The St. Joe Company Calls: Timber!
Board: Berkshire Hathaway
Obviously I can not post the map here but if you are interested send me an email, and I will reply with a PDF of map.
St. Joe Company has announced the sale of about two thirds of its land holdings in the Florida Panhandle. The sale is for 387,000 acres for about $565 million which works out to about $1500 per acre. This sale is essentially a disposal of the Company’s timber business. The land involved has no development potential within the next twenty to thirty years. St Joe is left with 184,000 acres that does have developmental potential although it will take a good many years for all that potential to be realized.
The remaining 184,000 acres is not timberland even though there may be trees on some it. It is land that management feels has developmental potential. Included within these 184,000 acres the company currently has land use entitlements for 30,000 acres of residential property, 200 plus acres of commercial property and 1000 acres of industrial entitlements for land around the new Panama City Airport. In November the company began the process of obtaining entitlements for 110,000 acres In western Bay county and eastern Walton County (see attached Map) Under a new Florida law it is now possible to lock in rezoning for this very large parcel.
The property included includes most of the land not already rezoned in these two counties. St Joe has not disclosed requested entitlements for specific areas, but has discussed plans for large adult- oriented community that would probably be a part of this plan. The company has scheduled five public hearings in the next two weeks to get public input.
In 2011 and 2012 St Joe has sold commercial land in this area for $227,000 per acre to $363,000 per acre (there have been no commercial land sales so far in 2013). It is currently selling quarter acre residential lots mostly in Breakfast point and Watersound for $67,000 (up from $52,500 in 2012). Residential lots in beach area sold for $175,000 so far in 2013 (up from $129,000 in 2012). Most of the beach area lots sold would have been in Windmark Beach which is Gulf County near the Port of St. Joe, and not on this Map. Since it will take number years to sell the property the present value of the land would be a substantial discount to the above prices. The present value will depend on the amount of high value entitlements received, but clearly would be worth a good deal more than the $1500 per acre that they realized from the sale of the timber land.
The timber operation generated before tax income of 2.4% last year. Short term upside for the stock comes from the fact the stock is down on what is basically good news (assuming Management can do better than 2% with the $565 million). The stock initially jumped on the announcement, but dropped after David Einhorn basically told the press “I told you so”. He had said the market was overvaluing the property when he shorted the stock in 2010. He went on to the plainly ludicrous inference Joe’s remained property may also be worth $1500 per acre. With property fronting on 20 miles of the intracoastal waterway, 30 plus miles of frontage on West Bay, 15 miles of both sides State Road 79, and 20 miles on the proposed West Bay Parkway the potential for commercial, industrial, and high value residential property is many times the $565 million they will receive from the timber land.
I assumed that by now Einhorn would have taken his profit and was long gone, but one would wonder why he would need to talk the stock down if he were out. There are still 13.3 million shares of the stock held by short sellers. This represents about 20 days trading in the stock at the average volume in recent trading.
On completion of the sale of the timberland the company will have $700 million in cash, $10 million net debt, and it has been cash flow positive for the last 3 years, so if I was short maybe I’d be talking the stock down too. At $17 and with $7 per share in cash when the deal is completed the market is valuing their remaining184, 000 acres at $5,000 per acre. With the retail value of the land north of $200,000 per acre, even a huge discount for present value is not likely to get you down to $5,000 per acre. Clearly the people holding those shorts do not believe that the company will ever be able to realize the retail price, but having lived in Florida for forty years and having driven most of the land in question it would not surprise me that if St Joe is willing to wait (with all that cash there is no reason they cannot wait) they will eventually get whatever price they want. When we get 10 years down the road no matter how much of the land has been sold, that which is left will be worth a good deal more than it is today.
Perhaps the most interesting question about St. Joe is what Bruce Berkowitz (his Fairholme Fund owns 27% of the stock and Berkowitz is chairman of the board) might have in mind for the company’s $700 million in cash. Bruce has beaten the S&P 500 by 10% a year for the last fourteen years at Fairholme so he is not going to have to work very hard to find something that will beat the 2.4% return the company is now getting from their $565 million. On their 3rd quarter conference call management repeatedly refused to discuss how they planned to use the proceeds of the sale of the timber land so we will just have to wait and see what happens to the cash once the sale is closed in the first half of 2014.
Currently the company has very little in the way of revenue and earnings from the bits and pieces of real estate the sell each year and from their resort operations. Probably it is this that keeps the shorts interested, valuing the company on the basis of its earnings only.
Joe has started to develop some recurring earnings from commercial rental property. Currently under Construction is a $60 million 360,000-square-foot shopping center located across from Pier Park Lifestyle Center on US-98 east of the State Road 79 intersection. The Pier Park North shopping center anticipates opening in spring of 2014. Tenants will include Bed Bath & Beyond, Rooms to Go, Shoe Carnival, Men's Wearhouse Mattress Firm, Dick's Sporting Goods, Michaels, Pier 1 Imports and Kirkland's. The property is being developed by a joint venture in which St. Joe will hold a 75% interest.