PICO Retains JMP Securities. Unloads Entire CCS Stake. Director Andrew Cates Resigns. Still No Return Of Capital.

After several weeks of silence, PICO Holdings‘ news releases have lit up the news wires, one after another.

On October 2, PICO made several announcements. First, PICO has retained JMP Securities to shop the remaining Vidler Water portfolio. Second, compensation for PICO CEO Max Webb and CFO John Perri has been revised to reflect this potentiality. Third, PICO Director Andrew Cates has resigned effective immediately.

Just as the latest issue of RPN was poised to roll the printing presses, PICO made the surprise announcement that it sold its entire stake in Century Communities.

RPN breaks it down.

PICO Poker Player

The retention of JMP Securities “to explore strategic alternatives,” has sparked a debate among PICO-watchers. Is PICO playing a high hand to win or is PICO bluffing for appearance’s sake?

Does the retention of JMP as investment banker signal the end game in which the Vidler portfolio is sold and shareowners are cashed out? Or is JMP’s employment a distraction, designed to make PICO Executives and the Board look proactive, while diverting attention from the recent lack of asset sales and zero return of capital?

We don’t have an answer. Both scenarios are possible and, as we consulted our panel, we got mixed opinions all around.

One investor said, “I view this as highly significant. It’s possible PICO already received a bid and JMP’s employment is the effort to get the highest and best offer. It could be a matter of months now.”

Another said, “It’s all smoke and mirrors to draw your attention away from the fact that zero capital has been returned and no assets have been sold in months. I’ll bet someone at JMP is friends with one of your PICO Directors and that’s how they got the gig.”

A third said, “Wait. Haven’t all of PICO’s assets been for sale since John Hart was fired over a year ago? What’s changed?”

Who is right? Or is the truth somewhere in between? We don’t know.

JMP’s retention looks positive and investors have reacted favorably, pushing PICO’s stock price to its 52-week high of $18.35 as RPN went to press. But the true probability of a transaction is unknowable to outsiders. Stay tuned.

One Certainty – Zero Return of Capital

One thing RPN is certain about: PICO has returned zero capital to owners and PICO steadfastly refuses to provide transparency.

With the most recent announcements and the increase in PICO’s stock price, any repurchase of shares, whether systematic, opportunistic or pursuant to a tender, just got a lot more expensive. And less economically potent for PICO owners.

After the UCP sale was announced in April, PICO could have initiated a 10b5-1 plan and could have systematically bought back shares for the last six months. A buy in of over 2 million shares by now would have been possible (20 trading days per month x 6 months x 20,000 shares per day = 20 x 6 x 20,000 = 2,400,000).

When we mentioned this to our most optimistic PICO observer, he said, “I don’t have an answer for that. I don’t know why they didn’t do that.”

Another shareholder roughly calculated that PICO could have created over $1.50 per share in value by purchasing 2 million shares at around $17.

Remember, for PICO’s inaction and lack of transparency to make sense, it must somehow create an extra dollar of value for owners that could not have been created by earlier action and greater transparency. Given that PICO could have been buying shares back for 6 months at lower prices than today, surmounting this hurdle is now more improbable for PICO. And it is more likely now than ever that the PICO Board has not served owners through its inaction and lack of transparency.

A sarcastic PICO-watcher commented, “It looks like the Board botched it.”

Dump It.  Dump It All.

In Oliver Stone‘s famous 1987 movie Wall Street, Budd Fox, as broker, advises Gordon Gekko to sell his entire stake in Blue Star Airlines before market close. After a series of expletives directed at Mr. Fox, Mr. Gekko accepts cold capitalistic reality and utters the famous phrase, “Dump it. Dump it all.”

Similarly, PICO has dumped its entire stake in Century Communities in one transaction, with the second half of the position sold 5 months earlier than mandated in the deal.

Recall that, pursuant to the UCP-CCS Plan of Merger, PICO could sell about 1.25 million CCS shares 60 days after the deal’s close. PICO could sell the remaining 1.15 million CCS shares in early 2018. However, according to the press release, PICO unloaded the entire 2.4 million share position on October 2, for $59.4 million, or roughly $24.67 per CCS share.

PICO now holds well over $100 million in cash on its balance sheet.

Cates Cruises

RPN was disappointed to read about the resignation of Mr. Cates. We have had our disagreements with PICO Executive Compensation over the last year. But Mr. Cates is significantly responsible for the value PICO has created for owners, and the value it is poised to create. Mr. Cates was one of two rough and tumble appointees that wrestled several Legacy Director alligators to clean up the PICO Boardroom and improve corporate governance.

Every milestone in the PICO battle for value – the firing of the corrupt and incompetent John Hart, the removal of dirtbag directors Kenneth Slepicka, Carlos Campbell and Michael Machado, the Palace Coup which tossed hapless Howie Brownstein and go-slow Chairman Raymond Marino, the piecemeal asset sales and the monetization of UCP – Mr. Cates played a significant role in all of them.

Mr. Cates and Daniel Silvers never took the easy way out. They were always willing to fight to improve PICO in the name of owners.

When Mr. Cates arrived at PICO, the stock price floated around $9 to $11 per share. As we admire our current fractional interests valued at over $18 per share, we should remember that Mr. Cates had an enormous role in this revaluation. From RPN’s desk, Mr. Cates gets a standing ovation as he walks off the PICO trading floor. We wish you all the best, Andy.

Max Incentives

Hand-in-hand with the JMP engagement, PICO supplemented the Executive Bonus Plan so that Messrs. Webb and Perri will be paid under double trigger scenarios. If PICO is acquired and these Execs are terminated, under certain conditions, they will receive a bonus based on deal price less cash and some expenses.

We speculate that Messrs. Webb and Perri are motivated to sell PICO. Mr. Webb owns 79,083 PICO shares that would be worth almost $1.6 million at $20 per share. Mr. Perri owns 29,902 PICO shares that would be worth about $600,000 at $20 per share. Our sums do not include any remaining options and the most recently granted RSUs owned by these Execs.

Plus, we speculate that an acquirer of PICO will likely use the same calculus as the existing PICO Board and opt to keep Messrs. Webb and Perri to run or wind down Vidler. They are unlikely to be paid half a million dollars annually (or somewhat less now that both men have voluntarily reduced their own compensation), but they would remain gainfully employed.

As an aside, we expect a Christmas card from John “The Juicer” Hart. Juicer owns 341,566 PICO shares and at $20 per share, he would walk away with almost $7 million pretax. Given that PICO stock was headed nowhere but down while Juicer was CEO, he owes all PICO owners, including RPN, a big “Thanks” and a Christmas card. We expect it any day.

Ticking Clock

Speaking of Webb and Perri, if these men want to realize a Bonus for 2017, they better get on their respective horses. Recall that the Executive Bonus Plan is calendar year based. Capital must be firmly committed to be returned to owners before December 31 for it to count in the annual bonus calculation.

Less than 3 months left!!!!

12 responses to “PICO Retains JMP Securities. Unloads Entire CCS Stake. Director Andrew Cates Resigns. Still No Return Of Capital.

  1. Thx again Rpn. I am a glass half full guy regarding latest moves. Interesting that pico moved up share sale of ccs. Obviously ccs had to approve. Also interesting to know if sale was in block back to ccs or someone else. No ccs sec filing though nor pico filing on the sale.

    • Thanks for your comments, Jjs. You are right, the CCS block trade had to be a tri-party agreement. Given CCS’s balance sheet, we are pretty sure the buyer of the block, or even a portion of it, was not CCS. It had to be a 3rd party interested in taking a big stake in CCS, worth about 9% of shares outstanding. Now that’s a bet of confidence!

  2. Thank you for this summary RPN. Regarding the bonus pool and incentive for Max and John to return capital to shareholders before end of year, the only assets sold beyond UCP were the $12.5M book value and gain of water assets, right? Since the bonus plan excludes the proceeds received from the sale of UCP from the bonus pool calculation? So therefore, Max and John need just return ~$12.5M through dividends or repurchases by end of year to add the resulting ~$1.1M to the bonus pool?

    Thank you!

    • Thanks for your input, PICO Fan. You have it pretty much correct.

      UCP was to be carved out for a separate bonus structure, a provision to which RPN and other shareowners objected strenuously. We still don’t know the fate of this provision.

      For all other assets, the Comp Committee (of which Eric Speron is now Chair) calculates a ratio based on gross proceeds and percentage of those proceeds returned to shareowners (or committed to be returned to shareowners). Then the Comp Committee will multiply this ratio by the sales price less gross invested capital, less administrative expenses for the calendar year.

      That result is multiplied by .0875 to arrive at the Bonus Pool.

      We calculate the Net Gain from the Arizona Storage Credits at about $12 million and administrative expenses will come in around $10 million for the year (assuming the John Hart Termination Payment is excluded). Therefore, our back of the envelope calculation indicates the Bonus might come in around $200,000 or so.

  3. Captain Obvious

    If my grandma owned PICO’s assets she could have hired a banker and lawyer to sell off assets far quicker and much more efficiently than this crew. I would have gladly reviewed the proposals obtained and the process used to obtain them. It would take grandma and I a few hours a quarter and less than $100k in total fees to liquidate this thing. Instead these guys are paying themselves millions. And we are supposed to celebrate because it’s no longer the 10s of millions they were taking before. This thing is still such a joke. Zero info on return of capital. Zero detail on preferred monetization method. Zero detail on tax strategy. What’s so insulting to me is that management and Board compensation is always crystal f’in clear in amount and timing while shareholders are chronically left in the dark.

    RPN, thank you for your always astute, clear and complete reporting, and for providing a platform for shareholders to voice themselves. You’ve done a great service to this ecosystem. That said I authoritatively disagree with your assessment on any acquirer wanting to keep Webb or Perri unless they need expensive public company administration. An acquirer will likely have the infrastructure it needs. It MIGHT take someone at the Vidler level. But Webb and Perri will unlikely be viewed as assets.

    To clarify what I feel to be obvious: There is no reason to have to pay PICO executives to motivate them to sell PICO Vidler. This is another freebie and needless giveaway at shareholder expense. This company should have been put into formal liquidation long ago where an hourly trustee could take over. I won’t surprise me to see that still occur. It won’t surprise me if PICO doing so triggers a bonus to management.

    A comprehensive (even a cursory) study of current and historical executive (and BOD) compensation at PICO reveals a disgusting abuse that continues today. In my book knowingly harming people isn’t cool. Not cool at all. Just one person’s opinion.

    • LOL. You are right about lack of transparency, Captain Obvious. At least the Board is clear about Exec/Director compensation!

      You may be right about an acquirer waiving employment to Messrs. Webb and Perri. It all depends on the particulars of that acquirer. Time will tell. We agree that the PICO wind down is not the most economically efficient and there is considerable room for financial improvement. In a perfect world, the structure would be more like what you describe.

      That said, perhaps we are near the finish line and this less than ideal corporate situation can be put to rest soon.

  4. I did some internet research regarding some of the North Valleys developments. First, it is clear from the public meeting notes for the planning commission and Reno City Council that there are significant issues with urban sprawl, traffic congestion, school overcrowding etc that the City Council is dealing with along with significant pushback from citizens against approval of large developments that would need water from Fish Springs.
    It appears that Stonegate, one of the largest developments, has been very recently (last 30 days) approved by the Planning Commission on a 5 -1 vote. Now it heads to the City Council which has to approve as well. I do not see a date for City Council consideration of the project and just reading local news accounts it is controversial.

    It also appears that Arroyo Crossing, a much smaller development, is on track to be built.

    It is difficult to tell where some of the other projects are in the zoning and approval process but I can say that virtually all of the master plan documents for the developments identify Fish Springs as the source for water for the developments. Fish Springs is really the only large source of water for North Valleys growth. So it is just a matter of when monetization of Fish Springs begins as opposed to if it will occur.

    Has anyone else looked into the development pipeline?

  5. 5 dollar share spec div payable nov 20

  6. Any insight to the actual value of Vidler? Hart said it was worth more than twice carrying book value. Is $400 million to $500 million reasonable for buyer to pay?

    • Hi Joe. As best we can tell, the water assets have a carrying value of about $175 million. Be careful about relying on John “The Juicer” Hart. He did not depart PICO with a reputation for candor or honesty! 🙂

  7. 400 to 500 million is not a realistic number. I think 12 to 15 per share is the top of range imho