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The long and short of The St. Joe Company (NYSE:JOE)

June 28, 2010 | About:

The St. Joe Company (NYSE:JOE) owns approximately 577,000 acres of land concentrated primarily in northwest Florida, as well as approximately 405,000 acres in the coast of the Gulf of Mexico. The stock has been pummelled by the downturn in Florida real estate and the ongoing oil spill in the Gulf of Mexico. The stock is a perennial favorite of value investors, but opinion is not uniformly positive. Bruce Berkowitz’s Fairholme is the largest shareholder. Marty Whitman’s Third Avenue is a large, long-term holder. Sham Gad is long and Jon Heller held it in the past, which lead to a fantastic back-and-forth with David Einhorn, who was short in 2007 (and may still be short). Cramer is short (or selling, at least). Why the wide divergence in opinion? A valuation of JOE turns on the value of its real estate, and arriving at a sensible estimate of value of JOE’s real estate holdings is a difficult task. Further, the damage to the coastline from the oil spill is unquantified.

The long thesis

Berkowitz, Gad and Heller’s long theses are essentially the same. JOE owns huge tracts of undeveloped land in Florida. Access to JOE’s land holdings is via an international airport, the Northwest Florida Beaches International Airport, which opened on May 23 this year. JOE donated the land for the airport and owns over 71,000 acres in the surrounding area. JOE’s 172,000 inland acres have sold for around 1,500 per acre, indicating they are collectively worth around $260M. With $150M in cash and long-term debt of $38M, after backing out the inland acres, JOE’s ~$2B enterprise value implies that the remaining 405,000 acres within 15 miles of the coastline are worth only around $5,000 per acre. Berkowitz, Gad and Heller believe that land is worth more.

For more, see Bruce Berkowitz’s thesis, Sham Gad’s thesis, and Jon Heller’s posts, which provides a link to Marty Whitman’s shareholder letter (Third Avenue has held JOE since 1990).

The short thesis

Cheap Stocks sets out David Einhorn’s August 2007 short thesis when the stock was trading at around $40:

The per acre analyses used by most St. Joe bulls exclude selling expenses and taxes. I believe that the equivalent gross value to the $9,000 an acre used in your analysis is the equivalent of $18,000 an acre, when taking expenses and taxes into account.

As it was, I did not quantify any amount of swampland at the Ira Sohn conference. I simply noted that some of the land is swampland. The weather is much worse than South Florida (just as hot in the summer and cooler in the winter), there are a lot of mosquitoes, there is not a lot to do, and the demographics are poor. I noted that I thought St. Joe overplayed the value of land within ten miles of the ocean and noted that I thought that vacationers would prefer to be “on the ocean.” More than a mile is too far for many families to walk to the beach. Finally, I thought the airport development is the type of story often seen in promotional stocks designed to buy years of time to encourage the market to ignore current financial results. The current airport does not operate near capacity. Airports in Jacksonville an Ft. Myers did not spur a lot of development next to their airports and it is odd the St. Joe seems to believe that a lot of people will want to live near the airport, as if that is a residential attraction.

As I pointed out in my speech, since 2001, St. Joe has sold 268,000 acres at an average price of under $2,000 an acre. Since my speech, St. Joe announced another quarter where they sold over 30,000 additional acres at $1,500 an acre. As such, I don’t see that it is very challenging to determine a value for most of St. Joe’s land. Assuming they haven’t sold the most salable stuff first, it appears that undeveloped land is worth on average sub $2,000 an acre before expenses.

I believe that about 680,000 of the remaining 739,000 acres are similarly undeveloped. Assuming St. Joe has no un-salable tracts of swampland and all the undeveloped land could be sold for $2,000 an acre, it would be worth $1.36 billion gross or about $700 million after selling expenses and taxes.

St Joe has just under 20,000 acres in development (some of which has already been sold). They have an additional 21,000 acres “In Pre-Development”, meaning they have land use entitlements, but they are still evaluating the development or need additional permits. They have another 10,000 acres they are planning to entitle.

The developed projects have a book value of $800 million. St. Joe is not making good margins on selling developed property. Residential and commercial land sales have not covered its overhead in any quarter since 2005, when it was still in the homebuilding business. St. Joe is one of very few companies that has spent large amounts on residential development and has not taken any impairment in the current environment. To give St. Joe the benefit of the doubt, let’s say the developments could be worth 1.5x book or $1.2 billion.

On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.

Cramer’s short or sell thesis is as follows:

With oil continuing to gush in the Gulf of Mexico, one obvious stock to put on the Sell Block is St. Joe, a property developer in Florida, 70% of whose properties sit on the “now imperiled coastline.” The positives just don’t matter; the company bought 577.000 acres of land at a rock bottom price, is expanding beyond luxury properties into commercial real estate and is suing BP (BP) for damages. If tar balls show up on beachfront property no one will want to buy.

If this is such a clear sell, why is Cramer singling JOE out? Because three analysts rate the stock as “neutral” and one says it is “undervalued.” Cramer has three words for that analyst: “Sell, sell, sell.”

“St. Joe down 40% off the oil spill isn’t an opportunity,” Cramer said, “it’s a falling knife and it will be able to cut you unless we get some certainty, some clarity about the scale of the damage.”

Why I am long

There are good reasons to be out of this stock. Florida real estate is synonymous with “Tulip bulb”, David Einhorn has been or is short, and JOE is, apparently, a falling knife, which sounds dangerous. Further, no one has a good bead on the value of JOE’s real estate. Einhorn is an exceptionally smart investor and, at his most charitable, valued JOE’s entire real estate holdings at $3,000 per acre. Einhorn’s short thesis is more dour. The most saleable property is worth $1,500 per acre before expenses and taxes, and a great deal of the rest is swampland. Cramer says the tar balls will push the value down further. The long thesis is simply that JOE’s real estate is worth more than $3,600 per acre (blending the inland real estate and the coastline corridor).

I’ve got no real view on the value of the real estate. I think it’s sensible to adopt Einhorn’s downside valuation as the downside valuation. Importantly, from my perspective, the downside valuation is not zero. In 2008, JOE raised $580M at $35 per share to pay down debt. Even in the worst case scenario – that the most saleable land has been sold and a great deal of the rest is swampland – JOE probably still has some value, which I’ve pencilled in at $5 (land is worth $1,500 per acre, two-thirds of it is unsaleable swampland) to $10 per share (land is worth $1,500 per acre, one-third of it is unsaleable swampland). The best case scenario is unknowable, but, because JOE has no net debt, and modest cash burn, we can hold the stock long enough to find out. The oil spill is a small concern, but BP is responsible for any clean up, either via the $20B fund or through the courts. For me, JOE represents two things: The first is a cheap bet on some longer term mean reversion in the prices for Florida real estate. The second is some shorter term mean reversion in the stock once the panic selling from the oil spill subsides. If I’m wrong, I think I’ll still get back 20% to 50% of my investment at these prices. JOE closed Friday at $22.87.

Hat tip BB.

[Full Disclosure: I hold JOE. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]



About the author:

Greenbackd is a former corporate advisory and securities lawyer working in value-oriented activist funds management.

Rating: 4.3/5 (11 votes)


Gjervis - 7 years ago    Report SPAM
what you can also do while you wait is make it pay you a dividend, by selling out of the money call options. This is what i am doing while i wait for calm to prevail, might as well make a little income off of it while it sits there.
Lrm21 - 7 years ago    Report SPAM
I've been watching this stock since prior to the oil spill due to the buzz around the new INTL airport. It was nice to see this post as Einhorn summed up all the concerns I had bouncing around in my head.

The big question mark with JOE is going to be if they can develop into a management company and create a viable enterprise.

This remains to be seen since the company is relatively new at the REIT game, getting into real estate in the late 90's.

There is a lot of opportunity to develop the panhandle area but as anyone with cursory knowledge of Florida knows, that if you are more 3-5 miles inward from the coastline anywhere in Florida you better be in Tallahassee or Orlando or you are in Swampland.

JOE does have a development in Tallahassee that is quite nice.

I believe even with the current decline the company is fairly valued as a land company,

The oil spill IMHO is masking the decline in this stock which is tracking the next downturn in real estate. This company still has lots of land with pending projects. I don't see how they are going to develop and sell with the current housing overhang.

Even if you feel real estate prices will start to increase again after the recent data that appears to be some years off.

JOE is definitely a stock you put away and look at it 5-6 years from now. But any valuation at this point comes down to your faith in management to create income that is not simply selling land at bubble prices.

I think there is more to the stock's correction than just the oil spill, and there are better ways to play the oil spill like maybe a hotel REIT that has exposure to the gulf.

This company is not a cash machine and so people are simply trying to value the assets which is pretty hard to do in the current environment.

If it was just the oil spill with solid fundamentals, I could see the attraction, but I am concerned of using the oil spill to ignore the deflationary storm on the horizon that doesn't bode well for non cash producing businesses. I would rather invest a true REIT that has income producing properties, a track record, and a yield and is probably as beaten up due to the current correction.

HPT, and WRE are ones I am looking at now.

Kiko81780 - 7 years ago    Report SPAM
Any thoughts on how JOE compares to Avatar (AVTR)? They both look like decent opportunities to me, but I'd like to look into the $/acre for both since they have large operations in Florida.
Paulwitt - 7 years ago    Report SPAM

I have been back and forth with JOE. I like the airport, rails, deepwater port i.e shipping hub, timber, and low debt. But I decided I wanted to look for immediate earnings.

Has anyone checked out Forestar group (FOR)? Just throwing this out there because I already hold shares of this company. This spinoff company with a 660 mil market cap has large land holdings for real estate sales, oil and gas, timber, water rights, and 3 income properties.

David Pinsen
David Pinsen - 7 years ago    Report SPAM
Looks like some window dressing for JOE today. I bought a few puts on it.

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