October 15, 2009 - 10:30am EST by
2009 2010
Price: 27.81 EPS $0.00 $0.00
Shares Out. (in M): 93 P/E 0.0x 0.0x
Market Cap (in $M): 2,573 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 2,508 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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Shares of the real estate developer, The St. Joe Company (JOE), are overvalued by as much as 70% because the market is underestimating the time it will take JOE to sell off its remaining land holdings. We believe that its currently implied value per acre of $4,300 is severely inflated because its supply of land will exceed demand for at least the next 15 years. All of the major homebuilders have exited the region where the company owns its land and will not return to buy additional acreage from JOE any time soon.


JOE has already sold off its most desirable land holdings. Realizing this, JOE has been promoting a new and nearby international airport that is set to open in May 2010 in the attempt to increase the value of its surrounding acreage. Our research suggests that the airport, whose land was donated by JOE, will NOT provide meaningful growth to the region and will not help increase JOE's land sales or prices. Two airports that already exist within an almost an hour's drive provide a sufficient number of flights. Furthermore, from our observations during our trip to the region, we do not expect international tourists being lured there to buy up land.


It is important to note that JOE may run into liquidity issues within the next couple of years depending on what happens with its $100 million revolver, operating costs and land sales. In our opinion, if it wasn't for former Florida Governor Jeb Bush selling his real estate company to JOE earlier this decade, the State of Florida would not have continued to buy hundreds of millions of dollars of land from JOE for the purposes of conservation (61% of JOE's sales in 2008). Due to the current headwinds facing the state's budget, we do not expect Florida to continue to buy JOE's land.


Capitalization (as of 10/13/09) Financials   Ratios      Share Info      
Price per Share   $27.39 Sales (m) $142.2 Total Debt/Capital 4.8% Dividend Yield 0.0%  
Shares Out (m)   92.5 Net Income (m) ($103.4) Debt/(EBDITA-CapEx) NM % Short Interest 11.9%  
Market Cap   $2,534.1 Pre-Tax FCF $68.3 EBIT/Int. Expense NM % Insider Ownership 0.7%  
Cash & ST Investments $116.6 Returns    Multiples      52 Week Range $14.53 -$35.03  
Total Debt   $49.1 Return on Assets -2.1% EV/Sales   17.4x CapEx      
Minority Int.   $2.8 Return on Capital -2.5% EV/Acre   $4,221 Maint. CapEx $10  
Enterprise Value   $2,469.4 Return on Equity -10.0% P/Tang. B   2.6x Total CapEx $35  


Business Description

The St. Joe Company operates a real estate development company that owns approximately 585,000 acres of land concentrated primarily in Northwest Florida. Its primary activities include securing land entitlements and developing land. Its four operating segments are:

  • Residential real estate - sells to 3rd party developers, individuals and homebuilders
  • Commercial real estate - sells to commercial and light-industrial users
  • Rural land - sells land to recreational, conservation and timberland users
  • Forestry - sells timber and wood fiber to paper companies


JOE's history goes back to 1936 when it originally operated as a paper mill through a joint venture with the Mead Corporation. Most of its land was acquired in the 1930's and 1940's for less than $10 per acre. Until 1997, JOE was focused primarily on utilizing its vast timberland resources to manufacture and sell paper. Today, approximately 60% of its land is classified as timberland and the remaining acreage is entitled for residential and commercial use. JOE has approximately 45,000 residential units and 13.8 million commercial square feet in its entitlements pipeline. Approximately 70% of the land that JOE owns is within 15 miles of the

coast of the Gulf of Mexico. More information about the company can be found at


Key Investment Factors:

Not enough natural buyers exist for JOE's land

  • Most homebuilders have exited the region and will not return
  • Demand for residential and commercial land will remain below supply for next 15 years
  • Majority of land is timberland; unlikely to sell for more than $1,500/acre because land is not sought-after
  • Most of its residential and commercial land is undesirable because of its location/attributes
  • Region's attempt to bring defense, engineering and IT firms will not meaningfully raise property values


 New Panama City International Airport will not provide enough economic growth

  • 2 nearby airports already provide a sufficient number of flights to the region
  • Majority of tourists to N.W. Florida will continue to be from neighboring states
  • Land surrounding the airport will not be attractive enough to residential and commercial buyers
  • New airport needs a low-cost airline but no airline has committed yet


Time is JOE's enemy

  • It could take between 30 and 50 years for JOE to sell its remaining land
  • On a present value basis, its land is worth about 25% of what it could be sold for today if buyers existed
  • Could face liquidity issues soon. Leverage has decreased, but covenant issues on revolver could arise


Valuation: Using a sensitivity analysis (base case below), we estimated equity values based on # of years to liquidation and price per acre for land types.



Land Classification # of Acres (est.)
Price/Acre (est.) Total Value
Rural Land           356,000
$1,500 $534,000,000
Commercial Land             12,687
$120,000 $1,522,440,000
Residential Land           165,313
$25,000 $4,132,825,000
Land for Potential Donations             50,000
$0 $0
Total           585,000

Time to Liquidate

30 Years

Cost to Develop and Sell Commercial & Residential Land @ 30% as % of Sales ($1,696,579,500)
Estimated Land Value after Development and Sales Expenses
Future Value of Land (Growth Rate = 4%)

Land Value minus Taxes & Expenses 

(35% Tax Rate) $9,471,517,227
Present Value of  Land (Discount Rate = 9%)

Minus: Net Debt

Equity Value

Estimated Value Per Share

Implied Upside (Downside) in Stock Price



  • New CEO: Britton Greene took over as CEO in May 2008; Greene was previously COO at JOE
  • Has tried to lease some of JOE's commercial land for long-term use but has been unsuccessful
  • Insider ownership is less than 1%; no recent insider stock purchases


Risks to Short Thesis

  • Large buyers decrease supply of residential lots
  • Tourism grows beyond "drive-in" market (historically from AL, GA, FL)
  • Local economy expands beyond engineering, military and science related industries


Other Factors for Consideration

Estimated amount of time to sell through the current inventory of improved land and

the remaining land it owns

JOE has approximately 45,000 acres of land that is either developed or in the process of being developed. We estimate that it could take JOE up to 40 years to sell its developed land. Even in the peak of the real estate boom in 2004, JOE only sold approximately 2,100 acres of residential land and 420 acres of commercial land. It could take JOE well over 100 years to sell all off its remaining land.


Credit revolver

  • JOE has a $100 million revolver in place that matures in September 2011
  • JOE must have a tangible net worth of $900 million or greater to be in compliance with its revolving credit facility; the company has only an approximate cushion of $70 million before its breaches this covenant; Joe had to amend this covenant twice in the past to lower the tangible net worth requirement.
  • If Joe continues to have asset write-downs, operating losses and pension plan losses, it could lose its ability to amend its future credit facility.


Property insurance premiums

  • The insurance premiums keep going up in Florida due to hurricanes. This could potentially deter people from buying homes in Florida. Also, rates are likely to increase because many hurricane insurance providers have recently exited the business. In 2008, the State Farm Florida Insurance Company, the largest private insurer in Florida, stopped issuing new homeowner insurance policies.


The role of military bases in the region

The military bases are very important to JOE and play an important role in the economy of Northwest Florida. A University of West Florida study found that about 35 percent of Northwest Florida's regional output is driven by defense spending, versus 18 percent for Northeast Florida, 5 percent for Central Florida and 3 percent for South Florida. The study also found that average earnings per military job in Florida are now at 175 percent of average earnings across all Florida jobs. In Northwest Florida the average earnings per military job is $78,836. In many ways, the military drives the sale of residential and commercial real estate.


How many people would you need to put on the land to fully develop it?

Based on the most recent U.S. Census, there are approximately 360,000 people that live in the counties in which JOE owns land. If we assume 2 people per residential unit and 1unit/acre, JOE would have enough land to house approximately 335,000 people. Note: JOE's VP of finance suggested that on average, 1 acre of land can hold only 1 housing unit because of the wetlands and land is needed for roads and amenities such as parks, pools, etc.



  • New airport opens in May 2010, but JOE is still unable to attract buyers for its neighboring land
  • The region is unable to secure a low-cost airline carrier
  • Airport opening gets delayed
  • Military bases in the region are closed and land prices drop
  • Largest shareholder (Fairholme Capital Management with 20% shares outstanding) exits position














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·     New airport opens in May 2010, but JOE is still unable to attract buyers for its neighboring land

·     The region is unable to secure a low-cost airline carrier

·     Airport opening gets delayed

·     Military bases in the region are closed and land prices drop

·     Largest shareholder (Fairholme Capital Management with 20% shares outstanding) exits position

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