Carl Sifakis, author of the book “Frauds, Deceptions, and Swindles,” called the 1920s’ Florida land mania the “greatest real estate swindle in US History.” I believe history is currently repeating itself in Florida today. In my opinion, St. Joe is significantly overvalued with several catalysts could cause the stock to fall 25-30% in short order and decline 50% ultimately.
In 1925, the real estate market simply burst (after 4 years of rapid appreciation), and in 1926 a devastating hurricane turned a lot of costal Florida into swamp land, and prices imploded. This is one of the worst real estate busts in this country’s history (http://www.stock-market-crash.net/florida.htm). After the burst, the DuPont family swooped up about 800,000 acres in 1926 +/- for about $2 an acre. Fast forward eighty years, and in last 20 months the DuPont family trust (who were 34% shareholders of JOE) have sold nearly 30,000,000 shares or 26.5% of the JOE at prices ranging from $31-46 a share (about half the current price).
Currently, the market values JOE at 5.7x ev/sales and about 42x this years optimistic earnings estimate. I think JOE is a value trap, with time (“several lifetimes to develop”), interest rates, demand, CAPEX, and costly zoning issues working against what investors are currently paying for the “NAV” which sell side estimates between $40-81 a share.
The company should be valued more like an oil company with proven reserves and trade at a fraction of this value due to the above difficulties and time to monetize to shareholders.
With approximately 800,000 acres of land in Florida, Joe is essentially a land development company which in a rich scenario I value at $33.68 a share less $5.25 in net debt or $28.43 a share. Management moved to become the home builder of choice in its master planned development projects by acquiring Arvida in 1997. As a home builder (80% of revenue and operating inc), I value JOE at $8.65 per share, putting a combined valuation at $37.08 a share versus the current share price of $70.
On Wednesday’s conference call management says that they “closely follow” the Miami condo market to look for excesses in Florida real estate market. We use two web sites and track daily for sale by owner listings and listings by real estate agents in six cities (Miami is one of them). The numbers in Miami in the last week have been astronomical essentially doubling supply for sale by owner since first week of April. We track this in six cities and A LOT OF supply is coming on in all six cities that we track. There is no way other way to explain it than supply is EXPLODING in nearly every city we track, not sure if we might be missing something seasonally, but over the three weeks we have seen 40-100% jump in daily listings in all cities we track. No idea what this means on pricing, but the supply is definitely coming online.
St. Joe has had the perfect storm of events, 50-year low interest rates, appreciating land, values, and speculative real estate market with nearly 50% of buyers (rural recreation market, the only stats they give) coming from further than 120 miles away to buy up from 15% in 2002. (15% 2002, 25% 2003, 31% 2004, 48% 2005 1q)
Very low cost land
Tax-favorable section 1031 transactions when they sell
“several lifetimes to develop property” CEO Jan 26, 2005
No real economy, infrastructure in northwest Florida panhandle.
Infrastructure build out from ground up (extremely capital intensive)
Extremely costly zoning and entitlement management (On 5 year average St. Joe’s OM is only 400 BPS better than top 20 avg. homebuilders despite, their “significant”competitive advantages of nearly free land)
Geographic concentration (90%+ northwest Florida panhandle)
22nd largest homebuilder in US
Many customers are speculators (106 lots in WindMark Beach sold but less than a dozen houses built on property now).
Project development (not all homeruns)
SummerCamp: 5 year project in environmentally sensitive area, JOE sold 62 units but cannot recognize any of the revenue because of permitting delays.
WindMark Beach: 3 year old project located between chemical refinery in Port St. Joe and USAF missle test area, adjacent to Tyndall AFB. Management's prior estimate was for phase II to be CF positive in '05, but sales are now on hold until further infrastructure build out. Expect WindMark Beach to be CF negative until late '06 or early '07.
Due to these delays they have had to bring on supply not intended until 2006 early in Perico beach to make this years guidance. Raymond James cut next years revenue from $954mn to $910mn.
Towns and Resorts (80% of revenue)
Reality (12.3% of revenue)
Timber (3.4% of revenue)
Rentals (4.6% of revenue)
Total revenue $950,000,000
Towns and Resorts will contribute about 80% of operating income. St. Joe Homebuilding is in a significantly higher risk category versus its peer group (see competitive disadvantages above).
Top 20 public comps on homebuilding side (includes: CTX, PHM, DHI, LEN, KBH, HOV, TOL, NVR, MDC, BZH, RYL, SPF, TOA, MTH, PCR, WLS, WCI, BHS, WLT, MHO)
Top 20 homebuilders:
EV/(ebitda-capex) trade at 6.5x avg
Ev/sales trade at .96x avg
P/E trade at 8.6x avg
Implies JOE homebuilding business is worth:
P/e basis $9.01
St. Joe homebuilding business valued at $8.58 a share (80% of revenue and operating income)
So with a reasonable degree of confidence I believe the homebuilding business is worth $7-9 per share. Mr. Market assumes that the remaining land is worth $5,000,000,0000 or $65.50 a share including $5.25 in net debt per share.
Market values Joe’s land at $5,000,000,0000 or $6,250 an acre. At first glance this might seem cheap, it is not considering:
On the 1Q05 earnings call, St. Joe announced yesterday that they had purchased 47,000 acres of adjacent property in southwest Georgia, 100 miles from the state line for $58,000,000 or $1,225 an acre. Why not? Mr. Market values you at $6,250 per acre and you can buy at $1,225.
During the quarter the company St Joe Land company sold 6,930 acres for $13.5 million or $1,942 per acre.
Tejon Ranch(TRC): located 60 miles north of Los Angles and owns 270,000 acres of land is valued at $2,455 an acre on an EV basis.
In addition, about 1 in 4 acres will have to be set aside (in conservation) to enable development.
People investing in Property from outside a 120 miles radius:
’05 48% (1q05)
Value of land
1x $1225 $12.89
2x $2450 $25.80
3x $3675 $38.68
4x $4900 $51.57
5x $6125 $64.47
JOE owns 320,000 acres within 10 miles of the beach. Valuing these acres at $6,000 is $25.26 a share and the inland land at $1500 an acre is worth $9.80 a share or combined $35.06.
Given TRC comp land value at $2455 and recent purchase of Georgia land at $1225, that JOE land is probably richly valued at $3,200 an acre. Using $3200 an acre gives a value of $33.68 a share.
I would find it highly unlikely that forestry land would be more than 2x what comparable land would fetch just 100 miles away.
If investors are simply looking at buying vast tracks of land for appreciating value TRC can be had for less than half of JOE, and within 1 hour of Los Angles.
Sum of parts:
Home building business (towns and resorts) worth $8.65 a share
Land, Commercial, Forestry, rentals worth $33.68
Less $5.25 in net debt
Total value: $37.08
Recent transactions in Land: done at 1/5 what the vast majority of what the market value JOE' inland property at.
Supply is coming on market at a tremendous rate much faster than market realizes
Consumer is weakening
DuPont family trust: several board members, long time owners sold 80% of their holdings at half the current share price last 18 months.
Speculators could become competitors to St. Joe
Similar to zero coupon bond, all cash flows way out in future, so highest sensitivity to interest rate moves: on valuation and impact on consumer
People realize that they don’t need vacation home in undeveloped areas FLA panhandle
Trend reverses out of town buyers w/in a 120 mile radius
1998-2004 $312 million in fcf $4.10 per share on $5.5bn ev or $75 ev per share
1998-2004 FCF less share repurchases = -$241 million or -$3.17 per share
Sell Side analyst that is closest (St. Petersburg, FLA) to the physical property is most bearish (FV $40-48), while rest in NYC are most bullish ($79-89).
On CNBC in January 2005 the CEO stated it will take “several lifetimes to develop” their property in Florida.
Inability to Monetize “NAV” in this lifetime: Most oil company’s trade at a fraction of their proven reserves given time, capital intensity, and risk of oil prices in the future. I believe JOE is no different.
Limited Economies of Scale, Geographically constrained, zoning issues
2005 Earnings: 2/3 of this years EPS need to come in 2H05 with significant risk:
Most likely 50 bps higher rate environment
Summer fewer visitors, nicer northern climates
St. Joe, needs the state to move 4 miles Highway 98 to begin selling lots at WindMark Beach.
High oil prices
Long Time Investor Relations guy left 3 days before earnings in April 2005.
|Entry||04/22/2005 12:57 PM|
|I like this; need something to hedge the technical olympic which i also bought. It is interesting that their own land sales are way below the market's valuation of JOE. Last year's average was around $3,500 per acre which itself now seems like an anomoly given the sub-$2k price/acre for previous years and the current quarter's sales as well. Thanks for this.|
|Subject||Water Color/Water Sound|
|Entry||04/22/2005 07:07 PM|
|My parents live at Rosemary Beach (www.rosemarybeach.com, -a Leukadia project) which is one of the area's top spots along with Seaside (surrounded by Water Color which I believe is JOE's flagship project). The few lots left at Rosemary (prob. 1/16+/acre)are going for $1-1.5mln and JOE has also sold prime lots for $1mln recently. I have not studied the stock,(JOE) but I have seen how hot the area is (ask your Atlanta/Memphis friends), visited, eaten and golfed at JOE properties. If the panhandle mkt holds up, you may be proven wrong in your analysis. On that note, I have convinced my parents to sell their home.|
|Entry||04/22/2005 07:27 PM|
|I forgot to mention in my earlier message -is another high-end JOE project with beautiful white sand and dunes with lots (not acres) trading for around $1mln a piece. Nearby Grayton Beach is consistantly rated one of the "Best Beaches" in the country. Seaside (featured in the Jim Carey movie "The Truman Show") and Rosemary Beach are known worldwide for their new urbanism "city planning" and unique classic architecture. From a glance, I recommend the sort of analysis performed on this website on GY be employed here in addition to comps on homebuilder stocks. I hope my thoughts are helpful.|
|Entry||04/24/2005 10:49 AM|
|is that the real estate market dynamics have never been better for a company like JOE and they still can;t deliver meaningful earnings while homebuilders are printing money. |
The trap on JOE is best shown in their most recent QTR: $212,000,000 in revenue and $15.2mn net??? There is a very very lengthy and costly zoning process, in addition to enormous infrastructure costs to build each project out, and its tough to build out much economies of scale in infrastructure and projects in remote areas, especially ones lacking more than a thinly populated vacation home market. While they can have a few high end sales on the beach they have little impact to the bottom line due to the very high OPEX structure.
A lot could go wrong for JOE very quickly... especially with the consumer weakening and JOE's dependence on second home buyers.
|Subject||buffett real estate|
|Entry||05/02/2005 12:25 AM|
|I got this from http://money.cnn.com/2005/05/01/news/fortune500/buffett_talks/index.htm?cnn=yes|
Not specific to FLA, and not a call on timing... but it seems at the very least significant headwinds are approaching
On real estate
Buffett: "A lot of the psychological well-being of the American public comes from how well they've done with their housew over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]....
"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than than the underlying costs, sometimes there can be pretty serious consequences."
Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, DC. "
Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2000 sq. ft of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."
Munger: "I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on."
|Entry||05/12/2005 12:10 PM|
|The thesis continues to play out... In the 10Q the company generated $28mn in negative CFO for the qtr. Dupont Trust sold another $47,000,000 worth of stock in APril 2005.|
|Entry||05/17/2005 08:55 AM|
|this came out yesterday on hurricane forecast. approximately 2/3 of JOE's eps comes in 2H of each year. |
|Subject||Miami condo supply|
|Entry||05/25/2005 04:38 PM|
Would you mind sharing what your "channel checks" are showing these days? I like your approach and think you're going to be right on JOE.
|Entry||05/25/2005 05:34 PM|
|Max here is a start... there are a number of other sites out there as well. On craigslist.org data, we track 6 markets, daily and weekly for supply. |
|Subject||joe: FED comments|
|Entry||06/07/2005 02:28 PM|
|14:26 Guynn's Comments |
Approximately an hour ago, Atlanta Fed President Guynn said that: "In some markets -- I won't name individual cities in the Southeast -- the activity in residential real estate looks pretty speculative to me and the makes me very uncomfortable. I don't think this is sustainable. There is a very good chance that some lenders, some buyers and some builders will get burned from what I see in some of those submarkets." As mentioned at 14:16, this seems to be contributing to the afternoon sell-off in the equity markets.
|Entry||06/08/2005 08:06 AM|
Any comments on JOE's introduction of it "New Ruralism" concepts?
Throw in a Cabella's and Starbucks, and they might have something.
|Entry||07/25/2005 06:25 PM|
|Looks like the FL market has only gotten crazier since your write-up. Any updated thoughts on the possible inflection point? Are you still tracking FL sales and inventory?|
|Entry||07/26/2005 05:20 PM|
|the seasonality made it tough to gauge inventory data. So we have backed off that. The company provides 25 page earnings releases... so it will take some time to look at. I will try to update after some of my other co;s report.|
|Entry||09/21/2005 02:56 PM|
|Do you have a price target for this, this stock is really cratering, and has worked out well?|
|Entry||11/08/2005 12:19 PM|
|"Since Hurricane Katrina in early September, we have observed buyers taking longer to make their purchasing decision. We attribute this change to the significant decline in consumer confidence in the last two months that was precipitated by the hurricanes and their aftermath, and to record gas prices."|
I wonder if this might apply to JOE as well?
|Subject||Joe exits homebuilding busines|
|Entry||09/08/2006 10:39 AM|
|I believe that JOE was the 22nd largest homebuilder in the US.... |
10:28 JOE St. Joe Company: Before the open JMP discussed exit of Florida homebuilding mkt; firm questions timing, cuts tgt to $25 (46.30 -1.62) -Update-
Before the open, JMP Securities said that while they believe JOE's exit of the Florida homebuilding mkt makes strategic sense in the long run, they question the timing of this decision, given the current weakness in the Florida housing market. The firm is concerned that this decision comes at a time when all homebuilders find themselves with too much land and are in the process of writing off land options and trying to shrink their land portfolios either by building and selling homes without replacing their land inventories or by outright sales of land to other builders. Thus, they believe that the co may find its earnings and cash flows dramatically reduced over the coming years until the Florida market recovers. Firm cut their 2006 & 2007 ests, and cut their tgt to $25 from $35.