JOE

Business Context and Reporting Period

Company: The St. Joe Company (JOE)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: One of the largest real estate development companies in Florida, owning approximately 805,000 acres, primarily in Northwest Florida. The company operates four segments: Residential Real Estate, Commercial Real Estate, Rural Land Sales, and Forestry. The company is the largest private landowner in Florida with a low cost basis on its land inventory.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 20% to $748.2 million, driven primarily by a 23% drop in real estate sales ($638.2 million vs. $824.8 million) due to a significant slowdown in the Florida residential market.
• Profitability Drop: Net income fell 60% to $51.0 million. Operating profit declined 56% to $78.2 million.
• Restructuring Charge: The company recorded a $13.4 million pre-tax restructuring charge in 2006 related to exiting the Florida homebuilding business and corporate reorganization. This included a $9.3 million write-off of previously capitalized homebuilding costs.
• Strategic Shift: Announced an exit from the Florida homebuilding business to focus on land planning and development, partnering with national homebuilders (e.g., Beazer Homes, David Weekley Homes) to sell developed lots.
• Workforce Reduction: Implemented organizational changes resulting in a 24% reduction in full-time employees.
• Discontinued Operations: Reported gains of $10.4 million from the sale of four commercial office buildings classified as discontinued operations.

Guidance, Outlook, and Risks

• Market Outlook: Management anticipates continued high levels of residential resale inventory in Florida markets throughout 2007, with a potential return to supply-demand balance not expected until 2008. Pricing for resort and seasonal products is being revised to reflect market conditions.
• Capital Strategy: The company increased its revolving credit facility from $250 million to $500 million in February 2007 to fund debt maturities and development projects. Management expects debt to increase in 2007 due to $229.3 million in maturities and planned capital expenditures.
• Key Risks:
  • Real Estate Downturn: Continued decline in demand for residential products, particularly resort and seasonal homes, due to economic conditions and high resale inventories.
  • Interest Rates: Increases in interest rates could reduce demand for mortgage-financed purchases.
  • Regulatory/Entitlements: Delays or failures in obtaining land-use entitlements could impact development timelines and costs.
  • Natural Disasters: Hurricanes and other natural disasters in Florida could damage properties or negatively impact consumer perception of the region.
• Unusual Items: A $1.5 million impairment loss was recorded for goodwill related to the Sunshine State Cypress subsidiary. The company also received $46.0 million in cash from the Florida Department of Transportation for land rights-of-way, with gains to be recognized over time.

Investor Verification Checklist

• Residential Market Recovery: Verify the timeline for the absorption of high resale inventories in Northwest Florida resort communities.
• Homebuilder Partnerships: Confirm the execution and closing rates of contracts with national homebuilders (Beazer, Weekley) as a replacement for the exited homebuilding division.
• Debt Maturities: Monitor the company's ability to refinance or repay the $229.3 million in debt maturing in 2007.
• Entitlement Pipeline: Assess the progress of the 44,300 residential units and 14.5 million square feet of commercial space in the entitlement pipeline.
• Office Portfolio Disposition: Track the marketing and potential sale of the 17-building office portfolio (2.3 million sq. ft.) listed with Eastdil Secured in January 2007.
• Restructuring Costs: Verify the remaining costs associated with the restructuring plan, estimated at an additional $3.0 million in 2007.