Bruce Berkowitz won the battle to change management at St. Joe Co., the money-losing Florida landowner. Now, he has to figure out how to make its forests and swamps profitable as short sellers bet against the shares.
“The company’s basically under attack,” said Berkowitz, who was named chairman of the Watersound, Florida-based company on March 4 and whose Fairholme Capital Management LLC is its largest shareholder. “There are plenty of people out there who’d like to see the company go down the tubes. That’s sort of by definition anybody who’s shorting the stock.”
David Einhorn, the hedge fund manager who holds an undisclosed short position on St. Joe, told investors in October that the company sold its best waterfront land and was left with mostly rural acreage that should value the shares at no more than $10 each. After his presentation, St. Joe stock on loan to short sellers climbed, reaching a 12-month high of 27 percent of total shares on Jan. 25, according to London-based Data Explorers, a securities information provider.
“This is the most interesting drama on Wall Street in 10 years -- two brilliant guys in binary positions,” said James Dahl, managing director of Rock Creek Capital, a Jacksonville, Florida-based investor in $500 million worth of timberland. “Only one can be right. There’s no middle ground.”
Berkowitz’s Fairholme owns almost 29 percent of St. Joe shares, with a cost basis of $26.26 each, according to a Feb. 1 filing. St. Joe shares rose 69 cents to $26.93 as of 4:15 p.m. in New York Stock Exchange composite trading.
“We suspect Bruce Berkowitz has confused a bad investment with what he thought was a bad management,” Einhorn’s Greenlight Capital LLC, which manages $6.8 billion of assets and profited from betting against Lehman Brothers Holdings Inc. (LEHMQ) in 2008, said in an e-mail.
Short sellers sell borrowed stock in the hope of buying the securities later at a lower price and returning them to the lender. St. Joe’s short interest has declined to 19 percent, the 11th highest among members of the Russell 1000 index (RIY), according to Data Explorers.
Einhorn’s argument “doesn’t compute to me,” Berkowitz said in an interview today on Bloomberg Radio. “If we have the opportunity, at the right price, we’d buy more” shares, he said.
Berkowitz, named domestic stock fund manager of the decade last year by Morningstar Inc., has invested extensively in troubled companies through Miami-based Fairholme, which manages about $22 billion of assets. Fairholme’s 10 largest holdings as of Dec. 31 included American International Group Inc. (AIG), General Growth Properties Inc. (GGP), Citigroup Inc. (C), CIT Group Inc. (CIT), Regions Financial Corp. (RF) and St. Joe, according the Feb. 1 filing.
Streak of Losses
St. Joe, northern Florida’s largest private landowner, reported losses for the past 11 quarters totaling $234 million as the state’s real estate crash drove down prices and forced the company to write down the value of land. Originally a timber and pulpwood company started by Alfred I. DuPont, St. Joe transformed in the 1990s into a developer of housing, beachfront resort communities and an international airport near the Gulf of Mexico, which opened in May.
Chief Executive Officer Britt Greene and three other board members resigned Feb. 28 after Berkowitz criticized their spending and corporate governance. The new board includes Berkowitz, Fairholme President Charles Fernandez, former Florida Governor Charlie Crist and Carnival Corp. Chief Operating Officer Howard Frank. Hugh Durden, St. Joe’s previous chairman, is serving as interim CEO while the company looks for Greene’s replacement.
New Operating Chief
The company named Park Brady chief operating officer, effective March 21, according to a statement yesterday. Brady, who will be paid $750,000 a year plus benefits, was previously president and CEO of ResortQuest, a vacation-rental company based in Fort Walton Beach, Florida.
Berkowitz takes the helm as Florida’s real estate slump enters its fifth year. Resale home prices fell to a median $136,500 last year, down 4.2 percent from 2009 and 45 percent from the 2006 peak, according to the Florida Association of Realtors. The state had the third-highest rate of foreclosure filings last year behind Nevada and Arizona, according to RealtyTrac Inc. Only Nevada and California had higher rates of unemployment, according to the U.S. Bureau of Labor Statistics.
St. Joe owns 574,000 acres (232,000 hectares) of land, about 70 percent of which is within 15 miles (24 kilometers) of the Gulf of Mexico. Einhorn said the land is worth $1,500 an acre, based on the value of its timber. Properties approved for 31,600 homes and 11.6 million square feet of commercial space are worth less than the cost of improvements, he said.
Forestry accounted for 29 percent of St. Joe’s $99.5 million in revenue last year, when the company reported a net loss of $35.9 million, or 39 cents a share. Dahl of Rock Creek, who is shorting the stock, said its forests are worth less than most.
“It’s the worst-managed timberland I’ve ever seen with no close second,” he said. “It’s garbage.”
St. Joe’s value should be based on its potential, not its forestry past, Berkowitz said.
“I don’t understand why forestry is the analysis,” he said. “What are you valuing the beach at, the golf courses, the hotels per acre?”
St. Joe missed past opportunities to maximize its land value, Berkowitz said. In 1959, then-CEO Edward Ball spurned an offer from Walt Disney, founder of Walt Disney Co. (DIS), saying, “I don’t do business with carnival people,” according to “Green Empire,” a 2004 book about St. Joe. Walt Disney World Resort opened in Orlando in 1971.
‘Box of Chocolates’
“Orlando should be sending a box of chocolates to St. Joe every day,” Berkowitz said.
St. Joe’s current troubles stem from its $827 million in investments from 2006 to 2008 in communities -- such as the town of Watersound, RiverTown and SummerCamp Beach -- that remain undeveloped and unsold, according to Einhorn’s presentation and a consolidated shareholder lawsuit.
Those investments were led by Peter Rummell, St. Joe’s chairman from 1997 to 2008, and a former Walt Disney Co. developer of projects such as Celebration, a master-planned community modeled after an idealized American small town. Rummell, who was named in February as chairman of the Urban Land Institute, a development think tank in Washington, declined to comment.
St. Joe’s revenue was down 28 percent last year from 2009 and 89 percent from the peak year of 2005. More than half of its $39 million in revenue from real estate sales came from recognizing the 2006 purchase of 2,148 acres by the Florida Department of Transportation.
Losses narrowed as St. Joe slashed pretax charges, mostly writedowns on property investments, to $27.1 million from $163.1 million in 2009. The reduced writedowns came after the company disclosed Jan. 10 that it faced an informal inquiry by the U.S. Securities and Exchange Commission over its impairment practices.
St. Joe acquired most of its land in the 1930s and 1940s and its valuations are based on a history of appreciation between 0 percent and 7 percent a year, according to its annual report, released March 3.
Berkowitz said he doesn’t expect the new management to revise the financial statement.
“It’s clean,” he said in a March 5 telephone interview. “Do you think the auditors would allow any sort of liberal policies given the stink about valuations?”
St. Joe’s land has become more valuable since May, when the Northwest Florida Beaches International Airport opened near Panama City, Florida, with flights from such cities as Atlanta, Houston and Nashville, Berkowitz said. The company promised to compensate Southwest Airlines Inc. for losses on its flights, money Southwest hasn’t claimed.
Aerospace companies, homebuilders and hoteliers are being courted as investment partners in the area, Berkowitz said. It may take at least a decade to determine whether his stake in St. Joe was a good bet, he said.
“Right or wrong is going to be determined 10 years from now,” Berkowitz said. “You’re buying land at values that are based on incorrect perceptions. This is what investing’s all about. It’s what free markets are all about.”
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