UCP Buyout To Close August 4. Bylinsky Named To PICO Comp Committee. Q2 Earnings Coming Up.

Wedlock Day – August 4

Although not disclosed in SEC filings, RPN has learned that the UCP Board of Directors expects the UCP purchase by Century Communities to close on August 4, 2017.

Recall that UCP Shareowner Joseph Tola filed a Class Action Complaint against the UCP Board of Directors, in the U.S. District Court for the Northern District of California. Mr. Tola is represented by Rosemary M. Rivas, Esq., of Levi & Korsinsky, LLP.

Mr. Tola claimed that the deal’s S-4 Registration Statement provided insufficient information. Mr. Tola also asserted that provisions of the deal prevented another suitor from seeking UCP’s hand in matrimony.

On June 21, UCP filed an Amended Registration Statement, which provided enhanced information and made clear that it was open to other potential grooms before UCP said “I do” to Century.

Mr. Tola was sufficiently satisfied with UCP’s efforts. The parties entered into a Stipulation of Dismissal pursuant to which Mr. Tola’s action will be dismissed “after the Transaction closes, which defendants currently expect to occur on August 4, 2017.”

You can read the Stipulation, on which Judge William Alsup placed his stamp of approval, here.

The implications for PICO are significant. Assuming the legal filing is predictive, in just 11 days, PICO will receive around $117 million in value. Upon closing, PICO will receive roughly $55 million in cash and 2.4 million Century shares. PICO must hold its Century shares for 60 days after the merger. Between Day 61 and Day 210 following the merger, PICO may sell 5% of Century outstanding shares every 50 days. After 210 days have elapsed, PICO may sell its Century shares at will.

Committee Composition

A quick glance at the PICO website, specifically the page entitled “Committee Composition,” reveals three interesting facts.

First, PICO CEO Max Webb serves on no Committees. We noticed Mr. Webb’s absence from Committees in the 2017 PICO Proxy Statement, but we assumed it was temporary. We guessed that once the Directors were settled, Mr. Webb would be joining at least one Board Committee. Since almost 3 months have passed since the PICO Annual Meeting, we now believe this situation is permanent.

It is not uncommon for a Chairman to serve on zero committees. A quick perusal of RPN’s investees indicates that about half follow this policy. But historically, the occupant of the PICO Chairmanship has sat on Board Committees. Kristina “Maleficent” Leslie sat on the Audit and Compensation Committees. More recently, Raymond “Delaymond” Marino served on the Corporate Governance and Nominating Committee.

The current Board appears to have changed that practice. Given Mr. Webb’s lengthy tenure during PICO’s period of shareholder abuse, and given the unique dynamics of the PICO situation, we view this omission as appropriate and favorable to shareholders. This opinion is strengthened by the fact that we view Mr. Webb’s Chairmanship as sub-ideal – especially given that Daniel Silvers would better fill that slot.

The flip side to Mr. Webb’s Committee absence is that all Committee members are Independent Directors. We feel this configuration suits PICO and its owners just fine. We commend the Board for its willingness to think differently.

Second, Greg Bylinsky of Bandera Partners has been named to Compensation Committee – a move we hoped the Board would make. We are confident Mr. Bylinsky’s inclusion will benefit owners and from a PR perspective, it looks a lot better. Between Eric Speron and Mr. Bylinsky, two of four votes on the Comp Committee hold an 8.1% PICO ownership interest. We like the sound of that.

We believe the presence of Messrs. Speron and Bylinsky on the Comp Committee will be more than pretty packaging. The Bonus calculations will get tricky as larger water assets are sold and there will be considerable room for interpretation as the definition of “Administrative Expense” is debated.

At March 31, 2017, PICO’s book equity was $332 million; of that sum, almost $27 million is owned by Messrs. Speron and Bylinsky. It is truly their money.

The third interesting fact gleaned from PICO’s Committee Composition page is that all Independent Directors serve on all Committees. The Committee Composition matrix reads like a 4 x 3 keno card: all squares are filled.

PICO shareowners do not pay more for this: the Nonemployee Director Compensation Policy indicates that only the Chairs of Committees are paid extra. In our experience, this configuration is unusual because it means more work for the Directors without more pay. We applaud our PICO Directors for their can-do spirit.

PICO should Q2 release earnings the first week in August. We expect an update on the UCP deal as well as news on return of capital to shareowners. Stay tuned!

26 responses to “UCP Buyout To Close August 4. Bylinsky Named To PICO Comp Committee. Q2 Earnings Coming Up.

  1. Can anyone explain what is going on with Nols.

    Thanks in advance.

  2. Silence on the nol amendment? Anyone out there?

  3. Yes jjs. ‘Anyone’ probably can explain because it’s standard practice and common knowledge. And there’s a neat tool called Google where you can look it up too. “5% poison pill nols”

  4. Thx. Too kind

    • Thanks for your input, Jjs. We not clear about your question. PICO recently filed an 8-K outlining the terms of its new “Section 382 Rights Plan,” which is designed to protect the NOLs from an ownership change. We hope some of the NOLs used in the Long Term Storage Credit sales. Are these events what you refer to? If not, please clarify. Thank you.

  5. Yes. That was what I was referring to. Just how the nol amendment fits into larger picture. I had some sense of reason for it but I’m obviously not as astute as Roxy in these things. I will look into this google thing he referenced though.

    • Thanks Jjs. Under Section 382 of the IRC, a corporation that experiences an “ownership change,” which generally means a 5% or greater holder raises their stake by 50% or more, may use its NOLs on a restricted basis. This is to prevent both holders and seekers of NOLs from trafficking in tax losses for future tax benefit. Previously, PICO was unprotected and so without its acquiescence, an investor could have bought enough PICO shares to impinge usage of the NOLs. Now, with the NOL preferred stock plan in place, PICO can prevent an “ownership change” and protect the NOLs for shareowners as it sells assets going forward.

      Don’t worry about Roxy. He just got up on the wrong side of the bed. 🙂

      Best to you Roxy!

  6. Actually it was jjs who was ignorantly and unnecessarily taking shots at other commenters a few posts ago, telling them their comments made “little or no sense” (when they made very high level sense). Just feeding him a bit of Justice 😉

  7. Touché.

  8. Peace ?????

  9. For those who still had UCP stock has anyone seen the cash and issued stock in CCS in their brokerage account yet?

    Mine has not come thru as of this morning. Thx

  10. Ho hum conference call again. Company has 92 million on hand and holds at current century price another 57 million which they can be out of entirely in 210 days. Yet, the company has bought back only a miniscule amount of shares and could only tell shareholders they are evaluating return of money options. I remain confused as to why there are not more concrete plans in place at this point given the board has known since April that they would have a significant amount of cash coming in.

  11. While I appreciate their reiterating they’re definitively on a liquidation course and reducing overhead, $6mm is still too much and too corrosive to NAV over longer periods of say 5-years which I fear we will have to suffer. For that reason I’m actually thankful they are not buying back much stock here. Duration is an elephant in the room here as is capital return tax strategy. These are two of the most crucial aspects of this story yet PICO has said literally nothing on both. What puzzles me most is why? In all likelihood we’ll see small Vidler monetization along the way and watch NAV go lower and lower. PICO, just tell us the how/when/why of these inevitable capital returns (or, if not, why the F you’re still evaluating!?). How will you address the ever decreasing NAV vs. your bloated overhead? On a positive note, as RPN has pointed out, this lack of transparency should have a negative effect on the share price allowing for more opportune buy-back pricing. I for one see this stock getting attractively cheap again ($11 or lower) before it sees $20+. But man what a difference a few years makes with this name. Thanks to RPN for the excellent coverage, for building an audience here, and for the venue for open discussion like this to hold PICO accountable for their behavior.

    • Id be shocked if it even saw $15 again, NAV is in the ballpark of $23/share so they have to be looking at a buyback of ~80m, this would increase the intrinsic value of the company, yes you have cash burn but six million annually is not huge imo, at $16 there is 40% upside to NAV – and even more if they buy back a fourth of the float at such a discount to NAV, we know how unique their water rights are and the supply/demand factors driving their value, imo these assets could continue to gradually increase in value and more than offset 6m in annual cash burn at the corporate level. Even if it takes two years to get to $22/share from the current $16 that is a low risk 19% annual return…

      • Thanks for pulling up a chair at the table, Carl! 🙂

        We agree that the $6 million annual burn is the price for fractional ownership liquidity and SEC transparency. We agree that the NAV is higher than the current share price of $16 and change. We hope that water rights monetizations allow investors a marker with which to price the entire Vidler portfolio higher.

    • We appreciate your insights, John. We chuckled at your mention that the lack of transparency reduces the share price. This is probably correct, but not how shareowners would like to see value created.

      We agree that either action or greater transparency, re return of capital, is warranted at this point.

  12. The problem is valuing Vidler’s NAV not today, but what it might be in 5 years. Even a sale two years from now could be too late. Shiller’s CAPE is at 30, cap rates are at historic lows, and every asset class is priced above perfection. In downward cycles illiquid assets are typically hit the hardest. Therefore, in a multi year down market environment and poor economy (which is feasibly around the corner) I could easily see PICO with a significantly impaired NAV and a stock living below $15 for extended periods. This is the reason for PICO to move quickly and very aggressively with Vidler monetization. And $6 million x 5 years = $30mm = a meaningful hit to NAV. I think it behooves this community to stay diligent with PICO. They’ve earned it and there’s no harm to come from it. Reform PICO now and forever until this despicable tragedy of malfeasance is finally put to rest. And the current PICO stewards should understand, accommodate and fully honor this posture.

    • All the big names come out for PICO! Thanks for contributing Bill! 🙂

      We agree that the water portfolio is highly cyclical. Just as there was a small window for a UCP deal, the same is true for the water rights. Most PICO investors agree that the trophy property is Fish Springs, whose value will depend greatly on the Reno, NV economic panorama. We saw what happened to Reno (and Fish Springs’ value) in the last downturn. It was not pretty. We hope PICO Executives and the Board are equally cognizant of these limitations to Vidler’s assets.

      Thanks for the encouragement. RPN has no plans to go anywhere until PICO shareowners receive the value they are justly entitled to.

  13. No clarity on what, if any, payment was for Webb/Perri for UCP liquidation, correct? Given the company singled out UCP from the other assets for incentive purposes, it would be nice for them to specify if there was compensation.

    • Thanks for reminding our readers about this inappropriate possibility. We have heard that PICO Exec compensation for the UCP deal was shelved. Unfortunately, no one broached the topic on the Q2 earnings call. PICO CEO Max Webb was only one Director among 6 at UCP. It would be a travesty of compensation if he received a bonus or other incentive for UCP’s monetization.

  14. One of the options would be a self tender/dutch auction.
    Interested to hear RPN’s thoughts on that as an option.


    • Thanks for commenting, jjs. Our panel believes a Dutch tender is the most likely form of capital return to owners. Given the amounts of capital PICO holds, the low liquidity of PICO stock and the low PICO share price, we view a dutch tender as a prudent option.

      When that will take place is anyone’s guess. The Board has thus far not taken action nor offered any detail.

  15. Warren Buffett

    It’s a shame these folks keep taking you guys for a ride. Always beware when the simple is disguised as complicated. This lightbulb screw-on is a one man job. Charlie or I could wind this PICO mess down with a single phone call to a banker and we’d have the courtesy to explain it to you, Sadly, we could easily do so on half of the back of an envelope.

    Compensation, burn rates and bonuses are utterly unnecessary here. Investing with people who make your skin crawl is like marrying for money when you’re already rich! I’d head for the hills on this one.

    • Nice to hear from you Warren. We hope things are well in Nebraska.

      The lack of action and lack of transparency are getting more difficult to explain and accept. As we wrote in our most recent post, the options available to the Board for returning capital to owners are not complicated and have been done before. Therefore, we don’t see the utility in the delay nor the secrecy. We hope the Board takes remedial action sooner rather than later.