The UCP sale was completed on August 4 and by now, all UCP shareowners should have received their slugs of cash and shares in Century Communities. Recipients of such loot include PICO, which took in $55.3 million cash and 2.4 million CCS shares.
For those who clicked on the UCP link above, you noticed that the UCP website is gone; readers are diverted to Century’s homepage.
The sale of UCP is significant win for PICO owners. We celebrate all at PICO who got this deal across the finish line. Liquidation of the UCP stake is also significant to PICO owners going forward: PICO is now a water company. Stated with greater specificity, PICO is a holding company that maintains a portfolio of water assets through its subsidary Vidler Water. Call it what you like, but as one observer noted, “With the simplification of PICO, an acquisition of the entire water portfolio becomes far more likely.” Let’s hope so.
PICO – World Record Holder
The first surprise of the quarter (at least to RPN ), was that PICO did not repurchase any shares. We speculated that PICO would make opportunistic purchases of its own shares during Q2 and we took an educated guess that PICO had established a 10b5-1 Plan for more systematic purchases. On the former, we were wrong. It appears as though, during the first half of 2017, PICO only bought in enough shares to cover dilution from equity awards and there were no owner-oriented open market purchases. Friend to shareholders, Andrew Shapiro of Lawndale Capital Management, asked about the existence of a 10b5-1 Plan, but the question was suspiciously dodged.
We believe that PICO holds the world record for the longest unfulfilled promise to return capital to shareowners – approaching 2 years. The “Revision To Business Plan,” which first committed to return capital to owners, was made public on November 17, 2015. Thus far, not one single dollar has been returned to owners.
Granted, this John Hartian parry to shareholder activists was actioned under a different Board, a different CEO and effectively, a different PICO. But the Plan has not been renounced or qualified by the existing PICO regime. In fact, CEO Max Webb stated on the Q2 call: “The board is deeply committed to returning capital to shareholders.”
Problem is, promises of capital return by PICO are getting stale. They are beginning to ring as empty as a celibate lover’s repetitions of “I love you.” PICO has held $20 million in excess capital since early this year, and after April 11, when the UCP deal was announced, PICO was free to return it to owners. Now, PICO sits on about $92 million, of which about $80 million is free to return to owners. And PICO has returned zero.
Mr. Webb blew shareholders a kiss with a reminder that Greg Bylinsky and Eric Speron, who collectively own 8.1% of PICO shares, sit on the Board. But neither Mr. Bylinsky nor Mr. Speron have much Director experience and neither man is a commanding presence in the Boardroom. It is possible that Messrs. Bylinsky and Speron are being out-argued and out-voted at the Director’s table, when it comes to expeditious return of capital to owners.
Mr. Webb assures us that he, CFO John Perri and the Board are diligently preparing to return this capital. But thus far, the safety is still on and the trigger has not been pulled.
Here is the problem with PICO’s promises: the various options for returning capital to owners are well-known and uncomplicated.
Our panel is replete with Directors, C-level Executives, institutional investors and experienced businesspeople. And none of them can figure out why PICO continues to delay, both the explanation and the action. Special dividends have been done before; the calculus is not complicated. Dutch tenders have been done before; the calculus is not complicated. Returns of capital (in the tax sense) have been done before; the calculus is not complicated.
One PICO observer said, “Maybe they are waiting for a lower share price to get more bang for the buck.”
“You mean like market timing?” we asked.
We hope the PICO Board is not engaged in the speculative and dubious exercise of trying to time a bottom for the PICO share price. No one knows in the short term where market indices will price nor where PICO shares will price. Speculative market timing is anathema to value investing – and all our Directors claim to be value investors.
Our most skeptical PICO observer stated, “Interesting that they continue to hold your capital now that the firm has been reincorporated in Delaware and proposed Indemnity Agreements are filed.”
One plausible explanation for PICO’s delay and silence on return of capital came from our Crack Strategist. He said, “If PICO is going to do a Dutch tender, it is most beneficial if they start with the lowest share price possible. If PICO repurchases a few hundred thousand shares in Q2 and drives the price to $18, and they need a 15% premium on the tender, then they get less bang for the buck than if they start with a $16.50 share price.”
It is also possible that PICO is blacked out again due to pending asset sale announcements. But that would not explain why PICO did not initiate buybacks through a 10b5-1 Plan after the UCP deal was announced in early April.
In conclusion, PICO’s constant expressions of love to owners, without copulatory reinforcement, are starting to lack charm. The Board has returned zero capital to owners and it refuses to utter any words on the subject. Mr. Webb would not even confirm or deny the existence of a 10b5-1 Plan. We find this unusual, approaching suspicious.
Messrs. Webb & Perri Donate To Shareowner Cause
Messrs. Webb and Perri announced that they were annually donating $74,000 and $66,000, respectively, to PICO shareowners (total annual donation: $140,000). Both executives, with a nod to the reductions in size and complexity at PICO, agreed to lower their annual base salaries by 15%.
These men had rock solid employment contracts that awarded them their full base salaries for as long as they remained employed at PICO. We salute the voluntary contributions of Messrs. Webb and Perri to the PICO shareowner cause.
Over the last 5 years, PICO executives have almost exclusively been on the taking end of corporate resources; we can’t recall a single financial windfall that went shareholders’ way. Any economic value that inured to owners was wrested away by active shareholders/directors willing to throw punches.
Today is a bright day in PICOville because shareowners have received:
a) a financial benefit that;
b) was voluntarily relinquished, and;
c) came from executives.
We thank Messrs. Webb and Perri for their gesture of executive chivalry which warms the heart (and lines the wallet) of the collective shareholder base.
On the Q2 Call, Mr. Webb uttered similar lines related to Century Communities, but without cloak and dagger implications. During Q&A, individual investor John White asked about PICO’s plans for its Century shares. Mr. Webb essentially said, “PICO loves Century Communities.” In other words, Mr. Webb waxed optimistic about Century and indicated that the principals at PICO are “big believers in Century.”
But we won’t hold them for long and we expect PICO to also make a quick exit.
We will be sellers of Century for a few reasons. First, the homebuilder industry has awful fundamentals. Barriers to entry are low, meaningful brand differentiation is impossible and returns on capital over the cycle are inadequate. Second, the builder industry is extremely cyclical and we are not in the trough nor the middle of the cycle. Third, the builder industry, over the long-term, is a consumer of capital.
PICO will be a seller for four main reasons. First, PICO has an articulated mandate to monetize assets and return capital to owners. Second, PICO now owns 9% of Century, so talking smack would be like telling a suitor for your sister that she has bad breath. Third, PICO wants to sell its Century shares into a strong market. Last, we believe PICO agrees with us: Century may be a great little homebuilder, but it is still a homebuilder. PICO already owned one of those, which it just sold for sub-historical cost. Been there, done that.
Financial Statement Analysis
At March 31, 2017, PICO reported $125.1 million of pretax federal net operating loss carryforwards. At June 30, 2017, this figure jumped to $162.3 million, an increase of $37.2 million. Given that the second quarter 10-Q was issued after August 4, we assume that this jump is attributable entirely to the UCP transaction.
As PICO owned roughly 10.4 million UCP Units (shares), PICO’s tax basis in UCP was about $3.58 per share higher than the deal price. In other words, PICO sold its UCP stake for roughly $115 million, but its tax basis was closer to $150 million.
Now that is what RPN calls destruction of capital. Way to go Dustin Bogue!