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, 2009
Business Overview: A real estate development company primarily engaged in residential, commercial, and industrial development, rural land sales, and timber operations, with most assets located in Florida.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues for the nine months ended September 30, 2009, decreased 51% to $105.5 million from $217.3 million in the prior year period. This was primarily driven by a significant drop in rural land sales revenues ($12.9 million in 2009 vs. $132.5 million in 2008).
• Net Loss Increase: Net loss for the nine months increased to $70.7 million from $8.0 million in the prior year. The increase was largely due to non-cash charges including a $44.7 million pension settlement charge and $32.6 million in impairment losses.
• Impairment Charges: Impairment losses totaled $32.6 million for the nine months ended September 30, 2009, compared to $4.6 million in the prior year. Key items included a $9.0 million write-down on Saussy Burbank notes receivable, a $7.4 million write-off of the Advantis note, and a $6.7 million write-down of the SevenShores project.
• Pension Settlement: The company recorded a $44.7 million non-cash pre-tax settlement charge in the second quarter of 2009 related to the purchase of a group annuity contract to settle pension obligations for retired participants.
• Liquidity Improvement: Cash and cash equivalents increased to $156.6 million at September 30, 2009, from $115.5 million at December 31, 2008, aided by a $32.3 million federal income tax refund received in the third quarter.

Guidance, Outlook, and Risks

• Strategic Alliance: On October 21, 2009, the company entered into a strategic alliance with Southwest Airlines to facilitate air service to the new international airport in Northwest Florida (opening May 2010). The company agreed to reimburse Southwest for losses during the first three years of service, with potential liability capped at $14 million in year one and $12 million in year two.
• Market Conditions: Management notes that the business continues to be negatively affected by the economic recession and adverse real estate conditions in Florida. Residential sales have declined precipitously, and inventories of resale homes remain high.
• Debt Covenants: The company amended its $100 million revolving credit facility in October 2009, extending the term to 2012 and lowering the minimum tangible net worth requirement to $800 million. The company was in compliance with all covenants as of September 30, 2009.
• Risks: Significant risks include the collectability of notes receivable from homebuilders, potential future write-downs of real estate assets, and the uncertainty of the duration of the real estate slump. The company also faces potential environmental liabilities and litigation risks.

Investor Verification Checklist

• Notes Receivable Collectability: Verify the status of the $25.3 million in notes receivable, particularly given the recent $9.0 million charge related to Saussy Burbank and the $7.4 million write-off of the Advantis note.
• Southwest Airlines Agreement: Monitor the financial impact of the loss reimbursement agreement with Southwest Airlines, which could affect cash flow starting in 2010.
• Real Estate Inventory Valuation: Assess the carrying value of the $844.9 million investment in real estate against current market prices, given the history of impairment charges in the residential and commercial segments.
• Tax Refund Utilization: Confirm the receipt and utilization of the $32.3 million tax refund and the projected $6.9 million refund from Artisan Park and SevenShores sales.
• Debt Covenant Compliance: Review future quarterly reports to ensure continued compliance with the amended credit facility covenants, specifically the tangible net worth and liquidity requirements.