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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
¨

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)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, no par value
 
New York Stock Exchange
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨  NO  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES ¨  NO þ
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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
The aggregate market value of the registrant’s Common Stock held by non-affiliates based on the closing price on June 30, 2017, was approximately $402.3 million.
As of February 26, 2018, there were 65,897,866 shares of common stock, no par value, issued of which 65,333,311 were outstanding.

Documents Incorporated By Reference
Portions of the Registrant’s definitive proxy statement for its 2018 Annual Meeting of Shareholders, which proxy statement will be filed no later than 120 days after the close of the Registrant’s fiscal year ended December 31, 2017, are hereby incorporated by reference in Part III of this Annual Report on Form 10-K.


Table of Contents

THE ST. JOE COMPANY
INDEX
 
 
Page No.
 
 
 
 



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PART I
Item 1.        Business
As used throughout this Annual Report on Form 10-K, the terms “St. Joe,” the “Company,” “we,” “our,” or “us” include The St. Joe Company and its consolidated subsidiaries unless the context indicates otherwise.
General
St. Joe was incorporated in 1936. We are a real estate development, asset management and operating company with real estate assets and operations currently concentrated primarily between Tallahassee and Destin, Florida, which we predominantly use, or intend to use, for or in connection with, our various residential real estate developments, commercial developments and leasing operations, resorts and leisure operations and our forestry operations.
We have significant residential and commercial land-use entitlements in hand or in process. 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 may explore the sale of such assets opportunistically or when we believe that we can better deploy those resources.
Business Strategy
We intend to use our land holdings and our cash and cash equivalents and investments to increase recurring revenue while creating long-term value for our shareholders. We believe that our present 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 strategic plan for 2018 includes making investments that we believe will contribute towards increasing our future growth, particularly in real estate projects that provide recurring revenue. Our 2018 capital expenditures budget is estimated to total $129.6 million, including $36.2 million for the development and acquisition of land for residential real estate projects, $82.7 million for our commercial leasing and sales segment, $9.2 million for our resorts and leisure segment and $1.5 million for our forestry segment and corporate expenditures. We anticipate evaluating opportunities to develop, improve or acquire a broad range of asset types that will generate recurring revenue, which provide an accepted rate of return, including but not limited to retail, office, resorts and leisure, industrial, hotels and apartments. We anticipate that these future capital commitments will be funded through new financing arrangements, cash and cash equivalents, short term investments and cash generated from operations. We expect to make these expenditures throughout the coming fiscal year, but do not anticipate that we will see the full benefit of these investments during 2018.
Specifically, in 2018, we intend to focus on the following initiatives:

Expand portfolio of income producing commercial properties. We presently own a portfolio of approximately 814,000 square feet of rentable commercial space, a 35% increase in 2017 over the 2016 rentable space. We intend to explore other opportunities to increase the size and scope of our existing portfolio in ways that will increase recurring income and create accretive value for our land holdings.
Residential development. We presently have various existing primary residential and resort residential communities at different stages of development. We plan to focus on investing in the communities that have the potential for long term, scalable and repeatable revenue. We expect to continue to be a developer of finished residential lots for sale to builders and retail lots for sale to consumers in our communities. We will also continue to explore the concept of establishing some form of an active adult community on our land holdings.
Expand and increase scope of resorts and leisure segment. We presently own and/or operate a wide range of resorts and leisure assets, which already generate significant recurring revenue for us. We plan to expand the scope and scale of our resorts and leisure assets and services in order to enhance the value and contribution those assets provide. We sold our short term vacation rental management business in the fourth quarter of 2017 to focus on the construction and operation of hotels and other properties we own as lodging opportunities in our market become broader.
Strategic infrastructure and economic development initiatives. We intend to continue to work collaboratively with public and private partners on strategic infrastructure and economic development initiatives that will help to attract quality job creators and help to diversify the Northwest Florida economy, which we believe will create accretive value for our land holdings. An example of a potential initiative is related to Triumph Gulf Coast, Inc., which is a not-for-profit corporation that is charged with distributing a legal settlement of $1.5 billion in economic damages over eighteen years within eight counties in Northwest Florida. We have significant land holdings in three of those counties: Bay County, Walton County and Gulf County.

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Joint ventures with best of class operators. We believe that by entering into partnerships, joint ventures or other collaborations and alliances with best of class operators, we can efficiently utilize our land assets while reducing our capital requirements.
Maintain efficient operations. We expect to continue a cost and investment discipline to ensure low fixed expenses and bottom line performance in all environments.
Maintain liquidity and balance sheet strength. We plan to continue to maintain a high degree of liquidity while seeking opportunities to invest our cash in ways that we believe will increase shareholder value, including investments in available-for-sale securities, share repurchases, real estate and other strategic investments.
Our Business
We operate our business in four reportable operating segments: (1) residential real estate, (2) resorts and leisure, (3) commercial leasing and sales and (4) forestry. For financial information about our operating segments, please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as Note 19. Segment Information included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K.    
Residential Real Estate
Our residential real estate segment typically plans and develops residential communities of various sizes. The Watersound Origins, Breakfast Point and SouthWood communities are our primary home projects. These communities typically attract buyers who intend to use the community for their main residence, in most cases. Our customer base for the sale of developed homesites in these communities has been largely focused on homebuilders, but also includes retail sales to individuals.
We have other residential communities, which were built in a region of Florida that has historically attracted second-home buyers, such as the SummerCamp Beach, RiverCamps, WindMark Beach and WaterColor communities that have homesites available for sale or future development. In addition, we have residential communities such as the WaterSound Beach and WaterSound West Beach communities, that are substantially developed, and the remaining developed homesites in these communities are available for sale.
Resorts and Leisure
Our resorts and leisure segment features a hotel and a diverse portfolio of vacation rentals, as well as restaurants, golf courses, a beach club, marinas and other resort amenities. Our resorts and leisure segment operations are managed for us by a third party management company.
We own the WaterColor Inn (the “WaterColor Inn”), an award winning boutique hotel, which provides guests with access to a beach club, spa, tennis center, an award-winning restaurant, and retail and commercial space. The Clubs by Joe (“The Club”), is our private membership club that provides members and guests access to our facilities, which include three golf courses and a beach club, all located in the Panama City Beach area. The Club’s focus is on creating a world class membership experience combined with the luxurious aspects of a four star/four diamond resort. In addition, we own a golf course located in Tallahassee.
We own additional properties in our WaterSound Beach and WindMark Beach communities that we operate as short term vacation rental property. Our short term vacation rental management business previously rented private homes in the WaterColor, WaterSound Beach and surrounding communities to individuals who were vacationing in the area. As discussed elsewhere in this annual report, in December 2017, we sold our short term vacation rental management business. We also manage, but do not own, The Pearl Hotel in Rosemary Beach, Florida. In addition, we own and operate two marinas in Northwest Florida.
Commercial Leasing and Sales
Our commercial leasing and sales segment includes the leasing of retail, office and commercial property, cell towers, and other assets as well as planning, development, entitlement, management and sale of our commercial land holdings for a variety of uses, including a broad range of retail, office, hotel, multi-family and industrial uses. We provide development opportunities for national, regional and local retailers and other strategic partners in Northwest Florida. We own and manage several retail shopping centers and develop commercial parcels. We have large land holdings near the Pier Park retail center, Northwest Florida Beaches International Airport, the Port of Port St. Joe, along roadways and near or within business districts in the region. These land holdings include industrial parks, several commerce parks and other properties.

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The following is a listing of some of our commercial leasing and sales properties:
Pier Park North. Our Pier Park North joint venture (“Pier Park North JV”) holds a retail center of approximately 330,000 square feet in Panama City Beach, Florida, of which approximately 10,000 square feet remains to be developed.
VentureCrossings. VentureCrossings is a commercial and industrial development adjacent to the Northwest Florida Beaches International Airport. We are soliciting global office, retail and industrial users for this prime development location. We built and own two buildings with 243,605 square feet of manufacturing and office space, which are currently under long-term leases that commenced in 2012 and 2017.
Beckrich Office Park. We acquired two office buildings in April 2017, located in Panama City Beach, Florida, with over 67,000 net leasable square feet, of which 52.4% are currently under lease.
Pier Park Crossings. In April 2017, we formed a joint venture, Pier Park Crossings, LLC (“Pier Park Crossings JV”), to develop, manage and lease apartments in Panama City Beach, Florida. The parties are working together to design, develop and construct a 240 unit multi-family apartment home community. We expect construction to begin in the first half of 2018.
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. We grow and sell pulpwood, sawtimber, and other forest products. As of December 31, 2017, we had approximately 115,000 acres in our forestry segment and expect to have the ability to consistently operate approximately 60,000 of those acres.
We may also sell our timber holdings, undeveloped land or land with limited development and easements. Some parcels include the benefits of limited development activity including improved roads, ponds and fencing. We have traditionally sold parcels of varying sizes ranging from less than one acre to thousands of acres. The pricing of these parcels varies significantly based on size, location, terrain, timber quality and other local factors.
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, but 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 composed of 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 can vary significantly by community. Our commercial 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.
Competition
Each of the real estate development and leasing businesses are highly competitive and fragmented. We compete with other local, regional and national real estate companies, some of which may have greater financial, marketing, sales and other resources than we do.
A number of highly competitive companies participate in the resorts and leisure business. Our ability to remain competitive and to attract customers and retain memberships depends on our success in distinguishing the quality and value of our products and services from those offered by others. We compete based on location, price and amenities.
In our forestry business, we compete with numerous public and privately held timber companies in our region. The principal methods of competition are price and delivery.

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Governmental Regulation
Our operations are subject to federal, state and local laws and regulations that affect every aspect of our business, including environmental and land use laws relating to, among other things, water, air, solid waste, hazardous substances, zoning, construction permits or entitlements, building codes and the requirements of the Federal Occupational Safety and Health Act and comparable state statutes relating to the health and safety of our employees. Although we believe that we are in material compliance with these requirements, there can be no assurance that we will not incur significant costs, civil and criminal penalties, and liabilities, including those relating to claims for damages to property or natural resources, resulting from our operations. We maintain environmental and safety compliance programs and conduct audits of our facilities and timberlands to monitor compliance with these laws and regulations. Enactment of new laws or regulations, or changes in existing laws or regulations or the interpretation and enforcement of these laws or regulations, might require significant expenditures.
Employees
As of February 26, 2018, we had 47 full-time employees. Most persons employed in the day-to-day operations of our resorts and leisure segment are employed by a third party management company engaged pursuant to a consulting and employment services agreement. In addition, we utilize part-time employees and independent contractors during the year based on seasonal needs.
Available Information
Our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports may be viewed or downloaded electronically, free of charge, from our website: http://www.joe.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). In addition, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. To obtain information on the operation of the Public Reference room, you may call the SEC at 1-800-SEC-0330. Our recent press releases are also available to be viewed or downloaded electronically at http://www.joe.com.
We will also provide electronic copies of our SEC filings free of charge upon request. Any information posted on or linked from our website is not incorporated by reference into this Annual Report on Form 10-K. The SEC also maintains a website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

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Item 1A.    Risk Factors
You should carefully consider the risks described below, together with all of the other information in this Annual Report on Form 10-K. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially and adversely affect our business. If any of these risks actually occur, our business, financial condition, results of operations, cash flows, strategies and prospects could be materially adversely affected.
Risks Related to Our Current Business Strategy
We may not be able to successfully implement our business strategy, which would adversely affect our financial condition, results of operations, cash flows and financial performance.
Our cash and available-for-sale securities comprise approximately 32.9% of the carrying value of our assets, while our assets related to our existing investments in real estate comprise approximately 36.1% of the carrying value of our assets. Our future financial performance and success are therefore heavily dependent on our ability to implement our business strategy successfully.
Our current business strategy envisions several initiatives, including investing in new real estate and real estate related opportunities, such as the development of our real estate, including expanding our portfolio of income producing commercial properties, expanding the scope of our club and resort assets and services, entering into strategic alliances, investing in businesses related to our real estate development, management, and operating activities, exploration of active adult communities, investing in available-for-sale securities or longer term investments in real estate investment trusts and other investments in illiquid securities and continuing to efficiently contribute to our bottom line performance. We may not be able to successfully implement our business strategy or achieve the benefits of our business plan. If we are not successful in achieving our objectives, our business, results of operations, cash flows and financial condition could be negatively affected.
Management has discretion as to the investments we make and may not use these funds effectively.
We plan to continue to invest in available-for-sale securities or longer term investments in real estate investment trusts and other investments in illiquid securities until we can find what we believe to be other advantageous opportunities for these funds. Our management has discretion in the selection of these investments and could make investments that do not improve our results of operations, cash flows and financial condition or enhance the value of our common stock or which result in financial losses that could have a material adverse effect on our business, results of operations, cash flows and financial condition and stock price. Additionally, longer term investments, such as real estate investment trusts and other investments in illiquid securities are inherently riskier investments and could result in us losing some or all of our investment as well as not being able to liquidate our position when we would otherwise wish to do so.
Our investments in new business opportunities are inherently risky, and could disrupt our ongoing business and adversely affect our operations.
We have invested and expect to continue to invest in new business opportunities, such as the expansion of our portfolio of income producing commercial properties, the development of our real estate, including the exploration of active adult communities and the expansion of port related opportunities at the Port of Port St. Joe. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenue to offset liabilities incurred and expenses associated with these new investments, including development costs, inadequate return of capital on our investments, and unidentified issues not discovered in our due diligence of such opportunities. Because these ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition and operating results.
We intend to invest our assets in ways such that we will not have to register as an investment company under the Investment Company Act of 1940. As a result, we may be unable to make some potentially profitable investments.
We are not registered as an “investment company” under the Investment Company Act of 1940 (the “Investment Company Act”) and we intend to invest our assets in such a manner so that we are not required to register as an investment company. This will require monitoring our portfolio so that (a) on an unconsolidated basis we will not have more than 40% of total assets (excluding U.S. government securities and cash items) in investment securities or (b) we will meet and maintain another exemption from registration. As a result, we may be (1) unable to make some potentially profitable investments, (2) unable to sell assets we would otherwise want to sell or (3) forced to sell investments in investment securities before we would otherwise want to do so.

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If Fairholme controls us within the meaning of the Investment Company Act, we may be unable to engage in transactions with potential strategic partners, which could adversely affect our business.
As of December 31, 2017, clients of Fairholme Capital Management, L.L.C. (“FCM”, a registered investment advisor registered with the SEC), Fairholme Funds, Inc. (the “Fairholme Fund”) and/or one or more of their affiliates, which we refer to, along with Fairholme Holdings and FTC (each as defined below), as Fairholme, beneficially owned approximately 42.33% of our common stock and Fairholme, including Mr. Berkowitz and clients of FCM and FTC, collectively beneficially owned 43.95% of our outstanding common stock. Mr. Berkowitz is the Chief Investment Officer of FCM, a director of both Fairholme Fund and Fairholme Trust Company, LLC (“FTC”, a non-depository trust company regulated by the Florida Office of Financial Regulation) and the Chairman of our Board of Directors (the “Board”). Mr. Berkowitz is also the Manager of, and controls entities that own and control, Fairholme Holdings, LLC (“Fairholme Holdings”), which wholly owns FCM and FTC. Cesar Alvarez also serves as a director of the Fairholme Fund, a director of FTC and is a member of our Board. In addition, Howard Frank serves as a director of the Fairholme Fund and is a member of our Board. Fairholme has served as our investment advisor since April 2013. Fairholme does not receive any compensation for services as our investment advisor.
Under the Investment Company Act, “control” means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of a company is presumed to control such company. The SEC has considered factors other than ownership of voting securities in determining control, including an official position with the company when such was obtained as a result of the influence over the company. Accordingly, even if Fairholme’s beneficial ownership in us is below 25% of our outstanding voting securities, Fairholme may nevertheless be deemed to control us. The Investment Company Act generally prohibits a company controlled by an investment company from engaging in certain transactions with any affiliate of the investment company or affiliates of the affiliate, subject to limited exceptions. An affiliate of an investment company is defined in the Investment Company Act as, among other things, any company 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the investment company, a company directly or indirectly controlling, controlled by, or under common control with, the investment company or a company directly or indirectly owning, controlling, or holding with power to vote, 5% or more of the outstanding voting securities of the investment company.
We believe that Fairholme is currently affiliated with a number of entities, including Imperial Metals Corp., Sears Holdings Corp. and Seritage Growth Properties. Due to these affiliations, should Fairholme be deemed to control us, under the Investment Act, we may be prohibited from engaging in certain transactions with these entities and certain of their affiliates and any future affiliates of Fairholme, unless an exception applies. To the extent Fairholme is not deemed to control us, if Fairholme’s beneficial interest in us is at or above 5% of our outstanding voting securities, it would remain our affiliate and we may be prohibited from engaging in certain transactions with it and its affiliates.
This could adversely affect our ability to enter into transactions freely and compete in the marketplace. In addition, significant penalties and other consequences may arise as a result of a violation for companies found to be in violation of the Investment Company Act.
If the SEC were to disagree with our Investment Company Act determinations, our business could be adversely affected.
We have not requested approval or guidance from the SEC with respect to our Investment Company Act determinations, including, in particular: our treatment of any subsidiary as majority-owned; the compliance of any subsidiary with any exemption under the Investment Company Act, including any subsidiary’s determinations with respect to the consistency of its assets or operations with the requirements thereof; or whether our interests in one or more subsidiaries constitute investment securities for purposes of the 40% test. If the SEC were to disagree with our treatment of one or more subsidiaries as being majority-owned, excepted from the Investment Company Act, with our determination that one or more of our other holdings do not constitute investment securities for purposes of the 40% test, or with our determinations as to the nature of the business in which we engage or the manner in which we hold ourselves out, we and/or one or more of our subsidiaries would need to adjust our operating strategies or assets in order for us to continue to pass the 40% test or register as an investment company, either of which could have a material adverse effect on us. Moreover, we may be required to adjust our operating strategy and holdings, or to effect sales of our assets in a manner that, or at a time or price at which, we would not otherwise choose, if there are changes in the laws or rules governing our Investment Company Act status or that of our subsidiaries, or if the SEC or its staff provides more specific or different guidance regarding the application of relevant provisions of, and rules under, the Investment Company Act.

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If the SEC or a court of competent jurisdiction were to find that we were required, but failed, to register as an investment company in violation of the Investment Company Act, we would have to cease business activities, we would breach representations and warranties and/or be in default as to certain of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of which would have a material adverse effect on our business.
Returns on our investments may be limited by our investment guidelines and restrictions.
In 2013, we established investment guidelines and restrictions approved by the Investment Committee of our Board pursuant to the terms of the Investment Management Agreement (the “Investment Management Agreement”) with FTC, as amended. In 2016, we and FTC entered into an Amendment (the “Amendment”) to the Investment Management Agreement. Pursuant to the Amendment, we modified the investment guidelines and restrictions described in the Investment Management Agreement to (i) decrease from at least 50% to 25% the amount of the investment account that must be held in cash and cash equivalents, (ii) permit the investment account 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 our investment portfolio shall not exceed $100.0 million market value, and (iii) provide that the aggregate market value of investments in common stock, preferred stock or other equity investments cannot exceed 25% of the market value of our investment portfolio at the time of purchase. All other material investment guidelines remain the same, including restrictions that no more than 15% of the investment account be invested in securities of any one issuer (excluding the U.S. Government), and that 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.
These above limitations may restrict our ability to make certain investments and may negatively impact the return that we could otherwise receive from our investment account. This could adversely affect our cash flows and results of operations.
Our future growth is dependent on transactions with strategic partners. We may not be able to successfully (1) attract desirable strategic partners; (2) complete agreements with strategic partners; and/or (3) manage relationships with strategic partners going forward, any of which could adversely affect our business.
We may seek strategic partnerships to develop real estate, as well as explore active adult communities, capitalize on the potential of our commercial and industrial opportunities and maximize the value of our assets. These strategic partnerships may bring development experience, industry expertise, financial resources, financing capabilities, brand recognition and credibility or other competitive assets. We cannot assure, however, that we will have sufficient resources, experience and/or skills to locate desirable partners. We also may not be able to attract partners who want to conduct business in desirable geographic locations and who have the assets, reputation or other characteristics that would optimize our development and asset management opportunities.
Once a strategic partner has been identified, actually reaching an agreement on a transaction may be difficult to complete and may take a considerable amount of time considering that negotiations require careful balancing of the parties’ various objectives, assets, skills and interests. A formal partnership may also involve special risks such as:
our partner may take actions contrary to our instructions or requests, or contrary to our policies or objectives with respect to the real estate investments;
our partner could experience financial difficulties, become bankrupt or fail to fund their share of capital contributions, which may delay construction or development of property or increase our financial commitment to the strategic partnership;
we may disagree with our partner about decisions affecting the real estate investments or partnership, which could result in litigation or arbitration that increases our expenses, distracts our officers and directors and disrupts the day-to-day operations of the property, which may delay important decisions until the dispute is resolved; and
actions by our partner may subject property owned by the partnership to liabilities or have other adverse consequences.
A key complicating factor is that strategic partners may have economic or business interests or goals that are inconsistent with ours or that are influenced by factors unrelated to our business. These competing interests lead to the difficult challenges of successfully managing the relationship and communication between strategic partners and monitoring the execution of the partnership plan. We cannot assure that we will have sufficient resources, experience and/or skills to effectively manage our ongoing relationships with our strategic partners. We may also be subject to adverse business consequences if the market reputation of a strategic partner deteriorates. If we cannot successfully execute transactions with strategic partners, our business, results of operations, cash flows and financial condition could be adversely affected.

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Losses in the fair value of our available-for-sale investments, and the concentration of our investment portfolio in any particular issuer, industry, group of related industries or geographic sector, could have an adverse impact on our results of operations, cash flows and financial condition. In addition, our equity investments may fail to appreciate and may decline in value or become worthless.
As of December 31, 2017, we had $281.7 million in our investment accounts. Of this amount, we hold $170.4 million in cash equivalents, $66.4 million in corporate debt securities, $35.0 million in preferred stock investments and $9.9 million in U.S. Treasury securities. Additionally, in 2016, we entered into an Amendment to our Investment Management Agreement which permits us to invest in common equity securities. The market value of these investments is subject to change from period to period. Our available-for-sale securities currently include investments in non-investment grade corporate debt securities and investments in non-investment grade preferred stock of four issuers. Pursuant to our Investment Management Agreement with FTC, we could invest up to a total of 15% of the investment account in any one issuer as of the date of purchase.
We have exposure to credit risk associated with our available-for-sale investments, which include corporate debt securities, preferred stock investments and U.S. Treasury securities. These instruments are also subject to price fluctuations as a result of changes in the financial market’s assessment of issuer credit quality, increases in delinquency and default rates, changes in prevailing interest rates and other economic factors. A downgrade of the U.S. government’s credit rating could also decrease the value of our available-for-sale investments.
Losses in the fair value of our available-for-sale investments can negatively affect earnings if management determines that such securities are other-than-temporary impaired. The evaluation of other-than-temporary impairment 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, our ability and intent to hold investments until unrealized losses are recovered or until maturity. If a decline in fair value is considered other-than-temporary, the carrying amount of the security is written down and the amount of the credit-related component is recognized in earnings. Based on these factors, the unrealized loss related to our investments and restricted investments of $3.2 million was determined to be temporary at December 31, 2017. During 2017, we determined that unrealized losses related to our corporate debt securities and preferred stock were other-than-temporary and recorded an impairment of $2.3 million for credit-related loss in investment income, net in our consolidated statements of operations.
Any losses in the fair value of our available-for-sale investments that are deemed to be other-than-temporary due to credit deterioration will result in us being required to record credit-related losses in our consolidated statements of operations. In addition, as a result of the concentration of our corporate debt securities and preferred stock investments, the performance of our investments may be disproportionately affected by any adverse change in the financial condition of these issuers or the market value of any of the securities in our portfolio, which could have a material adverse effect on our results of operations, cash flows and financial condition.
Furthermore, although common equity securities have historically generated higher average total returns than other types of securities over the long term, common equity securities also have experienced significantly more volatility in those returns. The market price of common stock is subject to significant fluctuations due to a number of factors including the operating performance of companies and other risks that may affect specific economic sectors, industries or segments of the market, as well as adverse economic conditions generally, all of which are outside of our control. Our equity investments may fail to appreciate and may decline in value or become worthless. A substantial decline in the value of our equity investments would have a material adverse effect on our results of operations, cash flows and financial condition.

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We face risks associated with short-term liquid investments.
We continue to have significant cash balances that are invested in a variety of short-term investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. From time to time, these investments may include (either directly or indirectly):
direct obligations issued by the U.S. Department of the Treasury;
obligations issued or guaranteed by the U.S. federal government or its agencies;
taxable municipal securities;
obligations (including certificates of deposit) of banks and thrifts;
commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;
repurchase agreements collateralized by corporate and asset-backed obligations;
both registered and unregistered money market funds; and
other highly rated short-term securities.
Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our investment, and our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of operations or financial condition.
Risks Related to our Current Business
Our results of operations may vary significantly from period to period which could adversely impact our stock price, results of operations, cash flows and financial condition.
Residential real estate sales tend to vary from period to period, particularly sales to homebuilders, who tend to buy multiple lots in sporadic transactions. Commercial real estate projects are likewise subject to one-off sales and the development of specific projects depending on demand.
Moreover, as it relates to all of our residential and commercial land-use entitlements in hand or in process, we seek higher and better uses for our assets through a range of activities from strategic land planning and development, infrastructure improvements and promoting economic development in the regions where we operate; and therefore may explore the sale of assets opportunistically or when we believe that we can better deploy those resources. As a consequence, there may be reporting periods in which we have no, or significantly less, revenue from residential or commercial real estate sales.
In December 2017 we sold our short term vacation rental management business. Following the sale we no longer manage third party vacation rentals, but continue to manage vacation rental properties we own, which will cause our future operating results to vary from prior periods. Furthermore, our resorts and leisure operations are affected by seasonal fluctuations. 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.
These variables have caused, and may continue to cause, our operating results to vary significantly from period to period, which could have an adverse impact on our stock price, cash flows, results of operations and financial condition.
Our business is subject to extensive regulation and growth management initiatives that may restrict, make more costly or otherwise adversely impact our ability to develop our real estate investments or otherwise conduct our operations.
A large part of our business strategy is dependent on our ability to develop and manage real estate in Northwest Florida, including exploring opportunities in mixed-use and active adult communities and expanding the Port of Port St. Joe operations. Approval to develop real property in Florida entails an extensive entitlements process involving multiple and overlapping regulatory jurisdictions and often requiring discretionary action by local government. This process is often political, uncertain and may require significant exactions in order to secure approvals. Real estate projects in Florida must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (the “Growth Management Act”) and local land development regulations. In addition, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact, or DRI, application. Compliance with the Growth Management Act, local land development regulations and the DRI process is usually lengthy and costly and can be expected to materially affect our real estate development activities.

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The Growth Management Act requires local governments to adopt comprehensive plans guiding and controlling future real property development in their respective jurisdictions and to evaluate, assess and keep those plans current. Included in all comprehensive plans is a future land use map, which sets forth allowable land use development rights. Some of our land has an “agricultural” or “silviculture” future land use designation and we are required to seek an amendment to the future land use map to develop real estate projects. Approval of these comprehensive plan map amendments is highly discretionary.
All development orders and permits must be consistent with the comprehensive plan. Each plan must address such topics as future land use and capital improvements and make adequate provision for a multitude of public services including transportation, schools, solid waste disposal, sewerage, potable water supply, drainage, affordable housing, open space, parks and others. The local governments’ comprehensive plans must also establish “levels of service” with respect to certain specified public facilities, including roads and schools, and services to residents. In many areas, infrastructure funding has not kept pace with growth, causing facilities to operate below established levels of service. Local governments are prohibited from issuing development orders or permits if the development will reduce the level of service for public facilities below the level of service established in the local government’s comprehensive plan, unless the developer either sufficiently improves the services up front to meet the required level of service or provides financial assurances that the additional services will be provided as the project progresses. In addition, local governments that fail to keep their plans current may be prohibited by law from amending their plans to allow for new development.
If any one or more of these factors were to occur, we may be unable to develop our real estate projects successfully or within the expected timeframes. Changes in the Growth Management Act or the DRI review process or the interpretation thereof, new enforcement of these laws or the enactment of new laws regarding the development of real property could lead to a decline in our ability to develop and market our communities successfully and to generate positive cash flow from these operations in a timely manner, which could have a materially adverse effect on our ability to service our demand and negatively impact our business, results of operations, cash flows or financial condition.
Our existing real estate investments are concentrated in Northwest Florida; therefore our long-term financial results are largely dependent on the economic growth of Northwest Florida.
The economic growth of Northwest Florida, where most of our land is located, is an important factor in creating demand for our products and services. Our principal sources of revenue are (1) sales of lots or entitled land to homebuilders and others in connection with residential housing developments, (2) sales and leasing of commercial real estate, (3) revenue generated through our hotel, club membership and other leasing activities that are principally tourism related and (4) future revenue from multi-family and other leasing projects. Consequently, demand for our products largely depends on the growth of the local economy.
We believe that the future economic growth of Northwest Florida will largely depend on the ability and willingness of state and local governments, in combination with the private sector, (1) to plan and complete significant infrastructure improvements in the region, such as new transportation hubs, roads, rail, pipeline, medical facilities and schools and (2) to attract companies offering high-quality, high salary jobs to large numbers of new employees. If new businesses and new employees in Northwest Florida do not grow as anticipated, demand for residential and commercial real estate and demand to expand the Port of Port St. Joe will not meet our expectations and our future growth will be adversely affected.
Changes in the demographics affecting projected population growth in Florida, particularly Northwest Florida, including a decrease in the migration of Baby Boomers, could adversely affect our business.
Florida has experienced strong population growth in the past few decades, particularly during the real estate boom in the first half of the last decade. However, a decline in the rate of migration into Florida could occur due to any one of a number of factors affecting Florida, including weak economic conditions, restrictive credit, the occurrence of hurricanes and increased costs of living.
The success of our communities will be dependent on strong migration and population expansion in our regions of development, primarily Northwest Florida. We also believe that Baby Boomers (generally considered to be the generation born between 1946 and 1964) seeking retirement or vacation homes in Florida will remain important target customers for our real estate products in the future. Florida’s population growth could be negatively affected in the future by factors such as adverse economic conditions, the occurrence of natural or manmade disasters and the high cost of real estate, insurance and property taxes. Furthermore, those persons considering moving to Florida may not view Northwest Florida as an attractive place to live or own a second home and may choose to live in another region of the state. In addition, as an alternative to Florida, other states such as Georgia, North and South Carolina and Tennessee are increasingly becoming retirement destinations. These states are attracting retiring Baby Boomers and the workforce population who may have otherwise considered moving to Florida. If Florida, especially Northwest Florida, experiences an extended period of slow growth, or even net out-migration, our business, results of operations, cash flows and financial condition would likely suffer.

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Mortgage financing issues, including lack of supply of mortgage loans, tightened lending requirements and possible future increases in interest rates, could reduce demand for our products.
Many purchasers of our real estate products obtain mortgage loans to finance a substantial portion of the purchase price, or they may need to obtain mortgage loans to finance the construction costs of homes to be built on homesites purchased from us. Also, our homebuilder customers depend on retail purchasers who rely on mortgage financing. Many mortgage lenders and investors in mortgage loans experienced severe financial difficulties arising from losses incurred on sub-prime and other loans originated before the downturn in the real estate market. As a result, the mortgage industry remains under scrutiny and continues to face the challenges of increased regulation at federal, state and local levels. Because of these challenges, the supply of mortgage products has been constrained, and the eligibility requirements for borrowers have been tightened.
Constraints on the mortgage lending industry could adversely affect potential purchasers of our products, including our homebuilder customers, thus having a negative effect on demand in our communities.
While interest rates for home mortgage loans have generally remained low, mortgage interest rates could increase in the future, which could adversely affect the demand for residential real estate. In addition to residential real estate, increased interest rates and restrictions in the availability of credit could also negatively impact sales or development of our commercial properties or other land we offer for sale. If interest rates increase and the ability or willingness of prospective buyers to finance real estate purchases is adversely affected, our sales, results of operations, cash flows and financial condition may be negatively affected.
We have significant operations and properties in Florida that could be materially and adversely affected by natural disasters, manmade disasters, severe weather conditions or other significant disruptions.
Our corporate headquarters and our properties are located in Florida, where major hurricanes have occurred. Because of its location between the Gulf of Mexico and the Atlantic Ocean, Florida is particularly susceptible to the occurrence of hurricanes. Depending on where any particular hurricane makes landfall, our developments in Florida, especially our coastal properties in Northwest Florida, could experience significant, if not catastrophic, damage. Such damage could materially delay sales or lessen demand for our residential or commercial real estate in affected communities and lessen demand for our resorts and leisure operations and leasing operations. If our corporate headquarters facility is damaged or destroyed, we may have difficulty performing certain corporate and operational functions.
In addition to hurricanes, the occurrence of other natural disasters and climate conditions in Florida, such as tornadoes, floods, fires, unusually heavy or prolonged rain, droughts and heat waves, could have a material adverse effect on our ability to develop and sell properties or realize income from our projects. The occurrence of these natural disasters could also have a material adverse effect on our forestry business, if timber inventory is destroyed. Furthermore, an increase in sea levels due to long-term global warming could have a material adverse effect on our coastal properties and forestry business. The occurrence of natural disasters and the threat of adverse climate changes could also have a long-term negative effect on the attractiveness of Florida as a location for primary or resort residences and as a location for new employers that can create high-quality jobs needed to spur growth in Northwest Florida.
Additionally, we are susceptible to manmade disasters or disruptions, such as oil spills like the Deepwater Horizon oil spill, acts of terrorism, power outages and communications failures. If a hurricane, natural disaster, manmade disaster or other significant disruption occurs, we may experience disruptions to our operations and damage to our properties, which could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Furthermore, any adverse change in the economic climate of Florida, or our regions of the state, and any adverse change in the political or regulatory climate of Florida, or the counties where our land is located could adversely affect our real estate development activities. Ultimately, our ability to execute our business strategy may decline as a result of weak economic conditions or restrictive regulations.

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Our insurance coverage on our properties may be inadequate to cover any losses we may incur.
We maintain insurance on our properties, including property, liability, fire, flood and extended coverage. However, we do not insure our timber assets and we self-insure home warranty claims. Additionally, our insurance for hurricanes is capped at $50.0 million per named storm and is subject to deductibles. We use our discretion when determining amounts, coverage limits and deductibles for insurance. These terms are determined based on retaining an acceptable level of risk at a reasonable cost. This may result in insurance coverage that in the event of a substantial loss would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also may make it unfeasible to use insurance proceeds to replace a facility after it has been damaged or destroyed. Under such circumstances, we may not receive insurance proceeds or the insurance proceeds we receive may not fully cover business interruptions or losses and our earnings, liquidity, or capital resources could be adversely affected.
Increases in property insurance premiums and decreases in availability of homeowner property insurance in Florida could reduce customer demand for homes and homesites in our developments.
Homeowner property insurance companies doing business in Florida have reacted to previous hurricanes by increasing premiums, requiring higher deductibles, reducing limits, restricting coverage, imposing exclusions, refusing to insure certain property owners, and in some instances, ceasing insurance operations in the state. It is uncertain what effect these actions may have on future property insurance availability and rates in the state.
Furthermore, Florida’s state-owned property insurance company, Citizens Property Insurance Corp., underwrites homeowner property insurance. If there were to be a catastrophic hurricane or series of hurricanes to hit Florida, the exposure of the state government to property insurance claims could place extreme stress on state finances.
The high costs of property insurance premiums in Florida could deter potential customers from purchasing a homesite in one of our developments or make Northwest Florida less attractive to new employers that can create high quality jobs needed to increase growth in the region, either of which could have a material adverse effect on our business, results of operations, cash flows and financial condition.
A decline in consumers’ discretionary spending or a change in consumer preferences could reduce our sales and harm our business.
Our real estate and resorts and leisure segments’ revenue ultimately depends on consumer discretionary spending, which is influenced by factors beyond our control, including general economic conditions, the availability of discretionary income and credit, weather, consumer confidence and unemployment levels. Any material decline in the amount of consumer discretionary spending could reduce our revenue and harm our business. These economic and market conditions, combined with continuing difficulties in the credit markets and the resulting pressures on liquidity, may also place a number of our key customers under financial stress, which could adversely affect our occupancy rates and our profitability, which, in turn, could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Downturns of the real estate market in Northwest Florida could adversely affect our operations.
Demand for real estate is sensitive to changes in economic conditions over which we have no control, including the level of employment, consumer confidence, consumer income, the availability of financing and interest rate levels. In addition, the real estate market is subject to downturns, and our business is especially sensitive to economic conditions in Northwest Florida, where many of our developments are located, and, more broadly, the Southeast region of the United States, which in the past has produced a high percentage of customers for the resort and seasonal vacation products in our Northwest Florida communities. If market conditions do not continue to improve as anticipated or were to worsen, the demand for our resort and real estate products could decline, negatively impacting our business, results of operations, cash flows and financial condition.
Recent tax law changes could make home ownership more expensive or less attractive.
Historically, significant expenses of owning a home, including mortgage interest expense and real estate taxes, generally have been deductible expenses for the purpose of calculating an individual’s federal, and in some cases state, taxable income as itemized deductions. The recently enacted tax law changes by the Federal government may result in the elimination of some deductions, or limiting the tax benefit of deductions, with regard to people with incomes above specified levels. These changes in tax laws could increase the after-tax cost of owning a home, which is likely to adversely impact the demand for homes and could reduce the prices for which we can sell homesites, particularly in higher priced communities.

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Significant competition could have an adverse effect on our business.
Our business is highly competitive and fragmented. We compete with other local, regional and national real estate leasing and development companies, some of which may have greater financial, marketing, sales and other resources than we do. Competition from other real estate leasing and development companies may adversely affect our ability to attract tenants and lease our commercial properties, attract purchasers and sell residential and commercial real estate and attract and retain experienced real estate leasing and development personnel. In addition, we face competition for tenants from other retail shopping centers and commercial facilities.
A number of highly competitive companies participate in the private resort industry. Our ability to remain competitive and to attract and retain guests and club members depends on our success in distinguishing the quality and value of our products and services from those offered by others.
The forestry business is also highly competitive in terms of price and quality. Wood products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products. There can be no assurance we will be able to compete successfully against current or future competitors or that competitive pressures we face in the markets in which we operate will not have a material adverse effect on our business, results of operations, cash flows and financial condition.
We are dependent upon homebuilders as customers, but our ability to attract homebuilder customers and their ability or willingness to satisfy their purchase commitments may be uncertain.
We are highly dependent upon our relationships with homebuilders to be the primary customers for our homesites and to provide construction services in our residential developments. The homebuilder customers that have already committed to purchase homesites from us could decide to reduce, delay or cancel their existing commitments to purchase homesites in our developments. From time to time we finance real estate sales with mortgage note receivables. If these homebuilders fail to pay their debts to us or delay paying us, it would reduce our anticipated cash flows. Homebuilders also may not view our developments as desirable locations for homebuilding operations, or they may choose to purchase land from other sellers. Any of these events could have an adverse effect on our business, results of operations, cash flows and financial condition.
We are exposed to risks associated with real estate development that could adversely impact our results of operations, cash flows and financial condition.
Our real estate development activities entail risks that could adversely impact our results of operations, cash flows and financial condition, including:
construction delays or cost overruns, which may increase project development costs;
claims for construction defects after property has been developed, including claims by purchasers and property owners’ associations;
an inability to obtain required governmental permits and authorizations;
an inability to secure tenants necessary to support commercial projects; and
compliance with building codes and other local regulations.
Our leasing projects may not yield anticipated returns, which could harm our operating results, reduce cash flow, or the ability to sell commercial assets.
Our business strategy includes the development and leasing of commercial properties and management of commercial properties and assets for sale. These commercial developments may not be as successful as expected due to leasing related risks, including the risk that we may not be able to lease new properties to an appropriate mix of tenants or obtain lease rates that are consistent with our projections, as well as the risks generally associated with real estate development. Additionally, development of leasing projects involves the risk associated with the significant time lag between commencement and completion of the project. This time lag subjects us to greater risks relating to fluctuations in the general economy, our ability to obtain construction or permanent financing on favorable terms, if at all, our ability to achieve projected rental rates, the pace that we will be able to lease to new tenants, higher than estimated construction costs (including labor and material costs), and delays in the completion of projects because of, among other factors, inclement weather, labor disruptions, construction delays or delays in receiving zoning or other regulatory approvals, or man-made or natural disasters. If any one of these factors negatively impacts our leasing projects we may not yield anticipated returns, which could have a material adverse effect on our operating results, cash flows and ability to sell commercial assets.

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We face potential adverse effects from the loss of commercial tenants.
A component of our business strategy is the development and leasing of commercial properties. The default, financial distress, or bankruptcy of a major tenant may adversely affect the income produced by our commercial properties. If one or more of our tenants, particularly an anchor tenant, declares bankruptcy, defaults or voluntarily vacates from the leased premises, we may be unable to re-lease such space or to re-lease it on comparable or more favorable terms. Additionally, the loss of an anchor tenant may make it more difficult to lease the remainder of the affected properties, which could have a material adverse effect on our results of operations, cash flows and financial condition. This could adversely affect our properties and growth.
We provide a limited guarantee of the debt for our Pier Park North JV, and may in the future enter into similar agreements, which may have a material adverse effect on our results of operations, cash flows and financial condition.
We have agreed to provide a limited guarantee in connection with our Pier Park North JV, and may in the future agree to similar agreements. In October 2015, the Pier Park North JV refinanced its construction loan and entered into a $48.2 million loan (the “Refinanced Loan”) that matures in November 2025. As of December 31, 2017, $47.3 million was outstanding on the Refinanced Loan. Pursuant to the Refinanced Loan, we have provided a limited guarantee in favor of the lender that covers losses arising as a result of: (i) tenant security deposits; (ii) tenant rents; (iii) costs and expenses related to any environmental clean-up; (iv) liability for fraud or material breach of warranty with respect to the financing; (v) unpaid real estate taxes assessed against the property; (vi) failure to maintain required insurance; (vii) foreclosure of the security instrument; or (viii) failure of the joint venture to comply with certain covenants in the agreement. In addition, the guarantee can become full recourse in the case of any fraud or intentional misrepresentation by the joint venture; any voluntary transfer or encumbrance of the property in violation of the due-on-sale clause in the security instrument; upon commencement of voluntary bankruptcy or insolvency proceedings; and upon breach of covenants in the security instrument. If we were to become obligated to perform on the guarantee, it could have a material adverse effect on our results of operations, cash flows and financial condition.
Environmental and other regulations may have an adverse effect on our business.
Our properties are subject to federal, state and local environmental regulations and restrictions that may impose significant limitations on our development ability. In most cases, approval to develop requires multiple permits, which involve a long, uncertain and costly regulatory process. Our land holdings contain jurisdictional wetlands, some of which may be unsuitable for development or prohibited from development by law. Development approval most often requires mitigation for impacts to wetlands that require land to be conserved at a disproportionate ratio versus the actual wetlands impacted and approved for development. Some of our property is undeveloped land located in areas where development may have to avoid, minimize or mitigate for impacts to the natural habitats of various protected wildlife or plant species. Additionally, much of our property is in coastal areas that usually have a more restrictive permitting burden or must address issues such as coastal high hazard, hurricane evacuation, floodplains and dune protection.
In addition, our current or past ownership, operation and leasing of real property, and our current or past transportation and other operations, are subject to extensive and evolving federal, state and local environmental laws and other regulations. The provisions and enforcement of these environmental laws and regulations may become more stringent in the future. Violations of these laws and regulations can result in, among other things, the following:
civil penalties;
remediation expenses;
natural resource damages;
personal injury damages;
potential injunctions;
cease and desist orders; and
criminal penalties.
In addition, some of these environmental laws impose strict liability, which means that we may be held liable for any environmental damage on our property regardless of fault.

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Some of our past and present real property, particularly properties used in connection with our previous transportation and papermill operations, were involved in the storage, use or disposal of hazardous substances that have contaminated and may in the future contaminate the environment. We may bear liability for this contamination and for the costs of cleaning up a site at which we have disposed of, or to which we have transported, hazardous substances. The presence of hazardous substances on a property may also adversely affect our ability to sell or develop the property or to borrow funds using the property as collateral.
Changes in laws or the interpretation thereof, new enforcement of laws, the identification of new facts or the failure of other parties to perform remediation at our current or former facilities could lead to new or greater liabilities that could materially adversely affect our business, results of operations, cash flows or financial condition.
From time to time, we may be subject to periodic litigation and other regulatory proceedings, which could impair our financial results of operations.
From time to time, we may be involved in lawsuits and regulatory actions relating to our business, our operations and our position as an owner and operator of real estate and related ventures. An adverse outcome in any of these matters could adversely affect our financial condition, our results of operations or impose additional restrictions or limitations on us. In addition, regardless of the outcome of any litigation or regulatory proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend our Company. For example, in 2015, we fully resolved an SEC investigation regarding our policies and practices concerning impairment of investment in real estate assets principally as reflected in our financial results for 2010, 2009 and prior periods. The settlement and all allegations related to actions taken prior to the 2011 replacement of the Board, the Chief Executive Officer and the Chief Financial Officer. None of the SEC’s allegations, findings, sanctions, remedies or orders related to any of our current directors or controlling shareholders. Without admitting or denying any factual allegations, we consented to the SEC’s issuance of an administrative order.
Pursuant to the order, we agreed to pay penalties, disgorgements and interest of approximately $3.5 million. In connection with the SEC investigation we also incurred significant legal expenses and devoted substantial management resources to its resolution. If we were to become subject to other litigation or regulatory proceedings in the future, it could impair our financial results of operations. In addition, as a result of the order, we became an “ineligible issuer” under Rule 405 of the Securities Act of 1933, which means that for a period of three years after the order, we will not be able to use certain streamlined registration procedures, and we will be unable to rely on an exemption from registration for the sale of securities under Regulation D for a period of five years after the order, both of which could make it harder for us to sell shares. Further, we will be unable to avail ourselves of the statutory safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 for a period of three years after the order.
In addition, the land use approval processes we must follow to ultimately develop our projects have become increasingly complex. Moreover, the statutes, regulations and ordinances governing the approval processes provide third parties the opportunity to challenge the proposed plans and approvals. As a result, the prospect of third-party challenges to planned real estate developments provides additional uncertainties in real estate development planning and entitlements. Third-party challenges in the form of litigation could result in denial of the right to develop, or would, by their nature, adversely affect the length of time and the cost required to obtain the necessary approvals. In addition, adverse decisions arising from any litigation would increase the costs and length of time to obtain ultimate approval of a project and could adversely affect the design, scope, plans and profitability of a project.
Limitations on the access to the airport runway at the Northwest Florida Beaches International Airport may have an adverse effect on the demand for our VentureCrossings land adjacent to the airport.
Our land donation agreement with the airport authority and the deed for the airport land provide access rights to the airport runway from our adjacent lands. We subsequently entered into an access agreement with the airport authority that provides access to the airport runway. Under the terms of the access agreement, we are subject to certain requirements of the airport authority, including but not limited to the laws administered by the Federal Aviation Administration (the “FAA”), the Florida Department of Environmental Protection (the “FDEP”), the U.S. Army Corps of Engineers (the “Corps of Engineers”), and Bay County. Should security measures at airports become more restrictive in the future due to circumstances beyond our control, FAA regulations governing these access rights may impose additional limitations that could significantly impair or restrict access rights.
In addition, we are required to obtain environmental permits from each of the Corps of Engineers and the FDEP in order to develop the land necessary for access from our planned areas of commercial development to the airport runway. Such permits are often subject to a lengthy agency administrative approval process, and there can be no assurance that such permits will be issued, or that they will be issued in a timely manner.

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We believe that runway access is a valuable attribute of some of our VentureCrossings land adjacent to the airport, and the failure to maintain such access, the imposition of significant restrictions on such access, or any associated permitting delays or issues, could adversely affect the demand for such lands and our business, results of operations, cash flows and financial condition.
Weather and other natural conditions and regulatory requirements may limit our ability to market and sell our timber assets, which could adversely affect our operations.
Weather conditions, timber growth cycles, access limitations (for example, restrictions on access to timberlands due to prolonged wet conditions) and regulatory requirements associated with the protection of wildlife and water resources may restrict our ability to market and sell our timber assets. In addition, our timber assets are subject to damage by fire, insect infestation, disease, prolonged drought, flooding and other natural disasters. Changes in global climate conditions could intensify one or more of these factors. Although damage from such natural causes usually is localized and affects only a limited percentage of the timber assets, there can be no assurance that any damage affecting our timberlands will in fact be so limited. We do not maintain insurance coverage with respect to damage to our timberlands. Our results of operations and cash flows may therefore be materially adversely affected if we are unable to sell our timber assets at adequate levels or if demand decreases due to an increase in our prices as a result of any of these factors.
We face risks associated with third-party service providers, which could negatively impact our profitability.
We rely on various third-parties to conduct the day-to-day operations of our resorts and club operations. Failure of such third parties to adequately perform their contracted services could negatively impact our ability to retain customers. As a result, any such failure could negatively impact our results of operations, cash flows and financial condition.
Risks Related to Our Company or Common Stock
The market price of our common stock has been, and may continue to be, highly volatile.
The market price of our common stock on the New York Stock Exchange has been volatile. We may continue to experience significant volatility in the market price of our common stock. Numerous factors could have a significant effect on the price of our common stock, including:
announcements of fluctuations in our operating results;
other announcements concerning our Company or business, including acquisitions or litigation announcements;
changes in market conditions in Northwest Florida or the real estate or real estate development industry in general;
changes in recommendations or earnings estimates by securities analysts; and
less volume due to reduced shares outstanding.
In addition, the stock market has experienced significant price and volume fluctuations in recent years, which have sometimes been unrelated or disproportionate to operating performance. Volatility in the market price of our common stock could cause shareholders to lose some or all of their investment in our common stock.
Fairholme has the ability to influence major corporate decisions, including decisions that require the approval of stockholders, and its interest in our business may conflict with yours.
Bruce R. Berkowitz is the Chief Investment Officer of FCM, a director of FTC and the Chairman of our Board. Mr. Berkowitz is also the Manager of, and controls entities that own and control, Fairholme Holdings, which wholly owns FCM and FTC. Cesar Alvarez also serves as a director of the Fairholme Fund, a director of FTC and is a member of our Board. In addition, Howard Frank serves as a director of the Fairholme Fund and is a member of our Board. As of December 31, 2017, clients of FCM and FTC beneficially owned approximately 42.33% of the Company’s common stock and Fairholme, including Mr. Berkowitz and clients of FCM and FTC, collectively beneficially owned 43.95% of our outstanding common stock. Accordingly, Fairholme is in a position to influence:
the vote of most matters submitted to our shareholders, including any merger, consolidation or sale of all or substantially all of our assets;
the nomination of individuals to our Board; and
a change in our control.
These factors may discourage, delay or prevent a takeover attempt that shareholders might consider in their best interests or that might result in shareholders receiving a premium for their common stock. Our articles of incorporation and certain provisions of Florida law contain anti-takeover provisions that may make it more difficult to effect a change in our control.

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In addition, Fairholme is in the business of making or advising on investments in companies and may hold, and may, from time to time in the future, acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business. Fairholme may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
Furthermore, future sales of our common stock by Fairholme, or the perception in the public markets that these sales may occur, may depress our stock price.
The loss of the services of our key management, personnel or our ability to recruit staff could adversely affect our business.
Our ability to successfully implement our business strategy will depend on our ability to attract and retain experienced and knowledgeable management and other professional staff. One of our objectives is to develop and maintain a strong management group at all levels. At any given time, we could lose the services of key executives and other employees. The loss of services of any of our key employees could have an adverse effect upon our results of operations, financial condition, and our ability to execute our business strategy. In addition, we cannot assure you that we will be successful in attracting and retaining key management personnel.
Changes in our income tax estimates could materially impact our results of operations, cash flows and financial condition.
In preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws and rates. To the extent adjustments are required in any given period, we include the adjustments in the deferred tax assets and liabilities in our consolidated financial statements. These adjustments could materially impact our results of operations, cash flows and financial condition.
We may not be able to utilize our net state operating loss carryforwards.
We have suffered losses, for tax and financial statement purposes, which generated significant state net operating loss carryforwards. These state net operating loss carryforwards may be used against taxable income in future periods; however, we will not receive any tax benefits with regard to tax losses incurred except to the extent we have taxable income in the remaining net operating loss carryforward period.
Based on the timing of reversals of our existing taxable temporary differences and our history of losses, management does not believe that the requirements to realize the benefits of certain of our deferred tax assets have been met; therefore, we have maintained a valuation allowance against a portion of our deferred tax assets in our consolidated financial statements as of December 31, 2017. Unless we generate more income in the future than presently estimated, we will not be able to utilize all of our state net operating loss carryforwards.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Tax Act”), new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the Tax Act. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse.

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We have had to take significant impairments of the carrying value of our investments in real estate and a decline in real estate values or continuing operating losses in our operating properties could result in additional impairments, which would have an adverse effect on our results of operations and financial condition.
Over the past five years, we have recorded impairment charges of $6.2 million related to real estate investments. We have approximately $332.6 million of real estate investments recorded on our books that may be subject to impairment. If market conditions were to deteriorate, our estimate of undiscounted future cash flows could fall below their carrying value and we could be required to take further impairments, which would have an adverse effect on our results of operations and financial condition.
Changes in accounting pronouncements could adversely affect our reported operating results, in addition to the reported financial performance of our tenants.
Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board (“FASB”) and the SEC, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Changes include, but are not limited to, changes in lease accounting and the adoption of accounting standards that establish the principles used to recognize revenue for all entities. These changes and others could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements.
Failure to maintain the integrity of internal or customer data could result in faulty business decisions, damage of reputation and/or subject us to costs, fines or lawsuits.
We face risks associated with security breaches or disruptions, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, persons inside our organization or persons with access to systems, and other significant disruptions of our networks and related systems. For a number of years, we have been increasing our reliance on computers and digital technology. While all of our business and internal employment records require the collection of digital information, our resorts and leisure segment, in particular, requires the collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers, as such information is entered into, processed, summarized, and reported by the various information systems we use. All of these activities give rise to material cyber risks and potential costs and consequences that cannot be estimated or predicted with any certainty. The integrity and protection of our customer, employee and other company data, is critical to us. Although we make efforts to maintain the security and integrity of these networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we and our service providers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us and our service providers to entirely mitigate this risk. Our failure to maintain the security of the data, which we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, fines, penalties, regulatory proceedings and other severe financial and business implications.
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements, or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives at all times. Deficiencies, including any material weakness, in our internal control over financial reporting, which may occur in the future, could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition, or liquidity.


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Item 1B.    Unresolved Staff Comments
None.
Item 2.        Properties
We own our principal executive offices located in WaterSound, Florida. As of December 31, 2017, we owned approximately 177,000 acres, the majority of which were located in Northwest Florida. Our raw land assets are managed by us as timberlands until designated for development. As further described herein, we own and develop multiple residential communities. In addition, our resorts and leisure and commercial leasing and sales segments include the following properties:
WaterColor Inn. We own the WaterColor Inn, a boutique hotel, and nearby retail and commercial space. We own additional properties in our WaterSound Beach and WindMark Beach communities that we operate as short term vacation rental property. We did not own the homes included in our short term vacation rental management business, which we sold in December 2017.
Clubs. We own four golf courses and a beach club in Northwest Florida. Three of the golf courses and the beach club are in the Panama City Beach area and the fourth golf course is located in Tallahassee. The golf courses and beach club are situated in or near our residential communities. Our golf course property primarily includes the golf course land, clubhouses, other buildings and equipment. We also own and operate two marinas. Our marina properties primarily include land and improvements, marina slips and equipment.
Leasing. We own the property included in our commercial leasing and sales segment, which include retail, office, industrial and commercial leasing properties, such as our Beckrich Office Park, property located in our consolidated Pier Park North JV, VentureCrossings industrial park, commerce park buildings, several retail shopping centers and other properties.
For more information on our real estate assets, see “Item 1. Business” and “Schedule III (Consolidated) - Real Estate and Accumulated Depreciation” included in the schedules to the consolidated financial statements included in Item 15 of this Form 10-K for further information.

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Item 3.        Legal Proceedings
We are subject to a variety of litigation, claims, other disputes and governmental proceedings that arise from time to time in the ordinary course of our business, none of which we believe will have a material adverse effect on our consolidated financial position, results of operations or liquidity.
In addition, we are subject to 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. Refer to Note 20. Commitments and Contingencies, included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K for further discussion
Item 4.        Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On February 26, 2018 we had approximately 1,036 registered holders of record of our common stock. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “JOE.”
The ranges of high and low prices for our common stock as reported on the NYSE are set forth below: 
 
Common Stock Price
 
High
 
Low
2017
 
 
 
Fourth Quarter
$
19.45

 
$
17.43

Third Quarter
$
19.90

 
$
17.70

Second Quarter
$
19.55

 
$
16.45

First Quarter
$
19.30

 
$
16.30

2016
 
 
 
Fourth Quarter
$
21.50

 
$
16.55

Third Quarter
$
19.68

 
$
17.37

Second Quarter
$
18.03

 
$
16.08

First Quarter
$
17.69

 
$
14.43

On February 26, 2018, the closing price of our common stock on the NYSE was $18.20. We did not pay cash dividends in 2017 or 2016. The declaration and payment of any future dividends will be at the discretion of our Board after taking into account various factors, including without limitation, our financial condition, earnings, capital requirements of our business, the terms of any credit agreements or indentures to which we may be party at the time, legal requirements, industry practice, and other factors that our Board deems relevant.

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The following performance graph compares our cumulative shareholder returns for the period December 31, 2012, through December 31, 2017, assuming $100 was invested on December 31, 2012, in our common stock, in the Russell 3000 Index, and a custom real estate peer group (the “Custom Real Estate Peer Group”), which is composed of the following companies:
Alexander & Baldwin Inc. (ALEX)
Consolidated Tomoka-Land Co. (CTO)
Five Point Holdings, LLC (FPH)
HomeFed Corp. (HOFD)
The Howard Hughes Corp. (HHC)
Maui Land & Pineapple Co. Inc. (MLP)
Stratus Properties Inc. (STRS)
Tejon Ranch Co. (TRC)
The total returns shown assume that dividends are reinvested. The stock price performance shown below is not necessarily indicative of future price performance.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12099356&doc=14
   
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
The St. Joe Company
$
100

 
$
83.15

 
$
79.68

 
$
80.20

 
$
82.32

 
$
78.21

Russell 3000 Index
$
100

 
$
133.55

 
$
150.32

 
$
151.04

 
$
170.28

 
$
206.26

Custom Real Estate Peer Group*
$
100

 
$
152.82

 
$
158.81

 
$
137.06

 
$
154.00

 
$
166.83

     
*
The total return for the Custom Real Estate Peer Group was calculated using an equal weighting for each of the stocks within the peer group.

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The following table provides information on our repurchases of common stock during the three months ended December 31, 2017:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
 
 
 
 
 
 
 
 
In Millions
October 1-31, 2017
 
220,299

 
$
17.93

 
220,299

 
$
143,752

November 1-30, 2017
 
418,058

 
17.87

 
418,058

 
136,277

December 1-31, 2017
 

 

 

 

Total
 
638,357

 
$
17.89

 
638,357

 
$
136,277

    
(1)
In 2015, we announced that our Board authorized an additional $200.0 million for stock repurchases under our stock repurchase program (the “Stock Repurchase Program”). As of December 31, 2016, we had a total of $190.9 million available for purchase of shares under our Stock Repurchase Program. The Stock Repurchase Program has no expiration date. On July 7, 2017, our Board authorized additional repurchases of up to $28.0 million of our shares of common stock under the Stock Repurchase Program. On July 11, 2017, we repurchased 1.5 million shares for an aggregate purchase price of $27.0 million. On September 18, 2017, our Board authorized additional repurchase authority of up to $66.0 million of our shares of common stock under the Stock Repurchase Program. On September 20, 2017, we repurchased 3.7 million shares for an aggregate purchase price of $65.8 million. After giving effect to these and other recent repurchase activities, as of December 31, 2017, we had $136.3 million remaining under the Stock Repurchase Program.


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Item 6.         Selected Financial Data
The following table sets forth our selected consolidated financial data on a historical basis for the five years ended December 31, 2017. This information should be read in conjunction with our consolidated financial statements (including the related notes thereto) and management’s discussion and analysis of financial condition and results of operations, each included elsewhere in this Form 10-K. This historical selected consolidated financial data has been derived from our audited consolidated financial statements.
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
In thousands, except per share amounts
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Total revenue (1) (2)
$
98,796

 
$
95,744

 
$
103,871

 
$
701,873

 
$
131,256

Total cost of revenue (3) (4)
67,194

 
62,194

 
67,094

 
136,798

 
91,993

Other operating and corporate expenses
20,382

 
23,019

 
33,426

 
26,128

 
27,855

Pension charges

 

 

 
13,529

 
1,500

Costs associated with special purpose entities

 

 

 
3,746

 

Depreciation, depletion and amortization
8,885

 
8,571

 
9,486

 
8,422

 
9,131

Total expenses
96,461

 
93,784

 
110,006

 
188,623

 
130,479

Operating income (loss)
2,335

 
1,960

 
(6,135
)
 
513,250

 
777

Other income, net (5) (6)
39,020

 
20,651

 
4,972

 
8,571

 
3,668

Income (loss) before equity in (loss) income from unconsolidated affiliates and income taxes
41,355

 
22,611

 
(1,163
)
 
521,821

 
4,445

Equity in (loss) income from unconsolidated affiliates

 

 

 
(32
)
 
112

Income tax benefit (expense) (7)
17,881

 
(7,147
)
 
(808
)
 
(115,507
)
 
409

Net income (loss)
59,236

 
15,464

 
(1,971
)
 
406,282

 
4,966

Net loss attributable to non-controlling interest
342

 
431

 
240

 
171

 
24

Net income (loss) attributable to the Company
$
59,578

 
$
15,895

 
$
(1,731
)
 
$
406,453

 
$
4,990

 
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
Basic and Diluted
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to the Company
$
0.84

 
$
0.21

 
$
(0.02
)
 
$
4.40

 
$
0.05

 
 
 
 
 
 
 
 
 
 
(1)
Total revenue includes revenue from real estate revenue, resorts and leisure revenue, leasing revenue and timber revenue.
(2)
Total revenue in 2014 includes $570.9 million from the AgReserves Sale and $43.6 million from the RiverTown Sale.
(3)
Total cost of revenue includes cost of revenue from real estate revenue, resorts and leisure revenue, leasing revenue and timber revenue.
(4)
Total cost of revenue in 2014 includes $58.4 million from the AgReserves Sale and $17.6 million from the RiverTown Sale.
(5)
Other income, net in 2017 includes $9.8 million from the short term vacation rental management business sale. Refer to Note 7. Sale of Vacation Rental Management included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K for further discussion.
(6)
Other income, net in 2016 includes $12.5 million related to a claim settlement. Refer to Note 6. Claim Settlement Receivable included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K for further discussion.
(7)
Income tax benefit (expense) in 2017 includes $33.5 million of net tax benefit related to the Tax Act.

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Table of Contents

 
As of December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
In thousands
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Investment in real estate, net
$
332,624

 
$
314,620

 
$
313,599

 
$
321,812

 
$
385,009

Cash and cash equivalents
$
192,083

 
$
241,111

 
$
212,773

 
$
34,515

 
$
21,894

Investments
$
111,268

 
$
175,725

 
$
191,240

 
$
636,878

 
$
146,972

Property and equipment, net
$
11,776

 
$
8,992

 
$
10,145

 
$
10,203

 
$
11,410

Total assets
$
920,993

 
$
1,027,945

 
$
982,742

 
$
1,303,135

 
$
669,472

Debt (1) (2)
$
55,630

 
$
55,040

 
$
54,474

 
$
63,804

 
$
44,217

Senior notes held by special purpose entity (2) (3)
$
176,537

 
$
176,310

 
$
176,094

 
$
177,341

 
$

Total debt
$
232,167

 
$
231,350

 
$
230,568

 
$
241,145

 
$
44,217

Total equity
$
592,584

 
$
686,799

 
$
673,447

 
$
979,701

 
$
563,525

(1)
Debt includes the Refinanced Loan held by our Pier Park North JV, Community Development District debt and construction loan for a commercial leasing property.
(2)
Debt and senior notes held by special purpose entity are presented net of debt issuance costs as of December 31, 2017, 2016 and 2015.
(3)
Refer to Note 5. Financial Instruments and Fair Value Measurements included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K for further discussion on our special purpose entities.



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Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
St. Joe is a real estate development, asset management and operating company with real estate assets currently concentrated primarily between Tallahassee and Destin, Florida. As a real estate development company, St. Joe seeks to enhance the value of our real estate assets by undertaking targeted types of residential and commercial real estate development opportunities. As an asset management company, St. Joe actively manages leasing operations and forestry operations to capture the value of our real estate assets. As an operating company, St. Joe operates some of the finest resorts and leisure operations that Northwest Florida has to offer, including the award-winning WaterColor Inn.
We believe that our present real estate holdings and liquidity position 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, asset management and resort operations. We actively seek higher and better uses for our diverse real estate assets through a wide range of strategic activities from land planning and development, to targeted infrastructure improvements and promoting economic development in the Northwest Florida region. We have significant residential and commercial land-use entitlements in hand or in process related to our land. We may explore the sale of all or portions of these assets opportunistically or when we believe that we can better deploy those resources.
Our strategic plan for 2018 includes making investments that we believe will contribute towards increasing our future growth, particularly in real estate projects that provide recurring revenue. Our 2018 capital expenditures budget is estimated to total $129.6 million, including $36.2 million for the development and acquisition of land for residential real estate projects, $82.7 million for our commercial leasing and sales segment, $9.2 million for our resorts and leisure segment and $1.5 million for our forestry segment and corporate expenditures. We anticipate that these future capital commitments will be funded through new financing arrangements, cash and cash equivalents, short term investments and cash generated from operations. We expect to make these investments, and possibly other investments, throughout the coming fiscal year, but do not anticipate that we will see the full benefit of our investments during 2018.
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, our practice is to only incur such expenditures when our analysis indicates that a 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 four 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 investment trusts, and other investments in liquid or illiquid securities where we believe we can increase our returns.
Segments
As of December 31, 2017, we have the following four operating segments: 1) residential real estate, 2) resorts and leisure 3) commercial leasing and sales and 4) forestry. Commencing in the fourth quarter of 2017, our commercial real estate segment and leasing operations segment were combined into a new segment titled “commercial leasing and sales”. This change is consistent with our belief that the decision making and management of the assets in these segments are being made as one group. Prior to the fourth quarter of 2017, commercial real estate and leasing operations were treated as individual operating segments. All prior years’ segment information has been reclassified to conform to the 2017 presentation. The change in reporting segments has no effect on the consolidated balance sheets, statements of operations, statements of comprehensive income (loss) or statements of cash flows for the periods presented.

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The following table sets forth the relative contribution of these operating segments to our consolidated operating revenue:
 
2017
 
2016
 
2015
Segment Operating Revenue
 
 
 
 
 
Residential real estate
22.0
%
 
20.3
%
 
20.3
%
Resorts and leisure
55.5
%
 
59.8
%
 
52.5
%
Commercial leasing and sales
14.7
%
 
12.5
%
 
15.5
%
Forestry
7.3
%
 
7.0
%
 
11.6
%
Other
0.5
%
 
0.4
%
 
0.1
%
Consolidated operating revenue
100.0
%
 
100.0
%
 
100.0
%
Residential Real Estate
Our residential real estate segment typically plans and develops residential communities of various sizes. From time to time, our residential real estate segment also evaluates opportunities to maximize value by selling some of our resorts and leisure properties. As is true with all of our projects, what residential real estate will actually be developed, including the actual amount of units that we ultimately approve for development in any residential development community, 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 the development. The following is a description of some of our major residential development communities 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. 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.
The SouthWood community is a large scale, mixed use community located in 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. 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 commercial leasing and sales segment.
We have other residential communities, such as the SummerCamp Beach, RiverCamps, WindMark Beach and WaterColor communities that have homesites available for sale or future development. In addition, we have residential communities, such as the WaterSound Beach and WaterSound West Beach 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. In addition, the majority of our sales are to homebuilders, who 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.
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 are growing retirement and workforce housing demographics and that our development experience and the location, size and contiguous nature of our Florida land holdings provide us with strategic opportunities in these demographics.

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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, which is April 2, 2019). However, the actual consideration we will receive for the impact fees will be based on a variety of factors outside our control. We received impact fees of $0.9 million, $0.4 million and $0.1 million, during 2017, 2016 and 2015, respectively. In total, we have received approximately $1.6 million from April 2014 through December 31, 2017.
Resorts and Leisure
Our resorts and leisure segment features a hotel and a diverse portfolio of vacation rentals, as well as restaurants, golf courses, a beach club, marinas and other resort amenities.
WaterColor Inn, Vacation Rentals and Other Management Services - Our WaterColor Inn and vacation rentals generated revenue from (1) the WaterColor Inn 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, maintenance of the inn’s facilities, 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 holding costs of assets we own and standard lodging personnel, such as front desk, reservations and marketing. As discussed further below, we sold our short term vacation rental management business during December 2017. Following the December 2017 sale, we no longer manage third party vacation rentals, but continue to manage vacation rental properties we own. Our restaurants generate revenue from food and beverage sales and incur expenses from the cost of services and goods provided and standard restaurant personnel costs.
Clubs - Our club operations include our golf courses, beach club and facilities that generate revenue from membership sales, membership reservations, 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, beach club and facilities, personnel costs and third-party management fees.
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.
From time to time, we may explore the sale of certain resort and leisure properties, as well as development of new resort and leisure properties.
Commercial Leasing and Sales
Our commercial leasing and sales segment includes the leasing of retail, office and commercial property, cell towers, and other assets as well as planning, development, entitlement, management and sale of our commercial land holdings for a variety of uses, including a broad range of retail, office, hotel, multi-family and industrial uses. Our commercial leasing and sales segment generates leasing revenue and incurs leasing expenses primarily from maintenance and management of our properties, personnel costs and asset holding costs. Our commercial leasing and sales segment also 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 entitlements and the sale of commercial operating properties. Real estate sales in our commercial leasing and sales segment incur costs of revenue directly associated with the land, development, construction and selling costs. Our Pier Park North JV incurs interest and financing expenses related to its loan as described in Note 11. Debt included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K. As is true with all of our projects, what commercial real estate will actually be developed 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 the development. From time to time, our commercial leasing and sales segment also evaluates opportunities to maximize value by selling some of our resorts and leisure properties.
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.

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As of December 31, 2017, we had an estimated 2.5 million tons of marketable pulpwood and 2.7 million tons of marketable sawlogs on approximately 60,000 acres. Our ability to operate the remaining acreage is limited by geographic restrictions, (e.g., lakes and wetlands that do not yield enough timber to make it cost effective to operate in those areas, land set aside for mitigation banks and certain regulatory restrictions). Based on our annual harvest plan, we anticipate harvesting approximately 330,000 tons of pulpwood and sawlogs during 2018.
Our forestry segment may also generate revenue from the sale or lease 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.
Results of Operations
Consolidated Results
Revenue and expenses. The following table sets forth a comparison of the results of our operations for the three years ended December 31, 2017
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
In millions
Revenue:
 
 
 
 
 
Real estate revenue
$
27.7

 
$
23.4

 
$
33.7

Resorts and leisure revenue
54.8


57.3


54.5

Leasing revenue
10.7


9.8


9.0

Timber revenue
5.6

 
5.2


6.7

Total
98.8

 
95.7

 
103.9

Expenses:
 
 
 
 
 
Cost of real estate revenue
15.4


8.0


16.4

Cost of resorts and leisure revenue
47.8


50.2


47.1

Cost of leasing revenue
3.2


3.1


2.8

Cost of timber revenue
0.8

 
0.8

 
0.8

Other operating and corporate expenses
20.4

 
23.1

 
33.4

Depreciation, depletion and amortization
8.9

 
8.6

 
9.5

Total
96.5

 
93.8

 
110.0

Operating income (loss)
2.3

 
1.9

 
(6.1
)
Other income (expense):
 
 
 
 
 
Investment income, net
35.4

 
17.8

 
22.7

Interest expense
(12.2
)
 
(12.3
)
 
(11.4
)
Claim settlement

 
12.5

 

Sale of vacation rental management, net
9.8

 

 

Other income (expense), net
6.0

 
2.7

 
(6.3
)
Total other income, net
39.0

 
20.7

 
5.0

Income (loss) before income taxes
41.3

 
22.6

 
(1.1
)
Income tax benefit (expense)
17.9

 
(7.1
)
 
(0.8
)
Net income (loss)
$
59.2

 
$
15.5

 
$
(1.9
)

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Table of Contents

Real Estate Revenue and Gross Profit
 
2017
 
% (1)
 
2016
 
% (1)
 
2015
 
% (1)
 
Dollars in millions
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate revenue
$
21.6

 
78.0
%
 
$
19.5

 
83.3
%
 
$
21.2

 
62.9
%
Commercial real estate revenue
3.9

 
14.1
%
 
2.1

 
9.0
%
 
7.2

 
21.4
%
Rural land and other revenue
2.2

 
7.9
%
 
1.8

 
7.7
%
 
5.3

 
15.7
%
Real estate revenue
$
27.7

 
100.0
%
 
$
23.4

 
100.0
%
 
$
33.7

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
9.1

 
42.1
%
 
$
13.1

 
67.2
%
 
$
10.3

 
48.6
%
Commercial real estate
1.1

 
28.2
%
 
0.8

 
38.1
%
 
2.2

 
30.6
%
Rural land and other
2.1

 
95.5
%
 
1.5

 
83.3
%
 
4.8

 
90.6
%
Gross profit
$
12.3

 
44.4
%
 
$
15.4

 
65.8
%
 
$
17.3

 
51.3
%
(1) 
Calculated percentage of total real estate revenue and the respective gross margin percentage.
Real Estate Revenue and Gross Profit. During 2017, residential real estate revenue increased $2.1 million, or 10.8%, to $21.6 million, as compared to $19.5 million during 2016, and gross profit decreased $4.0 million, or 30.5%, to $9.1 million, (or gross margin of 42.1%), as compared to $13.1 million, (or gross margin of 67.2%), during 2016. During 2017, we sold 174 homesites and 3 homes, compared to 106 homesites during 2016.
During 2016, residential real estate revenue decreased $1.7 million, or 8.0%, to $19.5 million, as compared to $21.2 million during 2015. During 2016, residential real estate gross profit increased $2.8 million, or 27.2%, to $13.1 million, (or gross margin of 67.2%), as compared to $10.3 million, (or gross margin of 48.6%), during 2015. During 2016, we sold 106 homesites compared to 161 homesites and a home during 2015.
The number of lots sold varied each period due to the timing of builder contractual closing obligations and the timing of development of finished lots in our residential communities. The revenue and gross profit for each period was impacted by the volume of sales within each of the communities and the difference in pricing among the communities. Included in the residential real estate revenue for 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 2017, we had nine commercial real estate sales totaling approximately 49 acres for $3.9 million. During 2016, we had eight commercial real estate sales totaling approximately 17 acres for $2.1 million. During 2015, we had three commercial real estate sales totaling approximately 14 acres for $7.2 million.
During 2016, cost of commercial real estate revenue included $0.9 million on the sale of commercial real estate and $0.4 million of impairment charges related to a commerce park, which resulted in commercial real estate gross profit of $0.8 million, or 38.1%.
Rural Land and Other Revenue and Gross Profit. During 2017, we sold approximately 382 acres of rural and timber land for $1.7 million and mitigation bank credits for $0.5 million. During 2016, we sold approximately 786 acres of rural and timber land for $1.4 million and mitigation bank credits for $0.4 million. During 2015 we sold approximately 3,330 acres of rural and timber land for $5.3 million and mitigation bank credits for less than $0.1 million. Revenue from rural and timber 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 Leasing and Sales and Forestry.

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Table of Contents

Resorts and Leisure Revenue and Gross Profit
 
2017
 
2016
 
2015
 
In millions
Resorts and leisure revenue
$
54.8

 
$
57.3

 
$
54.5

Gross profit
$
7.0

 
$
7.1

 
$
7.4

Gross margin
12.8
%
 
12.4
%
 
13.6
%
Resorts and leisure revenue decreased $2.5 million, or 4.4%, during 2017, as compared to 2016. The decrease in resorts and leisure revenue is due to a decrease of $3.7 million primarily from reduced vacation rental inventory based on a conscious decision to focus on higher yielding homes prior to the sale of our short term vacation rental management business in December 2017 as discussed further below, offset by an increase of $1.1 million in club revenue related to an increase in number of members and membership revenue. Resorts and leisure had a gross margin during 2017 of 12.8%, compared to 12.4% during 2016, and the increase is primarily due to membership revenue and controlled expenses.
Resorts and leisure revenue increased $2.8 million, or 5.1%, during 2016, as compared to 2015. The increase in our resorts and leisure revenue included an increase of $1.6 million in vacation rentals, due to an increase in average room rate along with an increase in average home size managed in the vacation rental program, an increase of $0.7 million for growth in rounds played at the golf courses by resort guests along with a strong showing by our food and beverage component and increases in ancillary spend for recreation, spa and resort service fees, and an increase of $0.5 million for membership growth. Resorts and leisure had a gross margin during 2016 of 12.4%, compared to 13.6% during 2015, the decrease is primarily due to increased cost of revenue in our vacation rental business, higher contract labor rates and hours worked as compared to 2015 and a one-time homeowner association payment of $0.7 million.
Leasing Revenue and Gross Profit
 
2017
 
2016
 
2015
 
In millions
Leasing revenue
$
10.7

 
$
9.8

 
$
9.0

Gross profit
$
7.5

 
$
6.7

 
$
6.2

Gross margin
70.1
%
 
68.4
%
 
68.9
%
Leasing revenue increased $0.9 million, or 9.2%, during 2017, as compared to 2016, primarily due to the acquisition of two office buildings in April 2017, as well as new leases at other properties. Cost of leasing revenue was essentially flat for 2017 and 2016, which resulted in an increase to gross margin for the period. Leasing revenue increased $0.8 million, or 8.9%, during 2016, as compared to 2015, primarily due to the continued commencement of revenue from new store openings in our Pier Park North JV, as well as other new leases. We recognized $5.5 million, $5.4 million and $4.6 million of leasing revenue from the Pier Park North JV during 2017, 2016 and 2015, respectively.
Timber Revenue and Gross Profit
 
2017
 
2016
 
2015
 
In millions
Timber revenue
$
5.6

 
$
5.2

 
$
6.7

Gross profit
$
4.8

 
$
4.4

 
$
5.9

Gross margin
85.7
%
 
84.6
%
 
88.1
%
Timber revenue increased $0.4 million, or 7.7%, during 2017, as compared to 2016, primarily due to an increase in the amount of tons sold, offset by price decreases due to fluctuations in market supply. There were 364,000 tons sold during 2017, as compared to 309,000 tons sold during 2016. Gross margin increased during 2017 to 85.7%, as compared to 84.6% during the same period in 2016, due to the increase in timber revenue. The cost of timber revenue is primarily fixed, which resulted in an increase to gross margin for the period.

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Table of Contents

Timber revenue decreased $1.5 million, or 22.4%, during 2016, as compared to 2015, primarily due to a decrease in the amount of tons sold due to fluctuations in market supply. There were 309,000 tons sold during 2016, as compared to 375,000 tons sold during 2015. Gross margin decreased during 2016 to 84.6%, as compared to 88.1% during the same period in 2015, primarily due to fluctuations in product mix and market supply.
Other Operating and Corporate Expenses
 
2017
 
2016
 
2015
 
In millions
Employee costs
$
6.9

 
$
7.1

 
$
13.8

401(k) contribution
1.2

 
1.4

 
1.3

Non-cash stock compensation costs
0.1

 
0.1

 
0.2

Property taxes and insurance
5.2

 
5.6

 
5.7

Professional fees
2.9

 
5.0

 
7.4

Marketing and owner association costs
1.5

 
1.5

 
1.4

Occupancy, repairs and maintenance
0.6

 
0.7

 
1.3

Other
2.0

 
1.7

 
2.3

Total other operating and corporate expenses
$
20.4

 
$
23.1

 
$
33.4

Other operating and corporate expenses decreased by $2.7 million or 11.7%, during 2017, as compared to 2016. The decrease in other operating and corporate expenses included a decrease in professional fees of $2.1 million, partially due to a litigation settlement that resulted in the reimbursement of legal expenses of $0.7 million during 2017. The decrease in other operating and corporate expenses during 2017 reflects our continued focus on a low expense structure.
Other operating and corporate expenses decreased by $10.3 million, or 30.8%, during 2016, as compared to 2015, primarily due to our focus on a low expense structure, which led to decreases in personnel costs, professional fees and other expenses.
Depreciation, Depletion and Amortization
The increase of $0.3 million in depreciation, depletion and amortization expenses in 2017, as compared to 2016, was primarily due to properties acquired or constructed during 2017, offset by a decrease for operating assets being fully depreciated. The decrease of $0.9 million in depreciation, depletion and amortization expenses in 2016, as compared to 2015, was primarily due to operating assets being fully depreciated.
Investment Income, Net
Investment income, net primarily includes (i) interest and dividends earned, (ii) accretion of the net discount, (iii) net realized gain or loss from the sale of our available-for-sale investments, less other-than-temporary impairment loss, (iv) interest income earned on the time deposit held by a special purpose entity and (v) interest earned on notes receivable and other receivables as detailed in the table below:
    
 
2017
 
2016
 
2015
 
In millions
Net investment income from available-for-sale securities
 
 
 
 
 
Interest and dividend income
$
16.4

 
$
6.6

 
$
7.0

Accretion income
2.0

 
1.8

 
1.5

Net realized gain on the sale of investments
10.7

 
0.8

 
5.3

Other-than-temporary impairment loss
(2.3
)
 

 

Total net investment income from available-for-sale securities
26.8

 
9.2

 
13.8

Interest income from investments in special purpose entities
8.2

 
8.2

 
8.2

Interest accrued on notes receivable and other interest
0.4

 
0.4

 
0.7

Total investment income, net
$
35.4

 
$
17.8

 
$
22.7


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Table of Contents

Investment income, net increased $17.6 million to $35.4 million for 2017, as compared to $17.8 million for 2016. The increase in interest and dividend income for 2017, as compared to the same period in 2016, is primarily due to changes in our investment portfolio including cash equivalents. During 2017, our investment portfolio included a higher percentage of corporate debt securities and preferred stock as compared to 2016. The returns on the corporate debt securities and preferred stock are generally higher than the returns on the U.S. Treasury Bills and cash equivalents. Investment income, net for 2017 also includes the sale of certain corporate debt securities, preferred stock, common stock and U.S. Treasury securities at a net realized gain of $10.7 million, partially offset by an other-than-temporary impairment for credit-related loss of $2.3 million.
Investment income, net decreased $4.9 million to $17.8 million for 2016, as compared to $22.7 million for 2015. During the years ended December 31, 2016 and 2015, the average balance of investments was approximately $202.7 million and $368.2 million, respectively. The decrease in investments during 2016 is primarily related to a change in investments from U.S. Treasury securities to commercial paper, which is included in cash and cash equivalents on our consolidated balance sheets. The net realized gain on sale of investments during 2016 and 2015 of $0.8 million and $5.3 million, respectively.
Interest Expense
Interest expense primarily includes interest expense on our Community Development District (“CDD”) debt, the senior notes (“Senior Notes”) issued by Northwest Florida Timber Finance, LLC, the Refinanced Loan for our consolidated Pier Park North JV and a commercial leasing property construction loan (the “Construction Loan”) as detailed in the table below:
    
 
2017
 
2016
 
2015
 
In millions
Interest expense and amortization of discount and issuance costs for Senior Notes issued by special purpose entity
$
8.8

 
$
8.8

 
$
8.8

Other interest expense
3.4

 
3.5

 
2.6

Total interest expense
$
12.2

 
$
12.3

 
$
11.4

    
Interest expense during 2017 as compared to 2016 had a minimal change. Interest expense increased by $0.9 million, or 7.9%, during, 2016 as compared to 2015, primarily due to an increase in interest expense related to the Refinanced Loan for our consolidated Pier Park North JV.
Claim Settlement
On March 24, 2016, we entered into a full and final release agreement with BP p.l.c. and various related entities pursuant to which we, on our 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, we will receive $13.2 million from BP Exploration & Production Inc., a large portion of which will reimburse us for expenses incurred. In October 2017 and 2016, the Company received payments of $2.7 million and $5.0 million, respectively. The remaining settlement amount will be made in payments of $2.7 million due in October 2018 and 2019. We also received a guaranty of payments from BP North America Corporation Inc. As of March 24, 2016, we recorded the claim settlement receivable using an imputed interest rate of 3.0%, based on our 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. The claim settlement of $12.5 million was recognized as other income in our consolidated statements of operations for the year ended December 31, 2016. The discount is being accreted over the term of the receivable using the effective interest method. Interest income for 2017 and the period from March 24, 2016 to December 31, 2016 was $0.2 million and $0.3 million, respectively.
Sale of Vacation Rental Management, net
In December 2017, we entered into and consummated an Asset Purchase Agreement (the “PCR Purchase Agreement”) with PCR Rentals LLC, (“PCR”) for the sale of our short term vacation rental management business (the “PCR Rentals Sale”). The PCR Purchase Agreement contained representations and warranties, confidentiality and indemnification provisions of the type customarily found in these types of transactions. We also have a limited right of first refusal on any third party offer to purchase the vacation rental management business that will end upon the earlier of (i) 18 months after the date of the PCR Rentals Sale or (ii) the later of (x) the date of payoff of the PCR Note (as defined below) and (y) nine months after the date of the PCR Rentals Sale.

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Table of Contents

We received proceeds of approximately $9.9 million, which resulted in a net gain of $9.8 million, from the PCR Rentals Sale, consisting of approximately $4.9 million in cash and transfer of liabilities and $5.0 million in the form of a promissory note (the “PCR Note”) secured by certain assets of PCR. The PCR Note bears interest at 10% per annum and matures on December 31, 2020, unless it matures earlier upon acceleration, by prepayment or otherwise. On February 14, 2018, the PCR Note was paid in full.
Other Income (Expense), Net
Other income (expense), net primarily includes insurance settlement proceeds and fees and expenses related to a resolved SEC investigation, income from our retained interest investments, hunting lease income and other income and expense items as detailed in the following table:
 
2017
 
2016
 
2015
 
In millions
Accretion income from retained interest investments
$
1.1

 
$
1.0

 
$
0.9

Hunting lease income
0.6

 
0.6

 
0.6

Miscellaneous income (expense), net
4.3

 
1.1

 
(7.8
)
Other income (expense), net
$
6.0

 
$
2.7

 
$
(6.3
)
Other income (expense), net increased $3.3 million during 2017, as compared to the same period in 2016. During 2017, we negotiated an insurance settlement that resulted in proceeds of $3.5 million, included within miscellaneous income (expense), net, for reimbursement of certain attorney fees and related costs incurred by us in defending shareholder litigation and the SEC investigation, which was resolved in October 2015.
Other income (expense), net was $2.7 million of income during 2016, and $6.3 million of expense during 2015. In 2015, we incurred $8.2 million of expenses related to an SEC investigation, which was resolved in October 2015. In 2016, SEC investigation expenses were partially offset by the reversal of an accrual of $0.7 million. These amounts were included within miscellaneous income (expense), net.
Income Tax Benefit (Expense)
The Tax Act was enacted on December 22, 2017, changing many aspects of U.S. corporate income taxation including reducing the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We recognized the tax effects of the Tax Act during the year ended December 31, 2017, which included a $33.5 million benefit from the reassessment of net deferred tax balances to reflect the newly enacted tax rate.
Our income tax benefit in 2017 was $17.9 million compared to income tax expense of $7.1 million and $0.8 million in 2016 and 2015, respectively. Our effective tax rate was (42.9%), 31.0% and 87.5% in 2017, 2016 and 2015, respectively.
Our effective rate for 2017 differed from the federal statutory rate of 35% primarily due to the effect of the new 21% federal corporate income tax rate enacted in December 2017, impact of state taxes, changes in the valuation allowance and changes in permanent book to tax differences. Our effective rate for 2016 differed from the federal statutory rate of 35% primarily due to the impact of state taxes, changes in the valuation allowance and changes in permanent book to tax differences. Our effective rate for 2015 reflected $2.8 million of settlement costs related to an SEC investigation that was not deductible for income tax purposes, which increased our effective rate. In the future, we expect that our effective rate will be closer to the statutory rate.

35

Table of Contents

Segment Results
Residential Real Estate
The table below sets forth the results of operations of our residential real estate segment for the three years ended December 31, 2017
 
2017
 
2016
 
2015
 
In millions
Revenue:
 
 
 
 
 
Real estate revenue
$
19.6

 
$
17.5

 
$
19.4

Other revenue
2.1

 
2.0

 
1.8

Total revenue
21.7

 
19.5

 
21.2

Expenses:
 
 
 
 
 
Cost of real estate and other revenue
12.5

 
6.4

 
10.9

Other operating expenses
4.3

 
5.7

 
10.2

Depreciation and amortization
0.1

 
0.3

 
0.5

Total expenses
16.9

 
12.4

 
21.6

Operating income (loss)
4.8

 
7.1

 
(0.4
)
Other (expense) income:
 
 
 
 
 
Interest expense
(1.2
)
 
(1.3
)
 
(1.2
)
Other income, net
0.3

 
0.1

 
0.8

Total other expense, net
(0.9
)

(1.2
)

(0.4
)
Net income (loss) before income taxes
$
3.9

 
$
5.9

 
$
(0.8
)
Real estate revenue includes sales of homes, homesites and other residential land and certain lot residuals from homebuilder sales that provide us a percentage of the sale price of the completed home if the home price exceeds a negotiated threshold. Other revenue includes brokerage fees, marketing fees and impact fee credits sold. Cost of real estate revenue includes direct costs (e.g., development and construction costs), selling costs and other indirect costs (e.g., development overhead, capitalized interest and project administration costs). During 2015, other operating expenses include non-recurring expenses related to the Bay-Walton Sector Plan.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
The following table sets forth our residential real estate revenue and cost of revenue activity by property type: 
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
Units Sold
 
Revenue
 
Cost of Revenue
 
Gross
Profit
 
Gross Margin
 
Units Sold
 
Revenue
 
Cost of Revenue
 
Gross
Profit
 
Gross Margin
 
Dollars in millions
Homesites
174

 
$
18.2

 
$
10.3

 
$
7.9

 
43.4
%
 
106

 
$
14.1

 
$
5.7

 
$
8.4

 
59.6
%
Homes
3

 
1.4

 
1.3

 
0.1

 
7.1
%
 

 

 

 

 
%
Land sale
N/A

 

 

 

 
%
 
N/A

 
3.4

 
0.1

 
3.3

 
97.1
%
Total
177

 
$
19.6

 
$
11.6

 
$
8.0

 
40.8
%
 
106

 
$
17.5

 
$
5.8

 
$
11.7

 
66.9
%
Homesites. Revenue from homesite sales increased $4.1 million, or 29.1%, during 2017, as compared to 2016, due to the mix of homesites sold, the timing of builder contractual closing obligations and the timing of development of finished lots in our residential communities such as Watersound Origins, Breakfast Point and SouthWood. Revenue from homesites during 2017 included the sale of 64 lots in the WindMark Beach community to a homebuilder. During 2017 and 2016, the average revenue per homesite sold was approximately $95,000 and $114,000, respectively, due to the location of the homesites. Gross margin decreased to 43.4% during 2017, as compared to 59.6% during 2016, primarily due to the mix of homesites sold during each respective period and the timing of the receipt of lot residuals that have no related costs at the time of recognition.    
Homes. Revenue from home sales in 2017 of $1.4 million is related to three completed homes that were sold within three of our communities.

36

Table of Contents

Land sale. During 2016, we had a sale of approximately 111 acres of unimproved residential land for $3.4 million resulting in a gross margin of $3.3 million.
Other operating expenses include salaries and benefits, property taxes, marketing, professional fees, project administration, support personnel, owner association and CDD assessments and other administrative expenses. In the second quarter of 2017, a litigation settlement resulted in the reimbursement of legal expenses of $0.7 million, which is reflected in other operating expenses for 2017. Other operating expenses decreased $1.4 million, or 24.6%, during 2017, as compared to 2016, primarily due to the legal expense reimbursement noted above along with decreases in property taxes, owner association assessments, personnel costs, professional fees and other administrative expenses.
Interest expense primarily consists of interest expense on our portion of the total outstanding CDD debt.
Other income, net primarily consists of interest earned on our mortgage notes receivable and other miscellaneous income.
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
The following table sets forth our residential real estate revenue and cost of revenue activity by property type: 
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
Units Sold
 
Revenue
 
Cost of
Revenue
 
Gross
Profit
 
Gross Margin
 
Units Sold
 
Revenue
 
Cost of Revenue
 
Gross
Profit
 
Gross Margin
 
Dollars in millions
Homesites
106

 
$
14.1

 
$
5.7

 
$
8.4

 
59.6
%
 
161

 
$
18.6

 
$
8.8

 
$
9.8

 
52.7
%
Home

 

 

 

 
%
 
1

 
0.8

 
0.8

 

 
%
Land sale
N/A

 
3.4

 
0.1

 
3.3

 
97.1
%
 
N/A

 

 

 

 
%
Total
106

 
$
17.5

 
$
5.8

 
$
11.7

 
66.9
%
 
162

 
$
19.4

 
$
9.6

 
$
9.8

 
50.5
%
Homesites. Revenue from homesite sales decreased $4.5 million, or 24.2%, during 2016, as compared to 2015, due to the mix of homesites sold and timing of sales which were primarily in the Watersound Origins, Breakfast Point, and Southwood communities. During 2016 and 2015, the average revenue per homesite sold was approximately $114,000 and $106,000, respectively, due to the location of the homesites. Gross margin increased to 59.6% during 2016, as compared to 52.7% during 2015, primarily due to price increases in certain communities, the mix of homesites sold during each respective period and the receipt of lot residuals that have no related costs at the time of recognition.
Home. Revenue from the home sale in 2015 of $0.8 million is related to a completed home that was sold within the WaterSound Beach community.
Land sale. During 2016, we had a sale of approximately 111 acres of unimproved residential land for $3.4 million resulting in a gross margin of $3.3 million.
Other operating expenses include salaries and benefits, property taxes, marketing, professional fees, project administration, support personnel, owner association and CDD assessments and other administrative expenses. Other operating expenses decreased $4.5 million, or 44.1%, during 2016, as compared to 2015, primarily due to decreases in personnel costs and professional fees, due to our continued focus on a low expense structure as well as non-recurring expenses during 2015 related to the Bay-Walton Sector Plan.
Interest expense primarily consists of interest expense on our portion of the total outstanding CDD debt.
Other income, net primarily includes interest earned on our mortgage notes receivables and other miscellaneous income and expenses. Other income, net decreased $0.7 million during 2016, as compared to 2015, primarily due to a decrease in interest earned on the RiverTown Note that was paid in June 2015.

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Table of Contents

Resorts and Leisure
The table below sets forth the results of operations of our resorts and leisure segment for the three years ended December 31, 2017
 
2017
 
2016
 
2015
 
In millions
Revenue:
 
 
 
 
 
Resorts and leisure revenue
$
54.8

 
$
57.3

 
$
54.5

Expenses:
 
 
 
 
 
Cost of resorts and leisure revenue
47.8

 
50.2

 
47.1

Cost of other revenue

 

 

Other operating expenses
0.5

 
0.5

 
0.4

Depreciation
4.2

 
4.5

 
5.1

Total expenses
52.5

 
55.2

 
52.6

Operating income
2.3


2.1


1.9

Other income (expense):
 
 
 
 
 
Sale of vacation rental management, net
9.8

 

 

Other income (expense), net
0.3

 

 
(0.1
)
Total other income (expense), net
10.1

 

 
(0.1
)
Net income before income taxes
$
12.4

 
$
2.1

 
$
1.8

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table sets forth the detail of our resorts and leisure revenue and cost of revenue: 
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
Revenue
 
Gross
Profit
 
Gross Margin
 
Revenue
 
Gross
Profit
 
Gross Margin
 
In millions
Resorts, vacation rentals and other management services
$
37.4

 
$
5.1

 
13.6
%
 
$
41.1

 
$
5.2

 
12.7
%
Clubs
14.6

 
1.3

 
8.9
%
 
13.5

 
1.2

 
8.9
%
Marinas
2.8

 
0.6

 
21.4
%
 
2.7

 
0.7

 
25.9
%
Total
$
54.8


$
7.0

 
12.8
%
 
$
57.3


$
7.1

 
12.4
%
Revenue from our resorts, vacation rentals and other management services decreased $3.7 million, or 9.0%, during 2017, as compared to 2016. The decrease in revenue was primarily due to reduced vacation rental inventory based on a conscious decision to focus on higher yielding homes prior to the sale of our short term vacation rental management business during December 2017, which also resulted in an increased gross margin to 13.6% during 2017 compared to 12.7% during 2016.
Revenue from our clubs increased $1.1 million, or 8.1%, during 2017, as compared to 2016, primarily related to an increase in number of members and membership revenue. Our gross margin was 8.9% during both 2017 and 2016. However, 2017 included a non-recurring impairment of $0.7 million related to a non-strategic resorts and leisure asset, without which our gross margin would have been 13.7% during 2017, as compared to 8.9% during 2016. The increase in gross margin was primarily due to the increase in membership revenue.
Our resorts and leisure gross margin was 12.8% during 2017, as compared to 12.4% during 2016, the increase is primarily due to membership revenue and controlled expenses, which was partially offset by an impairment related to resorts and leisure property and the decrease in marinas gross margin.
Other operating expenses include salaries and benefits, occupancy fees, professional fees and other administrative expenses.
Sale of vacation rental management, net includes proceeds of $9.9 million, which resulted in a net gain of $9.8 million. See Note 7. Sale of Vacation Rental Management included in the notes to the consolidated financial statements included in Item 15 of this Form 10-K for further discussion.

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Table of Contents

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
Revenue
 
Gross
Profit
 
Gross Margin
 
Revenue
 
Gross
Profit
 
Gross Margin
 
In millions
Resorts, vacation rentals and other management services
$
41.1

 
$
5.2

 
12.7
%
 
$
39.1

 
$
5.6

 
14.3
%
Clubs
13.5

 
1.2

 
8.9
%
 
12.4

 
1.0

 
8.1
%
Marinas
2.7

 
0.7

 
25.9
%
 
3.0

 
0.8

 
26.7
%
Total
$
57.3


$
7.1

 
12.4
%
 
$
54.5

 
$
7.4

 
13.6
%
Revenue from our resorts, vacation rentals and other management services increased $2.0 million, or 5.1%, during 2016, as compared to 2015, which included an increase of $1.6 million in vacation rentals, due to an increase in average room rate along with an increase in average home size managed in the vacation rental program.
Revenue from our clubs increased $1.1 million, or 8.9%, during 2016, as compared to 2015, primarily due to a continued increase in total members, which resulted in an additional $0.5 million of revenue and an increase of $0.6 million related to growth in rounds played at the golf courses by resort guests and a strong showing by our food and beverage component.
Our gross margin was 12.4% during 2016, as compared to 13.6% during the same period in 2015, the decrease is primarily due to a one-time homeowner association payment of $0.7 million.
Other operating expenses include salaries and benefits, occupancy fees, professional fees and other administrative expenses.
Commercial Leasing and Sales
The table below sets forth the results of operations of our commercial leasing and sales segment for the three years ended December 31, 2017
 
2017
 
2016
 
2015
 
In millions
Revenue:
 
 
 
 
 
Leasing revenue
$
10.6

 
$
9.8

 
$
9.0

Commercial real estate revenue
3.9

 
2.1

 
7.2

Total revenue
14.5

 
11.9

 
16.2

Expenses:
 
 
 
 
 
Cost of leasing revenue
3.2

 
3.1

 
2.8

Cost of commercial real estate revenue
2.8

 
1.3

 
5.0

Other operating expenses
3.4

 
3.5

 
3.0

Depreciation and amortization
3.7

 
3.1

 
3.1

Total expenses
13.1

 
11.0

 
13.9

Operating income
1.4


0.9


2.3

Other (expense) income:
 
 
 
 
 
Interest expense
(2.2
)
 
(2.2
)
 
(1.5
)
Other income, net

 
0.1

 

Total other expense, net
(2.2
)

(2.1
)

(1.5
)
Net (loss) income before income taxes
$
(0.8
)
 
$
(1.2
)
 
$
0.8


39

Table of Contents

The total net rentable square feet and percentage leased of leasing properties by location at December 31, 2017, 2016 and 2015 are as follows: 
 
 
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
 
Location
 
Net Rentable Square Feet
 
Percentage Leased
 
Net Rentable Square Feet
 
Percentage Leased
 
Net Rentable Square Feet
 
Percentage Leased
Pier Park North JV
Bay County, FL
 
320,305
 
96
%
 
320,305

 
93
%
 
320,305

 
90
%
Venture Crossings (1)
Bay County, FL
 
243,605
 
100
%
 
105,000

 
100
%
 
105,000

 
100
%
Beckrich Office Park
Bay County, FL
 
67,108
 
52
%
 

 
%
 

 
%
WindMark Beach Commercial (2)
Gulf County, FL
 
48,035
 
27
%
 
48,035

 
21
%
 
48,035

 
21
%
SouthWood Town Center
Leon County, FL
 
34,412
 
85
%
 
34,412

 
86
%
 
34,412

 
68
%
WaterColor Town Center (3)
Walton County, FL
 
22,532
 
100
%
 
22,532

 
100
%
 
22,532

 
100
%
Port St. Joe Commercial
Gulf County, FL
 
18,107
 
100
%
 
18,107

 
100
%
 
18,107

 
100
%
Beach Commerce Park
Bay County, FL
 
14,700
 
63
%
 
14,700

 
100
%
 

 
%
SummerCamp Commercial
Franklin County, FL
 
13,000
 
0
%
 
13,000

 
0
%
 
13,000

 
0
%
WaterSound Gatehouse
Walton County, FL
 
12,624
 
100
%
 
12,624

 
90
%
 
12,624

 
90
%
395 Office building
Walton County, FL
 
6,700
 
100
%
 
6,700

 
100
%
 
6,700

 
100
%
Pier Park outparcel
Bay County, FL
 
5,565
 
100
%
 

 
%
 

 
%
Wetappo
Gulf County, FL
 
4,900
 
100
%
 
4,900

 
100
%
 
4,900

 
100
%
WaterColor HOA Office (4)
Walton County, FL
 
1,244
 
100
%
 
1,244

 
100
%
 
1,244

 
100
%
WaterSound Origins
Walton County, FL
 
760
 
100
%
 
760

 
100
%
 
760

 
0
%
 
 
 
813,597
 
87
%
 
602,319

 
87
%