The St. Joe Co., a major forest landowner in the Florida
Panhandle that has made significant moves into residential
development in the region, is facing a formal investigation
from the Securities and Exchange Commission, the company has
revealed. The Miami Herald has the story
(“
SEC’s investigation of St. Joe Co. now
‘formal’,” by Ina Paive
Cordle).
St. Joe says the probe covers a variety of topics, according
to the Herald report, “including antifraud provisions
of federal securities laws, as they apply to the company, its
past and present officers, directors, employees, partners,
subsidiaries and affiliates. It also covers the compliance of
reporting obligations by those who currently and in the past
have directly or indirectly owned more than 5 percent of St.
Joe’s stock, including Fairholme Funds, Fairholme
Capital Management and St. Joe’s chairman Bruce R.
Berkowitz.” (Berkowitz, who runs the Fairholme
investment funds, has engineered a shakeup of company
management in the past year, and took over as chairman this
year.)
One of the key issues in the investigation is rumored to be
the company’s financial accounting practices with
regard to the “impairment” of land —
a practice by which companies write down the loss of market
value in their land holdings as a capital loss during real
estate market downturns. Most large U.S. builders have taken
major accounting write-offs on land devaluation in recent
years, and many have reaped corresponding Federal tax rebates
from “loss carryback” provisions in the tax
code, which let money-losing corporations recover money paid in
taxes during previous, profitable years.
The question of St. Joe’s asset valuations plays a
role in some high-stakes Wall Street games around the company,
Bloomberg reports
(“
St. Joe Shares Fall Most Since February on Disclosure of Formal
SEC Probe,” by John Gittelsohn). Hedge fund
manager David Einhorn, who runs New York-based hedge fund
Greenlight Capital Inc., holds a “short”
stake in St. Joe (in which the investor would make money if the
company’s stock price fell), writes Bloomberg, and has
told the press previously that St. Joe’s land is
overvalued.
But St. Joe contests that claim. Company boss Berkowitz told
Bloomberg that the land, mostly bought in the 1930s and 1940s,
is correctly valued on the books, saying: “St.
Joe’s board and executives have been very, very
conservative and spent a lot of money making sure we were doing
it correctly.”
New York financial analyst Sheila McGrath concurred, telling
Bloomberg that most of the company’s land is valued as
forest, not as developable acreage. “I’d be
very surprised if they’re not vindicated because their
real estate is on the books at well below market
value,” McGrath told Bloomberg.
But St. Joe’s fortunes, like those of any Florida
developer, hinge mainly on the recovery (or not) of the Florida
real estate market — and, in St. Joe’s case,
of building and real estate in the Panhandle. A significant
chunk of St. Joe’s developable property lies near the
newly built
Northwest Florida Beaches International Airport —
a facility that St. Joe donated much of the land for, and that
critics say is too large for the local market. If St. Joe wins
its bet and the new airport spurs a significant increase in
tourist traffic and in-migration, values for St. Joe’s
nearby buildable land may turn out to be higher in reality than
on paper. If not — well, anyone want to buy a
runway?