Some companies are really easy to write about, but The St. Joe Company (NYSE:JOE) is not one of them. So I'm taking a bit different approach here, walking through their new 10-K to highlight just how good of an opportunity this is.
(Source)
First, a description of their operations:
St. Joe was incorporated in the State of Florida in 1936. We are a real estate development, asset management and operating company. We own 171,000 acres of land in Northwest Florida. The Bay-Walton Sector Plan ("Sector Plan") entitles, or gives legal rights, for us to develop over 170,000 residential dwelling units, over 22 million square feet of retail, commercial and industrial space and over 3,000 hotel rooms on lands within Florida's Bay and Walton counties. We also have additional entitlements, or legal rights, to develop acreage outside of the Sector Plan. Approximately 86% of our real estate is located in Florida's Bay, Gulf, and Walton counties. Approximately 90% of our real estate is located within 15 miles of the Gulf of Mexico.
At their current market cap, that means St. Joe is valued just under $17k per acre. Real estate is all about location, location, location though, so this doesn't tell us too much.
St. Joe believes its long-term, owner-oriented capital and management allows us to optimize the value of Northwest Florida real estate by developing residential, hospitality, and commercial projects that meet growing market demands. This strategy should provide opportunities to build recurring revenues and enterprise value for the foreseeable future. We may partner with or explore the sale of discrete assets when we and/or others can better deploy resources. In 2020, the majority of our revenue was generated from sales, activities and operations on approximately 2% of our land.
So, the majority of their results for FY20 were from about 3k acres, and their goal is to convert their holdings into recurring revenue streams. This is important.
A newly initiated quarterly cash dividend of $0.07 was paid in December 2020. During the years ended December 31, 2020 and 2019, we repurchased 532,034 and 1,263,159 shares, respectively, of common stock. We have a total of $77.4 million available for the repurchase of shares pursuant to our Stock Repurchase Program (the "Stock Repurchase Program").
Chairman Bruce Berkowitz is heavily committed to returning capital to shareholders. About 2.5% of outstanding shares could currently be repurchased using this authorization.
Moving on to their three segments, JOE reports in Residential, Hospitality, and Commercial.
Residential
For Residential, their primary revenue stream is selling land to homebuilders. 
As of December 31, 2020, we had 1,269 residential homesites under contract with ten different local, regional, and national homebuilders, which are expected to result in revenue of approximately $115.0 million at closing of the homesites, which are expected over the next several years. As of December 31, 2019, we had 930 residential homesites under contract, which are expected to result in revenue of approximately $84.3 million ($20.3 million has been realized through December 31, 2020).
Later on during the discussion of operations, we learn the following:
During 2020, we sold 509 homesites and had unimproved residential land sales of $1.7 million, compared to 379 homesites sold during 2019. During 2020 and 2019, the average revenue, excluding homesite residuals, per homesite sold was approximately $124,000 and $87,000, respectively.
Hospitality
Current clubs & hotels under the Hospitality segment include:
a private membership club ("The Clubs by JOE"), hotel operations, food and beverage operations, golf courses, beach clubs, retail outlets, gulf-front vacation rentals, management services, marinas and other entertainment assets. The hospitality segment generates revenue and incurs costs from membership sales, membership reservations, golf courses, the WaterColor Inn and WaterSound Inn, short-term vacation rentals, management of The Pearl Hotel, food and beverage operations, merchandise sales, marina operations, charter flights, other resort and entertainment activities and beach clubs, which includes operation of the WaterColor Beach Club.
In terms of new properties about to come online:
We are in the process of constructing an Embassy Suites hotel, with our JV partner, planned for 255 guest suites in the Pier Park area of Panama City Beach, Florida; an upscale 75 room boutique hotel located adjacent to the Camp Creek Golf Club near the highly desirable Scenic Highway 30A corridor; a Hilton Garden Inn near Northwest Florida Beaches International Airport ("ECP"), which is planned to feature 143 guest rooms; a Homewood Suites by Hilton adjacent to the new Panama City Beach Sports Complex in Panama City Beach, Florida, which is planned to feature 131 one and two-bedroom guest suites; and The Lodge 30A, with our JV partner, an 85 room boutique hotel on Scenic Highway 30A in Seagrove Beach, Florida. In the third quarter of 2020 we executed a long-term land lease to develop, construct and operate a new waterfront Hotel Indigo and standalone restaurant in Panama City, Florida's downtown waterfront district. Construction is expected to begin in the second quarter of 2021. Once complete, we will manage the day-to-day operations of all planned hotels and restaurants.
We own and operate the Powder Room Shooting Range and Training Center ("The Powder Room") in Panama City Beach, Florida. The approximately 17,000 square feet facility was completed in December 2020 and includes a retail store with firearms and ammunition, as well as training and educational space and 14 shooting lanes.
The discussion of the results of operations included the following:
Hospitality revenue increased $1.7 million, or 3.7%, during 2020, as compared to 2019.....The increases in the current period were partially offset by a decrease in hospitality revenue due to the impact of the COVID-19 pandemic, which resulted in shut downs and reduced revenue from mid-March to mid-May, but was partially offset by a recovery from June to December that exceeded revenue as compared to the same periods in 2019. As of December 31, 2020, The Clubs by JOE had 1,563 members, compared with 1,274 members as of December 31, 2019.
Commercial
The Commercial segment includes both timber and commercial leasing revenues. The timber prospects are as follows:
As of December 31, 2020, we had an estimated 2.3 million tons of marketable pulpwood and 3.2 million tons of marketable sawlogs on approximately 64,000 acres. Based on our annual harvest plan, we anticipate harvesting approximately 260,000 tons of pulpwood and sawlogs during 2021.
The timber results for FY20 were as follows:
Timber revenue increased $2.4 million, or 61.5%, during 2020, as compared to 2019. The increase is primarily due to an increase in the amount of tons sold and product mix changes. The revenue for 2019 was affected by Hurricane Michael's significant market impact after landfall in October 2018. There were 322,000 tons sold during 2020, as compared to 220,000 tons sold during 2019.
On the commercial leasing side, they have the following:
Through wholly-owned subsidiaries and consolidated and unconsolidated joint ventures we are in the process of constructing 739 apartment units, in addition to the 378 apartment units and 107 senior living units that have recently been completed.
Our leasing portfolio consists of approximately 908,000 square feet of leasable space for mixed-use, retail, industrial, office and medical uses. Within the leasing portfolio, our mixed-use lease space totals approximately 134,000 square feet. It consists primarily of WaterColor Town Center, WindMark Beach Town Center, WaterSound Gatehouse, WaterColor Crossings and various flex-space buildings. Our retail lease space totals approximately 352,000 square feet. It consists primarily of Pier Park North JV and other leasable properties. Our industrial lease space totals approximately 304,000 square feet, primarily located at VentureCrossings. Our office lease space consists of approximately 96,000 square feet, primarily located in the Beckrich Office Park in Panama City Beach, Florida. Our medical lease space consists of approximately 22,000 square feet. It consists of a medical clinic at the Watersound Town Center and medical space at Beckrich Office Park. Through separate unconsolidated JVs other commercial properties include a 124 room TownePlace Suites by Marriott operated by our JV partner in Panama City Beach, Florida and a Busy Bee branded fuel station and convenience store operated by our JV partner in Panama City Beach, Florida.
Later in the discussion of operations, we learn the following:
During 2020, we had twenty-three commercial and rural real estate sales totaling approximately 473 acres for $11.7 million resulting in a gross profit margin of 53.0%. Commercial and rural real estate revenue for 2020 included $1.8 million related to the sale of the SouthWood Town Center. During 2019, we had twenty-five commercial and rural real estate sales totaling approximately 1,605 acres for $19.5 million resulting in a gross profit margin of 77.9%. Commercial and rural real estate sales in 2019 included approximately 28 acres totaling $4.3 million in revenue in the SouthWood community. Commercial and rural real estate sales in 2019 also included a sale totaling $9.9 million in revenue related to non-strategic land located in Leon County, Florida, with a gross profit of $9.7 million due to a low historical basis.
And on the leasing side:
Leasing revenue increased $3.2 million, or 20.5%, during 2020, as compared to 2019. The increase is primarily due to new leases at Pier Park Crossings apartments, which began leasing in the second quarter of 2019, as well as other new leases and higher rental rates.
Corporate SG&A
Despite the impressive growth JOE is displaying, corporate costs remain impressively under control:
This kind of cost discipline is rare, and comes with a situation where your chairman owns almost half the company and is committed to its success.
Valuation
Trying to value over 170k acres is hard, because of the significant differences in value between different owned parcels in JOE's portfolio. I think JOE is a three digit stock in the near future, and some other big investors agree with me. And that's someone who's actually visited a lot of their land. I'll still give you a few thoughts on FY21, which is still "early innings" for this stock.
- Residential (Lot Sales): This revenue stream (with a ~60% gross margin) is viewed by some as a one-time boost. However, the 509 FY20 lot sales were less than 0.5% of the number of sites they are authorized to build. They've also got 40x that number already at the concept plan stage. They can keep this going for years with no issues maintaining pace, and they're continuing to realize amazing prices. For FY21, connecting the dots on lots under contract compared to FY20, I think this segment grows at least 30-40% again in FY21, landing around ~$120m revenues and ~$75m gross profit. Looking further forward, they've just broken ground on homes for a planned community of over 3,500 homes. Using some assumptions about future home prices and pace of lot sales, you can get a value greater than JOE's market cap just from estimated future revenue in this segment (20k lots at $150k/lot is $3B, and that's less than 1/7th of the lots they're zoned to sell). JOE is just getting started.
- Hospitality: JOE is on track to roughly double their hotels based on the construction in process listed above, and Clubs by Joe grew membership about 25% during FY20. This segment also took almost a two month hit from Covid, so pro-forma FY20 should have been closer to $55m at a 25% margin. So 25% growth on that in FY21 could get Hospitality to ~$70m, with ~$20m gross profit. Unlike the residential segment, this revenue stream doesn't include one-off sales, but includes recurring memberships, and will have contributions in FY21 from the shooting range they opened in Dec-20 and their marinas that have been closed due to Hurricane Michael.
- Commercial (Timber): Timber income is somewhat akin to a bond paying $5m/year in perpetuity, with the possible upside that some acreage eventually becomes useful for further development. Consider: FY15 10-K: "As of December 31, 2015, we had an estimated 3.2 million tons of marketable pulpwood and 2.1 million tons of marketable sawlogs" FY18 10-K: "As of December 31, 2018, we had an estimated 2.3 million tons of marketable pulpwood and 2.7 million tons of marketable sawlogs" FY20 10-K: "As of December 31, 2020, we had an estimated 2.3 million tons of marketable pulpwood and 3.2 million tons of marketable sawlogs". They aren't selling through their trees, they're managing them - hence the bond comparison. Lumber prices are soaring right now, so maybe JOE can capture some of the upside as a surprise in FY21.
- Commercial (Leasing): Although the rentable square feet barely changed for JOE from FY19 to FY20, revenue grew almost 20% as they filled out apartments they had just completed. There are almost 200% more apartment units under construction than currently leased, and another 10% of commercial property square footage, including a self-storage facility and a Publix. With apartments coming online and almost fully leased, I expect residential to easily double again in FY21, and commercial to continue to display strong growth (they executed 8 new leases in Q4, bringing their total to 31), increasing total leasing revenue to around $30m in FY21. Throw in another ~$14m of commercial land sale and $6m from timber to arrive at ~$50m of FY21 Commercial revenue and ~$35m gross profit.
Bringing it all together, JOE posted $161m of revenue for FY20, and about $60m EBITDA. Back of the envelope above, we get to $240m revenue for FY21, and $130m gross profit. Layer in $15m D&A and $25m SG&A, and you arrive at ~$90m EBITDA. That's ~50% growth on revenues and EBITDA, even as things are just starting to take off.
Other Considerations and Risks
What else is coming? They've launched an insurance agency, just sold land to Coke to build a new distribution facility, and have a dizzying array of projects underway, as mentioned above. Despite CapEx growing to $162m in FY20, JOE remains committed to returning capital to shareholders, having repurchased $8.8m worth of stock in FY20 and instituting a dividend, which they have already raised. Wait till the dividend growth guys find this stock.
In terms of other takes on the stock, Nitor Capital has done excellent work with maps and things. They also just addressed some more recent bear arguments on Twitter. There's more articles on Kuppy's site too, at the link above. There's also two recent bear cases on SA, but they both seem to be predicated on this stock being properly valued a year ago. It wasn't. I would only suggest reading them if you want to see how weak the bear case is here.
David Einhorn spent 10 years shorting this stock, and it worked out pretty well for him. Clearly $80/share before they had really begun development was ambitious, and a great example of timing. I'd encourage you to review his old arguments to see how different this story is compared to 2005. It's hard to quantify how the devastation that Hurricane Michael brought to the area has also allowed for a complete redevelopment opportunity that didn't exist before.
Another consideration is JOE's public float. You don't often see a company worth $3B that has over 90% of their shares locked up with institutions. Any meaningful interest in JOE will be met with very few available shares to buy. This is another reason the continued share buybacks are great news for investors.
Biggest risk to JOE? Probably that a rapid rise in interest rates freezes the housing market, where they have sunk costs on land they can no longer sell right away. Even if that happens, recurring streams are more than enough to cover SG&A until the market rights itself. And if there's runaway inflation, at least you own something backed by real assets.
Also, another hurricane ripping through the panhandle would significantly impact JOE due to their geographic concentration. I take some comfort that all their buildings are newer, and likely to be built with the best resistance to storms possible.
Conclusion
JOE has finally reached an inflection point, development is happening everywhere and earnings are taking off. The optionality that comes with owning over 170k acres in one of the fastest growing parts of the fastest growing states is truly a rare opportunity. I've presented above just a few of the high level ways one can go about valuing this business, but this isn't just about FY21, it's about years from now when they've developed more land, and have a pile of cash from lot sale and growing recurring revenue streams. JOE is a buy-and-forget-for-10-years kind of investment, and I'm buying.
