Activist Bloggers Criticize Hart Compensation

As originally appeared in The Troubled Company Reporter.

PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $664 million in assets and $434 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 14% of PICO. Other activists at http://ReformPICONow.com/ have taken to the Internet to advance the shareholder cause.

The activist bloggers post Part V in their critique of PICO Holdings’ Compensation Plan awarded to CEO, John Hart. The call it, “. . . an abusive contract foisted upon shareholders by the corrupt and incompetent PICO Compensation Committee, comprised of Carlos Campbell, Michael Machado and Eric Speron.”

According to the bloggers, J. Justin Akin, small cap portfolio manager at River Road Asset Management, in a 13-D filing with the Securities and Exchange Commission,indicates that the Hart Compensation Scheme does not truly align Mr. Hart’s interests with those of shareholders.

The bloggers’ post says, “Mr. Hart is NOT incentivized to create value for PICO shareholders. He IS incentivized to sell assets above carrying value. This is what Mr. Akin was alluding to and this discrepancy is enormous!”

The activist bloggers calculate that PICO homebuilder subsidiary UCP could be sold today for $11-$12 per share. “Such a transaction would provide PICO with about $105 million, after costs and expenses. Assuming PICO stock rises to $13 on the announcement, PICO could tender for 8 million shares, or one third of shares outstanding. These interrelated transactions would create enormous value for PICO shareholders.

But since UCP’s carrying value is about $12 per share, Mr. Hart will disregard this owner-oriented transaction; it would provide him with no bonus.”

The bloggers repeat their criticisms: “UCP is a low-performing, competitively- disadvantaged homebuilder. UCP has low margins, no in-house mortgage operation, is geographically undiversified and borrows at uncompetitively high rates. Land costs in California and Washington, UCP’s primary markets, are far too expensive to pursue prudent growth. For UCP to create economic value, given its current balance sheet, we roughly calculate that it must earn at least $30 million in net income (assuming a 40% tax rate – that’s $50 million pretax). And UCP is light years away from that.”

“Since it is improbable that UCP will create value for PICO shareholders on an operational basis, UCP should be sold now. This is the highest net present value proposition for both UCP shareholders and PICO shareholders. But thanks to the inane Hart Bonus Plan, Mr. Hart is disincentivized to sell UCP now – it would not earn him a bonus.”

The post concludes in vitriolic fashion: “The only thing Mr. Hart is capable of selling above carrying value are his own services. And in Messrs. Campbell, Machado and Speron, Mr. Hart found a collective buyer dumb enough or corrupt enough to pay him full price. Mr. Hart is a liability to PICO shareholders – having destroyed half a billion dollars in shareholder value. Yet he skillfully placed sycophants in positions of control over shareholder money and extracted ludicrously undeserved sums.

While this candid assessment may seem harsh, recall that there are hedge funds/private equity firms that want to hire Mr. Hart — we hear several are looking for reliable janitors.”