Bruce Berkowitz (Trades, Portfolio)’s Fairholme Fund (Trades, Portfolio) owns more than 42% of The St. Joe Co. (JOE, Financial). The position comprises over 60% of the fund’s assets under management.
St. Joe is one of Florida’s largest landowners with over 570,000 acres, 70% of which is located within 15 miles of the Gulf of Mexico. This land is concentrated in Walton, Bay, Gulf, Franklin and Leon Counties. It’s currently using 5% of its holdings to develop 16,300 residential units and 10 million square feet of commercial space in this area, but maybe they didn’t get the climate change memo.
While fears of rising ocean levels may be overblown, with so many scientists on the same side, investors shouldn’t be taking that risk. National Climate Assesment, a U.S. Global Research Program, is projecting the sea level will rise between one and four feet by 2100. These estimates, however, might be too low.
Of course, that hasn’t slowed growth to the Sunshine State. When I moved to Boca Raton in 2001, the state had 16 million people. Today, the population is 21 million. At this rate, it’ll have over 35 million residents by 2050.
The question becomes, how many will want to live near the ocean? Especially if storm season becomes longer or more powerful or if problems like the red tide persist. Floridians are resilient, but if water starts coming up through the ground and flooding homes, it would be catastrophic.
The biggest question with St. Joe is why has the company dragged its feet amidst the greatest economic recovery and bull run in history? In 2010, the company had just as much cash as it does now. Yet, since then, it just hasn’t been able to consistently create shareholder value. Even with inconsistent top-line financials, a real estate developer should be able to build book value.
Technically speaking, investors shouldn’t pay eight times revenue or two times book value when other developers like Xinyuan Real Estate (XIN, Financial) or Brookfield Property Partners (BPY, Financial) trade at less than book value and pay a hefty dividend.
At best, investors like Berkowitz are in for a choppy ride on this one. Fairholme still owns over 10% of Sears Holdings (SHLD, Financial), and we all know how that has turned out. It doesn’t matter if it is one of the largest land owners in one of the most desirable states to live in. There are just too many factors that will keep this stock dropping.
Shorts are right on this one, accumulating a 25% stake in the float. There’s still a lot of room left to fall. Maybe the sellers are wrong and 16,300 residential homes will equate to massive financial performance upgrades, but it’s not likely.
Disclosure: I am not long or short any stocks mentioned in this article.
