Description

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)

Competitive Advantages
Very low cost land
Tax-favorable section 1031 transactions when they sell

Competitive Disadvantages
“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.

Business Valuation:
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:
Ev/(ebitda-capex) $7.04
Ev/sales $9.70
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.

Land

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.

Rural recreation
People investing in Property from outside a 120 miles radius:
’02 15%
’03 25%
’04 31%
’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

Catalysts
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

Value trap:
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
Hurricane season
Summer fewer visitors, nicer northern climates
St. Joe, needs the state to move 4 miles Highway 98 to begin selling lots at WindMark Beach.
Weaker Consumer
High oil prices

Long Time Investor Relations guy left 3 days before earnings in April 2005.

Catalyst

see above