Over a year ago, I wrote about The St. Joe Company (NYSE:JOE). Since that time, rising interest rates have severely dented most real estate stocks, and the stock price of JOE has been decimated in recent months. I wanted to go over the third quarter results and determine if the bullish thesis is still in place.
The St. Joe Company owns over 170,000 acres of land in Northwest Florida. Over 90% of the property is dotted along the coast and slightly inland near Panama City.
JOE has a different business model than most real estate companies or real estate investment trusts (“REITs”). This makes the company slightly harder to understand or value.
St. Joe operations are reported in three segments: (1) residential, (2) hospitality, and (3) commercial.
Firstly, under the residential segment, JOE develops and sells homesites and land to homebuilders and consumers.
Since 2019, homesite sales started to experience tremendous growth after languishing for many years.
The hospitality segment develops and owns hotels, golf clubs and operates a private membership club. Homesite sales are high margin at over 60%, but sales are lumpy. Thus, the company has counterbalanced the lumpy nature of homesite sales with more recurring revenue streams.
The commercial segment is primarily engaged in leasing commercial property.
Strong Demand For Building Lots
With the broader national real estate slowdown, I was expecting to see signs that demand for homesites was waning. I was quite surprised to learn that demand for homesites has remained robust without any cancellations.
“As of September 30, 2022, we had a backlog with 2,376 homesites under contract as well as 641 Latitude Margaritaville Watersound homes under contract, which together are expected to result in a record sales value of $502.8 million. We also continue to feel the impact from supply chain disruptions that have delayed homesite and home deliveries by a few months and have increased construction costs. Delayed deliveries are a matter of change in timing of the sale and are not resulting in canceled contracts. Homebuilders continue to purchase our homesites as soon as we complete development, without any requests for extensions.”
Source: St. Joe 10-Q, October 26, 2022
I was quite surprised that homebuilders appear to be confident about the prospect of developing in the area given that mortgage rates have recent exceeded 7%. As a reminder, 30-year mortgage rates a year ago were 1.8%.
The company has continued to prepare lots for sale at a similar pace to previous quarters. Clearly, they are not anticipating a major slowdown in the coming months.
The company has 3572 homesites under development. As of September 30, 2022, St. Joe had 2,376 residential homesites under contract. This is expected to result in revenue of approximately $186.3 million over the next several years. The pipeline of homesites under contract has increased by ~716 homesites over the last year.
I continue to be impressed with the management team at JOE. Operating expenses have barely budged while revenues have grown by 14% over the last year. Furthermore, since 2018, revenues have almost tripled, yet operating expenses are only up ~30%.
JOE’s business model is lean with a lot of operating leverage. I do not expect that future revenue growth of 15-20% will be accompanied by a huge increase in marketing spend or staff. The management appears to be conscious of keeping costs contained.
Buybacks And Insider Buying
In the first nine months ended September 30, 2022, the Company repurchased 576,963 shares of its common stock for $20.0 million. Normally, I would want the company to allocate more of it’s $160 million cash pile to repurchasing stock at such depressed levels. However, the company is able to generate higher returns on land development.
More significantly, the company CEO purchased almost $150,000 of shares in the open market in May/June. He paid ~$41-51 per share, a significant premium to the current price of ~$36. This was the first large cluster of insider buying in the last two years.
As I have mentioned previously, JOE is woefully under-covered by the analyst community, and there are many different ways to value the company. If JOE can somehow meet their 2024 milestones despite the broad real estate slowdown, I will be pleasantly surprised. It should be noted that homesite sales badly missed in Q3. Homesite sales volume decreased by 34% to 78 homesites, as compared to 119 homesites in the third quarter of 2021. Thus, the estimate of 1000 homesite sales this year and 2000 homesite sales next year might be too optimistic given the macro environment.
JOE has an Enterprise value of ~$2.5 billion. My profit estimate from homesite sales is ~$80 million for 2023. An 18X multiple on that business, which I expect to grow 12-15%, is quite conservative and comes up with a valuation of ~$1.45 billion.
For recurring revenue from hospitality and commercial, I expect net cash of $75 million in the next year. An 18X multiple is extremely conservative for recurring revenues that have been growing at 30%/yr. Nonetheless, that comes up with a valuation of $1.35 billion. The total valuation on a bear case scenario is $2.7 billion compared with a $2.5 billion Enterprise value.
I am not expecting any share price appreciation in St. Joe shares for the next 6-12 months. The national real estimate slowdown only started a year ago, and usually real estate troughs after 48 months. Homebuilders, land developers, and building products companies have all been caught in a riptide even though the financial results in the industry have been decent.
However, I am confident that, from a longer-term perspective, my investment in JOE should be profitable. Even with a bearish valuation, I find it difficult to value JOE anywhere less than $2.5 billion. The value of the land will continue to increase as JOE continues to develop more and more amenities in the area. The demographic tailwinds pushing people to migrate to the Florida Panhandle is a long-term trend that shows no signs of slowing.