New York-based hedge fund Kerrisdale Capital has launched a short-selling attack on St. Joe Company, the top holding in Bruce Berkowitz’s Fairholme fund.
St. Joe Company is a real estate development firm on the Florida Panhandle with building rights to a vast amount of land across the region.
Sahm Adrangi, chief investment officer at Kerrisdale, believes St. Joe’s real estate holdings are ‘overhyped’ and has published a blistering 29-page report criticizing the company and its current valuation.
The report argues that St. Joe has sold the majority of its initial one million acres of land and that its remaining 177,000 acres lie inland in swampy, remote regions that have yet to be developed.
‘St. Joe is valued as if a new metropolis will soon emerge from rural forest and swamp,’ the report said.
St. Joe shares traded at $17.95 on Monday and fell 5.6% as of Wednesday after Kerrisdale’s negative report, which claimed shares in the company were actually worth $10.50.
St. Joe did not respond to a request for comment.
A key tenet to Kerrisdale’s thesis on St. Joe centers on Berkowitz’s role as St. Joe’s largest shareholder and his position on the company’s board.
Berkowitz serves as chairman of St. Joe, which is also the top holding in his $1.5 billion Fairholme fund, representing 22.8% of assets as of the end of February.
The fund alone owns 34% of St. Joe and two of its board members also serve on the St. Joe board.
Kerrisdale believes that new rules from the Securities and Exchange Commission (SEC) that limit open-ended funds from holding more than 15% of assets in illiquid securities will force Fairholme to liquidate 10 million shares.
‘As liquidity risks mount for its largest shareholder, investors will see values sink back into mud,’ the Kerrisdale report said.
Fairholme hit back against this theory.
‘We disagree that Fairholme would have to reduce its holdings of the St. Joe Company to comply with new SEC liquidity guidelines,’ a spokesperson for the firm told Citywire.
The hedge fund’s report also argues that Berkowitz's ability to trade St. Joe shares is somewhat limited by his role as St. Joe chairman given insider trading and volume restrictions.
Berkowitz has battled short sellers before. In 2010, David Einhorn’s Greenlight Capital blasted St. Joe for its questionable accounting methods. In 2015, St. Joe's then chief executive and four other executives settled with the SEC for improperly accounting for the falling value of its residential real estate assets after the financial crisis.
Kerrisdale also is no stranger to a public showdown. The firm has been branded the ‘self-promotin'-est hedge fund in the land’ for its short-selling approach, whereby it makes its theses widely known to investors and the media.
The firm has gone after star portfolio managers before, including UK equity income guru Neil Woodford.
In 2017, Kerrisdale slammed Woodford Capital Trust’s top holding, Prothena, claiming the company would be ‘the next big biotech blow-up’ and tipped trials for Prothena’s main drug under development to fail, a prediction that has since come true.
Adrangi said he was confident his thesis about Fairholme's liquidity issues would come to a head.
‘When you get on board of a company you recognize that your trading will be quite restricted in a variety of ways. You’re just not going to be able to trade as freely,’ he said.
‘We reach out and talk about the thesis, certain shareholders are interested in engaging with us and hearing our perspective, others are not.’
Of late Berkowitz has been fighting a number of battles that have weighed on the fund’s performance.
In February 2017, the fund lost 6.2% in one day when its 18.7% combined position in Fannie Mae and Freddie Mac was hit by a court case that ruled the firms must pay all of its profits to the government as dividends, rather than to investors.
Berkowitz’s other big bet, struggling retailer Sears Holdings, also dealt the fund a blow when he stepped down from the company’s board in 2017 after it failed to improve its financial position and sales continued to disappoint. Berkowitz, who first invested in Sears in 2005, called the lack of progress ‘hugely frustrating and fatiguing for me to watch’ in an investor letter.
In January, Fairholme cut the fee for the fund from 1.03 basis points (bps) to 80bps. According to Morningstar, the fund has suffered about $7 billion in outflows over the past five years. The Fairholme fund ended 2017 down 5.96% and is off to a rocky start in 2018, down 10.28% year-to-date.
The Fairholme fund is not the only high-profile mutual fund with a position in St. Joe. The Blackrock Global Allocation strategy owns 10.22% of total St. Joe shares across three funds and the T. Rowe Price Mid-Cap Value fund owns 5.66%.
Their ownership stakes pale in comparison to Fairholme’s as Blackrock and T.Rowe’s positions are less than 1% of their funds’ total assets.