On March 30, 2017, the defenses were breached. In response to PICO‘s frontal assault, UCP took a seat at the bargaining table and negotiated a target date surrender. UCP did not surrender in real time. It will persist a little while longer. UCP, as it is currently conceived, will survive either another 7 months if the debt maturity goes sideways or another year (barring a surprise offer or other unanticipated transaction). Either way, value destruction at UCP will end sometime soon and shareowners may finally realize an acceptable return on their investment.
UCP produced the bold headline: “UCP Announces Expansion Of Board And Strengthened Corporate Governance.”
We find UCP’s tone amusing – as if UCP sought to improve corporate governance all along. The potential corporate governance improvements at UCP were not self-imposed. They are the result of PICO taking off the kid gloves.
The potential corporate governance improvements are warranted. Corporate governance – and shareholder returns – at UCP have been pure disappointment under Chairman Cortney and CEO Bogue. PICO had to do something.
The result is guaranteed as Director election at UCP requires a majority of votes, which PICO, with its almost 57% voting power, will meet by itself.
We got this one wrong in a few different posts. We didn’t envision a scenario in which Mrs. Wade kept her seat. This unfortunate result means that one of 4 UCP Directors focused on entrenchment and destruction of shareholder value gets more time to do more of the same.
Mr. Locker will be named to the UCP Corporate Governance and Nominating Committee. Eric Speron will be appointed to the Compensation Committee, an addition that is long, long overdue.
In corporate governance impropriety that brings back John Hartian memories, the UCP Comp Committee, comprised only of Mr. Cortney and UCP Director Peter H. Lori, has been guilty of several offenses against shareowners. This dubiously configured Comp Committee without any explanation, removed the Officer Stock Ownership Guidelines from the Proxy Statement. CEO Bogue received the most undeserved salary increase in the homebuilder industry. And Mr. Bogue received Golden Parachute fortification as PICO sought to earn an adequate return on its investment.
Now that all the dubious and abusive compensation machinations are complete, Messrs. Cortney and Lori are willing to accept a non-corrupt additional member. The rotten Cortney and Lori apples don’t fall far from the diseased Juicerian tree.
As we said earlier, PICO now likely has a maturity date on its UCP investment. Assuming no unexpected transactions, UCP will likely cease to exist in its current form either in October 2017 or by the 2018 Annual Meeting. Both dates are a long way away. This incompetent UCP crew is capable of destroying a lot of value in the interim.
Messrs. Cortney, Bogue, Lori and Mrs. Wade occupy a shameful place in corporate America. These four value-destroying charlatans continue to hold two shareholder bases hostage. Despite the fact that UCP has destroyed millions of dollars in value since its July 2013 IPO, these self-interested Directors refuse to maximize value for two sets of owners and sell the firm.
We understand this unethical choice. As we have said, Messrs. Cortney, Bogue and Mrs. Wade will never occupy their respective positions ever again. Therefore, they cling to the prestige and compensation of their current positions as if they were drowning men and women reaching for a life raft.
Corporate Governance Actions
According to the Settlement Agreement with PICO, UCP agrees to include 5 Proposals, along with its positive recommendation, in its 2017 Proxy Statement.
First, UCP will pursue hard declassification, starting at the 2018 Annual meeting. All Directors and potential Directors with terms expiring after 2018 have signed resignation letters to facilitate the hard declassification next year.
Second, shareholders with 25% or more voting power of UCP Common Stock may call a Special Meeting. This provision pertains only to UCP holders of Common Stock, which thereby excludes PICO, which owns Class B Common Stock and Series A Units. PICO had sought a 10% threshold.
Third, stockholders will be allowed to act by written consent.
Fourth, Directors may be removed without cause, the size of the Board may be changed and vacancies on the Board may be filled by a 75% supermajority vote (for as long as PICO or another shareholder owns 35% or more voting power). In other words, PICO plus 18.4%. PICO had sought a 66 2/3% threshold.
Fifth, Stockholders may amend the Bylaws by a 75% supermajority vote (for as long as PICO or another shareholder owns 35% or more voting power). In other words, PICO plus 18.4%. PICO had sought a 66 2/3% threshold.
UCP refused to honor PICO’s request to adopt cumulative voting for Directors.
To pass, each proposal needs a “For” vote from a majority of the roughly 8 million Class A shares (about 4 million “For” votes).
PICO agrees to vote “For” all 5 Proposals. Going forward, PICO agrees to vote its securities in such a manner that at least 3 UCP Directors at all times will be “Independent.”
The passage of both the Director changes and the 5 Proposals is all but guaranteed. All independent UCP shareowners who can stand vertically and maintain a pulse will vote “For” each of these items. With UCP’s formal recommendation behind all measures, passive investors will also vote “For.”
Don’t use that as an excuse to go fishing instead of voting your UCP shares! No voting result is written in stone, so your “For” vote will count. Like a baseball pitcher that can hit, sometimes shareholders have to help themselves out.
We have been saying for some time that 200 homes per market, per year is the minimum efficient scale for a builder. UCP CFO Mr. Pirrello admits as much in the Q3 earnings call. Here is what he said in response to an insightful question from Alan Ratner, of Zelman & Associates:
“As far as lots that are optioned, we have said in the past that we see opportunities in all of our markets but especially in those divisions where we are not operating at full kind of efficiency. And those would be in the Southeast and even in the Pacific Northwest where we are doing somewhere around 100 units per year. And the real focus there is to get the land supply up so that we can get them to be performing at a level similar to our Bay area in the Central Valley doing over 200. So that’s the low hanging fruit that we see.”
UCP is nowhere near 200 homes per market, per year, except in Monterey County, California, at the East Garrison project. This is probably why UCP has some of the worst operating margins in the builder industry.
UCP Should Sell Now
“They face hard facts of real estate life, one of which is that paying high prices now to put future home sites on the balance sheet can be perilous to future returns on that upfront investment. Companies that, because of their lesser heft have to pay more per lot expose themselves to greater risk than deeper-pocketed companies who wield lots of cash and cheaper capital in the land game.”
We suggest you click the link above to read the post in full.
Homebuilder M&A Red Hot
We have said for some time that now is a great time to sell a homebuilder. Market participants concur. Several buyers and sellers have shaken hands on a bid/ask spread to close transactions. Given UCP’s pathetic valuation of about 85% of net equity and little hope for improvement, a sale remains the only way for these hapless Directors and Executives to maximize value for owners. Here is a summary of the latest transactions, in reverse chronological order:
- AV Homes buys Savvy Homes — On March 3, 2017, publicly traded AV Homes (AVHI) announced it will pay $50 million for Raleigh, NC based Savvy Homes. The seller has over 20 active communities and delivered more than 250 homes in 2016. Savvy owns 230 residential lots and controls over 1,900 lots. The transaction is scheduled to close in Q2 2017.
- Sekisui House buys Woodside Homes — On February 22, 2017, Sekisui House of Osaka, Japan, announced its acquisition of Utah-based Woodside Homes. The price tag for Woodside, the country’s 27th largest builder, is estimated at $468 million. Woodside has a presence in California, Nevada, Utah and Arizona. In 2015, Woodside delivered 1,644 homes worth $603 million in revenue.
- Daiwa House Group buys Stanley Martin Communities — On February 14, 2017, Daiwa House completed its purchase of 82% of Stanley Martin Communities. The target is based in Virginia and has a presence in Washington, DC., Richmond and Charlottesville, Virginia, and Raleigh, North Carolina. Stanley Martin owned/controlled 8,700 lots and recorded $500 million in revenues in 2016. Toll Brothers paid $82.5 million for Coleman.
- Toll Brothers acquires Coleman Homes — On November 7, 2016, Toll Brothers announced its purchase of Boise, Idaho-based Coleman Homes. The seller owned/controlled 1,750 lots and had 135 homes in backlog worth $40.8 million. Toll Brothers paid $82.5 million for Coleman.
- Clayton Homes acquires Summit Homes — On November 3, 2016, Clayton Homes bought Summit Custom Homes. The seller was founded in 2002, is headquartered in Kansas City, Missouri, and boasts 1,200 lots. Summit was ranked No. 129 by Builder Magazine, with 2015 revenue of $86 million. Fred Delibero is CEO of Summit. Financial terms were not disclosed.
It sounds like there are more potential buyers for UCP than ever. Did we mention that it is a great time to sell a homebuilder?
In October 2016, Mr. McManus, editor of Builder Magazine, wrote an insightful piece on the arrival of Japanese acquirers to the US homebuilder industry. Among several astute observations, Mr. McManus notes:
“Motivating Japanese home building organizations in their pursuit of beachheads here in the U.S. are two strongly related forces: a need for yield on invested capital and diminishing opportunity to produce that yield in Japan, where the population is shrinking and household formation has stagnated.”
In the final paragraph, Mr. McManus made an accurate prediction:
“[W]ith two Japanese organizations–and other international players also seeking safe-haven residential real estate plays in the United States–as new bidders in the mix, it may serve to stir the pot on public-private merger and acquisition activity in the months ahead.“
The buyer pool for UCP is now deeper than ever. Self-serving UCP management is the only impediment to maximizing value for all UCP shareholders.
UCP Cash Earnings 2016
Many RPN readers enjoyed our expose’ of UCP’s Q4 earnings presentation. We entertained them by uncovering the dishonesty and desperation of Messrs. Bogue and Pirrello, both of whom futilely attempted to inflate UCP’s earnings to the investing public.
A few readers asked us about economic earnings, so we provide our version. First, a few notes. UCP does not disclose cash interest paid. We use interest incurred, which is likely higher, but not by much.
Like all builders, UCP capitalizes and expenses interest on debt, provided that real estate inventory balance exceeds debt balance. When capitalized interest is expensed, it is lumped in with cost of goods sold. Our “Incremental Interest Expense” figure is the interest incurred above and beyond what UCP expensed in cost of goods sold.
We always include routine depreciation and amortization, stock options and other forms of noncash employee compensation in our calculation of economic earnings. Although such P&L debits do not have immediate cash consequences, assets wear out and must be replaced. Equity equivalents granted to managers have an economic cost to owners. This inclusion may skew from cash earnings, but it is perfectly coherent with economic earnings.
Recall that Messrs. Bogue and Pirrello told UCP owners, with straight faces, that “Core Earnings” were $.84 cents per share and “Core ROE” was 6.5%. We laughed at their desperate attempt to artificially inflate UCP’s results in order to compensate for dismal performance, as measured by any and all relevant metrics. These men have a tendency to communicate dishonesty to owners and they are incompetent managers in the extreme. Below we show UCP’s economic earnings and compare it with the deceptive figures futilely championed by Messrs. Bogue and Pirrello:
Item RPN Economic Earnings ---- --------------------- Reported Pretax Earnings $9,163 Add: Goodwill Writedown $4,223 Abandonment/Impairment $3,112 Less: Contingent Consideration ($2,347) Valuation Allowance -- Cash Tax Payment to PICO ($4,830) Incremental Interest Expense ($4,385) --------------------- Total UCP Economic Income $4,936 Earnings Per Share $.26 Return on Avg. Equity ($222M) 2.2%
Messrs. Bogue and Pirrello deceptively claimed credit for $.84 cents per share in earnings. Recall that they conveniently “forgot” to adjust for the contingent commission reduction and the cash tax payment to PICO.
We calculate $.26 cents per share, or 69% less that the dubious figure provided by Messrs. Bogue and Pirrello. Recall that Messrs. Bogue and Pirrello disingenuously told us that “Core ROE” was 6.5%, while we calculate an economic ROE of 2.2%, which is less than a 10-year Treasury bond.
Monetization of PICO’s stake in UCP is now in sight. But it could be a long way off. In the meantime, both shareholder bases of UCP and PICO will incur significant risk and value destruction as 4 Directors – Messrs. Cortney, Bogue and Lori and Mrs. Wade – whom we characterize as dishonest and inept, continue their pursuit of self-interest in the extreme.