RPN Explains Support For PICO Board – Part 2. M&A Suit Filed Against UCP.

In our last post, we detailed some PICO history and explained how it figures into our support for the PICO Board. Today, we address several concerns that RPN readers have shared about the PICO Board. These communications were posted on the RPN Comment Board and sent in private email.

Readers’ concerns can be broken down into a few categories. We address them one by one.

Pace Of Asset Sales:

Several readers have expressed dissatisfaction with the pace of PICO asset sales. They note that the Vidler portfolio still retains several assets and the economic window for fair prices is finite.

While we agree that high bids will not remain open forever, we find the crux of this grievance perplexing. The PICO Board, as currently configured, had its coming out party on December 2, 2016. Contemporaneous with this announcement, the Board announced the sale of a tranche of Arizona water credits. Granted, this transaction was in the works under the old Board, but in subsequent months, this Board announced another Arizona water credit sale and the sale of UCP.

When the oil and gas property transaction is included, there have been four asset sales in six months. We find this performance to be more than acceptable. If PICO sells another four assets in the next six months, RPN will be bowing and chanting “We’re not worthy.”

Corporate transactions take time. We suggest PICO/UCP owners read the “Background of the Merger” in the Century Communities S-4 Registration Statement. (You can also read our synopsis at “Century Files Registration Statement. UCP – The Girl No One Wants To Dance With).” This narrative details arduous and prolonged process required to bring Century, UCP and PICO to a mutually acceptable bid and ask. Extended negotiation is typical in 9-figure deals. In addition, when multiple attorneys are involved, the only thing that moves fast is the issuance of invoices.

RPN believes that this Board has done an excellent job selling assets. As we said, four deals in six months arouses applause from us.

Return of Capital Transparency:

Many readers want the PICO Board to articulate exactly how it intends to return our capital. We would like this too. But the commitment and transparency some of our readers demand is not optimal.

First, let’s eliminate one possibility: The PICO Board is unlikely to pay a special dividend. All PICO holders will be taxed on a special dividend at their marginal tax rate, probably about 30% on average. Those of us in high tax locations, like California and New York, will pay more. Contrarily, a share repurchase affects only selling shareholders at a rate of 15% of gain, assuming long term holding status. As most institutional investors have been in PICO stock longer than a year, and several plan to continue holding, we’re pretty sure the PICO Board intends to return capital by repurchasing shares.

Second, our research indicates that PICO does not qualify for “return of capital” status. This complicated and esoteric designation allows owners to receive capital from an enterprise and record it for tax purposes as a reduction in their basis, not a dividend. This pushes out the taxable event into the future. The criteria to qualify for “return of capital” status is beyond the scope of RPN – and beyond our pay grade. Suffice it to say, it does not apply to PICO.

Third, as we have written, the PICO Board has already begun the repurchase process. The Q1 10-Q indicates that PICO bought in 13,000 shares for $184,000. While micro, recall that PICO was blacked out for most of the quarter, first by the water credits sale and then by the UCP negotiations. We are not sure why, but it seems to have slipped by some owners that PICO has begun the return of capital process.

We are thankful the PICO Board has played possum on return of capital. Any announcement would likely be counterproductive as it would raise the stock price, decreasing economic efficacy, dollar-for-dollar.  If PICO announced a return of $100 million within five months, the market would know that PICO intends to dump its Century shares. UCP owners don’t want that. PICO owners don’t want that. Century owners don’t want that.

We will not be surprised to learn that the PICO Board has established a 10b5-1 plan. Such a program is tailor made for PICO’s situation. Given that all PICO assets are for sale, the Board could come into material non-public information at any moment. Indeed, it expects to! Therefore, a buyback program that is not affected by PICO news is ideal.

Asset Sale Transparency:

Several readers want more details related to asset sales.

Again, we are puzzled by this complaint. PICO has sold four assets in six months. PICO has indicated that everything is for sale. It is common knowledge that there is no broad, deep, liquid market for water assets. They are one-of-a-kind, bespoke so to speak. One astute PICO observer told us a while ago, “Everything in the water business takes longer than you think it should.” This prophecy is being borne out.

The low hung fruit has been sold. The fruit higher up remains to be sold. Two major shareowners occupy Board seats. We don’t think the Board is stalling.  We think asset monetization is progressing nicely.

Additionally, the Board is not providing more asset sale detail probably because it does not know. The Board does not know the precise order of asset sales and prices at which they will transact. The Board does not know if a buyer will purchase one water asset, a bundle of assets or perhaps the whole Vidler portfolio.  Given such uncertainty, the Board is on far safer ground if it makes no comment.

We recently caught up with our favorite CEO. Our conversation turned to the topic of public relations and press releases. Our favorite CEO had this to say:

“Look, around here, until we have something to say, we don’t say anything. You have all sorts of constituencies. All of them are listening and poised to take action. You have your shareholders, both retail and institutional. You have your customers. You have your suppliers. You have your employees. You have your regulators. All of them are looking out for their own interests and if you say something that spooks them, you can have an enormous problem. We don’t say anything until we have something to say.”

We sympathize with this approach fully.

Plan Of Liquidation:

A few readers have suggested that PICO wind down under a Plan of Liquidation. We were unfamiliar with this process, so we did a little homework. A basic Internet search reveals little; there ain’t much out there about this animal. But we share what little we learned.

A Plan of Liquidation is governed by Section 331 of the Internal Revenue Code. This designation is exactly as it sounds: the firm files a formal plan to liquidate and distribute its assets to equity holders.

The PICO Board has investigated this option, but for many reasons, has decided against it. We spoke with a PICO owner with a strong legal background. He explained that a Plan of Liquidation is very technical and “massively restrictive.” There is a three-year time horizon (which would not be ideal for the sale of illiquid water assets) and once the Plan is in place, share buybacks are prohibited. Proceeds are returned to equity owners, each of which reduces the owners’ tax basis. Taxes are roughly the same in amount, but the day of reckoning is delayed.

According to our legally-minded PICO owner, the strict compliance requirements and lack of capital return flexibility, i.e. share repurchase prohibition, make a Plan of Liquidation unsuitable for PICO.


There are a few more reader grievances we have not addressed. In Part 3 of this series, we will pick those issues up. Stay tuned.

Joseph Tola Files Rep & Warranty Suit Against UCP Directors

From yesterday’s edition of Class Actions Reporter:

UCP INC: Faces “Tola” Lawsuit Over Century Communities Merger
JOSEPH TOLA, On Behalf of Himself and All Others Similarly Situated, Plaintiff, v. UCP, INC., MICHAEL C. CORTNEY, DUSTIN L. BOGUE, ERIC H. SPERON, PETER H. LORI, KATHLEEN R. WADE, MAXIM C.W. WEBB, CENTURY COMMUNITIES, INC., and CASA ACQUISITION CORP., Defendants, Case No. 3:17-cv-02713-WHA (N.D. Cal., May 10, 2017), seeks to enjoin a proposed transaction announced on April 11, 2017, pursuant to which UCP will be acquired by Century Communities, Inc. through its wholly-owned subsidiary, Casa Acquisition Corp.

Pursuant to the terms of the Merger Agreement, stockholders of UCP
will receive $5.32 in cash and 0.2309 of a share in the newly
combined company for each share they own.

Plaintiff alleges that defendants filed a Form S-4 Registration
Statement that omits material information with respect to the
Proposed Transaction, which renders the Registration Statement
false and misleading.

Specifically, says the complaint, the Registration Statement omits
material information regarding the Company’s financial
projections, Century’s financial projections, and the analyses
performed by the Company’s financial advisor, Citigroup Global
Markets Inc.; material information regarding potential conflicts
of interest of the Company’s officers and directors and Citi; and
material information regarding the background of the Proposed

UCP, Inc., is a homebuilder and land developer with expertise in
residential land acquisition, entitlement, and development, as
well as home design, construction, and sales. [BN]

The Plaintiff is represented by:

Rosemary M. Rivas, Esq.
44 Montgomery Street, Suite 650
San Francisco, CA 94104
Phone: (415) 291-2420
Fax: (415) 484-1294
E-mail: rrivas@zlk.com

– and –

Brian D. Long, Esq.
Gina M. Serra, Esq.
2 Righter Parkway, Suite 120
Wilmington, DE 19803
Phone: (302) 295-5310
Fax: (302) 654-7530

22 responses to “RPN Explains Support For PICO Board – Part 2. M&A Suit Filed Against UCP.

  1. RPN. Thank you for the latest post. There would be no harm to the Board discussing the path forward in a more transparent manner imho.

  2. RPN:

    Another great post. Thanks for taking the time to write on these issues. I’m not clear on a few things:

    1. MOST IMPORTANT QUESTION: What method will or might PICO use to return cash to shareholders post-Vidler monetization? What would the tax implications be?
    2. How could PICO possibly buyback $100s of millions in shares, period, let alone through anticipated black-outs and with an ever shrinking float?
    3. PICO’s sole mandate is monetization of assets and return of capital. You don’t think PICO should transparently discuss (or discuss at all) its basic thinking on return method: buybacks, special dividends, formal liquidation and tax strategy? To explain how it will ultimately return $100s of millions? It’s a very foundational, straightforward and reasonable question, yet perplexingly remains unaddressed by PICO.
    4. You assert “PICO has indicated everything is for sale.” At this point “everything” represents Vidler, and PICO has NOT made it clear if it intends monetize via selling Vidler assets, or if PICO will monetize via Vidler’s due-course of business water sales. PICO might not have concrete asset sale info to share, but it most certainly can and should communicate more transparently about its intentions.
    5. Extended duration and excessive comp and burn: I’ll assume your thoughts on this are coming in the next post.

    Since the UCP announcement, I have seen no complaints about the pace of recent monetizations. I think it’s fair to say everyone applauds them. The complaints seem isolated to no transparency around Vidler monetization path and return of capital method and tax consequences – perfectly valid. It’s not even reliably clear that PICO won’t revert to an acquisition strategy.

    Thanks again for your excellent coverage of this situation.

    • Thanks for your valid points, Sam. As we see the situation:

      1) The completion of the Vidler monetization is so uncertain, we believe that no one has any idea what PICO or the world will look like at that time. We excuse the Board for not providing such detail;

      2) Dutch tender;

      3) We believe PICO is buying back shares and will continue to buyback shares. To get the best price possible for those shares, we support the Board’s reticence on this matter;

      4) Every Vidler asset is different. Thus far, the PICO Board has shown complete willingness to monetize Vidler assets. We leave the details to the Board;

      5) Correct. We are not fans of the annual $9.1 million run rate.

      Thanks for your comments.

  3. Complacency

    Ditto Sam. I’d further clarify that this RPN post implies that buybacks are the sole sensible route to return capital to shareholders. As Sam points out, it would be pretty much impossible to buy $50 million + and ultimately $100s in the open market. Not enough time or volume. So a tender offer would be the alternative. The problem I have with that is that tenders are executed at premiums to current price and I’m not convinced buybacks are wise even at current prices let alone substantially higher. I’ll look forward to next post and appreciate the heathy dialogue with RPN and the other posters. And thanks to the board for your recent accomplishments, but please upgrade transparency and reduce burn.

    • Thanks for your commentary, Complacency. Many hedgies are in the PICO stock with a price target of $22 – $28. We make no comment on that valuation. The Board’s RSUs are in the $16 range. We believe that most PICO-ites value the PICO portfolio at supra-$16. Therefore, the premium you correctly identify would be appropriate.

      Ultimately, we do not know what the Vidler assets are worth. We are not providing a valuation. We are simply saying that we believe the involved parties are perfectly content to buy PICO shares at $16 or thereabouts.

  4. Thanks RPN. Great info as always. Agreed that the Board can’t over-provide on transparency as that limits their ability to deliver for shareholders. But, I can’t get past the lack of communication from the Board after they’ve handed the keys to the co-pilot and navigator of the Titanic. Tyco’s board didn’t turn the reins over to Kozslowski’s #2. If Webb and Perri weren’t influential for the Hart years, then what were they paid for? If they were involved/engaged, then why keep them around? Where is the accountability? Justify your last 10+ years!! If Dan Silvers is comfortable with Webb’s re-counting of his decade plus running PICO with Hart, let us know why. Otherwise, cut the overhead and move forward. Especially if the workout may be years of selling Vidler assets at the highest IRR levels. Frankly RPN, I don’t want to have a private conversation with Webb or a Director. I want a public airing of the issues. They can’t tell me anything nob-public anyway. Tell me why we continue to pay Webb and Perri after 10+ years of abysmal performance. The directors are experienced smart professionals. I’m sure there are reasons. But I’m more sure that shareholders are owed more than silence on these issues.

    • Thanks for your valuable contribution Jim. Recall that when the PICO Board fired Juicer, Max Webb and John Perri were still parties to lucrative, iron clad employment contracts that were promulgated by the corrupt and incompetent Comp Committee headed by Carlos “The Horse Thief” Campbell. The Board had a choice at that point: fire Webb and Perri with Juicer and pay both men’s severance, which would have amounted to several million dollars more; or keep both men on and renegotiate their contracts – albeit at a level that is probably above market value. If they fired Webb and Perri, the Board would have had to search for new candidates, negotiate new contracts, get them up to speed, and pay them several hundred grand also.

      The previous employment agreement tied the Board’s hands considerably. We feel the Board made the right choice.

  5. I agree that buybacks, with or without a 10b5-1, are an inefficient and unreliable means certainly beyond $100 million dollars worth. I doubt even a successful partial tender of that size is feasible. That’s one conversation that needs to be hashed out.

    But the more interesting and crystallizing one is Sam’s “MOST IMPORTANT QUESTION” above. Let’s remove the buyback smokescreen from the conversation and get to the end game. Assuming Vidler was just monetized, how will you return the remaining cash to PICO shareholders? And, yes, what will the tax treatment be. This exercise completely negates the ridiculous notion that management needs to keep everything hush-hush so it can accomplish lower priced buybacks.

    THEN I would weigh that method vs. buybacks. But for some reason, this PICO team does not want to discuss return method or tax treatment. RPN, this is what’s perplexing, not shareholders’ frustration.

    No matter how you slice it, PICO shareholders deserve better. To continue this minimal disclosure stance is mean, disrespectful and unnecessary.

  6. Clarification: I said, “ridiculous notion that management needs to keep everything hush-hush.” I mean because any buyback activity will end up being disclosed anyway. And I fully assume buyback activity will occur as we have already seen. Buybacks will only get a little bit of capital returned. How will the bulk be returned?

    I said PICO’s “minimal disclosure stance is mean, disrespectful and unnecessary.” This takes into account PICO’s horrendous long-term history of obnoxious shareholder neglect.

  7. PHholder. These are all great questions and issues deserving of a Board response. There is no reasonable excuse for the Board failing to address such questions and issues in a clear systematic fashion. Pico shareholders deserve nothing less and I hope the Board members who apparently follow this site respond. In my opinion If they do not they are failing in their obligations to shareholders. I have been a patient shareholder and have always understood owning this equity was not for the feint of heart. But my lord Board members communicate with the shareholders!

  8. If only nominal to a max of maybe a third of the stock could be bought back (and that would be a long shot), the remaining 2/3+ of the estate if/when returned will be subject to a 30% tax hit? Buy backs aside, lets say PICO’s NAV is something juicy like $25 per share. Subtract 30% and you’re receiving a net $17.50 in what 2, 4, 6 years? If RPN is right why do we even want PICO buying shares back at these levels? We need answers.

    • Thanks Anonymous. We believe that more than a third of the stock could be repurchased over time, or 7.7 million shares. The timetable is difficult to ascertain. We agree with readers that note the finite window of opportunity to sell these assets at a high price.

  9. 70 k shares traded hands in first 90 minutes. I think its safe to assume that is company on the bid

  10. RPN, thanks as always for the continued dialogue! And I hope you can understand my tenacity and redundancy in trying to run this important aspect of the PICO thesis to ground.

    Re: Capital Return Method and Tax Consequences

    RPN: Here’s my understanding of what you’re saying:
    1. buybacks/dutch tender are best
    2. special cash dividends are bad and taxable at +/- 30%
    3. formal liquidation is bad, inhibiting and won’t happen
    4. Other _________?

    We know that 100% can’t be returned by buybacks – that much of the total cash must ultimately be returned by other methods (assuming it is returned). I’m still not clear on what are those other non-buyback return methods are? It seems the only alternatives discussed are special cash dividend which comes with a 30% tax hit and formal liquidation.

    I had framed this inquiry as “THE MOST IMPORTANT QUESTION” as a theoretical that seems to clearly match PICO’s eventual situation: assuming PICO has successful monetized Vidler and is sitting on the resulting pile of cash, what method or mechanism would be the most sensible and tax efficient for PICO return that cash to shareholders? And what would that look like?

    Your answer: “The completion of the Vidler monetization is so uncertain, we believe that no one has any idea what PICO or the world will look like at that time. We excuse the Board for not providing such detail.”

    Hmm. Let’s again attempt to take the uncertainty out of it and crystalize the inquiry by turning it into a generic academic question – an ultra-pure theoretical: “Theoretical PICO” has got nothing but cash left, no liabilities and a BOD decision and mandate to get that cash to shareholders by any means except buyback as it plans to return the cash now and close PICO down. Let’s bring it even more clearly into theoretical and rename it XZY Corp. But assume XYZ Corp has the same basic constructs as PICO. What method(s) or mechanism(s) would XYZ Corporation, again all things being equal to PICO’s attributes, most likely be employed and what would the tax implications be? Maybe it’s only 1. special dividend and or 2. liquidation?

    Thank you in advance for your patience as I attempt to understand this aspect of the situation better and for your excellent work in helping us all understand PICO better in general via this amazing blog.

    • Thanks for your insights, Sam. You raise an excellent point: what does the endgame for PICO looklike? What are the possibilities?

      Thus far, you have advocated a Plan of Liquidation. We have no opinion on this matter, we simply did some basic research and talked with some knowledgeable PICO observers. As we printed last post, these PICO observers informed us that PICO investigated it and concluded it was not right for PICO at this point. We don’t know any more than that and we take no stance on the issue.

      Your inquiry is meritorious, but we simply do not feel compelled to make that demand of the Board right now. Neither we, nor anyone on our panel, is indicating that allocation of the poker chips after the final PICO hand is played – so to speak – is pertinent right now. Other shareholders, with complete justification, may feel differently.

      As we have written many times, we invite readers to author a guest post for publication on RPN. The work must be articulate, well-documented/researched and pertinent to PICO going forward (in other words, superior to our own work :).

  11. For informational purposes, NYRT is currently in formal liquidation. Here’s their proxy:

    Here’s an interesting excerpt from the “reasons why” section:
    “the tax benefits to certain of our stockholders from the fact that liquidating distributions will be non-taxable to a U.S. stockholder until cumulative liquidating distributions to that stockholder exceed the tax basis in the stockholder’s shares and then would be taxable at capital gains rates, rather than a portion of each distribution potentially being taxable at ordinary income rates if distributions were made in the ordinary course of business rather than as liquidating distributions;”

    Btw, it would take up to a year to get this voted through. Then a company would have 3-years in liquidation, and then remaining assets are punted to a liquidation trust which shareholders still own and can remain transferable (translation: the 3-year period is inconsequential).

    Note the level of detail this NYRT company went into in describing its thought process. I’m envious.

    Interestingly, as I was Googling around on this liquidation concept I bumped into an old RPN type activist website on a company, NSTR, which eventually went through a formal liquidation process. I thought this crowd might find some interesting reading in it:


  12. WaterWaterEverywhere

    The 1000 year drought in the Western US is over and the dams aquifers are full. Vidler will have a hard time selling water. Buckle up for a long and expensive ride. Pray for buy backs at $10. $17 buy backs are nuts in my opinion.

    • Thank you for your observations. We respect your opinion, however we remain optimistic.

      Thus far, our optimism, which we began to publicize in August 2016, has been richly rewarded.