JOE

Business Context and Reporting Period

Company: The St. Joe Company (ST JOE Co)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A real estate development company primarily engaged in residential, commercial, and industrial development, rural land sales, and timber operations, with substantially all operations located in Florida.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 58% in the third quarter and 23% in the first nine months of 2008 compared to 2007. This was driven primarily by a 76% drop in real estate sales revenue in Q3 and a 29% drop in the nine-month period, reflecting a severe downturn in residential and commercial real estate markets.
• Profitability Shift: The company reported a net loss of $19.2 million for Q3 2008, compared to a loss of $6.8 million in Q3 2007. For the nine-month period, the company swung from a net income of $38.2 million in 2007 to a net loss of $8.0 million in 2008.
• Debt Reduction: Total debt plummeted from $541.2 million at year-end 2007 to $50.8 million at September 30, 2008. This reduction was achieved through a $580 million common stock offering in March 2008, proceeds of which were used to prepay a $240 million senior note, a $100 million term loan, and the entire balance of a $500 million revolving credit facility.
• Significant Charges: The nine-month 2008 results included a $30.6 million loss on the early extinguishment of debt (including a $29.7 million make-whole payment), $4.6 million in impairment losses (primarily residential real estate), and $4.3 million in restructuring charges.

Guidance, Outlook, and Risks

• Market Conditions: Management cites a "substantial decline in demand" in Florida residential real estate markets since late 2005, exacerbated by the national financial crisis, lack of mortgage availability, and rising foreclosures. Visibility on market recovery remains low.
• Strategic Response: The company has increased rural land sales (61% of 2008 revenues) to offset declines in residential and commercial segments. It has also reduced employee headcount and capital expenditures.
• Liquidity: The company holds $106.3 million in cash and has a new $100 million revolving credit facility with BB&T (undrawn as of Sept 30, 2008). Management believes resources are adequate to fund ongoing operations.
• Risks: Key risks include continued downturns in real estate markets, potential future write-downs of asset carrying values, inability to attract strategic partners, and compliance with new debt covenants (specifically minimum net worth).
• Discontinued Operations: Results include operations of Sunshine State Cypress (held for sale) and prior sales of office buildings and the Saussy Burbank homebuilding division. Discontinued operations contributed a net loss of $0.2 million for the nine months ended Sept 30, 2008.

Investor Verification Checklist

• Debt Covenant Compliance: Verify compliance with the new BB&T Credit Agreement's minimum tangible net worth covenant, which was amended in October 2008 to 90% of June 30, 2008 levels.
• Asset Valuation: Review the $4.6 million impairment charge in residential real estate and assess the risk of further write-downs given the continued market decline.
• Rural Land Sales Sustainability: Evaluate the reliance on rural land sales (61% of revenue) and the impact of the terminated $130.4 million contract for 67,365 acres announced in October 2008.
• Pension Obligations: Note the $29.3 million reduction in the funded status of the defined benefit pension plan recorded in Q3 2008, which impacted Other Comprehensive Income but not net income.
• Installment Note Monetization: Review the $108.4 million in timberland installment notes monetized through QSPEs and the associated $8.5 million fair value adjustment charge.