ST JOE Co - Annual Report: 2005 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File No. 1-10466

The St. Joe Company

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (904) 301-4200

Securities Registered Pursuant to Section 12(b) of the Act:

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     YES þ          NO o

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     YES o          NO þ

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     YES þ          NO o

      Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated filer þ          Accelerated filer o          Non-Accelerated Filer o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES o          NO þ

      The aggregate market value of the registrant’s Common Stock held by non-affiliates based on the closing price on June 30, 2005, was approximately $6.04 billion.

      As of March 9, 2006, there were 103,995,359 shares of Common Stock, no par value, issued and 74,827,800  shares outstanding, with 29,167,559 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2006 (the “proxy statement”) are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index.

Table of Contents

PART I

      As used throughout this Form 10-K Annual Report, the terms “we,” “JOE,” “Company” and “Registrant” mean The St. Joe Company and its consolidated subsidiaries unless the context indicates otherwise.

      JOE is one of Florida’s largest real estate operating companies. We believe that we are the largest private landowner in the State of Florida. The majority of our land is located in Northwest Florida. We own approximately 838,000 acres, approximately 338,000 acres of which are within ten miles of the coast of the Gulf of Mexico.

      We are engaged in town and resort development, commercial and industrial development and land sales. We also have significant interests in timber. We believe we are one of the few real estate operating companies to have assembled the range of real estate, financial, marketing and regulatory expertise necessary to take a large-scale approach to real estate development and services.

      Our four operating segments are:

      We believe we have a number of key business strengths and competitive advantages, including one of the largest inventories of private land suitable for development in the State of Florida, a very low cost basis in our land and a strong financial condition, which allow us the financial flexibility to pursue development opportunities.

      Our business plan calls for us to continue to reposition our timberland holdings for higher and better uses in order to optimize the value of our core real estate assets in Northwest Florida. Value creation results from securing higher and better land-use entitlements, land restoration and enhancement, infrastructure improvements, amenity development, strategic planning, and parceling and development of our land holdings. We are currently seeking additional land-use entitlements, development orders and permits throughout our land holdings. Land-use entitlements are intended to facilitate alternative uses of our property and to increase its per-acre value.

Recent Developments

      Our business has experienced the following developments since December 31, 2004:

Land-Use Entitlements

      We have a broad range of land-use entitlements in hand or in various stages of the approval process for residential communities in Northwest Florida and other high-growth regions of the state as well as commercial entitlements. The following table describes the primary residential, second-home, resort, and commercial developments with land-use entitlements that we are currently planning and developing in Florida. As shown in the table, the expected build-out periods for these communities range from 2006 to 2017, the maximum project units for these communities exceed 39,000, and the total acreage encompassed by these communities is approximately 48,000 acres. Most of the communities are on lands we own. Some of the communities are being developed through ventures with unrelated third parties.

Summary of Land-Use Entitlements(1)

Active JOE Residential Projects in Florida

December 31, 2005

Towns & Resorts

      Our Towns & Resorts segment develops large-scale, mixed-use communities primarily on land that we have owned for a long period of time. We own large tracts of land in Northwest Florida, including large tracts near Tallahassee, and significant Gulf of Mexico beach frontage and waterfront properties, which we believe are suited for primary housing, resort and second-home communities. We believe this large, established land inventory, with a low cost basis, provides us an advantage over our competitors who must purchase real estate at current market prices before beginning projects. We manage the conceptual design, planning and permitting process for each of our new communities. We then construct or contract for the construction of the infrastructure for the community. Developed home sites and finished housing units are then marketed and sold.

      JOE also owns all of the outstanding stock of Saussy Burbank, a homebuilder located in Charlotte, North Carolina. In 2005, Saussy Burbank closed sales of 699 homes it constructed in North and South Carolina.

      The following is a description of some of the communities we are developing:

      WaterColor is situated on approximately 499 acres on the beaches of the Gulf of Mexico in south Walton County. We are selling developed home sites and building homes and condominiums in WaterColor. The community is planned to include approximately 1,140 units, including a private residence club with fractional ownership. Amenities include a beach club, tennis center, boat house, restaurant on an inland freshwater lake, a 60-room inn and restaurant and commercial space and parks.

      WaterSound Beach is located approximately five miles east of WaterColor. Situated on approximately 256 acres, WaterSound Beach includes over one mile of beachfront on the Gulf of Mexico. This community is currently planned to include approximately 511 units. Construction of two additional multi-family buildings with 44 units is scheduled to commence in 2006.

      WaterSound West Beach is located over one half mile west of WaterSound Beach on the beach side of County Road 30A. It has been designed as a gated, high-end community with 199 units with beach access through the adjacent Deer Lake State Park. Construction and sales began in 2005.

      WaterSound, located on approximately 1,402 acres and currently planned for a 1,330-unit mixed-use development, is a resort community approximately three miles from WaterSound Beach north of U.S. 98 in Walton County. WaterSound land-use entitlements include 457,380 square feet of commercial space. The DRI process for WaterSound was completed in 2005. This resort town is being planned for the pre-retirement and second-home markets with six and nine-hole golf courses along with pools, beach access and other amenities. Sales at WaterSound are expected to begin in mid-2006.

      WindMark Beach is situated on approximately 2,020 acres in Gulf County near the town of Port St. Joe and includes approximately 15,000 feet of beachfront. Construction of Phase II of WindMark Beach began in 2005 with sales expected to begin in 2006. This beachfront resort destination is planned to include approximately 1,662 units at full build-out. Construction to realign approximately four miles of U.S. Highway 98 away from the beachfront is scheduled for completion in the summer of 2006.

      SouthWood is situated on approximately 3,370 acres in southeast Tallahassee. Plans for SouthWood include approximately 4,770 residential units and a traditional town center with restaurants, entertainment facilities, retail shops and offices. Over 35% of the land in this community is designated for greenspaces, including a 123-acre central park.

      SummerCamp, in Franklin County, is situated on approximately 762 acres. Current plans include approximately 499 units, a beach club, a community dock and nature trails.

      RiverTown is situated on approximately 4,170 acres located in St. Johns County south of Jacksonville along the St. Johns River. With parks and public meeting places, RiverTown is being planned for 4,500 housing units and 500,000 square feet of commercial space. RiverTown will have seven unique neighborhoods interwoven with community and retail areas by a series of bike paths and walkways, with all

roads leading to the community’s centerpiece, the St. John’s River. RiverTown will offer homebuyers a wide variety of price points and lifestyles, appealing to several different target markets, including primary and second-home buyers. After six years of pre-development work, sales at RiverTown are scheduled to start in late 2006 with the first closings expected by year-end.

      St. Johns Golf and Country Club is a primary residential community situated on approximately 820 acres we acquired in St. Johns County in 2001. The community includes an 18-hole golf course and is planned to have approximately 799 houses at completion. Most homes will be adjacent to a golf course, conservation land, lakes or natural wooded areas. Sales of all remaining units are expected to occur by the end of 2006.

      Victoria Park is situated on approximately 1,859 acres in Volusia County near Interstate 4 in the historic college town of Deland between Daytona Beach and Orlando. Plans for Victoria Park include approximately 4,200 single and multi-family units built among parks, lakes and conservation areas with a traditional town center and an award-winning 18-hole golf course which is currently open for play.

      Artisan Park, located in Celebration, near Orlando, is being developed through a joint venture in which we own 74%. Artisan Park is situated on approximately 160 acres which we acquired in 2002. Artisan Park is planned to include approximately 267 single-family units, 47 townhomes, and 302 condominiums as well as parks, trails and a community clubhouse with a pool and educational and recreational programming. Sales of all remaining units are expected to occur by the end of 2006.

      Perico Island is situated in the City of Bradenton in Manatee County on Tampa Bay. Planned as an upscale 686-unit condominium community on 352 acres, it is being designed as an environmentally sensitive community. Construction and sales activities at Perico Island are expected to begin later in 2006.

      Several of our planned developments are in the midst of the entitlement process or are in the planning stage. We cannot assure you that:

      It is not feasible to estimate project development costs until entitlements have been obtained. Large-scale development projects can require significant infrastructure development costs and may raise environmental issues that require mitigation.

Commercial Real Estate

      Our Commercial Real Estate segment develops and sells real estate for commercial purposes. We also own office, industrial and retail properties throughout the southeastern United States.

      Development and Sales. We focus on commercial development in Northwest Florida because of our large land holdings along roadways and near or within business districts in the region. We also develop parcels within or near existing Towns & Resorts development projects. For each new development, we direct the conceptual design, planning and permitting process and then contract for the construction of the horizontal infrastructure and any vertical building.

      We develop and sell properties focused on the following products:

      Investment Property Portfolio. Our commercial development operations, combined with our tax deferral strategy of reinvesting qualifying asset sale proceeds into like-kind properties, have enabled us to create a portfolio of rental properties totaling 2.8 million square feet. Our portfolio of investment properties was 85% leased, based on net rentable square feet, as of December 31, 2005. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information on our investment property portfolio.

Land Sales

      Our Land Sales segment markets parcels for a variety of rural residential and recreational uses on a portion of our long-held timberlands in Northwest Florida. We are developing a range of innovative products for rural settings including RiverCamps, WhiteFence Farms, Florida Ranches, FloridaWild and WoodLands.

      In 2005, our Land Sales segment sold 28,958 acres of rural land at an average price of $2,378 per acre, excluding RiverCamps.

      The vast majority of the holdings marketed by our Land Sales segment will continue to be managed as timberland until sold. The revenues and income from our timberland operations are reflected in the results of our forestry segment.

      Our Woodlands product consists of land marketed in tracts from one to 1,000 acres for primary or secondary home building, recreation, timber or private retreats throughout Northwest Florida. Improvements to these tracts vary, but are typically minimal, and are generally restricted to burning, the thinning of timber, and simple fencing. Prices for parcels vary depending on the physical attributes of each site, including timber stands, topography and proximity to rivers, creeks and bays.

      Work continued in 2005 on our WhiteFence Farms and Florida Ranches, two new real estate products which are designed to transform what were once timberlands to higher and better uses. WhiteFence Farms are being designed as rural homesites to allow owners to enjoy an active or passive outdoors and farm-oriented lifestyle with modern conveniences and proximity to suburban and urban centers. Plans call for parcels of three to 15 acres located in communities of approximately 350 to 1,000 acres featuring cleared acreage, fencing, trails and entry features. Each farm will include a home site for a main farmhouse along with sites for other optional outbuildings, such as barns, guest houses and stables.

      WhiteFence Farms — Red Hills, with 59 farmsteads on 373 acres near Tallahassee, will be our first WhiteFence Farms development. Initial pricing is expected to range from $250,000 to $750,000 for farmstead sites ranging in size from three to 6.5 acres. Sales are expected to begin in the third quarter of 2006.

      Florida Ranches are for customers who want to own larger parcels from 10 to 150 acres with common improvements which may generally include clearing, fencing, road stabilization and entry features. Land preparation work continues on the initial Florida Ranches properties in several locations in Northwest Florida. Initial pricing for Florida Ranch parcels is anticipated to range from $4,500 to $10,000 per acre. Sales are expected to begin later in 2006.

      FloridaWild properties, many adjacent to protected conservation areas, are expected to appeal to environmentally conscious buyers who want to protect and enhance Northwest Florida’s environmental heritage. FloridaWild property owners are expected to use their land for a variety of outdoor activities, including fishing, hiking, hunting and bird and wildlife watching. Prices will generally range from $2,500 to $9,500 per acre.

      RiverCamps are planned developments in rustic settings, enhanced with amenities that may include docks, pools and community river houses. Most of the lots in these developments are expected to be located on or near waterfront property. The RiverCamps concept envisions home sites and high-quality finished cabins in low-density settings with access to various outdoor activities such as fishing, boating and hiking.

      The first of potentially several RiverCamps developments is RiverCamps on Crooked Creek, situated on approximately 1,491 acres in western Bay County, and bounded by West Bay, the Intracoastal Waterway and Crooked Creek. In 2005, we closed sales of 111 home sites in RiverCamps on Crooked Creek at prices ranging from $148,500 to $1,195,000. Planning of a new project, RiverCamps on Sandy Creek, continues. This new community is planned for 624 units located on a 6,500-acre parcel in Bay County. Additional RiverCamps locations are actively being reviewed in other parts of Northwest Florida.

Forestry

      Our Forestry segment focuses on the management and harvesting of our extensive timberland holdings. We grow, harvest and sell timber and wood fiber. Our principal forestry product is softwood pulpwood. We also grow and sell softwood and hardwood sawtimber. In addition, we own and operate a cypress sawmill and mulch plant (“Sunshine State Cypress”) which converts cypress logs into wood products and mulch.

      On December 31, 2005, our standing pine inventory totaled approximately 23.1 million tons and our hardwood inventory totaled approximately 8.5 million tons. Our timberlands are harvested by local independent contractors under agreements that are generally renewed annually. Our timberlands are located near key transportation links, including roads, waterways and railroads.

      Our strategy is to actively manage, with the best available silviculture practices, portions of our timberlands that produce adequate amounts of timber to meet our pulpwood supply agreement obligation with Smurfit-Stone Container Corporation, which expires June 30, 2012. We also harvest and sell additional timber to regional sawmills that produce products other than pulpwood. In addition, our forestry operation is focused on selective harvesting, thinning and site preparation of timberlands that may later be sold or developed by other JOE divisions.

Supplemental Information

      Information regarding the revenues, earnings and total assets of each of our operating segments can be found in note 13 to our Consolidated Financial Statements included in this Report.

Forward-looking Statements

      This Form 10-K includes forward-looking statements, particularly in the Management’s Discussion and Analysis Section. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ, possibly materially, from those in the information. Any statements in this Form 10-K that are not historical facts are forward-looking statements. You can find many of these forward-looking statements by looking for words such as “intend”, “anticipate”, “believe”, “estimate”, “expect”, “plan”, “should”, “forecast” or similar expressions. In particular, forward-looking statements include, among others, statements about the following:

      Forward-looking statements are not guarantees of future performance. You are cautioned not to place undue reliance on any of these forward-looking statements. These statements are made as of the date hereof based on our current expectations, and we undertake no obligation to update the information contained in this report. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur.

      Forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by a forward-looking statement include the risk factors described above as well as, among others, the following:

      The foregoing list is not exhaustive and should be read in conjunction with other cautionary statements contained herein and in our periodic and other filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this Form 10-K not to occur.

Employees

      We had approximately 1,230 full-time employees and 132 part-time employees at December 31, 2005. We consider our relations with our employees to be good. These employees work in the following segments:

Website Access to Reports

      We will make available, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC, through our home page at www.JOE.com.

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.

      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 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.

      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

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.

      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.

      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 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.

      Our real estate development activities entail risks that include:

      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.

      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.

      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:

      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.

      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:

      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.

      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.

      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:

      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.

      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. Rummell. 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.

      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

attract and retain quality personnel, our ability to effectively operate our business may be significantly limited.

      We own a large portfolio of commercial real estate rental properties. Our profitability could be adversely affected if:

      We have no unresolved comments from the Securities and Exchange Commission regarding our periodic or current reports.

      We own our principal executive offices located in Jacksonville, Florida.

      We own approximately 838,000 acres, the majority of which are located in Northwest Florida, including substantial gulf, lake and riverfront acreage. Most of our raw land assets are managed as timberlands until designated for development. For more information on our real estate assets, see Item 1. Business.

      We are involved in litigation on a number of matters and are subject to certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity. However, the aggregate amount being sought by the claimants in these matters is presently estimated to be several million dollars.

      We have retained certain self-insurance risks with respect to losses for third-party liability, worker’s compensation, property damage, group health insurance provided to employees and other types of insurance.

      We are subject to costs arising out of environmental laws and regulations, which include obligations to remove or limit the effects on the environment of the disposal or release of certain wastes or substances at various sites, including sites which have been previously sold. It is our policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted, if necessary, as additional information becomes available.

      Pursuant to the terms of various agreements by which we disposed of our sugar assets in 1999, we are obligated to complete certain defined environmental remediation. Approximately $5.0 million of the sales proceeds are being held in escrow pending the completion of the remediation. We have separately funded the costs of remediation. Remediation was substantially completed in 2003. We expect the remaining remediation to be completed and the amounts held in escrow to be released to us during 2006.

      Our former paper mill site in Gulf County, and certain adjacent real property north of the paper mill site are subject to various Consent Agreements and Brownfield Site Rehabilitation Agreements with the Florida Department of Environmental Protection. The paper mill site has been assessed and rehabilitated by Smurfit-Stone Container Corporation in accordance with these agreements. The adjacent real property north of the paper mill site has been assessed by us, with rehabilitation to be performed in 2006. Management does not believe our liability for any remaining rehabilitation on these properties will be material.

      Other proceedings involving environmental matters such as alleged discharge of oil or waste material into water or soil are pending against us. It is not possible to quantify future environmental costs because many issues relate to actions by third parties or changes in environmental regulation. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on our consolidated financial position, results of operations or liquidity.

      None.

PART II

      We had approximately 87,000 beneficial owners of our common stock as of March 2, 2006. Our common stock is quoted on the New York Stock Exchange (“NYSE”) Composite Transactions Tape under the symbol “JOE.”

      The range of high and low prices for our common stock as reported on the NYSE Composite Transactions Tape and the dividends declared for the periods indicated is set forth below:

      On March 9, 2006, the closing price of our common stock on the NYSE was $56.82.

      The following table describes the Company’s purchases of its common stock during the fourth quarter of 2005.

      The selected consolidated financial data set forth below are qualified in their entirety by and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere herein. The statement of income data with respect to the years ended December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004 have been derived from the financial statements of the Company included herein, which have been audited by KPMG LLP. The statement of income data with respect to the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 have been derived from the financial statements of the Company previously filed with the SEC, and also have been audited by KPMG LLP. Historical results are not necessarily indicative of the results to be expected in the future.

Overview

      The St. Joe Company is one of Florida’s largest real estate operating companies. We believe we have one of the largest inventories of private land suitable for development in the State of Florida, with a very low cost basis. The majority of our land is located in Northwest Florida. In order to optimize the value of these core real estate assets, our business plan calls for us to reposition our substantial timberland holdings for higher and better uses. We increase the value of our raw land assets, most of which are currently managed as timberland, through the entitlement, development and subsequent sale of residential and commercial parcels, home sites and homes, or through the direct sale of unimproved land. In addition, we reinvest the proceeds of qualifying asset sales into like-kind properties under our tax deferral strategy, which has enabled us to create a significant portfolio of commercial rental properties.

      We have four operating segments: Towns & Resorts, commercial real estate, land sales and forestry.

      Our Towns & Resorts segment generates revenues from:

      Our commercial real estate segment generates revenues from:

      Our land sales segment generates revenues from:

      Our forestry segment generates revenues from:

      Our ability to obtain land-use entitlements for our properties is a key requirement in repositioning our land to higher and better uses and for the generation of revenues. We continue to plan and obtain entitlements for an increasingly diverse set of land uses including retail, office, industrial, multi-family, marina and hotel uses. At the end of 2005, we had land-use entitlements in hand or in process for approximately 41,700 residential units and 14.6 million square feet of commercial space, with an additional 600 acres zoned for commercial uses.

      Our ability to generate revenues, cash flows and profitability is directly related to the real estate market, primarily in Florida, and the economy in general. Economic, political and weather-related conditions could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials, the cost and availability of insurance, the availability of and changes in prices of fuel and energy, and other factors affecting us and the real estate industry in general and coastal real estate in particular. Additionally, increases in interest rates could reduce the demand for homes we build and home sites we develop, particularly primary housing and home sites, and commercial properties we develop or sell.

      Sales activity in our resort residential projects in Northwest Florida slowed in the third and fourth quarters of 2005 as a result of an active hurricane season as well as macroeconomic and real estate supply and demand factors. While sales activity in our primary residential communities remained robust through most of 2005, there are some signs of slowing in the most recent months compared to strong sales for the same period last year, potentially as a result of these same macroeconomic and real estate supply and demand factors.

      The 2005 hurricane season was particularly active, with four named storms impacting the coast of the Gulf of Mexico during these quarters. We were fortunate that there was only minimal physical damage to our properties, allowing us to quickly resume normal operations after each storm. However, the hurricanes in 2005 disrupted and depressed normal visitor traffic flows — and consequently demand for resort residential properties. Resort sales have remained slow thus far in the first quarter of 2006, traditionally the off-season for Northwest Florida. The possible residual effects of 2005’s hurricane season and subsequent increases in resale supply have added some uncertainty to the timing of the rebound of resort residential sales. We do not expect a return to the fevered market of the past few years, but a return to something closer to the historical norm. We continue to view these factors as temporary but meaningful influences on near-term earnings.

      Also during 2005, we noticed an increase in labor and construction material costs, which we attribute in part to the 2005 hurricane season. Although historically we have been able to offset increases in labor and construction material costs by increasing sales prices, as a result of the real estate supply and demand factors noted above, we may not be able to offset such costs with increased prices in the near future. Consequently, we believe our margins may be adversely affected by any additional increases in labor and construction material costs. It will remain unclear for some time what direct and indirect impacts the 2005 hurricane season and these other factors will have on the Company.

      We remain disciplined in this slowing market. We are continuing to diversify our customer base, to include individual homeowners and national homebuilders, local Florida buyers and transitioning Baby Boomers, local commercial developers and regional and national developers. Additionally, we have increased our marketing efforts to promote sales growth.

      Management’s discussion and analysis contains forward-looking statements, including statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions, as well as trends and uncertainties that could affect our results. These statements are subject to risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. For additional information concerning these factors and related matters, see “Risk Factors” in Item 1A of the Report and “Forward-looking Statements” in Item 1 of this Report.

      The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on our historical experience and on various other assumptions that management believes are reasonable under the circumstances. Additionally, we evaluate the results of these estimates on an on-going basis. Management’s estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

      Investment in Real Estate and Cost of Real Estate Sales. Costs associated with a specific real estate project are capitalized once we determine that the project is economically probable. We capitalize costs directly associated with development and construction of identified real estate projects. Indirect costs that clearly relate to a specific project under development, such as internal costs of a regional project field office, are also capitalized. We capitalize interest based on the amount of underlying expenditures (up to total interest expense), and real estate taxes on real estate projects under development. If we determine not to complete a project, any previously capitalized costs are expensed in the period such determination is made.

      Real estate inventory costs include land and common development costs, such as roads, sewers and amenities, home construction costs, property taxes, capitalized interest and certain indirect costs. A portion of real estate inventory and estimates for costs to complete are allocated to each unit based on the relative sales value of each unit as compared to the estimated sales value of the total project. These estimates are reevaluated at least annually, with any adjustments being allocated prospectively to the remaining units available for sale. The accounting estimate related to inventory valuation is susceptible to change due to the use of assumptions about future sales proceeds and related real estate expenditures. Management’s assumptions about future housing and home site sales prices, sales volume and sales velocity require significant judgment because the real estate market is cyclical and is highly sensitive to changes in economic conditions. In addition, actual results could differ from management’s estimates due to changes in anticipated development, construction and overhead costs. Although we have not made significant adjustments affecting real estate gross profit margins in the past, there can be no assurances that estimates used to generate future real estate gross profit margins will not differ from our current estimates.

      Revenue Recognition — Percentage-of-Completion. In accordance with Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, revenue for multi-family residences under construction is recognized using the percentage-of-completion method when (1) construction is beyond a preliminary stage, (2) the buyer is committed to the extent of being unable to require a refund except for nondelivery of the unit, (3) sufficient units have already been sold to assure that the entire property will not revert to rental property, (4) sales price is assured, and (5) aggregate sales proceeds and costs can be reasonably estimated. Revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs.

      Revenue for our multi-family residences which were under construction at WaterSound Beach in 2003 was recognized using the percentage-of-completion method of accounting. Since the project was substantially completed as of December 31, 2003, we recorded substantially all of the activity related to this property during the year ended December 31, 2003. During the period ended March 31, 2004, we incurred $2.0 million in construction cost adjustments for this project. Had these costs been quantified in 2003, they would have been included in our budgets and thus have had an impact on our results for the year ended December 31, 2003. If these costs had been included in the total project budget, 2003 gross profit would have been reduced by $3.6 million (pre-tax), $2.3 million (after tax), since a lower percentage of revenue would also have been recognized. The results for the year ended December 31, 2004 would have been increased by $3.6 million (pre-tax), $2.3 million (after tax). Management has evaluated the impact of this item, which represented 3% of net income ($0.03 per diluted share) for both years ended December 31, 2004 and 2003, and concluded that it is not significant to our 2004 or 2003 results of operations.

      Impairment of Long-lived Assets and Goodwill. Our long-lived assets, primarily real estate held for investment, are carried at cost unless circumstances indicate that the carrying value of the assets may not be recoverable. We review long-lived assets for impairment whenever events or changes in circumstances indicate such an evaluation is warranted. This review involves a number of assumptions and estimates used in determining whether impairment exists, including estimation of undiscounted cash flows. Depending on the asset, we use varying methods to determine fair value, such as (i) discounting expected future cash flows, (ii) determining resale values by market, or (iii) applying a capitalization rate to net operating income using prevailing rates in a given market. These methods of determining fair value can fluctuate up or down significantly as a result of a number of factors, including changes in the general economy of our markets and demand for real estate. If we determine that impairment exists due to the inability to recover an asset’s carrying value, a provision for loss is recorded to the extent that the carrying value exceeds estimated fair value. If such assets were held for sale, the provision for loss is recorded to the extent that the carrying value exceeds estimated fair value less costs to sell.

      Goodwill is carried at the lower of cost or fair value and is tested for impairment at least annually, or whenever events or changes in circumstances indicate such an evaluation is warranted, by comparing the carrying amount of the net assets of each reporting unit with goodwill to the fair value of the reporting unit taken as a whole. The impairment review involves a number of assumptions and estimates including estimating discounted future cash flows, net operating income, future economic conditions, fair value of assets held and discount rates. If this comparison indicates that the goodwill of a particular reporting unit is impaired, the aggregate of the fair value of each of the individual assets and liabilities of the reporting unit are compared to the fair value of the reporting unit to determine the amount of goodwill impairment, if any.

      Intangible Assets. We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values, using customary estimates of fair value, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. These fair values can fluctuate up or down significantly as a result of a number of factors and estimates, including changes in the general economy of our markets, demand for real estate, lease terms, amortization periods and fair market values assigned to leases as well as fair value assigned to customer relationships.

      Pension Plan. The Company sponsors a defined-benefit pension plan covering a majority of our employees. Currently, our pension plan is over-funded and contributes income to the Company. The accounting for pension benefits is determined by standardized accounting and actuarial methods using numerous estimates, including discount rates, expected long-term investment returns on plan assets, employee turnover, mortality and retirement ages, and future salary increases. Changes in these key assumptions can have a significant impact on the income contributed by the pension plan. We engage the services of an independent actuary and investment consultant to assist us in determining these assumptions and in the calculation of pension income. For example, in 2005, a 1% increase in the assumed long-term rate of return on pension assets would have resulted in a $2.4 million increase in pre-tax income ($1.5 million net of tax). A 1% decrease in the assumed long-term rate of return would have caused an

equivalent decrease in pre-tax income. A 1% increase or decrease in the assumed discount rate would have resulted in less than a $0.1 million increase in pre-tax income.

      Income Taxes. 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 operation.

Recently Issued Accounting Standards

      In December 2004, the Financial Accounting Standards Board ( “FASB”) issued Statement of Financial Accounting Standards No. 152, Accounting for Real Estate Time-Sharing Transactions (“FAS 152”). FAS 152 clarifies the accounting for sales and other transactions involving real estate time-sharing transactions and is effective for financial statements for fiscal years beginning after June 15, 2005. Upon adoption, we do not expect FAS 152 to have a material effect on our financial position or results of operations.

      Also in December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets (“FAS 153”). FAS 153 eliminates a previous exception from fair value reporting for nonmonetary exchanges of similar productive assets and introduces an exception from fair value reporting for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary change is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is applicable to nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. The impact of adopting FAS 153 did not have a material adverse impact on the Company’s financial position or results of operations.

      In October 2005, the FASB published FASB Staff Position (“FSP”) No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (“FSP 13-1”), which stipulates that a lessee’s rental costs associated with operating leases during a construction period must be recognized as rental expense, included in income from continuing operations and allocated over the lease term according to current guidance on accounting for leases. We plan to adopt FSP 13-1 beginning January 1, 2006, as required by the FSP. Upon adoption, we do not expect FSP 13-1 to have a material effect on our results of operations or financial position.

      In June 2005, the FASB ratified the Emerging Issues Task Force’s (“EITF”) consensus on Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). In addition, the FASB has issued FSP SOP 78-9-1,“Interaction of AICPA Statement of Position (SOP) 78-9 and EITF Issue 04-5” to amend SOP 78-9, Accounting for Investments in Real Estate Ventures, so that its guidance is consistent with the consensus reached by the EITF in EITF No. 04-5. EITF 04-5 establishes that determining control of a limited partnership requires judgment, but that generally a sole general partner is deemed to control a limited partnership unless the limited partners have (a) the ability to substantially liquidate the partnership or otherwise remove the general partner without cause and/or (b) substantive participating rights. The consensus is currently applicable to the Company for new or modified partnerships, and will otherwise be applicable to existing partnerships in 2006. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. We will not be required to consolidate any of our current unconsolidated investments nor will this EITF have a material effect on our financial statements.

      In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“FAS 154”). FAS 154 requires companies making voluntary changes to their accounting policies to apply the changes retrospectively, meaning that past earnings will be revised to reflect the impact in each period, rather than the current practice of taking a single charge against current earnings. The statement applies to all voluntary changes in accounting policies and to new rules issued by the FASB that require companies to change their accounting, unless otherwise stated in the new rules. FAS 154 is effective for the Company beginning January 1, 2006, with earlier application allowed. We plan to adopt FAS 154 as of January 1, 2006, and do not expect FAS 154 to have a material effect on our current financial position or results of operations.

      In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” The Interpretation requires recognition of an asset and liability with regards to legal obligations associated with the retirement of a tangible long-lived asset, such as the abatement of asbestos. The interpretation is effective for fiscal years ending after December 15, 2005. The adoption of FASB Interpretation No. 47 did not have any effect on our financial statements.

      In April 2005, the Securities and Exchange Commission (“SEC”) adopted a final rule regarding the compliance date for FASB No. 123R, Share-Based Payment (“FAS 123(R)”), for public companies. The new rule changes the required date of implementation to the beginning of the first full fiscal year beginning after June 15, 2005. As a result, we plan to adopt FAS 123(R) as of January 1, 2006. FAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions), eliminating the alternative previously allowed to use the intrinsic value method of accounting. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of the instruments using methods similar to those required previously and currently used by us to calculate pro forma net income and earnings per share disclosures. The cost will be recognized ratably over the period during which the employee is required to provide services in exchange for the award. Upon implementation of FAS 123(R), we will recognize compensation cost over the vesting period in our financial statements for the unvested portion of existing options granted prior to the compliance date and the cost of stock options granted to employees after the compliance date based on the fair value of the stock options at grant date. We will continue to expense restricted stock compensation over the stock’s vesting period, which is deemed to be the period for which services are performed. Additionally, the 15% discount at which employees may purchase the Company’s common stock through payroll deductions will be recognized as compensation expense.

Results of Operations

      Net income for 2005 was $126.6 million, or $1.66 per diluted share, compared with $90.1 million, or $1.17 per diluted share, in 2004, and $75.9 million, or $0.98 per diluted share, in 2003. Results for 2005 reported in discontinued operations include an after-tax loss of $5.9 million, or $0.08 per diluted share, resulting from the sale of Advantis Real Estate Services Company (“Advantis”), our commercial real estate services unit. Discontinued operations for 2005 also include after-tax gains on sales of four office buildings totaling $19.2 million, or $0.25 per diluted share. The results for 2003 included a non-cash charge of $8.8 million, or $0.11 per diluted share, to reduce the carrying value of goodwill associated with Advantis.

      We report revenues from our four operating segments: Towns & Resorts, commercial real estate, land sales and forestry. Real estate sales are generated from sales of residential homes and home sites, parcels of developed and undeveloped land, and commercial buildings which are not reported as discontinued operations. Rental revenue is generated primarily from lease income related to our portfolio of investment and development properties as a component of the commercial real estate segment. Timber sales are generated from the forestry segment. Other revenues are primarily club operations and management fees from the Towns & Resorts segment.

      Revenues and Expenses. The following table sets forth a comparison of the revenues and expenses for the three years ended December 31, 2005.

      The increases in revenues from real estate sales and costs of real estate sales were in each case primarily due to increased sales in the Towns & Resorts and land sales segments. These increases were partially offset by a decrease in sales of commercial land and buildings. Results for the 2004 commercial real estate segment included a 93-acre sale for $26.5 million. Additionally, during 2005, four buildings were sold by the commercial real estate segment and recorded as discontinued operations, and during 2004, two buildings were sold by the commercial real estate segment and recorded as discontinued operations. Also, in 2004, costs of real estate sales increased due to actual construction costs in excess of estimates at WaterSound Beach, one of our residential communities. (For a more detailed discussion of this increase, see Revenue Recognition — Percentage-of-Completion under Critical Accounting Estimates above.) The increases in rental revenues and costs of rental revenues were in each case primarily due to the purchase of commercial buildings. Timber revenue decreased each year due to a reduction in volume harvested from Company-owned lands and, in 2005, price decreases. Timber revenue in 2004 was lower than 2003 due to an intentional reduction in production at the cypress mill operation for the purpose of improving margins and profitability, partially offset by price increases. Cost of timber revenues decreased due to lower costs in the timber operation resulting from lower sales and, in 2004, increased efficiencies in the cypress mill operation. Other revenues and costs of other revenues increased from 2004 to 2005 primarily due to increases in resort operations, and from 2003 to 2004 primarily due to increases in resale brokerage activity in the Towns & Resorts segment. Other operating expenses increased primarily due to increases in the land sales segment. For further discussion of revenues and expenses, see Segment Results below.

      Corporate Expense. Corporate expense, representing corporate general and administrative expenses, increased $4.2 million, or 10%, to $48.0 million in 2005 over 2004. The increase was due to an increase in non-capitalizable entitlements costs, a decrease in pension credit and an increase in compensation costs. Corporate expense increased $9.3 million, or 27%, to $43.8 million in 2004 from $34.5 million in 2003. The increase was due to increases in compensation costs, increases in audit and audit related fees, and miscellaneous other corporate expenses.

      Depreciation and Amortization. Depreciation and amortization increased $6.7 million, or 21%, to $38.1 million in 2005 compared to $31.4 million in 2004. The increase was due to a $3.4 million increase

in depreciation and a $3.3 million increase in amortization due primarily to additional investments in commercial investment property. Depreciation and amortization increased $6.7 million, or 27%, to $31.4 million in 2004 compared to $24.7 million in 2003. The increase was due to a $3.3 million increase in depreciation resulting primarily from additional investments in commercial investment property and residential operating property and property, plant and equipment and a $3.4 million increase in amortization resulting from an increase in intangible assets associated with our commercial operating properties.

      Impairment Losses. No impairment losses were recorded in 2005. During 2004, we recorded a $2.0 million impairment loss related to one of our Towns & Resorts projects in North Carolina pursuant to Statement of Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. See Discontinued Operations for a discussion of the $14.1 million pretax Advantis impairment loss recorded in 2003. During 2003, we also recorded an impairment loss of $0.3 million related to commercial properties.

      Other Income (Expense). Other income (expense) consists of investment income, interest expense, gains on sales and dispositions of assets and other income. Other income (expense) was $(7.7) million in 2005, $(6.5) million in 2004 and $(4.0) million in 2003. Investment income increased to $3.5 million in 2005 due primarily to higher invested cash balances. Investment income was $0.8 million in 2004 compared to $0.9 million in 2003. Interest expense increased to $15.2 million in 2005 from $10.2 million in 2004 primarily due to an increase in the average amount of debt outstanding in 2005. Interest expense increased $2.4 million in 2004 from $7.8 million in 2003, primarily due to an increase in the average amount of debt in 2004. Other income was $4.0 million in 2005, $2.8 million in 2004 and $2.9 million in 2003.

      Equity in Income (Loss) of Unconsolidated Affiliates. We have investments in affiliates that are accounted for by the equity method of accounting. Equity in income (loss) of unconsolidated affiliates totaled $13.0 million in 2005, $5.6 million in 2004 and $(2.2) million in 2003.

      The Towns & Resorts segment recorded equity in the income (loss) of unconsolidated affiliates of $10.6 million in 2005, $5.8 million in 2004 and $(4.1) million in 2003. The 2005 and 2004 results were primarily due to increases in closings at two unconsolidated affiliates that are developing residential property in Florida. For 2003, equity in income (loss) of unconsolidated affiliates included our 24% limited partnership interest in Arvida/JMB Partners, LP. This entity completed its operations in 2003 and continues to wind up its affairs under the name ALP Liquidating Trust. It reported a $(0.7) million loss in 2005 and a $(3.5) million loss in 2003 made up of a pre-tax charge based on estimates of future costs and future cash distributions associated with the completion of operations.

      The commercial real estate segment recorded equity in the income (loss) of unconsolidated affiliates of $2.4 million in 2005, $(0.2) million in 2004 and $1.9 million in 2003. Included in 2005 was equity in income of $2.2 million from Deerfield Commons I, LLC and $0.2 million from Deerfield Park, LLC resulting from the sale of the building and the final parcel of land, respectively, of these two affiliates. Equity in income from Deerfield Commons I and Deerfield Park, LLC combined totaled $1.6 million in 2004 and $1.5 million in 2003. On June 24, 2005, we sold our 50% interest in Codina Group, Inc. (“CGI”) at book value. Included in 2004 and 2003 results were losses of $(1.5) million and $(0.3) million, respectively, related to our 50% previous ownership interest of CGI. Equity in income of unconsolidated affiliates in 2003 also included a gain of $1.0 million from the sale of our 45% interest in the 355 Alhambra building located in Coral Gables, Florida.

      Income Tax Expense. Income tax expense on continuing operations totaled $64.3 million in 2005, $52.5 million in 2004 and $48.4 million in 2003. Our effective tax rate was 36% in 2005, 38% in 2004 and 36% in 2003. Our effective rate decreased in 2005 as a result of our on-going re-evaluation of our estimates of deferred tax assets and liabilities. Our effective tax rate increased in 2004 due to an increase in restricted stock deferred compensation, a portion of which is not deductible for tax purposes.

      Discontinued Operations. Discontinued operations include the operations and subsequent sales of Advantis and four commercial office buildings in 2005, and the operations and sales of two commercial office buildings sold in 2004. These entities’ results are not included in income from continuing operations.

      On September 7, 2005, Advantis was sold for a sales price of $11.4 million, consisting of $3.9 million in cash and $7.5 million in notes receivable, for a net of tax loss of $5.9 million, or $0.08 per share. For the years ended December 31, 2005, 2004, and 2003, Advantis recorded revenues of $70.0 million, $98.1 million and $62.5 million respectively. Pre-tax (loss) income was $(1.6) million, $0.7 million and $(16.9) million, respectively for the years ended December 31, 2005, 2004 and 2003. During 2003, as a result of declining operations due to the difficult economic environment for commercial real estate services companies, we utilized a discounted cash flow method to determine the fair value of Advantis and recorded an impairment loss to reduce the carrying amount of Advantis’ goodwill from $28.9 million to $14.8 million. This resulted in an impairment loss of $14.1 million pre-tax, or $8.8 million net of tax. Under the terms of the sale, we will continue to use Advantis to manage and lease certain of our commercial properties, and Advantis may be involved in certain land sales in the future. We believe the management contracts are at market rates and that our on-going involvement with Advantis is not material to either them or us.

      Building sales included in discontinued operations in 2005 consisted of the sales of four office buildings for aggregate proceeds of $93.8 million and total pre-tax gains of $30.8 million. For the years ended December 31, 2005, 2004 and 2003, respectively, the aggregate revenues generated by these four buildings prior to their sales totaled $7.5 million, $9.7 million and $9.4 million. Aggregate pre-tax income was $0.1 million, $0.7 million and $0.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.

      In 2004, we sold two office buildings for aggregate proceeds of $67.3 million and pre-tax gains of $7.7 million. Prior to their sale, aggregate revenues during 2004 and 2003 were $5.9 million and $9.8 million, respectively, and aggregate pre-tax income was $0.4 million and $0.7 million, respectively.

     Towns & Resorts

      Our Towns & Resorts segment develops large-scale, mixed-use resort, primary and secondary residential communities primarily on land with very low cost basis. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and land near Jacksonville, in Deland and near Tallahassee, the state capital. Our residential homebuilding in North and South Carolina is conducted through Saussy Burbank, Inc. (“Saussy Burbank”), a wholly owned subsidiary.

      Sales activity in our resort residential projects in Northwest Florida slowed in the third and fourth quarters of 2005 as a result of an active hurricane season as well as macroeconomic and real estate supply and demand factors. While sales activity in our primary residential communities remained robust through most of 2005, there are some signs of slowing in the most recent months compared to strong sales for the same period last year, potentially as a result of these same macroeconomic and real estate supply and demand factors.

      The 2005 hurricane season was particularly active, with four named storms impacting the coast of the Gulf of Mexico during these quarters. We were fortunate that there was only minimal physical damage to our properties, allowing us to quickly resume normal operations after each storm. However, the hurricanes in 2005 disrupted and depressed normal visitor traffic flows — and consequently demand for resort residential properties. Resort sales have remained slow thus far in the first quarter of 2006, traditionally the off-season for Northwest Florida. The possible residual effects of 2005’s hurricane season and subsequent increases in resale supply have added some uncertainty to the timing of the rebound of resort residential sales. We do not expect a return to the fevered market of the past few years, but a return to something closer to the historical norm. We continue to view these factors as temporary but meaningful influences on near-term earnings.

      Also during 2005, we noticed an increase in labor and construction material costs, which we attribute in part to the 2005 hurricane season. Although historically we have been able to offset increases in labor

and construction material costs by increasing sales prices, as a result of the real estate supply and demand factors noted above, we may not be able to offset such costs with increased prices in the near future. Consequently, we believe our margins may be adversely affected by any additional increases in labor and construction material costs. It will remain unclear for some time what direct and indirect impacts the 2005 hurricane season and the potential impact of these other factors will have on the Company.

      Revenues and costs of sales associated with multi-family units and Private Residence Club (“PRC”) units under construction are recognized using the percentage-of-completion method of accounting. Revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. If a deposit is received for less than 10% for a multi-family unit or a PRC unit, percentage-of-completion accounting is not utilized. Instead, full accrual accounting criteria are used, which recognize revenue when sales contracts are closed. All deposits are non-refundable (subject to a 15-day waiting period as required by law), except for non-delivery of the unit. In the event a contract does not close for reasons other than non-delivery, we are entitled to retain the deposit. However, the revenue and margin related to the previously recorded contract is reversed. Revenues and cost of sales associated with multi-family units where construction has been completed before contracts are signed and deposits made are recognized on the full accrual method of accounting as contracts are closed.

      Our townhomes are attached building units sold individually along with a parcel of land. Revenues and cost of sales for our townhomes are accounted for using the full accrual method. These units differ from multi-family and PRC units, in which buyers hold title to a unit or fractional share of a unit, respectively, within a building and an interest in the underlying land held in common with other building association members.

      Percentage-of-completion accounting is also used for home site sales when required development is not complete at the time of the sale. Currently, we are using percentage-of-completion accounting for home site sales at WaterSound West Beach and SummerCamp. Cash is collected at the time of the sale, while gross profit on home site sales at those communities is recognized based on construction completed in relation to total development costs.

      The table below sets forth the results of operations of our Towns & Resorts segment for the three years ended December 31, 2005:

      The following table summarizes sales activity at various residential communities for the three years ended December 31, 2005:

St. Joe Towns & Resorts

Sales Activity