|
Published: May 7, 2010
The saying goes something like this: "I have two words for you,
'real estate'." These days, a lot of people may feel that those
are actually dirty words. However, there are many different
kinds of real estate, and one kind that never goes out of
fashion. It's not residential real estate -- not with 25% of the
country's mortgages underwater. Commerical real estate isn't it,
either -- not with properties struggling to achieve
cash flow. No, the one type of real estate that will always
have value is properly-located undeveloped land.
St. Joe Company (NYSE: JOE) owns 577,000 acres of prime
Gulf Coast real estate. Founded in 1936, the company has slowly
acquired everything from beachfront property, to property on St.
James Island, to inland rural land ripe for development. The
company doesn't just sit on that land, though. Some of it
remains undeveloped, but it's found plenty of ways to monetize
the rest.
The company has four divisions: Residential Real Estate,
Commercial Real Estate, Rural Land Sales and Forestry. The
Residential Real Estate division operates some very attractive
resorts right on the Emerald Coast as well as other beaches
(just check out the
website). There are quaint residential communities,
also along the beach, which are sparsely populated and remain
relatively untouched. The Commercial division develops and sells
real estate for just about every type of business: retail,
office, industrial, multi-family, mixed use and even
hospitality. The Rural side sells undeveloped land from two
acres up to 468 acres for development (such as homebuilding),
recreation, conservation and for the timber industry. Finally,
as its name suggests, the Forestry division focuses on anything
having to do with timber, while also doing its part for
conservation by managing properties for that purpose.
If it's possible to more fully diversify a real estate holding,
I can't think how.
The trick with St. Joe as an investor, however, is how to value
it. There are two ways to look at a real estate holding company,
and both depend on one's investment time horizon.
Investors looking at St. Joe for a trade or for the short term
want to be conscious of where the stock price has been relative
to its historical highs and lows, and whether the company is
providing solid cash flow and earning money.
For the longer view, which is the way to
really evaluate real estate like this, investors should be more
forgiving of how the properties are delivering cash flow.
Economic hard times, like the present, are more likely to impact
all of the company's divisions. During the very long term, and
by that I mean some 30-40 years, that becomes less important.
Why? Because it's real estate. And over time, real estate
historically increases in value.
Case in point: The company had
net income of $39 million in 2007, but lost $36 million in
2008, and lost $130 million in 2009. However, because of the way
the company accounts for costs associated with development, the
company actually produced $50 million in cash flow in 2008 and
2009.
The cash flow is great, but unlike rental properties, St. Joe
doesn't need it to pay a mortgage. It has $150 million in net
cash on the books. So if you want to own that prime piece of
real estate in Florida, you can do it by owning St. Joe stock --
and own that property outright.
The stock has had an interesting ride. There was a big run-up
from $20 to $80 a share in the first half of the decade,
followed by a series of fits and starts, which ended with a
crash to $12 in March of last year (along with everything else).
Since then, we've seen Fairholme Capital Management accumulate a
whopping 30% stake in the company, of which 24% is in their
Fairholme Fund (FAIRX) mutual fund. They clearly saw the
long-term value of the real estate and started buying. One might
also take comfort in the fact that mutual fund Third Avenue Real
Estate Value Fund (TAREX) owns 3% of the company. Those who
follow Third Avenue know their real estate managers are among
the top in the industry.
The stock is -15% off its 52-week high, likely because of the
Gulf oil spill, which created environmental uncertainty around
St. Joe's property. The situation is fluid (no pun intended) and
investors should keep a careful eye to see what develops. Even
if the worst occurs and there is damage to St. Joe's properties,
it may still create a great long-term buying opportunity. Time
heals all wounds. It healed Alaska's coastline, and it'll do the
same in Florida.
-- Frederick Steier
Contributor
StreetAuthority |
