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Fortune Magazine Article, Oct. 17th, 2005
“Buy Florida Land Cheap!”
By John Burger: “In the early 1960’s, back when the St. Joe Co. was still in
the business of growing Florida pines, not developing Florida real estate,
legend has it that a Hollywood movie mogul by the name of Walt Disney
paid a visit to the timber company’s then-CEO, Ed Ball, Disney, you see,
was in the market for some Florida land—something about an amusement
park—and land was what St. Joe had in spades. St. Joe owned then (and still
owns today) about a million acres in the Florida Panhandle. All Disney
needed was 30,000.
There was just one problem: Ball was a curmudgeon who refused to
sell land to anyone. According to St. Joe company lore, Ball made Disney
wait in his foyer for hours. At the end of the day Ball’s secretary emerged
from his office with a hand written not for the movie man. The message:
“We don’t deal with carnival people.”
Oops. Ball’s act of arrogance may well have been a $100 Billion
blunder, considering the pricey sums paid for land in Orlando and around
Walt Disney World. Yet as St. Joe CEO Peter Rummel tells this tale—he
says it checks out, but for the record, the folks at Disney suspect it’s a tall
one—he sheds no tears over what might have been. “Sure, it was a missed
opportunity,” says Rummel, himself a former Disney executive. “But, I’d
argue that we’re in a better position today, able to take advantage of a
demographic movement unlike any in the history of the U.S.”
Baby-boomers, he’s talking about you. The U.S. Census Bureau
expects Florida to add 13 million new residents—equivalent to the combined
populations of New Jersey and Connecticut—between 2000 and 2030. With
so many boomers eyeing a Florida retirement and the Panhandle an
unspoiled alternative to the clogged roads and beaches to the South, St. Joe
(JOE) may well be the best aging-of-America play this side of
pharmaceutical stocks. Of course, that’s assuming that killer hurricanes and
breathless news coverage don’t scare off all the snowbirds. “I don’t care
what happens this year or next,” says Michael Winer, portfolio manager of
the Third Ave. Real Estate Value fund. “For us, the St. Joe story boils down
to some 800,000 acres of spectacular real estate that is ripe for generations
of development.” Third Avenue, the fund family headed by famed stock
picker Marty Whitman, is so bullish on St. Joe that it now owns just over
10% of the outstanding shares—a $470 million stake.
Founded by the Du Pont family as a timber company in 1936, St. Joe
is the largest private landowner in Florida, holding more that 855,000 acres.
Florida has been a booming real estate market for decades, yet it wasn’t until
the 1990’s that St. Joe’s board of directors realized home sites were more
valuable than timber or wood pulp. In 1997 the board hired Rummel—then
Disney’s top in-house real estate developer and the creator of the
Celebration, FL, planned community—to lead St. Joe’s transformation from
timber company to land company.
Rummel recalls being stumped the first time he laid eyes on maps and
aerial photos of St. Joe’s land holdings. The properties included hundreds of
miles of Panhandle beachfront, lakefront, and riverfront as well as 352,000
acres within ten miles of the Gulf of Mexico. Of course anyone with half a
brain can sell a beach house. What has distinguished St. Joe’s development
plans under Rummel is a keen sense of how to adapt non-beachfront land to
boomers’ active vision of retirement. For instance, St. Joe has turned 1,000
acres of woodlands, creeks, and marshes in Panama City Beach, FL, into the
kind of place where you’d expect a modern-day John Muir to retire—
assuming the naturalist had a taste for luxury living and the cash for a
$500,000 home. Called River Camps, this soon-to-be-completed
development will offer a boathouse for canoeing, paths for walking and
mountain biking, and onsite naturalists to guide morning bird expeditions.
The showcase home at RiverCamps boasts the usual array of luxury
amenities but with “cracker chic” design touches that evoke all the charm of
the backwoods South—from the huge screened-in porch to the melodic
patter of rain against the corrugated metal roof.
Even if St. Joe weren’t such a creative developer, the company’s $60
stock price (as of Sept. 28) would still be something of a head-scratcher.
With St. Joe’s total stock market capitalization now standing at $4.6 billion
Wall Street is valuing the company at the equivalent of roughly $5,400 an
acre—about a week’s rent for an upscale Florida condominium.
That’s even cheaper than it sounds. St. Joe right now has 19 active
developments spanning about 13,000 acres. Recent sales range from a $2.9
million beachfront condominium at WaterSound Beach in Santa Rosa
Beach, FL to a $130,000 lot in a Tallahassee subdivision called Southwood
(Ball would not be amused: Southwood used to be his personal estate). In
the second quarter of 2005, St. Joe recorded an average profit on all home
and home site sales equivalent to $160,000 an acre. St. Joe won’t make that
much on all its sales, but even now, the company is selling remote
unimproved ranch land for upwards of $7,000 an acre. And that’s before the
population boom that everyone knows is coming.
Why is the stock so undervalued? For one, Wall Street likes to price
stocks on current profits. But because St. Joe has only 1.5% of its land
under development, its profits don’t come close to reflecting the underlying
value of it assets. And its modest earnings give St. Joe a price/earnings ratio
of 32, which is high relative to the S&P 500, making the stock look
expensive.
A more immediate problem is the weather. Neither Hurricane Katrina
nor Hurricane Rita did any physical damage to St. Joe developments, but
coming on the heels of Florida’s 2004 storms, this year’s extreme weather
has put a dent in demand for gulf-front and near-gulf-front property. And it
has raised the prospect that flood insurance will become much more
expensive and harder to find. Rummel reports that two potential buyers
backed out of WaterSound beach home purchases in the wake of Katrina and
that, “in general, our sales have slowed down from where they were.”
That’s not what investors like to hear, especially with the dark cloud
of a possible housing bubble hanging over all housing related stocks. St. Joe
was hit hard, with its shares dropping to $60 from a high of $84 a share in
July. Of course, that’s exactly what makes this such a good time to buy. As
Ryan Beck & Co. analyst Sheila McGrath wrote in mid-September, “We do
not believe JOE’s land values have declined over 1.5% since July 1, yet its
share price has.”
For his part, Rummel has no doubt that sales will rebound once
hurricane season ends. “I will guarantee that if demand does weaken for
things near the coast, it’s only temporary,” he says. “There’s something in
our DNA that draws people to water.” Genetics aside he is probably right.
Economist and geographers who have studied how natural disasters affect
real estate values have generally found them to have no lasting impact.
Consider 1989, the year Hurricane Hugo ripped through Charleston,
S.C., and the World Series earthquakes that rocked San Francisco. In both
cases, local home values were higher one year later. Grant Thrall, a
professor of economic geography at the University of Florida, explains that
it’s only when natural disasters start affecting communities with true
regularity—a flood plain that is inundated every other year, for instance—
that residents move and home prices fall. “I don’t see [Katrina and Rita]
having a negative impact on real estate values,” says Thrall. “Generally
speaking, homebuyers have very abort memories.”
The storms could even have a positive impact for St. Joe. With
Katrina having rendered so many ports in Mississippi or Louisiana damaged
or inoperable, the Port of Panama City has experienced a huge surge in
traffic, including the arrival of its first-ever container ship and its
first-ever
oil tanker. Meanwhile, several thousand people displaced by Katrina have
taken up residence in the Panhandle region, many of them enrolling their
children in local school systems. “A lot of those folks aren’t going back
anytime soon,” says Rummel, explaining why he may accelerate
development plans for nonresort, primary-residence communities.
Any surge in economic activity and population growth in the
Panhandle would buoy the case for one of St. Joe’s top priorities: a new
airport in Panama City. Because so few commercial flights serve the region,
most second-home owners in the Panhandle hail from Atlanta, Birmingham,
Memphis, or other Southern locales within driving distances of northwestern
Florida. A new airport would change all that, opening up the region to
snowbirds and tourists from all over the country.
Government officials in Panama City have been debating the
need for
a new airport for years (The runway on the existing one is too short to
support large jets). Lately, though, St. Joe has been the driving force behind
the airport project—which could break ground as soon as 2006—going so
far as to donate the land. “Of course it’s self-serving,” Rummel groans
when querled about criticism that St. Joe is providing land for the airport
only to further its own real estate interests. “But we have been very
consistent about saying it’s the right thing for the region, and if it’s the
right
thing for the region, it’s the right thing for us.”
The hope is that the airport would give the region the
same king of
boast Fort Myers and Naples got from the opening of Southwest Florida
International Airport in 1983. “That whole area just exploded after that
airport was built,” says Third Ave.’s Winer. “There’s no reason the same
thing couldn’t happen in the Panhandle.” At $5,400 an acre, that’s a bet
we’d happily take.
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