We are short shares of The St. Joe Company. Please click here to read full disclosures.
Kerrisdale Capital will host a conference call today at 10:30am ET to discuss the The St. Joe Company report.
To participate in the conference call, dial 866-834-3313 (US) or 409-981-0700 (international) and reference the Kerrisdale Capital call or conference ID 5662359.
We are short shares of The St. Joe Company, a Florida Panhandle developer with overhyped real estate holdings and a controlling shareholder who will soon be forced to liquidate part of his investment. For more than a decade, St. Joe has lured investors with the promise of unlocking value in large tracts of undeveloped land near Panama City Beach. Every year, however, this promise has remained unfulfilled, because St. Joe’s purported plan for the land is pure fantasy. Once owners of 1 million acres of undeveloped Florida real estate, St. Joe has sold off most of its valuable property. The 177 acres that remain are not adjacent to the Gulf of Mexico; rather, they are mainly inland in swampy, remote, desolate areas occupied by industrial pine.
St. Joe’s cash flow from current operations is minimal – the interest earned from its portfolio of junk bonds exceeds the income from actual real estate development. The bull thesis for St. Joe rests on the company’s ability to transform remote land, which no one can feasibly develop over an investment lifetime, into a world-class destination for retirees and businesses. There has been little progress on this plan for over 15 years. Management preaches patience and urges investors to maintain a long-term view; however, the reality is that the holdings are too unattractive to develop in the timely manner needed to justify any valuation close to current trading levels.
Drawing on extensive conversations with securities lawyers and experts, we believe a negative catalyst will ironically come from St. Joe’s largest shareholder, the Fairholme Fund. Much like St. Joe’s land holdings, Fairholme is a tiny vestige of its former self. Years of poor stock selection and high redemptions have taken a fund that once held over $16bn in net assets to just $1.6bn. It has also created an unsustainable dynamic: as net assets have receded, the fund has sold its most liquid securities to raise cash, leaving its massive position in St. Joe far in excess of SEC guidelines for illiquid holdings.
The Fairholme Fund is an open-end fund that offers daily liquidity and must meet redemptions within 3 days. Two months ago, the SEC instituted rules that limit such funds from holding more than 15% of net assets in illiquid securities. We estimate that The Fairholme Fund, holders of 22.7m shares, 70x average daily trading volume, has over 27% of its net assets in St. Joe. This gross violation of the new SEC liquidity rules has negative implications for St. Joe shareholders. Fairholme must reduce its stake by 10m shares to comply with rules that go into effect on December 1st. Given insider trading and volume restrictions, there are not enough trading days between now and December 1st for Fairholme to reduce its position in an orderly manner. Fairholme’s impending demise, and the need to comply with the new SEC regulations, subjects St. Joe shareholders to the painful overhang of a forced seller.
St. Joe is valued as if a new metropolis will soon emerge from rural forest and swamp. As liquidity risks mount for its largest shareholder, investors will see values sink back into mud. We value shares at $10.50 representing downside of -42%.