St Joe Co (JOE) 2009 Q3 法說會逐字稿

Good day and welcome to the St. Joe Company third quarter earnings conference call. This call is being recorded. Currently all participants are in a listen-only mode. You'll be given a chance to later ask questions. At this time I would like to turn the call over to Vice President of Finance and Investor Relations, Mr. David Childers. Please go ahead, sir.

Good morning and welcome to the St. Joe Company conference call for 2009's third quarter results. I am David Childers, Vice President - Finance and Investor Relations.

On the call this morning are Britt Greene, our President and CEO, and our Executive Vice President and CFO, Bill McCalmont.

Before we start, let me remind you that matters discussed on this conference call that are not historical facts are forward-looking statements, 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. These filings are on our Website at www.joe.com. Reconciliation of non-GAAP measures mentioned in today's call can be found in the earnings release.

Bill?

Thanks, David. This morning, we announced a net loss for the third quarter of $14.4 million or $0.16 per share after tax on revenues of $43.2 million. Our net loss included pretax charges of $12.9 million or $0.08 per share after tax.

This compares to a net loss of $19.2 million or $0.21 per share after tax, and revenues of $33.2 million for the third quarter last year. Last year's quarter included pretax charges of $13 million or $0.09 per share after tax.

The third quarter impairment charges were primarily related to two non-cash items. First, we wrote down our note receivable that we took from Saussy Burbank as a result of the sale of that business in 2007. As you may know, Saussy has recently been struggling with their business model in this difficult environment for homebuilders.

During the quarter, we negotiated a settlement of their note and agreed to accept cash and the return of the lots and homes that secured the note in satisfaction of their obligation. We intend to immediately sell these lots and homes to take advantage of a tax loss carryback opportunity.

However, our assessment of the value we will realize upon liquidating the loss in homes is less than the carrying value of the note receivable, resulting in a $9 million impairment. This transaction did close early in the fourth quarter and we are now in the process of selling the lots and the homes.

We also incurred pretax non-cash impairments of approximately $2.1 million, associated with various homes, home sites and builder note receivables in certain communities. And you can find additional detail in the quarter's financial performance in the 10-Q that we filed this morning.

There's little doubt that we remain in one of the most difficult economic cycles in many decades, particularly in the real estate industry. Although our residential markets remain challenging, we successfully closed on the sale of 47 homes and home sites in the third quarter, generating revenues of just over $9 million. This was an 11% increase in revenue compared to the third quarter of 2008.

The third quarter closings included units in various communities across our portfolio, as well as substantially all of the remaining units at Artisan Park in Celebration, Florida.

Also during the third quarter, we were successful selling the SevenShores condominium and marina project in Bradenton, Florida. In our commercial markets, we sold 5.6 acres of commercial land for $2.1 million or a price of over $350,000 per acre. Included in this total is 3 acres of commercial land in Bay County, Florida, that sold for approximately $900,000 to a developer of limited service hotels.

We believe this sale was made in anticipation of the opening of the new international airport, and we also believe it is indicative of the value that can be realized as the new airport becomes a reality. The fact that the buyer was able to secure financing is clearly a positive sign for development in our markets.

In our Rural Land segment, we will sell significantly fewer acres in 2009 than we did in 2008 as we have previously indicated. We are not currently targeting the sale of large tracts of contiguous acreage, but instead are focusing on smaller tracks, primarily for outdoor recreational uses in order to generate cash to maintain our strong liquidity position.

Turning to cost controls, we continue to emphasize the management of our operating overhead expenses as well as reducing, deferring or limited capital expenditures. We continue to make good progress in our efforts to reduce SG&A expenses.

During the third quarter, we incurred cash overhead costs of approximately $14 million, compared to approximately $20 million in the same quarter last year, a reduction of 31%. We do expect to be able to sustain this reduced level of cash overhead.

We have also continued to focus on managing our capital expenditures. Capital expenditures for the first nine months of 2009 were just under $11 million compared to about $29 million for the same period in 2008, a reduction of 62%.

Looking forward, we will continue to prudently manage our capital expenditure levels. But as we see opportunities to make high ROI investments, particularly in our lands around Northwest Florida's new international airport, we intend to seriously explore these investments.

Turning to the balance sheet, at September 30, we had cash of over $156 million and pledged Treasury securities of $27.5 million compared to about $43 million of debt, $27.5 million of which is the fees debt. During the third quarter, our cash position increased primarily due to the receipt of federal tax refunds totaling over $32 million.

Also during the third quarter, our debt was reduced by approximately $6 million as a result of the sale of the SevenShores condominium project in Bradenton, as I previously mentioned.

In October, we extended the maturity date of our $100 million revolving credit facility to September 2012. We also lowered the required minimum net worth covenant. This revolving credit facility remained undrawn at quarter end.

Finally, I wanted to let you know that we are working with our auditors regarding the accounting treatment of Southwest Airline's agreement. We will most likely record a liability and the associated expense during the fourth quarter to reflect the possibility that we will have to make guarantee payments to Southwest. Although we have not yet quantified this amount.

In closing, I can't help but reflect on the many actions that we have taken during the past two years, resulting in a lean cost structure and virtually debt-free balance sheet. As we prepare for the opening of the new airport, we believe that we are well-positioned as we seek additional, strategic, long-term growth opportunities.

And now for an update on West Bay, Southwest Airlines and the new airport, I will turn it over to Britt.

Thanks, Bill. For the past 18 months we've been speaking about our focus on the opening of the country's newest international airport centered within some of St. Joe's most valuable land holdings. This focus was validated two weeks ago when Southwest Airlines announced it will serve this new airport.

St. Joe and Southwest Airlines have created a strategic alliance providing for air service in Northwest Florida's new international airport. We are only a little more than six months away from the grand opening in May 2010 of the first new international airport built in the United States in the last 16 years and the first built since the Transportation Security Administration was created.

With this alliance, Southwest's new service becomes a catalyst for value creation across our vast land holdings around the new airport and along the fabulous beaches of the region. In the past, Northwest Florida's economic growth has been hampered by limited air service and some of the highest airfares in the country.

Southwest Airlines -- with its legendary customer service, extensive network and competitive fare structure -- greatly improves our competitive position for economic development prospects, and dramatically raises this region's profile. Southwest's service to the new airport will consist of at least two daily nonstop flights from Northwest Florida to each of four destinations for a total of eight daily nonstop flights. That is a total of a little over 2,000 new seats arriving and departing every day.

In December, Southwest will be announcing the destinations and schedules of those flights. We are working to get ready by continuing our planning and design work on approximately 1,000 acres adjacent to the new airport. This land is being planned for industrial, light industrial office, retail and hotel users.

And now that the most successful airline in the country will serve the airport, we have accelerated our outreach efforts with site consultants and customers about their utilization of those 1,000 acres.

Southwest is one of the most important tools in marketing the region to the national marketplace. As they market the region as their new service point, they are also effectively marketing St. Joe's holdings that are at the focal point of that service.

Within hours of the announcement, there were more than 500 publications, newspapers, wire services and Websites focused on Northwest Florida and a new way of getting there. The US Department of Transportation calls it "the Southwest effect" and it can have a dramatically positive economic impact on a market and a region.

When Southwest begins its service, it will draw passengers from every part of their network. There will be tourists who will become real estate buyers and St. Joe's land will be where they begin their Northwest Florida experience.

Business traffic will shift. There will be area defense contractors from Tyndall and Eglin Air Force bases, the Army's Fort Rucker and the Panama City Beach Navy facilities who will come and go to West Bay seven days a week. New traffic patterns and new habits will emerge, all of which will reshape the real estate landscape in Northwest Florida with St. Joe's holdings at its center.

We believe Southwest Airline's entry into the Northwest Florida will provide an accelerated catalyst for St. Joe to create value for our shareholders for many years to come.

Next month, tickets will go on sale. I would like to encourage everyone on this call to go to Southwest.com and make your plans to be with us for the grand opening in May 2010.

We will now be happy to respond to your questions at this time. Thank you.

(Operator Instructions). Buck Horne from Raymond James.

Good morning, gentlemen. Just wondering if you could give us a little background maybe on how you guys negotiated with Southwest for the four destinations that are going to be announced in December? I guess I'm just trying to see if you can offer any clarity in terms of what kind of minimum criteria you guys were looking for in terms of population or distance from Panama City, in terms of what you guys are looking for in terms of starting the service.

Because historically they are -- at least what they described is THAT they would prefer to enter a market conservatively and try to take traffic that is currently driving by automobile off the road and bring them in to -- put them in planes and they are already going to Panama City.

So we are just looking for how you negotiated with Southwest in terms of getting incremental traffic into the region?

Actually there are two parts to that. So let me answer the first one.

Tertiary markets, which have been hard for us to market to, given the cost of flying and the inaccessibility in terms of the efficiency by which somebody could get from Midwest, Northern and even Northeastern Northern markets to this coastline has been difficult at best. They certainly opened that up.

We spent a lot of time as they did, they are the marketing experts when it comes to passengers and where they want to fly and where they want to go and how they get there. We listen to them, they listen to us, we pulled out our research from 12 years of selling real estate on the coast. And while most of that comes from the near Midsouth and the Atlanta/Birmingham, there's -- we have also had a significant portion from the outlier secondary and tertiary markets.

And when you map that out, essentially, you start to see centric or centralized nodes of activity from visitors to the Watercolor Inn and to the region and to those who actually purchase real estate, that help to better inform where those collective nodes are from a marketing standpoint.

The second part of your question which is about what you do with drive-in traffic, we have had drive-in traffic from what would arguably in most people's feeling be too long to sit in a car. But granted, people come while it's closer from Atlanta/Birmingham, there are those who have been as away as far as 10 or 12 hour drive times.

And the ability to take that collective group out of the 16 million visitors a year that drive into this marketplace, and change a percentage of them to a fly market would be tremendous. And I'm sure most of those people who have been in a car for 10 or 12 hours with family would recognize the fact at how that works.

The other benefit is the fact that those who come down for a week or extended vacations because they are driving that distance will now look at the area I think, more importantly, as an opportunity to come more often. Because the opportunity to get there is relatively inexpensive with Southwest connections, the direct aspect of that and the ability to come for a long weekend as opposed to trying to plan for a long week or two-week period of time.

So I think the combination of outreach to tertiary markets where we've had interest and the second part of that, of converting some of that 16 million drive market who are in those outlier markets where it's a long day's drive will start to fly as they see the connection. Or what informs Southwest and us when we talked about the markets that will be announced.

And Buck, this is Bill. If you are worried about cannibalization to any degree, when they announced service, Gary Kelly -- Southwest CEO -- said that if just 1% of the current drive-in markets flies, their airplanes will fly full. So not too much in the way of cannibalization there from our perspective.

Great. That's perfect. Thank you guys so much.

If I could switch gears real quick, talk a little bit about the Saussy Burbank [notes]. For a second and just maybe it you can provide a little bit more color about what happened there and maybe what the book value of the collateral you received back in that settlement was?

And how that -- I guess you are going -- I guess you described you are going to be liquidating it as soon as possible --

Right.

I just -- any more color you can provide then I guess where I'm going with that is, if there is any other builders, Saussy included, that might still have notes outstanding that are having trouble making interest or principal payments?

Well, Saussy, as you know, is a homebuilder located in the Atlantic States and we sold that business in 2007. At the time we did that we took back two notes. Essentially one was unsecured, one was secured by lots and homes and in discussions with Saussy over the last quarter, it became clear to us that they were incurring a significant amount of stress. And it was in our best interest to settle with them and then be able to take the tax loss carryback.

So you'll note, when you get a chance to look through the 10-Q, that in the notes receivable footnote we are carrying about $5.4 million of their note receivable from Saussy at the end of the quarter. And that represents our estimate of the value of the collateral and the cash that we will receive at the end of the third quarter and, actually, did receive early in the fourth quarter.

And then coupled with the $9 million tax loss carry back which will value at say 35% of that, we thought the overall package, if you will, from a cash perspective exceeded what we might likely negotiate and receive from Saussy over an extended period of time as they would have paid those notes out.

But we -- following the end of the quarter we have no exposure to Saussy per se. We do have the lots and homes though.

Okay. Thanks, gentlemen.

Jim Wilson from JMP Securities.

Thanks. Good morning. Wanted to get a little more detail on the commercial -- commercial assets -- commercial sales first in the quarter and then the commercial development plans around the airport. So I guess on the sales, were any of the sales actually in the airport area that you generated during the --?

No. The sales were not in the airport area. They were along Highway 98 in Bay County. But what we're seeing is increased levels of interest in all of our commercial sites following the Southwest Airlines announcement and obviously those -- the level of interest being converted to actual sales and contracts and closings take some period of time. But we are very encouraged with the immediate increase in interest.

The area around the airport, again, we're a little over six months away from the airline landing, but --. So we're being a little bit cautious because we get a lot of questions about how are you going to price your land and is it going to be ground leased or are you going to JV?

And we are looking at a number of opportunities there and while we are accelerating that opportunity and the phones are frankly lit up after the Southwest announcement, we are still going to be diligent about what we do, when we do it and to make sure there is market demand to satisfy what it is that we're seeing the interest in to make sure it is as successful as possible. So while we are being patient, we are not to the point that we are not going to take and capitalize on some of the opportunities that are there.

Okay and then maybe that answers my second question which is any change in plans with that first 1,000 acres or you are saying you're putting capital in to develop it yourself? I assume the answer is still you haven't determined it.

No. I think you'll see us take the opportunity of investing some capital there early because I think there is a long-term opportunity for the Company, both from a recurring income stream opportunity, but also the asset value appreciation that can occur after Southwest gets routed and the new airport starts to move more passengers and business travel starts to grow. And I think we are just going to -- I think ownership there is as important as just trying to retail some [pads] off early. I think you will see a combination, but will probably be predominantly involved for most cases in the early years.

Okay. Great. Thanks.

Jordan Hymowitz with Philadelphia Financial.

Good morning. Jim just asked most of my questions. My only thing is on the defense or military base, do you think that there is an accelerated interest from just that specific utilization in the airport area? Especially because of the no-fly area over the Gulf Coast Range? Or I'm sorry not the no-fly, the 24 hour fly over range over the Gulf Coast?

Yes Jordan. I'm not sure I'm answering -- I may not answer you completely here, but the fact that we are outside the military operating area, controlled airspace is important to a number of different potential users. Most obviously, the commercial airlines like the fact that they can get in and out 24/7.

But the defense contractors that are in the area, we see an opportunity to bring them and collect them in a campus in and around that new airport because of the flight schedule that will be delivered by Southwest Airlines to areas outside of the region that they have to commute to. So I think there is a unique opportunity here to take what was is a fairly significant and sizable workforce, which is a little over 1,900 companies, the 70,000 plus employees servicing the military and collect them in and around a transportation mode that makes a lot more efficient sense to them.

So that is where we are seeing the interest and that can come from a number of name contractors or even some of the smaller ones that are growing as a result of some of the new technology that is in the research and development labs there.

Okay. Thank you very much.

(Operator Instructions). Sheila McGrath from KBW.

Good morning. I was wondering if you could give us some more specifics on your thought process or how we should think about the potential loss sharing agreement with Southwest coming to the market?

As you know there are any number of variables that will determine the guarantee amount, if any, that we will pay to Southwest. f And over the life of the agreement, there's no certainty that we will pay them anything over this three-year measurement period.

So as we thought about the agreement with Southwest, we tried to fix as many of those variables as possible. So the routes are fixed. There will be eight arrivals and eight departures per day. Their non-fuel operating expenses are fixed. The gallons of fuel per flight are fixed.

Minimum revenues are set although we benefit to the extent that actual revenues exceed those minimum revenues, and fuel expenses are defined to relate to their unhedged cost of fuel per gallon. And as we think about our exposure, if you will, to any payments we may have to make, you know we haven't really factored in the demand that Southwest will induce, the demand that will migrate from [Val Pariso] or Walton Beach, Pensacola or Tallahassee.

And we haven't really quantified the benefits of the significant marketing dollars that Tourist DEVELOPMENT Council at both Bay and Walton County will expand to augment Southwest marketing dollars, or as I mentioned earlier, the conversion of drive-in traffic.

So at the end of the day, we think that any dollars that we might fund can be viewed as marketing dollars. And in our view those marketing dollars pale in comparison to the benefits that we would expect to realize over the term of the agreement.

And as we have run to our models and just in orders of magnitude, it's if the flights during this three-year period of time ran at the average load factor that Southwest experienced in the third quarter of '09, at the average fare that Southwest realized in the third quarter of '09 and at the unhedged fuel costs that Southwest incurred in the third quarter of '09, we wouldn't be making any payments.

Thank you. And my next question is regarding the 1,000 around the airport. Is it possible to venture a guess on when we would hear something about an initial commitment? Is it by the time the airport opens? Is this something after the airport opens? We're trying to understand timing there.

I think we will have something by the time the airport opens in terms of commitment to any one of a number of potential uses or users within those 1,000 acres. And most -- probably more focused is, there's a small parcel -- if you go to our Website, there is a small parcel about 52 acres that sits right outside the entrance to the new airport that will probably have some activity and then probably some light industrial.

But we haven't signed anything. And we will announce when appropriate, but there will be some activity.

Okay, and then just quickly on the Saussy kind of SevenShores, Artisan Park. You appear to be targeting assets that are not in Northwest Florida for sale and getting the benefit of tax refunds on it by doing the sale prior to your end. Are there any other assets that you are targeting with that kind of strategy in mind?

Well, you are correct in that we are targeting what we consider to be non-core assets that will not benefit from the opening of the new airport in Northwest Florida. We are targeting assets where we can carry back losses, take advantage of our tax laws carryback opportunity. And as we approach your end, we will continue to pursue that strategy with the hopes of realizing greater value as we approach the end of the year.

And to the -- on the balance sheet, the tax loss, or on the asset side, the tax refund is still up there and after you received the $32 million. Is that related to Saussy Burbank or was that related to --? Or SevenShores?

Well, it relates -- yes, no, it relates to all of the above and so the tax receivable at the end of the quarter was just about $28 million and we would expect to file our 2009 tax return as early as possible in year 2010 and receive the refund as soon as possible thereafter. Much like we did this year to receive the refund in the third quarter of '09.

Last question. On G&A, the overhead costs continued to go lower. First you think there is any room to go over there? And secondly, in terms of recurring revenue streams, if you could just give us an idea of either your thoughts on how long -- or some strategies to wrap recurring revenue streams such that overhead would be funded either by a 1031 portfolio or something?

Yes, as it relates to the G&A dollars, we have continued to reduce the ongoing carrying costs, operating costs -- excuse me -- of the Company. And I would not expect us to see reduced levels in terms of absolute dollars going forward.

I think we have continued to focus on this. We will continue to focus on it, but I think that the big games have been realized at this point.

I would agree with that, Sheila.

Okay.

This concludes today's question-and-answer session. Mr. Greene, I will turn the call back over to you.

I appreciate that. By now you have all been to Southwest.com to start booking your tickets for May, but you'll have to wait a few weeks until early December when the routes are announced. And appreciate your time today and as always your interest in the St. Joe Company and look forward to talking to you after the first of the year. Thank you.

Thank you.

This concludes today's conference. Thank you for your participation.