Description
Filed with the SEC from May 10 to May 16:
The St. Joe Co. (JOE)
Mutual-fund firm Fairholme Capital Management decreased its holdings to 25,546,028 shares (27.7%) as a result of its sale of 169,400 shares from May 7 through May 9 for prices that ranged from $17.18 to $18.06 each.
BUSINESS OVERVIEW
As used throughout this Annual Report on Form 10-K, the terms “St. Joe,” the “Company,” “we,” “our,” or “us” include The St. Joe Company and its consolidated subsidiaries unless the context indicates otherwise.
St. Joe was incorporated in 1936 and is one of the largest landholders in Florida. We own approximately 573,000 acres of land concentrated primarily in Northwest Florida. Most of this land was acquired decades ago and, as a result, has a very low initial cost basis, before development costs. Approximately 403,000 acres, or approximately 70 percent of our total land holdings, are within 15 miles of the coast of the Gulf of Mexico.
In order to increase the value of these core real estate assets, we seek to reposition portions of our substantial timberland holdings for higher and better uses. We seek to create value in and/or increase demand for our land by securing entitlements for higher and better land-uses, facilitating infrastructure improvements, developing community amenities, undertaking strategic and expert land planning and development, parceling our land holdings in creative ways, performing land restoration and enhancement and promoting economic development.
We have four operating segments: residential real estate, commercial real estate, rural land sales and forestry.
Market Conditions and the Economy
Our business, financial condition and results of operations continued to be adversely affected during 2011 by the ongoing real estate downturn and slow economic recovery in the United States in general, and Florida in particular which have been deeper and more prolonged than originally anticipated. These adverse conditions include among others, minimal gains in employment and consumer confidence from recessionary levels, a large number of homes for sale or in various stages of foreclosure, increased regulation and decreased availability of mortgage loans, historically low housing starts, stagnant household income levels, and a slow recovery in business investments. This challenging environment has exerted negative pressure on the demand for all of our real estate products.
The oil spill in the Gulf of Mexico from the Deepwater Horizon incident which occurred in mid-2010 has continued to have a negative impact on our properties and has created uncertainty about the future of the Gulf Coast region. During 2010 and into 2011, concerns regarding the extent of the environmental damage from the oil and other pollutants that have been discharged into the Gulf continued to impact tourism and the general real estate market in the Florida panhandle.
New Real Estate Investment Strategy
On January 25, 2012, we adopted a new real estate investment strategy, which is focused on reducing future capital outlays and employing new risk-adjusted investment return criteria for evaluating our properties and future investments in such properties. Pursuant to this new strategy, we intend to significantly reduce planned future capital expenditures for infrastructure, amenities and master planned community development and reposition certain assets to encourage increased absorption of such properties in their respective markets. As part of this repositioning, we expect properties may be sold in bulk in undeveloped or developed parcels, or at lower price points and over shorter time periods. We anticipate that the amount of future capital expenditures associated with existing projects will be reduced by approximately $190 million, the majority of which was expected to be spent in the next 10 years. We believe this new investment strategy continues to build upon the successful cost reduction initiatives implemented in 2011 and positions us to i) increase our short and medium-term cash flow, ii) reduce our long-term risk and iii) maintain the strong cash position necessary to weather a tepid and uncertain real estate environment and to best exploit our substantial land resources. Additionally, reducing capital expenditures on existing projects will allow us to reallocate capital to potential investment opportunities which meet our new investment criteria.
In connection with implementing our new real estate investment strategy, we reassessed the carrying value of our real estate and determined that an impairment to record certain of our assets to fair value was necessary. Accordingly, we recorded a non-cash charge for impairment in 2011 of $374.8 million. For further discussion, see Note 3, Impairments of Long-lived assets, in the Notes to the Consolidated Financial Statements.
VentureCrossings at the Northwest Florida Beaches International Airport
The Northwest Florida Beaches International Airport (the “Airport”) commenced commercial flight operations on May 23, 2010. The Airport has been a catalyst to Northwest Florida; passenger traffic at the Airport has increased from 312,540 in 2009 to 869,389 in 2011, a 178% increase since its opening. The Airport is located on 4,000 acres of land we donated in the West Bay Area Sector Plan (the “West Bay Sector”), one of the largest planned mixed-use developments in the United States. We own substantially all of the 71,000 acres in the West Bay Sector surrounding the Airport, including approximately 39,000 acres dedicated to preservation. Our West Bay Sector land has entitlements for over 4 million square feet of commercial and industrial space and over 16,000 residential units. In 2010, we launched VentureCrossings Enterprise Centre (“VentureCrossings”), a 1,000 acre commercial and industrial development adjacent to the Airport. A large commercial real estate services firm is working with us to market our land adjacent to the Airport for lease, sale or joint venture.
In 2011, we entered into a build-to-suit lease with ITT Corporation, our first tenant at VentureCrossings for a 105,000 square foot building on a 10.8 acre site. Construction is expected to be completed in late 2012 with rent commencing in early 2013. The lease has a ten-year term, with two five-year extensions
2011 Highlights
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We entered into a $55.9 million agreement for the sale of a timber deed which gives the purchaser the right to harvest timber on specific tracts of land (encompassing 40,975 acres) over a maximum of 20 years.
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We significantly reduced operating costs as part of our restructuring plan which is expected to save approximately $15 million to $18 million in operating expenses and corporate expenses on an annualized basis.
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We sold 131 homesites for $10.6 million, at an average price of $81,000 per homesite.
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We sold 9 acres of commercial land for $3.1 million, or over $363,000 per acre.
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We sold 259 acres of rural land for $3.5 million, or $13,374 per acre.
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We terminated our unused $125 million revolving line of credit facility at an annualized cost savings of $625,000.
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We restructured our resorts and clubs operations which resulted in a positive gross margin related to those resort operations of $1.1 million.
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We made available approximately 70,000 acres of timberland for multiple uses including timber management, which were previously held back from silviculture activities. The additional harvesting is expected to add an additional $1.5 million of gross margin annually.
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We began collecting rental revenue from the build-to-suit lease with CVS Pharmacy in Port St. Joe and revenue from the three hundred space covered parking facility at the entrance to the Northwest Florida Beaches International Airport.
Residential Real Estate
Our residential real estate segment typically plans and develops mixed-use resort, primary and seasonal residential communities of various sizes, primarily on our existing land. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and other waterfront properties and land in and around Jacksonville and Tallahassee.
Our new real estate investment strategy is focused on reducing future capital outlays and employing a risk adjusted investment return criteria for evaluating our properties and future investments in such properties. Pursuant to this new strategy, we intend to significantly reduce planned future capital expenditures for infrastructure, amenities and master planned community development and reposition certain assets to encourage increased absorption of such properties in their respective markets. As part of this repositioning, we expect properties may be sold in bulk, in undeveloped or developed parcels, or at lower price points and over shorter time periods.
Currently, customers for our developed homesites include both individual purchasers and national, regional and local homebuilders. Going forward, we may also sell undeveloped land with significant residential entitlements directly to third-party developers or investors.
The following are descriptions of some of our current residential development projects in Florida:
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WaterColor is situated on approximately 499 acres on the beaches of the Gulf of Mexico in south Walton County. The community includes approximately 1,140 residential units, as well as the WaterColor Inn and Resort, the recipient of many notable awards. The WaterColor Inn and Resort is operated by Noble House Hotels & Resorts, a boutique hotel ownership and management company with 16 properties throughout the United States. Other WaterColor amenities include a beach club, spa, tennis center, an award-winning upscale restaurant, retail and commercial space and neighborhood parks.
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WaterSound West Beach is located approximately four miles east of WaterColor on the beach-side of County Road 30A. This community is situated on 62 acres and includes 199 units with amenities that include private beach access through the adjacent Deer Lake State Park and a community pool and clubhouse facility.
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WaterSound Beach is located approximately five miles east of WaterColor and is planned to include approximately 511 units. Situated on approximately 256 acres, WaterSound Beach includes over one mile of beachfront on the Gulf of Mexico. The WaterSound Beach Club, a private, beachfront facility featuring a 7,000 square-foot, free-form pool and a restaurant, is located within the community.
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WaterSound is situated on approximately 2,425 acres and is entitled for 1,432 residential units and approximately 450,000 square feet of commercial space. It is located approximately three miles from WaterSound Beach north of U.S. 98 in Walton County. WaterSound includes Origins, a uniquely designed Davis Love III golf course, as well as a community pool and clubhouse facility.
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RiverCamps on Crooked Creek is situated on approximately 1,491 acres in western Bay County bounded by West Bay, the Intracoastal Waterway and Crooked Creek. The community is entitled for 408 units and has access to various outdoor activities such as fishing, boating and hiking. The community includes the RiverHouse, a waterfront amenity featuring a pool, fitness center, meeting and dining areas and temporary docking facilities.
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Breakfast Point is a new primary home community situated on approximately 132 acres located in Panama City Beach in Bay County. It is located approximately sixteen miles south of the new Northwest Beaches International Airport. The master plan has been completed and we initially plan to develop 348 homesites and sell them to local and national home builders.
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WindMark Beach is a beachfront resort community situated on approximately 2,020 acres in Gulf County near the town of Port St. Joe. WindMark Beach is entitled for 1,516 residential units and 76,000 square feet of commercial space. The community features a waterfront Village Center that includes a restaurant, a community pool and clubhouse facility, an amphitheater and approximately 42,000 square feet of commercial space. The community includes approximately 5.5 miles of walkways and boardwalks, including a 3.5-mile beachwalk.
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SummerCamp Beach is located on the Gulf of Mexico in Franklin County approximately 46 miles south of Tallahassee. The community is situated on approximately 762 acres and includes the SummerCamp Beach Club, a beachfront facility with a pool, restaurant, boardwalks and canoe and kayak rentals. SummerCamp Beach is entitled for 499 units.
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SouthWood is located on approximately 3,370 acres in southeast Tallahassee. Entitled for approximately 4,770 residential units, SouthWood includes an 18-hole golf course and club and a traditional town center with restaurants, recreational facilities, retail shops and offices. Over 35% of the land in this community is designated for open space, including a 123-acre central park.
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RiverTown, situated on approximately 4,170 acres located in St. Johns County south of Jacksonville, is entitled for 4,500 housing units and 500,000 square feet of commercial space. Phase I of RiverTown was re-launched in 2010 focusing on the first 800 units and features an amenity center with pool, tennis courts and playing fields. The centerpiece of the community is Riverfront Park, a 58-acre nature park along the St. Johns River.
Commercial Real Estate
Our commercial real estate segment plans, develops and sells or leases real estate for commercial purposes. We focus on commercial development in Northwest Florida because of our large land holdings surrounding the Northwest Florida Beaches International Airport, along roadways and near or within business districts in the region. We provide development opportunities for national and regional retailers and our strategic partners in Northwest Florida. We also offer land for commercial and light industrial uses within large and small-scale commerce parks as well as a wide range of multi-family rental projects. We also develop commercial parcels within or near existing residential development projects.
In 2010, we launched VentureCrossings Enterprise Centre, a 1,000 acre commercial and industrial development adjacent to the Northwest Florida Beach International Airport. A large commercial real estate services company.is soliciting global office, retail and industrial users for this prime development location. In 2011, we entered into a build-to-suit lease with ITT Corporation, our first tenant at VentureCrossings for a 105,000 square foot building on a 10.8 acre site. Construction is expected to be completed in late 2012 with rent commencing in early 2013.
During the fourth quarter of 2011, we changed the strategic direction of the former paper mill property located in the City of Port St. Joe (Gulf County, Florida). Instead of a mixed-use residential and retail development as had been previously planned, we decided the highest and best use of this property is port-related industrial. We made this change after carefully assessing the potential this property has for port-related economic development and the multiplier affect such potential has to Gulf County and our assets in Gulf County. We are in the process of implementing this strategic change in various ways in order to fully reposition this property accordingly.
Land-Use Entitlements
The entitlement of property is an integral first step in the development of our real estate holdings. As of December 31, 2011, we had approximately 30,822 residential units and 11.6 million commercial square feet in the entitlements pipeline, in addition to 642 acres zoned for commercial uses. The following table provides a summary of the entitlements that we have acquired in connection with our residential and mixed-use projects in development.
Rural Land Sales
Our rural land sales segment markets and sells rural land from our holdings primarily in Northwest Florida. Although the majority of the land sold in this segment is undeveloped timberland, some parcels include the benefits of limited development activity including improved roads, ponds and fencing. Our rural land sales segment also sells wetland mitigation credits to third parties from our wetlands mitigation banks.
We have traditionally sold parcels of varying sizes ranging from less than one acre to thousands of acres. The pricing of these parcels varies significantly based on size, location, terrain, timber quality and other local factors. We made a strategic decision in 2009 to sell fewer large tracts of rural land in order to preserve our timberland resources. In 2011, we continued to minimize the sale of rural land at today’s depressed prices and expect to continue this strategy in 2012.
In 2009, we began selling wetland mitigation credits to third parties from our two federal and state authorized wetland mitigation banks. We own and operate these two wetland mitigation banks and by conducting certain prescribed land management and timbering activities that enhance and restore the wetlands in these banks, we are allowed to sell credits that assist third parties in obtaining environmental permits from the federal and state regulatory authorities. Since 2009, we have sold credits to utility companies, developers, and institutional users for $1.9 million in revenue and an average price of approximately $69,000 per credit. The exact per credit price of each transaction varies depending on a number of factors. We have a total of 290 federal credits immediately available for use or sale and the ability to generate 1,100 additional credits.
The vast majority of the holdings marketed by our rural land sales segment will continue to be managed as timberland until sold. The revenues and income from our timberland operations are reflected in the results of our forestry segment.
CEO BACKGROUND
JACOB C. BELIN
Chairman of the Executive Committee Director since 1953 Age 81
Mr. Belin was President of St. Joe from 1968 to 1984 and Chairman of the Board and Chief Executive Officer (CEO) from 1982 to June, 1991. He has been Chairman of the Executive Committee since 1981. He is an officer and/or director of several of the subsidiaries of St. Joe, including Florida East Coast Industries, Inc. ("FECI"), a majority owned subsidiary of the Company. Mr. Belin also serves as a Trustee of the Alfred I. duPont Testamentary Trust (the "Trust"). See "Stock Ownership of Certain Beneficial Owners".
RICHARD H. DENT Director since 1994 Age 67
Mr. Dent was a Vice President, First Investors Management Co. from 1967 to 1976, Vice President, Manufacturers Hanover Trust Co. from 1977 to 1981 and since that time to the present has been President, Dent Capital Management, located in Greenwich, Connecticut.
ROBERT E. NEDLEY
President and Chief Operating Officer Director since 1989 Age 57
Mr. Nedley was a Vice President of the Company from 1982 to June, 1991. Mr. Nedley became President and Chief Operating Officer of the Company in June, 1991. He also is a member of the Executive and Pension Committees and serves as an officer and/or director of most of the subsidiaries of St. Joe.
RUSSELL B. NEWTON, JR. Director since 1994 Age 71
Mr. Newton in his early employment years was with Booz Allen & Hamilton, management consultants and President of Southern Stores, Inc. In 1968 he became President of Charter Oil Company and held that position until 1975 when he became principal owner and Chairman of Kern County Refinery, Inc. Since selling his interest in Kern County Refinery, Inc. in 1981, Mr. Newton has been an investor in oil marketing, shipping, public utilities, construction, direct mail solicitation and cable TV. Mr. Newton is Chairman of RBN Company which is involved in investment portfolio management. Mr. Newton is also a director of East Coast Oil Company and Alliance Mortgage Company.
JOHN J. QUINDLEN Director since 1995 Age 63
Mr. Quindlen retired as Senior Vice President and Chief Financial Officer of E. I. duPont de Nemours & Co. in 1993. Except for three years he served in the U. S. Navy as a Supply Officer, Mr. Quindlen worked for duPont since 1954 until his retirement, beginning in the Accounting Division of the Treasurer's Department and advancing through various positions within the finance and accounting departments of the Company until reaching the position at which he retired. Mr. Quindlen is a trustee of the Rodney Square Funds, the Kiewit Mutual Fund, and the Henry Francis duPont Winterthur Museum. He is a director of Atlantic Aviation Corporation, and a member of the Finance Council of the Archdiocese of Philadelphia.
WALTER L. REVELL Director since 1994 Age 61
Mr. Revell was Secretary of Transportation for the State of Florida from 1972 to 1975 and then was President, CEO and Director of Post, Buckley, Schuh & Jernigan, Inc. to 1983. Mr. Revell is presently Chairman of the Board and CEO of H. J. Ross Associates, Inc., a consulting engineering, architectural and planning firm in Coral Gables, Florida. He is also Chairman of the Board and CEO of Revell Investments International, Inc. and Infinity Technologies, Inc. Mr. Revell is also a director of Spillis Candela & Partners, Inc.; Norwegian Cruise Line, Ltd.; Dycom Industries, Inc.; Riscorp, Inc. and Hotelecopy, Inc., and General Partner of Craft Farms.
FRANK S. SHAW, JR. Director since 1995 Age 64
Mr. Shaw is President of Shaw Securities, Inc., a financial services company, and of Cherry Bluff, a North Florida development firm based in Tallahassee, Florida. He is also the former President and owner of Tallahassee Ford. Mr. Shaw is a director of First South Bank; Regional Financial Corporation and is Chairman of the Board of the Tallahassean, a weekly newspaper. Mr. Shaw serves on the Board of Directors of The Southern Scholarship Foundation, Maclay School Foundation, Leon County Library Foundation and the James Madison Institute.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We own a large inventory of land suitable for development in Florida. The majority of our land is located in Northwest Florida and has a very low initial cost basis before considering development costs. In order to increase the value of these core real estate assets, we seek to reposition portions of our substantial timberland holdings for higher and better uses. We seek to create value in and/or increase demand for our land by securing entitlements for higher and better land-uses, facilitating infrastructure improvements, developing community amenities, undertaking strategic and expert land planning and development, parceling our land holdings in creative ways, performing land restoration and enhancement and promoting economic development.
Rural Land Sales
Our rural land sales segment markets and sells tracts of land of varying sizes for rural recreational, conservation and timberland uses. The land sales segment prepares land for sale for these uses through harvesting, thinning and other silviculture practices, and in some cases, limited infrastructure development. Our rural land sales segment generates revenues from the sale of undeveloped land, land with limited development, easements and mitigation bank credits. Our rural land segment incurs costs of revenue from the cost of land or mitigation bank credits sold, minimal development costs and selling costs.
In recent years, our revenue from rural land sales have significantly decreased as a result of our decision to sell only non-strategic rural land and to principally use our rural land resources to create sources of recurring revenue as well as from declines in demand for rural land due to difficult current market conditions. In 2011, we continued to minimize the sale of rural land at today’s depressed prices and we expect to continue this strategy in 2012. We may, however, rely on rural land sales as a source of revenues and cash in the future.
Forestry
Our forestry segment focuses on the management and harvesting of our extensive timber holdings. We grow, harvest and sell sawtimber, wood fiber and forest products and provide land management services for conservation properties. Our forestry segment generates revenues from the sale of wood fiber, sawtimber, standing timber and forest products and conservation land management services. Our forestry segment incurs costs of revenues from internal costs of forestry management, external logging costs, and property taxes.
In 2011 an inventory of all our pine plantations was completed and a new software platform was implemented to facilitate management of the rural land holdings on a sustainable basis with regard to asset and harvest levels. These initiatives for the forestry segment have enabled the marketing of products to more diverse customers and the focus on market development. This plan made available approximately 70,000 acres for multiple uses including timber management on land previously held back from silviculture activities.
On March 31, 2011, we entered into a $55.9 million agreement for the sale of a timber deed which gives the purchaser the right to harvest timber on specific tracts of land (encompassing 40,975 acres) over a maximum term of 20 years. Unlike a pay-as-cut sales contract, risk of loss and title to the trees transfer to the buyer when the contract is signed. The buyer pays the full purchase price when the contract is signed and we do not have any additional performance obligations. Under a timber deed, the buyer or some other third party is responsible for all logging and hauling costs, if any, and the timing of such activity. Revenue from a timber deed sale is recognized when the contract is signed because the earnings process is complete. As part of the agreement, we also entered into a Thinnings Supply Agreement, pursuant to which we agreed, to the extent that the buyer decided to conduct a “First Thinning”, to purchase 85% of such first thinnings at fair market value. During, 2011, we purchased approximately $1.2 million, respectively, of first thinnings.
In November 2010, we entered into a new wood fiber supply agreement with Smurfit-Stone Container Corporation, which was recently acquired by RockTenn, (the “Wood Fiber Supply Agreement”). The new agreement replaces an agreement that we had entered into in July 2000 and that was scheduled to expire in June 2012. Under the agreement, we agreed to sell 3.9 million tons of pulpwood to RockTenn’s pulp and paper mill in Panama City, Florida over the next seven years. The new agreement also included more favorable pricing terms for us, provided for a steady demand for much of our wood fiber harvest and removed certain restrictions on our timberlands contained in the previous agreement.
2010 Restructuring and Relocation Program
In 2010, we announced that we were relocating our corporate headquarters from Jacksonville, Florida to WaterSound, Florida and consolidating existing offices from Tallahassee, Port St. Joe and Walton County into the WaterSound location. These relocations were completed in the second quarter of 2011. As a result of this restructuring and relocation program we incurred approximately $5.3 million of one-time charges during 2010 and $0.6 million during 2011 primarily relating to one-time termination benefits in connection with the termination of employees that would not be relocating and relocation benefits for those employees that would be relocating, as well as certain ancillary facility-related costs. The relocation costs include relocation bonuses, temporary lodging expenses, resettlement expenses, tax payments, shipping and storage of household goods, and closing costs for housing transactions. Although we previously announced that we would build a new headquarters facility, we have now decided to indefinitely delay the development of the new corporate headquarters building and impaired $0.8 million of predevelopment costs related to the new building in 2011.
2011 Restructuring Program
In the first quarter of 2011, as a result of discussions between our Board of Directors and Fairholme Capital Management, L.L.C., the largest beneficial owner of our common stock, Wm. Britton Greene entered into a Separation Agreement with us and resigned as our President and Chief Executive Officer. On April 11, 2011, we entered into separation agreements with four additional members of senior management. As a result of these five separations, we incurred approximately $8.5 million in charges during 2011 pursuant to the separation agreements of these individuals. These amounts do not include the additional $1.5 million non-cash compensation expense arising from the accelerated vesting of Mr. Greene’s restricted stock unit grants.
Our new management team adopted a restructuring plan aimed at significantly reducing operating costs. As part of this plan, we incurred approximately $2.4 million of charges during 2011 related to severance payments to employees. Our cost saving initiatives included lowering employee related costs by reducing headcount from 118 as of February 1, 2011 to 75 as of February 1, 2012; saving on occupancy costs by consolidating offices; renegotiating vendor contracts; and reducing discretionary spending where possible. We expect that our cost savings efforts will generate a decrease of approximately $15 million to $18 million in operating and corporate expenses on an annualized basis.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on our historical and current experience and on various other assumptions that management believes are reasonable under the circumstances. We evaluate the results of these estimates on an on-going basis. Management’s estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Investment in Real Estate and Cost of Real Estate Sales. Costs associated with a specific real estate project are capitalized during the development period. We capitalize costs directly associated with development and construction of identified real estate projects. Indirect costs that clearly relate to a specific project under development, such as internal costs of a regional project field office, are also capitalized. We capitalize interest (up to total interest expense) based on the amount of underlying expenditures and real estate taxes on real estate projects under development. If we determine not to complete a project, any previously capitalized costs are expensed in the period in which the determination is made.
Real estate inventory costs include land and common development costs (such as roads, sewers and amenities), multi-family construction costs, capitalized property taxes, capitalized interest and certain indirect costs. Construction costs for single-family homes are determined based upon actual costs incurred. A portion of real estate inventory costs and estimates for costs to complete are allocated to each unit based on the relative sales value of each unit as compared to the estimated sales value of the total project. These estimates are reevaluated at least annually and more frequently if warranted by market conditions or other factors, with any adjustments being allocated prospectively to the remaining units available for sale.
Pension Plan. We sponsor a cash balance defined-benefit pension plan covering a majority of our employees. The accounting for pension benefits is determined by accounting and actuarial methods using numerous estimates, including discount rates, expected long-term investment returns on plan assets, employee turnover, mortality and retirement ages, and future salary increases. Changes in these key assumptions can have a significant effect on the pension plan’s impact on the financial statements of the Company. For example, in 2011, a 1% increase in the assumed long-term rate of return on pension assets would have resulted in a $0.7 million increase in pre-tax income ($0.4 million net of tax). However, a 1% decrease in the assumed long-term rate of return would have caused an equivalent decrease in pre-tax income. A 1% increase or decrease in the assumed discount rate would have resulted in a less than $0.1 million change in pre-tax income. Our pension plan was overfunded and we do not expect to make contributions to the pension plan in the future. The ratio of plan assets to projected benefit obligation was 236% at December 31, 2011.
Stock-Based Compensation. We have offered stock incentive plans whereby awards were granted to certain employees and non-employee directors in the form of restricted shares of our common stock or options to purchase our common stock. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is typically recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
In February 2011, 2010 and 2009, we granted select executives and other key employees restricted stock awards with vesting based upon the achievement of certain market conditions that are defined as our total shareholder return as compared to the total shareholder return of certain peer groups during a three-year performance period.
We have used a Monte Carlo simulation pricing model to determine the fair value of our market condition awards. The determination of the fair value of market condition-based awards is affected by the stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the requisite performance term of the awards, the relative performance of our stock price and shareholder returns compared to those companies in our peer groups and a risk-free interest rate assumption. Compensation cost is recognized regardless of the achievement of the market condition, provided the requisite service period is met.
Income Taxes. In preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We record a valuation allowance against our deferred tax assets based upon our analysis of the timing and reversal of future taxable amounts and our history and future expectations of taxable income. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments are required in any given period we will include the adjustments in the tax provision in our financial statements. These adjustments could materially impact our financial position, cash flow and results of operation.
At December 31, 2011, the Company had a federal net operating loss of approximately $92.0 million and a state net operating loss carry forward of $612.6 million. These net operating losses are available to offset future taxable income through 2031.
In general, a valuation allowance is recorded if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax asset will not be realized Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in the appropriate tax jurisdictions to obtain a benefit from the reversal of deductible temporary differences and from loss carryforwards. Based on the timing of reversal of future taxable amounts and the Company’s recent history of losses and future expectations of reporting taxable losses, management does not believe it met the requirements to realize the benefits of certain of its deferred tax assets and has provided for a valuation allowance of $94.5 million at December 31, 2011. The Company also recorded in 2011 a valuation allowance of $3.8 million to offset the deferred tax asset component recognized in Accumulated Other Comprehensive Income.
At December 31, 2010, the Company had a valuation allowance of $1.0 million related to state net operating losses and charitable contribution carry forwards.
Adoption of New Accounting Standards
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 to now require (1) a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements; and (3) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU No. 2010-06 did not have a material impact on the Company’s financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Account Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05 described below so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires comprehensive income to be reported in either a single statement that presents the components of net income, the components of other comprehensive income, and total comprehensive income or in two consecutive statements. The first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Commercial Real Estate
Our commercial real estate segment plans, develops and entitles our land holdings for a broad range of retail, office, hotel, industrial and multi-family uses. We sell and develop commercial land and provide development opportunities for national and regional retailers as well as strategic partners in Northwest Florida. We also offer land for commercial and light industrial uses within large and small-scale commerce parks, as well as for a wide range of multi-family rental projects. Our commercial real estate segment generates revenues from the sale or lease of developed and undeveloped land for retail, multi-family, office, hotel and industrial uses and rental income. Our commercial real estate segment incurs costs of revenues from costs directly associated with the land, development costs and selling costs and operating costs of rental properties.
Rural Land Sales
Our rural land sales segment markets and sells tracts of land of varying sizes for rural recreational, conservation and timberland uses. The land segment prepares land for sale for these uses through harvesting, thinning and other silviculture practices, and in some cases, limited infrastructure development. Our rural land sales segment generates revenues from the sale of undeveloped land, land with limited development, and easements and mitigation bank credits. Our rural land segment incurs costs of revenue from the cost of land sold, minimal development costs and selling costs.
In recent years, our revenue from rural land sales have significantly decreased as a result of our decision to sell only non-strategic rural land and to principally use our rural land resources to create sources of recurring revenue as well as from declines in demand for rural land due to difficult current market conditions. We may, however, rely on rural land sales as a source of revenues and cash in the future.
Forestry
Our forestry segment focuses on the management and harvesting of our extensive timber holdings. We grow, harvest and sell sawtimber, wood fiber and forest products and provide land management services for conservation properties. Our forestry segment generates revenues from the sale of wood fiber, sawtimber, standing timber and forest products and conservation land management services. Our forestry segment incurs costs of revenues from internal costs of forestry management, external logging costs, and property taxes.
New Real Estate Investment Strategy
On January 25, 2012, we adopted a new real estate investment strategy, which is focused on reducing future capital outlays and employing new risk-adjusted investment return criteria for evaluating our properties and future investments in such properties. Pursuant to this new strategy, we intend to significantly reduce planned future capital expenditures for infrastructure, amenities and master planned community development and reposition assets to encourage increased absorption of properties in their respective markets. As part of this repositioning, we expect properties may be sold in bulk in undeveloped or developed parcels, or at lower price points and over shorter time periods. We anticipate that the amount of future capital expenditures associated with existing projects will be reduced by approximately $190 million, the majority of which was expected to be spent in the next 10 years. We believe this new investment strategy continues to build upon the successful cost reduction initiatives implemented in 2011 and positions us to i) increase our short and medium-term cash flow, ii) reduce our long-term risk and iii) maintain the strong cash position necessary to best exploit our substantial land resources. Additionally, reducing capital expenditures on existing projects will allow us to focus on opportunities that meet our new investment criteria.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical experience, available current market information and on various other assumptions that management believes are reasonable under the circumstances. Additionally we evaluate the results of these estimates on an on-going basis. Management’s estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and our accounting estimates are subject to change.
The critical accounting policies that we believe reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements are set forth in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes in these policies during the first three months of 2012, however there is no assurance that these policies will not change in the future.
Recently Issued Accounting Standards
See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
Seasonality
Our real estate business and our Northwest Florida residential resort and seasonal and resort and club communities are affected by seasonal fluctuations, with the spring and summer months traditionally being the most active time of year for customer traffic and sales.
Results of Operations
The Company generated a net loss of ($0.9) million, or ($.01) per share in the first quarter of 2012, compared to net income of $14.1 million, or $0.15 per share, for the first quarter of 2011. Results for the three months ended March 31, 2011 include a pre-tax gain of $50.3 million from the sale of the timber deed to an investment fund. Excluding the gain resulting from the timber deed, the Company reported losses in the first quarter of 2011 primarily due to the impact of continuing economic challengers and restructuring expenses.
Commercial Real Estate
Our commercial real estate segment plans, develops and entitles our land holdings for a broad range of retail, office, hotel, industrial and multi-family uses. We sell or lease and develop commercial land and provide development opportunities for national and regional retailers as well as strategic partners in Northwest Florida. We also offer land for commercial and light industrial uses within large and small-scale commerce parks, as well as for multi-family rental projects. Consistent with residential real estate, the markets for commercial real estate, particularly retail, remain weak.
Liquidity and Capital Resources
As of March 31, 2012, we had cash and cash equivalents of $165.7 million, compared to $162.4 million as of December 31, 2011.
We invest our excess cash primarily in bank deposit accounts, government-only money market mutual funds, short term U.S. treasury investments and overnight deposits, which we believe are highly liquid, as we intend to keep such funds readily available for operating expenses and strategic long-term investment purposes.
We believe that our current cash position and our anticipated cash flows will provide us with sufficient liquidity to satisfy our currently anticipated working capital needs and capital expenditures.
We currently expect to incur approximately $20.9 million of capital expenditures during the remainder of 2012. These capital expenditures primarily relate to development of our residential and commercial real estate projects, construction of amenities at these facilities, and includes the construction of a new build to suit at VentureCrossings.
In 2010, we entered into a strategic alliance agreement with Southwest Airlines to facilitate low-fare air service to the new Northwest Florida Beaches International Airport. We have agreed to reimburse Southwest Airlines if it incurs losses on its service at the new airport during the first three years of service by making break-even payments. There has been no reimbursement required since the effective date of the agreement in May 2010.
Oil Spill Lawsuits
As a result of the Deepwater Horizon oil spill, we have incurred significant expenses and our properties, results of operations and stock price have been negatively impacted. We are currently exploring funds that may be available through the Gulf Coast Claims Facility to reimburse us for these losses. In addition, we have filed, and may in the future file, additional lawsuits or claims against those parties we believe are responsible for the Deepwater Horizon oil spill.
On October 12, 2010, we filed a lawsuit in the Superior Court of the State of Delaware in New Castle County against Transocean Holdings, LLC, Transocean Offshore Deepwater Drilling, Inc., Transocean Deepwater, Inc. and Triton Asset Leasing GmbH (collectively, “Transocean”). The lawsuit alleges that Transocean, the owner of the drilling rig, was grossly negligent in the operation and maintenance of the drilling rig and its equipment and in overseeing drilling activities on the rig leading to the blowout of the well. We are seeking compensatory and punitive damages. On March 15, 2011, Judge Leonard Stark of the United States District Court for the District of Delaware issued an order in our action against Transocean Holdings, LLC and its related entities agreeing with us that the case must proceed in Delaware state court, not in federal court. Transocean appealed that ruling to the Third Circuit Court of Appeals, which promptly dismissed the appeal. On March 25, 2011, Judge Carl Barbier of the United States District Court for the Eastern District of Louisiana, who is overseeing the federal multidistrict litigation against a number of the Deepwater Horizon defendants, temporarily stayed our case against Transocean. We are voluntarily dismissing the lawsuit in Delaware against Transocean that is stayed in accordance with Judge Barbier’s March 25, 2011 order and will proceed against Transocean in the federal multidistrict litigation
On August 4, 2010, we filed a lawsuit in the Superior Court of the State of Delaware in New Castle County against Halliburton Energy Services, Inc. (“Halliburton”). The lawsuit alleges that Halliburton, the cementing contractor for the oil well, was grossly negligent in its management of the well cementing process leading to the blowout of the well. We are seeking compensatory and punitive damages.
On August 26, 2010, we filed a lawsuit in the Superior Court of the State of Delaware in New Castle County against M-I, L.L.C. (a/k/a “M-I SWACO”). The lawsuit alleges that M-I SWACO, the drilling fluid contractor for the drilling rig, was grossly negligent in the way that it managed and conducted the use of drilling fluids to maintain well control leading to the blowout of the well. We are seeking compensatory and punitive damages.
Shareholder Lawsuits
We have an ongoing securities class action lawsuit against St. Joe and certain of our current and former officers pending before Judge Richard Smoak in the United States District Court for the Northern District of Florida (Meyer v. The St. Joe Company et al., No. 5:11-cv-00027). A consolidated class action complaint was filed in the case on February 24, 2011 alleging various securities laws violations primarily related to our accounting for our real estate assets. The complaint seeks an unspecified amount in damages. We filed a motion to dismiss the case on April 6, 2011, which the court granted without prejudice on August 24, 2011. Plaintiff filed an amended complaint on September 23, 2011. The Company filed a motion to dismiss the amended complaint on October 24, 2011. On January 12, 2012, the Court granted the motion to dismiss with prejudice and entered judgment in favor of the Company and the individual defendants. On February 9, 2012, plaintiff filed a motion to alter or amend the judgment, which the Court denied on February 14, 2012. On March 15, 2012, plaintiff file a notice of appeal to the United States Court of Appeals for the Eleventh Circuit and that appeal is currently pending.
On March 29, 2011 and July 21, 2011, two separate derivative lawsuits were filed by shareholders on behalf of St. Joe against certain of its officers and directors in the United States District Court for the Northern District of Florida (Nakata v. Greene et. al., No. 5:11-cv-00090 and Packer v. Greene, et al., No. 3:11-cv-00344). The complaints allege breaches of fiduciary duties, waste of corporate assets and unjust enrichment arising from substantially similar allegations as those described above in the Meyer case. The complaints seek an unspecified amount in damages. On June 6, 2011, the court granted the parties’ motion to stay the Nakata action pending the outcome of the Meyer action. On September 12, 2011, a third derivative lawsuit was filed in the Northern District of Florida (Shurkin v. Berkowitz, et al., No. 5:11-cv-304) making similar claims as those in the Nakata and Packer actions and seeking an unspecified amount in damages. St. Joe and the individual defendants have not been served with the Shurkin complaint. On September 16, 2011, plaintiffs in Nakata and Packer filed a joint motion to consolidate all derivative actions and appoint lead counsel. On October 3, 2011, plaintiff in Shurkin filed a cross motion seeking separate lead counsel for Shurkin and coordination of Shurkin with the other derivative cases. On October 6, 2011, the Company filed a response in which it stated that all derivative cases should be consolidated. On October 14, 2011, Nakata and Packer plaintiffs filed an amended joint motion seeking consolidation of those two cases only. On October 21, 2011, the court issued an order consolidating the Nakata and Packer lawsuits. Further action in the Nakata and Packer action is awaiting resolution of the Meyer action discussed above.
Securities and Exchange Commission Investigation
On January 4, 2011 the SEC notified the Company it was conducting an inquiry into the Company’s policies and practices concerning impairment of investment in real estate assets. On June 24, 2011, the Company received notice from the SEC that it has issued a related order of private investigation. The order of private investigation covers a variety of matters for the period beginning January 1, 2007 including (a) the antifraud provisions of the Federal securities laws as applicable to the Company and its past and present officers, directors, employees, partners, subsidiaries, and/or affiliates, and/or other persons or entities, (b) compliance by past and present reporting persons or entities who were or are directly or indirectly the beneficial owner of more than 5% of the Company’s common stock (which includes Fairholme Funds, Inc, Fairholme Capital Management L.L.C. and the Company’s current Chairman Bruce R. Berkowitz) with their reporting obligations under Section 13(d) of the Exchange Act, (c) internal controls, (d) books and records, (e) communications with auditors and (f) financial reports. The order designates officers of the SEC to take the testimony of the Company and third parties with respect to any or all of these matters. The Company is cooperating with the SEC on historical matters as well as communicating and providing relevant information regarding the Company’s recent change in investment strategy and impairments. The Company believes that the probability of loss related to this matter and an estimate of the amount of loss, if any, are not determinable at this time. The Company cannot evaluate the likelihood of an unfavorable outcome related to this matter to be either “probable” or “remote”, nor can they predict the amount or range of possible loss from an unfavorable outcome to give an estimated range.
Item 5. Other Information
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
(e) On March 2, 2012, the Company granted Park Brady 36,023 shares of restricted stock, which vested immediately on the grant date. The restricted stock had a grant date fair value of $15.99. Mr. Brady elected to receive 36,023 shares of stock in lieu of his 2011 discretionary cash bonus.
As previously disclosed on the Form 8-K filed with the SEC on March 13, 2012, Janna L. Connolly resigned from her position as Senior Vice President and Chief Financial Officer of Company. On March 23, 2012, the Company entered into a Separation Agreement with Ms. Connolly pursuant to which Ms. Connelly received the severance amounts due under her employment agreement with the Company dated as of September 29, 2009.
CONF CALL
Bruce Berkowitz
Good morning ladies and gentlemen. I am Bruce Berkowitz, Chairman of the Board of The St. Joe Company. It’s my pleasure to welcome all of you. In accordance with the notice of meeting, I call to order the 2012 annual meeting of shareholders. Each of you should have registered as you entered the meeting. If anyone hasn’t registered, please do so at this time.
We will conduct this meeting in accordance with the agenda you were given as you entered the meeting room this morning. Please note that after the formal meeting is adjourned, there will be an opportunity at the end of the meeting for shareholder questions and discussions. On the reverse side of the agenda there is a list of the rules of conduct for this meeting. To ensure orderly meeting, we require that all participants abide these rules.
Present today are representatives of KPMG, the company’s independent registered public accounting firm who will be available to answer any appropriate questions during the Q&A portion of the meeting. Ken Borick will act as the secretary of the meeting. We are being assisted today in the calculation of proxies and ballots by Michael Barbera (ph) from Broadridge Financial Solutions. At this time, I appoint Michael Barbera as inspector of the election.
The notice of the meeting has been mailed – the notice of this meeting has been mailed to each shareholder of record as of March 15, 2012. The inspector of election has informed me that 85,023,733 shares of company’s voting stock are present in person or by proxy, constituting a quorum for today’s meeting. A list of shareholders on March 15, 2012, the record date may be inspected by any shareholder who is present. The final report of the inspector of elections will include the vote, if any, if shareholders present and voting in person.
The inspector of election has provided an affidavit of mailing to show that notice of the meeting was given on or about April 5, 2012. A copy of both the notice and the affidavit will be incorporated into the minutes of this meeting.
Next, I will describe each matter to be acted on at the meeting and then we will take the vote. Since no direct nominees, since the proposals for business were properly filed by shareholder in advance at this meeting, the business at this meeting is limited to the following three proposals. The first proposal before the shareholders is the election of the eight directors to serve until the next annual meeting. I am standing for re-election as a director today along with the following nominees. Sitting behind me, I’d ask each of the nominees to wave as his name is called. Cesar Alvarez is not with us. He had to be in court today. So he sends his regret. Park Brady, Governor Charles Crist, Howard Frank, Jeff Keil, Stan Martin, Thomas Murphy. We recommend the election of these nominees.
The second proposal is the ratification of the appointment of KPMG as our independent registered public accounting firm for the 2012 fiscal year. The Audit and Finance Committee has again retained the services of KPMG to audit the company’s financial statements for 2012 and the committee recommends that the shareholders ratify the appointment of KPMG. Mr. Frank, the chairman of the audit and finance committee will be available to answer any appropriate questions during the Q&A portion of the meeting.
The third proposal is the proposal of use of vote in an advisory, non-binding manner on the compensation paid to our named executives as disclosed in the proxy statements pursuant to item 402 of Regulation S-K. We recommend the approval of the compensation of our named executive officers.
We will now vote on the proposals. Those shareholders voting in person should now market their ballot. If you’ve previously voted by proxy, you do not need to vote again today unless you want to change your vote. If you would like a ballot, please raise your hand and one will be provided to you.
Okay. The inspector of election will wait to collect the outstanding ballots. And if anyone else has a filled ballot that you would like to give to the inspector of election, please do so now. Okay. Since everything wanting to vote, has voted, one person is about to vote. We will officially close the poll after one shareholder has voted. The poll is now officially closed and will the inspector of elections, please report the results after balloting.
Unidentified Participant
Sure. In the final tabulation there reflects small changes from what I have announced. The final tabulation will be set forth in the formal report of the inspector of election, the secretary of the company should we need after the accounting has been verified. I certify that with respect to proposal number one, each nominees for director has received the majority of the votes cast. The proposal two received the majority of the votes cast and proposal three received a majority of the votes cast.
Bruce Berkowitz
Thank you. I hereby declare that the director nominees have been duly elected, that the appointment of KPMG as a company’s independent registered public accounting firm has been ratified and that shareholders approved in a non-binding advisory vote the compensation of the named executive officers as disclosed in the proxy statement.
I would like to express my sincere appreciation for all of you attending at the meeting. And this is going to conclude the formal part of our annual meeting. This concludes the 2012 annual meeting and hopefully we will see each of you next year. The meeting is officially adjourned and we shall now move - questions and discussions.
So it comes to the part of the agenda providing for questions and our answers. Anyone wishing to address the meeting should rise and speak into a microphone as this meeting is being webcast. After I recognize you, please state your name and whether you are a shareholder or proxy holder and proceed with your question or comment. Please remember to conduct yourself with the rules of this meeting, including limiting your time for two questions or comments at no more than 2 minute each.
By opening up for questions, I will ask Park Brady, the company’s chief executive officer to provide a brief overview of the company operations.
Park Brady
Good morning. First of all, before I start, I wanted to introduce our senior management so that you can all get to know them a little better. They’ve worked hard over the last year to get us to where we are today. And I will speak to that in just a second.
Patrick Bienvenue is our Executive Vice President, came on with us in September of last year, Tom Hoyer who has been here all of eight weeks as our new CFO of the company, Ken Borick, our General Counsel, Steve Hilliard who has been in charge of all of our operations, Rhea Goff who is our VP of HR and a person who has been with us since 1976 in the company, we call him David Pedia because he knows everything about what’s going on – and he is the person we reach to when we are looking for history of the company. So Dave Harrelson who runs our timber operations. Jorge Gonzalez who has been doing entitlements. He’s been working with the government relations for years with the company, has recently taken on the responsibility for the direction of our core facilities for St. Joe which I will speak to in a second. And Cliff Cohen who is our in-charge of our sales operations. Thank you.
I want to speak just a little bit, I am going to do this quickly, just a few minutes we will get into the Q&A. When we do get into the question and answer, Dennis has got a microphone here, since this is being webcast, we will need for everyone to raise their hand and then take the microphone to speak. Identify yourself and then speak. So if you will follow these directions, the people listening out there on the webcast will be able to understand and hear it.
A year ago, a little over a year ago, March of 21st I started with the company is when we basically had a management change. We were directed by the board to, as Bruce put it very eloquently, stopped the bleeding. This company has been burning cash consistently and to continue operations with selling off assets to make that happen. Where we over the last year have done a number of things. I am not going to bore you with all the details but we went and did what every business has been doing since the financial crisis started in 2008.
We cut staff, we renegotiated agreements with vendors. We went out and cut unneeded operations. We outsourced some of our operations to cut expenses. We did a number of things in this company that got us its life (ph) we were able to announce in January that we were going to be cash flow positive with the exclusion of non-discretionary spending in capital which meant to be – we’d be investing some of our capital in things that we felt made sense for the company. That was a big change.
And what that did for us is it gave us a whole new way that we could look at the company. It gave us time to sit back and say now we can assess our assets. We don’t have to worry about the fact that we’re depleting our capital and cash. We can move forward and take our time what this company needed and it really has given us a breather to allow ourselves to look at the company differently and to seek and study our assets and determine what we are going to do going forward.
We also looked at – we were asked by the board to say, let’s make sure that our plans that we have in place put us in a place where we are conserving our capital and we have time. And that was, Patrick came on-board in September, we very quickly started looking at the plans that were in place previously and we said, wait a minute. If we continue with the plans that we already have in place, we’re going to be spending lots of capital down the road to – and we will deplete the cash that we have and we will have to do what we have done in the past - to convert assets to make that happen.
We felt like this recovery was going to be longer than previously felt. We felt like the recovery – steepness of that recovery, those of us who have been in Florida, I have been here since 1953, is that we’ve been through a number of recessionary cycles, we felt like it wasn’t going to be as steep as that. So that led us to be rethinking our plans for different projects for some of our assets. And what we did was we revised our real estate strategy based on a new way of looking at it. And we impaired – did the impairment back in January that ended up in the third quarter of the year.
Still have the same assets, same wonderful things that you see in the map of 574,000 acres that’s sitting up there north. And that was a big thing for us to do. But it put us in a position where we have now revised the strategy going forward.
What are we doing as a company? The company in the past has been looking at projects like the one you are sitting in today, WaterColor, we are placemarker. We are going to build this place. And that works in a very, very high energy economy where lots of things were going on, in that, and we are going to primarily focus on the high end secondary home in the reserve market. And that was the core business. Well, the core business dropped off, it stopped. We’ve all seen what happened to us. And in this whole process over the last year, we said, we’re not just doing the core business as our development. In fact, that sort of stopped and stopped everywhere.
We are in a number of businesses and we are in the real estate sales business, we’re in the commercial sales business. We are in the commercial development of residential, we are in timber operations, we are in the resort and lodging. And so we have taken the approach that we now manage these assets and manage them as individual businesses that are not a minute piece of a core business. And so what we have been able to do is take all of those operations with the exception of residential sales and we now have those individual businesses contributing to the positive revenue of the company.
And that’s what we are going to do going forward. We have taken and we are looking at other ways to look at our assets. One of the things that we are looking at right now is taking and saying, we have never been really in the primary home business. In a primary home business which is a market that’s out there selling right now, if primary home is value business, it’s a market that’s happening. We recognized that and we said that is something that we are going to look into going forward because we’ve got all the records siting up there on that map, is that we have the real opportunity going forward with the primary home business of making it happen for Joe.
The other thing that we have been looking at because all the demographics show, that we’ve studied so far is adult living. We are sitting here with large acreage and the ability to plan and build a large adult living community where you have beach access, we have things that lot of others don’t have out there. And we feel like that’s a place where 50 million people who are going to be retiring over the next 10 years and a lot of them want to come to Florida that we have a real opportunity going forward for that market.
We will continue to, where we are successful, there is a lot of activity and it’s now coming back up which has really happened in recent months is, if you’ve driven to WaterColor, you’ve driven to WaterSound West Beach, you’ve driven to some of the other communities out there, there is lots of activity and things happening. So we’re going to continue to nurture that and move with that. But in addition, we are going to move into the new areas that we have not explored before.
The last thing I want to just – or last two things I want to speak to is, we still feel our airports and airport properties with 70,000 acres, 30,000 units entitled is a jewel and it will be a jewel. The question is how soon will that happen for Joe? In everything that we are doing, we are taking a conservative approach and say it’s going to be a little longer than what we thought before. We did last year execute a lease with ITP. If you’re going out to the airport, you can take a look, there is 105,000 square foot building sitting there today that’s going to be finished in September and October. ITP will move into it, it will -- we own the building and they are paying a nice lease and we have a nice rate of return on that lease. And we will continue to do is explore those options.
We have numerous people, we’ve talked to about going to the airport, being a VentureCrossings that’s out there but people are reticent because of this economy to pull a trigger. All of us who have watched any new airport in the United States that’s open, one that I am familiar with for years is (indiscernible) international airport. It’s incredible what happens over the years. We know it’s going to happen. Southwest who has been adding flights, that added a flight to St Louis there. They are very happy with what’s happening at the airport. It’s been good for them. Northwest Florida has a lot of exciting things happening. And we’ve put ourselves in the place where we can benefit from that.
Joe has 574,000 acres, 80% of it was in 50 miles in the coast of Northwest Florida and you all know this what duty sits here, is that we feel like we are in a great place. We’ve got cash, we don’t have any significant debt that’s sitting out there. And we’ve got all these valuable assets.
The last piece that I want to speak is, Port of St. Joe. A year ago, Port of St. Joe was planned to be residential community. It’s been rezoned, planned unit development there that was going to have it see that. And we started looking at it saying to ourselves, wait a minute. If one of the 15 permitted course in the state of Florida, federally permitted, if it has access to the intracoastal, it’s a deepwater port. The ports that went out in Florida and looked in the adjacent areas where it basically maxed out. Many people don’t realize that the port of Panama City, 25% of the copper that comes in the U.S. comes into port of Panama City, 25 miles from us.
With the closest port to the Panama Canal, closer to Miami, but you’ve got to go around till you get to Miami. We’re closer to it than anyone across the Gulf Coast. And unlike any other ports that’s out there today in the U.S. we have lots of acreage next to our port. We’ve got 4000 plus acreage that we can provide storage facilities, all the other things that ancillary things that go on with the port. And anyone who look at the ports knows that they are huge economy generators for the local community. And they are also huge generator of jobs.
So we are excited about that repositioning. Just eight weeks ago, we went through the rezoning of the port facility from residential, it’s now back to industrial. And we announced that we are working with the port authority there where we were a little bit at odds before because we wanted to be residential and they want a port facility. And we are now back on to saying, hey, is this – we feel like that’s an asset that can really generate a lot for us and create value for not only the community that a port of St. Joe and the surrounding counties but for other properties that we won in the county.
I want to just close by saying, it’s been a quick year. It seems like we just had the beginning a few months ago last year, we’ve done a lot in last year. We’ve got a great team in place. We are ready to take advantage of what comes our way. If the economy turns, and the winds at our back there, that would be great. We are planning for that not happening. But we are also able to react to it if it does happen.
We will open it up now for questions and answers. Again, Dennis has got the microphone and just raise your hand and identify yourself and then – No questions.
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Fund Letters
