Thursday, October 14, 2010

Old Fashioned Due Diligence: Einhorn Says St. Joe Development is ‘A Ghost Town’

OCTOBER 13, 2010, 1:47 PM ET
By Tom Lauricella

Wall Street Journal

Greenlight Capital’s David Einhorn took stock pickers through a tour of Florida’s panhandle as he outlined the reasons he’s shorting the stock of real estate developer St. Joe Company.

The basic thesis: the company’s holdings of Florida real estate are worth nowhere near the $746 million the company says they are worth. Rather than the $20 to $28 range St. Joe shares have been trading at, Einhorn thinks that at best the company is worth $7 to $10 per share. And if the company’s management doesn’t change course, he argues it could eventually fall to zero.
Within minutes of Einhorn speaking St. Joe shares tanked. At last glance they’re down 10.4% to $21.98.
Einhorn’s bet that shares of St. Joe have been overvalued sets up a stock-pickers steel cage match against Bruce Berkowitz, the widely-admired value investor whose Fairholme Capital Management held nearly 27 million shares as of June 30.
It’s reminiscent of Pershing Capital founder Bill Ackman’s wager against MBIA, where the famed manager Marty Whitman of Third Avenue wrongly took the other side of the trade. Einhorn, of course, is famed for shorting Lehman Brothers at $70 per share and showing no reluctance to duke it out with companies he’s betting against.
His talk to the Value Investing Congress Wednesday — which was received with rousing applause — was accompanied by a 139-slide presentation that combined not just the usual balance sheets and quotes from annual reports, but photos and videos Einhorn’s team took of St. Joe’s properties. They showed empty lots, abandoned houses and vacant retail storefronts.
Einhorn’s talk focused on St. Joe’s main development properties, but began drilling into the company’s recent assertions that it will get a big boost from development around the Northwest Florida Beaches International Airport, an airport surrounded by timberland north of Panama City Beach, Fla. St. Joe had given land to help build the airport, Einhorn said.
In a December 2009 press release, the company’s president said: “‘The Southwest Effect,’ the connectivity Southwest brings is expected to stimulate economic development, job growth and real estate absorption in the company’s projects across Northwest Florida. Southwest, with their renowned customer service, is a game changer for the entire region.”
But Einhorn said that of the seven gates at the airport, only one can accommodate the 737 planes flown by Southwest. In addition, he questioned the attractiveness of property owned by St. Joe immediately around the airport and said that St. Joe is now trying to re-lease land it had given to help get the airport built.
The center of his argument that St. Joe has been overvalued is its residential developments. One big issue, Einhorn said, is that St. Joe has already sold many of its best properties – especially those that are beach-front real estate. Many of the properties the firm is carrying on its books are in some cases miles from the beach. Worse, Einhorn said, many of the properties that St. Joe sold are undeveloped lots that are in the hands of land speculators or owned by banks through foreclosure. Thus St. Joe is having to compete against those owners who are selling properties at sharply lower prices than on St. Joe’s books.
For this, Einhorn’s team visited St. Joe’s developments, scoured the property records in Florida and publicly information on the relatively few sales that have been made in recent years. One community is Rivertown, where Einhorn presented a video shot from a car driving down empty streets. At another, Watersound, they visited a golf course, which he said was “deserted.” For Summercamp Beach he showed displayed a picture of an unfinished house.
He described the St. Joe community of Windmark as his “favorite” example. “This is a ghost town,” he said. Not only was the St. Joe property empty, “it seems like everything surrounding Windmark is for sale.”
One his final slides compared the values assigned to properties in three communities by St. Joe - $280.8 million - against Greenlight’s assessment - $38.7 million. “I think that St. Joe and it’s accountants might want to update their calculations,” he said. “They need to take a substantial impairment” against the value of their real estate, he said. Einhorn closed by noting that St. Joe has filed suit for damages caused by the BP oil spill this summer. But St. Joe’s website notes that press releases from downplayed the impact of the oil spill. Pictures on the company’s website show swimmers frolicking in the surf.
Asked where he could go wrong with his call against St. Joe, Einhorn replied “they could discover real oil.”
Einhorn says he’s been looking at the stock since 2006 and this summer he contacted Berkowitz to see if he would discuss the company. “I’m waiting for his call,” Einhorn said. Einhorn also said he attempted to contact officials from St. Joe but they would not talk to him.
Note: We’ve put in a request for comment to company representatives and will update this post when/if we get one.
St. Joe offered this prepared response, via email: “It is important to understand that an investment in St. Joe is an investment in a company that has a virtually debt free balance sheet and owns approximately 577,000 acres of land concentrated primarily in Northwest Florida, famous for its miles of sugar white sand beaches. These land holdings include over 400,000 acres within 15 miles of the Gulf of Mexico and approximately 300,000 acres within 40 miles of the new Northwest Florida Beaches International Airport. We continue to focus on the execution of our strategic plan in order to maximize the value of our assets.”