St. Joe (JOE 0.17%) sat idly on around 170,000 acres of undeveloped land on Florida's Gulf Coast for many years. During that time, the company faced the age-old chicken or egg question: What do we build first, homes and amenities to attract people, or commercial and industrial to attract jobs? A few years ago, they decided to start building both, profitably, with lower-than-average risk, at a fever pitch. Read on to see why St. Joe's could be an excellent long-term holding.
A different approach to development
St. Joe's land is nestled between vacation destinations Destin and Panama City, Florida. About 90% of the company's acreage is located within 15 miles of the Gulf of Mexico. The company has homes, hotels, resorts, golf clubs, marinas, and commercial space already completed or planned for the acreage.
Building entire communities and massive commercial and hospitality projects typically take colossal up-front capital investments. The profit comes later, when projects are completed. In between, there is risk of cost overruns, delays, and changing market conditions.
Image source: Getty Images.
St. Joe takes an entirely different approach to its business model. First, communities are planned and permitted; then, homesites are sold directly to homebuilders. St. Joe makes a profit from the sales before the lengthy construction process.
On the Commercial and Hospitality side, St. Joe creates joint ventures for projects. St. Joe contributes the land and takes a majority stake in the JV. The JV partner takes on the construction and borrowing. St. Joe is responsible for day-to-day operations and splits profits according to each JVs ownership structure when the properties are competled. Partners take on most of the risk of debt, cost overruns, and delays, while St. Joe keeps its corporate overhead at a minimum. You can't always tell this by looking at St. Joe's financial statements, where it consolidates most of those JVs; partners' debt appears on St. Joe's balance sheet, but St. Joe isn't on the hook to pay it off.
St. Joe measures its progress through a non-GAAP figure it calls cash generated for distribution or investment (CGFDI). It basically measures operating profit plus or minus real estate, JV, and financing cash flows (see chart below). CGFDI has increased over tenfold since 2016.
|
Metric |
2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|---|
| CGFDI (Total) | $16.9 million | $55.5 million | $57.5 million | $65.5 million | $71.5 million | $154.5 million |
| CGFDI (Per Share) | $0.23 | $0.79 | $0.92 | $1.09 | $1.21 | $2.62 |
| Year-over-year per-share growth | N/A | 243% | 16% | 18% | 11% | 117% |
Source: Company investor presentation; author's calculations.
St. Joe has grown its residential homesite sales every year, from 106 in 2016 to 853 last year. As of May, it had a backlog of nearly 2,300 homesites under contract and at least 17,000 more under development or in the permitting and entitlement process.
St Joe has over 1,100 hotel rooms in operation or under construction in its hospitality segment,up significantly from 126 in 2016. In addition, club memberships have grown from 754 in 2016 to over 2,200 last year. The company aims to have 3,250 memberships and add 750 boat slips by 2024. Reaching these goals and completing apartment and senior living projects will add recurring revenue, but residential construction will likely remain the company's bread and butter. Between 2019 and 2021, residential revenue grew from 32.7% to 54.6% of St. Joe's total sales.
Is St Joe a buy?
Rising interest rates and recession fears have hit stocks this year. It stands to reason that those factors would hit a real estate company like St. Joe. This year, the stock is down, trading at a P/CF -- like P/E, but adjusted for non-cash items -- of 23, its lowest level since 2019.
On top of that, South Florida is in the crosshairs of climate change as rising sea levels threaten its shorelines. St. Joe's properties are all in the Northwest, further away from the threat, but not immune to rising sea levels.
Though the company has sheltered itself from some of the risks of a typical construction company, that doesn't mean business won't slow down. At the same time, Realtor.com estimates that there was a nationwide shortage of nearly 6 million new homes at the end of 2021, and that beach towns in Florida are seeing significant proportions of new building permits relative to their size.
With such a long runway ahead, St. Joe's stock looks like it could be an excellent long-term investment. Housing stock investors with a low risk tolerance may want to see mortgage rates stabilize and recession fear subside before they consider stepping in.
