Tuesday, August 07, 2007

David Einhorn of Greenlight Capital Responds to our Latest St Joe's Post

We were happy to hear from David Einhorn regarding our recent St. Joes (JOE) piece. David thought we were incomplete in our representation of the analysis he presented at the May Ira Sohn Research Conference. We invited him to lay out his case, which is presented in this post.

While we respectfully disagree with his conclusion, and he obviously disagrees with ours, we find this type of debate very healthy. We happen to be long JOE, while Einhorn's firm, Greenlight Capital has a short position.

David Einhorn, Greenlight Capital on St. Joes Corp.
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.


We thank David Einhorn for agreeing to let us publish his response. Why would we agree to have a well-known manager present his views that are contrary to ours in a stock we have a position in? We happen to find the debate refreshing, and even helpful to investors as they seek information.

*The author has a long position in St Joes Corp. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.


bsivia said...

you are saying the land is work $10,000 and he is saying land is selling for $2000, I think that is the major difference here right?

He is valuing the company based on what the land is selling for, and you are valuing the company based on the EV! I think what land is selling for provides better description of what is on the ground, don't you think? please let me know if I have misunderstood..

Anonymous said...

The comment about Ft. Myers is out of date. There is construction all around the new airport which is several miles from the water.

Anonymous said...

I think St Joe is an interesting example of opportunity lost. They have become a victum of the residential homebuilding downturn because of they are absolutely tied to the demand for the land they sell for homes. Dispite there exit from the actual homebuilding business they still require this segment to be expanding in order to remain profitable. Interesting enough, they have and continue to overlook a remarkable opportunity to enhance shareholder value through the commercial development component that goes hand in hand with the development of there land holdings. They have the ability to leverage there assets in significant multiples by seizing control of the commercial opportunity they create with there residential development. Instead of moving in this direction they have abandoned this option (Advantis was a classic mismanagement nightmare)and continue to monitize there commercial assets when they should be expanding this portflio to help offset the residental downturn. These cycles can often go in the opposite direction and if this philosphy was effectively applied could easily offset there current problems.