JOE - ST. JOE CO

[alertmeipp]

I have been watching JOE for quite sometimes, it almost comes down to 52 low. Haven't got time to read into it except a few short / long presentation. Nice to see them being cash flow positive but what's the next catalyst? Development seems to take a long time.

 

Any holders here care to elaborate why you are holding or buying this co.?

[Guest hellsten]

There's gold in them thar sink holes? New 52-week low, not far from the lows in 2009. I haven't looked at JOE so far, but I had a quick look now… Q3 report will be released today.

 

An article about JOE's history, which includes Leucadia, David Einhorn and Bruce Berkowitz:

http://caps.fool.com/Blogs/joe-metamorphosis-moth-or/741860

 

Video of Berkowitz talking about JOE in 2009:

http://www.rationalwalk.com/?p=9956

 

My notes:

Real estate play. 600 000 acres, 70% of land is 15 miles from the Gulf coast. "Lower Alabama". 2% of state of Florida. Last open space. Catalyst is the new international airport. Beautiful land, diverse, rain forest with an airport in the middle.

 

Largest air force base. Deepwater port of St Joe, close to Panama canal. 20 years late, nobody believes the story. Like the new CEO.

 

Bought at swamp prices. No debt, patient management, understands the possibilities.

 

This company should be more a liquidating trust. A real-estate family would love to get a hand on JOE.

 

They're not making any money, but $3 dollars per share of development made by the government, free cash put into the land.

 

Port of St Joe:

http://www.portofportstjoe.com/

 

access to rail, the U.S. Gulf Intracoastal Waterway, and state and U.S. highways.

 

One of the port’s greatest assets is the approximately 260 acres of combined ready-to-be-leased lands adjacent to the bulkheads and the more than 5,000 acres of land in the Port environs available for immediate development. Businesses wishing to establish facilities have plenty of room to build and expand.

 

2012 Annual report:

http://files.shareholder.com/downloads/JOE/2776309462x0x651315/51308a0f-1fe7-45be-84b1-992af80eab29/2012_Annual_Report_Final_.pdf

 

We achieved a net profit for the first time since 2007 and we have become optimistic about the recovery of the U.S. housing market. As a result, we are redirecting the Company from defense to offense. That process may produce fluctuating results over the next few years while we build mass and momentum in our businesses, but we are very bullish on the long term prospects for St Joe.

…

An important offensive play for us in 2012 was the exploration of the retirement demographic as a target market for

new communities. We are pursuing this for a simple reason- statistics show that up to 77 million people in the United

States will be retiring over the next 20 years.

…

St. Joe was incorporated in 1936 and owns land, timber and resort assets located primarily in Northwest

Florida, Jacksonville, Florida and Tallahassee, Florida. Of the 567,000 acres of land we own, most was acquired

decades ago and, as a result, has a very low initial cost basis, before development costs. Approximately 403,000

acres, or approximately 71 percent of our total land holdings, are within 15 miles of the coast of the Gulf of

Mexico.

…

Specifically, in 2013, we intend to focus on the following initiatives:

➣ Develop opportunities to capitalize on the growing retirement demographic.

➣ Build a portfolio of recurring revenue streams. The creation of long-term recurring revenue streams from our assets is an integral component of our long-term value creation strategy.

➣ Develop new commercial and industrial uses for our land portfolio. We intend to continue exploring

➣ Increase partnerships with best of class operators.

➣ Continue efficient operations.

…

We currently operate our business in five reportable operating segments:

(1) residential real estate,

(2) commercial real estate,

(3) resorts, leisure and leasing operations,

(4) forestry and

(5) rural land.

…

In January 2011, the SEC commenced an informal inquiry into our accounting practices for impairment of

investment in real estate assets and then notified us in June of 2011 that it had issued a related order of private

investigation.

…

Over the past five years, we have recorded impairment charges of $507.1 million related to real estate

investments.

…

Most of our raw land assets are managed as timberlands until designated for development.

 

So we have a company that owns 2% of Florida with many potential catalysts, including demographics and a recovering housing market:

 

The majority of rural land sold is undeveloped timberland and is managed as timberland until sold, although

some parcels include the benefits of limited development activity including improved roads, ponds and fencing.

We have traditionally sold parcels of varying sizes ranging from less than one acre to thousands of acres. The

pricing of these parcels varies significantly based on size, location, terrain, timber quality and other local factors.

 

Rural land sales for the three years ended December 31, 2012 included the following:

2012 $3,758 (average price per acre)

2011 $13,374 (average price per acre)

2010 $4,897 (average price per acre)

 

Leased 20 acres of the Port St. Joe facility to a regional ship builder, and commenced recognizing rent August 2012;

Closed six commercial property sales in Northwest Florida, consisting of 67 acres, for an aggregate of $10.4 million;

Closed nine rural land sales, consisting of 6,221 acres, for an aggregate of $23.4 million;

…

$23.5 million related to a 2006 sale of approximately 3,900 acres of rural land to the Florida Department of Transportation

 

Price per acre:

$10.4 million / 67 acres = $155223 / acre (commercial land)

$23.4 million / 6221 acres = $3761 / acre (rural land)

23.5 million / 3900 acres = $6025 / acre (rural land)

 

The value of the land is somewhere between, close to, or very far from:

567000 acres * $3761 = 2.1 billion (rural land)

567000 acres * $6025 = 3.4 billion (rural land)

567000 acres * $155223 = 88 billion (commercial land)

 

The company is now selling at around $2900 per acre, so JOE looks cheap.

 

There's also this book about JOE's history:

http://www.h-net.org/reviews/showrev.php?id=9301

http://www.amazon.com/exec/obidos/ASIN/0813026970

 

Some of St. Joe's most lucrative deals came from selling conservation land to the state, nearly 90,000 acres at more than $182 million.

 

JOE is clearly no Texas Pacific Land Trust, but Bruce hinted in the interview from 2009 that JOE should perhaps become something similar to TPL:

"This company should be more a liquidating trust."

[MYDemaray]

Subsequent to the quarter, the Company entered into an agreement to sell approximately 382,834 acres of timberland for $565 million. The final price is subject to adjustments set forth in the sales agreement. The closing is subject to a number of conditions, including approval by the Company’s shareholders. The land to be sold has an aggregate carrying value of approximately $54 million at October 31, 2013. Additional information on the sales agreement can be found in the Company’s press release dated November 7, 2013, and Form 8-K filed with the SEC on November 7, 2013.

 

Uh..so let me get this straight, $1.9bn market cap, negligible debt, and they just sold non-core assets for $565mn, or ~30% of the market value?  And...short interest is 13mn shares, or 48 days to cover?  Smells like SHLD.

 

Of course...this is much lower than the price per acre cited above.

[ItsAValueTrap]

I've been short JOE for a while and have been losing money on my short.

 

However, I've always thought that the real estate development part was the worst part of St. Joe.  Historically, they haven't made much money doing it if you look at it over the full cycle (the RE boom leading up to 2005/2007 and the RE bust afterwards).

 

- $565M divided by 382,834 acres is $1476/acre.  The land that they sold was a mix of timberland and rural land.  Yes the land fetches less money than commercial/residential/industrial, but it seems to me that St. Joe sold off its good business and now they are left with the bad business (real estate development).  The rural and timber parts of St. Joe had positive cash flow historically, while real estate development hasn't made much profits or cash flow.

[MYDemaray]

Yeah...I went back and re-read the Einhorn presentation, and $1,500/acre was base case for rural land, which all-in got you to $7-10/share in intrinsic.  As he points out, they've basically made all their money selling rural land.  The thesis for the rest requires some leaps of faith.  That said, it's heavily shorted (49 days to cover, 14% of float).  I bought some calls in the PA, which I will probably just flip in a few days.  I'm sure some people will either want to profit take, or get out.

[thepupil]

how is this good news? They sold land for 1500/acre pre-tax (hopefully they can use some of the writedowns in previous years to offset the gigantic tax inefficiency of selling low basis land for cash) and the company traded well above that value/acre beforehand.

 

Sure the remaining is more valuable, but it will be sold off very very slowly.

 

There is the technical short squeeze aspect and the fact that you have a capital allocator in control of the company. I'm just surprised they would do this, unless there is more on the tax end that allows them to not take a huge hit. If there is a way to not take a big tax hit, then $500MM+ in Bruce's/ex LUK guys' hand is better than 385,000 acres of timberland

[dcollon]

From WSJ

Einhorn_Claims_Victory_in_Fight_Over_Florida_Land_-_WSJ.pdf

[giofranchi]

From WSJ

 

Thank you, David!

 

Cheers,

 

Gio

[Guest hellsten]

From WSJ

 

Thanks. Sounds like Einhorn is still short and that he's closing the position as soon as the market has reacted to his comments :D

 

…meaning he profits if St. Joe's share price falls…

…

In an interview Monday, Mr. Einhorn said he was vindicated. "This transaction crystallizes the value of St. Joe," he said.

 

Mr. Einhorn, what about the land and business they didn't sell?

 

I understand that the new strategy is very risky, but Berkowitz might help them avoid any missteps. No position…

[ItsAValueTrap]

So if Einhorn's Chipotle Mexican Grill short works badly, what will you guys think of him?

 

 

*I am short JOE too... yeah I copied Einhorn.

[Junto]

I went long JOE this past week for two primary reasons, the sale builds liquidity and investments are managed by Berkowitz. This adds to my prior position that I thought the land value would take too long to realize but the stock was undervalued given the rebound in real estate values.

 

We'll see if my simple thesis turns out correct.

[phil_Buffett]

@junto i also went Long last week for the same reason as you mentioned. let us see what will happen :)

[ragnarisapirate]

Guys, I was at their RE holdings last summer... Einhorn's thesis seems to hold up.

 

At the community by Port St Joe, it was a wasteland...

[gg]

Ragnar - I have heard that from a few others as well. Curious if you think Berkowitz is just in too deep with this one, or what he is missing? Or is his time horizon just that much longer than anyone else's?

 

[i have no position, and never have, in JOE. I do respect most of Berkowitz's investments, though, and have done decently in the positions I've followed him on]

[ragnarisapirate]

Ragnar - I have heard that from a few others as well. Curious if you think Berkowitz is just in too deep with this one, or what he is missing? Or is his time horizon just that much longer than anyone else's?

 

[i have no position, and never have, in JOE. I do respect most of Berkowitz's investments, though, and have done decently in the positions I've followed him on]

 

I have never talked to the guy, so it's hard to tell. I was recently short- so I think he is wrong on the stock.

 

EDIT: I think that his time horizons are longer than mine- he may quadruple the value of the company, but if it takes him 20 years to do it, I would hope that I can find better places to put my money.

[ragnarisapirate]

As a side note, the company was trying to rent out a lot of the units to generate revenue... The office manager told me that they were full just the last week, and that they had another group coming in the next week and that they would again, be full...

 

What I found out after going around the the area and talking to people and digging, is that they became a community partner of Blue Skies Ministries (http://www.blueskiesministries.org/testimonials/community-partners/), and were bringing in groups of kids who have various types of cancer. The foundation spent ~101K on retreats a few years ago- don't know how much of that went to JOE, though- if any (http://990s.foundationcenter.org/990_pdf_archive/272/272071359/272071359_201112_990.pdf).

 

Here is a slide show.

 

A noble cause, for sure... But not one that makes the real estate worth much. The ethics of shorting can cloud here.

 

[Junto]

Jeff, thanks for letting me know. I know you have a good feel for real estate.

 

My expectation is that the liquidity boost will probably be redeployed in more efficient manners than years past under the direction of Berkowitz.  It is a jockey play and a potential short squeeze play. Real estate market in Florida has been rebounding over the past 12-24 months and the downside is controllable in my view.  Operations can't get too far away from you, debt is non-existent from a leverage concern, and catalyst is here.

 

 

 

 

 

[ragnarisapirate]

Here is a hypothetical:

 

Let's say that their developments are worth the entire amount of all the PP&E on the books. Now, let's say that the land they sold was on the books for nothing and they pay no taxes on the $565mm gain. (I am doing this to create a best case scenario). Book value is ~1.1b and the market cap is ~1.65 making the price to book ~1.5

 

That's higher than BH, BRK, MKL, LUK, and a ton of others, that are sitting on assets that have proven cash flows. Granted- I think we can all agree that Berkowitz isn't going to sit on the cash forever like a lot of the other cash shells seem to do. I would love to see him make JOE into a holding company conglomerate sort of thing- he could do some really neat things.

 

As a side note, does anyone find it crazy that BH and BRK are trading for the same price to book?

[racemize]

As a side note, does anyone find it crazy that BH and BRK are trading for the same price to book?

 

I guess size/youth?  I'm having trouble seeing how Buffett can pull off 15%+ gains with his size at this point.  Perhaps he can do it though.

[FCharlie]

Is Berkowitz in full control of JOE's excess cash? 

[thepupil]

Under the current agreement, berkowitz controls the cash but is very restricted. I would recommend all longs and shorts to play around with the property appraiser's websites for bay, gulf, and Franklin county.

 

I was short in the past and have recently spent some time going through the remaining developments in an effort to perhaps go long ( I like the idea of a st joe holdco) but just couldn't get comfortable paying $1B for the remaining land and development operations. If I had $10 billion dollars i wouldn't buy the land around Panama City beach and a few subdivisions for $1B. So I'm not going to do it on a micro level.

 

Going through the einhorn presentation and reviewing the value destruction that took place in the Rummell days is saddening. It's a much slimmer company now but I still can't help be scared that they did this sale to "focus on their core business of development".

 

 

In April 2013, the Company engaged Fairholme Capital Management, L.L.C. (“Fairholme”), to serve as an

investment adviser to the Company. As of September 30, 2013, Fairholme owns approximately 27% of the Company's common stock. Mr. Bruce Berkowitz is the Managing Member of Fairholme and the Chairman of the Company's Board of Directors. Fairholme will receive no compensation for their services as the Company's investment advisor.

 

Pursuant to the terms of the Investment Management Agreement (the “Agreement”) with Fairholme, Fairholme agreed to supervise and direct the investments of an investment account established by the Company in accordance with the investment guidelines and restrictions approved by the Investment Committee of the Company's Board of Directors, which were set forth in the Agreement. The investment guidelines require that, as of the date of any investment, (i) at least 50% of the investment account be held in cash, investment grade cash equivalents or U.S. treasury securities, (ii) no more than 50% of the investment account be held in corporate debt securities, which may be investment grade or non-investment grade, and (iii) no more than 10% of the investment account be invested in securities of any one issuer (excluding the U.S. Government). The investment account may not be invested in equity securities. As of September 30, 2013, the investment account included $2.4 million of money market funds, $125.0 million of U.S. treasury securities and $21.1 million of corporate debt securities, which were non-investment grade. Money market funds are recorded in Cash and cash equivalents and U.S. treasury securities and corporate debt securities are recorded in Investments on the Company's Condensed Consolidated Balance Sheets.

[Junto]

Here is a hypothetical:

 

Let's say that their developments are worth the entire amount of all the PP&E on the books. Now, let's say that the land they sold was on the books for nothing and they pay no taxes on the $565mm gain. (I am doing this to create a best case scenario). Book value is ~1.1b and the market cap is ~1.65 making the price to book ~1.5

 

That's higher than BH, BRK, MKL, LUK, and a ton of others, that are sitting on assets that have proven cash flows. Granted- I think we can all agree that Berkowitz isn't going to sit on the cash forever like a lot of the other cash shells seem to do. I would love to see him make JOE into a holding company conglomerate sort of thing- he could do some really neat things.

 

As a side note, does anyone find it crazy that BH and BRK are trading for the same price to book?

 

Points well taken. With rough numbers, reaffirming your point

 

9/30 Equity Value is $557,936,000 before non-controlling interests, with 92,302,299 shares outstanding = $6.04/share

We know value of sold assets is $54 million and sold for $565 million. For simple purposes, $511 million gain on book.

Federal Net Operating Loss carry forward of $85.2 million. Valuation Allowance if $91.1 million so if I am reading the 10-Q right gross estimated operating loss carry forward of $176.2 million so tax shield at a simple 35% tax rate of roughly $503 million.

Revised Equity Value $1,064,000,000/92,302,229 = $11.52 of which ($22,831+146,051 + 26,404 + 506,000) = $701,286,000 or$7.60/share is cash

 

Now here is where it gets interesting. The CEO is non-committal on the intent of the funds after closing whether they take the lump sum or spread it over time on an installment sale. It is obvious the liquidity is not needed for the future development plans for the business and the ROI is probably not there compared to alternative investments outside the existing business model. In other words, I would be surprised if they doubled down on the existing strategy instead of moving into a new frontier. 

 

Short interest 10/31 is 13,183,640 or 14.30% of float and 54 days to cover.

 

What is stopping Berkowitz from exerting pressure on the board to make a transformation change of the business model when more than half the book value is in cash and the prospects of better returns are elsewhere? The stock is set for a squeeze and if not, I am comfortable trusting Berkowitz with the cash. It is a small position in any case so the risk / reward is there for me in this market.

 

Hard to pay up for insurance in this market as the rates will kill the book value in mark-to-market and opportunity cost on not realizing the losses may turn out to be worse. Rotate short duration is the key right now (5 years max).

 

I guess we will see.

 

[FCharlie]

So in theory, Berkowitz, after this transaction closes, could put $500 million to work.... $250 million in treasuries, $250 million in corporate debt. Knowing Berkowitz, he'd probably load up on the debt of Sears, JC Penny, & Freddie & Fannie.

 

Seems like the cash pile could perform better with Berkowitz managing it than it would have done being managed for timber sales.

 

It's a shame he doesn't have full control. Either way, the fact that he has some control over the cash makes JOE much more interesting to me.

 

 

[thepupil]

I agree that is interesting and think Berkowitz will make sure that cash is deployed well. It is also likely he tries to change the cash management agreement to have more control.

 

I just have issues with the non-cash/fixed income portion of the book and the implied price thereof (about $1B). Rivertown still appears to be quite vacant. Summercamp Beach is in Franklin County which is still a real estate wasteland from what i can tell on the property appraiser. Very few have built and we are several years into the recovery. Venture Crossings has been very slow.

 

You can buy Berkowitz through Fairholme or Fairholme Income although he has said in past JOE could be used to hold things he could not buy elsewhere (although  I don't know how Berkowitz starting a hedge fund will impact that, maybe he'll combine JOE with that like ESL/SHLD).

 

I think to own JOE you still have to trust the land development vision because you are still paying for that. There is a lot to look through and poke around in the property appraisers, but it was really hard for me to see JOE in any other light than a bunch of marginal land and developments that will take decades and tons of capital to develop.

 

But I definitely wouldn't short it. Too much Berkowitz optionality.

 

Summercamp Beach

http://qpublic6.qpublic.net/qpmap4/map.php?county=fl_franklin&parcel=35-06S-03W-1000-0000-0358&extent=1971489+333904+1972141+334392&layers=parcels+parcel_sales+aerials+roads

 

Rivertown

http://gis2.sjcpa.us/imf/imf.jsp?site=map&qlyr=parcels&qry=webgeodata.LOADER.parcel04.PIN%3D%27000702%200130%27&qhlt=true&qzoom=true&qbuf=250

 

Venture Crossings/Rivercamps

http://qpublic6.qpublic.net/qpmap4/map.php?county=fl_bay&parcel=32611-612-000&extent=1553757+473061+1554609+473781&layers=parcels+parcel_sales+roads

http://www.bing.com/maps/default.aspx?cp=30.292299~-85.819397&style=o&lvl=19&tilt=-90&dir=0&alt=-1500

 

 

[thepupil]

http://www.businessinsider.com/david-einhorn-robin-hood-conference-2013-11

 

I've attached my worksheet i created this past week. If you assume a 35% tax rate on JOE's land sale, JOE will have ~$6/share in cash,investments, and pension receivables. If they pay zero (by taking additional impairments or deferring by means of a 1031 exchange), I get to ~$8.

 

I get real liabilities of $50MM vs. the $100MM on the balance sheet since some of the debt is defeased ( I don't include the pledged treasuries in my calculation of cash + investments) and there is a large deferred revenue liability that will go away soon.

 

I am unsure if JOE is worth the current price but I think Einhorn's argument that it is worth $7.00 is overly pessimistic.

 

 

Balance_Sheet.xlsx