For homesite developer St. Joe (NYSE:JOE), owning 586,000 acres of Florida real estate is not quite a death knell. That said, the company is captive to a number of national and regional downturns, some of which may not turn around even as the overall economy recovers.
Place, not location
Over the past few years, St. Joe largely left the homebuilding business -- a timely and laudable move, given the nationwide pileup of unsold homes. The company now focuses on "place-making," a strategy that, to my sometimes-suspicious ears, makes it sound like the Starbucks (NASDAQ:SBUX) or Whole Foods (NASDAQ:WFMI) of real estate. These days, they're not exactly inspiring comparisons.
So what does this highfalutin phrase mean? In essence, St. Joe assesses and prepares parcels of its northwestern Florida land base for community and commercial building. That entails managing land entitlements in addition to making investments in roads, pools, and golf courses. The company then either sells the construction-ready development or enters a partnership with a builder; interestingly, one of those partners is the beleaguered Beazer Homes.
As of the conference call on Feb. 24 about year-end results, its inventory of unsold homes stood at 160, and St. Joe remained involved in the design and construction stages of some ongoing projects.
Passing inspection -- at first glance
Judging from the most recent conference call, St. Joe management will be the first to admit that the company is facing gale-force headwinds. In fact, revenue from the company's rural land segment helped to bolster recent quarterly results. Management indicated that the rural market remains firm; moreover, in 2008, company officials said that land sales were restricted to "nonstrategic" assets. Combine those facts with its recent progress in making its workforce and capital spending more efficient, and it's tempting to become a tad positive about St. Joe's future.
Further sweetening the apparent appeal are macroeconomic sparks of life. The Fed's move to buy long-dated Treasury bonds has already brought mortgage rates below 5%. That's good stuff for homeowners who qualify for refinancing, and it's bound to free up at least a few consumer dollars to feed the starving economy. Also, sales of existing Florida homes have improved steadily over the past several months.
But the fact is that we could have a national refinancing bonanza and cheap foreclosed Florida homes could sell like two-for-one tube socks, but that wouldn't necessarily translate into the kind of long-term activity that St. Joe needs: vibrant home construction in northwestern Florida.
First and foremost, historically low mortgage rates do not yield a sudden need for a bunch of new homes. If those prudent families who waited to buy until they could actually afford to do so purchase existing homes, and those who lost their home go back to renting (which they should have stuck to), then aggregate demand will remain flat. Moreover, I suspect that the stock market is going to have to retrace the majority of its losses before the appetite for second and third homes reappears.
A long-term approach may disappoint
But maybe you are a super patient investor, and you are perfectly fine waiting for home inventories to be worked down, no matter how long it takes. Good for you, but investing in St. Joe could still be a mistake.
Unlike shingle-slingers Toll Brothers (NYSE:TOL), KB Homes (NYSE:KBH), and Lennar (NYSE:LEN), St. Joe's fate is wedded to a single region. A huge number of specific variables -- hurricanes, Florida homeowners' insurance troubles, southern migration, homebuilder sentiment, regional infrastructure investments, and regional economic trends -- arguably need to go St. Joe's way for it to sustain growth.
Sure, you say, one can list a cadre of potential obstacles for any company. But these things are largely beyond management's control. Having 70% of your acreage within 15 miles of the coast makes for a pristine setting, but you cannot innovate your way out of climate change should a couple of nasty hurricane seasons come your way.
Want another example? From the company's annual report: "The success of our primary communities will be dependent on strong in-migration population expansion in our regions of development, primarily Northwest Florida" -- yet "net in-migration is projected to be only 4,234 for the 2008-09 fiscal year. " Think baby boomers are as mobile as ever now that asset values have collapsed? Me neither.
Northwest Florida could experience a renaissance somewhere down the road. And given that on its books, St. Joe carries much of its land at 1930s and 1940s values, it has the potential for fat margins on whatever real estate plan it pursues at that time. But in the end, rather than following the typical "If you build it, they will come" model most developers use, the St. Joe model seems more akin to "If they come, we'll be waiting." That's a little too passive for my money.
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