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Fairholme Capital Management, LLC 2019 Semi-Annual Report

Fairholme Capital Management, LLC is a Miami-based registered investment adviser founded in 1997 by Bruce R. Berkowitz. The firm recently released its 2019 Semi-annual Report – a copy of which can be downloaded below. The company acts as an adviser for the Fairholme Funds and offers investment management services to high-net-worth clients, business entities, trusts, corporations, charitable organizations, estates, profit-sharing plans, and pensions via the Managed Account Program. Fairholme Capital Management is also responsible for managing a private fund that is dedicated to qualified purchasers and accredited investors.

Prior to founding Fairholme Capital Management LLC, Bruce R. Berkowitz worked as a Managing Director at Smith Barney Investment Advisers and a Senior Portfolio Manager at Lehman Brothers Holdings. He also joined St. Joe Company’s board of directors in late 2010.

In its semi-annual report, Fairholme Capital Management announced a 26.42% gain for the Fairholme Fund for the first half of 2019. Investments in Fannie Mae, Freddie Mac, Imperial Metals, and St. Joe contributed to the fund’s strong returns during the six-month period.

“To the Shareholders and Directors of The Fairholme Fund:

The Fairholme Fund increased net asset values by 26.42% for the first six months of 2019. Strong absolute and relative returns were based on investments in Fannie Mae, Freddie Mac, St. Joe, and Imperial Metals.

The Fairholme Fund increased 26.42% versus a 18.54% increase for the S&P 500 for the six-month period that ended June 30, 2019. The above graph and performance table compare The Fairholme Fund’s unaudited performance (after expenses) with that of the S&P 500, with dividends and distributions reinvested, for various periods ending June 30, 2019. The value of a $10,000 investment in The Fairholme Fund at its inception was worth $54,466 (assumes reinvestment of distributions into additional Fairholme Fund shares) compared to $29,345 for the S&P 500 at June 30, 2019. Of the $54,466, the value of reinvested distributions was $35,326.

Fannie Mae and Freddie Mac (“Fannie” and “Freddie”)

In 2008, Fannie and Freddie’s boards of directors agreed to federal conservatorship and U.S. Treasury investments earning 10% of principal, $2 billion in fees, and 80% ownership stakes. Since then, Fannie and Freddie have earned and paid $300 billion to our U.S. Treasury, which is $24 billion more than promised. It is now time for Fannie and Freddie, like all others forced to take U.S. Treasury money during the last financial crisis, to keep what is rightly earned, recapitalize, and exit conservatorship. Such a course would follow established laws, maximize taxpayer safety and returns, and allow a reasonable, risk-adjusted return on the Fund’s Fannie and Freddie junior preferred shares.

St. Joe Company (“JOE”)

By 2021, JOE, with project partners, hopes to reach a run rate of 1,000 home and home lot sales per year; rent over 1,300 apartments, 900 hotel rooms, and 1.5 million square feet of commercial space; and register more than 1,400 The Clubs by JOE full-time members. Thirty residential, commercial, and hospitality projects are expected to start this year. Each project is based on pent-up demand, stands on its own, and is expected to increase company operating earnings and asset values. I continue to chair JOE’s board of directors.

Imperial Metals Corporation (“Imperial”)

In March, Imperial entered into an agreement to sell 70% of Red Chris, its flagship copper and gold mine, to Newcrest Mining for $807 million. Proceeds will be used to pay down maturing debt, including the senior debt owned by the Fund. The Fund will remain an owner of Imperial’s common stock, which offers further appreciation with such de-leveraging, Newcrest managing Red Chris, and rising copper and gold prices.

Outlook

There is room for further portfolio gains. Fannie and Freddie preferred stocks trade for less than half of stated liquidation prices. JOE is accelerating growth while diversifying risks. Imperial is about to complete the Red Chris transaction. Gold prices are up. The Fund holds cash and investment grade cash equivalents totaling more than 30% of net assets in preparation for expected opportunities.”

You can download a copy of Fairholme Capital Management LLC’s 2019 Semi-Annual Report here:

Fairholme Capital Management LLC’s 2019 Semi-Annual Report

You can also see the list of our 2019 Q2 investor letters and download them on this page.

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