David Einhorn's Comments on St. Joe

From David Einhorn's first quarter letter:

We have been short St. Joe (NYSE:JOE) for more than half a decade. David first discussed our position at the Ira Sohn conference in 2007, and then gave a second, more detailed presentation of our updated thesis at the 2010 VIC. The presentation highlighted that a number of JOE’s real estate investments were impaired and should have been reflected as such in the company’s financial statements. JOE and the bulls disagreed. We assume that JOE’s auditors did as well, seeing as they signed off on the 2010 year-end results without requiring any impairment.

In early 2012, JOE announced a “new business strategy.” JOE is unwilling to elaborate on what this new strategy entails. At least one piece of it involved reviewing prior assumptions regarding the value of its unsold assets. In doing so, JOE was forced to recognize some of the necessary impairment that had been obvious to us for years.

The following table shows that JOE belatedly recognized residential real estate impairment in three counties highlighted in the VIC presentation:

JOE took $374 million in total impairment, which represented an approximate 80% write-down of the properties that JOE chose to impair and almost 40% of JOE’s book equity.While the impairment may seem large, we believe that more will be needed. Specifically, we believe JOE continues to carry its mostly vacant commercial real estate at inflated values.JOE also has a large investment in “operating properties,” which are mostly amenities that support its various developments and do not generate adequate profits to support their capitalized carrying values.

Recognition of these losses does more than merely get the accounts in order. It reveals the flaw in JOE’s business model. The company's effort to develop its best land through a historic boom has, in fact, been a cumulative money loser. If the land can’t be developed profitably under extremely favorable market conditions, its best use remains as undeveloped timber and conservation land. Perhaps this is what JOE has in mind; we have no way of knowing. But either strategy presents greater challenges going forward. The best land (on the beach) has already been sold, while timberland and conservation land values in the region have continued to fall. We remain skeptical that there is a path for any management team to create much value here.