JOE - NYSE

Park Brady - CEO Marek Bakun - SVP and CFO

Buck Horne - Raymond James Paul Puryear - Raymond James

Good day, ladies and gentlemen, and welcome to The St. Joe Company's First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Park Brady, Chief Executive Officer. Sir, you may begin.

Hello, everyone, and welcome to the St. Joe earnings call for the first quarter ending March 31, 2014. I'm Park Brady and joining me on the call is Marek Bakun, our CFO. Before we get started, Marek will cover the forward-looking statements. Marek?

Thank you, Park. Some of the information we will discuss in this call is forward-looking. This information includes statements that are preceded by or include the words, believe, expect, intend, anticipate, will, may, could or similar expressions. These forward-looking statements may be affected by the risks and uncertainties of our business and actual results may differ materially from the forward-looking statements. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in today's press release and our SEC filings, which documents are publicly available. Our statement as of today, May 8, 2014, we have no obligation to update any forward-looking statements that we may make. Now, I'll turn it back over to Park for some opening comments, after which I will review first quarter 2014 results.

Thanks, Marek. This was a transformational quarter for the company. We completed the sale to AgReserves of approximately 380,000 acres of noncore land in March. This rural land was nonstrategic and was primary used for timber operations. On a pro forma basis, the 562 million sales price is equivalent to approximately 60 times earnings on that land in 2013. To put this in perspective, the company would simply have to earn a return of 3% a year on this cash to generate 50% more earnings than the asset was previously generating as Timberland. In addition to the Timberland sale, on April 2, we completed the sale of our RiverTown community. This community near Jacksonville was outside our core area of Northwest Florida. That left us with 182,000 acres of land holdings primarily between Tallahassee and Destin with much of it in proximity to the Gulf of Mexico. To put this in perspective, the remaining acres owned by JOE is over four times the size of the Miami Fort Lauderdale area and twice the size of the Atlanta region. Four weeks ago, we submitted our application for a modification of our existing West Bay Sector Plan to add approximately 50,000 acres to that plan. If approved we will have a 110,000 acre primarily active adult project that will have Gulf Intracoastal, Bay and Lake access. We are very excited about this project that will be called WaterSound. Our goal will be to provide a project which appeals to the 78 million boomers retiring in the future years. This project will emphasize value, health, activity and environmental stewardship, a very special part of Northwest Florida. St. Joe Clubs and Resorts, a private membership club, was launched at the start of the year. This club consolidates two marinas, three golf clubs, the WaterSound Beach Club under one umbrella. St. Joe Clubs and Resorts is giving us significant advantage as we compete to increase our share of the vacation rentals and other resort property for management opportunities in the area, as well as incentives to new homebuyers in our projects. We are off to a strong start and we are looking forward to the success of this program. Pier Park North is a joint venture to construct 330,000 square feet of retail lifestyle center in Panama City Beach. It is proceeding as planned. Initial tenants are open for business in the quarter. In addition to Dick's, which is already open, we have additional 21 tenants under lease agreement. The two transactions have provided the company with liquidity and a fortress-like balance sheet. We know that the question is, what are you going to do with the money? We are presently working with the Board and will consider all options in due time as we assess our future cash needs for our active adult community and other projects. I'll turn it back over to Marek for a review of the first quarter 2014 results.

Thank you, Park. I will make some brief comments about the first quarter financial results before I open it up for your questions. Additionally, I want to walk through the AgReserves transaction and subsequent monetization of the timber note to explain the process, purpose and result of the transaction. Since the Timberland transaction is such a dominant part of the quarterly results, I would like to start there. We completed the Timberland sale on March 5. At that time, we transferred title to the property and received 362 million less cost and expenses of cash, and a 200 million timber note which was secure by letter of credit from a bank, in this case JPMorgan. Based on IRS rules and the type of land that was sold, we expect to defer income tax on the profit related to the 200 million of the note for the duration of the note. In our situation that is 15 years. The interest on the timber note was eventually set at 4.006%. That completed the real estate sale. Subsequently, in order to receive the cash for the timber note now versus 15 years from now we proceeded to monetize the timber note. As disclosed in the 8-K filings we completed the monetization of timber note in early April. The process, including creation of a special purpose entity or SPE, St. Joe transferred the timber note and the letter of credit to this SPE. The SPE issued 180 million of monetization note to third party investors which were secured by the timber note and the letters of credit. The remaining 20 million was left of equity in the special purpose entity and will be available in 15 years when the timber notes are paid off. The monetization note were issued at 4.75% interest rate and issued in a discount. In April, we received 165 million of cash, another 15 million of cost of monetization and future operation cost for the special purpose entity and expect to receive the remaining 20 million at maturity which is 15 years. For RiverTown, the transaction closed on April 2. The transaction ultimately closed at the announced price of 43.6 million. The company expects to record pre-tax income of approximately 26 million for the RiverTown sale in the second quarter of 2014. Of the 43.6 million purchase price, we received 24 million in cash and a note secured by the property of 19.6 million, club time of 15 months. In addition, buyer assumed that RiverEdge community development district which company obligations of 11 million, but about 5.4 of those were in the balance sheet of March 31 and the buyer have post-closing obligation to purchase impact fee credits which we estimate between 20 million to 26 million over the next five years as the project is developed. The majority is expected at the end of that five-year period. Let's go to the financial statements. The Timberland transaction dominated the numbers for the quarter. Outside of the transaction, we had 23.2 million in revenue compared to 26.8 million in the first quarter of 2013. The segments break down as follows. Reduction in timber sale due to the AgReserves sale closing in early March. As a result of the sale we delivered 244,000 tons in the first quarter compared to 326,000 tons in the first quarter of 2013. In residential real estate, we sold 49 homesites in the quarter compared to 80 in 2013 in first quarter. Margins increased substantially from 36.8% in 2013 to 50.9% in the first quarter of 2014. The increase is due to mix of lots, timing of revenue recognition and the increased prices. Commercial real estate sales can vary depending on the mix of commercial land sold in each period. 1.8 million has the total of 2.4 million in revenue in the quarter related to (indiscernible) near the Pier Park project. Revenue for resorts, leisure and leasing operation include revenue from our resort and leisure activities and include activity from our WaterColor Inn, vacation rental program, four golf courses, marina operation and other related activities. Sales include the retail commercial leasing operations. Due to various factors such as harsh weather condition we experienced in the first quarter of 2014, the timing of Easter holiday and spring break, revenue declined from 9 million in 2013 to 8.2 million in first quarter of 2014. As for the balance sheet, we ended up with 519 million in cash, cash equivalents and investments as of March 31, 2014. Keep in mind that the RiverTown and the monetization of timber note was not complete until April. At the end of April 2014, cash, cash equivalents and investments totaled approximately 711 million. We do anticipate approximately 71 million of federal income taxes that will be paid through 2014. We are continuing to develop the Pier Park North project through the quarter. As of March 31, 2014, we had 16.8 million of debt related to the project. As of now, we have approximately 220,000 square feet leased. In conclusion, as Park stated, it was a transformational quarter for the company. As I wrap up, I can tell you we're focused on our core businesses. These are resorts and leisure, development of remaining land portfolio, the Port, and the active adult community. As stated lasted quarter, the Board and management are working together to explore all spectrum of options for the company's capital. These options include but are not limited to dividends, stock buybacks, acquisitions and other capital allocation. We're taking our time but will keep you posted as we make progress. Operator, if it's okay, can we open it up for questions.

Thank you, sir. (Operator Instructions). Our first question comes from Buck Horne from Raymond James. Your line is open. Please go ahead.

Good afternoon, guys. Congratulations on completing this transaction. That's a major, major milestone. I guess you're limited on what you're willing to talk about in terms of immediate cash uses, but can we talk a little bit about the West Bay Sector Plan and maybe what kind of feedback have you gotten from the community in the near term since you submitted the approval? What's the timeline do you think to get approval to move forward? And any issues that need to be resolved?

Buck, this is Park. We have spent two and half years of planning on this project. We have gone through detailed analysis of the land, the environmental aspects of the land and we knew that it was extremely important that we prepare because of the size of this project and prepare well. And as part of that process, since last year we have been going through a series of public meetings. We've done four of those where we asked for input into what the thoughts were about the project and how we had accessed the land and uses in place and how we were going to merge this into the original West Bay Sector Plan. And all I can say is that so far the reaction has been positive for us. But this is a large project. It involves a lot of public process. We expect it will take us over a year to actually get approval of the West Bay Sector Plan. It involves two counties. 90% of the land or a little bit less of that is in Bay County and I think around 11% to 12% is in Walton County. So we're dealing with two county entities as well as a number of state personnel as well. We have spent a lot of time one on one. We have spent a lot of time in groups with agencies, with individuals and with the public and we feel very good about where we are right now. But again, it's a public process and I'd like to just let everyone know that no public process is a given, but we think we've done a lot of planning. We think we've done it right. We think this is a great use of the land. We have one of our messages out to the local communities which we think has been well received is that in this area it's the government through the military installations that provides one leg of the economic stool, it is the tourism business, resort business which is seasonal and very difficult to deal with if you're in business and we think this will provide a third leg year around economic benefit but a benefit that is environmentally oriented and concerned about the stewardship of this land. So that's a long answer to your question, Buck, but we feel good about where we are today.

That's very helpful. Do you have any estimates in the near term what St. Joe will need to invest in terms of either planning, infrastructure or amenities to get the project off the ground? And can you give any quantification of – just a ballpark estimate of money you need to set aside for the plan? And ultimately how many acres are we talking about getting entitlements for, for residential usage or commercial usage here?

The applications, it speaks for itself. It's 600 pages, Buck. It talks about the square footage of industrial space, of commercial space, of number of residential units. The one thing that we did have to do in this whole process is we had to speak to on a conservative basis what you'd call the most usage case in our application, because this is a 50-year long-term plan. And the number that comes of residential units in this application is about 170,000. We don't feel we'll ever get to there, because we – once you go through this process, you got to go through another for each individual piece that you break out and decide. It's called a DSAP. Each individual piece that you come out and start with your active project, you got to then deal with the issues of utilities and other things. So we had to present a plan that presented the max usage for the site to make sure that we were covered, but it will be somewhat less than that before we're eventually done from a residential stampede. But this millions of square feet of commercial, it's some number less than the 170,000 that are in the application itself and primarily active adult but there will be other service needs that we'll have to build as we go forward.

I've got one more. Paul Puryear is in the room.

Hi, Park.

Hi.

The monetization of the note looks pretty expensive. Can you walk us through the economics for why you would do that now? Is it interest rate risk?

I'll let Marek speak to that because it was a very complicated transaction and Marek fire in there.

Paul, the number we have in the disclosure is $15 million, so I want to explain what that $15 million means. We didn't actually spend all $15 million today. The 15 million includes the operation and any interest difference over the life of the 15-year note. So, we're receiving money at about 4% rate but we're paying about 4.75%. So in that $15 million, any spread difference between that – for the life of the project is included in that number. Economically it deferred in the scale of about $65 million worth of income taxes. And so we were able to monetize and bring in close to $30 million of additional cash into the business versus paying the taxes on that gain today. That's the economics. So if you break that down, it's about 4% money, maybe a little less for a period of 15 years with no additional collateral.

Yes, but you were going to defer the taxes anyway, correct?

If we received cash on the transaction, we would have been obligated to pay taxes.

But I mean that virtue of doing the note, you deferred the taxes?

Correct.

So you don't need the cash, so why monetize it now? Was that about the interest rate spread?

The overall cost over the life is about 4% money on this. So we feel that the opportunity cost of that additional money in our account today is we're at 4%.

Okay. We can take it up later. Thank you.

Thanks, guys.

Thank you. (Operator Instructions). I'm showing no more participants in the queue at this time. I'd like to hand the conference back over to Mr. Brady for closing remarks.

Oh, boy! That was short and sweet. We expected more questions. I want to thank everyone for attending the call today. Again, as we said, this is a transformational quarter for St. Joe. We are excited now that we can concentrate on our resorts, our land portfolio and our active adult community and we look forward to exciting things in the future. Again, thank you for attending and listening in today.