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Business Observer Friday, Jan. 16, 2004 16 years ago

Florida's Largest Private Landholder

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St. Joe Co. sees record earnings and profits as it develops North Florida. But environmentalists want to slow it down.
by: Janelle Makowski Staff Writer

Florida's Largest Private Landholder

St. Joe Co. sees record earnings and profits as it develops North Florida. But environmentalists want to slow it down.

By Adam Levy and Jason Kelly

Bloomberg News Service

PANAMA CITY - From 20,000 feet up, the Florida Panhandle is a sea of green - swamps and swaths of pine trees. Peter Rummell, chief executive officer of St. Joe Co., views the scene differently as he looks out the window of a Hawker corporate jet.

In a region dubbed the Redneck Riviera for its blue-collar tourist trade, Rummell is building thousands of beachfront houses, hunting lodges and river camps. Some of the properties will cost more than $3 million, and he hopes to sell them as second homes to bankers, lawyers and executives from all over the southern U.S. If completed, the project would be Florida's biggest real estate development since Rummell's former employer Walt Disney Co. opened the Magic Kingdom in Orlando in 1971.

Rummell's company is Florida's largest private landholder, with almost 1 million acres, most of it on the Panhandle. Much of St. Joe's land was assembled in the 1920s and 1930s by an heir of the duPont family, and it includes 40 miles of beaches, bays and coastal dune lakes.

"There's tremendous opportunity with this land," says Michael Winer, a fund manager at Third Avenue Asset Management, New York, St. Joe's second-biggest investor, with 7 million shares worth about $260 million.

Even so, Winer and other St. Joe shareholders are wary of obstacles that could prevent the company's dream from becoming a reality. "The whole St. Joe story is somewhat of a leap of faith," says Winer.

Most volatile

One reason is that undeveloped land is the most volatile of real estate assets, says Henry Fishkind, president of Fishkind & Associates, an economic analysis and forecasting company.

Home building is intrinsically risky, too, says Advest Inc. real estate analyst Sheila McGrath. Rising home loan rates or cooling demand for property in one region could derail St. Joe's plans. Still, McGrath rates St. Joe a "strong buy."

As with other Florida developments, environmentalists want to rein in St. Joe's projects. "It's all too much, too fast," says Tallahassee attorney John Hedrick, chair of the Panhandle Citizens Coalition, which wants citizens to have a say in how northwestern Florida gets developed.

The coalition is backing referendums across the Panhandle, from Sopchoppy to Pensacola, to block St. Joe projects. It won its first big victory in late November, when citizens in Carrabelle voted down an ordinance that would have enabled St. Joe to exceed a three-story building height limit.

Further confounding investors is that nobody knows what St. Joe is worth. Michael Ropa, a commissioner in Bay County, where St. Joe owns more than one-third of the land, estimates the properties are worth as much as $10 billion.

St. Joe officials won't confirm that figure. President Kevin Twomey says the company doesn't know how to value much of its property, and he and Rummell are still finding ways to make money from land others dismiss as a place to hunt.

St. Joe generates cash in part by selling land on which it doesn't want to build. St. Joe's stock market value is $2.85 billion, and its $369 million in debt is just 13% of its total capitalization.

'All the balance sheet'

"They have all the balance sheet they need," Winer says.

Jerry Ray, one of several St. Joe executives who worked with Rummell at Disney, calls St. Joe a "story stock," a long-haul bet that management can turn this stretch of Florida into a high-end tourist mecca.

Investors who bought into St. Joe's story have been rewarded: From January 1997, when Rummell, now 58, took over, to Jan. 6, St. Joe shares gained 163%, while the Standard & Poor's 500 Index rose 49%. In the 52 weeks ended Jan. 6, St. Joe's stock rose as much as 43% to $37.34, having traded as low as $26.19 in March 2003.

Analysts estimate 2003 earnings at $60 million, or 78 cents a share. That makes for a price-earnings ratio of 48 compared to 28 for the S&P 500. St. Joe trades at 5.9 times its book value, or its assets minus liabilities. That's almost double the S&P 500's price-to-book ratio of 3.2.

To lure home buyers from Midwestern and Northeastern states, St. Joe officials have lobbied for a new airport. The current airport in Panama City accommodates only regional jets from cities no farther than 700 miles away.

St. Joe has donated 7,000 acres to the state for a new airport; the Federal Aviation Administration, Bay County and the city are now considering whether it should be built. It would be as large as Tampa International Airport.

St. Joe officials say it doesn't need the airport and can thrive on home buyers within a 10-hour driving radius from the Panhandle stretching north to Nashville, Tennessee, and west to Houston.

"It's not critical, but it's a big positive," says Hoover. "The analog is Naples. When they put in an airport, they started getting people from the North, the Midwest, even Europe."

The new airport would cost $210 million, split evenly among federal, state and local governments. Gov. Jeb Bush supports it. The administration of his brother, President George W. Bush, has approved a $2 million grant to study the airport. Ties between St. Joe and the Bushes run deep; Jeb Bush appointed Rummell to the state university system's board of governors.

St. Joe also co-owns Codina Group, a Florida real estate company that Bush was president of before he was governor.

St. Joe executives actively donate money to politicians and candidates. Since 2000, Rummell and his wife have written 54 checks totaling $63,275 to Democratic and Republican political campaigns, according to the Center for Responsive Politics. In the most recent presidential race, Rummell and his wife sent $20,000 to the Republican National Committee.

Hedrick of the Panhandle Citizens Coalition calls the airport "corporate welfare."

"St. Joe's deep pockets have bought it a lot of clout," says Jack Rudloe, owner of a private marine laboratory in Panacea. "As a result, people are rolling over, enabling a massive infrastructure to be built here."

'Clanking and groaning'

"I like to walk through the marshes," Rudloe says. "One day there are fiddler crabs and periwinkle snails and other great stuff. The next day there's clanking and groaning machines."

Rummell says St. Joe has more than done its part to preserve northwestern Florida. Since 1998, it has sold to preservation groups or set aside as protected land more than 150,000 acres, an average of 2,500 acres per month. Over the next three years, it will work to conserve another 118,000 acres.

St. Joe Paper Corp., the Jacksonville-based company's former name, had for 50 years used the land to harvest trees for its paper mills. That began to change in the early 1990s, when the Alfred I. duPont Testamentary Trust, led by chairman and longtime DuPont Co. employee Winfred Thornton, decided to diversify its 80% stake in St. Joe and tap into the real estate boom that had enveloped the Southeast.

St. Joe put up for auction its mills and the other industrial assets it had amassed - a regional telephone company, a railroad and sugar-growing operations - and went looking for a chief executive.

St. Joe's board briefly considered hiring Al Dunlap - nicknamed "Chainsaw Al" after he fired thousands of workers to revive companies.

Instead, the board in late 1996 hired Rummell, who was running Disney's real estate division. Rummell was involved with Disney's failed effort to put a theme park and resort near the Manassas National Battlefield Park in Virginia.

Since Rummell took over, St. Joe has won government approval to build 14,000 homes in 20 developments.

Officials are considering the company's applications to put up another 13,000-plus homes on 10,000 additional acres. St. Joe plans housing on another 50,000 acres.

St. Joe's flagship property is WaterColor, a 499-acre development with a central park and the WaterColor Inn, a 60-room luxury hotel. WaterColor's beachfront condos sell for $1.5 million, and homes directly on the Gulf of Mexico sell for as much as $3.5 million.

Through a combination of what Rummell calls noninvasive marketing - mailing glossy pamphlets to people who have rented homes in the area, building preview centers on Panhandle thoroughfares and designing Web sites for vacation-home shoppers - St. Joe is attempting to lure an upscale clientele into buying second homes.

Rummell's latest foray is the RiverCamps development, built on 1,500 acres of marshes and thick pine 15 miles from the gulf. He says he didn't even want the property because it seemed unsuitable for vacation homes. He classified it as "timber forever" and put it up for sale in 1999 - at $1,000 an acre - to prove the point that Wall Street was low-balling its estimated value of the company's holdings.

When no bids emerged, St. Joe kept the land and came up with a planned settlement of luxury homes on stilts. Third Avenue's Winer, who visited the development in March, was skeptical. "I walked outside and was swarmed by mosquitoes eating me alive," he says. "I couldn't imagine this property would sell."

St. Joe put 23 home sites up for sale in 2003. Three weeks later, it received 314 bids for an average of $150,000 a lot. Almost 50 buyers lined up to bid $249,000 for a 1-acre lot with a creek view.

"These were old swamps that weren't very useful or productive at all," says the duPont trust's Thornton.

Rummell has so far put up numbers that St. Joe's shareholders love, and Winer says he's betting that St. Joe will continue to create value. "They keep on delivering," he says. "I keep saying, 'Show me,' and they keep on showing me."

Economic analyst Fishkind says he has one caveat about the project. "We're not talking about big volume so far, and St. Joe has big plans," he says. The central question, Fishkind says, is whether St. Joe will be able to continue to find enough buyers as it builds more and more high-end properties.

And if the growing number of Florida environmentalists who want to slow down the project get their way, that won't be the only obstacle Rummell and St. Joe's shareholders will face.

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