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Reader comment on: Einhorn Versus Berkowitz
in response to reader comment: Einhorn is only focusing on 1.2% of JOE's land holding
Submitted by weiwuwei (United States), Jan 6, 2011 15:49
You make an interesting point that the named properties that Einhorn discusses only cover 7k acres out of 577k, and that their value even after Einhorn's suggested write-downs is over $5,500 per acre. However, it's not logical to apply this value to all of JOE's other 536k acres because their land is not all the same. I'd divide their 577k acres in total as follows: Airport adjacent land = 31k Timberland and Rural land that's unentitled for development = 501k Entitled acres other than the properties Einhorn names = 34k Named properties = 7k Total = 577k What Einhorn's presentation suggests is that the 7k acres are worth $5,500+ per acre. What we can infer from that is the other 34k entitled acres might also be worth as much. And the 31k airport acres too. But for the majority of the land, 501k acres, it is unentitled for development, or it is timberland. This probably shouldn't be valued at $5,500 per acre. In the first part of his presentation, Einhorn shows that it may be worth $1,100-1800 per acre based on previous sales. See slides 28-29. If you value 501k acres at $1,800 and the other acres at $5,500+ you get about $1.3B in total value or almost $14.40/share. It's more than the $7-10 Einhorn suggested, and more than the current book value of $9.50+ or so. But less than the current share price. Einhorn would probably argue that you'd develop your best land first, so the first 7k acres are better than the other 34 entitled acres, with most of the good beachfront already sold, for example. So he'd say the other 34k entitled acres will not sell for $5,500+ per acre. The company on the other hand might say that out of the remaining 501k unentitled acres, some of them could eventually get entitled and developed, and when they do, their value will be more than $1,800 per acre. Einhorn would respond that this is irrelevant as the COST to develop these acres is more than they can be sold for. In Rivertown alone, a lot sells for $31k but costs $85k to develop per Einhorn. Even per JOE management, a lot costs $30-35k to develop, I believe they said. So the revenue from these sales does not translate to any profits. As for the cash burn, Einhorn's point is that expenses eat into the profits from the land sales. Not that there is a net cash burn, but that profits are lower than they would otherwise be because of high overhead. So after you calculate a land value based on sales per acre, you have to subtract annual costs to the tune of at least $50m/year or about 55 cents/share.
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