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St. Joe to stop building houses

Florida's No. 1 private landowner is shifting its focus, but analysts wonder if that points to a broader slump in Florida real estate.

By KRIS HUNDLEY
Published September 9, 2006

Evidence is mounting that the downturn in Florida's real estate market may be broader than experts had expected.

St. Joe Co., the largest private landowner in Florida, is exiting the homebuilding business in the state. Giant homebuilder Lennar Corp. of Miami is reducing its third-quarter earnings estimates. And the National Association of Realtors predicted home sales will be lower than projected throughout the remainder of the year.

Jacksonville-based St. Joe, which once banked its fortunes on timber and paper, transformed itself into a "place-maker" about a decade ago. In 1997, it acquired homebuilding expertise with its purchase of Arvida, which had been building residential communities throughout the Southeast.

St. Joe quickly began carving both permanent and resort residential developments from its former timberland, much of it in the Panhandle. To date, it has developed 22 primary residential and resort communities, with an additional 42 residential projects in the planning stages. Among its planned projects is SevenShores, a 13-building condo development in Bradenton.

Last year St. Joe, which owns about 825,000 acres in Florida, built about 1,800 homes. New homes contributed $462-million to the company's total 2005 revenue of $938-million, with the remainder coming mostly from site sales and commercial real estate.

St. Joe's chief executive Peter S. Rummell said the move out of homebuilding will allow the company to focus on creating infrastructure in its developments, while partnering with homebuilders who will do construction.

As a result of the phaseout over the next 18 months, St. Joe said it would lay off about 10 percent of its work force, or about 100 employees, and take a $10.7-million writeoff, including $9-million in the third quarter. In mid August, the company had reported a corporation reorganization and layoff of about 150 employees.

"Joe's expanding relationships with local, regional and national homebuilders have made this move possible," Rummell said. "We had anticipated being able to make this strategic shift once we had proven the viability of our markets, particularly in Northwest Florida, and we are pleased this opportunity has come as quickly as it has."

Investors reacted positively to St. Joe's move, driving the company's stock up $1.75 to close Friday at $49.67 a share. In the past year, the stock's price has ranged from a low of about $41 to a high of $72.

But Alex Barron, analyst with JMP Securities in San Francisco, said he remains unconvinced that other builders, who are also feeling the strain of slow sales, will jump on St. Joe's offer of sites. Though St. Joe announced partnerships in August with two homebuilders - Beazer Homes and David Weekly Homes - and Rummell said 19 other companies have submitted letters of interest, Barron does not believe such arrangements will result in the anticipated sales.

"All homebuilders find themselves with too much land and are in the process of writing off land options and trying to shrink their land portfolios," said Barron, who lowered his rating on St. Joe's stock to underperform in early August after the company reported second-quarter earnings that were 50 percent of year-ago earnings. "Joe's decision to exit the homebuilding business is a clear indication that builders are now losing money by building homes in Florida."

Despite the dismal real estate market, St. Joe has remained a favorite of funds that value its enormous portfolio of low-cost land, which Rummell's predecessors bought for a few dollars an acre. Barron acknowledged that St. Joe is in an enviable position with its landholdings, but said that will not translate into increased earnings soon.

"Maybe five years from now," he said. "Right now the Florida housing market is going into a very deep correction."

One of St. Joe's homebuilding partners, Beazer, cut its earnings forecast Thursday, saying sales were slow and cancellations rose to 50 percent, from 26 percent a year ago. A similar message came Friday from Lennar, one of the nation's biggest homebuilders, which lowered its third-quarter earnings estimate to $1.25 to $1.35 a share, down from earlier projections of $1.90 to $1.95.

"Given difficult market conditions, we have limited our land purchases while we have remained focused on ... minimizing completed inventory," said Lennar president and chief executive Stuart Miller, who said his company is limiting land purchases and minimizing inventory because of market conditions.

Nationwide, the National Association of Realtors said a surplus of inventory will keep a lid on the median new-home price, which it expects will rise only 0.2 percent, to $241,400, for the year. Existing home sales are expected to fall 7.6 percent to 6.54-million in 2006. Because the two previous years were record-breakers, however, the Realtors group said 2006 sales will still be the third-best year on record.

Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

[Last modified September 8, 2006, 23:15:49]