buy when there's oil in the water (jun-10)

8/9/2019 Buy When There's Oil in the Water (Jun-10)

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Buy When There’sOil In The Water



C O N F I D E N T I A L I N F O R M

A T I O N

The Beginning

The St Joe Company was founded in 1936 as part of the Alfred I. duPont Testamentary Trust by du Pont’s brother-in-law Edward Ball.

Prior to its establishment, the trust had already begun land purchases,making its in 1923, acquiring cheap land in the Florida Panhandle.

Land purchases continued throughout the 1940s and 1950s, and St Joeeventually owned more than a million acres at “a couple bucks per acre.”

The company invigorated the local economy following the Depression,employing thousands at its paper mill, but ultimately exited the businessafter nearly sixty years, selling the mill to Florida Coast Paper for $390million in 1996.

Following Ball’s death in 1981, the company began to sell off its industrialoperations and focus on land development. Peter Rummell, formerchairman of Walt Disney Imagineering, was hired in 1997 to lead theirreal estate business and became Chairman and CEO.




A T I O N

The St Joe Company Today

Britton Greene has served as CEO of the company since May 2008 andas President since October 2007.

The company sold its homebuilding operations and commercial realestate portfolio in 2007. Greene has since focused the company onsecuring higher and better land-use entitlements for its raw land,facilitating infrastructure improvements, and undertaking strategic landplanning and development.

The St. Joe Company today is the premier real estate developmentcompany in Northwest Florida, with approximately 580,000 acres of low-cost land, between Tallahassee and Destin.

St. Joe owns approximately 41,000 entitled acres that allow for the

development of 43,000 residential units and over 13 million square feetof commercial uses.

The company also manages timber operations on thousands of acres of rural land with 289,000 acres encumbered under a pulpwood supply agreement totaling over 22 million tons of standing pine and over 7million tons of hardwood inventory.




A T I O N

Extraordinary Assets

Source: The St. Joe Company March 2010 Investor Presentation




A T I O N

A Moat You Can Literally Tan On

St. Joe’s wide competitive advantage is simply its near-zero cost land. Itsmassive scale and low-cost basis is impossible for other developers toreplicate, making JOE the partner of choice for all development activity in Northwest Florida.

Approximately 405,000 acres, roughly 70% of total land holdings, are within 15 miles of the coast: over 130 miles of frontage along the Gulf and several bays; 5.7 miles of white sandy beaches; 78 miles of frontagealong the Intracoastal Waterway.

But JOE is not a one-trick seahorse. The company works rigorously tostrengthen its competitive position by partnering with the state andfostering strong relationships with all of the counties where it owns land.

St. Joe is actively engaged in regional planning and often donates land forinfrastructure development to tip the scales in its favor when seeking landentitlements.

The company donated 4,000 acres in West Bay for the construction of anew airport. In exchange, JOE received land-use approvals for nearly 30,000 areas around the airport.



C O N F I D E N T I A L I N F O R M A T I O N

Knock, Knock, Knocking on Joe’s Door

Source: VentureCrossings

Former Panama City Airport land recently

purchased by Leucadia




Addressing Near Term Headwinds

A challenging economic environment amidst a bursting real estate bubblehas proved management as a shrewd steward of investor capital. St. Joeused the proceeds from a well-timed sale of 17 million shares of stock at$35 in 2008, to eliminate all of its outstanding debt.

Today, the company has ample cash, virtually no interest-bearing debt,and a significantly leaner cost structure than prior years. JOE has nomaterial cash obligations due in the near term, so investors can afford tosit and wait.

St. Joe has exited its capital-intensive business segments, outsourced themanagement of its hotels and resorts to third-party operators, and soldoff non-strategic assets, resulting in a federal income tax refund of $62.4million, most of which will be received in the second half of 2010.

Management aims to minimize capital expenditures for development by partnering with third parties for new projects or selling entitled landoutright to developers or investors.




What’s Priced In?

Valuation is an imperfect science at best. Benjamin Graham onceremarked that you don’t need a scale to tell if someone is overweight.Similarly, we don’t need to know precisely how much St Joe is worth toknow that it is drastically undervalued.

At the stock’s current Enterprise Value of $2 billion, the market iscurrently valuing JOEs land surrounding the West Bay Airport (net of the39,000 acres donated for conservation and the 4,000 donated to theairport) at roughly $60,000 per acre. Putting this in perspective, Leucadiarecently paid $80,000 per acre for the land surrounding the old PanamaCity Airport. But at $60,000 per acre today, investors in JOE are getting the remaining half a million acres in Northwest Florida for free!!

Alternatively, the market is valuing JOEs 41,000 entitled acres today at

under $50,000 per acre, and assigning zero value to the company’sremaining 536,000 acres.

What if we are wrong? In a worst case scenario, where no one is everagain interested in building on JOE’s land, we estimate the stock is wortharound $15, assuming the raw land is sold for about $2,000 an acre.




What’s The Catalyst?

Southwest Airlines announced service to the new Northwest FloridaBeaches International Airport in Q4-09.

St. Joe has signed agreements with TranSystems Corp and The HaskellCompany to support the planning, engineering, designing and building of infrastructure and facilities for commercial use.

St Joe has signed agreements with CB Richard Ellis to market for joint venture, lease or sale the land within the 1,000 acres adjacent to the new airport.

Initiated a significant outreach program to site consultants andmultinational corporations and suppliers within the aerospace, aviation,defense and security industries.




State of Florida Incentives

Target IndustriesNew or expanding businesses within the Transportation Equipment Manufacturing sector are eligible to be consideredfor incentives that help with relocation and expansion.

High Wage JobsCompanies creating Florida jobs paying at least 115% of Bay County’s average wage are to be considered for incentives.

High Impact Business Performance IncentiveGrant (HIPI) A negotiated incentive used to attract and grow major high-impact facilities in Florida, HIPI grants are provided incertain portions of Florida’s target sectors to companies who can create jobs and make a significant investment in the

area’s economy.

Capital Investment Tax Credit (CITC)Used to attract and grow capital-intensive industries in Florida, CITC is an annual credit, provided for up to 20 years.

QualifiedDefense and Space Contractor Tax Refund (QDSC) A tool to preserve and grow Florida’s high technology employment base, QDSC was created to give Florida acompetitive edge as a base for defense, homeland security or space business contractors.

QualifiedTarget Industry Tax Refund (QTI) A tool available to Florida communities, QTI encourages quality job growth in targeted high value-added businesses.

Economic Development TransportationFund (“Road Fund”) An incentive program designed to alleviate transportation problems that impact a company’s location or expansiondecision.

Quick Response Training (QRT)QRT is a customer-driven program designed to provide new and expanding Florida businesses the customized training necessary for relocation and expansion. A flexible reimbursement program, it is structured to respond quickly to meet abusiness’s training objectives.





Bay County Incentives

Economic Development Ad Valorem Property Tax Exemption The Bay County Board of County Commissioners may provide an abatement of the local property tax onimprovements to real and personal property at the business location for a period up to 10 years.

Streamlined Permitting The Bay County Board of Commissioners offers streamlined permitting to expanding or relocating businesses thatcreate more than 10 new jobs within the first 12 months after facility construction is complete.

Workforce Center Services A one-stop shop for Bay County employers’ human resources needs, the Workforce Center offers free

comprehensive services that assist companies in their recruitment efforts and in the management of their workforces.

Custom Packages The County works in partnership with local and state agencies to customize incentive packages for companies whose location to or expansion in Bay County has a significant economic impact. Such packages may include acombination of State of Florida incentives, local incentives, cash contributions, financing assistance and workforcedevelopment programs.




The Lay

of The Land




Land Analysis

Source: The St. Joe Company, May 10, 2006 Land Analysis

Roughly 250,000 acres sold since Q1-06, primarily rural land and timberoutside the path of development

Conservation Acreage also has value – mitigation credits havebeen bringing in roughly $60K per credit.

Land sales have slowed considerably but averaged$168,000 per acre from 2004-2006. Sold 29 acres in2009 for $6.6 million, or $227,000 per acre.

Rural land acreage covers a wide range of price points. JOE sold 6,967 acres in 2009 for $14.3

million, or $2,050 per acre. We believe aninvestment in JOE is a free option on

management’s ability to obtain higher and better

uses for this land.




Commercial Entitlements

Source: The St. Joe Company 2009 Annual Report

Commercial Land-UseEntitlements

predominantly consistof Commercial Parks,

valued at roughly $30million at $50,000 per

acre.




Residential Entitlements


RiverCamp development withinthe West Bay Sector

WaterColor and WaterSound Developments are JOEs primary existing resort properties. Over

the past four years, lots have averaged sale pricesfrom $100,000 up to $800,000 or more




Residential Entitlements Cont.




C O N F I D E N T I A L I N F O R

M A T I O N

RiverCamps

RiverCamp development within the West Bay Sector

RiverCamp Lots range from $50,000 upto $1,000,000 depending on location




M A T I O N

WaterColor




M A T I O N

West Bay Sector Development

Roughly 6,500 residential units entitled of the 27,000 units in the 50 YearMaster Plan for the West Bay Sector

Roughly 4.4MM square feet entitled of the 37MM buildable commercial squarefeet in the 50 Year Master Plan including 490 hotel rooms and 2 marinas





M A T I O N

Introduction to the West Bay Sector





M A T I O N

West Bay Sector – Phase I





M A T I O N

West Bay Sector – Phase II





M A T I O N

Initial West Bay DSAP Development Program

Source: July 2009 West Bay DSAP Tables



BottomLine




M A T I O N

Volatility Is Not Risk - Volatility Creates Opportunity

NOAA Projected Surface Oil Distance From St. Joe Company Properties




M A T I O N

Beachgoers Continue To Enjoy The Beach




M A T I O N

Patience Is A Virtue

It is just as important to understand why an investment is undervalued, asto recognize it is a bargain in the first place. With only three analystscovering the company, St. Joe generates very little attention from thestreet for one simple reason – it is fantastically boring.

JOEs quarter to quarter earnings tell us next to nothing about thecompany’s intrinsic value. Speculators are much more interested in

counting how many iPads Apple has sold in recent weeks, then estimating the potential value of an asset held for generations.

But Mr. Market’s obsession with the short term creates opportunity fordisciplined investors. If everyone else is scurrying around pricing thenext fad on the basis of next quarter’s sales, they are likely to mispriceassets for the long term. Which is precisely what has happened here.

St. Joe is a long-term story that may very well take years or decades tofully play out. But when we consider the macroeconomic environmenttoday, and the long-term impact of our government’s fiscal recklessnessand related monetary policy, we are inclined to seek out insurance. In thisrespect, St. Joe offers investors an extremely cheap hedge against the risksillustrated on the following page.




M A T I O N

There’s Timber In Them Thar Hills

Timber has proven to be an enormous store of value – one which rose in realterms during both the 1930’s Deflation and 1970’s Inflation.




M A T I O N

Don’t Let “Jo Jo” Scare You - St Joe Is Sound

“If you get any good news at all, you’re at the bottom”

Don’t confuse volatility with risk .If Jo Jo is willing to sell us a dollar forfifty cents today, we are willing buyershere. If he decides to sell us more fora quarter next week, we are even more

enthusiastic buyers. The risk of a

permanent loss of capital is low attoday’s Gulf-fear-induced prices.



Appendix




M A T I O N

Contact Information

The Broyhill Affinity Fund

800 Golfview Park Post Office Box 500Lenoir, NC 28645

Phone: 828 758 6100Fax: 828 758 8919

For more information please contact:

Mr. Christopher R. Pavese, [email protected]




M A T I O N

Disclosures

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

This material has been prepared solely for the purposes of illustration and discussion. “Broyhill Asset Management” is the marketing namefor the investment management business conducted by Broyhill Asset Management, LLC. and its affiliates. Broyhill Asset Management, LLCis an SEC Registered Investment Advisor. Private investment vehicles are offered through Broyhill Wakin General Partners LLC, Surety Capital Management LLC, and Broyhill Strategic Partners LLC, and are only offered by delivery of confidential offering memorandum andsubscription materials to eligible investors who meet certain statutory and/or regulatory criteria. Each General Partner is a separate legalentity and is affiliated with Broyhill Asset Management, LLC through common ownership and control.

Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The

information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and should not be relied upon as such.

Any information, data, statement, opinions, or projections made herein may contain certain forward looking statements, projections, andinformation that are based on the beliefs of Broyhill Asset Management as well as assumptions made by, and information currently availableto, Broyhill Asset Management. Such statements reflect the view of Broyhill Asset Management with respect to future events and are subjectto certain risks, uncertainties and assumptions (including, but not limited to, changes in general economic and business conditions, interestrate and securities market fluctuations, competition from within and without the investment industry, new products and services in theinvestment industry, changes in customer profiles, and changes in laws and regulations applicable to Broyhill Asset Management). Shouldone or more of these other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein.

All information, including performance information, has been prepared in good faith; there are no representations or warranty expressed orimplied, as to the accuracy or completeness, of the information, and nothing herein shall be relied upon as a promise or representation as tothe past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models,and/or other analysis (which may not necessarily be described herein). No representations or warranty are made as to the reasonableness of any such assumptions, models, or analysis. The information set forth herein was gathered from various sources which are believed, but notguaranteed, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to changeat any time. Accordingly, neither Broyhill Asset Management nor its principals or affiliates make any representations as to the timeliness of any information in this presentation.

buy when there's oil in the water (jun-10)

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