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St. Joe Can Afford to be Patient

Philip Guziec, CFA

Phil Guziec: Hi, I'm Phil Guziec, Co-Editor and Portfolio Manager of Morningstar's OptionInvestor research service, and recently we took a bullish put position selling a put on St. Joe, and I'm here with Anthony Dayrit, our analyst, covering St. Joe to discuss the company.

Anthony Dayrit: Great to be here, Phil.

Guziec: Thanks for coming, Anthony. So, let's start out with the basics of St. Joe. What is the company and what's the company's history?

Dayrit: Sure. Well, St. Joe is a land development company that owns nearly 600,000 acres throughout the Florida, Northwest Florida Panhandle. Beginning around the 1930s, the company started out as originally a timber company, and in order to feed its paper mills started buying up just huge amounts of land throughout Northwest Florida, and buying this for prices as low as $1 to $2 an acre. Today, the company is basically a real estate developer that secures entitlements for the land and then sells it to prospective buyers.

Guziec: So the value of the company basically is in this land that they're developing and selling?

Dayrit: Correct. Now, 70% of the 580,000 acres is located within 15 miles of the coast line as well.

Guziec: So it's pretty prime real estate.

Dayrit: Correct.

Guziec: It's sunny…

Dayrit: Bright sand beaches.

Guziec: -- retirement areas, beautiful, beautiful. Okay. Well, we have a wide moat rating on St. Joe. How do you justify that?

Dayrit: Well, the way we see the wide moat is twofold. One, St. Joe owns this at a near zero cost basis. As I said, they bought a lot of this land for – sometimes even pennies on the dollar. Now, the other part of the wide moat is that if anyone wants to buy land in the next 20 to 30 to even 50 years in Northwest Florida, it's pretty likely that they're going to have to go through St. Joe.

Guziec: How does it add value to this land as it entitles it and sells it? How does the company really create value and monetize the land?

Dayrit: Well, Northwest Florida has traditionally been a pretty underdeveloped region of the state just in terms of the lack of accessible transportation. And one thing St. Joe does is they've been pretty adept at partnering with local municipalities, local governments in developing the land.

The best example of this right now is that the company donated 4,000 acres in Panama City for the construction of a new airport, and in exchange they received land use permits for around 35,000 acres around the entire airport, and they can sell and develop that land as well. So it's really – the company is pretty intertwined with all of the local governments in Northwest Florida, and basically putting in the necessary infrastructure to drive economic growth.

Guziec: So they basically created value for the land surrounding the airport by giving away the land for the airport.

Dayrit: That's correct.

Guziec: That's a beautiful move.

Dayrit: Yes.

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Guziec: So it actually brings us to how we value the company. Could you talk about the couple of ways you come up with a value for St. Joe?

Dayrit: Yeah. Well, our main valuation, it's pretty simple is that, we take the – we'd use the net asset value and we take the roughly 400,000 of coastal acres, coastal land and assign that a per acre value of $10,000. And then we take the remaining 172,000 acres and assign that a value of $1,500 an acre and we consider that to be either rural or swampland, and the $1,500 estimate is pretty much where the land has been going – rural land has been selling for around these last few years and when we net out the liabilities, we get an equity value of $4.4 billion, which is right around our $50 fair value estimate.

Guziec: And the share is trading in the low 20s right now?

Dayrit: Yes. The share is trading at the low 20s, and at that valuation, we'd assume a per acre value of all of St. Joe's land at roughly $3,400 an acre.

Guziec: Okay. Now, the land is really, for an investor, only worth the eventual cash flows that come from it.

Dayrit: Yes.

Guziec: Could you talk about the other way that you look at the valuation for the company?

Dayrit: Sure. The other way that we've tried to look at St. Joe is by basically isolating the West Bay Sector. Now, there is around…

Guziec: And that's the land around that airport that they drive at?

Dayrit: Yes. Yes. It's around the New Panama City Airport, which has just opened at the end of May. And we take the 35,000 acres around that airport, and we assume that the company will be able to sell 700 acres per year over the next 50 years and assume that they can sell each acre for around $100,000 an acre.

And when we use that model, we get a per share value for just that West Bay project of $13, and if we take everything else of St. Joe's land and put that into a $1,500 per acre bucket, we get an additional $9. So that also gets us to around $22, $23. And we think those are both pretty conservative assumptions.

Guziec: Now, what about those oil spill liabilities, how does that relate to BP?

Dayrit: The way we like to look at St. Joe and the oil spill is that, any liabilities to BP would be St. Joe's asset. So, St. Joe has been pretty vocal in documenting the status of its beaches before the oil spill, and they've said repeatedly that BP would be liable, would be footing that bill in the future.

Guziec: And then, last question, what about their liquidity? So, you know, there's interim challenges to their business developing the land between the real estate downturn and the oil spill. How secure are they in being able to weather that storm from a cash flow standpoint?

Dayrit: I'd say that St. Joe's, their balance sheet is quite pristine at this point. They're in a net cash position. In 2008, they raised around $580 million by selling equity at $35 per share that paid down all of their debt at that time. Their overhead costs, they've widdled it basically to the bone. I believe in 2006 they had upwards of around nearly 2,000 employees, today they have less than 150.

So they really have minimal overhead costs and in the meantime, kind of, in the short term, St. Joe is basically living off of its tourism revenues at its resorts and also selling off more non-strategic or basically the swampland parts of their land. So they're able to basically get by and survive on those and they can certainly afford to be patient over the next few years.

Guziec: Thanks for joining us, Anthony.

Dayrit: Thank you, Phil.

Guziec: I'm Phil Guziec from Morningstar's OptionInvestor. And thank you for watching.