Leading up to the 2016 PICO Annual Meeting, shareholders were in a disgusted mood. The Legacy PICO Board had committed one shareholder abuse after another. PICO stock price bounced around all-time lows. RPN had just revealed that John “The Juicer” Hart and Kenneth “The Slug” Slepicka had perpetrated an undisclosed related transaction that made both men conflicted.
At the Annual Meeting, Juicer spread disinformation and deception and implied that a shareholder-led conspiracy stymied his ability to create value. Carlos “NACD-Decorated Horse Thief” Campbell spun a prolonged lie to PICO owners with a straight face, thereby earning the moniker we have bestowed upon him. Raymond “Delaymond” Marino pretended like everything was under control and everyone was focused on creating value for shareowners. Stellar corporate governance, imminent assets sales, return of capital – all in the offing, Delaymond assured us.
In summary, the 2016 PICO Annual Meeting was the epitome of the Principal – Agent Problem manifested in real life.
(Bloomberg recently reported that protestors in Venezuela have begun hurling containers of feces at government forces. Called “poopootov cocktails,” these projectiles are intended to disgust, insult and repel. It is a good thing such events were not reported before the 2016 PICO Annual Meeting; a fecally enterprising shareowner might have taken aim at Juicer.)
2017 – The Max Webb Show
The PICO 2017 Annual Meeting was polar opposite. There were no incompetent or self-interested Directors in the room. Assets have been sold. A micro return of capital has taken place and profuse promises (which we believe are earnest) have been made to return more. PICO stock has reached $17 per share. UCP and its prodigal CEO Dustin Bogue are poised to be someone else’s problem.
It wasn’t exactly an audience with the Dalai Lama. But the 2017 Annual Meeting consisted of good shareowners communicating with good Directors, and everyone had good thoughts and good intentions in mind.
PICO’s CEO Max Webb did 99% of the non-Vidler talking at the Annual Meeting – and some of the Vidler talking. He was composed, articulate and at ease with his new, elevated responsibility. Mr. Webb showed us why his continued presence at PICO benefits shareowners – although he is not coming cheap. Mr. Webb has mastery of both UCP and the Vidler assets and is clearly the best choice to lead the liquidation process. PICO is no ordinary liquidation.
Dorothy Timian-Palmer impressed everyone with her technical knowledge, as she always does. She adroitly fielded questions about Vidler’s water assets, with added commentary on the largest ones.
Corporate costs have come down since the last update a few months ago. Annual overhead was estimated at a $9.9 million run rate on the Q4 earnings call. This has been reduced to $9.1 million currently. Once UCP is transacted and certain Vidler projects are completed, Mr. Webb predicts general corporate expenses will come down still more.
The biggest disappointment of the 2017 Annual Meeting was the 9,993,802 PICO shares that approved the fusion the CEO/Chairman roles. We have articulated our opposition to this proposal. We feel it is structurally unsound, we don’t feel Mr. Webb earned the right to be Chairman and it rewards bad behavior. The flip side is that Daniel Silvers would have made an excellent Chairman. He has proven his shareholder orientation, he is unafraid in the Boardroom and he is unconflicted by compensation issues. Mr. Silvers also deserved the Chairman slot after leading the Palace Coup, which expelled the merchants from the temple.
Winston Churchill once said, “The best argument against democracy is a five minute conversation with the average voter.” We allocate the 9,993,802 “For” votes on this proposal into the same category.
Andrew “Andy” Shapiro appropriately asked the Board to be sensitive to base Executive Compensation as PICO is reduced in both size and complexity. We have been saying the same thing for a long time. Andy is right, but it will never happen – not in a million years.
Return Of Capital – Micro
It’s so small, you may have missed it. PICO returned capital to owners in Q1 2017. The 10-Q reveals that PICO bought back 13,400 shares at an average price of $13.70 per share, worth $184,000.
On the RPN Comment Board, many readers have been vocal about their desire for capital return. However, due to the Century/UCP negotiations, PICO was blacked out from repurchasing shares for the last several months. PICO has provided effusive assurances that more capital return is coming. Any such measure will be less effective with a $17 stock price, but most investors expect continued share buybacks and a Dutch Tender is probably in our future.
This brings us to an important question. How much capital does PICO have to return to owners? Let’s break it down.
PICO publicly stated on the Q4 earnings call that there was $20 million available for return of capital. At the close of the UCP deal, which is expected by the end of Q3, PICO will receive about $55 million in cash. Sixty one days after deal close, PICO can sell about 1.25 million Century shares. At the current price of $26 per Century share, such a transaction would yield another $32 million.
By the end of 2017, PICO could potentially return about $100 million to owners.
By the end of Q1 2018, PICO can sell the tag end of its Century position. At today’s price of $26, this sale of about 1.15 million shares would yield another $30 million. By Q1 2018, PICO could potentially return about $130 million to owners.
We don’t want to get too excited. And we don’t want to get you too excited. But a few shareholders speculate that PICO won’t be around in 2 years. These shareholders believe that with UCP jettisoned, a strong economy in Vidler’s markets and a continued positive outlook for water assets, “patient capital” will bid for the entire Vidler portfolio. These owners theorize that a patient investor will buy the whole Vidler enchilada, cut overhead and public company expenses, preserve the Vidler employee core, and patiently liquidate the water assets piecemeal.
Such a scenario makes greater sense with the high potential for corporate tax reform which, in one swoop, will reduce the value of PICO’s (and all corporate America’s) NOLs. With the NOLs suddenly worth less, an “Ownership Change,” as defined by Section 382 of the Tax Code, does not produce such a scary reduction in value.
We have no knowledge of such a scenario. It is one possible scenario for PICO’s future. There are many others.
In conclusion, this is a different PICO. Corruption and incompetence have been replaced by shareholder orientation and capability. As we have been saying for several months, the future for PICO owners looks bright.
Century – Locked And Loaded
On May 8, Century Communities announced that it will offer $300 million of Senior Notes due 2025. Century will use a portion of proceeds to repay its revolving credit facility and the remainder will go to “general corporate purposes, which may include among other things, working capital and acquisitions, including the previously announced merger transaction with UCP, Inc.”