St. Joe Is Firing On All Cylinders (NYSE:JOE)
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I have previously written two bullish articles about The St. Joe Company (NYSE:JOE).
Firstly, in September 2021, and secondly last autumn, I wrote a bullish article when shares were trading at $36. Since that last article, shares have skyrocketed to over $61. Despite my bullishness, I have been somewhat shocked at the 70% return in less than a year. Like many, I was expecting a bit of a real estate slowdown given the upward mortgage rate trajectory.
I wanted to go over the second quarter results and determine whether the shares are now fully valued or whether there is more upside ahead.
The St. Joe Company has a somewhat tricky business to understand. For this reason, it has been the focus of short sellers for over two decades. Most recently, Hedgeye published that shares of JOE had 35-40% downside.
Over the years, JOE has morphed from a land bank to a real estate developer with a number of joint ventures. The company owns over 169,000 acres of land with 86% of that land in Walton, Gulf and Bay county. As you can see from the map below, most of the acreage is between Destin and Panama City, FL.
JOE Presentation 2023
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.
Secondly, the hospitality segment develops and owns hotels, golf clubs and operates a private membership club.
Finally, the commercial segment is primarily engaged in leasing commercial property.
We'll go over the second quarter results for the residential and hospitality segments. The commercial segment is too small to move the needle in terms of valuation at this time.
The financial results in the second quarter were tremendous and shares spiked over 20% on the release.
St. Joe Stock Chart
The residential segment benefitted from selling more lots and selling those lots at higher prices than 2022.
The company sold 300 homesites in the second quarter of 2023 as compared to 231 homesites in the second quarter of 2022. In addition, the 300 homesite sales were diversified across 10 different communities. The average base revenue per homesite increased to $153,000 when compared to $83,000 for the second quarter of 2022.
The new home segment of the housing market has been booming over the last 18 months. Mortgage rates approaching 8% seems to have frozen the secondary market as existing homeowners do not want to sell and give up their low locked in mortgage rates of 3% or less. Subsequently, this seems to have pushed a lot of housing demand towards new builds. The entire homebuilding sector has been among the strongest performers in 2023.
Fortunately, JOE still has a big backlog of homesites under contract.
As of June 30, 2023, JOE had 1,825 residential homesites under contract, at an average price of $87,000 per homesite. Last year, JOE had 2,172 residential homesites under contract at approximately $77,000 per homesite. It always important to note that these lot sales are high margin sales at 60% margins.
Furthermore, JOE has a big long term pipeline of land lots at various stages of development. There are 23,127 lots in the pipeline which should ensure steady sales over the next 7-8 years.
St. Joe Presentation 2023
Sales of residential lots has been booming over the last twelve months and there does not seem to be any demand weakness on the near term horizon.
In the second quarter, hospitality revenue increased by 52% to a quarterly record of $45.1 million from $29.6 million.
As you can see below, JOE has an enormous pipeline of properties planned for 2023 and beyond.
St. JOE Presentation 2023
It is important to note just how much development has occurred on JOE properties since 2020. At the start of 2020, there were only 71 hotel rooms for visitors in the JOE complex. Now there are over 1,177 hotel rooms. In 2023 alone, five hotels with 646 rooms opened. Of course, all of this development and newfound amenities increases the value of the remaining building lots and that is one of the reasons we have seen such a sharp rise in land values in recent years.
I have been impressed with the management team at JOE. From 2019-2022, consolidated revenues increased from $127 million to $428 million. However, JOE has kept operating expenses in check despite the massive growth. They have not gone on a hiring spree or lost control of marketing expenses.
JOE Presentation May 2023
Despite the massive revenue growth over the last few years, operating expenses as a percentage of revenue have fallen significantly to only 9%.
JOE's business model continues to be lean with a lot of operating leverage. I do not expect that future revenue growth of 20-25% will be accompanied by a huge increase in employee expenses or stock based compensation. The management is focused on keeping operating expenses under 10%.
JOE has an enterprise value of $4.1 billion. Last year, I valued the company at $3 billion.
However, that was most likely too conservative. After all, JOE is a fast growing company with a 28% growth rate and a pipeline for a similar growth rate over the next several years.
JOE Presentation 2023
My profit estimate from homesite sales is ~$100 million for 2024. Since this is a fast growing business, I am apply a 25X multiple on that business. That is about $2.5 billion for the residential segment.
For recurring revenue from hospitality and commercial, I expect net cash of $95 million in the next year. I would apply a 20X multiple for these recurring revenues that have been growing at 30%/yr. That is a valuation of $1.9 billion for the hospitality and commercial segment. The total valuation of $4.4 billion versus an enterprise value of $4.1 billion. In sum, JOE is fairly valued given that it may be over earning this year due to the huge boom in sales.
The St. Joe Company has blown away my wildest expectations in the last year. I never would have expected that a real estate company would see such robust demand given 7% mortgage rates. The demand is a testament to how many people continue to migrate to the Florida panhandle and the demand for new homesites given the deep freeze in the existing home sale inventory.
I expect the shares to flatline over the next year or two before the next big leg up. The shares are fully valued and I fear that the company has over earned due to Covid related Florida migration and the bizarre mortgage situation that has limited the inventory of existing homes on the market.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of JOE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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