Einhorn revealed his firm’s short position in St. Joe at the 2007 Ira Sohn Conference and presented an updated, 139-page thesis at the 2010 Value Investors Conference. Founded in 1936, St. Joe is the second-largest land owner in Florida, owning approximately 567,000 acres of land primarily in Northwest Florida it is either developing or using to grow and sell timber.
The company is also famous for having Fairholme investor Bruce Berkowitz as owner of 27.47% of its outstanding shares, which amounts to 7.1% of his total portfolio.
St. Joe bought most of its land decades ago at a very low price. In his presentation, Einhorn points out that St. Joe began to become an active land developer in 1997 with the hiring of an imaginative former Disney creative developer.
“So what has happened during the transformation, or at least the first 10 years of it?” Einhorn asked in his presentation. “Joe has made $70 million a year in pre-tax profits, more than all of it has come from selling low-basis rural land and timber. The development of real estate into higher-value uses through into and through the real estate boom and other items has not generated a positive return.”
Then-CEO Peter Rummell in 2007 billed the vision for a stretch of its beach as “a national destination with the same kind of recognition as Nantucket, Hilton Head Island or Napa.”
Einhorn objected to the depiction, arguing instead that the company peaked during the real estate boom and that its best and most profitable days were behind it. For instance, in 1999 it owned 1,086,780 acres and by Dec. 31, 2009, it had sold down to 577,000 acres.
In addition, he pointed out that Florida’s home prices fell more dramatically than the greater U.S., declining in 2010 to 60% of their value in 2007. In one development, SummerCamp Beach, the company sold lots for an average of $880,000 in 2006; in 2010, its average price for lots sold was $331,000. The total investment in selected real estate, he said, represented approximately 86% of Joe’s real estate carrying value.
St. Joe’s write-downs since the decline, however, were only modest, he noted.
Einhorn concluded that:
· Further development is likely to destroy additional value
· Joe’s highest and best use is to return to its pre-Rummell roots as a Rural Land company
· The rural land is worth $650-950 million or $7-10 per share
· There is a modest additional value for the 41,000 entitled acres
He believed the company was stuck: “It can’t build, it can’t sell and it can’t generate value to cover its operating costs,” he said.
St. Joe’s stock price peaked at an all-time high of around $85 a share in 2005, and declined to about $26 to open 2010 as the real estate crisis ensued. If Einhorn began shorting the stock in 2006, his original price was approximately in the range of $67 and $43 that year.
By the end of the day that Einhorn gave his presentation on St. Joe, shares plunged around 11% to $21.98 per share.
St. Joe offered its third quarter financial results on Nov. 1, 2012, showing some improvements. St. Joe’s revenue increased year over year to $55.9 million from $26.7 million; net income increased year over year to $15.3 million, from a net loss of $2.4 million. (See St. Joe’s 10-year financials here.)
The improvements were the effect of the number of residential units sold increasing to 58 units from 40 units in the third quarter last year. Combined with higher prices, revenue in its residential real estate sales increased 146%. It also sold $18.3 million worth of rural land.
In the first nine months of 2012, Joe realized year-over-year revenue increases of 93.3% in residential real estate, 390.5% in commercial real estate, 606% in rural land, 13.6% in resort and club revenues, and 40% in “other.” Only its resort and club revenue declined, falling 63.6%.
The company’s residential sales consisted of 56 homesites and only two actual homes, however, in the third quarter.
“We believe our residential sales are showing signs of recovery in many of our Northwest Florida projects. However, with the U.S. and Florida economies still battling the adverse effects of home foreclosures, restrictive credit, significant inventories of unsold homes and weak economic conditions, the timing of a sustainable recovery to all our residential projects remains uncertain,” the company said in its 10-K.
Einhorn last commented publicly on St. Joe in his first quarter 2012 investor letter. In the letter, he noted that he was correct about the need for the company to recognize impairments in its residential real estate as the company took $374 million in total impairment, an approximately 80% write-down of its impaired properties and almost 40% of its book equity. The amount still needed to be greater though, he believed.
Year to date, Joe’s stock price has rallied 55%. Einhorn said in his May letter that, “We remain skeptical that there is a path for any management team to create much value here,” but has not publicly disclosed since whether he is still shorting the company.
See David Einhorn’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of David Einhorn.