RPN’s Man Of The Year – 2017. Somewhere Over Dorothy’s Rainbow. RPN Sells UCP for $13+.

RPN’s Man of the Year – 2017

Max Webb

After considerable deliberation among the RPN principals and our panel of experts, we select Max Webb as RPN’s Man Of The Year 2017.

Let’s review events at PICO Holdings since Mr. Webb was named CEO in October 2016. First, Mr. Webb displaced John “The Juicer” Hart, a change that created much uncertainty among the PICO shareowner base.

Shortly thereafter, PICO announced two tranches of Arizona Storage Credit sales for $25 million, revision to Executive and Director Compensation, removal of sloth-like and impotent Directors Raymond “Delaymond” Marino and Hapless Howie Brownstein.

Early 2017 saw the battle for improved corporate governance at UCP, in which Mr. Webb played a key role. Most importantly, Mr. Webb sheparded the sale of PICO’s stake in UCP to Century Communities. And Mr. Webb presided over the the subsequent $5 per share return of capital to PICO owners.

Investors are now hopeful that, with the hiring of I-Bankers at JMP Securities, Mr. Webb will monetize the Vidler portfolio.

Mr. Webb would be the first to admit that he has not worked alone. The corporate governance overhaul at PICO was led by Daniel Silvers and Andrew Cates, which cleared the way for Mr. Webb to maximize value. In an acceptance speech, Mr. Webb would give gratitude to his able CFO, John Perri. A strong economy has given Mr. Webb upward markets into which to sell assets. And the presence of large shareowners on the PICO Board has been a positive influence.

Since becoming CEO, Mr. Webb has stewarded shareholder capital pretty much flawlessly. He has procured the best prices possible for assets, he has transacted them expeditiously and the vast majority of proceeds have been returned to owners in a tax efficient manner. Shareholders can’t ask for more.

At this point, RPN has to admit that we were wrong. For the first 18 months of our existence, we were not fans of Mr. Webb. Given that he worked alongside the most corrupt leader since Attila the Hun for almost two decades, we assumed Mr. Webb was an active accomplice in PICO’s crimes against shareowners.

Our negative assumption about Mr. Webb was not pulled out of thin air. Recall that Mr. Webb sat on the UCP Board while several shareholder-adverse actions were taken. Mr. Webb turned a blind eye to innumerable profligate misdeeds during his tenure as PICO’s CFO. And as one PICO observer said, “If you see the problem and you don’t do anything, you are part of the problem.”

However, thus far, Mr. Webb has shown himself to be not merely a passive follower as CFO but a decisive leader as CEO. He refused to make waves while Juicer robbed the PICO piggy bank, but he has been a champion of shareholder value once given the corner office. We feel Mr. Webb deserves applause from PICO owners for his stewardship of our enterprise since ascending to CEO.

For his expeditious and fulsome maximization of value at PICO in just over a year as CEO, Max Webb is RPN’s Man Of The Year – 2017.

Somewhere Over Dorothy’s Vidler Rainbow

Certain PICO observers are getting restless. They wonder why the delay to monetize the Vidler portfolio, especially the Fish Springs asset. A few PICO owners speculate that Dorothy Timian-Palmer, CEO of Vidler, is giving the PICO Board the runaround.

These observers note that Juicer, Mr. Webb and Mrs. Timian-Palmer have been talking up the Fish Springs property for the better part of three years. These Executives have told the investing public that if the right bid was received, they would take it.

Yet despite all the Executive optimism, no satisfactory bids have surfaced?

The Board put Mrs. Timian-Palmer’s money where her mouth was when JMP Securities was retained. The Vidler monetization should be progressing, cuz at least now it is formalized. But we still have no bids.

A few PICO observers speculate that Mrs. Timian-Palmer stands in the way. If Fish Springs is perfectly positioned, if its value is obvious and if its water assets are such a scarce resource, then why hasn’t any interested party hit the right bid?

Given that Mrs. Timian-Palmer is PICO’s foremost water expert and was the architect of the Vidler portfolio, she has the ability to talk water circles around everyone else at PICO – especially at the Board level, where none of the Directors are water experts.

Skeptical shareowners wonder out loud if Mrs. Timian-Palmer is talking down reasonable bids for Vidler assets, especially Fish Springs. They speculate that she is telling the Board that the various Vidler assets are worth more than current bids for three reasons:

a) she is unrealistically optimistic about their ultimate worth;

b) her bonus for selling Vidler assets is de minimis; and

c) she will be monetizing herself out of a job.

To summarize, some PICO owners fear that, in order to protect her own interests, Mrs. Timian-Palmer is talking down perfectly reasonable bids for Vidler assets. Since the Board lacks the specialized water knowledge to refute her conclusions, the Vidler monetization process is structurally flawed.

One clever shareholder had a simple yet effective idea: the PICO Board should hire an independent water expert to evaluate the Vidler portfolio and either corroborate or dispute Mrs. Timian-Palmer’s conclusions. Where there is disagreement, the two should have it out in front of Directors, thereby subjecting the process to competitive scrutiny.

At RPN, water asset valuation is far above our pay grade. But we see the potential for mischief in the Vidler monetization process. Mr. Webb has thus far proven himself immune to such temptations of self-interest, but Mrs. Timian-Palmer may not have the same constitution. Given that the carrying value of PICO’s water assets is about $170 million, we agree that retention of an independent water expert makes sense.

AT THE LEAST, there is something incongruous about Mrs. Timian-Palmer’s incessant optimism yet a shortage of reasonable bids.

The RPN Force Reawakens

Like bears in winter, RPN went into hibernation. In late December 2017, as we marked the 2-year anniversary of RPN, our website host commemorated this milestone with an invoice for a yearly renewal payment. After spending several thousand dollars of our personal funds on the PICO-UCP situation, with an excellent Board of Directors in place, a fine CEO, significant corporate governance improvement and lots of profits to go around, we decided to leave our fate to our readers.  In other words, we asked readers for money.

And we heard crickets.

The principals of RPN have never been good at taking hints (just ask our ex-girlfriends), so we petitioned a second time. While the response was not overwhelming, it was sufficient to put the economic ground back under RPN – and so we are back on our feet.

If you read RPN for the next year, give thanks to Dave and Jjs. These two generous individuals stepped forward to reactivate and maintain RPN for another year. Our gratitude goes out to these gentlemen.

We forgive our wealthy readers who have earned hundreds of thousands of dollars (some have earned millions of dollars) from the PICO-UCP situation, and refused to support us. As our Crack Strategist told us several months ago, “In this business, gratitude lasts the better part of a morning.”

RPN Sells UCP For $13.15

The principals of RPN recently liquidated their stake in UCP-CCS at an effective price of $13.15 per share. Wait, the deal price — announced in the press release — was $11.35 per UCP share, not $13.15.

In the noncommittal short term, we liked Century Communities. We liked the CCS management team, we perceived strong momentum in the builder industry and we believed that the benefits of the low UCP acquisition price would flow through to CCS. On August 14, 2017, we wrote, “[Max] Webb waxed optimistic about Century and indicated that the principals at PICO are ‘big believers in Century.’ We agreed with Mr. Webb’s optimism, analysis and public posture. We held our Century shares as Moody’s changed its outlook on Century to ‘Positive.’”

In other words, we were clear that we planned to hold our CCS shares, at least for the short term.

Plus, once the acquisition was announced, we did some investigation. We wanted to know why the bid for UCP was so low? We found a real estate expert and asked why so many potential buyers either passed on UCP or bid low? Among many other observations, these are some of the things he said:

“UCP is a land development company that happens to build homes when necessary. It’s how they should in theory make up for their lack of scale; by creating value in their land holdings…But that’s the problem with public money and land – you have to be patient and sit on land. Collectively as a whole UCP is kind of a tough pill to swallow.  Two great tastes that don’t taste great together: inefficient regional homebuilding or long term risky land holdings (remember homebuilders do not like holding on to land that they can’t or aren’t ready to build on immediately).”

At no time did this expert say that UCP was structurally flawed or inherently disadvantaged. As we all knew, UCP was a hybrid: part land developer with tracts that would take years to progress, and part conventional homebuilder. According to our expert, the bidders contemplating a UCP acquisition wanted one side or the other, but not both – hence the bids came in low.

We like investment situations such as this: where the optics may not be pristine but the economics are favorable. We reasoned that CCS would be able to create value from this configuration and eventually, such value would show up in the stock price. While no single buyer wanted both parts, we reasoned that if broken up, the parts would be worth more than $11.35 per share. And we reasoned that CCS had enough time in this housing cycle to realize at least some of that value.

“Phooey,” skeptical readers could say. “The acquisition only closed 5 months ago. What kind of value could CCS have realized in 5 months?” It’s a valid point. We don’t know why CCS shares soared over 40% during that time (from $24 in August 2017 to over $35 today). We do know that $35 surpassed our target exit price, so we gladly peeled off the position.

We also know that the more diligent effort we put forth, the more profits seem to flow our way. As Thomas Jefferson famously said, “I am a great believer in luck and I find the harder I work the more I have of it.”

6 responses to “RPN’s Man Of The Year – 2017. Somewhere Over Dorothy’s Rainbow. RPN Sells UCP for $13+.

  1. Rpn. Thanks again for all your fine work.

    Stone gate development is up today before Reno city council to address citizen concerns regarding the development. It was voted down in November. I don’t think a vote will be taken today though as it seems more like a report on dealing with the traffic and other logistical concerns that have been holding up approval.

    These development issues are significant and I believe is one of the reasons monetization of vidler is taking time. I think the values pico and Dorothy have discussed concerning fish springs are likely accurate.

  2. Here is a link to today’s meeting agenda: http://renocitynv.iqm2.com/Citizens/Detail_Meeting.aspx?ID=1643

    Note that the Planning commission: “recommends [City] Council adopt the requested Master Plan amendment by resolution and zoning map amendment by ordinance and approve the tentative PUD Handbook by Minute Order subject to Truckee Meadows Regional Planning Commission determination that the request is in conformance with the Truckee Meadows Regional Plan.” (page 29 of “Staff Report Printout”)

    Traffic is still a concern, however, the Planning Commission states the following in their report: “…It is unclear at this time how the timing of the proposed development within StoneGate will impact existing freeway infrastructure capacity. The project is proposed to be built out over a period of 20 years. As the development is proposed, updated traffic analysis may be required.” (page 18)

  3. No action on stonegate yesterday at meeting. Pushed off until February.

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