[One] of your shorts, St. Joe Company [JOE], has both proponents and detractors in the value-investing community. Why are you among the latter?
RW: We spoke earlier about overpromising, and St. Joe is among the most promotional companies out there. After paring its business down, the company basically consists of about 610,000 acres of northwest Florida land for which it plans to define the best uses, secure entitlements and approvals, and then sell off to developers. To hear the company tell it, this land is a goldmine that you just can’t replicate. Having driven from Tallahassee to their main resorts on the Gulf of Mexico, I’m quite confident that in that first 80 miles or so of the drive, no one in my lifetime is going to want to live there. A lot of the land is just dead, forested area. We keep close tabs on land prices and activity in their existing developments and it’s clear the real estate market for them is abysmal. As an example, one residential lot in their WaterColor development – which is beautiful, by the way – has traded hands five times since 2003. It sold for $331,000 in 2003, got as high as $690,000 in 2004, and sold earlier this year for $200,000. That’s a 70% drop from the peak.
Two developments they were talking up a year ago were WindMark Beach, on the Gulf coast southwest of Tallahassee, and RiverTown, which is in Jacksonville. From our contacts in Florida, we’re told that there hasn’t been a single home started in either development this year. That tells you something about the vibrancy of the market. Just working off the existing unsold inventory of houses will take years, and that doesn’t even take into consideration all the existing lots which have been sold but don’t yet have houses. We could imagine St. Joe not having any meaningful sales outside of just raw acreage for two or three years.
The company has also made a lot of the fact that they donated land and expect to benefit greatly from a new airport in Panama City. I’ve been in and out of the existing airport and to me it seems perfectly fine and not terribly busy. In fact, traffic in that airport was down 7% in 2006, 5% in 2007 and so far this year is down another 10%. They think they need a new airport? If I were a local taxpayer I’d be a bit upset about that.
The shares cratered near the end of last year, but at a recent $37.25 are up nearly 18% in the past year. What downside do you see?
RW: The acreage can be broken into three buckets: 45,000 acres for primary and secondary home development that are already entitled, 95,000 acres that are intended to be entitled, and the rest which is timberland. For each piece we’ve done a discounted-cash-flow analysis, based on what we think are conservative assumptions about sale prices and margins. For the timberland, we assume they sell the entire inventory over a five-year period at 80% operating margins and a 15% tax rate. We assume prices start at $2,000 per acre and climb 3% annually, which is conservative given that they sold such land for an average $1,350 per acre in the second quarter. That gives a total value of $530 million for the rural acreage.
The entitled acres we assume are sold over a 20-year period, at 50% operating margins and a 35% tax rate. Here we assume prices start at $100,000 per acre and climb 3% annually. That values these acres at $700 million.
The last piece is the to-be-entitled acres, which we assume are sold starting at $70,000 per acre over a 30-year period, again with 50% operating margins and a 35% tax rate. That gives a value for the entitlement pipeline of $780 million. The company has no net debt, so our fair value adds up to about $2 billion, or $20 per share. The company can dress up quarterly operating results from time to time by selling timberland at their discretion, but we just see a big value hole here that will be tough to climb out of.
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