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.]
Great analysis on JOE:
Click to access JOE-Einhorn.pdf
LikeLike
As I said, JOE was a risky investment. Support at $21.25 was strong for a short time.
LikeLike
Doesn’t this agreement (from the 2009 annual report – pg 26) present a potentially nasty catalyst to the value investor?
“Southwest has agreed that service at the new airport will consist of at least two daily non-stop flights
from Northwest Florida to each of four destinations for a total of eight daily non-stop flights. We have agreed
to reimburse Southwest Airlines if it incurs losses on its service at the new airport during the first three years
of service.”
Seems like the downside could be heady. How would one go about valuing this?
LikeLike
An investment never relies on prices being paid by buyers down the line, it relies on internal free cashflow yield or net liquidating value only. If someone pays up in future, all the better, but the true investor buys at a price where the internal return or liquidating value alone is sufficient compensation. Never rely on being able to sell into the market at a higher price than you paid, you need to buy cheap enough so that if the stock is delisted and you just receive minority shareholder dividends & distributions, you still make an adequate return for the illiquidity, lack of control, and having your cash tied up.
A land company like Joe does not justify investment based on cash flow, so we need to look at liquidating value. A true investor will only buy at a discount to the most conservative estimates of liquidating value. You yourself have pegged that at $1500 per acre, on 1/3 the total acreage. That means the low-end conservative liquidating value is $5 per share. Given the inability to force a liquidation without acquiring a controlling stake, one would need a substantial discount to even that liquidating value. So, purchasing would not be justified until maybe $2.50-3 per share. This is almost 90% below the current quote.
St Joe is thus not a suitable investment for conservative value investors.
LikeLike
Dear St. Joe Company,
I’ll be flying into your new airport in Panama City this month. But if i get down there and discover my waitress has lost her Southern accent at a restaurant that doesn’t serve sweet tea… I’ll blame you.
Very sincerely,
Jack
LikeLike
[…] 8, 2010 by greenbackd In my original post about The St. Joe Company (NYSE:JOE) (see The long and short of The St. Joe Company (NYSE:JOE) I mentioned that Jon Heller of Cheap Stocks had been a past holder. Jon has clarified his position […]
LikeLike
[…] 29, 2010 by greenbackd Further to my post yesterday on The St. Joe Company (NYSE:JOE) Chris Pavese of Broyhill Asset Management has submitted to Zero Hedge a comprehensive take on JOE: […]
LikeLike
I agree that Joe may have some upside. But it is much too small to be worth the trouble. Consolidated Tomoka is a much better value. In a normal real estate environment they sell their land for more than $50k per acre. The company owns more than $110m in triple net lease investment property to keep them cash flow positive when the economy turns sour. Their business model is far superior relying on IRC section 1031, like kind exchange. They indefinitely defer taxes on any land sales.
The company is currently being valued as if the land is worth less than $5k per acre. Ten years ago the company was selling their land at an average of $30k per acre. The company’s share price may remain depressed for several more years, but the company is a good bet to at least double in the next 5 years.
A company that is solidly profitable in even a mediocre real estate market, pays very little in taxes and owns a good chunk of the west end of Daytona Beach matches up well with swampland on the panhandle.
LikeLike
Support is at $21.25. It’s strong enough now. So you can long JOE, but with great risk.
It was a insight for short-term period.
LikeLike
You have a great blog, I am long HAWK btw, although I think the initial overview (maybe the guest post) understated the co’s reliance on PEMEX? I think the situation is a bit more dour that the initial take even pre BP but like you agree that there is some value in the hard assets above the current MV.
With JOE though, are you saying you feel your downside is $5-10 but you have no view on the upside potential? Without a catalyst or two and land that doesn’t generate cash flow, you’re putting yourself at the mercy of market inflation/deflation on asset prices, no?
Is the plan that because this co has no debt to just relax and hold it for a cpl of years and hope to make 50% on it or lose 50% on it?
LikeLike
I think JOE’s upside is difficult to quantify, but well north of $5,000 per acre for the coastal corridor. Previous sales of land in the coastal corridor have been good, but volume is too small to be meaningful. See tonight’s post for more color.
LikeLike