Commentary

Jan
10
2011

St Joe’s: Another Public Activist Debate

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We previously profiled the public debate between Bill Ackman’s Pershing Square Capital and Eric Hovde’s Hovde Capital over General Growth Properties (NYSE: GGP). Another interesting debate is unfolding over The St. Joe Company (NYSE: JOE), between David Einhorn’s Greenlight Capital and Bruce Berkowitz’s Fairholme Funds. The St. Joe Company operates resorts and timberland, but its primary asset consists of approximately 577,000 acres of land in the Florida panhandle, 70% of which is within 15 miles of the beach.

The debate over JOE has been ongoing since at least May 23, 2007, when Einhorn used The Ira Sohn Investment Research Conference (an annual forum where select hedge fund managers present their investment ideas to raise money for charity) as a platform to present his short thesis. At the time, JOE was trading at $55 and Einhorn valued it at $15. JOE dropped 10% after Einhorn’s presentation and nearly 50% in the subsequent six months (of course, this was during the general market meltdown in the second half of 2007). Notes from the presentation were passed around at the time and we have shown below in full certain notes compiled by BTIG and re-printed on ZeroHedge:

Short – JOE – The St. Joe Company
Company has primarily been in the business of development and sale of oceanfront properties in the Florida Panhandle.

  • Sales to speculators led to record sales in 2005.
  • Speculators have now turned into sellers. Most of St. Joes land holdings are timberland swamp.
  • Poverty in the area does not help the company’s situation. The average income in the area is 30% below the national average.
  • Great hope for new airport in 2010 but current airport underutilized. Comparable airports built (Jacksonville) have not had significant impacts upon that area.
  • Lots of management turnover.
  • Sell side models value stock at current price.
  • peak ROE was 23% last year it was 9%.
  • At current prices investors are paying over 8x book value for land.

Einhorn performed a discounted cash flow analysis as if they developed all properties in 10 years.
Discounted at 10% leaves the stock valued at $15

The company has two remaining businesses to service the $400 million in debt.

  • Commercial real estate development.
  • Sale of undeveloped acreage, this has been the principal source of revenue

More information about Einhorn’s 2007 thesis can be found here.

Entering 2009, JOE remained well below its 2007 trading levels. It was then, in May, that Bruce Berkowitz entered the debate. Berkowitz, whose Fairholme Funds is JOE’s largest shareholder with a 29% stake, began publicly touting his long thesis, while the stock traded at $25. Berkowitz became publicly more bullish after the Deepwater Horizon accident in the Gulf of Mexico which sent shares of JOE from $35 to $22 over the following two months, predominantly the result of fear that JOE’s coastal properties would be negatively impacted by the oil spill.

Berkowitz’s long thesis is based on three points. First, the company has an extremely low cost basis for its real estate holdings with little debt, a result of its long history and acquisitions stemming from the 1930’s. The market, according to Berkowitz, was failing to impound the true long-term economic value of this land, instead valuing it at “swampland” prices – just $3,500 per acre. Second, Berkowitz viewed the Deepwater Horizon accident as inconsequential with respect to JOE’s future, as the beaches remained open with no public health advisories. Third, Berkowitz saw a clear catalyst in the opening of the Northwest Florida Beaches International Airport in Panama City Beach, which is the first international airport built within the United States in fifteen years and is capable of turning the area into a major tourist destination and improving the commercial and industrial capacity of the region. Moreover, JOE strategically donated 4,000 acres toward the development of the airport, ensuring that it was built within JOE’s long-term master development plan.

This video interview with Berkowitz contains a synopsis of his long thesis from 2009. Berkowitz gave similar interviews throughout 2010.

In October, Einhorn announced he was short JOE and provided a comprehensive 139-slide presentation at the Value Investing Congress in New York to support his position. Einhorn believes that JOE’s assets are underperforming relative to the value the company is carrying them at, and that this will result in significant writedowns in the future. He showed that the company’s profits for the last decade were almost completely the result of land sales which subsidized its other operations, and that the sum of retained earnings and dividends, on a per acre basis over that period, amounted to just $1,102 – a third of Berkowitz’s “swampland” prices. Einhorn suggests that even at the high end of comparable sales, JOE’s land would be worth just $1,500 per acre. Einhorn argues that JOE has sold its best assets first and that it should take “substantial impairment” on the remaining assets. Additionally, Einhorn shows that further development will lead to negative returns, and that the company has ceased development because of these negative returns.

With the stock trading around $25 before the presentation, Einhorn revised his earlier estimate of JOE’s value to $7-$10 per share as a rural land company. The stock traded down 20% following his presentation.

Berkowitz has so far chosen not to respond publicly to the specific arguments Einhorn has made. Who will ultimately win this argument? Only time will tell, but in December it was announced that Berkowitz and his partner, Charlie Fernandez, would join JOE’s Board of Directors, seemingly indicating that Fairholme is willing to take an activist approach to unlocking value in its investment in JOE.