| ST JOE CO Item 1A Risk Factors Our business faces numerous risks, including those set forth below |
| If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected |
| The risks described below are not the only ones we face |
| Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations |
| 11 _________________________________________________________________ [78]Table of Contents A downturn in economic conditions and demand for real estate could adversely affect our business |
| Our ability to generate revenues is directly related to the real estate market, primarily in Florida, and to the national and local economy in general |
| Over the last several years, some investors have increasingly utilized real estate as an investment |
| Florida resort real estate has benefited from this trend, creating demand for our products |
| During 2005, the demand for resort real estate in Northwest Florida lessened, causing a decrease in sales of our resort residential products |
| If this trend were to continue, the demand for our products could further decline, negatively impacting our net income and potentially impacting selling prices and/or absorption rates |
| While the primary residential real estate markets have generally remained healthy in our regions of development, continued demand for our primary residential products is dependent on long-term prospects for job growth and strong in-migration population expansion in our regions of development |
| Considerable economic and political uncertainties currently exist that could have adverse effects on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general |
| Significant expenditures associated with investment in real estate, such as real estate taxes, insurance, maintenance costs and debt payments, cannot generally be reduced if changes in Florida’s or the nation’s economy cause a decrease in revenues from our properties |
| In particular, if the growth rate for the Florida economy declines or if a recession in the Florida economy occurs, our profitability could be materially adversely affected |
| The occurrence of hurricanes and other natural disasters in Florida could adversely affect our business |
| The southeastern United States experienced a record-setting hurricane season in 2005 |
| In particular, Hurricane Katrina, which struck New Orleans and the Mississippi Gulf Coast in August, caused severe devastation to those areas and received prolonged national media attention |
| We believe that the 2005 hurricane season had a negative impact on sales of our resort residential products |
| Another active hurricane season in 2006 could continue to negatively impact sales of our real estate products |
| In addition to the effects on demand, the 2005 hurricane season and future hurricanes could also lead to increased costs and shortages of construction labor and building supplies |
| The United States has never experienced a post-hurricane reconstruction effort like that planned and underway on the Gulf Coast so the long-term effects of this reconstruction on the construction industry cannot yet be predicted with certainty |
| Increased costs of labor and materials would negatively impact our profitability |
| Labor and materials shortages could delay the development of one or more of our projects, which could negatively impact our sales and profitability |
| In addition to hurricanes, the occurrence of other natural disasters in Florida, such as floods, fires, unusually heavy or prolonged rain and droughts, could have a material adverse effect on our ability to develop and sell properties or realize income from our projects |
| The occurrence of natural disasters could also cause increases in property and flood insurance rates and deductibles, which could reduce demand for our properties |
| Our businesses are primarily concentrated in the State of Florida |
| As a result, our financial results are dependent on the economic growth and health of Florida, particularly Northwest Florida |
| The economic growth and health of the State of Florida, particularly Northwest Florida where the majority of our land is located, are important factors in sustaining demand for our products and services |
| As a result, any adverse change to the economic growth and health of Florida, particularly Northwest Florida, could materially adversely affect our financial results |
| The future economic growth in certain portions of Northwest Florida may be adversely affected if its infrastructure, such as roads, airports, medical facilities and schools, are not improved to meet increased demand |
| There can be no assurance that these improvements will occur |
| Currently, the Federal Aviation Administration is considering five alternatives to expand the capacity of the Panama City — Bay County International Airport |
| Two of these alternatives involve expansion of the 12 _________________________________________________________________ [79]Table of Contents current facility, and two alternatives require relocation of the airport to a new site proposed by the Airport Authority in the West Bay Sector on land owned by us |
| The final alternative is to take no action at all |
| The relocation of the airport is a condition to certain of our land-use entitlements in Bay County |
| We also believe that the relocation of the airport is important to the overall economic development of Northwest Florida |
| The FAA has issued a draft EIS with respect to the proposed alternatives |
| The FAA will be conducting additional analysis over the next several months on the redevelopment of the existing Panama City — Bay County International Airport for non-airport uses |
| This additional work will result in a delay in the release of the Final EIS for the relocation of the airport which will be located on property donated by JOE The Airport Authority now expects that the Final EIS will be made public in May of 2006, and the subsequent FAA Record of Decision will be issued in September of 2006 |
| In addition to the EIS process, other regulatory steps remain before a final decision is reached on the relocation of the airport |
| The relocation is also dependent on adequate funding |
| If the relocation of the airport does not occur, our business could be materially affected |
| Changes in the demographics affecting projected population growth in Florida, including a decrease in the migration of Baby Boomers, could adversely affect our business |
| Florida has experienced strong recent population growth, including the migration of Baby Boomers to the state |
| This population growth is expected to continue into the foreseeable future |
| Baby Boomers seeking retirement or vacation homes in Florida represent a significant portion of purchasers in many of our developments, and we intend to continue to plan and market future developments to Baby Boomers |
| Any decrease in the demographic trend of Baby Boomers moving to Florida could adversely affect our business |
| Increases in interest rates could reduce demand for our products |
| Continued increases in interest rates could reduce the demand for homes we build, particularly primary housing and home sites we develop, commercial properties we develop or sell, and land we sell |
| Increased interest rates could also negatively impact pricing for our products |
| A reduction in demand or pricing would materially adversely affect our profitability |
| Our real estate operations are cyclical |
| Our business is affected by demographic and economic trends and the supply and rate of absorption of lot sales and new construction |
| As a result, our real estate operations are cyclical, which may cause our quarterly revenues and operating results to fluctuate significantly from quarter to quarter and to differ from the expectations of public market analysts and investors |
| If this occurs, our stock’s trading price could also fluctuate significantly |
| We are exposed to risks associated with real estate sales and development |
| Our real estate development activities entail risks that include: • construction delays or cost overruns, which may increase project development costs; • compliance with building codes and other local regulations; • evolving liability theories affecting the construction industry; • an inability to obtain required governmental permits and authorizations; • an inability to secure tenants or anchors necessary to support commercial projects; • failure to achieve anticipated occupancy levels or rents; and • an inability to sell our constructed inventory |
| 13 _________________________________________________________________ [80]Table of Contents In addition, our real estate development activities require significant capital expenditures |
| We obtain funds for our capital expenditures through cash flow from operations, property sales or financings |
| We cannot be sure that the funds available from these sources will be sufficient to fund our required or desired capital expenditures for development |
| If we are unable to obtain sufficient funds, we may have to defer or otherwise limit our development activities |
| Our residential projects require significant capital expenditures for infrastructure development before we can begin our selling efforts |
| If we are unsuccessful in our selling efforts, we may not be able to recover these capital expenditures |
| Our business is subject to extensive regulation which makes it difficult and expensive for us to conduct our operations |
| Development of real estate entails a lengthy, uncertain and costly entitlements process |
| 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 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 |
| 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 |
| Local governments that fail to keep their plans current may be prohibited by law to amend their plans to allow for new development |
| All development orders and development permits must be consistent with the 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, sanitation, sewerage, potable water supply, drainage, affordable housing, open space and parks |
| The local governments’ comprehensive plans must also establish “levels of service” with respect to certain specified public facilities, including roads, 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 facilities and services are not operating at established levels of service, or if the projects for which permits are requested will reduce the level of service for public facilities below the level of service established in the local government’s comprehensive plan |
| If the proposed development would reduce the established level of service below the level set by the plan, the development order will require that the developer either sufficiently improve the services up front to meet the required level or provide financial assurances that the additional services will be provided as the project progresses |
| The DRI review process includes an evaluation of a project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous state and local environmental, zoning and community development agencies |
| Local government approval of any DRI is subject to appeal to the Governor and Cabinet by the Florida Department of Community Affairs, and adverse decisions by the Governor or Cabinet are subject to judicial appeal |
| The DRI approval process is usually lengthy and costly, and conditions, standards or requirements may be imposed on a developer with respect to a particular project, which may materially increase the cost of the project |
| The DRI approval process is expected to have a material impact on our real estate development activities in the future |
| Changes in the Growth Management Act or the DRI review process or the interpretation thereof, new enforcement of these laws, the enactment of new laws regarding the development of real property or the identification of new facts could lead to new or greater liabilities that could materially adversely affect our business, profitability or financial condition |
| 14 _________________________________________________________________ [81]Table of Contents 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 |
| Most of 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 that require land to be conserved at a disproportionate ratio versus the land approved for development |
| Much 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 |
| Much of our property is in coastal areas that usually have a more restrictive permitting burden and 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: • 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 damages on our property regardless of fault |
| 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, profitability or financial condition |
| Our joint venture partners may have interests that differ from ours and may take actions that adversely affect us |
| We are involved in joint venture relationships and may initiate future joint venture projects as part of our overall development strategy |
| A joint venture involves special risks such as: • we may not have voting control over the joint venture; • the venture partner at any time may have economic or business interests or goals that are inconsistent with ours; • the venture partner may take actions contrary to our instructions or requests, or contrary to our policies or objectives with respect to the real estate investments; and • the venture partner could experience financial difficulties |
| 15 _________________________________________________________________ [82]Table of Contents Actions by our venture partners may subject property owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement or have other adverse consequences |
| Changes in our income tax estimates could affect our profitability |
| 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 sheet |
| 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 |
| To the extent adjustments are required in any given period, we will include the adjustments in the tax provision in our financial statements |
| These adjustments could materially impact our financial position, cash flow and results of operations |
| Significant competition could have an adverse effect on our business |
| The real estate industry is generally characterized by significant competition |
| A number of residential and commercial developers, some with greater financial and other resources, compete with us in seeking properties for acquisition, resources for development and prospective purchasers and tenants |
| Competition from other real estate developers and real estate services companies may adversely affect our ability to: • sell homes and home sites; • attract purchasers; • attract and retain tenants; • sell undeveloped rural land; • attract and retain experienced real estate development personnel; and • obtain construction materials and labor |
| The forest products industry is highly competitive |
| Many of our competitors in the forest products industry are fully integrated companies with substantially greater financial and operating resources |
| Our products are also subject to increasing competition from a variety of non-wood and engineered wood products |
| In addition, we are subject to competition from lumber products and logs imported from foreign sources |
| Any significant increase in competitive pressures from substitute products or other domestic or foreign suppliers could have a material adverse effect on our forestry operations |
| We are highly dependent on our senior management |
| Our senior management is responsible for the continuing effort to create value for shareholders by repositioning our timberland holdings for higher and better uses |
| Our future success is highly dependent upon the continued employment of our senior management, particularly Peter Rummell, our Chairman and Chief Executive Officer |
| In August 2003, we entered into a five-year employment agreement with Mr |
| The loss of one or more of our senior managers could have a material adverse effect on our business |
| We do not have key-person life insurance on any of our senior managers |
| If we are unable to attract or retain experienced real estate development personnel, our business may be adversely affected |
| Our future success largely depends on our ability to attract and retain experienced real estate development personnel |
| The market for these employees is highly competitive |
| If we cannot continue to 16 _________________________________________________________________ [83]Table of Contents attract and retain quality personnel, our ability to effectively operate our business may be significantly limited |
| Decline in rental income could adversely affect our financial results |
| We own a large portfolio of commercial real estate rental properties |
| Our profitability could be adversely affected if: • a significant number of our tenants are unable to meet their obligations to us; • we are unable to lease space at our properties when the space becomes available; and • the rental rates upon a renewal or a new lease are significantly lower than expected |