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EX-32.2 - EXHIBIT 32.2 - ST JOE COjoe-2017331xex322.htm
EX-32.1 - EXHIBIT 32.1 - ST JOE COjoe-2017331xex321.htm
EX-31.2 - EXHIBIT 31.2 - ST JOE COjoe-2017331xex312.htm
EX-31.1 - EXHIBIT 31.1 - ST JOE COjoe-2017331xex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number: 1-10466
 
The St. Joe Company
(Exact name of registrant as specified in its charter)
 
Florida
 
59-0432511
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
133 South Watersound Parkway
Watersound, Florida
 
32461
(Address of principal executive offices)
 
(Zip Code)
(850) 231-6400
(Registrant’s telephone number, including area code)
 
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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨

Accelerated filer
þ

 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  þ
As of May 1, 2017, there were 71,969,882 shares of common stock, no par value, outstanding.



THE ST. JOE COMPANY
INDEX
 

 
Page No.
 
 



2


PART I - FINANCIAL INFORMATION
Item 1.     Financial Statements

THE ST. JOE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Investment in real estate, net
$
322,097

 
$
314,620

Cash and cash equivalents
216,982

 
241,111

Investments
175,623

 
175,725

Restricted investments
4,448

 
5,636

Income tax receivable
26,672

 
27,057

Claim settlement receivable
7,863

 
7,804

Other assets
36,473

 
38,410

Property and equipment, net of accumulated depreciation of $59.8 million and $59.4 million at March 31, 2017 and December 31, 2016, respectively
9,067

 
8,992

Investments held by special purpose entities
208,219

 
208,590

Total assets
$
1,007,444

 
$
1,027,945

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Debt
$
55,525

 
$
55,040

Other liabilities
47,715

 
40,950

Deferred tax liabilities
70,276

 
68,846

Senior notes held by special purpose entity
176,366

 
176,310

Total liabilities
349,882

 
341,146

EQUITY:
 
 
 
Common stock, no par value; 180,000,000 shares authorized; 74,342,826 issued at both March 31, 2017 and December 31, 2016; and 72,297,845 and 74,342,826 outstanding at March 31, 2017 and December 31, 2016, respectively
572,059

 
572,040

Retained earnings
99,114

 
94,746

Accumulated other comprehensive income
3,219

 
2,507

Treasury stock at cost, 2,044,981 shares held at March 31, 2017
(34,156
)
 

Total stockholders’ equity
640,236

 
669,293

Non-controlling interest
17,326

 
17,506

Total equity
657,562

 
686,799

Total liabilities and equity
$
1,007,444

 
$
1,027,945

See notes to the condensed consolidated financial statements.

3



THE ST. JOE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

The following presents the portion of the consolidated balances presented above attributable to the Company’s consolidated variable interest entities. The Company’s consolidated variable interest entities include the Pier Park North joint venture (“Pier Park North JV”), Windmark JV, LLC (“Windmark JV”), Artisan Park, L.L.C., Panama City Timber Finance Company, L.L.C. and Northwest Florida Timber Finance Company L.L.C. as discussed in Note 2. Summary of Significant Accounting Policies. Basis of Presentation and Principles of Consolidation. The following assets may only be used to settle obligations of the consolidated variable interest entities and the following liabilities are only obligations of the variable interest entities and do not have recourse to the general credit of the Company, except for the guarantees and covenants discussed in Note 9. Debt.
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Investment in real estate, net
$
63,946

 
$
63,362

Cash and cash equivalents
3,303

 
3,965

Other assets
11,882

 
13,209

Investments held by special purpose entities
208,219

 
208,590

Total assets
$
287,350

 
$
289,126

LIABILITIES
 
 
 
Debt
$
47,342

 
$
47,519

Other liabilities
2,194

 
4,275

Senior notes held by special purpose entity
176,366

 
176,310

Total liabilities
$
225,902

 
$
228,104

See notes to the condensed consolidated financial statements.

4


THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited) 
 
Three Months Ended 
 March 31,
 
2017
 
2016
Revenue:
 
 
 
Real estate revenue
$
1,525

 
$
7,081

Resorts and leisure revenue
8,108

 
8,751

Leasing revenue
2,393

 
2,361

Timber revenue
1,171

 
2,061

Total revenue
13,197

 
20,254

Expenses:
 
 
 
Cost of real estate revenue
331

 
1,765

Cost of resorts and leisure revenue
8,804

 
9,319

Cost of leasing revenue
669

 
750

Cost of timber revenue
157

 
210

Other operating and corporate expenses
6,180

 
6,819

Depreciation, depletion and amortization
1,953

 
2,288

Total expenses
18,094

 
21,151

Operating loss
(4,897
)

(897
)
Other income (expense):
 
 
 
Investment income, net
10,356

 
2,730

Interest expense
(3,043
)
 
(3,035
)
Claim settlement

 
12,548

Other, net
4,051

 
452

Total other income, net
11,364

 
12,695

Income before income taxes
6,467


11,798

Income tax expense
(2,279
)
 
(3,244
)
Net income
4,188


8,554

Net loss attributable to non-controlling interest
180

 
111

Net income attributable to the Company
$
4,368


$
8,665

 
 
 
 
NET INCOME PER SHARE
 
 
 
Basic and Diluted
 
 
 
Weighted average shares outstanding
73,970,407

 
74,809,010

Net income per share attributable to the Company
$
0.06

 
$
0.12

See notes to the condensed consolidated financial statements.

5


THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
 (Unaudited)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Net income:
$
4,188

 
$
8,554

Other comprehensive income (loss), net of tax:
 
 
 
Available-for-sale investment items:
 
 
 
Net unrealized gain (loss) on available-for-sale investments
3,905

 
(88
)
Net unrealized gain on restricted investments
4

 

Reclassification of realized gain included in earnings
(3,122
)
 

Reclassification of other-than-temporary impairment loss included in earnings
366

 

Total before income taxes
1,153


(88
)
Income tax (expense) benefit
(441
)
 
34

Total other comprehensive income (loss), net of tax
712


(54
)
Total comprehensive income, net of tax
$
4,900


$
8,500

See notes to the condensed consolidated financial statements.


6


THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)

 
Common Stock
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income
 
 
 
 
 
 
 
Outstanding
Shares
 
Amount
 
Treasury
Stock
 
Non-controlling
Interest
 
Total
Balance at December 31, 2016
74,342,826

 
$
572,040

 
$
94,746

 
$
2,507

 
$

 
$
17,506

 
$
686,799

Issuance of common stock for director’s fees


 
19

 

 

 

 

 
19

Repurchase of common shares
(2,044,981
)
 

 

 

 
(34,156
)
 

 
(34,156
)
Other comprehensive income

 

 

 
712

 

 

 
712

Net income (loss)

 

 
4,368

 

 

 
(180
)
 
4,188

Balance at March 31, 2017
72,297,845

 
$
572,059


$
99,114


$
3,219


$
(34,156
)

$
17,326


$
657,562

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.


7


THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
4,188

 
$
8,554

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
1,953

 
2,288

Stock based compensation
19

 

Gain on sale of investments
(3,122
)
 

Other-than-temporary impairment loss
366

 

Deferred income tax expense
988

 
1,106

Cost of real estate sold
174

 
1,434

Expenditures for and acquisition of real estate to be sold
(2,183
)
 
(1,249
)
Accretion income and other
(1,208
)
 
(365
)
Changes in operating assets and liabilities:
 
 
 
Notes receivable
40

 
65

Claim settlement receivable

 
(12,548
)
Other assets
651

 
1,004

Other liabilities
4,928

 
4,142

Income taxes receivable
348

 

Net cash provided by operating activities
7,142

 
4,431

Cash flows from investing activities:
 
 
 
Expenditures for Pier Park North JV
(489
)
 
(277
)
Expenditures for property and equipment
(4,847
)
 
(347
)
Purchases of investments
(49,510
)
 
(9,275
)
Sales of investments
57,053

 
8,460

Maturities of assets held by special purpose entities
415

 
415

Net cash provided by (used in) investing activities
2,622

 
(1,024
)
Cash flows from financing activities:
 
 
 
Repurchase of common shares
(34,156
)
 
(14,820
)
Borrowings on construction loan
509

 

Principal payments for debt
(226
)
 
(35
)
Debt issue costs
(20
)
 

Net cash used in financing activities
(33,893
)
 
(14,855
)
Net decrease in cash and cash equivalents
(24,129
)
 
(11,448
)
Cash and cash equivalents at beginning of the period
241,111

 
212,773

Cash and cash equivalents at end of the period
$
216,982

 
$
201,325


See notes to the condensed consolidated financial statements.

8


THE ST. JOE COMPANY
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Cash paid during the period for:
 
 
 
 
Interest expense
 
$
5,137

 
$
5,664

Income taxes
 
$

 
$

 
 
 
 
 
Non-cash financing and investing activities:
 
 
 
 
Increase in Community Development District debt
 
$
194

 
$
174

Expenditures for operating properties and property and equipment financed through accounts payable
 
$
1,206

 
$
4


See notes to the condensed consolidated financial statements.

9


THE ST. JOE COMPANY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
(Unaudited)
1. Nature of Operations
The St. Joe Company together with its consolidated subsidiaries (the “Company”) is a Florida real estate development, asset management and operating company with real estate assets and operations currently concentrated primarily between Tallahassee and Destin, Florida.
The Company conducts primarily all of its business in the following five reportable operating segments: 1) residential real estate, 2) commercial real estate, 3) resorts and leisure, 4) leasing operations and 5) forestry.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements are not included herein. The unaudited interim condensed consolidated financial statements include the accounts of the Company and all of its majority-owned and controlled subsidiaries and variable interest entities where the Company is the primary beneficiary. Investments in joint ventures and limited partnerships in which the Company has significant influence, but not a controlling interest are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated in consolidation. The December 31, 2016 balance sheet amounts have been derived from the Company’s December 31, 2016 audited consolidated financial statements. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results of the Company that may be expected for the full year ending December 31, 2017.
A variable interest entity (“VIE”) is an entity in which a controlling financial interest may be achieved through arrangements that do not involve voting interests. A VIE is required to be consolidated by its primary beneficiary, which is the entity that possesses the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to the entity. The Company consolidates VIEs when it is the primary beneficiary of the VIE, including real estate joint ventures determined to be VIEs (see Note 8. Real Estate Joint Ventures).
The interim condensed consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for fair presentation of the information contained herein. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company adheres to the same accounting policies in preparation of its unaudited interim condensed consolidated financial statements as the Company’s December 31, 2016 annual financial statements. As required under GAAP, interim accounting for certain expenses, including income taxes, are based on full year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual income tax rates.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions including investments in real estate, real estate impairment assessments, investments, other-than-temporary investment impairment assessments, retained interest investments, accruals and deferred income taxes. Actual results could differ from those estimates.

10


Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, bank demand accounts, money market instruments, short term commercial paper and short term U.S. Treasury securities having original maturities at acquisition date of ninety days or less.
Investments
Investments and restricted investments consist of available-for-sale securities recorded at fair value, which is established through external pricing services that use quoted market prices and pricing data from recently executed market transactions. Unrealized gains and temporary losses on investments, net of tax, are recorded in other comprehensive income (loss). Realized gains and losses on investments are determined using the specific identification method. The amortized cost of debt securities are adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization and accretion is included in investment income, net.
The Company evaluates investments classified as available-for-sale with an unrealized loss to determine if they are other-than-temporary impaired. This evaluation is based on various factors, including the financial condition, business prospects, industry and creditworthiness of the issuer, severity and length of time the securities were in a loss position, the Company’s ability and intent to hold investments until the unrealized loss is recovered or until maturity and the amount of the unrealized loss. If a decline in fair value is considered other-than-temporary, the decline is then bifurcated into its credit and non-credit related components. The amount of the credit-related component is recognized in earnings, and the amount of the non-credit related component is recognized in other comprehensive income (loss), unless the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security prior to its anticipated recovery. During 2017, the Company determined that a certain unrealized loss was other than temporarily impaired and recorded an impairment of $0.4 million related to credit-related loss in investment income, net in the Company’s condensed consolidated statements of income.
Restricted Investments
The Company’s restricted investments are related to the Company’s deferred compensation plan. As part of the Pension Plan termination in 2014, the Company directed the Pension Plan to transfer the Pension Plan’s surplus assets into a suspense account in the Company’s 401(k) Plan. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated balance sheets until they are allocated to current and future 401(k) plan participants for up to the next four years. See Note 14. Employee Benefit Plan.
Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1. Quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, such as internally-developed valuation models which require the reporting entity to develop its own assumptions.

11


Long-Lived Assets
Long-lived assets include the Company’s investments in operating and development property and property and equipment. The Company reviews its long-lived assets for impairment quarterly to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As part of the Company’s review for impairment of its long-lived assets, the Company reviews the long-lived asset’s carrying value, current period actual financial results as compared to prior period and forecast contained in the Company’s business plan and any other events or changes in circumstances to identify whether an indicator of potential impairment may exist. Some of the events or changes in circumstances that are considered by the Company as indicators of potential impairment include:
a prolonged decrease in the fair value or demand for the Company’s properties;
a change in the expected use or development plans for the Company’s properties;
a material change in strategy that would affect the fair value of the Company’s properties;
continuing operating or cash flow loss for an operating property;
an accumulation of costs in excess of the projected costs for a development property; and
any other adverse change that may affect the fair value of the property.
The Company uses varying methods to determine if an impairment exists, such as (i) considering indicators of potential impairment, (ii) analyzing expected future cash flows and comparing the expected future undiscounted cash flows of the property to its carrying value or (iii) determining market resale values.
During the three months ended March 31, 2017 and March 31, 2016, there were no impairments of long-lived assets.
Comprehensive Income
The Company’s comprehensive income includes unrealized gains and temporary losses on available-for-sale securities and restricted investments.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax impact of differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period in which the new rate is enacted. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than fifty percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits, if any, in interest expense and penalties in other, net.
Concentration of Risks and Uncertainties
The Company’s real estate investments are concentrated in Northwest Florida in a number of specific development projects. Uncertain economic conditions could have an adverse impact on the Company’s real estate values and could cause the Company to sell assets at depressed values in order to pay ongoing obligations.
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments, other receivables, investments held by special purpose entity or entities (“SPE”) and investments in retained interests. The Company deposits and invests cash with regional financial institutions, which balances as of March 31, 2017 exceed the amount of F.D.I.C. insurance provided on such deposits. In addition, as of March 31, 2017, the Company had $132.8 million invested in eight issuers of corporate debt securities that are non-investment grade, $41.0 million invested in four issuers of preferred stock that are non-investment grade and $1.8 million invested in one issuer of common stock. In addition, as of March 31, 2017, the Company had investments in short term commercial paper from nine issuers of $157.4 million and short term U.S. Treasury securities of $25.0 million.

12


Earnings Per Share
Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period, including all potentially dilutive shares issuable under outstanding stock options. Stock options are not considered in any diluted earnings per share calculation when the Company has a loss from operations as their effect would be anti-dilutive. Non-vested restricted stock is included in outstanding shares at the time of grant. For the three months ended March 31, 2017 and 2016 basic average shares outstanding were the same as diluted shares outstanding. There were no outstanding common stock equivalents as of March 31, 2017 or December 31, 2016.
Revenue and Revenue Recognition
Revenue consists primarily of real estate sales, resorts and leisure operations, leasing operations, and timber sales. Taxes collected from customers and remitted to governmental authorities (e.g. sales tax) are excluded from revenue and costs and expenses.
Real Estate Revenue
Revenue from real estate sales, including sales of homesites, commercial properties and rural or timberland, are recognized when a sale is closed and title transfers to the buyer, the buyer’s initial investment is adequate, any receivables are probable of collection, the usual risks and rewards of ownership have been transferred to the buyer, and the Company does not have significant continuing involvement with the real estate sold.
The buyer’s minimum initial investment requirement is typically the receipt of cash for approximately twenty to twenty-five percent of the sales value depending on the type and use of the property purchased. If the minimum initial investment requirement is not met, revenue may be deferred depending on the circumstances. In addition, revenue is not recognized until title transfers and any consideration received is deferred until title is transferred.
As part of the purchase price consideration for a homesite from sales to homebuilders, the Company may receive a percentage of the sale price of the completed home if the home price or gross profit of the home exceeds a negotiated threshold. These lot residuals are recognized in revenue when consideration is received by the Company in periods subsequent to the initial recognition of revenue for the sale of the homesite.
Resorts and Leisure Revenue
Resorts and leisure revenue includes service and rental fees associated with the WaterColor Inn and the Company’s vacation rental programs in WaterColor, WaterSound Beach and surrounding communities. In addition, other resorts and leisure revenue include club membership sales, daily play at golf courses, merchandise sales, food and beverage sales, marina boat slip rentals and fuel sales, and management services of The Pearl Hotel. The revenue is generally recognized as services are provided. Vacation rental revenue includes the entire rental fee collected from the customer, including the homeowner’s portion. A percentage of the fee is remitted to the homeowner and presented in cost of resorts and leisure revenue. The Company is the principal in its vacation rental business and has determined that it is the primary obligor to the guest, as it has sole discretion in establishing prices and provides the majority of the services to the guest. Club membership revenue is recognized when billed to the member and the non-refundable initiation fee is deferred and recognized ratably over the estimated membership period. Revenue generated from our management services of The Pearl Hotel includes a management fee, fifty percent of certain resort fees and a percentage of The Pearl Hotel’s gross operating profit.
Leasing Revenue
Leasing revenue consists of long term rental revenue from retail operations, commercial operations, cell towers and other assets, which is recognized as earned, using the straight-line method over the life of the lease. Leasing revenue includes properties located in the Company’s consolidated Pier Park North JV and Windmark JV, as well as the Company’s industrial park, VentureCrossings, and other properties. Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments change during the lease term. Accordingly, a receivable or liability is recorded representing the difference between the straight-line rent and the rent that is contractually due from the tenant.
Forestry Product Revenue
Revenue from the sale of the Company’s forestry products is primarily derived from pay-as-cut sales contracts or timber bid sales, whereby risk of loss and title to the trees transfer to the buyer when cut by the buyer. Under a pay-as-cut sales contract, the buyer or some other third party is responsible for all logging and hauling costs, if any.

13


Timber bid sales are agreements in which the buyer agrees to purchase and harvest specified timber (i.e. mature pulpwood and/or sawlogs) on a tract of land over the term of the contract. Unlike a pay-as-cut sales contract, risk of loss and title to the trees transfer to the buyer when the contract is signed. The buyer pays the full purchase price when the contract is signed and the Company does not have any additional performance obligations. Under a timber bid sale, the buyer or some other third party is responsible for all logging and hauling costs, if any, and the timing of such activity. Revenue from a timber bid sale is recognized when the contract is signed since the earnings process is complete.
Recently Adopted Accounting Pronouncements
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09 that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted the new guidance as of January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Consolidation
In October 2016, the FASB issued ASU 2016-17 that amends the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The Company adopted the new guidance as of January 1, 2017. The adoption of this guidance had no impact on the Company’s financial condition, results of operations or cash flows.
Recently Issued Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09 that establishes the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08 that further clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10 that clarifies guidance on identifying performance obligations and to improve the operability and understandability of licensing implementation guidance. In May 2016, the FASB issued ASU 2016-11 that rescinds SEC guidance pursuant to announcements at the March 3, 2016 Emerging Issues Task Force Meeting. In May 2016, the FASB issued ASU 2016-12 that provides narrow-scope improvements and practical expedients to Revenue from Contracts with Customers. In December 2016, the FASB issued ASU 2016-20 that includes technical corrections and improvements to ASU 2014-09. The new guidance will be effective for annual and interim periods beginning after December 15, 2017. The Company plans to adopt this guidance effective January 1, 2018 and has evaluated the impact of the adoption of this guidance and as a result of this evaluation does not expect it will have a material impact on its financial condition, results of operations and cash flows.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01 that amends existing guidance to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance will require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in results of operations. Additionally, certain disclosure requirements and other aspects of accounting for financial instruments will change as a result of the new guidance, which is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact that the adoption of the new guidance will have on its financial condition, results of operations and cash flows.
Leases
In February 2016, the FASB issued ASU 2016-02 that amends the existing accounting standards for lease accounting, including requiring lessees to recognize both finance and operating leases with terms of more than 12 months on the balance sheet. The accounting applied by a lessor is largely unchanged from existing guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The new guidance will be effective for annual and interim periods beginning after December 15, 2018 and requires a modified retrospective adoption. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and cash flows.

14


Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13 that requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected and requires that credit losses from available-for-sale debt securities be presented as an allowance for credit loss. This new guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15 that amends the classification of certain cash receipts and cash payments, to reduce the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, it is not expected to have a material impact on the Company’s financial condition, results of operations and cash flows.
Income Taxes
In October 2016, the FASB issued ASU 2016-16 that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amendment eliminates the exception for an intra-entity transfer of an asset other than inventory. The new standard is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted in the first interim period and the amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact that the adoption of the new guidance will have on its financial condition, results of operations and cash flows.
Business Combinations
In January 2017, the FASB issued ASU 2017-01 that clarifies the definition of a business for entities that must determine whether a business has been acquired or sold. The amendment is intended to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company has evaluated the impact of the adoption of this guidance and as a result of this evaluation does not expect it will have a material impact on its financial condition, results of operations and cash flows.





15



3. Investment in Real Estate
Real estate by property type and segment includes the following:
 
March 31,
2017
 
December 31,
2016
Development property:
 
 
 
Residential real estate
$
103,919

 
$
101,292

Commercial real estate
56,118

 
56,073

Resorts and leisure
855

 
263

Leasing operations
6,916

 
2,291

Forestry
2,491

 
2,492

Corporate
2,470

 
2,438

Total development property
172,769

 
164,849

 
 
 
 
Operating property:
 
 
 
Residential real estate
8,138

 
8,097

Resorts and leisure
105,818

 
107,029

Leasing operations
83,891

 
82,336

Forestry
20,072

 
19,608

Other
50

 
50

Total operating property
217,969

 
217,120

Less: Accumulated depreciation
68,641

 
67,349

Total operating property, net
149,328

 
149,771

Investment in real estate, net
$
322,097

 
$
314,620


Development property consists of land the Company is developing or intends to develop for sale or future operations. Residential real estate includes primary residential and resort residential communities, direct costs associated with the land, development and construction of these communities, including common development costs such as roads, utilities and amenities and indirect costs such as development overhead, capitalized interest, marketing and project administration. Commercial real estate consists of land for commercial and industrial uses, including land holdings near the Northwest Florida Beaches International Airport and Port of Port St. Joe, and includes direct costs, such as roads and utilities, associated with the land and development costs for the Company’s properties. Resorts and leisure development property currently consists of the improvement and expansion of existing beach club property. Leasing development property primarily includes the land development and construction of buildings for lease in VentureCrossings and a Pier Park outparcel, as well as the consolidated Pier Park North JV. Development property in the leasing operations and resorts and leisure segments will be reclassified as operating property as it is placed into service.    
Operating property includes property that the Company uses for operations and activities. Residential real estate operating property consists primarily of residential utility assets. The resorts and leisure operating property includes the WaterColor Inn, vacation rental properties, golf courses, a beach club and marinas. Leasing operating property includes property developed or purchased by the Company and used for retail and commercial rental purposes, including property in the Pier Park North JV. Forestry operating property includes the Company’s timberlands. Operating property may be sold in the future as part of the Company’s principal real estate business.
The Company capitalized indirect development costs during the three months ended March 31, 2017 of less than $0.1 million and had no capitalized indirect development costs during the three months ended March 31, 2016.

16



4. Investments
At March 31, 2017, investments and restricted investments classified as available-for-sale securities were as follows:
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Investments:
 
 
 
 
 
 
 
Corporate debt securities
$
128,200

 
$
6,005

 
$
1,420

 
$
132,785

Preferred stock
40,525

 
876

 
335

 
41,066

Common stock
1,662

 
110

 

 
1,772

 
170,387


6,991


1,755


175,623

Restricted investments:
 
 
 
 
 
 
 
Short-term bond
4,235

 
4

 

 
4,239

Money market fund
209

 

 

 
209

 
4,444

 
4

 

 
4,448

 
$
174,831


$
6,995


$
1,755


$
180,071

At December 31, 2016, investments and restricted investments classified as available-for-sale securities were as follows:
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Investments:
 
 
 
 
 
 
 
Corporate debt securities
$
135,590

 
$
5,311

 
$
1,769

 
$
139,132

Preferred stock
36,048

 
656

 
111

 
36,593

 
171,638


5,967


1,880


175,725

Restricted investments:
 
 
 
 
 
 
 
Short-term bond
4,232

 

 
6

 
4,226

Money market fund
1,410

 

 

 
1,410

 
5,642

 

 
6

 
5,636

 
$
177,280


$
5,967


$
1,886


$
181,361

Mr. Bruce R. Berkowitz is the Chairman of the Company’s Board of Directors. He is the Manager of, and controls entities that own and control, Fairholme Holdings, LLC, which wholly owns Fairholme Capital Management, L.L.C. (“FCM”, a registered investment advisor registered with the Securities and Exchange Commission) and the Fairholme Trust Company, L.L.C. (“FTC”, a non-depository trust company regulated by the Florida Office of Financial Regulation). Mr. Berkowitz is the Chief Investment Officer of FCM, and the Chief Executive Officer and a director of FTC. Since April 2013, FCM has provided investment advisory services to the Company directly, or more recently, as the sub-advisor to FTC. Neither FCM nor FTC receives any compensation for services as the Company’s investment advisor. As of March 31, 2017, clients of FCM and FTC beneficially owned approximately 33.75% of the Company’s common stock. FCM and its client the Fairholme Fund, a Series of the Fairholme Funds, Inc., are affiliates of the Company.
Both Mr. Cesar Alvarez and Mr. Howard Frank are members of the Company’s Board of Directors and also serve as directors of the Fairholme Funds, Inc. Mr. Alvarez is also a director of FTC.

17


Pursuant to the terms of the Investment Management Agreement, as amended (the “Agreement”), FTC agreed to supervise and direct the investments of investment accounts established by the Company in accordance with the investment guidelines and restrictions approved by the Investment Committee of the Company’s Board of Directors. The investment guidelines are set forth in the Agreement and require that, as of the date of any investment: (i) no more than 15% of the investment account may be invested in securities of any one issuer (excluding the U.S. Government), (ii) any investment in any one issuer (excluding the U.S. Government) that exceeds 10%, but not 15%, requires the consent of at least two members of the Investment Committee, (iii) 25% of the investment account must be held in cash or cash equivalents, (iv) the investment account is permitted to be invested in common equity securities; however, common stock investments shall be limited to exchange-traded common equities, shall not exceed 5% ownership of a single issuer and, cumulatively, the common stock held in the Company’s investment portfolio shall not exceed $100.0 million market value, and (v) the aggregate market value of investments in common stock, preferred stock or other equity investments cannot exceed 25% of the market value of the Company’s investment portfolio at the time of purchase.
As of March 31, 2017, the investment account included $132.8 million of corporate debt securities, $41.0 million of preferred stock and $1.8 million of common stock investments. Of the $132.8 million corporate debt securities and $41.0 million preferred stock $8.5 million and $0.1 million, respectively, were issued by Sears Holdings Corp or affiliates, of which Messrs. Berkowitz and Alvarez are on the board of directors, and may be deemed an affiliate of FCM, or the Company.
During the three months ended March 31, 2017, realized gain from the sale of available for-sale securities were $3.1 million and proceeds from the sale of available-for-sale securities were $57.1 million.
During the three months ended March 31, 2016, there was no realized gain or loss from the sale or maturity of available for-sale securities and proceeds from the sale of available-for-sale securities were $8.5 million.
The following table provides the debt securities, preferred stock and restricted investments unrealized loss position and related fair values:    
 
As of March 31, 2017
 
As of December 31, 2016
 
Less Than 12 Months
 
12 Months or Greater
 
Less Than 12 Months
 
12 Months or Greater
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
$
45,034

 
$
480

 
$
8,462

 
$
940

 
$
64,516

 
$
1,410

 
$
6,971

 
$
359

Preferred stock
7,447

 
272

 
132

 
63

 

 

 
153

 
111

Restricted investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term bond

 

 

 

 
4,226

 
6

 

 

 
$
52,481

 
$
752

 
$
8,594

 
$
1,003

 
$
68,742

 
$
1,416

 
$
7,124

 
$
470


As of March 31, 2017, the Company had an unrealized loss of $1.8 million related to corporate debt securities and preferred stock. The Company had an unrealized loss of $1.9 million as of December 31, 2016 related to corporate debt securities, preferred stock and restricted investments. As of March 31, 2017 and December 31, 2016, the Company did not intend to sell the investments with a material unrealized loss and it is more likely than not that the Company will not be required to sell any of these securities prior to their anticipated recovery, which could be maturity. As of March 31, 2017, the Company determined that an unrealized loss related to its corporate debt securities and preferred stock was other-than-temporarily impaired and recorded an impairment of $0.4 million for credit-related loss in investment income, net in the Company's condensed consolidated statements of income.

18


The net carrying value and estimated fair value of investments and restricted investments classified as available-for-sale at March 31, 2017, by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations.
 
Amortized Cost
 
Fair Value
Due in one year or less
$
3,932

 
$
3,470

Due after one year through five years
124,177

 
129,266

Due after ten years through fifteen years
91

 
49

 
128,200

 
132,785

Preferred stock
40,525

 
41,066

Common stock
1,662

 
1,772

Restricted investments
4,444

 
4,448

 
$
174,831

 
$
180,071

5. Financial Instruments and Fair Value Measurements
Fair Value Measurements
The financial instruments measured at fair value on a recurring basis at March 31, 2017 were as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
12,524

 
$

 
$

 
$
12,524

Commercial paper
157,370

 

 

 
157,370

U.S. Treasury securities
24,992

 

 

 
24,992

 
194,886

 

 

 
194,886

Investments:
 
 
 
 
 
 
 
Corporate debt securities
44,372

 
88,413

 

 
132,785

Preferred stock
11,011

 
30,055

 

 
41,066

Common stock
1,772

 

 

 
1,772

 
57,155

 
118,468

 

 
175,623

Restricted investments:
 
 
 
 
 
 
 
Short-term bond
4,239

 

 

 
4,239

Money market fund
209

 

 

 
209

 
4,448

 

 

 
4,448

 
$
256,489

 
$
118,468

 
$

 
$
374,957


19


The financial instruments measured at fair value on a recurring basis at December 31, 2016 were as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
86,236

 
$

 
$

 
$
86,236

Commercial paper
129,671

 

 

 
129,671

 
215,907

 

 

 
215,907

Investments:
 
 
 
 
 
 
 
Corporate debt securities
57,788

 
81,344

 

 
139,132

Preferred stock
19,177

 
17,416

 

 
36,593

 
76,965

 
98,760

 

 
175,725

Restricted investments:
 
 
 
 
 
 


Short-term bond
4,226

 

 

 
4,226

Money market fund
1,410

 

 

 
1,410

 
5,636

 

 

 
5,636

 
$
298,508

 
$
98,760

 
$

 
$
397,268

Money market funds, commercial paper, U.S. Treasury securities, certain corporate debt securities, certain preferred stock, common stock and short-term bonds are measured based on quoted market prices in an active market and categorized within level 1 of the fair value hierarchy. Money market funds, commercial paper and short term U.S. Treasury securities with a maturity date of ninety days or less from the date of purchase are classified as cash equivalents in the Company’s condensed consolidated balance sheets.
Certain corporate debt securities and certain preferred stock are not traded on a nationally recognized exchange but rather are traded in the U.S. over-the-counter market where there is less trading activity and these are measured primarily using pricing data from external pricing services that report prices observed for recently executed market transactions. For these reasons, the Company has determined that certain corporate debt securities and certain preferred stock are categorized as level 2 financial instruments since their fair values were determined from market inputs in an inactive market.
Restricted investments include certain of the surplus assets that were transferred from the Company’s Pension Plan to a suspense account in the Company’s 401(k) Plan in December 2014. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated financial statements until they are allocated to participants. As of March 31, 2017 and December 31, 2016, the assets held in the suspense account were invested in the Vanguard Money Market Fund, which invests in short-term, high quality securities and seeks to provide current income and preserve shareholders’ principal investment and a Vanguard Short-Term Bond Fund, which invests in money market instruments and short-term high quality bonds, including asset-backed, government, and investment grade corporate securities with an expected maturity of 0-3 years. The Vanguard Money Market Fund and Vanguard Short-Term Bond Fund are measured based on quoted market prices in an active market and categorized within level 1 of the fair value hierarchy. The Company’s Retirement Plan Investment Committee is responsible for investing decisions and allocation decisions of the suspense account. Refer to Note 14. Employee Benefit Plan.
Fair Value of Financial Instruments
The Company uses the following methods and assumptions in estimating fair value for financial instruments:
The fair value of the Company’s retained interest investments is based on the present value of the expected future cash flows at the effective yield.
The fair value of the investments held by special purpose entities - time deposit is based on the present value of future cash flows at the current market rate.
The fair value of the investments held by special purpose entities - U.S. Treasury securities are measured based on quoted market prices in an active market.
The fair value of the senior notes held by special purpose entity is based on the present value of future cash flows at the current market rate.

20


The carrying amount and fair value of the Company’s financial instruments were as follows:
 
March 31, 2017
 
December 31, 2016
 
Carrying 
value
 
Fair value
 
Level
 
Carrying 
value
 
Fair value
 
Level
Assets
 
 
 
 
 
 
 
 
 
 
 
Retained interest investments
$
10,757

 
$
13,760

 
3
 
$
10,635

 
$
13,669

 
3
Investments held by special purpose entities:
 
 
 
 
 
 
 
 
 
 
 
Time deposit
$
200,000

 
$
200,000

 
3
 
$
200,000

 
$
200,000

 
3
U.S. Treasury securities and cash equivalents
$
8,219

 
$
8,055

 
1
 
$
8,590

 
$
8,398

 
1
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Senior notes held by special purpose entity
$
176,366

 
$
198,690

 
3
 
$
176,310

 
$
199,691

 
3
Retained Interest Investments
The Company has a beneficial interest in certain bankruptcy-remote qualified SPEs used in the installment sale monetization of certain sales of timberlands in 2007 and 2008. The SPEs’ assets are not available to satisfy the Company’s liabilities or obligations and the liabilities of the SPEs are not the Company’s liabilities or obligations. Therefore, the SPEs’ assets and liabilities are not consolidated in the Company’s condensed consolidated financial statements as of March 31, 2017 and December 31, 2016. The Company’s continuing involvement with the SPEs is the receipt of the net interest payments and the remaining principal of approximately $16.9 million to be received at the end of the installment notes’ fifteen year maturity period, in 2022 through 2024. The Company has a beneficial or retained interest investment related to these SPEs of $10.8 million and $10.6 million as of March 31, 2017 and December 31, 2016, respectively, recorded in other assets on the Company’s condensed consolidated balance sheets.
Investments and Senior Notes Held by Special Purpose Entities
In connection with a real estate sale in 2014, the Company received consideration including a $200.0 million fifteen-year installment note (the “Timber Note”) issued by Panama City Timber Finance Company, LLC (“PCTFC”). The Company contributed the Timber Note and assigned its rights as a beneficiary under a letter of credit to Northwest Florida Timber Finance, LLC (“NFTF”). NFTF monetized the Timber Note by issuing $180.0 million aggregate principal amount of its 4.8% Senior Secured Notes due in 2029 (the “Senior Notes”) at an issue price of 98.5% of face value to third party investors. The investments held by PCTFC as of March 31, 2017, consist of a $200.0 million time deposit that, subsequent to April 2, 2014, pays interest at 4.0% and matures in March 2029, U.S. Treasuries of $7.8 million and cash of $0.4 million. The Senior Notes held by NFTF as of March 31, 2017 consist of $176.4 million, net of the $3.6 million discount and debt issuance costs. PCTFC and NFTF are VIEs, which the Company consolidates as the primary beneficiary of each entity.
6. Claim Settlement Receivable
On March 24, 2016, the Company entered into a full and final release agreement with BP p.l.c. and various related entities pursuant to which the Company, on its own behalf and on behalf of certain wholly owned subsidiaries, released any and all claims related to the Deepwater Horizon oil spill which occurred on April 20, 2010.  In exchange for this release, the Company will receive $13.2 million, of which $8.2 million remains to be received as of March 31, 2017, from BP Exploration & Production Inc., a large portion of which will reimburse the Company for expenses incurred.  On October 3, 2016, the Company received a $5.0 million payment. The remaining settlement amount will be made in payments of $2.7 million due in October of 2017, 2018 and 2019.  The Company also received a guaranty of payments from BP North America Corporation Inc. As of March 24, 2016, the Company recorded the claim settlement receivable using an imputed interest rate of 3.0%, based on its best estimate of the prevailing market rates for the source of credit, resulting in an initial present value of $12.5 million and a discount of $0.7 million. $12.5 million of the claim settlement was recognized as other income in the Company’s condensed consolidated statements of income for the three months ended March 31, 2016. The discount is being accreted over the term of the receivable using the effective interest method. Interest income for the three months ended March 31, 2017 and the period from March 24, 2016 to March 31, 2016 was less than $0.1 million.

21


7. Other Assets
    
Other assets consist of the following:
 
March 31,
2017
 
December 31,
2016
Retained interest investments
$
10,757

 
$
10,635

Accounts receivable, net
3,858

 
4,625

Notes receivable, net
1,886

 
1,926

Prepaid expenses
6,951

 
5,685

Straight line rent
3,806

 
3,812

Other assets
8,280

 
8,789

Accrued interest receivable for Senior Notes held by SPE
935

 
2,938

Total other assets
$
36,473

 
$
38,410

Notes receivable, net consists of the following: 
 
March 31,
2017
 
December 31,
2016
Pier Park Community Development District notes, non-interest bearing, due September 2022
$
1,684

 
$
1,684

Interest bearing homebuilder notes, secured by the real estate sold — 4.0% interest rate, due December 2016, paid January 2017

 
33

Various mortgage notes, secured by certain real estate, bearing interest at various rates
202

 
209

Total notes receivable, net
$
1,886

 
$
1,926

The Company evaluates the carrying value of the notes receivable and the need for an allowance for doubtful notes receivable at each reporting date. As of March 31, 2017 and December 31, 2016, there was no allowance for doubtful notes receivable.
8. Real Estate Joint Ventures
The Company enters into real estate joint ventures, from time to time, for the purpose of developing real estate in which the Company may or may not have a controlling financial interest. GAAP requires consolidation of VIEs in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE loss and right to receive benefits that are significant to the VIE. The Company examines specific criteria and uses judgment when determining whether the Company is the primary beneficiary and must consolidate a VIE. The Company continues to assess whether it is the primary beneficiary on an ongoing basis.
Consolidated Real Estate Joint Ventures
In December 2016, the Company entered into a joint venture agreement with Windmark JV pursuant to which the Company transferred to Windmark JV all of its interest in the Windmark Beach project. As of March 31, 2017 and December 31, 2016, the Company owned a 49.0% equity interest in the consolidated joint venture. A wholly owned subsidiary of the Company is the managing member of Windmark JV and runs its day-to-day operations. Windmark JV owns and its members make major decisions related to the management and development of the Windmark Beach project. For financial accounting purposes, the Company is deemed to control Windmark JV, which is consolidated within the financial results of the Company as of March 31, 2017 and December 31, 2016.
During 2012, the Company entered into a joint venture agreement with a partner to develop a retail center at Pier Park North. As of March 31, 2017 and December 31, 2016, the Company owned a 60.0% equity interest in the consolidated joint venture. The Company’s partner is responsible for the day-to-day activities of the joint venture. However, the Company has significant involvement in the design of the development and approves all major decisions, including project development, annual budgets and financing. The Company determined the joint venture is a VIE and that the Company is the VIE’s primary beneficiary as of March 31, 2017 and December 31, 2016.

22


In addition, the Company is the primary beneficiary of Artisan Park, L.L.C, another real estate joint venture that is consolidated within the financial results of the Company. The Company is entitled to 74% of the profit or loss of this VIE and is responsible for the day-to-day activities of the joint venture.
Unconsolidated Real Estate VIE
As of March 31, 2017 and December 31, 2016, the Company was a partner in ALP Liquidating Trust (“ALP”) that is accounted for using the equity method. The joint venture was entered into to develop and sell certain mixed use residential and commercial projects. The Company has evaluated the VIE consolidation requirements with respect to this joint venture and has determined that the Company is not the primary beneficiary, since the Company does not have the power to direct the activities that most significantly impact the economic performance of the VIE. The Company is not required to contribute additional funds to ALP.
Summarized financial information for ALP is as follows: 
 
March 31,
2017
 
December 31,
2016
BALANCE SHEETS:
 
 
 
Cash and cash equivalents
$
11,412

 
$
11,948

Other assets
61

 
59

Total assets
$
11,473

 
$
12,007

 
 
 
 
Accounts payable and other liabilities
$
592

 
$
955

Equity(1)
10,881

 
11,052

Total liabilities and equity
$
11,473

 
$
12,007

 
(1) In 2008 the Company wrote-off its investment in ALP as a result of ALP reserving its assets to satisfy potential claims and obligations in accordance with its publicly reported liquidation basis of accounting. Subsequently, ALP changed its method of accounting to a going concern basis and reinstated its equity and stated it would report certain expenses as they are incurred. The Company has not recorded any additional equity income as a result of ALP’s change in accounting.
For the three months ended March 31, 2017 and 2016, ALP reported net loss of $0.2 million and net income of less than $0.1 million, respectively.
9. Debt
Debt consists of the following at March 31, 2017:

Principal

Unamortized Discount and Debt Issuance Costs

Net
Refinanced loan in the Pier Park North JV, due November 2025, bearing interest at 4.1%
$
47,926


$
584


$
47,342

Community Development District debt, secured by certain real estate or other collateral, due May 2031 - May 2039, bearing interest at 3.4% to 7.0% at March 31, 2017
7,695




7,695

Construction loan, due March 2027, bearing interest at LIBOR plus 1.7% (effective rate of 2.7% at March 31, 2017)
508

 
20

 
488

Total debt
$
56,129


$
604


$
55,525


23


Debt consists of the following at December 31, 2016:
 
Principal
 
Unamortized Discount and Debt Issuance Costs
 
Net
Refinanced loan in the Pier Park North JV, due November 2025, bearing interest at 4.1%
$
48,132

 
$
613

 
$
47,519

Community Development District debt, secured by certain real estate or other collateral, due May 2031 - May 2039, bearing interest at 3.4% to 7.0% at December 31, 2016
7,521

 

 
7,521

Total debt
$
55,653

 
$
613

 
$
55,040

In October 2015, the Pier Park North JV refinanced a construction loan by entering into a $48.2 million loan (the “Refinanced Loan”). As of March 31, 2017 and December 31, 2016, $47.9 million and $48.1 million, respectively, was outstanding on the Refinanced Loan. The Refinanced Loan accrues interest at a rate of 4.1% per annum and matures in November 2025. The Refinanced Loan was secured by a first lien on, and security interest in, a majority of the Pier Park North JV’s property and a remaining $1.3 million short term letter of credit. In connection with the Refinanced Loan, the Company entered into a limited guarantee in favor of the lender, based on its percentage ownership of the joint venture. In addition, the guarantee can become full recourse in the case of any fraud or intentional misrepresentation by the Pier Park North JV; any voluntary transfer or encumbrance of the property in violation of the due-on-sale clause in the security instrument; upon commencement of voluntary or insolvency proceedings and upon breach of covenants in the security instrument.
Community Development District (“CDD”) bonds financed the construction of infrastructure improvements at several of the Company’s projects. The principal and interest payments on the bonds are paid by assessments on the properties benefited by the improvements financed by the bonds. The Company has recorded a liability for CDD assessments that are associated with platted property, which is the point at which the assessments become fixed or determinable. Additionally, the Company has recorded a liability for the balance of the CDD assessment that is associated with unplatted property if it is probable and reasonably estimable that the Company will ultimately be responsible for repaying. The Company has recorded debt of $7.7 million and $7.5 million related to CDD assessments as of March 31, 2017 and December 31, 2016, respectively. The Company’s total outstanding CDD assessments were $22.6 million as of March 31, 2017 and December 31, 2016. The Company pays interest on the total outstanding CDD assessments.
In March 2017, a wholly owned subsidiary of the Company entered into a $1.6 million construction loan to finance the construction of a two retail tenant commercial leasing property located in Panama City Beach, Florida (the “Construction Loan”). The Construction Loan bears interest at LIBOR plus 1.70% and matures in March 2027. The Construction Loan provides for interest only payments during the first twelve months and principal and interest payments thereafter with a final balloon payment at maturity. The Construction Loan is secured by the real property, assignment of rents and the security interest in the rents and personal property.  In connection with the Construction Loan, the Company executed a guarantee in favor of the lender to guarantee the payment and performance of the borrower under the Construction Loan until the project meets certain cash flow stabilization requirements.  As of March 31, 2017, $0.5 million was outstanding under the Construction Loan.
The aggregate maturities of debt subsequent to March 31, 2017 are:
 
March 31,
2017
2017
$
784

2018
1,047

2019
1,094

2020
1,139

2021
1,186

Thereafter
50,879

 
$
56,129


24


10. Other Liabilities
Other liabilities consist of the following:
 
March 31,
2017
 
December 31,
2016
Accounts payable
$
6,164

 
$
4,376

Accrued compensation
1,269

 
2,655

Deferred revenue
16,261

 
15,289

Membership deposits and initiation fees
7,852

 
7,384

Advance deposits
7,872

 
3,419

Other accrued liabilities
7,585

 
4,977

Accrued interest expense for Senior Notes held by SPE
712

 
2,850

Total other liabilities
$
47,715

 
$
40,950

Deferred revenue at March 31, 2017 and December 31, 2016 includes $12.5 million related to a 2006 agreement pursuant to which the Company agreed to sell land to the Florida Department of Transportation. Revenue is recognized when title to a specific parcel is legally transferred.
Membership deposits and initiation fees consist of deposits and fees received for club memberships. Initiation fees are recognized as revenue over the estimated average duration of membership, which is evaluated periodically.
Advance deposits consist of deposits received on hotel rooms and vacation rentals. Advance deposits are recorded as other liabilities in the condensed consolidated balance sheets without regard to whether they are refundable and are recognized as income at the time the service is provided for the related deposit.
Other accrued liabilities include $1.2 million of accrued property taxes as of March 31, 2017, which are generally paid annually in November. As of December 31, 2016 the Company had no accrued property taxes.
11. Income Taxes
Income tax expense differed from the amount computed by applying the federal statutory rate of 35% to pre-tax income or loss as a result of the following: 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Tax at the federal statutory rate
 
$
2,326

 
$
4,168

State income taxes (net of federal benefit)
 
233

 
417

Tax effect of timber at the federal statutory rate of 23.8%
 
(114
)
 
(206
)
Decrease in valuation allowance
 
(280
)
 
(354
)
Other
 
114

 
(781
)
Total income tax expense
 
$
2,279

 
$
3,244

The Company had no federal net operating loss carryforwards as of March 31, 2017 and December 31, 2016. The Company had a federal AMT credit carryforward of $12.7 million and $13.5 million as of March 31, 2017 and December 31, 2016, respectively. The AMT credit carryforward is available indefinitely to offset future federal income tax liabilities. As of March 31, 2017 and December 31, 2016, the Company had state net operating loss carryforwards of $421.0 million and $427.3 million, respectively. The state net operating loss is available to offset future taxable income through 2036.
In general, a valuation allowance is recorded if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in the appropriate tax jurisdictions to obtain a benefit from the reversal of deductible temporary differences and from loss carryforwards.

25


As of December 31, 2016, based on the timing of reversal of future taxable amounts and the Company’s history of losses, management did not believe it met the requirements to realize the benefits of certain of its deferred tax assets; therefore, the Company had maintained a valuation allowance of $5.1 million. During the three months ended March 31, 2017, the Company reversed $0.3 million of the valuation allowance that was recorded as of December 31, 2016. As of March 31, 2017, management believes it has not met the requirements to realize the benefits for a portion of its deferred tax assets for state net operating loss carryforwards; therefore, the Company has maintained a valuation allowance of $4.8 million for these deferred tax assets.
The Company had approximately $1.7 million of total unrecognized tax benefits as of each March 31, 2017 and December 31, 2016. Of this total, there are no amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. There were no decreases or increases related to prior year or current year tax positions.
In December 2016, the Company entered into a joint venture agreement with Windmark JV, pursuant to which the Company sold to Windmark JV all of its interest in the Windmark Beach project. The sale of the Windmark Beach project created a net taxable loss for the Company in 2016. The loss will be carried back to 2014 for a federal income tax refund of $22.3 million.
12. Accumulated Other Comprehensive Income
Following is a summary of the changes in the balances of accumulated other comprehensive income, which is presented net of tax, as of March 31, 2017:
 
Unrealized Gain and (Loss) on Available-for-Sale Securities
Accumulated other comprehensive income at December 31, 2016
$
2,507

Other comprehensive income before reclassifications
2,405

Amounts reclassified from accumulated other comprehensive income
(1,693
)
Other comprehensive income
712

Accumulated other comprehensive income at March 31, 2017
$
3,219

Following is a summary of the tax effects allocated to other comprehensive income (loss) for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31, 2017
 
Before-Tax Amount
 
Tax (Expense) or Benefit
 
Net-of-Tax Amount
Unrealized gain on debt securities:
 
 
 
 
 
Unrealized gain on available-for-sale investments
$
3,905

 
$
(1,503
)
 
$
2,402

Unrealized gain on restricted investments
4

 
(1
)
 
3

Reclassification adjustment for gain included in earnings
(3,122
)
 
1,203

 
(1,919
)
Reclassification adjustment for other-than-temporary impairment loss included in earnings
366

 
(140
)
 
226

Net unrealized gain
1,153

 
(441
)
 
712

Other comprehensive income
$
1,153

 
$
(441
)
 
$
712


 
Three Months Ended March 31, 2016
 
Before-Tax Amount
 
Tax Benefit
 
Net-of-Tax Amount
Unrealized loss on available-for-sale investments
$
(88
)
 
$
34

 
$
(54
)

26


13. Stockholders’ Equity
Stock Repurchase Program
During the three months ended March 31, 2017 and 2016, the Company repurchased 2,044,981 and 995,650 shares, respectively, of its common stock at an average purchase price of $16.70 and $14.88, per share, respectively, for an aggregate purchase price of $34.2 million and $14.8 million, respectively, pursuant to its stock repurchase program (the “Stock Repurchase Program”). As of March 31, 2017, the Company had a total authority of $156.8 million available for purchase of shares of its common stock pursuant to its Stock Repurchase Program. The Company may repurchase its common stock in open market purchases from time to time, in privately negotiated transactions or otherwise, pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The timing and amount of any additional shares to be repurchased will depend upon a variety of factors, including market and business conditions and other factors. Repurchases may be commenced or suspended at any time or from time to time without prior notice. The Stock Repurchase Program will continue until otherwise modified or terminated by the Company’s Board of Directors at any time in its sole discretion. During the period from April 1, 2017 through May 1, 2017, the Company purchased an additional 327,963 shares for an aggregate purchase price of $5.6 million.
Issuance of Common Stock for Director’s Fees
On May 17, 2016, the Board approved the issuance of 8,919 restricted stock awards to three members of the Board of Directors as part of their compensation package and pursuant to the 2015 Performance and Equity Incentive Plan.  These restricted stock awards vested 25% on the date of issue and 25% on August 17, 2016, November 17, 2016 and February 17, 2017.  For the three months ended March 31, 2017, the Company recorded expense of less than $0.1 million, related to restricted stock awards to the Company’s directors. 
14. Employee Benefit Plan
The Company maintains a 401(k) retirement plan covering substantially all officers and employees of the Company, which permits participants to defer up to the maximum allowable amount determined by the IRS of their eligible compensation.
As part of the Pension Plan termination in 2014, the Company directed the Pension Plan to transfer $7.9 million of the Pension Plan’s surplus assets into a suspense account in the Company’s 401(k) Plan. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated financial statements until they are allocated to participants. As of March 31, 2017 and December 31, 2016, the fair value of these assets was recorded in restricted investments on the Company’s condensed consolidated balance sheets and were $4.4 million and $5.6 million, respectively.
The Company expenses the fair value of the assets at the time the assets are allocated to participants, which is expected to be allocated up to the next four years. During the three months ended March 31, 2017 and 2016, the Company recorded an expense of $1.2 million and $1.4 million, respectively, for the fair value of the assets, less expenses, that were allocated to participants during that period. Any gain or loss on these assets is reflected in the Company’s condensed consolidated statements of income and was less than a $0.1 million gain for both the three months ended March 31, 2017 and 2016. Refer to Note 5. Financial Instruments and Fair Value Measurements.

27


15. Other Income (Expense)
Other income (expense) consists of the following:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Investment income, net
 
 
 
Net investment income from available-for-sale securities
 
 
 
Interest and dividend income
$
4,548

 
$
189

Accretion income
922

 
464

Realized gain on the sale of investments
3,122

 

Other-than-temporary impairment loss
(366
)
 

Total net investment income from available-for-sale securities
8,226

 
653

Interest income from investments in SPEs
2,051

 
2,050

Interest accrued on notes receivable and other interest
79

 
27

Total investment income, net
10,356

 
2,730

Interest expense
 
 
 
Interest expense and amortization of discount and issuance costs for Senior Notes issued by SPE
(2,193
)
 
(2,190
)
Interest expense
(850
)
 
(845
)
Total interest expense
(3,043
)
 
(3,035
)
Claim settlement

 
12,548

Other, net
 
 
 
Accretion income from retained interest investments
263

 
241

Hunting lease income
139

 
138

Miscellaneous income, net
3,649

 
73

Other, net
4,051

 
452

 
 
 
 
Total other income, net
$
11,364


$
12,695

Investment Income, Net
Interest and dividend income includes interest income accrued or received on the Company’s corporate debt securities and dividend income received from the Company’s preferred stock and other investments. Accretion income includes the amortization of the premium or accretion of discount related to the Company’s available-for-sale securities, which is amortized based on an effective interest rate method over the term of the available-for-sale securities. Realized gain on the sale of investments include the gain recognized on the sale of an available-for-sale security prior to maturity. During the three months ended March 31, 2017, the Company determined that a portion of its investments in corporate debt securities and preferred stock were other-than-temporarily impaired and recorded a $0.4 million impairment related to credit-related loss in investment income, net on the Company's condensed consolidated statements of income. See Note 4. Investments.
Interest income from investments in SPEs primarily includes interest accrued or received on the investments held by PCTFC, which is used to pay the interest expense for Senior Notes held by NFTF.
Interest Expense
Interest expense includes interest expense related to the Company’s CDD debt and Refinanced Loan in the Pier Park North JV. Borrowing costs, including the discount and issuance costs for the Senior Notes issued by NFTF, are amortized based on the effective interest method at an effective rate of 4.9%.
Claim Settlement
Claim settlement during the three months ended March 31, 2016 includes $12.5 million for a settlement related to the Deepwater Horizon oil spill. See Note 6. Claim Settlement Receivable for further discussion.

28


Other, Net
During the three months ended March 31, 2017, the Company negotiated an insurance settlement that resulted in proceeds of $3.5 million, for reimbursement of certain attorney fees and related costs incurred by the Company in defending shareholder litigation and the SEC investigation which was resolved in October 2015. This amount was included in other, net in the condensed consolidated statements of income.
The Company records the accretion of investment income from its retained interest investment over the life of the retained interest using the effective yield method with rates ranging from 3.7% to 11.8%. Hunting lease income is recognized as income over the term of each lease.
16. Segment Information
The Company conducts primarily all of its business in the following five reportable operating segments: 1) residential real estate, 2) commercial real estate, 3) resorts and leisure, 4) leasing and 5) forestry.
The residential real estate segment generates revenue from the development and sale of homes and homesites and the sale of parcels of entitled, undeveloped land. The commercial real estate segment sells undeveloped or developed land and commercial operating property. The resort and leisure segment generates revenue and incurs costs from the WaterColor Inn and Resort, vacation rental program, management of The Pearl Hotel, membership sales, restaurants, four golf courses, a beach club, marina operations and other related resort activities. The leasing segment generates revenue and costs from leasing retail property, commercial property, cell towers and other assets. Leasing operations include properties located in the Company’s consolidated Pier Park North JV and Windmark JV, as well as the Company’s industrial park, VentureCrossings and other properties. The forestry segment produces and sells pulpwood, sawtimber and other forest products and may sell the Company’s timber or rural land holdings.
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.
The Company uses income before income taxes and non-controlling interest for purposes of making decisions about allocating resources to each segment and assessing each segment’s performance, which the Company believes represents current performance measures.
The accounting policies of the segments are set forth in Note 2 to the Company’s consolidated financial statements contained in Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Total revenue represents sales to unaffiliated customers, as reported in the Company’s condensed consolidated statements of income. All significant intercompany accounts and transactions have been eliminated in consolidation. The caption entitled “Other” consists of mitigation credit revenue and non-allocated corporate general and administrative expenses, net of investment income.

29


Information by business segment is as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Operating revenue:
 
 
 
Residential real estate
$
1,275

 
$
6,988

Commercial real estate

 

Resorts and leisure
8,108

 
8,751

Leasing operations
2,384

 
2,361

Forestry
1,350

 
2,121

Other
80

 
33

Total operating revenue
$
13,197

 
$
20,254

 
 
 
 
(Loss) income before income taxes:
 
 
 
Residential real estate
$
(668
)
 
$
3,357

Commercial real estate
(576
)
 
(600
)
Resorts and leisure
(1,776
)
 
(1,800
)
Leasing operations
203

 
(43
)
Forestry
1,242

 
1,854

Other
8,042

 
9,030

Total income before income taxes
$
6,467

 
$
11,798

 
 
 
 
 
March 31,
2017
 
December 31, 2016
Total Assets:
 
 
 
Residential real estate
$
119,119

 
$
112,220

Commercial real estate
60,238

 
60,150

Resorts and leisure
77,797

 
73,436

Leasing operations
85,206

 
80,863

Forestry
21,091

 
20,664

Other
643,993

 
680,612

Total assets
$
1,007,444

 
$
1,027,945

17. Commitments and Contingencies
The Company establishes an accrued liability when it believes it is both probable that a material loss has been incurred and the amount of the loss can be reasonably estimated. The Company will evaluate the range of reasonably estimated loss and record an accrued liability based on what it believes to be the minimum amount in the range, unless it believes an amount within the range is a better estimate than any other amount. In such cases, there may be an exposure to loss in excess of the amounts accrued. The Company evaluates quarterly whether further developments could affect the amount of the accrued liability previously established or would make a loss contingency both probable and reasonably estimable.
The Company also provides disclosure when it believes it is reasonably possible that a material loss will be incurred or when it believes it is reasonably possible that the amount of a loss will exceed the recorded liability. The Company reviews loss contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.

30


The Company is subject to a variety of litigation, claims, other disputes and governmental proceedings that arise from time to time in the ordinary course of its business, including litigation related to its prior homebuilding and development activities and those described herein. The Company cannot assure that it will be successful in defending these matters. Based on current knowledge, the Company does not believe that loss contingencies arising from pending litigation, claims, other disputes and governmental proceedings, including those described herein, will have a material adverse effect on the consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
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 a range of loss can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted, if necessary, as additional information becomes available.
The Company’s former paper mill site in Gulf County and certain adjacent properties are subject to various Consent Agreements and Brownfield Site Rehabilitation Agreements with the Florida Department of Environmental Protection (“FDEP”). The paper mill site has been rehabilitated by Smurfit-Stone Container Corporation in accordance with these agreements and a final Site Rehabilitation Completion Order (“SRCO”) issued by the FDEP has been received. The Company is in the process of assessing certain neighboring properties. Management is unable to quantify future rehabilitation costs above present accruals at this time or provide a reasonably estimated range of loss.
Other litigation, claims, disputes and governmental proceedings, including environmental matters, are pending against the Company. Accrued aggregate liabilities related to the matters described above and other litigation matters were $1.2 million and $1.3 million as of March 31, 2017 and December 31, 2016, respectively. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Due to uncertainties related to these matters, accruals are based only on the information available at the time. As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company's results of operations in a given period.    
The Company has retained certain self-insurance risks with respect to losses for third party liability and property damage, including its timber assets.
At March 31, 2017 and December 31, 2016, the Company was required to provide surety bonds that guarantee completion of certain infrastructure in certain development projects and mitigation banks of $6.2 million and standby letters of credit of $0.4 million, which may potentially result in liability to the Company if certain obligations of the Company are not met.
As of March 31, 2017, the Company had a total of $33.2 million in contractual obligations, all of which are for the remainder of 2017.
Security on the Refinanced Loan includes a remaining short term $1.3 million letter of credit. See Note 9. Debt for a further discussion on the Refinanced Loan.


31



Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a real estate development, asset management and operating company with real estate assets currently concentrated primarily between Tallahassee and Destin, Florida, which we predominantly use, or intend to use, for or in connection with, our various residential or commercial real estate developments, resorts and leisure operations, leasing operations and forestry operations.
We seek higher and better uses for our real estate assets through a range of activities from strategic land planning and development, infrastructure improvements and promoting economic development in the regions where we operate. We have significant residential and commercial land-use entitlements in hand or in process. We may explore the sale of such assets opportunistically or when we believe that we can better deploy those resources.
We believe that our present land holdings and liquidity position can provide us with numerous opportunities to increase recurring revenue and create long-term value for our shareholders by allowing us to focus on our core business activity of real estate development and asset management, including opportunities surrounding the Northwest Florida Beaches International Airport and our other land holdings in Northwest Florida.
Our real estate investment strategy focuses on projects that meet our investment return criteria. The time frame for these expenditures and investments will vary based on the type of project. However, we will only incur such expenditures if our analysis indicates that the project will generate a return equal to or greater than the threshold return over its life. An analysis is conducted for capital expenditures in each of our five segments.
We seek opportunities to invest our funds in ways that could increase our returns. These investments may include longer term commercial or residential real estate or real estate related investments (in which we may play an active or passive role), investments in real estate investments trusts, and other investments in liquid or illiquid securities where we believe we can increase our returns.
Segments
We conduct primarily all of our business in the following five reportable operating segments: 1) residential real estate, 2) commercial real estate, 3) resorts and leisure, 4) leasing operations and 5) forestry.
The following table sets forth the relative contribution of these operating segments to our consolidated operating revenue during the three months ended March 31, 2017 and 2016:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Segment Operating Revenue
 
 
 
Residential real estate
9.7
%
 
34.5
%
Commercial real estate
%
 
%
Resorts and leisure
61.4
%
 
43.2
%
Leasing operations
18.1
%
 
11.7
%
Forestry
10.2
%
 
10.5
%
Other
0.6
%
 
0.1
%
Consolidated operating revenue
100.0
%
 
100.0
%
For more information regarding our operating segments, see Note 16. Segment Information of our condensed consolidated financial statements included in this quarterly report.

32


Residential Real Estate
Our residential real estate segment typically plans and develops primary residential and resort residential communities of various sizes, primarily on our existing land. The following is a description of some of our major residential development communities in Northwest Florida that we are currently in the process of planning or developing:
The Watersound Origins community is a residential community in South Walton County, Florida with direct access to Lake Powell. The project has received government approval for 1,074 single family units with an additional multi-family component, however, the actual amount of units that we ultimately approve for development will depend on our development strategy, the extent to which the anticipated returns of the project meet our investment return criteria, and the availability of capital resources to fund such development. The Watersound Origins community includes a six-hole golf course, which is owned by us and operated by our resorts and leisure segment.
The Breakfast Point community is a residential community in Panama City Beach, Florida. The project has received government approval for 368 single family units. However, the actual amount of units that we ultimately approve for development will depend on our development strategy, the extent to which the anticipated returns of the project meet our investment return criteria, and the availability of capital resources to fund such development. 
The SouthWood community is a large scale, mixed use community located in the southeastern section of Tallahassee, Florida. The project has received government approval for 4,770 residential units, including 2,074 single family residences and 2,696 multi-family units, however, the actual number of units that we ultimately approve for development will depend on our development strategy, the extent to which the anticipated returns of the project meet our investment return criteria, and the availability of capital resources to fund such development. SouthWood also includes a golf clubhouse, 18-hole golf course and a town center with dining, retail shops and offices. The SouthWood Golf Club is operated by our resorts and leisure segment and a portion of the town center is leased and operated by our leasing segment.
We have other residential communities, such as the SummerCamp Beach, RiverCamps and WindMark Beach communities that have homesites available for sale. In addition, we have residential communities, such as the WaterColor, WaterSound Beach and WaterSound West Beach communities that are substantially developed and the remaining developed and available homesites in these communities are available for sale.
Our residential real estate segment generates revenue primarily from the sale of developed homesites; the sale of parcels of entitled, undeveloped land; a lot residual on homebuilder sales that provides us a percentage of the sale price of the completed home if the home price exceeds a negotiated threshold; the sale of impact fee credits; marketing fees and other fees on certain transactions. The results of our residential real estate revenue may vary from period to period depending on the communities where lots are sold, as prices vary significantly by community.
Our customer base for the sale of developed homesites is primarily focused on homebuilders. Homebuilders generally buy more homesites in a single transaction but tend to buy on a more sporadic basis. As a result, we may experience volatility in the consistency and pace of our residential real estate sales. In addition, the mix of homesites that we currently sell consists mostly of homesites in our primary residential communities which typically have a lower price and gross margin than homesites in our resort residential communities.
Our residential real estate segment incurs cost of revenue primarily from costs directly associated with the land, development and construction of real estate sold and indirect costs such as development overhead, capitalized interest, marketing, project administration, and selling costs.
The Bay-Walton Sector Plan is a long term master plan that includes entitlements, or legal rights, to develop over 170,000 residential units and over 22 million square feet of retail, commercial, and industrial uses on approximately 110,500 acres of our land holdings.  We anticipate a wide range of residential and commercial uses on these land holdings, including some portion of these entitlements serving the active adult retirement market.  We believe that there is a growing retirement demographic and that our development experience and the location, size and contiguous nature of our Florida land holdings provide us with strategic opportunities in this demographic. As is true with all of our projects, what will actually be developed will be a function of more detailed planning, analysis and market conditions, which will occur over time.
As part of the April 2014 RiverTown real estate sale, the buyer, Mattamy, is obligated to pay impact fees to us. Based on Mattamy’s current development plans and St. Johns County’s current costs for impact fees, we estimate that we may receive $20.0 million to $26.0 million for the impact fees over the five-year period following the closing (most of which we expect to receive at the end of that five-year period). However, the actual additional consideration received for the impact fees will be based on a variety of factors outside our control. We received $0.1 million during both the three months ended March 31, 2017 and 2016, and we have received a total of approximately $0.8 million from April 2014 through March 31, 2017.

33


Commercial Real Estate
In our commercial real estate segment we plan, develop, entitle, manage and sell our land holdings for a variety of uses including a broad range of retail, office, hotel, multi-family and industrial uses. From time to time, our commercial real estate segment also evaluates opportunities to maximize value by selling some of our resorts, leisure or operating properties.
Our commercial real estate segment generates revenue from the sale of developed and undeveloped land for retail, office, hotel, multi-family and industrial uses, from the sale of undeveloped land or land with limited development and easements and the sale of commercial operating properties. Our commercial real estate segment incurs costs of revenue directly associated with the land, development, construction and selling costs.
Resorts and Leisure
Our resorts and leisure segment features a diverse portfolio of vacation rentals and a hotel, as well as restaurants, golf courses, a beach club, marinas and other related resort amenities.
WaterColor Inn, Vacation Rentals and Other Management Services - Our WaterColor Inn and vacation rentals generate revenue from (1) the WaterColor Inn and Resort and other management services, (2) our management of The Pearl Hotel, (3) our vacation rental business and (4) our restaurants. The WaterColor Inn incurs expenses from the cost of services and goods provided, personnel costs and third party management fees. Revenue generated from our management services of The Pearl Hotel includes a management fee, fifty percent of certain resort fees and a percentage of The Pearl Hotel’s gross operating profit. Expenses include primarily internal administrative costs. Our vacation rental business generates revenue from the rental of private homes and other services, which includes the entire rental fee collected from the customer, including the homeowner’s portion. A percentage of the fee is remitted to the homeowner and presented in the cost of resorts and leisure revenue. The vacation rental business also incurs expenses from asset holding costs and standard lodging personnel, such as front desk, reservations and marketing.
Clubs - Our club operations include our golf courses, beach club and facilities that generate revenue from membership sales, daily play at our golf courses, merchandise sales and food and beverage sales and incur expenses from the services provided, maintenance of the golf courses and beach club facilities, personnel costs and third party management fees.
St. Joe Club & Resorts is our private membership club that provides members and registered resort guests access to our facilities. The focus is on creating a world class membership experience combined with the aspects of a four star/four diamond resort. We believe that the access to our facilities by registered resort guests allows us to enjoy a competitive advantage in the lodging business.
Marinas - Our marinas generate revenue from boat slip rentals and fuel sales, and incur expenses from cost of services provided, maintenance of the marina facilities, personnel costs and third party management fees.
Leasing Operations
Our leasing operations generate revenue from leasing retail property, commercial property, cell towers, and other assets, and incur expenses primarily from maintenance and management of our properties, personnel costs and asset holding costs. Leasing operations include properties located in our consolidated Pier Park North JV and Windmark JV, as well as our industrial park, VentureCrossings and other properties.
Pier Park North. Our leasing operations include our Pier Park North JV, which we developed with Casto, our joint venture partner and one of the country’s leading developers of neighborhood and community retail centers. The retail center includes 330,000 square feet in Panama City Beach, Florida, of which approximately 10,000 square feet remains to be developed.
VentureCrossings. We built and own a 105,000 square foot building with manufacturing and office space in VentureCrossings and lease the facility under a long-term lease that commenced in 2012. We are currently constructing a new manufacturing facility of approximately 137,000 square feet, which we plan to lease to GKN Aerospace.
Forestry
Our forestry segment focuses on the management of our timber holdings in Northwest Florida and generates revenue primarily from open market sales of timber on site without the associated delivery costs. Our forestry segment revenue includes the sale of pulpwood, sawtimber and other forest products and incurs costs of revenue from internal costs of forestry management and property taxes.

34


Our forestry segment may also generate revenue from the sale of our timber holdings, undeveloped land or land with limited development and easements. Costs incurred as part of a sale of these lands may include the cost of timber, land, minimal development costs and selling costs.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical experience, available current market information 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, and our accounting estimates are subject to change.
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, 2016. There have been no significant changes in these policies during the first three months of 2017, however we cannot assure you that these policies will not change in the future.
Recently Adopted and Issued Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies to our condensed consolidated financial statements included in this report for recently issued or adopted accounting standards, including the date of adoption and effect on our condensed consolidated financial statements.
Seasonality
Our business may be affected by seasonal fluctuations. For example, revenue from our resorts and leisure operations are typically higher in the second and third quarters; however, they can vary depending on the timing of holidays and school breaks, including spring break.
In addition to the seasonality effect described above, our residential real estate business is predominantly sales to homebuilders, who tend to buy multiple lots in sporadic transactions, which impacts the variability in our results of operations. In addition, the results of our residential real estate revenue may vary from period to period depending on the communities where lots are sold, as prices vary significantly by community. Our commercial real estate projects are likewise subject to one-off sales and the development of specific projects depending on demand. These variables have caused, and may continue to cause, our operating results to vary significantly from period to period.

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Results of Operations
Consolidated Results
The following table sets forth a comparison of the results of our operations for the three months ended March 31, 2017 and 2016.
 
Three Months Ended 
 March 31,
 
2017
 
2016
 
In millions
Revenue:
 
 
 
Real estate revenue
$
1.5

 
$
7.1

Resorts and leisure revenue
8.1

 
8.7

Leasing revenue
2.4

 
2.4

Timber revenue
1.2

 
2.1

Total
13.2

 
20.3

Expenses:
 
 
 
Cost of real estate revenue
0.3

 
1.8

Cost of resorts and leisure revenue
8.8

 
9.3

Cost of leasing revenue
0.7

 
0.8

Cost of timber revenue
0.2

 
0.2

Other operating and corporate expenses
6.2

 
6.8

Depreciation, depletion and amortization
1.9

 
2.3

Total expenses
18.1

 
21.2

Operating loss
(4.9
)
 
(0.9
)
Other income (expense):
 
 
 
Investment income, net
10.4

 
2.7

Interest expense
(3.0
)
 
(3.0
)
Claim settlement

 
12.5

Other, net
4.0

 
0.5

Total other income, net
11.4

 
12.7

Income before income taxes
6.5

 
11.8

Income tax expense
(2.3
)
 
(3.2
)
Net income
$
4.2

 
$
8.6


    
    

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Real Estate Revenue and Gross Profit
 
Three Months Ended March 31,
 
2017
 
% (1)
 
2016
 
% (1)
 
Dollars in millions
Revenue:
 
 
 
 
 
 
 
Residential real estate revenue
$
1.3

 
86.7
%
 
$
7.0

 
98.6
%
Commercial real estate revenue

 
%
 

 
%
Rural land and other revenue
0.2

 
13.3
%
 
0.1

 
1.4
%
Real estate revenue
$
1.5

 
100.0
%
 
$
7.1

 
100.0
%
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Residential real estate revenue
$
1.0

 
76.9
%
 
$
5.2

 
74.3
%
Commercial real estate revenue

 
%
 

 
%
Rural land and other revenue
0.2

 
100.0
%
 
0.1

 
100.0
%
Gross profit
$
1.2

 
80.0
%
 
$
5.3

 
74.6
%
(1) 
Calculated percentage of total real estate revenue and the respective gross margin percentage.
Real Estate Revenue and Gross Profit. During the three months ended March 31, 2017, residential real estate revenue decreased $5.7 million, or 81.4%, to $1.3 million as compared to $7.0 million during the same period in 2016, and gross profit decreased $4.2 million, or 80.8%, to $1.0 million, (or gross margin of 76.9%), as compared to $5.2 million, (or gross margin of 74.3%), during the same period in 2016. During the three months ended March 31, 2017, we sold 2 lots compared to 22 lots during the same period in 2016, due to the timing of builder contractual closing obligations and the timing of development of finished lots in our primary residential communities. The revenue and gross profit for each period was impacted by the volume of sales within each of the communities and variance in pricing among the communities. Included in the residential real estate revenue for the three months ended March 31, 2016, is a $3.4 million unimproved land sale with a gross profit of $3.3 million due to a low historical basis.
Commercial Real Estate Revenue and Gross Profit. Revenue from commercial real estate can vary drastically from period to period depending on the proximity to developed areas and mix of commercial real estate sold in each period, with varying compositions of retail, office, industrial and other commercial uses. During the three months ended March 31, 2017 and 2016, there were no commercial real estate sales.
Rural Land and Other Revenue and Gross Profit. During the three months ended March 31, 2017, we sold approximately 43 acres of rural and timber land for $0.2 million and mitigation bank credits for less than $0.1 million. During the three months ended March 31, 2016, we sold approximately 94 acres of rural and timber land for $0.1 million. Revenue from rural land can vary drastically from period to period.
Our gross margin can vary significantly from period to period depending on the characteristics of property sold. Sales of rural and timber land typically have a lower basis than residential and commercial real estate sales. In addition, our basis in residential and commercial real estate can vary depending on the amount of development or other costs spent on the property.
For additional information see the Segment Results sections for Residential Real Estate, Commercial Real Estate and Forestry.

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Resorts and Leisure Revenue and Gross Deficit
 
Three Months Ended March 31,
 
2017
 
2016
 
In millions
Resorts and leisure revenue
$
8.1

 
$
8.7

Gross deficit
$
(0.7
)
 
$
(0.6
)
Gross margin
(8.6
)%
 
(6.9
)%
 
 
 
 
Resorts and leisure revenue decreased $0.6 million, or 6.9%, during the three months ended March 31, 2017, as compared to the same period in 2016. The decrease in resorts and leisure revenue is due to a decrease of $0.9 million in room rentals, vacation rentals and resort fees due to the timing of holiday and school breaks compared to the same period in 2016, partially offset by an increase of $0.2 million in club revenue related to an increase in membership sales, along with an increase in marina revenue of $0.1 million. Revenue from our resorts and leisure operations are typically higher in the second and third quarters; however, they can vary depending on the timing of holidays and school breaks, including spring break. Resorts and leisure had a negative gross margin during the three months ended March 31, 2017 of (8.6)% compared to a negative gross margin of (6.9)% during the three months ended March 31, 2016, due to the seasonality of these revenues, as noted above, and related fixed costs.
Leasing Revenue and Gross Profit
 
Three Months Ended March 31,
 
2017
 
2016
 
In millions
Leasing revenue
$
2.4

 
$
2.4

Gross profit
$
1.7

 
$
1.6

Gross margin
70.8
%
 
66.7
%
 
 
 
 
Leasing revenue and gross profit was essentially flat for each of the three month periods ended March 31, 2017 and 2016.
Timber Revenue and Gross Profit