Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
or
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 1-10466
The St. Joe Company
(Exact name of registrant as specified in its charter)
|
| | |
Florida | | 59-0432511 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
133 South Watersound Parkway Watersound, Florida | | 32461 |
(Address of principal executive offices) | | (Zip Code) |
(850) 231-6400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filer | ¨
| Accelerated filer | þ
|
| | | |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | | |
| | Emerging growth company | ¨
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
As of July 31, 2017, there were 70,432,071 shares of common stock, no par value, outstanding.
THE ST. JOE COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE ST. JOE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
ASSETS | | | |
Investment in real estate, net | $ | 334,699 |
| | $ | 314,620 |
|
Cash and cash equivalents | 247,178 |
| | 241,111 |
|
Investments | 167,742 |
| | 175,725 |
|
Restricted investments | 4,469 |
| | 5,636 |
|
Income tax receivable | — |
| | 27,057 |
|
Claim settlement receivable | 7,922 |
| | 7,804 |
|
Other assets | 40,528 |
| | 38,410 |
|
Property and equipment, net of accumulated depreciation of $59,891 and $59,404 at June 30, 2017 and December 31, 2016, respectively | 9,541 |
| | 8,992 |
|
Investments held by special purpose entities | 208,267 |
| | 208,590 |
|
Total assets | $ | 1,020,346 |
| | $ | 1,027,945 |
|
LIABILITIES AND EQUITY | | | |
LIABILITIES: | | | |
Debt | $ | 55,498 |
| | $ | 55,040 |
|
Other liabilities | 60,620 |
| | 40,950 |
|
Deferred tax liabilities | 69,940 |
| | 68,846 |
|
Senior notes held by special purpose entity | 176,422 |
| | 176,310 |
|
Total liabilities | 362,480 |
| | 341,146 |
|
EQUITY: | | | |
Common stock, no par value; 180,000,000 shares authorized; 74,342,826 issued at both June 30, 2017 and December 31, 2016; and 71,926,737 and 74,342,826 outstanding at June 30, 2017 and December 31, 2016, respectively | 572,059 |
| | 572,040 |
|
Retained earnings | 109,878 |
| | 94,746 |
|
Accumulated other comprehensive (loss) income | (944 | ) | | 2,507 |
|
Treasury stock at cost, 2,416,089 shares held at June 30, 2017 | (40,444 | ) | | — |
|
Total stockholders’ equity | 640,549 |
| | 669,293 |
|
Non-controlling interest | 17,317 |
| | 17,506 |
|
Total equity | 657,866 |
| | 686,799 |
|
Total liabilities and equity | $ | 1,020,346 |
| | $ | 1,027,945 |
|
See accompanying notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
The following presents the portion of the consolidated balances attributable to the Company’s consolidated variable interest entities. The Company’s consolidated variable interest entities include the Pier Park North joint venture (“Pier Park North JV”), Pier Park Crossings LLC (“Pier Park Crossings JV”), Windmark JV, LLC (“Windmark JV”), Artisan Park, L.L.C., Panama City Timber Finance Company, LLC and Northwest Florida Timber Finance, LLC as discussed in Note 2. Summary of Significant Accounting Policies. Basis of Presentation and Principles of Consolidation. The following assets may only be used to settle obligations of the consolidated variable interest entities and the following liabilities are only obligations of the variable interest entities and do not have recourse to the general credit of the Company, except for the guarantees and covenants discussed in Note 9. Debt.
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
ASSETS | | | |
Investment in real estate, net | $ | 63,111 |
| | $ | 63,362 |
|
Cash and cash equivalents | 3,631 |
| | 3,965 |
|
Other assets | 14,759 |
| | 13,209 |
|
Investments held by special purpose entities | 208,267 |
| | 208,590 |
|
Total assets | $ | 289,768 |
| | $ | 289,126 |
|
LIABILITIES | | | |
Debt | $ | 47,160 |
| | $ | 47,519 |
|
Other liabilities | 4,262 |
| | 4,275 |
|
Senior notes held by special purpose entity | 176,422 |
| | 176,310 |
|
Total liabilities | $ | 227,844 |
| | $ | 228,104 |
|
See accompanying notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
Real estate revenue | $ | 7,150 |
| | $ | 6,744 |
| | $ | 8,675 |
| | $ | 13,825 |
|
Resorts and leisure revenue | 19,328 |
| | 19,793 |
| | 27,436 |
| | 28,544 |
|
Leasing revenue | 2,662 |
| | 2,321 |
| | 5,055 |
| | 4,682 |
|
Timber revenue | 1,243 |
| | 693 |
| | 2,414 |
| | 2,754 |
|
Total revenue | 30,383 |
| | 29,551 |
| | 43,580 |
| | 49,805 |
|
Expenses: | | | | | | | |
Cost of real estate revenue | 3,614 |
| | 2,975 |
| | 3,945 |
| | 4,739 |
|
Cost of resorts and leisure revenue | 14,884 |
| | 15,645 |
| | 23,687 |
| | 24,964 |
|
Cost of leasing revenue | 798 |
| | 759 |
| | 1,467 |
| | 1,509 |
|
Cost of timber revenue | 238 |
| | 203 |
| | 395 |
| | 413 |
|
Other operating and corporate expenses | 4,154 |
| | 5,725 |
| | 10,334 |
| | 12,543 |
|
Depreciation, depletion and amortization | 2,032 |
| | 2,101 |
| | 3,985 |
| | 4,390 |
|
Total expenses | 25,720 |
| | 27,408 |
| | 43,813 |
| | 48,558 |
|
Operating income (loss) | 4,663 |
| | 2,143 |
| | (233 | ) |
| 1,247 |
|
Other income (expense): | | | | | | | |
Investment income, net | 14,303 |
| | 2,959 |
| | 24,658 |
| | 5,689 |
|
Interest expense | (3,035 | ) | | (3,145 | ) | | (6,078 | ) | | (6,180 | ) |
Claim settlement | — |
| | — |
| | — |
| | 12,548 |
|
Other income, net | 592 |
| | 601 |
| | 4,643 |
| | 1,050 |
|
Total other income, net | 11,860 |
| | 415 |
| | 23,223 |
| | 13,107 |
|
Income before income taxes | 16,523 |
| | 2,558 |
|
| 22,990 |
|
| 14,354 |
|
Income tax expense | (5,909 | ) | | (978 | ) | | (8,188 | ) | | (4,222 | ) |
Net income | 10,614 |
|
| 1,580 |
|
| 14,802 |
|
| 10,132 |
|
Net loss attributable to non-controlling interest | 150 |
| | 230 |
| | 330 |
| | 342 |
|
Net income attributable to the Company | $ | 10,764 |
| | $ | 1,810 |
|
| $ | 15,132 |
|
| $ | 10,474 |
|
| | | | | | | |
NET INCOME PER SHARE | | | | | | | |
Basic and Diluted | | | | | | | |
Weighted average shares outstanding | 71,981,505 |
| | 74,338,023 |
| | 72,970,462 |
| | 74,573,517 |
|
Net income per share attributable to the Company | $ | 0.15 |
| | $ | 0.02 |
| | $ | 0.21 |
| | $ | 0.14 |
|
See accompanying notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Net income: | $ | 10,614 |
| | $ | 1,580 |
| | $ | 14,802 |
| | $ | 10,132 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | |
Available-for-sale investment items: | | | | | | | |
Net unrealized gain on available-for-sale investments | 745 |
| | 90 |
| | 4,650 |
| | 2 |
|
Net unrealized loss on restricted investments | (4 | ) | | — |
| | — |
| | — |
|
Reclassification of realized gain included in earnings | (7,739 | ) | | — |
| | (10,861 | ) | | — |
|
Reclassification of other-than-temporary impairment loss included in earnings | — |
| | — |
| | 366 |
| | — |
|
Total before income taxes | (6,998 | ) | | 90 |
|
| (5,845 | ) |
| 2 |
|
Income tax benefit (expense) | 2,835 |
| | (35 | ) | | 2,394 |
| | (1 | ) |
Total other comprehensive (loss) income, net of tax | (4,163 | ) | | 55 |
|
| (3,451 | ) |
| 1 |
|
Total comprehensive income, net of tax | $ | 6,451 |
| | $ | 1,635 |
|
| $ | 11,351 |
|
| $ | 10,133 |
|
See accompanying notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | | | | | |
| Outstanding Shares | | Amount | | Treasury Stock | | Non-controlling Interest | | Total |
Balance at December 31, 2016 | 74,342,826 |
| | $ | 572,040 |
| | $ | 94,746 |
| | $ | 2,507 |
| | $ | — |
| | $ | 17,506 |
| | $ | 686,799 |
|
Capital contribution from non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 141 |
| | 141 |
|
Issuance of common stock for director’s fees | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
| | 19 |
|
Repurchase of common shares | (2,416,089 | ) | | — |
| | — |
| | — |
| | (40,444 | ) | | — |
| | (40,444 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | (3,451 | ) | | — |
| | — |
| | (3,451 | ) |
Net income | — |
| | — |
| | 15,132 |
| | — |
| | — |
| | (330 | ) | | 14,802 |
|
Balance at June 30, 2017 | 71,926,737 |
| | $ | 572,059 |
|
| $ | 109,878 |
|
| $ | (944 | ) |
| $ | (40,444 | ) |
| $ | 17,317 |
|
| $ | 657,866 |
|
| | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) |
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 14,802 |
| | $ | 10,132 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation, depletion and amortization | 3,985 |
| | 4,390 |
|
Stock based compensation | 19 |
| | 56 |
|
Gain on sale of investments | (10,861 | ) | | — |
|
Other-than-temporary impairment loss | 366 |
| | — |
|
Deferred income tax expense | 3,488 |
| | 650 |
|
Cost of real estate sold | 3,426 |
| | 3,951 |
|
Expenditures for and acquisition of real estate to be sold | (5,021 | ) | | (1,736 | ) |
Accretion income and other | (1,899 | ) | | (778 | ) |
Loss on disposal of real estate and property and equipment | 29 |
| | 5 |
|
Changes in operating assets and liabilities: | | | |
Notes receivable | (808 | ) | | 157 |
|
Claim settlement receivable | — |
| | (12,651 | ) |
Other assets | (2,316 | ) | | (141 | ) |
Other liabilities | 14,093 |
| | 6,544 |
|
Income taxes receivable | 26,671 |
| | 1,272 |
|
Net cash provided by operating activities | 45,974 |
| | 11,851 |
|
Cash flows from investing activities: | | | |
Expenditures for operating property | (15,646 | ) | | (2,662 | ) |
Expenditures for property and equipment | (1,271 | ) | | (408 | ) |
Proceeds from the disposition of assets | — |
| | 3 |
|
Purchases of investments | (93,821 | ) | | (216,698 | ) |
Maturities of investments | — |
| | 185,000 |
|
Sales of investments | 110,389 |
| | 8,413 |
|
Maturities of assets held by special purpose entities | 415 |
| | 415 |
|
Net cash provided by (used in) investing activities | 66 |
| | (25,937 | ) |
Cash flows from financing activities: | | | |
Capital contribution from non-controlling interest | 141 |
| | — |
|
Repurchase of common shares | (40,444 | ) | | (14,820 | ) |
Borrowings on construction loan | 1,188 |
| | — |
|
Principal payments for debt | (838 | ) | | (384 | ) |
Debt issue costs | (20 | ) | | — |
|
Net cash used in financing activities | (39,973 | ) | | (15,204 | ) |
Net increase (decrease) in cash and cash equivalents | 6,067 |
| | (29,290 | ) |
Cash and cash equivalents at beginning of the period | 241,111 |
| | 212,773 |
|
Cash and cash equivalents at end of the period | $ | 247,178 |
| | $ | 183,483 |
|
See accompanying notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(Dollars in thousands)
(Unaudited)
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2017 | | 2016 |
Cash paid during the period for: | | | | |
Interest expense | | $ | 5,819 |
| | $ | 5,859 |
|
Income taxes | | $ | 2,312 |
| | $ | 2,300 |
|
| | | | |
Non-cash financing and investing activities: | | | | |
Increase in Community Development District debt | | $ | 73 |
| | $ | 57 |
|
Expenditures for operating properties and property and equipment financed through accounts payable | | $ | 6,098 |
| | $ | 577 |
|
See notes to the condensed consolidated financial statements.
THE ST. JOE COMPANY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
(Unaudited)
1. Nature of Operations
The St. Joe Company together with its consolidated subsidiaries (“St. Joe” or the “Company”) is a Florida real estate development, asset management and operating company with real estate assets and operations currently concentrated primarily between Tallahassee and Destin, Florida.
The Company conducts primarily all of its business in the following five reportable operating segments: 1) residential real estate, 2) commercial real estate, 3) resorts and leisure, 4) leasing operations and 5) forestry.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements are not included herein. The unaudited interim condensed consolidated financial statements include the accounts of the Company and all of its majority-owned and controlled subsidiaries and variable interest entities where the Company is the primary beneficiary. Investments in joint ventures and limited partnerships in which the Company has significant influence, but not a controlling interest are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated in consolidation. The December 31, 2016 balance sheet amounts have been derived from the Company’s December 31, 2016 audited consolidated financial statements. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.
A variable interest entity (“VIE”) is an entity in which a controlling financial interest may be achieved through arrangements that do not involve voting interests. A VIE is required to be consolidated by its primary beneficiary, which is the entity that possesses the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to the entity. The Company consolidates VIEs when it is the primary beneficiary of the VIE, including real estate joint ventures determined to be VIEs (see Note 8. Real Estate Joint Ventures).
The interim condensed consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for fair presentation of the information contained herein. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company adheres to the same accounting policies in preparation of its unaudited interim condensed consolidated financial statements as the Company’s December 31, 2016 annual financial statements. As required under GAAP, interim accounting for certain expenses, including income taxes, are based on full year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual income tax rates.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions including investments in real estate, real estate impairment assessments, investments, other-than-temporary investment impairment assessments, retained interest investments, accruals and deferred income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, bank demand accounts, money market instruments and short term commercial paper having original maturities, at acquisition date, of ninety days or less.
Investments
Investments and restricted investments consist of available-for-sale securities recorded at fair value, which is established through external pricing services that use quoted market prices and pricing data from recently executed market transactions. Unrealized gains and temporary losses on investments, net of tax, are recorded in other comprehensive (loss) income. Realized gains and losses on investments are determined using the specific identification method. The amortized cost of debt securities are adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization and accretion is included in investment income, net.
The Company evaluates investments classified as available-for-sale with an unrealized loss to determine if they are other-than-temporary impaired. This evaluation is based on various factors, including the financial condition, business prospects, industry and creditworthiness of the issuer, severity and length of time the securities were in a loss position, the Company’s ability and intent to hold investments until the unrealized loss is recovered or until maturity and the amount of the unrealized loss. If a decline in fair value is considered other-than-temporary, the decline is then bifurcated into its credit and non-credit related components. The amount of the credit-related component is recognized in earnings, and the amount of the non-credit related component is recognized in other comprehensive (loss) income, unless the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security prior to its anticipated recovery.
Restricted Investments
The Company’s restricted investments are related to the Company’s deferred compensation plan. As part of the Pension Plan termination in 2014, the Company directed the Pension Plan to transfer the Pension Plan’s surplus assets into a suspense account in the Company’s 401(k) Plan. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated balance sheets until they are allocated to current and future 401(k) plan participants for up to the next four years. See Note 14. Employee Benefit Plan.
Fair Value Measurements
Fair value is an exit price, representing the amount that would be received by selling an asset or paying to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1. Quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, such as internally-developed valuation models which require the reporting entity to develop its own assumptions.
Long-Lived Assets
Long-lived assets include the Company’s investments in operating and development property and property and equipment. The Company reviews its long-lived assets for impairment quarterly to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As part of the Company’s review for impairment of its long-lived assets, the Company reviews the long-lived asset’s carrying value, current period actual financial results as compared to prior period and forecast contained in the Company’s business plan and any other events or changes in circumstances to identify whether an indicator of potential impairment may exist. Some of the events or changes in circumstances that are considered by the Company as indicators of potential impairment include:
| |
• | a prolonged decrease in the fair value or demand for the Company’s properties; |
| |
• | a change in the expected use or development plans for the Company’s properties; |
| |
• | a material change in strategy that would affect the fair value of the Company’s properties; |
| |
• | continuing operating or cash flow loss for an operating property; |
| |
• | an accumulation of costs in excess of the projected costs for a development property; and |
| |
• | any other adverse change that may affect the fair value of the property. |
The Company uses varying methods to determine if an impairment exists, such as (i) considering indicators of potential impairment, (ii) analyzing expected future cash flows and comparing the expected future undiscounted cash flows of the property to its carrying value or (iii) determining market resale values.
During the three and six months ended June 30, 2017 and 2016, there were no impairments of long-lived assets.
Comprehensive Income
The Company’s comprehensive income includes unrealized gains and temporary losses on available-for-sale securities and restricted investments.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax impact of differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period in which the new rate is enacted. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than fifty percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits, if any, in interest expense and penalties in other income, net.
Concentration of Risks and Uncertainties
The Company’s real estate investments are concentrated in Northwest Florida in a number of specific development projects. Uncertain economic or other conditions could have an adverse impact on the Company’s real estate values and could cause the Company to sell assets at depressed values in order to pay ongoing obligations.
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments, other receivables, investments held by special purpose entity or entities (“SPE”) and investments in retained interests. The Company deposits and invests cash with regional financial institutions and as of June 30, 2017 these balances exceed the amount of F.D.I.C. insurance provided on such deposits. In addition, as of June 30, 2017, the Company had $24.9 million invested in U.S. Treasury securities, $96.0 million invested in seven issuers of corporate debt securities that are non-investment grade, $40.3 million invested in four issuers of preferred stock that are non-investment grade and $6.5 million invested in one issuer of common stock. In addition, as of June 30, 2017, the Company had investments of $207.2 million in short term commercial paper from eleven issuers.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period, including all potentially dilutive shares issuable under outstanding stock options. Stock options are not considered in any diluted earnings per share calculation when the Company has a loss from operations as their effect would be anti-dilutive. Non-vested restricted stock is included in outstanding shares at the time of grant. For the three and six months ended June 30, 2017 and 2016, basic average shares outstanding were the same as diluted shares outstanding. There were no outstanding common stock equivalents as of June 30, 2017 or December 31, 2016.
Revenue and Revenue Recognition
Revenue consists primarily of real estate sales, resorts and leisure operations, leasing operations, and timber sales. Taxes collected from customers and remitted to governmental authorities (e.g. sales tax) are excluded from revenue and costs and expenses.
Real Estate Revenue
Revenue from real estate sales, including sales of homesites, commercial properties and rural or timberland, is recognized when a sale is closed and title transfers to the buyer, the buyer’s initial investment is adequate, any receivables are probable of collection, the usual risks and rewards of ownership have been transferred to the buyer, and the Company does not have significant continuing involvement with the real estate sold.
The buyer’s minimum initial investment requirement is typically the receipt of cash for approximately twenty to twenty-five percent of the sales value depending on the type and use of the property purchased. If the minimum initial investment requirement is not met, revenue may be deferred depending on the circumstances. In addition, revenue is not recognized until title transfers and any consideration received is deferred until title is transferred.
As part of the purchase price consideration for a homesite from sales to homebuilders, the Company may receive a percentage of the sale price of the completed home if the home price or gross profit of the home exceeds a negotiated threshold. These lot residuals are recognized as revenue when consideration is received by the Company in periods subsequent to the initial recognition of revenue for the sale of the homesite.
Resorts and Leisure Revenue
Resorts and leisure revenue includes service and rental fees associated with the WaterColor Inn and the Company’s vacation rental programs in WaterColor, WaterSound Beach and surrounding communities. In addition, other resorts and leisure revenue includes club membership sales, membership reservations, daily play at golf courses, merchandise sales, food and beverage sales, marina boat slip rentals and fuel sales, and management services of The Pearl Hotel. The revenue is generally recognized as services are provided. Vacation rental revenue includes the entire rental fee collected from the customer, including the homeowner’s portion. A percentage of the fee is remitted to the homeowner and presented in cost of resorts and leisure revenue. The Company is the principal in its vacation rental business and has determined that it is the primary obligor to the guest, as it has sole discretion in establishing prices and provides the majority of the services to the guest. Club membership revenue is recognized when billed to the member and the non-refundable initiation fee is deferred and recognized ratably over the estimated membership period. Revenue generated from our management services of The Pearl Hotel includes a management fee, fifty percent of certain resort fees and a percentage of The Pearl Hotel’s gross operating profit.
Leasing Revenue
Leasing revenue consists of long term rental revenue from retail, office and commercial operations, cell towers and other assets, which is recognized as earned, using the straight-line method over the life of each lease. Leasing revenue includes properties located in the Company’s consolidated Pier Park North JV and Windmark JV, as well as the Company’s industrial park, VentureCrossings, and other properties. Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments change during the lease term. Accordingly, a receivable or liability is recorded representing the difference between the straight-line rent and the rent that is contractually due from the tenant.
Forestry Product Revenue
Revenue from the sale of the Company’s forestry products is primarily derived from pay-as-cut sales contracts or timber bid sales, whereby risk of loss and title to the trees transfer to the buyer when cut by the buyer. Under a pay-as-cut sales contract, the buyer or some other third party is responsible for all logging and hauling costs, if any.
Timber bid sales are agreements in which the buyer agrees to purchase and harvest specified timber (i.e. mature pulpwood and/or sawlogs) on a tract of land over the term of the contract. Unlike a pay-as-cut sales contract, risk of loss and title to the trees transfer to the buyer when the contract is signed. The buyer pays the full purchase price when the contract is signed and the Company does not have any additional performance obligations. Under a timber bid sale, the buyer or some other third party is responsible for all logging and hauling costs, if any, and the timing of such activity. Revenue from a timber bid sale is recognized when the contract is signed since the earnings process is complete.
Recently Adopted Accounting Pronouncements
Business Combinations
In January 2017, the FASB issued ASU 2017-01 that clarifies the definition of a business for entities that must determine whether a business has been acquired or sold. The amendment is intended to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company adopted the new guidance as of April 1, 2017. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
Recently Issued Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09 that establishes the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08 that further clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10 that clarifies guidance on identifying performance obligations and to improve the operability and understandability of licensing implementation guidance. In May 2016, the FASB issued ASU 2016-11 that rescinds SEC guidance pursuant to announcements at the March 3, 2016 Emerging Issues Task Force Meeting. In May 2016, the FASB issued ASU 2016-12 that provides narrow-scope improvements and practical expedients to Revenue from Contracts with Customers. In December 2016, the FASB issued ASU 2016-20 that includes technical corrections and improvements to ASU 2014-09. The new guidance will be effective for annual and interim periods beginning after December 15, 2017. The Company plans to adopt this guidance effective January 1, 2018, using a modified retrospective approach. The Company has evaluated the impact of adopting this guidance and as a result of this evaluation does not expect it will have a material impact on its financial condition, results of operations and cash flows. The Company expects an impact to revenue-related disclosures as a result of adopting this guidance.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01 that amends existing guidance to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance will require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in results of operations. Additionally, certain disclosure requirements and other aspects of accounting for financial instruments will change as a result of the new guidance, which is effective for interim and annual reporting periods beginning after December 15, 2017. The Company has evaluated the impact of the adoption of this guidance and as a result of this evaluation does not expect it will have a material impact on its financial condition, results of operations and cash flows.
Leases
In February 2016, the FASB issued ASU 2016-02 that amends the existing accounting standards for lease accounting, including requiring lessees to recognize both finance and operating leases with terms of more than 12 months on the balance sheet. The accounting applied by a lessor is largely unchanged from existing guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The new guidance will be effective for annual and interim periods beginning after December 15, 2018 and requires a modified retrospective adoption. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and cash flows.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13 that requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected and requires that credit losses from available-for-sale debt securities be presented as an allowance for credit loss. This new guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15 that amends the classification of certain cash receipts and cash payments, to reduce the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, it is not expected to have an impact on the Company’s cash flows.
Income Taxes
In October 2016, the FASB issued ASU 2016-16 that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amendment eliminates the exception for an intra-entity transfer of an asset other than inventory. The new standard is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted in the first interim period and the amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has evaluated the impact of the adoption of this guidance and as a result of this evaluation does not expect it will have an impact on its financial condition, results of operations and cash flows.
3. Investment in Real Estate
Real estate by property type and segment includes the following:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Development property: | | | |
Residential real estate | $ | 103,427 |
| | $ | 101,292 |
|
Commercial real estate | 55,155 |
| | 56,073 |
|
Resorts and leisure | 2,041 |
| | 263 |
|
Leasing operations | 14,198 |
| | 2,291 |
|
Forestry | 2,489 |
| | 2,492 |
|
Corporate | 2,515 |
| | 2,438 |
|
Total development property | 179,825 |
| | 164,849 |
|
| | | |
Operating property: | | | |
Residential real estate | 7,344 |
| | 8,097 |
|
Resorts and leisure | 105,825 |
| | 107,029 |
|
Leasing operations | 90,845 |
| | 82,336 |
|
Forestry | 20,137 |
| | 19,608 |
|
Other | 50 |
| | 50 |
|
Total operating property | 224,201 |
| | 217,120 |
|
Less: Accumulated depreciation | 69,327 |
| | 67,349 |
|
Total operating property, net | 154,874 |
| | 149,771 |
|
Investment in real estate, net | $ | 334,699 |
| | $ | 314,620 |
|
Development property consists of land the Company is developing or intends to develop for sale or future operations. Residential real estate includes primary residential and resort residential communities, direct costs associated with the land, development and construction of these communities, including common development costs such as roads, utilities and amenities and indirect costs such as development overhead, capitalized interest, marketing and project administration. Commercial real estate consists of land for commercial and industrial uses, including land holdings near the Northwest Florida Beaches International Airport and Port of Port St. Joe, and includes direct costs, such as roads and utilities, associated with the land and development costs for the Company’s properties. Resorts and leisure development property consists of the improvement and expansion of existing beach club property. Leasing development property primarily includes the land development and construction of buildings for lease in VentureCrossings and a Pier Park outparcel, as well as the consolidated Pier Park North JV and Pier Park Crossings JV. Development property in the leasing operations and resorts and leisure segments will be reclassified as operating property as it is placed into service.
Operating property includes property that the Company uses for operations and activities. Residential real estate operating property consists primarily of residential utility assets. The resorts and leisure operating property includes the WaterColor Inn, certain vacation rental properties, golf courses, a beach club and marinas. Leasing operating property includes property developed or purchased by the Company and used for retail and commercial rental purposes, including property in the Pier Park North JV. Forestry operating property includes the Company’s timberlands. Operating property may be sold in the future as part of the Company’s principal real estate business.
4. Investments
At June 30, 2017, investments and restricted investments classified as available-for-sale securities were as follows:
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Investments: | | | | | | | |
U.S. Treasury securities | $ | 24,930 |
| | $ | — |
| | $ | 7 |
| | $ | 24,923 |
|
Corporate debt securities | 97,563 |
| | 713 |
| | 2,257 |
| | 96,019 |
|
Preferred stock | 40,525 |
| | 855 |
| | 1,103 |
| | 40,277 |
|
Common stock | 6,481 |
| | 165 |
| | 123 |
| | 6,523 |
|
| 169,499 |
|
| 1,733 |
|
| 3,490 |
|
| 167,742 |
|
Restricted investments: | | | | | | | |
Short-term bond | 4,254 |
| | — |
| | 4 |
| | 4,250 |
|
Money market funds | 219 |
| | — |
| | — |
| | 219 |
|
| 4,473 |
| | — |
| | 4 |
| | 4,469 |
|
| $ | 173,972 |
|
| $ | 1,733 |
|
| $ | 3,494 |
|
| $ | 172,211 |
|
At December 31, 2016, investments and restricted investments classified as available-for-sale securities were as follows:
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Investments: | | | | | | | |
Corporate debt securities | $ | 135,590 |
| | $ | 5,311 |
| | $ | 1,769 |
| | $ | 139,132 |
|
Preferred stock | 36,048 |
| | 656 |
| | 111 |
| | 36,593 |
|
| 171,638 |
|
| 5,967 |
|
| 1,880 |
|
| 175,725 |
|
Restricted investments: | | | | | | | |
Short-term bond | 4,232 |
| | — |
| | 6 |
| | 4,226 |
|
Money market fund | 1,410 |
| | — |
| | — |
| | 1,410 |
|
| 5,642 |
| | — |
| | 6 |
| | 5,636 |
|
| $ | 177,280 |
|
| $ | 5,967 |
|
| $ | 1,886 |
|
| $ | 181,361 |
|
Mr. Bruce R. Berkowitz is the Chairman of the Company’s Board of Directors. He is the Manager of, and controls entities that own and control, Fairholme Holdings, LLC, which wholly owns Fairholme Capital Management, L.L.C. (“FCM”, a registered investment advisor registered with the Securities and Exchange Commission) and the Fairholme Trust Company, L.L.C. (“FTC”, a non-depository trust company regulated by the Florida Office of Financial Regulation). Mr. Berkowitz is the Chief Investment Officer of FCM, and the Chief Executive Officer and a director of FTC. Since April 2013, FCM has provided investment advisory services to the Company directly, or more recently, as the sub-advisor to FTC. Neither FCM nor FTC receives any compensation for services as the Company’s investment advisor. As of June 30, 2017, clients of FCM and FTC beneficially owned approximately 35.43% of the Company’s common stock. FCM and its client the Fairholme Fund, a Series of the Fairholme Funds, Inc., may be deemed affiliates of the Company.
Both Mr. Cesar Alvarez and Mr. Howard Frank are members of the Company’s Board of Directors and also serve as directors of the Fairholme Funds, Inc. Mr. Alvarez is also a director of FTC.
Pursuant to the terms of the Investment Management Agreement, as amended (the “Agreement”), FTC agreed to supervise and direct the investments of investment accounts established by the Company in accordance with the investment guidelines and restrictions approved by the Investment Committee of the Company’s Board of Directors. The investment guidelines are set forth in the Agreement and require that, as of the date of any investment: (i) no more than 15% of the investment account may be invested in securities of any one issuer (excluding the U.S. Government), (ii) any investment in any one issuer (excluding the U.S. Government) that exceeds 10%, but not 15%, requires the consent of at least two members of the Investment Committee, (iii) 25% of the investment account must be held in cash or cash equivalents, (iv) the investment account is permitted to be invested in common equity securities; however, common stock investments shall be limited to exchange-traded common equities, shall not exceed 5% ownership of a single issuer and, cumulatively, the common stock held in the Company’s investment portfolio shall not exceed $100.0 million market value, and (v) the aggregate market value of investments in common stock, preferred stock or other equity investments cannot exceed 25% of the market value of the Company’s investment portfolio at the time of purchase.
As of June 30, 2017, the investment account included $24.9 million of U.S. Treasury securities, $96.0 million of corporate debt securities, $40.3 million of preferred stock and $6.5 million of common stock investments. Of the $96.0 million corporate debt securities and $40.3 million preferred stock $8.6 million and $0.1 million, respectively, were issued by Sears Holdings Corporation or affiliates, of which Mr. Berkowitz is on the board of directors, and may be deemed an affiliate of FCM, or the Company.
During the three and six months ended June 30, 2017, realized gain from the sale of available for-sale securities were $7.7 million and $10.9 million, respectively. During the six months ended June 30, 2017 proceeds from the sale of available-for-sale securities were $110.4 million.
During the three and six months ended June 30, 2016, there was no realized gain or loss from the sale or maturity of available for-sale securities. During the six months ended June 30, 2016, proceeds from the sale of available-for-sale securities were $8.4 million and proceeds from the maturity of available-for-sale securities were $185.0 million.
The following table provides the U.S. Treasury securities, corporate debt securities, preferred stock, common stock and restricted investments unrealized loss position and related fair values:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2017 | | As of December 31, 2016 |
| Less Than 12 Months | | 12 Months or Greater | | Less Than 12 Months | | 12 Months or Greater |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Investments: | | | | | | | | | | | | | | | |
U.S. Treasury securities | $ | 24,923 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Corporate debt securities | 49,758 |
| | 1,394 |
| | 9,542 |
| | 863 |
| | 64,516 |
| | 1,410 |
| | 6,971 |
| | 359 |
|
Preferred stock | 11,544 |
| | 1,055 |
| | 147 |
| | 48 |
| | — |
| | — |
| | 153 |
| | 111 |
|
Common stock | 3,054 |
| | 123 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted investments: | | | | | | | | | | | | | | | |
Short-term bond | 4,250 |
| | 4 |
| | — |
| | — |
| | 4,226 |
| | 6 |
| | — |
| | — |
|
| $ | 93,529 |
| | $ | 2,583 |
| | $ | 9,689 |
| | $ | 911 |
| | $ | 68,742 |
| | $ | 1,416 |
| | $ | 7,124 |
| | $ | 470 |
|
As of June 30, 2017, the Company had investments with an unrealized loss of $3.5 million related to U.S. Treasury securities, corporate debt securities, preferred stock, common stock and restricted investments. The Company had an unrealized loss of $1.9 million as of December 31, 2016 related to corporate debt securities, preferred stock and restricted investments. As of June 30, 2017 and December 31, 2016, the Company did not intend to sell the investments with a material unrealized loss and it is more likely than not that the Company will not be required to sell any of these securities prior to their anticipated recovery, which could be maturity. During the six months ended June 30, 2017, the Company determined that an unrealized loss related to its corporate debt securities and preferred stock was other-than-temporarily impaired and recorded an impairment of $0.4 million for credit-related loss in investment income, net in the Company's condensed consolidated statements of income.
The net carrying value and estimated fair value of investments and restricted investments classified as available-for-sale at June 30, 2017, by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities since certain borrowers have the right to call or prepay obligations.
|
| | | | | | | |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 28,886 |
| | $ | 28,584 |
|
Due after one year through five years | 92,165 |
| | 90,963 |
|
Due after five year through ten years | 1,351 |
| | 1,339 |
|
Due after ten years through fifteen years | 91 |
| | 56 |
|
| 122,493 |
| | 120,942 |
|
Preferred stock | 40,525 |
| | 40,277 |
|
Common stock | 6,481 |
| | 6,523 |
|
Restricted investments | 4,473 |
| | 4,469 |
|
| $ | 173,972 |
| | $ | 172,211 |
|
5. Financial Instruments and Fair Value Measurements
Fair Value Measurements
The financial instruments measured at fair value on a recurring basis at June 30, 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 14,447 |
| | $ | — |
| | $ | — |
| | $ | 14,447 |
|
Commercial paper | 207,202 |
| | — |
| | — |
| | 207,202 |
|
| 221,649 |
| | — |
| | — |
| | 221,649 |
|
Investments: | | | | | | | |
U.S. Treasury securities | 24,923 |
| | — |
| | — |
| | 24,923 |
|
Corporate debt securities | — |
| | 96,019 |
| | — |
| | 96,019 |
|
Preferred stock | 11,345 |
| | 28,932 |
| | — |
| | 40,277 |
|
Common stock | 6,523 |
| | — |
| | — |
| | 6,523 |
|
| 42,791 |
| | 124,951 |
| | — |
| | 167,742 |
|
Restricted investments: | | | | | | | |
Short-term bond | 4,250 |
| | — |
| | — |
| | 4,250 |
|
Money market fund | 219 |
| | — |
| | — |
| | 219 |
|
| 4,469 |
| | — |
| | — |
| | 4,469 |
|
| $ | 268,909 |
| | $ | 124,951 |
| | $ | — |
| | $ | 393,860 |
|
The financial instruments measured at fair value on a recurring basis at December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 86,236 |
| | $ | — |
| | $ | — |
| | $ | 86,236 |
|
Commercial paper | 129,671 |
| | — |
| | — |
| | 129,671 |
|
| 215,907 |
| | — |
| | — |
| | 215,907 |
|
Investments: | | | | | | | |
Corporate debt securities | 57,788 |
| | 81,344 |
| | — |
| | 139,132 |
|
Preferred stock | 19,177 |
| | 17,416 |
| | — |
| | 36,593 |
|
| 76,965 |
| | 98,760 |
| | — |
| | 175,725 |
|
Restricted investments: | | | | | | |
|
|
Short-term bond | 4,226 |
| | — |
| | — |
| | 4,226 |
|
Money market fund | 1,410 |
| | — |
| | — |
| | 1,410 |
|
| 5,636 |
| | — |
| | — |
| | 5,636 |
|
| $ | 298,508 |
| | $ | 98,760 |
| | $ | — |
| | $ | 397,268 |
|
Money market funds, commercial paper, U.S. Treasury securities, certain preferred stock, common stock and short-term bonds are measured based on quoted market prices in an active market and categorized within level 1 of the fair value hierarchy. Money market funds and commercial paper with a maturity date of ninety days or less from the date of purchase are classified as cash equivalents in the Company’s condensed consolidated balance sheets.
Corporate debt securities and certain preferred stock are not traded on a nationally recognized exchange but rather are traded in the U.S. over-the-counter market where there is less trading activity and these are measured primarily using pricing data from external pricing services that report prices observed for recently executed market transactions. For these reasons, the Company has determined that corporate debt securities and certain preferred stock are categorized as level 2 financial instruments since their fair values were determined from market inputs in an inactive market.
Restricted investments include certain of the surplus assets that were transferred from the Company’s Pension Plan to a suspense account in the Company’s 401(k) Plan in December 2014. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated financial statements until they are allocated to participants. As of June 30, 2017 and December 31, 2016, the assets held in the suspense account were invested in Vanguard Money Market Funds, which invest in short-term, high quality securities or short-term U.S. government securities and seek to provide current income and preserve shareholders’ principal investment and a Vanguard Short-Term Bond Fund, which invests in money market instruments and short-term high quality bonds, including asset-backed, government, and investment grade corporate securities with an expected maturity of 0-3 years. The Vanguard Money Market Funds and Vanguard Short-Term Bond Fund are measured based on quoted market prices in an active market and categorized within level 1 of the fair value hierarchy. The Company’s Retirement Plan Investment Committee is responsible for investing decisions and allocation decisions of the suspense account. Refer to Note 14. Employee Benefit Plan.
Fair Value of Financial Instruments
The Company uses the following methods and assumptions in estimating fair value for financial instruments:
| |
• | The fair value of the Company’s retained interest investments is based on the present value of the expected future cash flows at the effective yield. |
| |
• | The fair value of the investments held by special purpose entities - time deposit is based on the present value of future cash flows at the current market rate. |
| |
• | The fair value of the investments held by special purpose entities - U.S. Treasury securities are measured based on quoted market prices in an active market. |
| |
• | The fair value of the senior notes held by special purpose entity is based on the present value of future cash flows at the current market rate. |
The carrying amount and fair value, measured on a nonrecurring basis, of the Company’s financial instruments were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Carrying value | | Fair value | | Level | | Carrying value | | Fair value | | Level |
Assets | | | | | | | | | | | |
Retained interest investments | $ | 10,909 |
| | $ | 13,868 |
| | 3 | | $ | 10,635 |
| | $ | 13,669 |
| | 3 |
Investments held by special purpose entities: | | | | | | | | | | | |
Time deposit | $ | 200,000 |
| | $ | 200,000 |
| | 3 | | $ | 200,000 |
| | $ | 200,000 |
| | 3 |
U.S. Treasury securities and cash equivalents | $ | 8,267 |
| | $ | 8,155 |
| | 1 | | $ | 8,590 |
| | $ | 8,398 |
| | 1 |
Liabilities | | | | | | | | | | | |
Senior notes held by special purpose entity | $ | 176,422 |
| | $ | 200,481 |
| | 3 | | $ | 176,310 |
| | $ | 199,691 |
| | 3 |
Retained Interest Investments
The Company has a beneficial interest in certain bankruptcy-remote qualified SPEs used in the installment sale monetization of certain sales of timberlands in 2007 and 2008. The SPEs’ assets are not available to satisfy the Company’s liabilities or obligations and the liabilities of the SPEs are not the Company’s liabilities or obligations. Therefore, the SPEs’ assets and liabilities are not consolidated in the Company’s condensed consolidated financial statements as of June 30, 2017 and December 31, 2016. The Company’s continuing involvement with the SPEs is the receipt of the net interest payments and the remaining principal of approximately $16.8 million to be received at the end of the installment notes’ fifteen year maturity period, in 2022 through 2024. The Company has a beneficial or retained interest investment related to these SPEs of $10.9 million and $10.6 million as of June 30, 2017 and December 31, 2016, respectively, recorded in other assets on the Company’s condensed consolidated balance sheets.
Investments and Senior Notes Held by Special Purpose Entities
In connection with a real estate sale in 2014, the Company received consideration including a $200.0 million fifteen-year installment note (the “Timber Note”) issued by Panama City Timber Finance Company, LLC. The Company contributed the Timber Note and assigned its rights as a beneficiary under a letter of credit to Northwest Florida Timber Finance, LLC. Northwest Florida Timber Finance, LLC monetized the Timber Note by issuing $180.0 million aggregate principal amount of its 4.8% Senior Secured Notes due in 2029 (the “Senior Notes”) at an issue price of 98.5% of face value to third party investors. The investments held by Panama City Timber Finance Company, LLC as of June 30, 2017, consist of a $200.0 million time deposit that, subsequent to April 2, 2014, pays interest at 4.0% and matures in March 2029, U.S. Treasuries of $7.9 million and cash of $0.4 million. The Senior Notes held by Northwest Florida Timber Finance, LLC as of June 30, 2017 consist of $176.4 million, net of the $3.6 million discount and debt issuance costs. Panama City Timber Finance Company, LLC and Northwest Florida Timber Finance, LLC are VIEs, which the Company consolidates as the primary beneficiary of each entity.
6. Claim Settlement Receivable
On March 24, 2016, the Company entered into a full and final release agreement with BP p.l.c. and various related entities pursuant to which the Company, on its own behalf and on behalf of certain wholly owned subsidiaries, released any and all claims related to the Deepwater Horizon oil spill which occurred on April 20, 2010. In exchange for this release, the Company will receive $13.2 million from BP Exploration & Production Inc., a large portion of which will reimburse the Company for expenses incurred. On October 3, 2016, the Company received a $5.0 million payment. The remaining settlement amount will be made in payments of $2.7 million due in October of 2017, 2018 and 2019. The Company also received a guaranty of payments from BP North America Corporation Inc. As of March 24, 2016, the Company recorded the claim settlement receivable using an imputed interest rate of 3.0%, based on its best estimate of the prevailing market rates for the source of credit, resulting in an initial present value of $12.5 million and a discount of $0.7 million. $12.5 million of the claim settlement was recognized as other income in the Company’s condensed consolidated statements of income for the six months ended June 30, 2016. The discount is being accreted over the term of the receivable using the effective interest method. Interest income for the three months ended June 30, 2017 and 2016 was less than $0.1 million. Interest income for the six months ended June 30, 2017 and the period from March 24, 2016 to June 30, 2016 was $0.1 million.
7. Other Assets
Other assets consist of the following:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Retained interest investments | $ | 10,909 |
| | $ | 10,635 |
|
Accounts receivable, net | 5,579 |
| | 4,625 |
|
Notes receivable, net | 2,734 |
| | 1,926 |
|
Prepaid expenses | 7,302 |
| | 5,685 |
|
Straight line rent | 3,855 |
| | 3,812 |
|
Other assets | 7,211 |
| | 8,789 |
|
Accrued interest receivable for Senior Notes held by SPE | 2,938 |
| | 2,938 |
|
Total other assets | $ | 40,528 |
| | $ | 38,410 |
|
Notes receivable, net consists of the following:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Pier Park Community Development District notes, non-interest bearing, due September 2022 | $ | 1,684 |
| | $ | 1,684 |
|
Interest bearing homebuilder note, secured by the real estate sold — 5.5% interest rate, principal payment of $0.1 million due June 2018 and any remaining amount outstanding is due by June 2019 | 857 |
| | — |
|
Interest bearing homebuilder notes, secured by the real estate sold — 4.0% interest rate, due December 2016, paid January 2017 | — |
| | 33 |
|
Various mortgage notes, secured by certain real estate, bearing interest at various rates | 193 |
| | 209 |
|
Total notes receivable, net | $ | 2,734 |
| | $ | 1,926 |
|
The Company evaluates the carrying value of the notes receivable and the need for an allowance for doubtful notes receivable at each reporting date. As of June 30, 2017 and December 31, 2016, there was no allowance for doubtful notes receivable.
8. Real Estate Joint Ventures
The Company enters into real estate joint ventures, from time to time, for the purpose of developing real estate in which the Company may or may not have a controlling financial interest. GAAP requires consolidation of VIEs in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE loss and right to receive benefits that are significant to the VIE. The Company examines specific criteria and uses judgment when determining whether the Company is the primary beneficiary and must consolidate a VIE. The Company continues to assess whether it is the primary beneficiary on an ongoing basis.
Consolidated Real Estate Joint Ventures
In April 2017, the Company entered into a joint venture agreement to develop, manage, and lease apartments in Panama City Beach, Florida. The joint venture parties are working together to design, develop and construct a 240 unit multi-family apartment home community to be located on land owned by the Company in the Pier Park area. As of June 30, 2017 the Company owned a 65.0% equity interest in the consolidated joint venture. The Company’s partner is responsible for the day-to-day activities of the joint venture. However, the Company has significant involvement in the design of the development and approves all major decisions, including project development, annual budgets and financing. The Company determined Pier Park Crossings JV is a VIE and that the Company is the VIE’s primary beneficiary as of June 30, 2017.
In December 2016, the Company entered into a joint venture agreement, pursuant to which the Company transferred to Windmark JV all of its interest in the Windmark Beach project. As of June 30, 2017 and December 31, 2016, the Company owned a 49.0% equity interest in the consolidated joint venture. A wholly owned subsidiary of the Company is the managing member of Windmark JV and runs its day-to-day operations. Windmark JV owns and its members make major decisions related to the management and development of the Windmark Beach project. For financial accounting purposes, the Company is deemed to control Windmark JV, which is consolidated within the financial results of the Company as of June 30, 2017 and December 31, 2016.
During 2012, the Company entered into a joint venture agreement with a partner to develop a retail center at Pier Park North. As of June 30, 2017 and December 31, 2016, the Company owned a 60.0% equity interest in the consolidated joint venture. The Company’s partner is responsible for the day-to-day activities of the joint venture. However, the Company has significant involvement in the design of the development and approves all major decisions, including project development, annual budgets and financing. The Company determined the joint venture is a VIE and that the Company is the VIE’s primary beneficiary as of June 30, 2017 and December 31, 2016.
In addition, the Company is the primary beneficiary of Artisan Park, L.L.C, another real estate joint venture that is consolidated within the financial results of the Company. The Company is entitled to 74.0% of the profit or loss of this VIE and is responsible for the day-to-day activities of the joint venture.
Unconsolidated Real Estate VIE
As of June 30, 2017 and December 31, 2016, the Company was a partner in ALP Liquidating Trust (“ALP”) that is accounted for using the equity method. The joint venture was entered into to develop and sell certain mixed use residential and commercial projects. The Company has evaluated the VIE consolidation requirements with respect to this joint venture and has determined that the Company is not the primary beneficiary, since the Company does not have the power to direct the activities that most significantly impact the economic performance of the VIE. The Company is not required to contribute additional funds to ALP.
In 2008, the Company wrote-off its investment in ALP as a result of ALP reserving its assets to satisfy potential claims and obligations in accordance with its publicly reported liquidation basis of accounting. Subsequently, ALP changed its method of accounting to a going concern basis and reinstated its equity and stated it would report certain expenses as they are incurred. The Company has not recorded any additional equity income as a result of ALP’s change in accounting.
Financial information for ALP is provided to the Company on a delayed basis. The summarized information as of March 31, 2017 and December 31, 2016 includes total assets of $11.0 million and $11.5 million, respectively, total liabilities of $0.3 million and $0.6 million, respectively and total equity of $10.7 million and $10.9 million, respectively. For the three months ended March 31, 2017 and 2016, ALP reported a net loss of $0.2 million and $0.3 million, respectively.
9. Debt
Debt consists of the following at June 30, 2017:
|
| | | | | | | | | | | |
| Principal |
| Unamortized Discount and Debt Issuance Costs |
| Net |
Refinanced loan in the Pier Park North JV, due November 2025, bearing interest at 4.1% | $ | 47,718 |
|
| $ | 558 |
|
| $ | 47,160 |
|
Community Development District debt, secured by certain real estate or other collateral, due May 2031 - May 2039, bearing interest at 3.4% to 7.0% at June 30, 2017 | 7,169 |
|
| — |
|
| 7,169 |
|
Construction loan, due March 2027, bearing interest at LIBOR plus 1.7% (effective rate of 2.9% at June 30, 2017) | 1,188 |
| | 19 |
| | 1,169 |
|
Total debt | $ | 56,075 |
|
| $ | 577 |
|
| $ | 55,498 |
|
Debt consists of the following at December 31, 2016:
|
| | | | | | | | | | | |
| Principal | | Unamortized Discount and Debt Issuance Costs | | Net |
Refinanced loan in the Pier Park North JV, due November 2025, bearing interest at 4.1% | $ | 48,132 |
| | $ | 613 |
| | $ | 47,519 |
|
Community Development District debt, secured by certain real estate or other collateral, due May 2031 - May 2039, bearing interest at 3.4% to 7.0% at December 31, 2016 | 7,521 |
| | — |
| | 7,521 |
|
Total debt | $ | 55,653 |
| | $ | 613 |
| | $ | 55,040 |
|
In October 2015, the Pier Park North JV refinanced a construction loan by entering into a $48.2 million loan (the “Refinanced Loan”). As of June 30, 2017 and December 31, 2016, $47.7 million and $48.1 million, respectively, was outstanding on the Refinanced Loan. The Refinanced Loan accrues interest at a rate of 4.1% per annum and matures in November 2025. The Refinanced Loan was secured by a first lien on, and security interest in, a majority of the Pier Park North JV’s property and a remaining $1.3 million short term letter of credit. In connection with the Refinanced Loan, the Company entered into a limited guarantee in favor of the lender, based on its percentage ownership of the joint venture. In addition, the guarantee can become full recourse in the case of any fraud or intentional misrepresentation by the Pier Park North JV; any voluntary transfer or encumbrance of the property in violation of the due-on-sale clause in the security instrument; upon commencement of voluntary bankruptcy or insolvency proceedings and upon breach of covenants in the security instrument.
Community Development District (“CDD”) bonds financed the construction of infrastructure improvements at some of the Company’s projects. The principal and interest payments on the bonds are paid by assessments on the properties benefited by the improvements financed by the bonds. The Company has recorded a liability for CDD debt that is associated with platted property, which is the point at which it becomes fixed or determinable. Additionally, the Company has recorded a liability for the portion of the CDD debt that is associated with unplatted property if it is probable and reasonably estimable that the Company will ultimately be responsible for repaying. The Company has recorded CDD related debt of $7.2 million and $7.5 million as of June 30, 2017 and December 31, 2016, respectively. The Company’s total outstanding CDD debt was $21.9 million and $22.6 million as of June 30, 2017 and December 31, 2016, respectively. The Company pays interest on the total outstanding CDD debt.
In March 2017, a wholly owned subsidiary of the Company entered into a $1.6 million construction loan to finance the construction of a commercial leasing property located in Panama City Beach, Florida (the “Construction Loan”). The Construction Loan bears interest at LIBOR plus 1.70% and matures in March 2027. The Construction Loan provides for interest only payments during the first twelve months and principal and interest payments thereafter with a final balloon payment at maturity. The Construction Loan is secured by the real property, assignment of rents and the security interest in the rents and personal property. In connection with the Construction Loan, the Company executed a guarantee in favor of the lender to guarantee the payment and performance of the borrower under the Construction Loan until the project meets certain cash flow stabilization requirements. As of June 30, 2017, $1.2 million was outstanding under the Construction Loan.
The aggregate maturities of debt subsequent to June 30, 2017 are:
|
| | | |
| June 30, 2017 |
2017 | $ | 452 |
|
2018 | 1,481 |
|
2019 | 1,523 |
|
2020 | 1,526 |
|
2021 | 1,507 |
|
Thereafter | 49,586 |
|
| $ | 56,075 |
|
10. Other Liabilities
Other liabilities consist of the following:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Accounts payable | $ | 12,906 |
| | $ | 4,376 |
|
Accrued compensation | 1,765 |
| | 2,655 |
|
Deferred revenue | 16,614 |
| | 15,289 |
|
Membership deposits and initiation fees | 8,948 |
| | 7,384 |
|
Advance deposits | 7,863 |
| | 3,419 |
|
Other accrued liabilities | 9,674 |
| | 4,977 |
|
Accrued interest expense for Senior Notes held by SPE | 2,850 |
| | 2,850 |
|
Total other liabilities | $ | 60,620 |
| | $ | 40,950 |
|
Deferred revenue at June 30, 2017 and December 31, 2016 includes $12.5 million related to a 2006 agreement pursuant to which the Company agreed to sell land to the Florida Department of Transportation. Revenue is recognized when title to a specific parcel is legally transferred.
Membership deposits and initiation fees consist of deposits and fees received for club memberships. Initiation fees are recognized as revenue over the estimated average duration of membership, which is evaluated periodically.
Advance deposits consist of deposits received on hotel rooms and vacation rentals. Advance deposits are recorded as other liabilities in the condensed consolidated balance sheets without regard to whether they are refundable and are recognized as income at the time the service is provided for the related deposit.
Other accrued liabilities include $2.5 million of accrued property taxes as of June 30, 2017, which are generally paid annually in November. As of December 31, 2016 the Company had no accrued property taxes.
11. Income Taxes
Income tax expense differed from the amount computed by applying the federal statutory rate of 35% to pre-tax income or loss as a result of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Tax at the federal statutory rate | $ | 5,836 |
| | $ | 976 |
| | $ | 8,162 |
| | $ | 5,144 |
|
State income taxes (net of federal benefit) | 583 |
| | 97 |
| | 816 |
| | 514 |
|
Tax effect of timber at the federal statutory rate of 23.8% | (112 | ) | | (54 | ) | | (226 | ) | | (260 | ) |
Decrease in valuation allowance | (316 | ) | | (9 | ) | | (596 | ) | | (363 | ) |
Other | (82 | ) | | (32 | ) | | 32 |
| | (813 | ) |
Total income tax expense | $ | 5,909 |
| | $ | 978 |
| | $ | 8,188 |
| | $ | 4,222 |
|
The Company had no federal net operating loss carryforwards as of June 30, 2017 and December 31, 2016. The Company had a federal AMT credit carryforward of $10.2 million and $13.5 million as of June 30, 2017 and December 31, 2016, respectively. The AMT credit carryforward is available indefinitely to offset future federal income tax liabilities. As of June 30, 2017 and December 31, 2016, the Company had state net operating loss carryforwards of $404.1 million and $427.3 million, respectively. The state net operating loss is available to offset future taxable income through 2036.
In general, a valuation allowance is recorded if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in the appropriate tax jurisdictions to obtain a benefit from the reversal of deductible temporary differences and from loss carryforwards.
As of December 31, 2016, based on the timing of reversal of future taxable amounts and the Company’s history of losses, management did not believe it met the requirements to realize the benefits of certain of its deferred tax assets; therefore, the Company had maintained a valuation allowance of $5.1 million. During the six months ended June 30, 2017, the Company reversed $0.6 million of the valuation allowance that was recorded as of December 31, 2016. As of June 30, 2017, management believes it has not met the requirements to realize the benefits for a portion of its deferred tax assets for state net operating loss carryforwards; therefore, the Company has maintained a valuation allowance of $4.5 million for these deferred tax assets.
The Company had approximately $1.7 million of total unrecognized tax benefits as of each June 30, 2017 and December 31, 2016. Of this total, there are no amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. There were no decreases or increases related to prior year or current year tax positions.
In December 2016, the Company entered into a joint venture agreement, pursuant to which the Company sold to Windmark JV all of its interest in the Windmark Beach project. The sale of the Windmark Beach project created a net taxable loss for the Company in 2016. The loss was carried back to 2014 for a federal income tax refund of $21.9 million during the six months ended June 30, 2017. In addition, the Company received a federal tax refund for 2016 of $4.4 million during the six months ended June 30, 2017.
12. Accumulated Other Comprehensive Income (Loss)
Following is a summary of the changes in the balances of accumulated other comprehensive income (loss), which is presented net of tax, as of June 30, 2017:
|
| | | |
| Unrealized Gain and (Loss) on Available-for-Sale Securities |
Accumulated other comprehensive income at December 31, 2016 | $ | 2,507 |
|
Other comprehensive income before reclassifications | 2,861 |
|
Amounts reclassified from accumulated other comprehensive loss | (6,312 | ) |
Other comprehensive loss | (3,451 | ) |
Accumulated other comprehensive loss at June 30, 2017 | $ | (944 | ) |
Following is a summary of the tax effects allocated to other comprehensive loss for the three months ended June 30, 2017 and 2016:
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
| Before-Tax Amount | | Tax (Expense) or Benefit | | Net-of-Tax Amount |
Unrealized gain (loss) on investments: | | | | | |
Unrealized gain on available-for-sale investments | $ | 745 |
| | $ | (287 | ) | | $ | 458 |
|
Unrealized loss on restricted investments | (4 | ) | | 2 |
| | (2 | ) |
Less: reclassification adjustment for gain included in earnings | (7,739 | ) | | 3,120 |
| | (4,619 | ) |
Net unrealized loss | (6,998 | ) | | 2,835 |
| | (4,163 | ) |
Other comprehensive loss | $ | (6,998 | ) | | $ | 2,835 |
| | $ | (4,163 | ) |
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2016 |
| Before-Tax Amount | | Tax Expense | | Net-of-Tax Amount |
Unrealized gain on available-for-sale investments | $ | 90 |
| | $ | (35 | ) | | $ | 55 |
|
Following is a summary of the tax effects allocated to other comprehensive loss for the six months ended June 30, 2017 and 2016:
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
| Before-Tax Amount | | Tax (Expense) or Benefit | | Net-of-Tax Amount |
Unrealized gain on investments: | | | | | |
Unrealized gain on available-for-sale investments | $ | 4,650 |
| | $ | (1,789 | ) | | $ | 2,861 |
|
Reclassification adjustment for gain included in earnings | (10,861 | ) | | 4,183 |
| | (6,678 | ) |
Reclassification adjustment for other-than-temporary impairment loss included in earnings | 366 |
| | — |
| | 366 |
|
Net unrealized loss | (5,845 | ) | | 2,394 |
| | (3,451 | ) |
Other comprehensive loss | $ | (5,845 | ) | | $ | 2,394 |
| | $ | (3,451 | ) |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2016 |
| Before-Tax Amount | | Tax Expense | | Net-of-Tax Amount |
Unrealized gain on available-for-sale investments | $ | 2 |
| | $ | (1 | ) | | $ | 1 |
|
13. Stockholders’ Equity
Stock Repurchase Program
During the six months ended June 30, 2017 and 2016, the Company repurchased 2,416,089 and 995,650 shares, respectively, of its common stock at an average purchase price of $16.74 and $14.88, per share, respectively, for an aggregate purchase price of $40.4 million and $14.8 million, respectively, pursuant to its stock repurchase program (the “Stock Repurchase Program”). As of June 30, 2017, the Company had a total authority of $150.5 million available for purchase of shares of its common stock pursuant to its Stock Repurchase Program. The Company may repurchase its common stock in open market purchases from time to time, in privately negotiated transactions or otherwise, pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The timing and amount of any additional shares to be repurchased will depend upon a variety of factors, including market and business conditions and other factors. Repurchases may be commenced or suspended at any time or from time to time without prior notice. The Stock Repurchase Program will continue until otherwise modified or terminated by the Company’s Board of Directors at any time in its sole discretion.
On July 7, 2017, the Board of Directors of the Company authorized additional repurchases of up to $28.0 million of the Company’s shares of its common stock under the Stock Repurchase Program. On July 11, 2017, the Company purchased an additional 1,500,000 shares for an aggregate purchase price of $27.0 million. After giving effect to the repurchase, as of July 31, 2017, the Company has $150.5 million remaining under the Stock Repurchase Program.
Issuance of Common Stock for Director’s Fees
On May 25, 2017, the Company’s Board of Directors (the “Board”) approved granting to each non-employee director an equity grant with an aggregate fair market value of $50,000 or, at the director’s election, its cash equivalent. On July 3, 2017 two of the Company’s directors were each granted 2,667 shares of restricted stock pursuant to the Board’s May 25th approval and the Company's 2015 Performance and Equity Incentive Plan. This restricted stock will vest on the date of the Company's 2018 Annual Meeting of Shareholders (the "Annual Meeting") and is subject to forfeiture upon termination of service on the Board prior to the Annual Meeting. Four non-employee directors elected to receive cash in lieu of the stock.
On May 17, 2016, the Board approved the issuance of 8,919 restricted stock awards to three members of the Board as part of their 2016 compensation package and pursuant to the 2015 Performance and Equity Incentive Plan. These restricted stock awards vested 25% on the date of issue and 25% on August 17, 2016, November 17, 2016 and February 17, 2017. For each of the six months ended June 30, 2017 and 2016, the Company recorded expense of less than $0.1 million, related to restricted stock awards to the Company’s directors.
14. Employee Benefit Plan
The Company maintains a 401(k) retirement plan covering substantially all officers and employees of the Company, which permits participants to defer up to the maximum allowable amount determined by the IRS of their eligible compensation.
As part of the Pension Plan termination in 2014, the Company directed the Pension Plan to transfer $7.9 million of the Pension Plan’s surplus assets into a suspense account in the Company’s 401(k) Plan. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated financial statements until they are allocated to participants. As of June 30, 2017 and December 31, 2016, the fair value of these assets was recorded in restricted investments on the Company’s condensed consolidated balance sheets and were $4.5 million and $5.6 million, respectively.
The Company expenses the fair value of the assets at the time the assets are allocated to participants, which is expected to be allocated up to the next four years. During the six months ended June 30, 2017 and 2016, the Company recorded an expense of $1.2 million and $1.4 million, respectively, for the fair value of the assets, less expenses, that were allocated to participants during that period. Any gain or loss on these assets is reflected in the Company’s condensed consolidated statements of income and was less than a $0.1 million gain for both the three and six months ended June 30, 2017 and 2016. Refer to Note 5. Financial Instruments and Fair Value Measurements.
15. Other Income (Expense)
Other income (expense) consists of the following:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Investment income, net | | | | | | | | |
Net investment income from available-for-sale securities | | | | | | | | |
Interest and dividend income | | $ | 4,024 |
| | $ | 252 |
| | $ | 8,573 |
| | $ | 442 |
|
Accretion income | | 399 |
| | 579 |
| | 1,320 |
| | 1,041 |
|
Realized gain on the sale of investments | | 7,739 |
| | — |
| | 10,861 |
| | — |
|
Other-than-temporary impairment loss | | — |
| | — |
| | (366 | ) | | — |
|
Total net investment income from available-for-sale securities | | 12,162 |
| | 831 |
| | 20,388 |
| | 1,483 |
|
Interest income from investments in SPEs | | 2,050 |
| | 2,050 |
| | 4,101 |
| | 4,101 |
|
Interest accrued on notes receivable and other interest | | 91 |
| | 78 |
| | 169 |
| | 105 |
|
Total investment income, net | | 14,303 |
| | 2,959 |
| | 24,658 |
| | 5,689 |
|
Interest expense | | | | | | | | |
Interest expense and amortization of discount and issuance costs for Senior Notes issued by SPE | | (2,194 | ) | | (2,191 | ) | | (4,387 | ) | | (4,382 | ) |
Other interest expense | | (841 | ) | | (954 | ) | | (1,691 | ) | | (1,798 | ) |
Total interest expense | | (3,035 | ) | | (3,145 | ) | | (6,078 | ) | | (6,180 | ) |
Claim settlement | | — |
| | — |
| | — |
| | 12,548 |
|
Other income, net | | | | | | | | |
Accretion income from retained interest investments | | 271 |
| | 243 |
| | 534 |
| | 484 |
|
Hunting lease income | | 140 |
| | 138 |
| | 279 |
| | 277 |
|
Miscellaneous income, net | | 181 |
| | 220 |
| | 3,830 |
| | 289 |
|
Other income, net | | 592 |
| | 601 |
| | 4,643 |
| | 1,050 |
|
| | | | | | | | |
Total other income, net | | $ | 11,860 |
| | $ | 415 |
|
| $ | 23,223 |
|
| $ | 13,107 |
|
Investment Income, Net
Interest and dividend income includes interest income accrued or received on the Company’s corporate debt securities and dividend income received from the Company’s preferred stock and other investments. Accretion income includes the amortization of the premium or accretion of discount related to the Company’s available-for-sale securities, which is amortized based on an effective interest rate method over the term of the available-for-sale securities. Realized gain on the sale of investments include the gain recognized on the sale of an available-for-sale security prior to maturity. During the six months ended June 30, 2017, the Company determined that a portion of its investments in corporate debt securities and preferred stock were other-than-temporarily impaired and recorded a $0.4 million impairment related to credit-related loss in investment income, net on the Company's condensed consolidated statements of income. See Note 4. Investments.
Interest income from investments in SPEs primarily includes interest accrued or received on the investments held by Panama City Timber Finance Company, LLC, which is used to pay the interest expense for Senior Notes held by Northwest Florida Timber Finance, LLC.
Interest Expense
Interest expense includes interest expense related to the Company’s CDD debt and Refinanced Loan in the Pier Park North JV. Borrowing costs, including the discount and issuance costs for the Senior Notes issued by Northwest Florida Timber Finance, LLC, are amortized based on the effective interest method at an effective rate of 4.9%.
Claim Settlement
Claim settlement during the six months ended June 30, 2016 includes $12.5 million for a settlement related to the Deepwater Horizon oil spill. See Note 6. Claim Settlement Receivable for further discussion.
Other Income, Net
During the six months ended June 30, 2017, the Company negotiated an insurance settlement that resulted in proceeds of $3.5 million, for reimbursement of certain attorney fees and related costs incurred by the Company in defending shareholder litigation and the SEC investigation which was resolved in October 2015. This amount was included in other income, net in the condensed consolidated statements of income.
The Company records the accretion of investment income from its retained interest investment over the life of the retained interest using the effective yield method with rates ranging from 3.7% to 11.7%. Hunting lease income is recognized as income over the term of each lease.
16. Segment Information
The Company conducts primarily all of its business in the following five reportable operating segments: (1) residential real estate, (2) commercial real estate, (3) resorts and leisure, (4) leasing and (5) forestry.
The residential real estate segment generates revenue from the development and sale of homes and homesites and the sale of parcels of entitled, undeveloped land. The commercial real estate segment sells undeveloped or developed land and commercial operating property. The resort and leisure segment generates revenue and incurs costs from the WaterColor Inn and Resort, vacation rental program, management of The Pearl Hotel, membership sales, membership reservations, restaurants, four golf courses, a beach club, marina operations and other related resort activities. The leasing segment generates revenue and costs from leasing retail, office and commercial property, cell towers and other assets. Leasing operations include properties located in the Company’s consolidated Pier Park North JV and Windmark JV, as well as the Company’s industrial park, VentureCrossings and other properties. The forestry segment produces and sells pulpwood, sawtimber and other forest products and may sell the Company’s timber or rural land holdings.
The Company’s reportable segments are strategic business units that offer different products and services. They are each managed separately and decisions about allocations of resources are determined by management based on these strategic business units.
The Company uses income before income taxes and non-controlling interest for purposes of making decisions about allocating resources to each segment and assessing each segment’s performance, which the Company believes represents current performance measures.
The accounting policies of the segments are set forth in Note 2 to the Company’s consolidated financial statements contained in Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Total revenue represents sales to unaffiliated customers, as reported in the Company’s condensed consolidated statements of income. All significant intercompany accounts and transactions have been eliminated in consolidation. The caption entitled “Other” consists of mitigation credit and title fee revenue and non-allocated corporate general and administrative expenses, net of investment income.
Information by business segment is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Operating revenue: | | | | | | | |
Residential real estate | $ | 4,706 |
| | $ | 5,796 |
| | $ | 5,980 |
| | $ | 12,784 |
|
Commercial real estate | 2,178 |
| | — |
| | 2,178 |
| | — |
|
Resorts and leisure | 19,328 |
| | 19,794 |
| | 27,436 |
| | 28,544 |
|
Leasing operations | 2,653 |
| | 2,321 |
| | 5,037 |
| | 4,682 |
|
Forestry | 1,324 |
| | 1,603 |
| | 2,674 |
| | 3,724 |
|
Other | 194 |
| | 37 |
| | 275 |
| | 71 |
|
Total operating revenue | $ | 30,383 |
| | $ | 29,551 |
| | $ | 43,580 |
| | $ | 49,805 |
|
| | | | | | | |
Income (loss) before income taxes: | | | | | | | |
Residential real estate | $ | 1,893 |
| | $ | 1,081 |
| | $ | 1,224 |
| | $ | 4,439 |
|
Commercial real estate | (74 | ) | | (548 | ) | | (649 | ) | | (1,148 | ) |
Resorts and leisure | 3,380 |
| | 2,795 |
| | 1,604 |
| | 994 |
|
Leasing operations | 309 |
| | (336 | ) | | 511 |
| | (379 | ) |
Forestry | 1,130 |
| | 1,241 |
| | 2,371 |
| | 3,094 |
|
Other | 9,885 |
| | (1,675 | ) | | 17,929 |
| | 7,354 |
|
Total income before income taxes | $ | 16,523 | |