St Joe Co (JOE) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to The St. Joe Company's first quarter 2008 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I will turn the call over to the Chairman and Chief Executive Officer of St. Joe Company, Mr. Peter Rummell. Please go ahead, sir.

Thank you, and good morning. Welcome to The St. Joe Company's conference call for 2008's first quarter. I'm Peter Rummell, Chairman and CEO of Joe, and joining me this morning are our President and soon-to-be CEO, Britt Greene; our CFO, Bill McCalmont; and Chief Strategy Officer, Chris Corr.

Before we begin, let me remind everybody about our forward-looking statements. Matters discussed on this call that are not historic facts are forward-looking statements that are based on our current expectations. Actual results may differ materially. Forward-looking statements are subject to certain risks and uncertainties that are described in today's earnings release and in our SEC filings, which are on our website at joe.com.

For the first quarter, Joe's net income was $32.1 million or $0.40 a share. This compares to net income of $19.7 million or $0.27 a share for the first quarter of last year. The largest contributor to net income was strong rural land sales. In contrast, as we have reported, Florida's resort and residential real estate markets remain weak.

Joe's first quarter results included pretax impairment charges of $2.3 million or $0.02 a share after-tax as a result of continuing declines in sales and listing prices in our primary communities. Also included in first quarter results are pretax restructuring charges of $0.5 million or less than $0.01 per share after-tax, compared to $3.2 million or $0.03 a share after-tax in 2007.

Nationally, consumer confidence is low, and many consumers seem to be deferring residential real estate purchases until there is more economic clarity. As we've anticipated, Joe's residential real estate sales reflect the broader markets. Commercial land sales have also become impacted by the weakening demand by national retailers.

As our first quarter results indicate, demand for rural land remains strong, and we are having success selling non-strategic rural land parcels to a wide variety of customers. During the first quarter, we made significant progress in four specific areas -- construction of the Panama City Bay County International Airport moved forward on time and on budget after several favorable jurisdictional decisions. Two, Joe's successful equity offering made Joe virtually debt-free, and increased its financial flexibility to weather these current market conditions. Three, Joe sold 57,000 plus acres of non-strategic rural lands for a total of $91 million. And four, as I mentioned at the top, Joe's succession plan is being implemented smoothly, with Britt Greene slated to become CEO next week at our annual meeting.

While it's impossible to predict when conditions in Joe's markets will improve, we are taking important steps to be properly positioned when they do. We have become a leaner, more nimble company. We are building relationships with potential strategic allies, and we are working with public and private interests to advance economic development in northwest Florida.

Let me talk specifically about the airport for a minute. At the construction site of the new Panama City Airport in West Bay, the first quarter saw the culmination of a decade of hard work. Each day, the Airport Authority continues construction brings us one day closer to a new airport capable of attracting better air service, and stronger economic development for the region. It also brings us closer to the permanent protection of West Bay in the establishment of the West Bay Preservation area.

So far, as we've reported, the project has survived several legal challenges. Since last fall, the few airport opponents that remain have filed suit in three different federal courts in an effort to halt or delay the relocation of the airport. To date, these courts have consistently issued rulings allowing construction to continue. The Airport Authority continues to estimate that the new airport will open in late spring, 2010, barring unexpected delays or additional legal challenges.

In preparation of the beginning of the airport, Coastal Vision 3000, a rapidly growing business group with members from across northwest Florida, has initiated a regional effort to attract improved air service to Northwest Florida. Now that the airport is under construction, attracting new air service becomes a primary focus for the region and is a key component of Joe's efforts to drive demand for real estate in Northwest Florida.

We learned early on in this process that until the airport was actually under construction, airlines had little interest in talking to us. So now, those conversations are well underway, with both domestic and international carriers.

Now I'll ask Britt to take us through the first quarter's operating results. Britt?

Thank you, Peter. As Peter noted earlier, we anticipated a difficult and challenging quarter, and we had one. The marketplace for residential real estate in Joe's Florida markets remains weak.

During the first quarter, we have successfully implemented the Rural Land Sales Program we announced in the fourth quarter of 2007. I'm pleased to report that demand for both large and small tracts of rural land has held up well during this current market downturn. I also want to stress that these land sales are part of what we have previously designated as our harvest asset. They are clearly non-strategic assets that make sense to monetize today. We continue to see interest from large landowners, recreational land buyers, conservation land buyers, and pension funds.

In contrast to rural land, resort and primary residential markets remain very weak. Resort and primary residential sales generated in the first quarter were $9.7 million in revenue.

We did not close any commercial land sales during the first quarter. Due to the challenges facing national retailers and the nature of commercial land transactions, we expect revenue from commercial land sales to remain lumpy through the year. However, it is worth noting that we continue to see interest in strategically located commercial and industrial properties. We have had solid interest from prospective users and strategic partners for property located in and around the West Bay Sector near the new airport. However, we are going to be strategic in how best we realize this land's value, and we are evaluating ways to build sustainable recurring income streams from commercial development on this very valuable land.

Moving forward, we will continue to tighten our focus on our most valuable land holdings. At the end of the first quarter, Joe owned approximately 638,000 acres, concentrated primarily in Northwest Florida. Approximately 430,000 of those acres or 68% of Joe's total land holdings are located within 15 miles of the coast of the Gulf of Mexico. We have approximately 46,200 land use entitlements in hand or in process, and about 14.5 million square feet of commercial space, as well as an additional 611 acres with land use entitlements for commercial purposes. Over the past 10 years, we have built a very strong entitlements pipeline and we have created the supply. Our challenge now is to drive demand to use that supply. Regional economic development is a priority to drive that demand and absorption of real estate.

In terms of operations, we are continuing to push for greater efficiencies. We are making good progress, laying the groundwork for alliances, joint ventures and strategic partnerships on Joe land. We are also working closely with regional economic development organizations to target businesses that can benefit from proximity to a new airport. For example, we are working closely with Florida's Great Northwest, which is the Panhandle's leading economic development organization. They recently completed a very detailed analysis of the economic clusters most suites for growth in Northwest Florida.

For example, three of these key clusters are Northwest Florida -- in Northwest Florida will be aerospace, defense and security; international trade and logistics; and renewable energy. Over the next year, we'll be working with Florida's Great Northwest to market opportunities in the West Bay Sector and surrounding region. We are working to leverage the knowledge, skills and resources of third party alliances to drive demand for real estate in Northwest Florida. Using our entitled land as currency, we believe we can build equity in a wide variety of business opportunities, including these targeted clusters that can become an important source of shareholder value for the longer term.

Now I'm going to turn it over to Bill McCalmont, our CFO, who will provide a brief update on Joe's balance sheet. Bill?

Thanks, Britt. We continue to make strides for time on our side during this economic downturn by focusing on improving our balance sheet and by reducing capital expenditures, SG&A and interest. With respect to the balance sheet, on March 3, we sold just over [17 million] shares of common stock. The approximately $580 million of net proceeds from the public offering were used to repay substantially all of Joe's outstanding indebtedness. This successful equity offering has dramatically increased our financial flexibility in weathering the current market downturn. And as we move forward, we are committed to maintaining a strong balance sheet.

In early April, we paid off $240 million of senior notes, making us virtually debt-free. And at the end of the first quarter, we had no cash drawn on our line, and had approximately $480 million of available capacity under this $500 million revolving credit facility.

From a capital perspective, we are continuing to focus on reducing our capital expenditures. In the first quarter of this year, we spent approximately $18 million, compared to approximately $75 million in last year's first quarter and $184 million in the first quarter of 2006. We continue to expect capital expenditures in 2008 to be less than $90 million, and even lower in 2009. These expenditures are primarily in our RiverTown, Victoria Park and WinMark beach communities.

We also continue to focus on our cash SG&A. In the fourth quarter of 2007, we announced a restructuring plan to dramatically reduce our employee headcount. As a result of this restructuring and a continued focus on cost, our total cash overhead or the combination of corporate overhead, field overhead and capitalized overhead, declined by about $5 million or 16% during the quarter compared to the first quarter of 2007. This reduction in cash SG&A was achieved despite an increase in property taxes of approximately $1 million.

Looking ahead, the virtual elimination of debt service and the declining operating overhead provides more flexibility going forward in the volume, timing and pricing of our non-strategic land sales. We expect these non-strategic land sales will be the primary source of revenue for the near to intermediate term, and will continue to be lumpy. Given that the current environment has placed significant [substantial] stress on what we would consider the traditional buyer for our residential and commercial land parcels, we expect these segments to continue to be challenging. In these segments, we believe the current demand environment is characterized more by opportunistic value buyers who are less likely to provide attractive offers at this time.

Peter, back to you.

Thanks. For now and the foreseeable future, Florida real estate markets are facing extremely challenging times, as you've heard all three of us say. Resort and residential markets are particularly weak, as inventories remain high. Inventories seem to be ranging from anywhere from 12 to 48 months supply, depending on what part of the state you're talking about and the specific market.

In looking ahead, we think there's a convergence of events that we will see in 2010 that will be an important and telling moment for Northwest Florida and for Joe. On this conference call two years from today, we will be talking about the grand opening and first flights for the new Panama City Airport. And by that time, 24 months from now, many economists think the economic conditions in general will be improving.

Our job between now and then is to continue making the Company more efficient and work with a broad range of strategic allies, from state economic development organizations to third party developers, to ensure West Bay and the new airport are a success and that the entire region maximizes that benefit.

Let me make one final comment. As most of you know, next week at our annual meeting, Britt will take over -- will assume the position of CEO, and I will continue as Chairman of the Board. Most of us like to think of ourselves as irreplaceable, but in fact, one of the lessons we learn in maturity is that, one, that's not true; and two, a major part of our job, particularly as a CEO, is to make sure that that's not true.

I think we're all very proud that Britt comes from within the organization and will provide stability in context as Joe moves forward; but at the same time, certainly will be his own man. He has more than 25 years of real estate experience and he's a proven leader. I'm confident Britt will be an outstanding CEO, and he has a strong and experienced team that will go with him.

So with that, let's open it up to questions about this or anything else.

Thank you, Mr. Rummell. (Operator Instructions). Buck Horne, Raymond James.

Could you walk us through a little more detail exactly the economics of commercial land venture, how that might look, and what kind of equity position you can get? And how would any income stream you get out of that be treated for tax purposes?

Bill, you want to do that?

Well, let me key it up and maybe Bill can follow up on it. First of all, any one of them can take into obviously a number of different looks in terms of the scenario of what a national deal would play out. But whether it's a ground lease opportunity or a venture with a partner who would do both horizontal and vertical, where we might share in a percentage of the rent being associated with that commercial development, or a combination of ground lease with vertical participation or a portion of a sale with participation -- I mean, there's multiple ways that that can play out, depending on the user, the size of the particular project, and where it's located and the timing of that. So, Bill, I don't know if you want to add to that.

Yes. From a tax perspective, to the extent that we leased our land, we'd expect to incur taxable income at a time we received payments under the land lease and to the extent that we participate in a joint venture. And as Britt said, use plan as our currency to gain an equity position in that joint venture, we would use the carryover basis in land and then not realize a taxable event until we received income, either upon a residual sale or recurring income during the course of the joint venture's operation of whatever the asset and the case may be. So we view that as a very efficient use of our land from a tax planning perspective.

Okay. That's very helpful. On the deferred tax benefits in the quarter that you were able to recapture out of Rural Land Sales, it seemed like you got a pretty high capture rate on those deferred tax cash flows. Could you expect to see similar types of capture rates on that going forward?

Yes. Our goal is to execute our Rural Land Sales Program primarily using installment sales. And by virtue of the installment sales methodology, we are able to defer those income taxes for 15 years. So, other than smaller tract land sales, we would expect the larger tracts to be executed using installment sales methodology.

Great. Thank you very much.

Sheila McGrath, KBW.

I was wondering on the residential side, if you could walk through your perception -- are the markets deteriorating -- getting worse? Or are they just kicking along the bottom? And if you could differentiate primary versus resort for us.

Sheila, it's -- I'll ask Britt to respond too. You have to be very specific in this, and I'm going to limit this -- this is not a Florida comment; this is an our-markets comment, and I want to be specific about that. But in our markets, what we've seen is, number one, resale inventories have stopped growing, which is the first thing that has to happen. And that's happened over the last eight months, 10 months, something like that. And that I think is an important fact.

The second thing we've seen is that we have seen resale pricing, which is what we use as a benchmark. And I've said that for the last couple of years. We've seen resale pricing firm. And you've heard Britt say that for a built product, that tends to be in the low 20's and for lots, it tends to be in the high 20's or as much as 30% off of the original November -- August '05 high. So, from the apex in August of '05, we've seen residential product -- and I wouldn't differentiate too much between first and second home here. Four, built for sale product is off in 22%, 23%, something like that. Lots are a little more, probably somewhere around 30%. But that deterioration has been holding for about the last 10 months. We haven't seen prices go down further.

So, inventory has quit growing, and resale pricing is starting to firm. So I think those are the first things that has to happen. So the question now becomes, if we are, in fact, on the floor of the valley, the question is how wide is the valley? And that's sort of everybody's question. So I'm -- we're not allowing ourselves to be optimistic, but those, in fact, are facts, and I think those are the first sort of pieces of the puzzle that have to fall into place.

You want to add to that?

No, I think that's pretty well stated, Peter. It's just the stability of those two elements has been trending and holding, so I think we're looking now to start seeing, as we move forward, those inventory levels to actually start going down as sales start to affect the -- eating into those inventories that sit there.

I'll give you an editorial comment, and that is that we have trained people to expect that prices are going to be lower tomorrow than today if they just wait. And so now, people are going to have to learn that they've gotten to that point, and you, in essence, have to sort of retrain buyers to finally acknowledge that they're at that point and that they need to start making decisions.

Okay. On another kind of big picture question, there were a number of articles in the paper today on potentially a new road going from Bay County up to Alabama. And I was wondering if you could comment on that. And is that the same road that's discussed going from the airport towards WaterSound? Are those two different roads?

No, those are very different. That is a -- the one you're talking about is an east-west road that's in some of the master plans. The road that you -- the one that you saw mentioned in the news clips is an idea that's been around for literally a couple decades, but has gotten some new visibility, because there are a group of people who are now trying to get it financed as a toll road.

It's an interesting idea. We've been involved in the conversations. I think the idea of connecting the Alabama and Florida Interstate systems is a great idea that we're a proponent for, but an awful lot has to happen before anything -- before you're going to be able to drive on anything.

Maybe, Peter, I'd just add to that. I mean, our focus and attention really is around the airport and the roads servicing that airport -- State Road 77, State Road 79, which have already been widened to Highway 20, and the effort to get them widened up to I-10 are really our focus and attention; to connect and build interstates in a state and then intra-state are difficult, long-term efforts, and we'll watch what happens. But for right now, our focus is on economics around the airport.

(Operator Instructions). David Cohen, Morgan Stanley.

Peter, good luck. I hope we continue to hear you on these calls. Just wanted to ask, you talked about the different industry groups that you think would be potentially big drivers of the area -- the aerospace, international trade and renewable energy. What is the local regional and, I guess, state governments doing to kind of attract those types of industry groups into the region? Are they doing enough, in your mind? Will there be incentives for them in terms of taxes and other incentives that will cause them to come down there?

You know, that's a good question. Florida, historically, has not done much because they haven't had to. Jed Bush specifically felt very strongly that there was so much organic growth that it wasn't the best use of dollars. I think the fact is that the world has changed, that things are softer now, and there have been some high visibility efforts to help the clinic that -- what is it, what, the Palm Beach -- Scripps went to Palm Beach, and there have been a couple of others like that.

So, there are examples of the State helping. I think the current administration realizes that in a soft economy, you have to do more than when everything was working. There is -- the budget is leaner than it was, and so there's not a huge bucket of money around, but the administration has said that there are interesting opportunities that they're attending. And I think, while there are no guarantees, I think they're more attentive than they have been in the past.

Just let me -- if I can add to that, Peter. On the side of the government, military being part of government, military has done a tremendous part between Eglin Air Force Base, [Tindel] and the Navy Coastal System stations in terms of R&D work. And those three facilities has really grown a private contractor base in the region, which I think is somewhere in excess of 340 -- 350 private contractors working within Northwest Florida and growing as these facilities start to grow in their R&D research.

So, there's an opportunity to start to use that as a driver to private growth and economic development in the area, and certainly, the new airport helps to promote that.

And with one of those three segments that Britt talked about is only a segment of interest because of the military presence.

Right. Okay. And then just to follow up, you talked about the Coastal Vision 3000, trying to get kind of more airlines into the new airport, new and better air service. Other than the larger -- the longer runways, what are the other things that are potentially going to draw the airlines in? I mean, when you look at usage of the old airport and potential usage of the new airport, I mean, what are the other things that the airlines are -- that Coastal Vision 3000 is pushing and what type of success are they having there?

They did a good deal of research and some smart market research. And one of the things we found was that the definition of the area -- this came really, feedback from the airlines -- the definition of the area has been redefined. And you're going to start seeing in advertising campaigns -- is this all right to talk about?

Yes.

-- you're going to start seeing an advertising campaign that talks about the beach. And that term is going to become a term of art. You're going to start seeing in northeastern airports. And it is -- and that is, in fact, about 120 mile stretch that goes from Destin on the west to Fort St. Joe on the east. And you're going to see a regional marketing focus around that and a budget behind it that hasn't been there in the past.

The other thing you have to keep in mind is when you define that region the way I just did, from Destin to Fort St. Joe, there are about 60,000 rooms in that market. So this is no backwoods place. This is an area with an enormous concentration of rentable units and the airlines have focused on that. There are efforts now being put together to do smart packaging between the hotel operators and the airlines. It's just a much more aggressive regional effort underway than ever was done in the past.

Okay, just final question. You previously had talked about the 1,200 homes -- or the 190 homes in the 1,200, I think, units that you were going to price to sell. You have made some progress, but I don't think you sold that much of that stuff this quarter. What is the strategy going forward? It seems like it's tough to sell anything right now. So, are you holding onto that for now?

Yes, we are. Where we've had success in moving some product, we've obviously adjusted our price to continue to see if we can gain momentum. But -- and certainly, we're finishing up some Phase I's at WindMark Beach and RiverTown, which have added lots into the system. So, as we --

Lots; not homes.

Lots; not homes. We've had some success in reducing the home inventory, but we've been very cautious not to try to be the lead and chase the price down, but to be mindful of the fact that there's a resale market out there; see where that sits; see if we can get activity by adjusting our pricing when appropriate.

And Bill, I don't know if you want to add anything to that. But you will see that number fluctuate. And I think, through the course of the year, we're not intending to produce any more completed product. We have a little bit -- we have some condos at WindMark Beach being finished up in Phase I, and other than that, our lot development is coming to a close with our Phase I development in WindMark and RiverTown and WaterSound. So, we're going to see that steady out, then we'll see the reduction come from sales activity as we go forward.

And as you know, we're just now entering the primary selling season in West Florida through Labor Day, and so you should see the results of our efforts in the second and third quarter sales activities.

Right.

Okay, and then the impairment charges -- I mean, does that have any -- where did that (multiple speakers) --

Those were -- yes. Those were primarily in our communities in Central Florida, where we build homes on non-legacy land. So, primarily Central Florida.

Got it. Thank you.

This does conclude the question-and-answer session. Mr. Rummell, I'll turn it back to you for closing remarks.

Very good. Thank you all very much. Thanks for your continuing interest, and we will talk to you next quarter. Have a great day.

Ladies and gentlemen, thank you so much for your participation. This does conclude today's conference. And you may now disconnect your phone lines.