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Paradise for sale (lots of it)

Sales have nearly ground to a halt at the top-tier retreats of St. Joe, the state's top private landowner. The company says there's no call for panic.

By KRIS HUNDLEY
Published September 17, 2006


 
[Times photo: Maurice Rivenbark]
A couple are alone taking a Saturday afternoon walk in a largely empty St. Joe development in Walton County.
Live in a farmhouse, but skip the dirty work

In the glossy marketing brochures for St. Joe Co.'s resort communities, the residents are wealthy and well-insulated from downturns in the real estate cycle.

But in the real world, many owners in the developer's second-home sanctuaries along Florida's Panhandle are showing signs of strain. And that strain is causing problems for St. Joe, which banks on new buyers to propel its earnings.

Over the past half-dozen years, the developer has created four high-end baby-boomer retreats, stretching from west of Panama City east to Port St. Joe. Each project was lavishly marketed as a place where people with deep pockets could find serenity, community and a connection to nature. Turns out, many of the buyers were simply looking for profits.

Today, nearly 600 home sites, condos and newly constructed homes in St. Joe's resort communities are up for resale. New sales by the developer, meanwhile, have slowed to a trickle or stopped entirely.

Along Walton County's Highway 30-A in WaterColor, St. Joe's flagship resort next to Seaside, about one-third of the community - more than 300 condos, single-family homes and vacant lots - is on the market.

But since "for sale" signs are forbidden by the developer, which controls everything from the color of a home's shutters

to where residents park their cars, the only indicators of owner angst are balloons tied to front-porch railings.

Rather than add to the glut of properties on the market, St. Joe has quietly throttled back on new releases. Peter S. Rummell, St. Joe's chairman and chief executive, said just as the company profited from the real estate run-up of the past five years, now it must cope with the flip side of the cycle.

"We are in a position where there was too much of a good thing," he said. "Now to some degree we've got to wait. And to some degree we've got to help the market correct itself. But the first thing you don't do is aggravate the problem, even though that will cost us current income."

At the same time St. Joe's new sales have gone into remission, the developer has plowed ahead on expensive infrastructure improvements - a new town center here, a luxury beach club there - in an effort to spark momentum at the high-end properties. The upshot is an array of would-be Shangri-las with picture-perfect town commons and beachfront boardwalks, but few if any residents and an undercurrent of unease.

Michele Bertoldi is a 37-year-old medical license consultant in Tallahassee who thought he'd won the lottery when he and two partners picked up a lot at St. Joe's RiverCamps on Crooked Creek in Bay County about 18 months ago. They paid $600,000 for the nearly 1-acre home site, then promptly put it on the market for $750,000.

But Bertoldi's lot is just one of more than 70 sites for resale - more than 40 percent of the total - in the community 6 miles north of the gulf. Across a 1,500-acre flatland of spindly pine trees and palmettos, there are fewer than a half-dozen homes in early stages of construction. More noticeable are the St. Joe-approved, tastefully discreet "for sale" signs that dot the landscape like crosses in a graveyard.

It's no surprise that St. Joe, Florida's largest private landowner, would feel repercussions when the nation's and the state's real estate market turned south. But the abruptness and degree to which frenzy cooled - particularly buyers' appetites for pricey vacation homes - has knocked the wind out of the Jacksonville-based company's earnings, slicing them in half in the second quarter.

St. Joe's stock took a similar hit, dropping from a high of $85.25 in July 2005 to a low of $40.93 on June 20. Last week, the stock surged in a rally attributed to short-sellers covering their positions, as well as rumors of a sale, which were denied by the company. St. Joe's stock closed on Friday at $55.60, up $2.08.

In August, Rummell said the company was reducing its earnings estimates for the year by 50 percent, saying it may take 18 to 24 months to see a rebound in the housing market.

"This (downturn) is not a matter of diminished demand," he said. "This is a matter of oversupply and overpriced (product)."

Monte Williams, a custom home builder from Pensacola, can't afford to wait. He made the biggest profit in his 20-year career on the first home he built in WaterColor, selling it for nearly $1.9-million over a year ago. But his second home, a near clone of the first with travertine baths, copper kitchen sinks and oil-rubbed walnut floors, has been on the market for nine months.

Williams has cut the asking price once - by $400,000 - to about $1.4-million. One offer fell through after the prospective buyer balked at how much it would cost to insure it. Two others were nixed by nervous spouses. Now the house is slated to be the first one in WaterColor to be auctioned.

"The folks at WaterColor won't like it, but there's not much they can do about it," Williams said of the upscale image-keepers at St. Joe. "If we auction the house off at a decent number, there will be plenty more auctions at WaterColor."

The company once known as St. Joe Paper has been through industry cycles before, but this is the first time its fortunes are so closely tied to the whims of second-home buyers from Birmingham.

Once a papermaking empire that began accumulating vast tracts of Florida property in the 1930s for dollars an acre, the company was jolted awake in early 1997 with the hiring of Rummell. A former Disney executive who helped create the town of Celebration, Rummell was versed in the art of molding communities out of sand and scrub. With St. Joe, he had more than 1-million acres of Florida land as his sandbox.

In 1999, Rummell said he'd need a decade to make his dreams a reality. "One of our great luxuries is a strong balance sheet," he said at the time. "The costs of carrying land is what kills most developers. We don't have that."

Fast forward to 2006 and St. Joe's property holdings, now about 825,000 acres, are still larger than the state of Rhode Island. About 338,000 acres of its land are within 10 miles of the coast of the Gulf of Mexico. Though St. Joe still sells a little timber and raw land, its emphasis is on residential communities, with nearly two dozen projects in development and an additional 42 in entitlement or predevelopment stages.

St. Joe's resort home properties accounted for more than half of its 2005 profits. With inventory now overflowing, the picture for next year is not as pretty.

At St. Joe's WaterSound Beach, on the Panhandle's Santa Rosa Beach, 38 percent of the property lots are on the market. Prices range from $285,000 for a lot to nearly $5-million for a home.

Some 40 miles east of Panama City at St. Joe's WindMark Beach, near the town of Port St. Joe, director of sales Ray Markwell was waiting for a resurgence of interest. When WindMark's first 15 lots were released in 2002, he was overwhelmed with 60 reservations.

"I was raising prices as fast as I could," he said. "But those people were just flipping sand and the real end-users left."

Today, just 10 homes have been built on 106 lots in WindMark's first phase; half of them are for resale. More than 40 percent of the remaining lots are also back on the market.

Markwell said he's telling sellers to hang tight. St. Joe, which owns 80 percent of Gulf County, persuaded the county to reroute about 4 miles of Highway 98 around the development. The new road opened on Thursday.

Before the boom turned to bust, Cynthia Parker of Birmingham sold and made a tidy profit on two lots in WindMark. A third lot she bought, however, has been on the market for more than a year at $695,000. But that didn't stop Parker from picking up another site in the project's latest release.

"Sales have slowed dramatically, but I have complete faith in the area and St. Joe," said Parker, who intends to build a vacation home at WindMark. "Anybody that can move a state highway is probably going to be able to do anything they want to do."

In response to the downturn, St. Joe is moving out of home building and will sell more lots directly to builders. The company is also offering special incentives to buyers and is giving site owners more time to build.

"We have to make sure we do not jeopardize the long-term value of the company," Rummell said. "I've said before there is going to be risk in a quarter. But one thing we will never risk is the balance sheet. We are built to work our way through this to come out stronger on the other side."

St. Joe will also undoubtedly benefit from a relocated airport in Panama City. Plans for the larger facility were approved by the Federal Aviation Administration on Friday. The company owns 75,000 acres surrounding the new airport site in northwest Bay County and has promised to donate 4,000 acres for the facility. Though construction could begin as early as next year, progress may be delayed by airport opponents who are likely to fight the FAA's decision in court.

Analysts who have recently downgraded St. Joe are focused less on the airport debate than other potential drags on earnings. Alex Barron of JMP Securities in San Francisco thinks St. Joe's planned sales to home builders, who are also suffering from weak sales, won't be as lucrative as hoped. He is also concerned about the glut of resale property at St. Joe's developments. "Who wants to live in a community where everything is for sale or rent?" he said.

But Sheila McGrath of Ryan Beck & Co. remains bullish on St. Joe, believing a new airport (which can accommodate larger jets) will open the area to wealthy second-home buyers from the Northeast. She said the company's major stockholders - 15 of whom own 71 percent of the shares - are looking for long-term payback.

"You have to own this company with a 24-month horizon," she said.

St. Joe is fortunate that major shareholders aren't breathing down its neck when earnings hinge on prospective buyers like Janet Weidmann.

The 52-year-old real estate broker from Atlanta has been renting at WaterColor with her husband for several years. But with four kids in college, they were unable to buy. Now the kids are through college, prices at St. Joe's projects have fallen, and the developer is even throwing in free furniture.

But Weidmann, who quizzed a RiverCamps salesman about hurricanes, termites and mosquitoes, wasn't motivated to buy.

"If I were putting money on anybody, it would be on St. Joe, because it's got deep pockets," Weidmann said. "But I decided I could spend $5,000 a year to rent for the next 80 years and still come out even at today's prices."

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

[Last modified September 19, 2006, 21:37:59]


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