Buffett Might Side With Einhorn Over Berkowitz on St. Joe Position
Berkowitz has been a shareholder for quite a long time and has a large position in St. Joe. Einhorn who is likely the most respected short seller among famous investors today has shorted St. Joe.
The performance of these two value investors over the past decade or so is nothing less than outstanding. Berkowitz and his Fairholme Fund since inception in December 1999 is up an annualized 12.83% versus the S&P 500 which is down 1.51%. It is not easy to be up that much against a poorly performing stock market when you aren’t allowed to short stocks.
At the end of May 2010 Berkowitz had 4.3% of his fund invested in St. Joe. He had this to say bout the company to Forbes:
“Forbes: Now on the real estate side, do you still have St. Joe?
Berkowitz: Yes, we're the largest owner of St. Joe in Florida. That was, again, another big misperception. First of all, everyone now believes real estate's going to zero. And everybody believes that the almost 600,000 acres of St. Joe land in the panhandle, is just mosquito infested swamp lands. And no one's really spent the time to look at the 140 miles of coastline along the gulf, and the bays, and the inter-coastal waterways, and of the sand.
It's a beautiful ecosystem. You got the seasons there. I thought that was, of course, the part of Florida that was supposed to first be developed before Fort Lauderdale and Boca by the DuPonts. But it's the last big piece of Florida. And of course, there's a new international airport being built right in the middle of their land which opens up next spring, summer. So that's what the area has missed. It's been, you know, you had to take a plane, a train and a car to get to some of these beautiful spots. Now you'll be, you know, you'll be able to fly in and be within 10, 15 miles of where you need to go.”
Einhorn of course is no slouch either with annualized returns closer to 20% and is especially well known for his success on the short side and incredibly thorough research. Einhorn released an incredibly detailed short thesis on JOE here:
And Einhorn had this to say to the author of a well known website http://stocksbelowncav.blogspot
The per acre analyses used by most St. Joe bulls exclude selling expenses and taxes. I believe that the equivalent gross value to the $9,000 an acre used in your analysis is the equivalent of $18,000 an acre, when taking expenses and taxes into account.
As it was, I did not quantify any amount of swampland at the Ira Sohn conference. I simply noted that some of the land is swampland. The weather is much worse than South Florida (just as hot in the summer and cooler in the winter), there are a lot of mosquitoes, there is not a lot to do, and the demographics are poor. I noted that I thought St. Joe overplayed the value of land within ten miles of the ocean and noted that I thought that vacationers would prefer to be "on the ocean." More than a mile is too far for many families to walk to the beach. Finally, I thought the airport development is the type of story often seen in promotional stocks designed to buy years of time to encourage the market to ignore current financial results. The current airport does not operate near capacity. Airports in Jacksonville an Ft. Myers did not spur a lot of development next to their airports and it is odd the St. Joe seems to believe that a lot of people will want to live near the airport, as if that is a residential attraction.
As I pointed out in my speech, since 2001, St. Joe has sold 268,000 acres at an average price of under $2,000 an acre. Since my speech, St. Joe announced another quarter where they sold over 30,000 additional acres at $1,500 an acre. As such, I don't see that it is very challenging to determine a value for most of St. Joe's land. Assuming they haven't sold the most salable stuff first, it appears that undeveloped land is worth on average sub $2,000 an acre before expenses.
I believe that about 680,000 of the remaining 739,000 acres are similarly undeveloped. Assuming St. Joe has no un-salable tracts of swampland and all the undeveloped land could be sold for $2,000 an acre, it would be worth $1.36 billion gross or about $700 million after selling expenses and taxes.
St Joe has just under 20,000 acres in development (some of which has already been sold). They have an additional 21,000 acres "In Pre-Development", meaning they have land use entitlements, but they are still evaluating the development or need additional permits. They have another 10,000 acres they are planning to entitle.
The developed projects have a book value of $800 million. St. Joe is not making good margins on selling developed property. Residential and commercial land sales have not covered its overhead in any quarter since 2005, when it was still in the homebuilding business. St. Joe is one of very few companies that has spent large amounts on residential development and has not taken any impairment in the current environment. To give St. Joe the benefit of the doubt, let's say the developments could be worth 1.5x book or $1.2 billion.
On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.
I found link recently to a talk that Buffett gave to MBA students at Florida University in 1998. In the talk was reference to a situation very similar to St. Joe which might shed some light on whether he would be thinking along the lines of Einhorn or Berkowitz about JOE:
sometimes get very confused about--they will look at some huge land company, like Texas Pacific Land Trust, which has been around over 100 years and has got a couple of million acres in Texas. And they will sell 1% of their land every year and they will take that (as income? Garbled) and come up with some huge value compared to the market value. But that is nonsense if you really own the property. You can't move. You can't move 50% of the properties or 20% of the properties, it is way worse than an illiquid stock. So you get these, I think, you get some very silly valuations placed on a lot of real estate companies by people who really don't understand what it is like to own one and try to move large quantity of properties.
REITS have behaved horribly in this market as you know and it is not at all inconceivable that they become a class that would get so unpopular that they would sell at significant discounts from what you could sell the properties for. And they could get interesting as a class and then the question is whether management would fight you in that process because they would be giving up their income stream for managing things and their interests might run counter to the shareholders on that. I have always wondered about REITS that have managements they say their assets are so wonderful, and they are so cheap and then they (management) go out and sell stock. There is a contradiction in that.
They say our stock is very cheap at $28 and then they sell a lot of stock at $28 less an underwriting commission. There is a disconnect there. But it is a field we look at. Charlie and I can understand real estate, and we would be open for very big transaction periodically. If there was a LTCM situation translated to real estate, we would be open to that, the trouble is so many other people would be too that it would unlikely go at a price that would get us really get us excited.
I don’t have a position in JOE. I find it hard to imagine that Berkowitz has made a huge error on the company given his track record. And given the analysis done by Einhorn I find it even harder to believe that he doesn’t have a very good grasp on what JOE is really worth today. I guess that leaves me on the fence which is a perfectly find place to be.