Josh McLean

I just wanted to give everyone a quick update of what is going on in Panama City. They are making huge strides in changing the city and are well on their way. I think that within a 5 year period this place will be completely different.

Here is an article about Pier Park developed by the Simon Group, one of the nation's best developers. Pier Park is a 1.1 million square foot retail center across the street from the beach. http://www.simon.com/about_simon/leasing/LocalMall.aspx?id=1204&tab=redevelopment

This is an article about the new Panama City International Airport which is under construction. This will be the first airport built since 9/11. http://www.pcbeach.org/airport.shtml

St. Joe has also just reached an agreement with Glimcher and will jointly develope another 58 acres adjacent to Pier Park. This will be geared towards large national retail stores.

www.JoshMcleanHomes.com

I would be happy to update your knowledge of the Airport project.

The entire 1300+ acres of the airport development site have been cleared and grubbed. This means all trees, roots, and vegetation have been removed.

The main access road ahs been brought to its final elevation, compacted, sub-base installed, curbed, and is ready for paving in early July.

The building pads for the Terminal, Terminal apron, and main parking lot have been finalized.

The building pad and parking area for the rental car facility has been finalized.

The primary runway taxiway is in the process of being graded and stormwater ditches are being installed.

The primary runway is being graded and brought to its final elevation.

Stormwater ponds and conveyance systems have been installed and erosion control applied in all of these areas.

The earthwork portion of this phase should be completed by November 2008, a full 3 months ahead of schedule.

We should start the paving of the runways before October of this year.

The design for the terminal, public safety building, control tower, air cargo, and maintenance buildings has been completed and bids will be solicited in early July.

The project is well underway and a substantial amount of work has been completed in the last five and a half months. The attached aerial pictures taken earlier this month might give you a full appreciation of the size of the effort and progress.

Regards,

John Zebroski

J. J. Zebroski
Project Director
Panama City/Bay County International Airport

REAL ESTATE AND FLORIDA HAVE been a toxic combination for the past three years. So it's no surprise that shares of St. Joe (ticker: JOE), a land developer based in Jacksonville, have taken a big hit. After peaking in the mid-80s nearly three years ago, they headed south as soon as the Sunshine State's realty market fell apart. At around 40 last week, the stock had lost more than half its value since mid-2005.

The bear case on the stock, which has had considerable short interest, is that the state's depressed real-estate market won't recover at least until 2010.

By focusing on selling construction-ready tracts to others rather than building residential and commercial properties itself, St. Joe will free up millions of dollars.

But some prominent value investors, including Third Avenue Management, have taken big stakes in St. Joe, which, they argue, is well positioned to rebound once the market turns. A recent stock offering, which netted the company $580 million, was dilutive to existing shareholders but let St. Joe wipe out its debt, erasing any concerns about its liquidity. The company also eliminated its dividend and said that it would buy back shares when it viewed this as appropriate.

The bull case is that a debt-free company that owns 700,000 acres -- much of it on or near the relatively undeveloped and, in many areas, beautiful Gulf Coast of Florida's panhandle -- is on very solid ground. A big plus: A new airport, now under construction, has the potential to increase the area's allure to visitors from outside the South, help broaden its economy beyond tourism and make the area more attractive when property buyers emerge in strength again.

St. Joe is "in a great position to take advantage of the growth in the marketplace when that occurs," says Michael Winer, portfolio manager of the Third Avenue Real Estate Value Fund (TAREX). "I don't think it's a question of if it's going to occur."

Following the recent stock offering, "St. Joe's risk profile is so much lower, and you have the ability to be more patient," says Sheila McGrath, an analyst at Keefe, Bruyette & Woods, who has an Outperform rating on the stock and a 12-month price target of 50.

The past few years haven't been kind to St. Joe. In 2007, it earned 53 cents a share on $377 million in revenue, well below 2006's 69 cents on $524.3 million. However, says Winer. "They've made a lot of changes and learned their lesson." One lesson was that it sometimes doesn't pay to be a builder, especially when the property market is tanking.

St. Joe got into the construction business after Peter Rummell became CEO in 1997 and saw how difficult it was to entice builders to northwest Florida. He transformed St. Joe from a sleepy outfit whose holdings included a paper mill and sugar- cane operation into a developer of tasteful properties. However, this "required a tremendous amount of capital and overhead," says Britt Greene, St. Joe's president, who will succeed Rummell next month. Now, St. Joe is exiting the building business, with the transition eased by the fact that other builders have come to the region. Going forward, "entitled land" -- construction-ready sites sold with all of the necessary land-use and environmental approvals -- will be its focus.

As of Dec. 31, St. Joe had entitlements for 38,559 residential units that are being developed or are in pre-development, along with 12.3 million square feet of commercial land ready to go. And it has plenty more. Whenever these properties are sold, they'll be extremely profitable for St. Joe because the parcels were bought 70 or 80 years ago for a song and still are carried on the company's balance sheet at prices below market value.

By exiting the building business, St. Joe will free up capital that it otherwise would have tied up in vacation homes, primary residences or other buildings. Its capital expenditures this year are projected to be $90 million, down from $600 million in 2006. In line with this, the company has outsourced management of golf courses, a hotel and two marinas that it owns. As of Feb. 1, St. Joe had 337 employees, versus 1,083 a year earlier.

Just when the panhandle's real-estate market will revive is uncertain, but there are some encouraging signs. Mark Vitner, a senior economist at Wachovia, says that northwest Florida has much stronger economic ties to Georgia and Alabama than to, say, hard-hit south Florida. Alabama's economy, in particular, is prospering, he says.

In a Sweet Spot: The allure of many of St. Joe's coastal sites will rise after a new airport makes Florida's panhandle more accessible.

St. Joe is Florida's largest private land owner. Its acquisitions began in the 1920s, after Alfred I. DuPont arrived in Jacksonville. Edward Ball, his brother-in-law, bought huge tracts across Florida, typically for a dollar or two an acre. The holdings remain huge, even though St. Joe has put about 200,000 acres into permanent conservation over the past decade, and has sold small holdings away from the coast. The sales provided crucial revenue -- $161 million in 2007 -- and "allowed us to weather this storm," says Rummell. The company is now selling another 100,000 acres.

Another line of business is timber, but at nearly $26 million in revenue last year, it's not huge. Nevertheless, timberland in Florida is taxed at a lower rate than, say, a residential development. And St. Joe can harvest these lands and eventually develop some for other uses.

In Panama City, the new airport is rising on 4,000 acres donated by the company, which owns all of the surrounding land, on which it intends to offer properties to aviation-related businesses, such as shippers. St. Joe wants to ramp up joint ventures in which it provides land in return for a share of the future cash flow generated by its partners. That will make its stock more than merely a play on land liquidation.

A notable exception: Simon Property Group (SPG), which is opening a sprawling shopping center in Panama City Beach, bought its land outright from St. Joe, though the project was crucial for building credibility for future commercial development. St. Joe still owns some land adjacent to the Simon property and will build there.

The Bottom Line:

St. Joe's share price, which has been halved since 2005, could rise 25% over the next 12 months, as the Florida real-estate market moves toward an eventual recovery.

The new airport, scheduled to open in 2010, should be a boon. Unlike the current airport, it will have a runway long enough to accommodate fully loaded, medium-range jets like MD-80s. This should broaden the region's tourist base, which now mostly consists of travelers who drive from places like Birmingham, Atlanta or Memphis. The airport should make the panhandle's lovely beaches -- sometimes jokingly referred to as part of the "redneck riviera" -- more accessible to sun seekers from Chicago, the Northeast and other major markets outside the South. Longer-term, it should foster other business development, too.

Valuing St. Joe precisely is difficult because its growth is embedded in its land holdings, whose sale prices are hard to predict. "The bottom line is that on a per-acre basis, it still looks like you are buying the land at a reasonable valuation today," says Winer.

Based on a recent share price of just under 40, McGrath estimates that investors were paying a little more than $10,000 an acre for St. Joe's prime land, including the holdings around the new airport. That's way below the $266,000 an acre St. Joe averaged in its commercial land sales last year.

As for the impending change in the executive suite, there shouldn't be any big shifts in direction beyond those underway. Greene is respected by investors. "He came up through the ranks and he really understands the potential of the land," says Bruce Berkowitz, CEO of Fairholme Capital Management.

Sounds like the right guy and the right plan. Plus, St. Joe can afford to wait.