Tilson Takes a Trip to See St. Joe (JOE) Properties

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Jun 02, 2011
In the May letter to T2 investors Tilson details a trip to view the property that supports the value of Einhorn short and Berkowitz long, St. Joe.


Note that Tilson is also short.


From the Letter:


Our fund declined 1.8% in May vs. -1.1% for the S&P 500, -1.5% for the Dow and -1.3% for the Nasdaq. Year to date, it’s down 2.8% vs. up 7.8% for the S&P 500, 9.8% for the Dow and 7.2% for the Nasdaq.


On the long side, the three winners of note were Winn-Dixie, which reported strong earnings and jumped 28.5%, The Howard Hughes Corp. (18.1%), and Iridium (the stock rose 13.9% and the warrants 28.8%). More than offsetting these gains were Delta Lloyd (-12.1%), Grupo Prisa (-8.2%), JC Penney (-7.9%), and Berkshire Hathaway (-4.8%).


We were essentially flat on the short side, with gains in OpenTable (-20.6%), St. Joe (-16.8%), and MBIA (-14.7%) offset by a 78.5% jump in a relatively small position in Barnes & Noble which, after many months of shopping itself without success, received out of left field a buyout offer from Liberty Media. Such an offer for a business that is in very rapid decline speaks volumes about today’s frothy markets – and underscores the perils of short selling in this environment, which is why we’ve reduced our short book substantially this year. That said, we still have a number of high-conviction shorts, none more so than St. Joe.


St. Joe


In last month’s letter, we shared our presentation at the Value Investing Congress West (www.tilsonfunds.com/T2PartnersValueInvestingCongressPresentation-5-3-11.pdf), in which we discussed our largest short position, St. Joe (and also one of our favorite longs, The Howard Hughes Corp.).


The bull-bear tug-of-war on St. Joe doesn’t revolve around the company’s timberland, as there seems to be general agreement that it’s worth $7-$12/share. But the stock closed May at $21.73, so the debate centers around the additional $10-$15/share ($0.9-1.4 billion of market value), which is based on the future of St. Joe’s residential and commercial developments and the Northwest Florida Beaches International Airport. St. Joe bulls believe that the company’s developments have enormous future value, much of which will be unleashed by the new airport, which opened in May 2010.


We’re skeptical, but are always testing our investment theses and seeking out disconfirming information, especially for our largest positions, so we decided to see the airport and a number of St. Joe properties for ourselves. On Wednesday, May 18th we flew to northern Florida for the day, and what we saw reinforced our investment thesis on St. Joe. There are indeed pretty (though narrow) beaches, but the region is quite poor, sparsely populated and not well developed, other than endless beach houses and condos/apartments on the water, catering to mostly low-end tourists who drive to the area (we could see why it’s called the “RedneckRiviera”). As a tourist destination, it doesn’t hold a candle to the well-developed areas in much of the rest of Florida.


In the early years of the housing bubble, St. Joe built a small number of developments such as WaterColor and part of WaterSound on the ocean in popular areas. Because of their attractive location (and, of course, the housing bubble), St. Joe sold most of the lots in these developments at good prices. But then St. Joe went crazy, spending well over $1 billion during the bubble years on developments that aren’t on the ocean (WaterSound Origins, RiverCamps, RiverTown) or are far away from the airport and well-trafficked areas (WindMark, SummerCamp). The combination of the unattractive locations and the bursting of the housing bubble has resulted in these developments being ghost towns today. In our opinion, they are likely to always remain so (though they would be perfect for the government to hide people in the witness protection program).


These developments clearly aren’t worth even a fraction of what St. Joe spent to build them, yet the company hasn’t marked them down to any meaningful degree, apparently due to the use – and, in our opinion, abuse – of the “recoverability test” (see pages 35-40 in our Value Investing Congress West presentation).


As for future industrial and/or commercial development of St. Joe’s land, we’re even more skeptical. There are no large markets nearby, few other businesses, and many of the roads are single-lane in each direction. And the airport only has six gates, with a mere 19 arrivals and departures daily by two carriers (Delta and Southwest).


In Appendix A are some photos from our trip, with comments and links to five short videos (we’ve posted all 115 photos from our trip at https://picasaweb.google.com/WTilson/StJoeProperties).