Below is a copy of my June Client Letter which is a review of JOE. At the annual meeting Berkowitz was quite upbeat about his ability to add to shareholder value at St. Joe, saying that in the future he would be looking at any opportunity that he felt would add value. Since the meeting he expanded on this in an interview that was posted here. He said that he will use St Joe to purchase all sorts of things that are legally barred to a mutual fund.Which produced the interviewers comment about a "Little Berkshire". in any event the prospect of Berkowitz running St. Joe as a sort of hedge fund within Fairhomne is enough to get me interested.Anyway we shall have to wait and see (actions speak louder etc)if you are suspicious by nature you could assume that Berkowitz was just using the interview to chase out shorts.No he wouldn't do that. Of course not. Not Bruce. St Joe CompanyThis story begins last October when David Einhorn of Greenlight Capital recommended the short of St. Joe Company at the Value Investing Congress in New York. While conceding that the stock might go up in value if the company's property development plans proceeded smoothly, he used 119 slides to show that both sales and development had slowed to a crawl based on the current and foreseeable future. Einhorn’s presentation was very detailed and appeared well done. It contained all of the obvious things like the fact that lots that were selling for $350,000 in 2007 were selling for $125,000 in 2010 and with sales volume is a fraction of that in 2006. None of this would appear particularly startling in view of what we already know about real estate in Florida. However, his main contention that St. Joe should give up the real estate development business and return to being a timber company would seem to border on being a bad joke. His contention is that it costs more to develop the real estate into buildable lots than the lots are worth flies in the face of the fact that the state has grown from nothing to 18 million people in the last sixty years. Granted the panhandle is not South Florida, and the winters get cold; but South Florida is full, and people still like to live near the beach. St Joe owns 574,000 acres of the Florida Panhandle, 70% of which is within 10 miles of the beach, Einhorn dredges up a lot of numbers to support his contention, but the notion that growing pine trees that can be turned into pulp and 2X4s is the highest and best use of all of St. Joe’s land seems to me to be nonsense.Bruce BerkowitzActually, the story starts in 2007 when Bruce Berkowitz started buying St. Joe for his Fairholme Fund. Fairholme Fund now owns 30% of St. Joe and Berkowitz has taken over as Chairman of the board of St. Joe. The Real Estate is St Joe’s only significant asset. At today’s prices Mr. Market is saying the Company’s Real estate is worth about $3,500 an acre. Einhorn says it’s only good for growing pine trees and is only worth $1100 an acre. Berkowitz is traditional value investor and bought his position at prices higher than today’s. As a value investor, he would have bought with a margin of safety so he must feel that the land is worth considerably more than $3,400 per acre. So, we have two very smart guys but they cannot both be right. St Joe is either undervalued or overvalued; it cannot be both.While the company has shown an operating loss for the last three years, it has been able to build its cash position from $24 million at the end of 2007 to $216 million at the end of 1st quarter of 2011. At the same time, it decreased debt from $541 million to $29 million even as its annual revenue has dropped by 73%.In 2010, St. Joe’s total revenue was about $100 million, granted a significant decline from $500 million in 2006. Still, it seems to me that St Joe would have been a better short at $85 in 2005 than it is today at $25. With a positive cash flow and a strong balance sheet in the face of a terrible real estate market, it seems like it would be easy to find a weaker company to short. Of 2010’s $100 million in revenue only about 39% is from real estate sales with most of the rest coming from resort club revenues which have been fairly stable over the last three years, and timber sales which actually showed a small increase last year. In the face of this, at his Value Investing Congress in early May, Whitney Tilson joined Einhorn and announced that his biggest short position was St. Joe. As a rationale for this position, he regurgitated some of Einhorn’s presentation from last fall’s Congress, outlining problems at WindMark Beach. This residential subdivision is one of fifteen subdivisions that St. Joe has developed in which they are currently selling lots. The company’s figures indicate that total revenue to St. Joe from WindMark Beach last year was something less than $150,000 or about two tenths of one percent of the company’s 2010 revenue-- not something that I would want to base any kind of investment decision on. It would like basing a decision to short Berkshire Hathaway solely on that fact that See’s Candies was having a bad year.Growth Management RepealIn addition to these active subdivisions, St Joe has approval from state and local authorities for thirty more subdivisions in Florida. All told St Joe has received approval for the development of 36,257 residential units and 900 + acres of commercial property. Conveniently, in this context, the Florida Legislature recently repealed Florida’s Growth Management Law. This regulation was restrictive and expensive in that it required that all Florida development plans be reviewed in Tallahassee. This repeal should have a positive impact on the intrinsic value of Florida Real Estate by making it easier and cheaper to start new developments.While it is not clear that any of its projects is likely to generate strong cash flow in the next few years, it is clear that David Einhorn and Bruce Berkowitz have very different opinions on the Value of St Joe’s Real Estate. First QuarterOn May 5th, the company reported first quarter results which included the sale of 22 residential lots for an average of $95,000, a 1.2 acre commercial lot for $192,000 per acre, and 98 acres of rural land for $28,000 per acre. While the company’s revenue from lot sales was a fraction of what it was three years ago, it did manage its first quarterly profit in a while. The sale of the rural land for $28,000 per acre would seem to place into question Einhorn’s $1100 per acre valuation for St Joe’s real estate. In addition, St. Joe sold timber rights in the first quarter to 40,975 acres for $1,365 per acre. For its $56 million, the purchaser gets to harvest the trees that are on the land, but once the timber is cut, the land reverts to St. Joe. While this transaction helps to establish the value of the timber on St. Joe’s property, it certainly also makes Einhorn’s estimates look silly. St. Joe’s first quarter profit was largely the result of this onetime timber sale. As a result of the sale, the Company’s revenue for the quarter was $73.4 Million, against $13.3 million for the first quarter of last year, and $100 million for all of last year. Earnings for the quarter were $0.15 per share compared to a loss of $0.13 last year, and this marks the first quarterly profit for the company in three years.The Annual MeetingI attended the company’s annual meeting on May 17th at Watercolor Florida. While there was no new news at the meeting, Berkowitz did indicate that trying to value St. Joe on the basis of what was happening in one subdivision was not a proper way to value the whole company. He was generally very upbeat of the company’s prospects, and said that sales at Watercolor for the first week of May where the best in the history of the development. I took this to mean that he was referring to resort revenues, and it did appear that area was very busy. Watercolor is a very upscale beachfront resort on the Gulf of Mexico between Destin and Panama City. The resort is very nice and the beaches along the gulf in this area are among the nicest in Florida.I spent a good deal of time driving the area and it is obvious that a lot of St. Joe’s land is very rural, and some of this has very little development potential. On the other hand, their beach front property is extremely valuable and their 70,000 acres around the new Panama City Airport has potential for commercial and industrial development. While the airport is in the country now, it is only a few miles from West Bay, a large body of water that opens to the Gulf and includes the Port of Panama City. Most of the land between the airport and the bay is owned by St. Joe.In addition to beach front property, St. Joe appears to own quite a bit of waterfront property on this bay and around Port St. Joe. They also own lakefront and river front property throughout this area of the state. Currently they have developments open in Tallahassee and in Jacksonville. St Joe owns a lot of land, but there is a large difference in the value of different pieces of their land based on the land’s eventual highest and best use. I don’t see that Einhorn’s estimates are of any real value as they considerably understate the worst case estimates. If I had to guess I would say that Mr. Market is valuing the land at a sizable discount. From his recent comments and action, it appears the Berkowitz is more interested in the potential for development around the new Panama City Airport than in the resort property (This may in part explain the recent changes to the board of directors). Attached is a map that shows St. Joe’s property in 2003. The airport is located in the West Bay Sector Plan, and it appears that St. Joe not only owns all the property around the airport, but most of the land between the airport and Watercolor. The State of Florida has plans to build a four lane high way to connect the airport to I 10 and the port of Panama City. The State has also spent money on converting the port of Panama City to handle container shipping. What we can say with reasonable certainty is that the Company is at the mercy of the real estate market in Florida and so their revenue is not likely to return the level of 2005 anytime soon. But their balance sheet is solid, something that probably is not true for a good deal of their competition. Management has done a very good job of reducing the company’ debt and cutting overhead and the company seems to be in good shape to weather a prolonged slump. Real estate will recover, thought it may take longer this time. With Berkowitz in charge of St. Joe’s very valuable assets the long term prospects for this company would appear to be good.
Nice post, thanks.One interesting tidbit (I'm sure people will jump on me if I've misunderstood).The new Panama City airport is surrounded by St Joe land because St Joedonated the land for the new airport. Smart donation, I suppose.Meanwhile, the land representing the old airport has been purchased by another deep value gang---Leucadia.Jim
Berkowitz and Einhorn may both be right - probably meaning Berkowitz could be 'more right'.Coincidentally, back around the 2006 market peak, I had arranged for the sale of a parcel of undeveloped land in the FL panhandle, for about $4k per acre. The land was fully approved for half-acre lots and roads, though no work had been done. The land was few miles inland from the Gulf, and the subdivision approvals had been in place a couple of decades. It would have been a bear to develop; even at the market peak it didn't make sense. The listing caught local attention because the size made it a 'unique' offering. Several years prior, the owner of that parcel had been contacted about allowing the trees on the property to be cut. The was a one-time thing - no continuing rights - and the proceeds completely covered the owner's purchase price, so he went ahead.We see now that St Joe's recently announced that it has entered a similar 'harvesting' agreement for the rights (for 20 years) for 50,000 of their acres for about $1,000 per acre. St Joe's still owns the underlying land.It would seem like we'd need a complete analysis of the land to make an accurate call, but that to some extent, both avenues could be appropriate. Anyone looking to make anything through large-scale development in the near term may be in for a tough haul, but a $1,000 floor for a good chunk of their land - without giving up the land, may be realistic, while there could be upside in perhaps limited areas around the water and such.Before anyone gets too excited about the FL panhandle real estate - especially even a short distance from the water - they really should check it out. It's not how folks who haven't seen it usually envision it.
I'm generally suspicious of most things, so take my post with that grain of salt. I agree with Einhorn. Most of St. Joe is pretty crappy land that nobody would want at a premium valuation. The key concept to keep in mind is this - folks don't travel hours and hours to almost get to where they want to be. 8 miles from the sandy Gulf shores means very little. I live 8 miles from the ocean here in NH and I may as well be 50. I own a home in Maine in a very prime summer area, and ocean front acreage is expensive. But even 1/2 mile away, building-grade lots are priced reasonably, and 2 miles away, they're priced like the ones 50 miles inland.Nobody books flights from Houston to end up 2 miles from the coast in Maine, to enjoy in June-August. Nobody in Michigan pays $50k per acre to be 3 miles from the Panhandle beaches, and then pays to build a dreamhouse. They'd rather pay $300k for a great spot in a perfect location near the sand, but those are all sold in the St. Joe portfolio. Who wants to live on the swampier, less-beachier lots that they have left on the books at too-high levels? Bruce Berkowitz?et
Meanwhile, the land representing the old airport has been purchased by another deep value gang---Leucadia.For $80,000 per acre
When I was young I got to work as a trader for a few years, under probably the only three Japanese bankers in the world who were good traders.When they started me off, I had a small speculative position limit but mostly I was supposed to be putting arbitrage deals together. You could borrow money in yen as a short term deposit, sell a usd/yen currency swap, then lend money out in USD over the same period ... and make a few basis points profit. This sort of thing was the absolute bottom of the forex trading world (I wonder if they even do it any more) but you have to start somewhere.Anyway, the trick of course was to put the deals together fast while the opportunity remained. It was easy to do but you had to do it pretty fast and if you got stuck on the phone with the broker while the market moved, you were out of luck.One time I didn't finish and was left holding the bag. I suggested to the best trader I could just leave it open and wait for it to come back (I thought there was a pretty good chance of this). His answer: "you opened it as an arbitrage, close it out as an arbitrage and take your loss. If you opened it originally as a trade, fine, you could ride it out maybe. But it never works when you start as one thing, the market goes against you, and you turn it into something else."To me that's JOE and Berkowitz. He can't sell it with everyone watching him, so now he's going to turn it into the magic float-free BRK, apparently. So much potential! Give me a break.I think Einhorn embarrassed him and all the razzle-dazzle since then is to save face. And I question investing with someone who can't say "I blew it".
Sometimes one isn't "early" and "patient." One is just "wrong."BB keeps a big cash position to "put to work" if the market tanks, but he may need to use if for redemption if his performance this year continues as it has. And then we'll get to see just how much he likes JOE vs other holdings in the fund.Reminds me a little of Marty Whitman and Forest City (FCEA). He owned it for years and years, but watched it drop from 60ish to 4ish, all the while singing FCEA's praises and telling the world he was simply patient, not wrong. Prince Alwaleed Bin Talal experienced a similar fate with C.These folks freeze themselves with their public statements and then are effectively stuck when the investment thesis changes for the worse.- the ghost of ob1mike
razorfangius wrote:And I question investing with someone who can't say "I blew it"Did you listen to FAIRX's latest conference call?Berkowitz On AIG: “I Was Wrong”http://blogs.wsj.com/marketbeat/2011/05/09/berkowitz-on-aig-...
To me that's JOE and Berkowitz. He can't sell it with everyone watching him, so now he's going to turn it into the magic float-free BRK, apparently. So much potential! Give me a break.Einhorn's point is Berkowitz can't sell his mammoth stake even if he wanted to because the shares are so overvalued in the current real estate environment, being propped up, apparently, only by Berkowitz's enthusiasm for them. He also can't develop the land in the manner that would increase its value because it would cost more than it would sell for.So I'm not sure Berkowitz's mini-Berkshire concept is so much a change of thesis as it is something to do in the long interim between today's stalemate and a comeback of the Florida real estate market.His whole thing is going into areas everybody else hates, so while JOE and his pile of financials look awful at the moment, that's sort of the idea. He made a pile last year after jumping with both feet into the recapitalization of General Growth Properties, the over-leveraged retail mall owner, which looked like a burning zeppelin and had its chief competitor, Simon Properties, circling the remains. Today the recapitalized GGP is back on its feet and Berkowitz cashed out at a hefty profit and a stake in Brookfield Asset Management, a partner in the restructuring.As someone smarter than me has pointed out, being early is sometimes indistinguishable from being wrong. The Einhorn-Berkowitz clash is all about time frames. For the short and medium term, Einhorn seems pretty clearly right. For the long term, Berkowitz might well be right. One day, Florida real estate will come back. The panhandle beaches are not as appealing as the south Florida beaches due to their seasonality, but if long-term population and human migratory patterns hold, the real estate near them is likely to become more valuable eventually.The question is just how long is long term in this case. Berkowitz could be right about the eventual value, but he and the rest of us might be dead before it's realized. That won't be much consolation for holders of his fund. So if he can find productive uses for the cash while sitting on the land, he might mitigate the disaster. As he demonstrated with the GGP rescue, he does have some clue how to deploy cash.
He also can't develop the land in the manner that would increase its value because it would cost more than it would sell for. This is one of Einhorn’s sillier conclusions were he took the costs of developing Windmark which is a very upscale beachfront resort and divided the costs development by the number lots in the first phase rather than the number of lots in the whole development. It simply is not that expensive to develop real estate in Florida. In most cases the developers biggest cost is the cost of the land and St. Cost while always is less than their competition. It will be an interesting to see how this work out, but they could both be right, Einhorn may have already cover his shorts with a profit, and St Joe will start recover as soon as the real estate gets better.Einhorn’s Presentation at last fall’s Value Investing Congress was long and detailed but the details in the presentation were only those that supported is thesis. To Value St Joe as it stands you would have to look at their land in detail. True much of the real estate is miles from the beach and its highest and best use will be to grow timber for many years. But St Joe owns most of the land on the north side of Highway 98 between Sandestin and Panama City, and between Panama City and Port St. Joe. Ditto all of the land on either side of the intercostal Waterway between Sandestin and St. Joe (about 80 miles). Sandestin is currently one the fastest growing areas in Florida with commercial development on the both sides hwy 98 all the way west to Destin (about 15 miles). St Joe recently sold 2 acres of land a few miles east of Sandestin on 98 to Wal-Mart for $200,000 an acre. For a map of St Joe’s holdings in 2003 follow this link and go page 7.http://files.shareholder.com/downloads/JOE/1269136020x0x1769...In addition there is the 70,000 acres around the New Panama City Airport. Einhorn tried to lump all 450,000 acres into a single category and say its best use was to grow trees. This was a wonderful job of talking his own book but hardly a valuable attempt to value St Joe’s Holdings. If he is as smart he seems he would have covered his shorts in the selloff that followed his presentation.If Einhorn’s presentation was superficial Tilson’s was worse. All he did is regurgitate the most negative part of Einhorn’s presentation. This again looks like an attempt to talk his book (maybe to cover the shorts he placed after listening to Einhorn).
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