I exclude those land sales, 2012 pro forma revenue is $121.1 million. In 2011, we sold a timber deed that added $54.5 million in revenue in the first quarter of that year. If I exclude the timber deed revenue, 2011 pro forma revenue is $90.8 million.

After making these adjustments, the pro forma comparison becomes a $121.1 million of revenue in 2012, compared to $90.8 million of revenue in 2011, which is a 33% increase. All of our businesses contributed to the increase in revenue.

Beginning with residential, we sold 19% more lots year-over-year and the associated revenue grew 81%. Revenue increased at a faster pace than unit sales, because the increase in demand has driven higher lot prices in some of our communities, particularly in our vacation communities.

This momentum in sales volume and prices is carried into 2013 as we see an increased interest from builders beyond just our vacation communities. Primary community such as, RiverTown and Jacksonville, SouthWood and Tallahassee, and Breakfast Point and Panama City Beach, are all receiving greater interest from builders.

In our timber business, we harvested 19% more tons of timber in 2012 compared to 2011. Revenues increased by 21% after adjusting for the 2011 timber deed. Demand was strong in our timber markets and we are able to supply that demand because we opened 70,000 acres of land to timber operations that had been previously restricted for harvest.

We also invested in infrastructure and software that improved the production in our timber stands. Our pricing for our timber, driven by the stronger demand also contributed to the increase in revenue. We've created a new business segment for our operations of resorts, leisure and leasing operations and this is the first period that we will be reporting it.

The segment includes our vacation resorts, golf clubs and marinas, as well as the retail and commercial leasing operation. This segment represents our businesses with recurring revenue streams.

2012 revenue for this segment was 16% higher than in 2011. One major contributing factor was higher room rates at the WaterColor Inn, our four-star resort located on the beach within the WaterColor community. Another contributing factor was that we rented more vacation rental houses since we had more houses under contract in the vacation rental program. Both of these operations benefited from stronger demand not only during the summer but also into the late fall.

We get a compounding effect from this increased demand. For example, ancillary revenue for things like food in the rental of recreational equipment is higher. In our leasing operations, the major factor in the increase was the commencement of two commercial leases in the second half of the year, one of them is at port of Port St. Joe and the other is Venture Crossings by the airport.

Net income for the full year 2012 was $6 million compared to a net loss of $330.3 million in 2011. That comparison, however, is complicated by three items for which I will make adjustments so that you can get better comparison.

Our 2011 results reflect a $377.3 million pre-tax impairment charge and the sale of a timber deed that netted $53.5 million in pre-tax profit. If I exclude those items the pre-tax loss will be $62.1 million in 2011.

For 2012, if I exclude the impact of the unusual rural land sales that I discussed earlier, which contributed $14.2 million of pre-tax profit in 2012, the pre-tax loss would be $7.8 million. The pro formas comparison that becomes a pre-tax loss of $7.8 million for 2012 compared to a pre-tax loss of $62.1 million in 2011. The better result in 2012 is largely due to the operating improvements that I will be describing.

Another contributing factor, however, is overhead reductions but we have realized lower legal expense, stock compensation expense and pension expense in 2012. Let me reiterate some points that I've made on previous calls. First, rural land sales are not, nor do we anticipate that they will be a core part of our strategy for generating revenue on cash flow going forward. In fact, we don't have any rural land sales budget for 2013.

Although, we'll continue to sell non-strategic property if the opportunity arises, our focus for growth will be in residential and commercial development as we take advantage of more significant land holdings and improving economic conditions.

We'll also focus on building recurring profit stream by investing in projects that produce decent revenue. We believe that our development experience and location in Florida provides us with strategic opportunities in the retirement market.

We expect that our timber operations and resorts and clubs operations will continue to be steady contributors to our financial results in the years to come. Also I want to reemphasize that 2012 was just one year and a multiyear turnaround in which we intend to take advantage of the improving economy the demand for affordable retirement living and commercial opportunities in our North Florida markets.

We ended the year with approximately $166 million in cash which is $3.6 million more than where we began the year. The current cash balance reflects the fact that we invested $23 million in our key projects and prepaid a $90 million debt obligation in a lot of key projects.

The only other debt that we carry on our balance sheet and very significant is a mortgage debt related to a commercial property that we sold several years ago. Net debt has been the fees, which means that we purchased treasury securities debt as they mature, but we're sufficient to retire all the debt.

Let me spend a little time talking about where we’re going. One obvious trend that we believe presents us with great opportunity is the advancing wave of retiring baby boomers. Reports say that 77 million people in United States will be retiring over the next 20 years.

Many of them will stay where they are because that is where the family is located, but we expect based on past history that a meaningful number will relocate. We also believe from past history that many of them will relocate to Florida. Fortunately, we have a lot of land located in attractive geographic areas in Florida that we think will work very well for those who want to try something new. We've spent a significant amount of time in 2012 planning our launch into active adult communities and we expect to begin executing on our ideas this year.

Another unique opportunity that we have is at the port of Port St. Joe. That piece of property, which was the site of St. Joe's old pulp mill, was planned to be a residential neighborhood. Facing an uphill approval process for building residential on the property and in an uncertain residential market in the region, we began looking at alternatives that would bring a more certain return in a shorter timeframe.

After talking to other port operators in and around Florida, we concluded that there was room for another port on the Gulf of Mexico. We believe that in the long term, the expansion of the Panama Canal and the economic growth of the southeastern United States will create a solid base of business around which we build the port operation.

We've also begun building a portfolio of assets with recurring revenue streams. We will seek to incorporate leasable properties in or near our residential communities as we build them out. An example is the 390,000 square foot retail lifestyle center called Pier Park North that we're developing with a partner in Panama City Beach, Florida, which we've announced in previous press releases.

This kind of activity will allow us to slowly build solid recurring revenue streams as we develop our land. We will continue to evaluate at our assets to determine what we believe will be their best use and thus (their) role in creating long-term shareholder value. We're excited about the potential opportunities in our assets, especially against the backdrop of an improving economy. You'll find more information in our earnings press release, which was released about an hour ago and in our 10-K, which we plan to file tomorrow.

Let's open it up for questions.

Transcript Call Date 02/28/2013

Operator: Buck Horne, Raymond James.

Buck Horne - Raymond James: I was wondering, just help me out with couple little items here. It looks like there was a small impairment loss in the quarter, could you explain where that came from and what was impaired exactly.

Thomas Hoyer - CFO: Sure. The first thing I'll tell you is, we didn't impair it, because the value had really changed. We changed the use of the asset. It's a covered airport parking facility that's out at the airport that we donated the land for the Northwest Beach Florida International Airport. We had a parking facility there that was siphoning off parking revenue from the airports parking facility. They approached us with a trade, really a transaction, where if we agree to shut down our short-term parking facility for a period of time, they would release us from a land lease for which we really didn't have any immediate use and we agreed to that transaction, because the release from the lease, the land lease will save us about $4.2 million over a number of years. The parking facility was – is pretty new. It was roughly a break-even parking facility, so shutting it down didn't really impact our operations in any way, shape or form. When we shut down the parking facility we had to write-off the improvements that we've made to it to essentially make it a parking facility, including the general development cost for Venture – their portion of the general development cost for Venture Crossings, because it's actually part of the Venture Crossings development out there, so in the end we wind up with a non-cash charge for saving $4.2 million in cash. That's what it is.

Buck Horne - Raymond James: Does the airport now – you guys still own that land, right?

Thomas Hoyer - CFO: That's correct. We still own the land.

Buck Horne - Raymond James: Okay, it's just not being used for parking or...

Thomas Hoyer - CFO: Yeah, it's not being used for parking.

Buck Horne - Raymond James: Okay, not being used for parking. Okay, on the residential side of things, I mean you said you've raised lot pricing. Can you give us an indication of by how much you raised lot pricing, which communities are you seeing the most interest and to what extent can you give us any detail on the – what kind of – are you signing any land options with home builders right now or what's under option contract?

Thomas Hoyer - CFO: Sure. Let me talk about it in kind of general terms. Similar to, I think, what I told you on the third quarter call, a lot of the increase in pricing has come in our resort communities, the communities that are here along 38, for those who are familiar with the area. So WaterSound, WaterSound West Beach, where we've had higher demand and we've been able to increase lot prices. Generally, in the 10% to 40% range since the beginning of 2012 and in some cases is high as 60% or 65%, we had increased volume in a couple of our primary communities but prices there were relatively flat year-over-year. In the last few months, though, we have received greater interest from builders in a primary communities. We have not signed any transactions yet, related to selling any number of lots to any particular builder. But we're talking to several national super regional builders, negotiating with them to try and do just that.

Buck Horne - Raymond James: Do you have or can you give us an indicating of like at year end how many residential lot contracts you have that were signed, but were scheduled to close either in the first or second quarter this year, in terms of sort of backlog number that you could give us some guidance on?

Thomas Hoyer - CFO: No, I don’t have a backlog number for you. It’s something that we’ve been tracking here internally. We have been doing it for a while because the numbers were immaterial enough that it wasn't worth we’re tracking here internally. So I apologize, I don’t have a number for you.

Buck Horne - Raymond James: One last quick and I’ll jump out of the queue, but just a total estimate for CapEx or land development dollars you plan to spend in 2013, any update there?

Thomas Hoyer - CFO: No. I'm not giving any guidance right now. I know that's valuable information for you, but it’s not because I'm really concerned about the business and the trends, we have enough different ideas that we’re working on here. I don’t know which ones are going to be successful or unsuccessful, which ones we’re investing or not investing, but I can’t really responsively give you an estimate on revenue or cash flow, CapEx as part of the cash flow. It will be more than it was in 2012. I just really can’t give you a number.

Operator: Sheila McGrath, Evercore.

Sheila McGrath - Evercore: Tom, I was wondering if you could talk about the commercial development across from Pier Park, what’s the status of that project, any more details on costs and what economically is Joe a 50% interest, just a little more detail on that project.

Thomas Hoyer - CFO: Yeah, sure. We actually were a two-thirds owner in that project. We have actually started construction on it. We broke ground on that about three or four weeks ago. So far the construction looks like it's going to come in a little lower than the estimates that we put together when we first were looking at this project. Its 390,000 square feet and we have several anchor tenants that have already signed up for it in the mid-60s in terms of lease-up at this point signed leases and still have several LOIs that we’re negotiating. So far that project seems to be getting off on a very good start.

Sheila McGrath - Evercore: Did you say how much the total cost to the project is?

Thomas Hoyer - CFO: The total cost of the project is probably going to be about little over $50 million.

Sheila McGrath - Evercore: Also, could you give us an update on interest level at Venture crossing? Are there any new dialogs with new tenants there?

Thomas Hoyer - CFO: Venture Crossings is still a long-term play for us. I think. We have had a few more discussions with people, but there is nothing eminent, there is nothing that's been negotiated out there. I think in the long-term that's going to be a very successful project. A lot of that depends – the success out there depends on the overall economy here in the Southeast and in this region. We are situated to take advantage of that. I just don't think it is going to happen in the next couple of years. It will be longer term than that.

Sheila McGrath - Evercore: Then just in press release you mentioned again the potential for retirement community and also the port. I understand those are longer-term initiatives but I was just wondering if you could give us a little bit on any milestones that you are targeting in 2013 or just a little bit more detail on those initiatives?

Thomas Hoyer - CFO: Yes, we should be announcing some milestones. They are longer term projects. What we hope to be able to tell you in 2013 as it relates to the port is signing up some new tenants down there, possibly some improvements that we would do down there, potentially assistance that we get from the state providing funds to do some work down there, things like that would be milestones that we'd hope to be able to report to you in 2013, if not 2013, 2014. We think the port is a very good opportunity for us, again a little longer term but real good opportunity. As far as the retirement community, we are still evaluating what we’re going to do there. The next big milestone is basically we’ll be announcing what we’re going to do and where we’re going to do it and we should be doing that here and this year. Hope we’d be able to tell you who our partners are going to be on it and kind of where we’re going to start and how much we’re going to start with. Those are the milestones that we hope we'll be able to talk to you about in 2013.

Sheila McGrath - Evercore: Also just on the lawsuits related to oil spill that's gotten quite – I'm just not familiar where things stand at this point, if you could just give us an update on that?

Thomas Hoyer - CFO: Sure. There was the original fund, if you will, for paying claims against BP oil close down about I think is up four or five months ago. We had a claim into that fund. We actually received about $1.7 million of payments, which was not the full amount of our claim. That claim rolled over to a District Court over in Louisiana where it's still being processed. There is a – some separate litigations that we're going to participate in to see if we can recover more than just the first claim. The first claim was really focused on losses that we had at our operations like the WaterColor Inn in the marinas. We're going to move on to other damages, oil on the beaches, which obviously would impact our ability to sell homes, the marketability of our land.

Sheila McGrath - Evercore: Then are there dates or timing that you expect to hear news on that?

Thomas Hoyer - CFO: No, I don't really have a good timeframe for you there. It's winding its way through. We don't have a schedule or a timeline that I can provide with you on that.

Sheila McGrath - Evercore: Last question, I did see some closings at RiverCamps and Wild Heron. Is that Joe buying back lots, or what exactly is that activity that I've seen recently?

Thomas Hoyer - CFO: Some of that is Joe buying back lots and some of it is other people buying lots.

Sheila McGrath - Evercore: So, you're buying lots from – out of distressed situations…?

Thomas Hoyer - CFO: Yes.

Operator: (David Frank, Columbia Management).

David Frank - Columbia Management: First off, I had just a housekeeping item. Have you folks set the date for your annual meeting, yet?

Thomas Hoyer - CFO: We have, but we haven't announced it yet. We're going to do that shortly.

David Frank - Columbia Management: But it will be similar timing to last year; is that fair to say?

Thomas Hoyer - CFO: Yeah, it’ll be in mid-May.

David Frank - Columbia Management: Lot of my questions have been asked. Maybe a little – if you could give a little more color on how do we think about timber in 2013? Is it – do you see it roughly being the same as how you exited 2012? What factors could impact your timber sales and profits in 2013?

Thomas Hoyer - CFO: Timber, it's a pretty fixed inventory of supply. There's only so many trees that we can actually harvest in a year. We had a nice bump in 2012 because we actually opened up a bunch of land, about 70,000 acres to timber harvest that had previously been restricted against timber harvest. Going into 2013, we don't have a big card like that to play. I think that we'll have incremental improvement in our timber business. We have a super management team there. Their job is to incrementally grow the cash flow that comes out of that business. They've done a very good job on working up the infrastructure, and also using a new software tool to help them manage the timber stands more productively. We are also hopeful that given the market recovery, the housing recovery that timer prices will continue to rise in 2013 as well, but I don’t really have a prediction on that, we think they will.

David Frank - Columbia Management: With the types of timer you are selling and the outlets that are purchasing them, you don’t anticipate any big changes there?

Thomas Hoyer - CFO: No, I don’t anticipate any big changes there.

David Frank - Columbia Management: Then, in terms of the traffic at the airport, the flights, the number of people, are there anything significant happening there?

Thomas Hoyer - CFO: No, not really. Since the airports opened, we've seen a significant increase in traffic; they are in both the number of flights and the number of people flying on those planes. Southwest last year added some flights through – out of Houston and from St. Louis and they've been doing pretty well there. Delta, I fly Delta sometimes and Delta has kind of moved up from the smaller regional jets to the larger jets. It's going pretty good, the traffic pattern has been strong out there at the airport.

Operator: Aaron Scully, Janus Research.

Aaron Scully - Janus Research: This Village's life development, maybe you could talk about that a little bit more. So you did about 160 units or lots last year. Could you give a sense of how large this retirement community could be – let's just say it's a tenth or a twentieth of the Village is like how many lots or units could that potentially entail?

Thomas Hoyer - CFO: I think the Village is, I think today is about 40,000 lots maybe going to about 50,000 lots. They are the biggest in the country right now. I think by a long short. I can't really give you any details on our plans, we're still working through them. It's would be very premature for me to talk about what we're thinking about.

Aaron Scully - Janus Research: That's helpful. I'm just (sizing). Who knows, but even if it's tenth, it's a meaningful amount of units or lots. I guess the second question, again I know you don't want to tip your hat, but would you be striving for a model where it would be capital-light for you guys and contributing just the land and the bulk of the construction would be on a partner. How are you guys thinking about that?

Thomas Hoyer - CFO: I think that we would most likely avail ourselves of the tool here in Florida called a Community Development District and a CDD bond issue. It's similar to Mello-Roos, for anybody who's lived in California or MUD districts in Texas. It is a mechanism, it is taxing authority actually. We bought money through the CDD, use it to build efficiently horizontal infrastructure and some of the amenities and it becomes attached to ultimate homeowner and the ultimate homeowner repays it through their – basically through the mortgage bank was part of their to in addition to the mortgage payment, but it goes through that servicing mechanism. I think that probably we'll avail our self of that is we are building out a retirement community or any other community. We've used CDD debt at RiverTown and SouthWoods, it's not something that's new to us, it's a very good tool for developers like ourselves.

Aaron Scully - Janus Research: And then a partner would be brining – in your community expertise and that would be the…?

Thomas Hoyer - CFO: Yes, the partner that we'd look for in, like an active adult community is exactly right. We'd look for somebody who has a lot of experience building those types of homes. They know what to put in those homes; what not to put in those homes, control the cost. We think that price will probably be pretty important and somebody who has expertise marketing and selling.

Aaron Scully - Janus Research: Maybe just a quick question on the port and I know that you are talking about bringing in a port operator, maybe you could just touch on maybe some of the main benefits of this, like would there be any relatively immediate benefits that we see from brining on a new port operator?

Thomas Hoyer - CFO: Immediate, like in the next year or so?

Aaron Scully - Janus Research: Yes.

Thomas Hoyer - CFO: Probably not, I think that we have a potential of signing up another tenant down there within a year, so brining a port operator on, we are thinking bigger and longer-term than just a couple of tenants and it's the port of – port St. Joe. We are trying to get somebody in early just so that we don't make any decisions today that somehow preclude us from doing something in the future. So we might be a little bit ahead of the curve in terms of getting some help with the port, but we think it's a smart move.

Aaron Scully - Janus Research: Just one last question on, you've mentioned some potential sales to or some conversations with national developers. Can you just kind of quantify in the ballpark is this kind of a 10 to 20 lot or is it a 50 plus lot opportunity, or is it bigger than that? How should we think about the size of that?

Thomas Hoyer - CFO: It's just bigger than that. These are national builders and super-regionals. These are hundreds and hundreds of lots that we're talking…

Aaron Scully - Janus Research: So again working off a base of almost (160) from last year.

Thomas Hoyer - CFO: Yes.

Operator: I am showing no further questions at this time, sir.

Thomas Hoyer - CFO: I think we've answered all the questions. Thank you everybody for participating today. We'll be talking about our first quarter in the first week of May and I'll talk to you then. Have a good day.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes our program, and you may all disconnect and have a wonderful day.