The St. Joe Company (JOE) is a real estate development company in Northwest Florida whose operations had been hit hard in the 2008 downturn. JOE's stock price has recovered from the mid-teen lows it saw in early and mid-2012, as housing has experienced a broad recovery over the past 6 months throughout the U.S. and specifically Florida. Despite the stock's run-up to $22/share, JOE's overhyped asset base consists of secluded rural land in Northwest FL, undeveloped residential lots in vacant communities, and primarily empty commercial acreage that is dependent on the success of a relocated Panama City airport. As detailed in this report, we believe the market is currently baking in a best case scenario. The current stock price is not justified even after assuming a relatively aggressive asset valuation of JOE's real estate holdings.
Timberland / Rural Land:
Most of JOE's land in this vertical (which is the primary bulk of its land holdings) is undeveloped real estate with nothing in close proximity around it in Northwest Florida besides the relocated Panama City Airport. The company's historical strategy here is to gradually sell down this undeveloped land while making a gain on the sale. JOE has noted that land values have been so depressed in the past few years that it is going to pare back on substantial land sales until the "market recovers". Management has noted that the raw land sales in 2010 and 2011 were very small and abnormally high-priced, so we should not assume those price/acre assumptions going forward.
What this tells us is the range of price/acre values for both raw land and timberland real estate is approximately $1,250-$2,050 per acre. This yields an average value of $890 million for its raw land and timberland. We think this valuation is more than fair (as it relates to today) as this goes back a decade, and prices are clearly not back up to historic averages, or else JOE would be selling down these properties at a decent clip.
Commercial Entitled Land:
Similar to its rural land business, JOE had been active in selling entitled commercial acreage to homebuilders and developers over the years. This commercial acreage is deemed to be "land-use entitled", meaning: A project is deemed land-use entitled when all major discretionary governmental land-use approvals have been received. Thus this acreage is worth more per acre than simple rural land with no entitlements attached to it. Plus JOE claims that the above commercial acres are all near important locations such as the new Panama City Airport, shopping centers, and community parks. Going back six years, the average price per acre in entitled commercial transactions was about $230,000 per acre. Once again, in 2011 the company sold only a small portion of its commercial acres owned, yielding a much higher price than historical transactions. This should not be the assumed price/acre going forward. If it were, then obviously JOE would be selling these acres down as fast as possible.
With 584 acres remaining in its portfolio, we assume that JOE's commercial asset value should be around $130 million (average of low/high valuation cases) if based on historic levels. Once again, this is assuming a fully recovered Florida market.
Residential Entitled Land:
JOE's strategy on the residential front is to build out its residential areas across Northwest Florida and then sell the completed lots (or homes or "units") to either home buyers or homebuilding companies. It has essentially stopped building out these lots in order to preserve liquidity, and in order to "wait it out" until natural home buyers start coming back to the market.
The company has about 16,000 units remaining to be first developed and then sold. In order to analyze the value the residential assets yield to investors, we made assumptions that we feel are pretty bullish (just to see what our risk is to the short). We assume that by 2014, JOE begins large scale construction on all of its properties, and this long-term project will be over the course of 10 years. This is rather bullish in our opinion as JOE has not made any type of near-term plans in terms of a build-out strategy for its residential assets. Then we assume that by 2018, the Northwest FL market fully recovers to the peak $260,000 per unit sale price that JOE was averaging at the top of the market in 2006. We assume JOE will also achieve peak margins of 33% by 2017, which it again earned in the 2007 timeframe. Discounting these cash flows back at a 10% WACC yields us $450 million of value on its entitled residential real estate.
Operating Residential Land:
JOE has some operating resort and club properties from which it earns revenue. The business is not currently cash flow positive nor has it ever cash flowed. Gross margins are either negative or razor thin, and capex ranges from 15-30% of sales due to the upkeep that hotels, clubs and golf courses need. JOE clearly wants to have golf courses and other upscale amenities surrounding its other properties in order to help prop up the real estate value of its surrounding residential, commercial and rural land. This comes at a cost as this business segment (and the company as a whole for that matter) is consistently bleeding cash. Since no DCF can be analyzed on the operating business (due to negative cash flows), we will value this business at book value of $151 million (residential and commercial operating property book value), even though it is tough to see a natural buyer of operating hotels and resorts that bleed cash, surrounded by empty lots and land.
Implied JOE Value:
We view the above valuation assumption in each one of JOE's business lines to be fairly optimistic. We assume no economic or real estate hiccups, a construction strategy that occurs a lot sooner than management has indicated, rural and timberland liquidation values returning to historic norms, and a commercial business that is achieving 2006/2007 price per acre values. Not to mention, the timber and rural land liquidation analysis assumes present day realization of these proceeds (undiscounted cash flow realization today). Even with these assumptions, the implied price per share is ~$19, which is still below where JOE is trading at today.