PICO Reports Q2 Earnings. UCP Deal Closes. CEO Webb & CFO Perri Donate To Owners. Still No Capital Return.

On August 9, PICO Holdings reported Q2 earnings.

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.

Blue Horseshoe Loves Anacott Steel

We all remember that great line from Oliver Stone‘s 1987 movie “Wall Street.”

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.”

We agree with Mr. Webb’s optimism, analysis and public posture. We still hold our Century shares as well. Moody’s just changed its outlook on Century to “Positive.”

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

The most interesting aspect of the Q2 financial statements to RPN was the jump in federal Net Operating Losses from Q1 to Q2.

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!

15 responses to “PICO Reports Q2 Earnings. UCP Deal Closes. CEO Webb & CFO Perri Donate To Owners. Still No Capital Return.

  1. Thanks Rpn. The best defense I can make for management is that they are waiting until they sell the century holdings and then do the largest self tender possible instead of a piecemeal process.

  2. PICO still has a lot to learn in the transparency, PR and human relations departments. This lack of communication displays poor judgement and inexperience. God, it pains me to think of the money we’re paying these amateurs. Any random stranger could singularly handle this liquidation better and keep the owners appropriately apprised. In all seriousness, an experienced part-time liquidation trustee/custodian could be installed today on an hourly basis.

    And btw, don’t expect any answers to your inquiries on Max’s and John’s UCP monetization bonuses. That’s the last thing they want shareholders knowing about. Nauseating self enrichment is alive and well at PICO and shareholders can do nothing about it except suck it up a deal!

    • Thanks for sharing your thoughts, Oscar. We believe all parties would benefit from greater transparency and we are surprised the Board has still returned no capital to owners. We don’t believe that owners are as powerless as you imply.

  3. Totally agree. So sorry this management poorly communicate with us shareholder. Please be better PICO. Not nice

  4. Guess Who ?????

    The status quo is totally fine with me. I know exactly how much and when I’m getting paid AND I don’t have even a dime at risk. This PICO gravy train is a wet dream! #freemoney #bestdealever #sucksforyou #suckers #zerowork=megabucks

    P.S. No need to worry about the UCP bonus. I’m all set there too! It’s HUGE! #cha-chingforme


  5. Would be nice for Comp Committee to clarify the UCP compensation issue for Webb/Perri. I still don’t like that we hear nothing from any Board members outside Webb and Perri (realize he’s not on board). These two guys were in the command center for the sinking of the ship. The Board obviously trusts them as they retained them. As RPN has stated, it would have been expensive to punt them when Hart was punted. Personally, I would have preferred a clean sweep of the team that capsized the boat.

    Board – for those that have been wronged by this team in the past, please consider a wider range of spokespeople. And please clarify any compensation for the UCP disposal.

    • Thanks Jim. We agree. It was unfortunate that no shareholders asked about this matter on the latest earnings call. We agree that it would be productive if the Board would clarify the issue. The press release back in December 2016 was clear enough: a bonus for a sale of UCP was forthcoming. We are not sure why there is not such candor now.

  6. As a long-term value investor with extensive public company board experience, I have to assume that this crew lacks the know-how to weigh their shareholder relations needs with their conservative legal counsel. With the lack of requisite experience in the room, they are unable to exercise the reasonable push that is sometimes needed to get an adequate level of communication going. PICO’s harmony with the shareholder base should be easily attainable, and it’s in the best interests of the company to achieve it. A shareholder base that feels unheard, feels ignored, and that doesn’t help anyone. It unnecessarily brews resentment. All that said I highly doubt any shareholder is going to get active to change things, so we will get what we get. This type of shareholder disrespect and neglect is deplorable, but it is unfortunately commonplace too.

    • Thanks for your insights, John D. We agree with your sentiments. We are puzzled by the Board’s lack of action and lack of communication. So far, still zero dollars to owners, despite approaching $100 million in the PICO bank account.

      It might not be an existing investor that seeks changes at PICO. Any investor who perceives a large enough value gap between PICO’s current stock price and an ultimate NAV may make a move for corporate governance improvement. Many investors bet against owners over the last year and all those bets turned out to be losers – change took place and the PICO share price increased.

  7. Fair enough PICO Shareholder. Time will tell. I can’t believe they’re giving us reason to hope for activism (again).

    A friendly and transparent culture with investors is not a difficult one to build, especially when you have a relatively simple and benign estate, as PICO does. This is one reason it’s so painful to watch them fumble this (again). I for one am becoming suspicious and question this board’s competence. Creating harmony here would be so easy, so why all the secrets?

    • ReformPICONow

      We agree with your sentiments, John D. It is difficult to justify both the Board’s silence and inaction. At the end of the day, the Board’s choices should either save shareowners at least an incremental dollar or make shareowners at least an incremental dollar. If their unorthodox conduct provides no incremental value to owners, then it is unjustified and ill-conceived.

  8. It is getting difficult to keep coming up with non negative explanations as to why the Board has done nothing with respect to capital return. But I will offer another one anyway. Maybe the plan is to do a self tender but they are currently working on a deal to sell a significant asset or assets. If so, then the board would have to communicate that potential deal when announcing a self tender. Such a potential deal would obviously affect the self tender range and affect shareholders willingness to tender. Additionally, if the potential deal was not certain to occur then the board could not reasonably set a range and shareholders could not reasonably judge whether the self tender range was appropriate. Just my two cents.

    • Thanks for your insights, jjs. You are right and we have written a few times about the potential for asset sales to interfere with share buybacks. However, a potential transaction does not explain away why the Board did not initiate a 10b5-1 plan for systematic share buybacks. CEO Max Webb and the Board have refused to state whether or not a 10b5-1 plan is in place.

      When/if the PICO Board finally returns capital, an appropriate question will be: “Was all this secrecy and prolonged inactivity really necessary? Did it create value for owners that would not have been created with greater transparency and earlier action?”