UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission file number 1-10466
The St. Joe Company
(904) 301-4200
None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 5, 2004, there were 103,043,480 shares of common stock, no par value, issued and 76,013,413 outstanding, with 27,030,067 shares of treasury stock.
THE ST. JOE COMPANY
INDEX
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PART I. FINANCIAL INFORMATION
See notes to consolidated financial statements.
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The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2004 and December 31, 2003 and the results of operations and cash flows for the three-month and nine-month periods ended September 30, 2004 and 2003. The results of operations and cash flows for the three-month and nine-month periods ended September 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for the full year.
During the three months ended September 30, 2004, the Company sold two of its commercial buildings. The Company has reported the sales of these two buildings and their operations prior to sale as discontinued operations for all periods presented.
In December 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46R (“FIN 46R”), Consolidation of Variable Interest Entities, to replace Interpretation No. 46 (“FIN 46”) which was issued in January 2003. FIN 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and whether it should consolidate the entity. FIN 46R is applicable immediately to variable interest entities created after January 31, 2003 and as of the first interim period ending after March 15, 2004 to those created before February 1, 2003 and not already consolidated under FIN 46 in previously issued financial statements. The Company did not create any significant variable interest entities before February 1, 2003 or after January 31, 2003. The Company has adopted FIN 46R, analyzed the applicability of this interpretation to its structures, and determined that the Company is not a party to any variable interest entities that should be consolidated.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“FAS 150”). FAS 150 requires companies having consolidated entities with specified termination dates to treat minority owner’s interests in such entities as liabilities in an amount based on the fair value of the entities. Although FAS 150 was originally effective July 1, 2003, the FASB has indefinitely deferred certain provisions related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to FAS 150 solely as a result of consolidation. As a result, FAS 150 has no impact on the Company’s Consolidated Statements of Income for the nine months ended September 30, 2004. The Company has one consolidated entity with a specified termination date: Artisan Park, L.L.C. (“Artisan Park”). At September 30, 2004, the carrying amount of the minority interest in Artisan Park was $6.8 million and the fair value was $11.5 million. The Company has no other material financial instruments that are affected currently by FAS 150.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation(“FAS 123”), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FAS 123 allows entities to apply the provisions of Accounting
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Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”), and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method defined in FAS 123 has been applied. Under APB 25, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure(“FAS 148”), requires prominent disclosure in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted under FAS 148 and FAS 123, the Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure in accordance with the provisions of FAS 148 and FAS 123. Accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements.
Had the Company determined compensation costs based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
Earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during the period. Diluted EPS assumes weighted average options have been exercised to purchase 916,918 and 1,940,913 shares of common stock in the three months ended September 30, 2004 and 2003, respectively, and that 320,605 shares of unvested restricted stock are issued in the three months ended September 30, 2004, each net of assumed repurchases using the treasury stock method. Diluted EPS assumes weighted average options have been exercised to purchase 1,275,532 and 2,045,331 shares of common stock in the nine months ended September 30, 2004 and 2003, respectively, net of assumed repurchases using the treasury stock method.
From August 1998 through September 30, 2004, the Board of Directors authorized a total of $800.0 million for the repurchase of the Company’s outstanding common stock from time to time (the “Stock Repurchase Program”), of which a total of approximately $657.8 million had been expended through September 30, 2004. In addition to repurchases on the open market, the Company has also repurchased shares
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from the Alfred I. duPont Testamentary Trust and its beneficiary, The Nemours Foundation (collectively, the “Trust”),from time to time based on a share multiplier (0.31 from May 8, 2004 through August 6, 2004) times the number of shares the Company purchased from the public during the previous week (the “public shares”) at a price equal to the volume weighted average price, excluding commissions, paid by the Company for the public shares, subject to a minimum sales price ($37.00 per share through August 6, 2004). The most recent stock repurchase agreement with the Trust expired on August 6, 2004 and there is no intent to renew that agreement.
From the inception of the Stock Repurchase Program to September 30, 2004, the Company repurchased from shareholders 24,952,711 shares (17,016,366 shares on the open market and 7,936,345 shares from the Trust), and executives surrendered 2,022,229 shares as payment for strike prices and taxes due on exercised stock options and taxes due on vested restricted stock, for a total of 26,974,940 acquired shares. During the nine months ended September 30, 2004, the Company repurchased from shareholders 1,221,865 shares (958,500 shares on the open market and 263,365 shares from the Trust), and 870,368 shares were surrendered to the Company by executives as payment for the strike prices and taxes due on exercised stock options and taxes due on vested restricted stock. During the nine months ended September 30, 2003, the Company repurchased from shareholders 2,017,170 shares (1,140,300 shares on the open market and 876,870 shares from the Trust), and executives surrendered 341,884 shares of Company stock as payment for the strike prices and taxes due on exercised stock options and taxes due on vested restricted stock.
Shares of Company stock issued upon the exercise of stock options for the nine months ended September 30, 2004 and 2003 were 1,989,342 shares and 1,763,330 shares, respectively.
Weighted average basic and diluted shares, taking into consideration shares issued, weighted average unvested restricted shares, weighted average options used in calculating EPS and treasury shares repurchased, for each of the periods presented are as follows:
The Company paid $18.4 million and $18.8 million for interest in the first nine months of 2004 and 2003, respectively. The Company paid state income taxes of $2.5 million, net of refunds, in the first nine months of 2004 and received income tax refunds, net of state income tax payments made, of $2.8 million in the first nine months of 2003. The Company capitalized interest expense of $6.8 million and $6.5 million during the first nine months of 2004 and 2003, respectively.
The Company’s non-cash activities included the assumption of a mortgage by the purchaser of a building that was sold, the execution of a debt agreement in payment for an interest in a new unconsolidated affiliate, the surrender of shares of Company stock by executives of the Company as payment for the exercise of stock options and the tax benefit on exercises of stock options. During the first nine months of 2004, a mortgage in the amount of $25.4 million was assumed by the purchaser of a commercial building that the Company sold and the Company executed a debt agreement in the amount of $11.4 million as payment for its interest in a new unconsolidated affiliate. (See Note 4.) During the nine months ended September 30, 2004 and 2003, executives surrendered Company stock worth $20.9 million and $6.5 million, respectively, as payment for the strike price of stock options.
Cash flows related to residential and commercial real estate development activities are included in operating activities on the statements of cash flows.
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Revenue for the Company’s multi-family residences under construction at WaterSound Beach is recognized, in accordance with Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate(FAS 66), using the percentage-of-completion method of accounting. Under this method, revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. Since the project was substantially completed as of December 31, 2003, the Company had recorded substantially all of the activity related to this property during the year ended December 31, 2003. During the period ended March 31, 2004, the Company incurred $2.0 million in construction costs for contract adjustments related to the project. These costs represented changes to the original construction cost estimates for this project. Had these costs been quantified in 2003, they would have been included within the Company’s budgets and thus have had an impact on its results for the year ended December 31, 2003. If these costs had been included within the total project budget, 2003 gross profit would have been reduced by $3.6 million (pre-tax), $2.3 million (after tax), since a lower percentage of revenue would also have been recognized. The results for the nine months ended September 30, 2004 would have been increased by $3.6 million (pre-tax), $2.3 million (after tax).
Management has evaluated the impact of this item, which represented 3% of net income ($0.03 per diluted share) for the year ended December 31, 2003, and concluded that it is not significant to its 2003 results of operations. In addition, while the impact of this item would increase net income for the first nine months of 2004 by 4% ($0.03 per diluted share), management has concluded that it is not expected to be significant to its results of operations for the year ending December 31, 2004, based upon its current forecast for the full year period.
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Real estate investments by segment include the following (in thousands):
Included in operating property are Company-owned amenities related to Towns & Resorts, the Company’s timberlands and land and buildings developed by the Company and used for commercial rental purposes. Development property consists of Towns & Resorts land and inventory currently under development to be sold. Investment property includes the Company’s commercial buildings purchased with tax-deferred proceeds and land held for future use.
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Debt consists of the following (in thousands):
During the first quarter of 2004, the Company entered into a debt agreement with a new joint venture in the amount of $11.4 million. The other party to the joint venture contributed land with a fair value of equal amount. This debt reflects the Company’s agreement to pay all of the expenses of the joint venture up to the amount of principal and interest owed. Thereafter, all expenses of the joint venture will be shared equally. The $11.4 million debt bears interest at one-month LIBOR plus 100 basis points. The principal is due at the earlier of December 31, 2008 or the date of the first partnership distribution. Interest is payable annually on the anniversary of the date of the agreement.
On June 8, 2004, the Company issued senior notes in a private placement with an aggregate principal amount of $100 million, with $25 million maturing on June 8, 2009 with a fixed interest rate of 4.97% and $75 million maturing on June 8, 2011 with a fixed interest rate of 5.31%. Interest will be payable semiannually. The notes, as well as the $175 million senior notes issued previously, contain financial covenants similar to those in the Company’s $250.0 million senior revolving credit facility.
During the third quarter of 2004, the Company sold a commercial building in which the purchaser assumed the remaining balance on the mortgage in the amount of $25.4 million. During the nine months ended September 30, 2004, the Company repaid debt secured by commercial buildings in the amount of $32.7 million.
The aggregate maturities of debt subsequent to September 30, 2004 are as follows: 2004, $0.4 million; 2005, $21.2 million; 2006, $3.7 million; 2007, $70.0 million; 2008, $86.0 million; thereafter, $219.0 million.
A summary of the net periodic pension credit follows (in thousands):
The Company conducts primarily all of its business in four reportable operating segments: Towns & Resorts development, commercial real estate development and services, land sales, and forestry. The Towns & Resorts development segment develops and sells housing units and homesites and manages residential
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communities. The commercial real estate development and services segment owns, leases, and manages commercial, retail, office and industrial properties throughout the Southeast and sells developed and undeveloped land and buildings. The land sales segment sells parcels of land included in the Company’s holdings of timberlands. The forestry segment produces and sells pine pulpwood and timber and cypress products.
The Company uses earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a supplemental performance measure, along with net income, to report operating results. The Company’s management believes EBITDA is an important metric commonly used by companies in the real estate industry for comparative performance purposes. EBITDA is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles (“GAAP”). Additionally, EBITDA is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to cash flows as a measure of liquidity. However, management believes that EBITDA provides relevant information about the Company’s operations and, along with net income, is useful in understanding the Company’s operating results.
The accounting policies of the segments are the same as those described above in the summary of significant accounting policies. Total revenues represent sales to unaffiliated customers, as reported in the Company’s consolidated income statements. All intercompany transactions have been eliminated. The caption entitled “Other” primarily consists of general and administrative expenses, net of investment income.
The Company’s reportable segments are strategic business units that offer different products and services. They are each managed separately and decisions about allocations of resources are determined by management based on these strategic business units.
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Information by business segment follows:
The Company and its affiliates are involved in litigation on a number of matters and are subject to various claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. However, the aggregate amount being sought by the claimants in these matters is presently estimated to be several million dollars.
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The Company has retained certain self-insurance risks with respect to losses for third party liability, worker’s compensation, property damage, group health insurance provided to employees and other types of insurance.
At September 30, 2004, the Company was party to surety bonds and standby letters of credit in the amounts of $35.1 million and $16.0 million, respectively, which may potentially result in liability to the Company if certain obligations of the Company are not met.
The Company is not liable as guarantor on any credit obligations that relate to unconsolidated affiliates in accordance with Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
The Company is subject to costs arising out of environmental laws and regulations, which include obligations to remove or limit the effects on the environment of the disposal or release of certain wastes or substances at various sites, including sites which have been previously sold. It is the Company’s policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals will be reviewed and adjusted, if necessary, as additional information becomes available.
Pursuant to the terms of various agreements by which the Company disposed of its sugar assets in 1999, the Company is obligated to complete certain defined environmental remediation. Approximately $5.0 million of the sales proceeds remain in escrow pending the completion of the remediation. The Company has separately funded the costs of remediation. In addition, approximately $1.7 million is being held in escrow representing the value of the land subject to remediation. Remediation was substantially completed in 2003. The Company expects remaining remediation to be completed and the amounts held in escrow to be released to the Company in 2005.
The Company is currently a party to, or involved in, legal proceedings directed at the cleanup of Superfund sites. The Company is also involved in regulatory proceedings related to its former mill site in Gulf County, Florida. The Company has accrued an allocated share of the total estimated cleanup costs for these sites. Based upon management’s evaluation of the other potentially responsible parties, the Company does not expect to incur additional amounts even though the Company has joint and several liability. Other proceedings involving environmental matters such as alleged discharge of oil or waste material into water or soil are pending or threatened against the Company. It is not possible to quantify future environmental costs because many issues relate to actions by third parties or changes in environmental regulation. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity. Environmental liabilities are paid over an extended period and the timing of such payments cannot be predicted with any confidence. Aggregate environmental-related accruals were $4.1 million and $4.0 million as of September 30, 2004 and December 31, 2003, respectively.
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Overview
The St. Joe Company is one of Florida’s largest real estate operating companies. We have one of the largest inventories of private land suitable for development in the State of Florida, with very low cost basis. The majority of our land is located in Northwest Florida. In order to optimize the value of our core real estate assets in Northwest Florida, our strategic plan calls for us to reposition our substantial timberland holdings for higher and better uses. We increase the value of our raw land assets, most of which are currently managed as timberland, through the development and subsequent sale of parcels, homesites, and homes, or through the direct sale of unimproved land. In addition, we reinvest qualifying asset sales proceeds into like-kind properties under our tax deferral strategy which has enabled us to create a significant portfolio of commercial rental properties. We also provide commercial real estate services, including brokerage, property management and construction management for Company-owned assets as well as for third parties.
We have four operating segments: Towns & Resorts development, commercial real estate development and services, land sales, and forestry.
Our Towns & Resorts development segment generates revenues from:
Our commercial real estate development and services segment generates revenues from:
Our land sales segment generates revenues from:
Our forestry segment generates revenues from:
Our ability to generate revenues, cash flows and profitability is directly related to the real estate market, primarily in Florida, and the economy in general. Considerable economic and political uncertainties exist that could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials
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Management periodically conducts market research in the early stages of a project’s development to ensure our product meets expected customer demand. We also continuously and actively monitor local competitors’ product offerings to evaluate the competitive position of our products. We are disciplined about the release of new product in Northwest Florida and plan no additional releases of units at our resort communities in 2004. Our goal is to ensure that as much of our land as possible benefits from the appreciation that we are building with the region’s increased visibility, infrastructure development and place-making. Real estate market conditions in our regions of development, particularly for residential and resort property in Northwest Florida, have been exceptionally strong. These current market conditions place us in an unusually favorable position which may not continue in the future. However, we believe that long-term prospects of job growth, coupled with strong in-migration population expansion, in Florida indicate that demand levels may remain favorable over at least the next two to five years.
Our commercial real estate development and services segment continues to build on strong market interest in Northwest Florida’s retail, office, multi-family and other mixed-use products caused by historical constraints on supply in the area as well as high interest by developers.
Forward-Looking Statements
This report contains forward-looking statements, including statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions, as well as trends and uncertainties that could affect our results. These statements are subject to risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2003, those described from time to time in other filings with the Securities and Exchange Commission, and the following:
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We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this Form 10-Q not to occur.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Additionally, we evaluate the results of these estimates on an on-going basis. Management’s estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The critical accounting policies that we believe reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements are set forth in Item 7 of our annual report on Form 10-K for the year ended December 31, 2003. There have been no significant changes in these policies during the first nine months of 2004.
Investment in Real Estate and Cost of Real Estate Sales/ Percentage of Completion Adjustment. Revenue for our multi-family residences which were under construction at WaterSound Beach in 2003 was recognized, in accordance with Statement of Financial Accounting Standards No. 66,Accounting for Sales of Real Estate (FAS 66), using the percentage-of-completion method of accounting. Under this method, revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. Since the project was substantially completed as of December 31, 2003, we recorded substantially all of the activity related to this property during the year ended December 31, 2003. During the period ended March 31, 2004, we incurred $2.0 million in construction costs for contract adjustments related to the project. These costs represented changes to the original construction cost estimates for this project. Had these costs been quantified in 2003, they would have been included within our budgets and thus have had an impact on our results for the year ended December 31, 2003. If these costs had been included within the total project budget, 2003 gross profit would have been reduced by $3.6 million (pre-tax), $2.3 million (after tax), since a lower percentage of revenue would also have been recognized. The results for the nine months ended September 30, 2004 would have been increased by $3.6 million (pre-tax), $2.3 million (after tax).
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Management has evaluated the impact of this item, which represented 3% of net income ($0.03 per diluted share) for the year ended December 31, 2003, and concluded that it is not significant to our 2003 results of operations. In addition, while the impact of this item would increase net income for the first nine months of 2004 by 4% ($0.03 per diluted share), management has concluded that it is not expected to be significant to our results of operations for the year ending December 31, 2004, based upon our current forecast for the full year period.
Results of Operations
Net income for the third quarter of 2004 was $26.3 million, or $0.34 per diluted share, compared with $23.0 million, or $0.30 per diluted share, for the third quarter of 2003. Net income for the first nine months of 2004 was $62.0 million, or $0.81 per diluted share, compared with $47.3 million, or $0.61 per diluted share, for the first nine months of 2003. Net income for the first nine months of 2003 included a non-cash charge of $8.8 million net of tax, or $0.11 per share, to reduce the carrying value of goodwill associated with Advantis Real Estate Services (“Advantis”), the company’s commercial real estate services unit. Net income for the third quarter of 2004 included after tax conservation land sales gains of $0.1 million, or less than $0.01 per share, compared to $2.3 million, or $0.03 per share, in the third quarter of 2003. Net income for the first nine months of 2004 included after-tax conservation land sales gains of $1.6 million, or $0.02 per share, compared to $13.8 million, or $0.18 per share, in the first nine months of 2003.
We report revenues from our four operating segments: Towns & Resorts development, commercial real estate development and services, land sales, and forestry. Real estate sales are generated from sales of housing units and developed homesites in our Towns & Resorts development segment, developed and undeveloped land and in-service buildings in our commercial real estate development and services segment which are not reported as discontinued operations, parcels of undeveloped land and developed rural sites in our land sales segment and occasionally sales of bulk land from our forestry segment. Realty revenues, consisting of property and asset management fees, construction management fees, and lease and sales commissions, are generated from the commercial real estate development and services segment. Timber sales are generated from the forestry segment. Rental revenue is generated primarily from lease income related to our portfolio of investment and development properties as a component of the commercial real estate development and services segment. Other revenues are primarily club operations and management fees from the Towns & Resorts development segment and development fees from the commercial real estate development and services segment.
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Consolidated Results
Revenues and expenses. The following table sets forth a comparison of the revenues and expenses for the three–month and nine-month periods ended September 30, 2004 and 2003.
The increases in revenues from real estate sales and cost of real estate sales for the three and nine month periods ended September 30, 2004 compared to 2003 were in each case primarily due to increased sales in the Towns & Resorts development segment and land sales in the commercial real estate development services segment and, in the nine months ended September 30, 2004, to the sale of a building in the commercial real estate development and services segment. Additionally, during the third quarter of 2004, two buildings were sold and recorded as discontinued operations. In our Towns & Resorts development segment, there were fewer homesites sold in our resort communities in the third quarter of 2004 compared to the third quarter of 2003 as we continue to manage inventory to maximize value to benefit from expected near-term price increases caused by strong demand in the market. Also, in the nine months ended September 30, 2004, costs of real estate sales increased due to actual construction costs in excess of estimates at WaterSound Beach, one of our residential communities. (For a more detailed discussion of this increase, see Investment in Real Estate and Cost of Real Estate Sales/ Percentage of Completion Adjustment under Critical Accounting Estimates above.) The increases in realty revenues were primarily due to increases in construction and brokerage activity and related revenues. The increases in cost of realty revenues were primarily associated with the increased revenues. The increases in rental revenues and cost of rental revenues were in each case primarily due to the purchase of commercial buildings and improved leased percentages of rental property in the commercial real estate development and services segment. Timber revenue decreased due to a reduction in volume harvested from Company-owned lands and an intentional reduction in production at the cypress mill operation for the purpose of improving margins and profitability. Cost of timber revenues decreased due to lower costs in the timber operation and increased efficiencies in the cypress mill operation. Other revenues and cost of other revenues increased primarily due to increases in volume and pricing in the Towns & Resorts development segment’s club operations. Other operating expenses increased primarily due to increases in marketing and project administration costs in the Towns & Resorts development segment and staffing costs in the commercial real estate development and services segment. For further discussion of revenues and expenses, see Segment Results below.
Corporate expense.Corporate expense, representing corporate general and administrative expenses, increased $0.6 million, or 6%, to $10.6 million in the third quarter of 2004, from $10.0 million in the third quarter of 2003. The increase was due to an increase of $0.7 million in compensation expense on restricted stock issuances and $0.3 million in miscellaneous corporate expenses, including increased audit and audit
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Depreciation and amortization. Depreciation and amortization increased $1.9 million, or 28%, to $8.6 million in the third quarter of 2004, compared to $6.7 million in the third quarter of 2003. The increase was due to a $0.6 million increase in depreciation resulting primarily from additional investments in commercial investment property and residential operating property and property, plant and equipment and a $1.3 million increase in amortization resulting from an increase in intangible assets associated with our commercial operating properties. Depreciation and amortization increased $6.4 million, or 34%, to $25.4 million in the first nine months of 2004, compared to $19.0 million in the first nine months of 2003. The increase was due to a $2.5 million increase in depreciation resulting primarily from additional investments in commercial investment property and residential operating property and property, plant and equipment and a $3.9 million increase in amortization resulting from an increase in intangible assets.
Impairment losses.During the second quarter of 2004, we recorded a $2.0 million impairment loss related to one of our Towns & Resorts projects in North Carolina. During the second quarter of 2003, we recorded an impairment loss to reduce the carrying amount of Advantis’ goodwill from $28.9 million to $14.8 million, pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. The impairment related to Advantis resulted in an impairment loss of $14.1 million pre-tax, or $8.8 million net of tax.
Other income (expense). Other income (expense) consists of investment income, interest expense, gains on sales and dispositions of assets and other income. Other income (expense) was $(2.5) million in the third quarter of 2004 and $(1.9) million in the third quarter of 2003. Other income (expense) was $(6.9) million in the first nine months of 2004 and $(5.3) million in the first nine months of 2003. Interest expense was higher in the 2004 periods due to an increase in the average amount of debt outstanding in the 2004 periods compared to the 2003 periods.
Equity in income (loss) of unconsolidated affiliates. We have investments in affiliates that are accounted for by the equity method of accounting. Equity in income (loss) of unconsolidated affiliates totaled $1.4 million in the third quarter of 2004 and $1.3 million in the third quarter of 2003. Equity in income (loss) of unconsolidated affiliates totaled $3.0 million in the first nine months of 2004 and $(2.5) million in the first nine months of 2003.
The Towns & Resorts development segment recorded equity in the income (loss) of unconsolidated affiliates of $1.0 million for the third quarter of 2004, compared to $(0.2) million for the third quarter of 2003. The increase was primarily due to an increase in closings at Paseos and Rivercrest, two 50% owned unconsolidated affiliates. The Towns & Resorts development segment recorded equity in the income (loss) of unconsolidated affiliates of $3.1 million for the first nine months of 2004, compared to $(4.3) million for the first nine months of 2003. Equity in the income (loss) of unconsolidated affiliates for the first nine months of 2003 included a $(3.5) million pre-tax charge based on estimates of future costs and future cash distributions associated with the completion of operations of Arvida/ JMB Partners, L.P. (“Arvida/ JMB”), which completed its operations in 2003 and is winding up its affairs. Arvida/ JMB had no contribution to equity in income (loss) of unconsolidated affiliates in the first nine months of 2004. Equity in the income (loss) of other joint ventures increased $3.9 million from $(0.8) million for the first nine months of 2003 to $3.1 million for the first nine months of 2004, primarily as a result of an increase in closings of residential sales at these unconsolidated affiliates.
The commercial real estate development and services segment recorded equity in the income (loss) of unconsolidated affiliates of $0.4 million in the third quarter of 2004, compared to $1.5 million in the third quarter of 2003 and $(0.1) million in the first nine months of 2004, compared to $1.8 million in the first nine months of 2003. Equity in income of Deerfield, LLC decreased $0.4 million to $0.7 million for the three months ended September 30, 2004 compared to the same period in 2003 and $0.2 million to $1.1 million for
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Income tax expense.Income tax expense totaled $13.8 million in the third quarter of 2004 and $13.6 million in the third quarter of 2003. Income tax expense totaled $36.1 million in the first nine months of 2004 and $27.9 million in the first nine months of 2003. Our effective tax rate was 39% in the three and nine month periods ended September 30, 2004 and 37% in the three and nine month periods ended September 30, 2003. The increases in rates were due to increases in restricted stock deferred compensation, a portion of which is not deductible for tax purposes.
Discontinued operations. Discontinued operations include the operations and subsequent sales of two commercial office buildings. On July 30, 2004, we sold 1750 K Street for proceeds of $47.3 million ($21.9 million, net of the assumption of a mortgage by the purchaser) and a pre-tax gain of $7.5 million ($4.6 million net of taxes). We sold Westchase Corporate Center on August 16, 2004, for proceeds of $20.3 million and a pre-tax gain of $0.2 million ($0.1 million net of taxes).
Segment Results
The table below sets forth the results of operations of our Towns & Resorts development segment for the three month and nine month periods ended September 30, 2004 and 2003.
Our Towns & Resorts development division develops large-scale, mixed-use communities primarily on land with very low cost basis. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and land near Jacksonville, in Deland, and near Tallahassee, the state capital. Our residential homebuilding in North Carolina and South Carolina is conducted through Saussy Burbank, Inc. (“Saussy Burbank”), a wholly owned subsidiary. We are disciplined about the release of
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WaterColor is situated on approximately 499 acres on the beaches of the Gulf of Mexico in south Walton County. We are building single-family and multi-family residences and selling developed homesites in WaterColor. At full build-out, the community is planned to include approximately 1,140 units including the 60-room WaterColor Inn, a beach club, tennis center, boat house, restaurants in the WaterColor Inn and on an inland freshwater lake, commercial space and parks. In the third quarter of 2004, development began on phase four, a 60-acre parcel adjacent to WaterColor Crossing with approximately 185 units. Reservations have been accepted for all 88 ownership interests in the 11 residential units at the Watercolor Private Residence Club (“PRC”), adjacent to the WaterColor Inn. The completion of the PRC building and initial closings are scheduled for the fourth quarter of 2004. Each PRC owner receives a deed to 1/8 interest in a specific residence and is entitled to a minimum of five weeks per year in the PRC. From WaterColor’s inception through September 30, 2004, total contracts accepted or closed totaled 789 homes and homesites and 83 PRC shares.
WaterSound Beach is located approximately four miles east of WaterColor. Situated on approximately 256 acres with over a mile of white sand beach, this gated community is currently expected to have 499 units at full build-out. Contracts have been accepted on all of the initial 49 units of Compass Point, a 92-unit neighborhood of multi-family residences. The remaining 43 units are scheduled for sales release in 2005 and 2006. From WaterSound Beach’s inception through September 30, 2004, contracts for 361 units were accepted or closed.
Infrastructure construction continues on WaterSound, a resort community located three miles from WaterSound Beach. Sales are expected to begin in 2006.
WaterSound West Beach is approximately one mile west of WaterSound Beach, with beach access through the adjacent Deer Lake State Park. Designed as a gated, high-end community with pricing expected to be comparable to WaterSound Beach, a number of environmental regulatory steps remain before construction can begin. Construction and sales are expected to begin in 2005.
Land-use approvals have been finalized for WindMark Beach, a mixed-use development on approximately 2,080 acres in Gulf County. WindMark Beach includes an 80-acre first phase, with 110 homesites. At September 30, 2004, the six remaining homesites have not yet been released for sale. Sales in the new phases of WindMark Beach are scheduled to begin in late 2005. From WindMark Beach’s inception through September 30, 2004, contracts for 104 homesites were accepted or closed.
SouthWood, four miles east of the state capitol building in Tallahassee, is entitled for a maximum of 4,770 residential units plus retail shops, restaurants, community facilities, light industrial sites and professional offices. Certain regulatory approvals are required prior to commencing development on construction in Phase II that is scheduled to begin in the 2006-2007 timeframe. From SouthWood’s inception through September 30, 2004, contracts for 785 units were accepted or closed.
SummerCamp is located approximately 45 miles south of Tallahassee on the Gulf Coast in Franklin County. With nearly 4 miles of waterfront, the community is entitled for a maximum of 499 units on 782 acres of timberland. Current plans call for beach clubs, observation piers, gathering pavilions, a canoe and kayak boathouse, a community dock and nature trails. On July 9, 2004, 296 potential buyers sought reservations for 12 homesites at SummerCamp in the third release of homesites for sale. Pending the receipt of regulatory and environmental permits, closings of these homesites, as well as the 40 homesites and 29 homes from previous releases, are expected to begin in the first quarter of 2005.
RiverTown is entitled for a maximum of 4,500 units situated on 4,170 acres located in St. Johns County, south of Jacksonville, with more than 3.5 miles of frontage on the St. Johns River. RiverTown is being
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In the third quarter of 2004, infrastructure construction continued on the final phases of St. Johns Golf and Country Club, a primary residential community located in St. Johns County. From its inception through September 30, 2004, contracts for 616 units of this 799 unit community were accepted or closed. Sales in this community are expected to be completed by the middle of 2006.
Victoria Park, located in Volusia County, is situated on approximately 1,859 acres we acquired near Interstate 4 in Deland between Daytona Beach and Orlando. Victoria Park is entitled for a maximum of 4,000 residences built among parks, lakes and conservation areas. From Victoria Park’s inception through September 30, 2004, contracts for 578 units were accepted or closed.
Artisan Park, a 160-acre village located in Celebration, near Orlando, is being developed through a joint venture managed by us in which we own 74%. From Artisan Park’s inception through September 30, 2004, contracts for 276 units were accepted or closed out of 616 maximum project units entitled.
The Company manages and owns 50% of the joint ventures developing Rivercrest and Paseos, two primary residential communities. At Rivercrest, a 413-acre community located near Tampa, 902 units have been sold or are under contract out of a total of 1,300 maximum units entitled. At Paseos, a 175-acre community in Jupiter, 315 units have been sold or are under contract out of 325 maximum units entitled.
Real estate sales include sales of homes and homesites and sales of land. Cost of real estate sales includes direct costs, selling costs and other indirect costs. In the third quarter of 2004, the components of cost of real estate sales were $91.9 million in direct costs, $8.3 million in selling costs, and $10.0 million in other indirect costs. In the third quarter of 2003, the components of cost of real estate sales were $73.4 million in direct costs, $6.8 million in selling costs, and $9.0 million in other indirect costs. The overall increases in real estate sales and cost of real estate sales were primarily due to increases in revenues and cost of sales recorded at Saussy Burbank and on multi-family residences and PRC units using the percentage-of-completion method of accounting.
Sales of homes in the third quarter of 2004 totaled $127.9 million, with related cost of sales of $103.2 million, resulting in a gross profit percentage of 19%, compared to sales in the third quarter of 2003 of $80.6 million, with cost of sales of $68.8 million, resulting in a gross profit percentage of 15%. The increase in gross profit percentage was primarily due to higher margin condominiums being built and under contract at WaterSound Beach and the PRC being built at WaterColor, both causing an increase in the gross profit recognized using the percentage-of-completion method of accounting.
Cost of real estate sales for homes in the third quarter of 2004 consisted of $86.8 million in direct costs, $7.1 million in selling costs, and $9.3 million in indirect costs. Cost of real estate sales for homes in the third quarter of 2003 consisted of $57.3 million in direct costs, $4.1 million in selling costs, and $7.4 million in indirect costs.
Sales of homesites in the third quarter of 2004 totaled $25.6 million, with related cost of sales of $7.0 million, resulting in a gross profit percentage of 73%, compared to sales in the third quarter of 2003 of $52.5 million, with related cost of sales of $20.4 million, resulting in a gross profit percentage of 61%. The increase in gross profit percentage was primarily due to better pricing at WaterColor and WindMark Beach. There were 29 homesites sold in our resort communities in the third quarter of 2004 compared to 168 homesites sold in those communities in the third quarter of 2003. We continue to manage inventory to maximize value to benefit from expected near-term price increases caused by strong demand in the market. Cost of real estate sales for homesites in the third quarter of 2004 consisted of $5.1 million in direct costs,
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Other revenues totaled $13.3 million in the third quarter of 2004 with $11.0 million in related costs, compared to revenues totaling $8.8 million in the third quarter of 2003 with $7.7 million in related costs. These included revenues from the WaterColor Inn, other resort operations and management fees.
Other operating expenses, including salaries and benefits of personnel and other administrative expenses, increased $0.5 million in the third quarter of 2004 compared to the third quarter of 2003. The increase was primarily due to damages of some walkovers at WaterColor and WaterSound resulting from Hurricane Ivan.
The following table sets forth home and homesite sales activity by individual developments:
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Revenue and costs of sales associated with multi-family units and PRC units under construction are recognized using the percentage of completion method of accounting. Revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. If a deposit is received for less than 10% for a multi-family unit or a PRC unit, percentage of completion accounting is not utilized. Instead, full accrual accounting criteria is used, which generally recognizes revenue when sales contracts are closed and adequate investment from the buyer is received. In the WaterSound Beach community, deposits of 10% are required upon executing the contract and another 10% is required 180 days later. For PRC units, a 10% deposit is required. All deposits are non-refundable (subject to a 10-day waiting period as required by law) except for non-delivery of the unit. In the event a contract does not close for reasons other than non-delivery, we are entitled to retain the deposit. However, the revenue and margin related to the previously recorded contract would be reversed. Revenues and cost of sales associated with multi-family units where construction has been completed before contracts are signed and deposits made are recognized on the full accrual method of accounting, as contracts are closed.
At WaterColor, the gross profit percentage on single-family residence sales decreased to 22% in the third quarter of 2004 from 29% for the third quarter of 2003, primarily due to the relative mix and location of the homes sold. There was one single-family residence sold in the third quarter of 2004 for $918,000, compared to the average price of $823,000 for the two single-family residences sold in the third quarter of 2003. In the third quarter of 2004, there was no revenue or gross profit recognized on the sale of multi-family residences due to the wind up of the first phase of multi-family residences in 2003. The gross profit percentage from homesite sales increased to 77% in the third quarter of 2004 from 60% in the third quarter of 2003 due to an increase in average price and the mix of locations of the closed homesites. The average price of a homesite sold in the third quarter of 2004 was $694,000, compared to $295,000 in the third quarter of 2003.
At WaterSound Beach, the gross profit percentage from sales of multi-family residences, for which the percentage of completion method of accounting is used, was 42% in the third quarter of 2004, all of which was generated by sales at the new Compass Point community. In the third quarter of 2003, the gross profit percentage generated from sales of multi-family residences was 30%, all of which was generated by sales at WaterSound Crossings in the Bridges community.
At Artisan Park, the gross profit percentage on homesite sales increased to 78% in the third quarter of 2004 from 33% in 2003, primarily due to increased prices. The average price of a homesite sold in the third quarter of 2004 was $225,000 compared to $122,000 in the third quarter of 2003.
At Victoria Park, the gross profit percentage on home sales increased to 13% in the third quarter of 2004 from 10% in the third quarter of 2003, primarily due to an increase in the prices of comparable units. The gross profit percentage on homesite sales increased to 56% in the third quarter of 2004 from 44% in the third quarter of 2003, primarily due to the recognition in the third quarter of 2004 of previously deferred revenue.
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In the first nine months of 2004, the components of cost of real estate sales were $247.0 million in direct costs, $21.6 million in selling costs, and $28.4 million in other indirect costs. In the first nine months of 2003, the components of cost of real estate sales were $195.1 million in direct costs, $16.4 million in selling costs, and $21.8 million in other indirect costs. The overall increase in real estate sales was primarily due to an increase in the number of units sold and higher selling prices. Cost of real estate sales increased primarily due to the increased volume of sales. Increases in real estate sales and cost of real estates sales were both partially offset by a decrease in revenues and cost of sales recorded on multi-family residences because the majority of the gross profit on units closed in the first nine months of 2004 was recognized in 2003 due to the percentage-of-completion method of accounting.
Sales of homes in the first nine months of 2004 totaled $316.2 million, with related cost of sales of $267.4 million, resulting in a gross profit percentage of 15%, compared to sales in the first nine months of 2003 of $243.3 million, with cost of sales of $198.7 million, resulting in a gross profit percentage of 18%. The decrease in gross profit percentage was primarily due to a decrease in the contribution from high margin multi-family homes. Additionally, as discussed above (See Critical Accounting Estimates.), we incurred $2.0 million in construction costs in the first nine months of 2004 due to contract adjustments on a multi-family property for which substantially all of the activity had been recorded during the year ended December 31, 2003.
Cost of real estate sales for homes in the first nine months of 2004 consisted of $224.8 million in direct costs, $17.1 million in selling costs, and $25.5 million in indirect costs. Cost of real estate sales for homes in the first nine months of 2003 consisted of $167.8 million in direct costs, $11.9 million in selling costs, and $19.0 million in indirect costs.
Sales of homesites in the first nine months of 2004 totaled $94.1 million, with related cost of sales of $29.6 million, resulting in a gross profit percentage of 69%, compared to sales in the first nine months of 2003 of $91.5 million, with related cost of sales of $34.6 million, resulting in a gross profit percentage of 62%. The increase in gross profit percentage was due to better pricing at WaterColor, WaterSound Beach, and Windmark Beach, partially offset by an increase in cost of sales at WaterColor. Cost of real estate sales for homesites in the first nine months of 2004 consisted of $22.2 million in direct costs, $4.5 million in selling costs, and $2.9 million in indirect costs. Cost of real estate sales for homesites in the first nine months of 2003 consisted of $27.3 million in direct costs, $4.5 million in selling costs, and $2.8 million in indirect costs.
Other revenues totaled $32.2 million in the first nine months of 2004 with $27.0 million in related costs, compared to revenues totaling $20.8 million in the first nine months of 2003 with $20.2 million in related costs. These included revenues from the WaterColor Inn, other resort operations and management fees.
Other operating expenses, including salaries and benefits of personnel and other administrative expenses, increased $4.6 million during the first nine months of 2004 compared to the first nine months of 2003. The increase was primarily due to increases in marketing and project administration costs attributable to the increase in residential development activity.
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At WaterColor, the gross profit percentage from single-family residence sales decreased to 25% in the first nine months of 2004 from 30% in the first nine months of 2003, primarily due to the mix of relative location and size of the home sales closed in each period. The average price of a single-family residence sold in
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At WaterSound Beach, the gross profit percentage on sales of multi-family residences decreased to 34% in the first nine months of 2004 from 38% in the first nine months of 2003. Increased margins in 2004 were offset by an increase in the cost of revenues associated with the 80 completed and sold multi-family residences caused by actual construction costs exceeding estimates in the first quarter of 2004, as discussed above (See Critical Accounting Estimates). Most of the contribution from income for the 50 multi-family units that closed in the first nine months of 2004 was recorded in 2003 due to percentage of completion accounting. The gross profit percentage on homesites increased to 75% in the first nine months of 2004 from 63% in the first nine months of 2003, primarily due to price increases and a decrease in development costs.
At The Hammocks, the gross profit percentage on homesite sales increased to 48% in the first nine months of 2004 from 22% in the first nine months of 2003, primarily due to price increases and a decrease in development costs. The gross profit percentage on home sales decreased to 7% in the first nine months of 2004 from 10% in the first nine months of 2003 due to a change in the mix of relative size and location of homes sold in each period.
At Summerwood, there was a $1.7 million expense taken in the first nine months of 2004 for warranty costs in excess of warranty reserves.
At St. Johns Golf and Country Club, the gross profit percentage on homesite sales increased to 59% in the first nine months of 2004 from 53% in the first nine months of 2003, primarily due to the mix of the relative size of the homesites sold in each period.
At James Island, the gross profit percentage on home sales decreased to 12% in the first nine months of 2004 from 14% in the first nine months of 2003, primarily due to increases in marketing, interest and warranty costs and declining sales as the community nears completion.
At Hampton Park, the gross profit percentage on home sales decreased to 12% in the first nine months of 2004 from 15% in the first nine months of 2003, primarily due to increases in warranty and selling costs and in the cost of purchased lots.
At Artisan Park, the gross profit percentage on homesite sales increased to 57% in the first nine months of 2004 from 33% in 2003, primarily due to increased prices. The average price of a homesite sold in the third quarter of 2004 was $180,000 compared to $122,000 in the third quarter of 2003.
At Victoria Park, the gross profit percentage on homesite sales increased to 48% in the first nine months of 2004 from 42% in 2003, primarily due to the mix of relative locations of homesites sold in each period.
During the first nine months of 2004 we recorded an impairment loss of $2.0 million related to one of Saussy Burbank’s community development projects. Average prices of homes sold in the nine months ended September 30, 2004 and 2003 were approximately $217,000 and $207,000, respectively.
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The table below sets forth the results of operations of our commercial real estate development and services segment for the three month and nine month periods ended September 30, 2004 and 2003.
Our commercial real estate development and services segment develops and sells real estate for commercial purposes. We also own and manage office, industrial and retail properties throughout the southeastern United States. Through the Advantis business unit, we provide commercial real estate services, including brokerage, property management and construction management for company-owned assets as well as third parties.
Rental revenues.Rental revenues generated by our commercial real estate development and services segment on owned operating properties increased $2.7 million, or 36%, in the third quarter of 2004 compared to the third quarter of 2003, due to six buildings with an aggregate of 694,000 square feet placed in service or acquired since September 30, 2003 and an increase in the overall leased percentage, partially offset by the sale of a building with 100,000 square feet on February 12, 2004. Operating expenses related to these revenues increased $0.5 million, or 15%, primarily due to the buildings placed in service since September 30, 2003. This segment’s results include rental revenue and cost of rental revenue from 22 rental properties with 2.5 million total rentable square feet in service at September 30, 2004 and 19 rental properties with 2.3 million total rentable square feet in service at September 30, 2003. Additionally, this segment had an interest in one building totaling approximately 0.1 million square feet and 3 buildings totaling approximately 0.4 million square feet at September 30, 2004 and 2003, respectively, that were owned by partnerships and accounted for using the equity method of accounting. Excluding buildings accounted for using the equity method of accounting, the overall leased percentage increased to 85% at September 30, 2004, compared to 80% at September 30, 2003. Further information about commercial income producing properties that we owned or managed, along with results of operations for the three month periods ended September 30, 2004 and 2003, is presented in the tables below.
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At Harbourside and Southhall Center, the loss of tenants caused a decrease in the leased percentages and rental revenues. We are now marketing these spaces. At Millenia Park One and SouthWood Office One, leased percentages and revenues increased due to the addition of new tenants.
Realty revenues.Advantis’ realty revenues in the third quarter of 2004 increased $7.1 million, or 42%, over the third quarter of 2003, primarily due to increases in construction and brokerage revenues. Cost of Advantis’ realty revenue increased $6.4 million, or 65%, primarily due to increased costs associated with the increase in construction and brokerage revenues. The gross profit percentage was 32% for the third quarter of 2004 compared to 42% in the third quarter of 2003. The decrease in gross profit percentage was due to increases in broker agent compensation rates related to the increase in brokerage activity and due to the expansion of the construction business to include base building projects which have a lower margin than tenant renovation projects. Advantis’ other operating expenses, consisting of office administration expenses, increased to $7.9 million in the third quarter of 2004 from $7.4 million in the third quarter of 2003, a 7% increase, primarily due to an increase in staffing costs. Advantis recorded a pre-tax loss of $(0.3) million for the third quarter of 2004 after eliminations of intercompany profits of $0.3 million, compared to $(0.6) million for the third quarter of 2003, after eliminations of intercompany profits of $0.4 million.
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Real estate sales.Total proceeds from land sales in the third quarter of 2004 were $21.4 million, with a pre-tax gain of $3.9 million. Land sales included the following:
During the third quarter of 2003, total proceeds from land sales were $0.9 million, with a pre-tax gain of $0.6 million. Land sales included the following:
There were no building sales recorded in continuing operations during the three months ended September 30, 2004 and 2003.
Depreciation and amortization, primarily consisting of depreciation on income producing properties and amortization of lease intangibles, was $4.1 million in the third quarter of 2004 compared to $2.9 million in the third quarter of 2003.
Discontinued operations. Building sales in the third quarter of 2004 consisted of the sales of 1750 K Street and Westchase Corporate Center, both of which are reported as discontinued operations. 1750 K Street was sold on July 30, 2004, for proceeds of $47.3 million ($21.9 million, net of the assumption of a mortgage by the purchaser) and a pre-tax gain of $7.5 million. Westchase Corporate Center was sold on August 16, 2004, for proceeds of $20.3 million and a pre-tax gain of $0.2 million.
Rental revenues.Rental revenues generated by our commercial real estate development and services segment on owned operating properties increased $7.5 million, or 35%, in the first nine months of 2004 compared to the first nine months of 2003, primarily due to six buildings with an aggregate of 694,000 square feet placed in service or acquired since September 30, 2003 and an increase in the overall leased percentage, partially offset by the sale of a building with 100,000 square feet on February 12, 2004. Operating expenses related to these revenues increased $1.6 million, or 18%, primarily due to the buildings placed in service since September 30, 2003. Further information about commercial income producing properties that we owned or managed, along with results of operations for the nine month periods ended September 30, 2004 and 2003, is presented in the table below.
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Realty revenues.Advantis’ realty revenues in the first nine months of 2004 increased $24.1 million, or 57%, over the first nine months of 2003, due to increases in construction and brokerage revenues. Cost of Advantis’ realty revenue increased $18.5 million, or 77%, primarily due to increased costs associated with the increase in construction and brokerage revenues. The gross profit percentage was 36% for the first nine months of 2004 compared to 44% in the first nine months of 2003. The decrease in gross profit percentage was due to increases in broker agent compensation rates related to the increase in brokerage activity and due to the expansion of the construction business to include base building projects which have a lower margin than tenant renovation projects. Advantis’ other operating expenses, consisting of office administration expenses, increased to $24.4 million in the first nine months of 2004 from $21.4 million in the first nine months of 2003, a 14% increase, primarily due to an increase in staffing costs. Advantis recorded a pre-tax loss of $(0.8) million for the first nine months of 2004, compared to $(17.7) million for the first nine months of 2003, including the 2003 impairment loss of $(14.1) million.
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Real estate sales.Total proceeds from land sales in the first nine months of 2004 were $40.7 million, with a pre-tax gain of $9.1 million. Land sales included the following:
During the first nine months of 2003, total proceeds from land sales were $15.1 million, with a pre-tax gain of $10.5 million. Land sales included the following:
Building sales recorded in continuing operations during the nine months ended September 30, 2004 consisted of the sale of Westside Corporate Center. On February 12, 2004, we sold the 100,000-square-foot Westside Corporate Center building in Plantation, Florida, for proceeds of $12.0 million, with no pre-tax gain. The operations of Westside Corporate Center have not been recorded as a discontinued operation due to the fact that our affiliate continues to provide brokerage and leasing services for the building. There were no building sales during the nine month period ended September 30, 2003.
Depreciation and amortization, primarily consisting of depreciation on income producing properties and amortization of lease intangibles, was $12.0 million in the first nine months of 2004 compared to $7.9 million in the first nine months of 2003.
Discontinued operations. The 1750 K Street and Westchase Corporate Center building sales are both reported as discontinued operations. 1750 K Street was sold on July 30, 2004, for proceeds of $47.3 million and a pre-tax gain of $7.5 million. Westchase Corporate Center was sold on August 16, 2004, for proceeds of $20.3 million and a pre-tax gain of $0.2 million.
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The table below sets forth the results of operations of our land sales segment for the three and nine month periods ended September 30, 2004 and 2003.
Land sales activity for the three month and nine month periods ended September 30, 2004 and 2003, excluding conservation lands, was as follows:
Land sales for the third quarter of 2004 included one large parcel of approximately 323 acres with frontage on North Bay in Bay County, Florida, which sold for $8.7 million, or approximately $27,000 per acre. Land sales for the first nine months of 2004 included that sale and the sale of an 866-acre parcel with some bay frontage in Bay County which sold for $10.0 million, or approximately $11,550 per acre. Since average sales prices per acre vary according to the characteristics of each particular piece of land being sold, our average prices may vary from one period to another.
Conservation land sales activity for the three month and nine month periods ended September 30, 2004 and 2003 was as follows:
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During the first nine months of 2004, we released 27 home sites at RiverCamps on Crooked Creek. Early in the fourth quarter of 2004, an additional 15 homesites were offered for sale. We expect to accept contracts and close sales of home sites in these releases in the fourth quarter of 2004. Work also continues on other potential RiverCamps locations in Northwest Florida. During the three and nine month periods ended September 30, 2004, the land sales segment recognized $0.3 million and $0.5 million, respectively, in revenue related to RiverCamps, with related costs of $0.1 million and $0.3 million, respectively. In the first nine months of 2003, RiverCamps generated $0.7 million in revenues with $0.7 million in related costs, all from the sale of the 2003 HGTV Dream Home located on East Bay in Bay County, Florida.
The table below sets forth the results of operations of our forestry segment for the three month and nine month periods ended September 30, 2004 and 2003.
Revenues for the forestry segment in the third quarter and first nine months of 2004 decreased 4% compared to the comparable periods in 2003. Total sales under our fiber agreement with Smurfit-Stone Container Corporation were $3.4 million (171,000 tons) in the third quarter of 2004, compared to $3.0 million (168,000 tons) in the third quarter of 2003. Total sales under this agreement were $9.8 million (513,000 tons) in the first nine months of 2004, compared to $8.7 million (504,000 tons) in the first nine months of 2003. The increase in revenues was primarily due to increasing prices under the terms of the agreement. Sales to other customers totaled $3.2 million (140,000 tons) in the third quarter of 2004, compared to $3.8 million (199,000 tons) in the third quarter of 2003. Sales to other customers totaled $11.1 million (502,000 tons) in the first nine months of 2004, compared to $12.3 million (656,000 tons) in the first nine months of 2003. Sales to other customers decreased as we reduced the volume harvested from Company-owned lands. Revenues from our cypress mill operation were $1.5 million in the third quarter of 2004 and $1.7 million in the third quarter of 2003. Revenues from the cypress mill operation were $6.3 million in the first nine months of 2004 and $7.2 million in the first nine months of 2003. Revenues from the cypress mill operation decreased as we intentionally reduced production to help improve margins and profitability in response to challenges in finding wood supplies at good prices.
Cost of timber sales decreased $0.6 million for the third quarter of 2004 compared to the third quarter of 2003. Cost of sales as a percentage of revenue was 63% for the third quarter of 2004 compared to 67% for the third quarter of 2003. Cost of timber sales decreased $2.4 million for the first nine months of 2004 compared to the first nine months of 2003. Cost of sales as a percentage of revenue was 62% for the first nine months of 2004 compared to 68% for the first nine months of 2003. The decrease in cost of sales as a percentage of revenue was due to increased efficiencies in our cypress mill operation and slightly lower cost of sales for timber in the 2004 periods compared to 2003. Cost of sales for the cypress mill operation was $1.1 million, or 73% of revenue, for the third quarter of 2004 compared to $1.3 million, or 76% of revenue, for the third quarter
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Liquidity and Capital Resources
We generate cash from:
We use cash for:
Management believes that our financial condition is strong and that our cash, real estate and other assets, operating cash flows, and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses, including the continued investment in real estate developments. If our liquidity is not adequate to fund operating requirements, capital development, stock repurchases and dividends, we have various alternatives to change our cash flow, including eliminating or reducing our stock repurchase program, eliminating or reducing dividends, altering the timing of our development projects and/or selling existing assets.
Net cash provided by operations was $53.8 million and $45.3 million in the first nine months of 2004 and 2003, respectively. Expenditures relating to our Towns & Resorts development segment were $360.8 million and $243.5 million in the first nine months of 2004 and 2003, respectively. Expenditures for operating properties in the first nine months of 2004 and 2003 totaled $22.2 million and $33.0 million, respectively, and were made up of commercial property development and residential club and resort property development.
The expenditures for operating activities relating to our Towns & Resorts development and commercial development and services segments are primarily for site infrastructure development, general amenity construction and construction of homes and commercial space. Approximately one-half of these expenditures are for home construction and generally take place after the signing of a binding contract with a buyer to purchase the home following construction. As a consequence, if contract activity slows, home construction will similarly slow. We expect this general expenditure level and relationship between expenditures and housing contracts to continue in the future.
We have generated a net operating loss for tax purposes in each of the three prior tax years, thereby negating the cash payment of federal income taxes during 2001-2003. For the full year 2004, however, federal
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Net cash provided by investing activities in the first nine months of 2004 was $19.9 million and included $41.1 million in proceeds from the sale of discontinued assets and proceeds of $11.9 million from the sale of a commercial building, partially offset by $19.1 million for the purchase of two commercial buildings, $5.1 million for improvements to commercial investment property, and $2.8 million for the purchase of the remaining interests in two commercial buildings of which we already owned a majority interest. In the first nine months of 2003, net cash used in investing activities was $53.7 million and included $22.1 million for the purchase of a commercial building and $7.7 million for improvements to commercial investment property.
In the first nine months of 2004 and 2003, net cash used in financing activities was $35.6 million and $1.4 million, respectively.
We have approximately $0.4 million of debt maturing in the remainder of 2004. For the full year ended December 31, 2004, we expect to spend $125 million to $175 million for the repurchase of shares, the acquisition of surrendered shares and dividend payments.
We have a $250 million senior revolving credit facility (the “credit facility”), which matures on March 30, 2006 and can be used for general corporate purposes. The credit facility includes financial performance covenants relating to our leverage position, interest coverage and a minimum net worth requirement. The credit facility also has negative pledge restrictions. Management believes that we are currently in compliance with the covenants of the credit facility. At September 30, 2004, there was no balance on this credit facility. At December 31, 2003, the outstanding balance was $40.0 million.
On June 8, 2004, we issued senior notes in a private placement with an aggregate principal amount of $100 million, with $25 million maturing on June 8, 2009 with a fixed interest rate of 4.97% and $75 million maturing on June 8, 2011 with a fixed interest rate of 5.31%. Interest will be payable semiannually. The senior notes contain financial covenants similar to those in our $175 million senior notes issued in 2002 and our $250.0 million senior revolving credit facility.
We have used community development district (“CDD”) bonds to finance the construction of on-site infrastructure improvements at four of our projects. The principal and interest payments on the bonds are paid by assessments on, or from sales proceeds of, the properties benefited by the improvements financed by the bonds. We record a liability for future assessments which are fixed or determinable and will be levied against our properties. At September 30, 2004, CDD bonds totaling $99.5 million had been issued, of which $86.5 million had been expended. At December 31, 2003, CDD bonds totaling $99.5 million had been issued, of which $79.0 million had been expended. In accordance with Emerging Issues Task Force Issue 91-10, Accounting for Special Assessments and Tax Increment Financing, we have recorded $35.0 and $30.0 million of this obligation as of September 30, 2004 and December 31, 2003, respectively.
Through September 30, 2004, our Board of Directors had authorized, through a series of five specific authorizations ranging from $150 million to $200 million, a total of $800.0 million for the repurchase of our outstanding common stock from time to time on the open market (the “Stock Repurchase Program”), of which $142.2 million remained available at September 30, 2004.
The Alfred I. duPont Testamentary Trust and its beneficiary, The Nemours Foundation (collectively, the “Trust”) participated in the Stock Repurchase Program from time to time through August 6, 2004, by selling weekly to us shares equal to a share multiplier (0.31 from May 8, 2004 through August 6, 2004) times the number of shares we purchased from the public during the previous week (the “public shares”) at a price equal to the volume weighted average price, excluding commissions, paid by us for the public shares, subject
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From the inception of the Stock Repurchase Program through September 30, 2004, we repurchased from shareholders 24,952,711 shares (17,016,366 shares on the open market and 7,936,345 shares from the Trust), and executives surrendered 2,022,229 shares of our stock in payment of strike prices and taxes due on exercised stock options and taxes due on vested restricted stock, for a total of 26,974,940 acquired shares. During the first nine months of 2004, we repurchased from shareholders 1,221,865 shares (958,500 shares on the open market and 263,365 shares from the Trust), and 870,368 shares were surrendered by our executives as payment of the strike prices and taxes due on exercised stock options and taxes due on vested restricted stock. During the first nine months of 2003, we repurchased from shareholders 2,017,170 shares (1,140,300 shares on the open market and 876,870 shares from the Trust), and executives surrendered 341,884 shares of our stock in payment of the strike prices and taxes due on exercised stock options and taxes due on vested restricted stock. Through September 30, 2004, a total of $657.8 million had been expended as part of the Stock Repurchase Program, including $51.0 million in the first nine months of 2004 and $59.0 million in the first nine months of 2003.
At September 30, 2004, we were not liable as guarantor on any credit obligations that relate to unconsolidated affiliates in accordance with Financial Accounting Standards Board Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
There have been no material changes to contractual obligations and commercial commitments during the first nine months of 2004.
There have been no material changes to quantitative and qualitative disclosures about market risk during the first nine months of 2004.
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company (including our consolidated subsidiaries) required to be included in our periodic filings under the Exchange Act.
(b) Changes in Internal Controls.During the quarter ended September 30, 2004, there have not been any changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
See Part I, Item 1, Note 7.
Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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