Author Archives: Pico Shareholder

PICO Reports Q3 Earnings – A Quickie. Special Dividend Record Date Passes.

On November 7, PICO Holdings reported earnings for Q3 2017.

There wasn’t much news, either in the SEC filings or in the earnings call. The earnings call was so short and uneventful, we thought we heard a cricket chirp in the background.

While not very exciting for PICO CEO Max Webb and CFO John Perri, we view the lack of participation as a positive indicator. We believe that investors have trust and faith in these Executives and this Board. As a result, there wasn’t a whole lot to inquire about.

Investors in general, and especially those with an activist slant, tend to focus their grease on the squeaky wheels. Two years ago, PICO was the squeakiest wheel in small cap corporate America. Today’s PICO is far improved.  Hence, less grease.

PICO itself damped much of the rationale for inquiry when it announced a $5 Special Dividend on October 26. With about $150 million in cash on the balance sheet, shareowners were wondering when a few of those greenbacks would hit their wallets. PICO has answered that question.

The most interesting detail from the Q3 Press Release was the steady increase in federal Net Operating Losses. The federal NOL balance was $125.1 million on March 31, 2017, $162.3 million at June 30, 2017 and and finished Q3 at $187.1 million. The sharp increase in NOLs indicates that PICO’s asset sales have been far below basis for tax purposes. We can thank John “The Juicer” Hart for that.

The numbers given above are federal only. PICO also carries significant state tax benefits which will shield some monetization proceeds from the Golden State of California.

Hopefully, these NOLs will benefit owners when the remaining Vidler assets are monetized. If such assets are sold at a premium to their tax bases, the NOLs should funnel a few more Benjamins to PICO owners. Fingers crossed.

Alternative Dividend Facts

We were surprised to learn the dates related to the PICO $5 Special Dividend. The Record Date was November 6, the Payment Date is “on or around” November 20 and the Ex-Dividend Date is November 21.

Huh? Since when does an Ex-Dividend Date come after the Payment Date?

Typically, the ex-dividend date is the deadline that matters. The ex-dividend date comes two business days before the record date and is the chronological dividing line between receiving the dividend or not receiving the dividend.

However, the PICO Press Release and Mr. Webb on the earnings call, make clear that the parameters of the $5 PICO Special Dividend are different. According to the Press Release:

“The dividend will be payable on or around November 20, 2017, and pursuant to FINRA Rule 11140, the ex-dividend date will be November 21, 2017 – one business day after the anticipated distribution of the special dividend.”

We looked up FINRA Rule 11140, because we’d never encountered it before. Section (b)(2) states in pertinent part:

“In respect to cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security, the ex-dividend date shall be the first business day following the payable date.”

For the full text of the FINRA Rule 11140 provisions, click here.

Best we can tell, investors can purchase PICO shares before the Ex-Dividend Date on November 21 and receive the $5 Special Dividend. The Special Dividend should be paid sometime after that, even though the Payment Date is “on or around” November 20.

Better Late Than Never

PICO may own the record for longest unfulfilled return of capital – over 2 years. Recall that on November 17, 2015, Juicer and Legacy PICO announced a “Revision to Business Plan,” which committed to asset sales and return of capital. Here is the exact wording from that Release:

“With the Company’s share price trading at a discount to its book value, the Company believes the highest potential return to shareholders at this time is from a return of capital. Therefore, as assets are monetized, rather than reinvest, the Company currently intends to return capital back to shareholders through the stock repurchase program approved by the Board or through other means such as special dividends.”

It has taken shareholders, certain Executives and certain Directors a long time and a lot of sweat equity to reach this milestone. Upon receiving the Special Dividend, we suggest that all PICO participants give themselves a pat on the back. We deserve it.

PICO To Return Capital To Owners – Finally!

Late afternoon, on October 26, PICO Holdings announced that it would finally return excess capital to owners.

PICO will pay shareowners a Special Dividend worth $5 per share. This will drain the PICO corporate coffers of almost $116 million. Expect the dividend to hit your brokerage account around November 20.

The best part about the Special Dividend: it qualifies as a tax free “return of capital.” Upon receipt of the Special Dividend, most investors will reduce the cost basis in their PICO shares by $5 with no immediate tax consequences.

We say “most investors”  because if you own PICO in an IRA or other tax deferred account, other rules apply. Given that most PICO shares are probably held in taxable accounts, the PICO Board did right by providing us with this temporary tax benefit.

Here is what the IRS says about return of capital:

“Distributions that qualify as a return of capital aren’t dividends. A return of capital is a return of some or all of your investment in the stock of the company. A return of capital reduces the adjusted cost basis of your stock. For information on basis of assets, refer to Topic No. 703. A distribution generally qualifies as a return of capital if the corporation making the distribution doesn’t have any accumulated or current year earnings and profits. Once the adjusted cost basis of your stock has been reduced to zero, any further nondividend distribution is a taxable capital gain that you report on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, and Form 1040, Schedule D (PDF), Capital Gains and Losses.”

For more information about this, see Topic 404.

JFK & PICO – A Big Week For Disclosure

We, and many other shareowners, have lamented the PICO Board’s heretofore unwillingness to return capital to owners and related secrecy.  One witty investor wrote to RPN over the weekend: “PICO’s secrecy and our government keeping thousands of pages of information related to the assassination of President Kennedy for more than 50 years end the same way.  What was the big secret?”

Another PICO observer said, “I’m not sure what all the prolonged lack of transparency was about. Who obtained any benefit from that?”

Several aspects of the Special Dividend are nice. It is tax-free. It is clean and uni-stroke. It will be paid quickly, as 2017 ends, so investors can collect the Special Dividend in November then only wait 5 weeks to sell for tax year 2018.

But the tax benefit is likely to be temporary. Many PICO owners will be sellers soon and PICO has retained I-Bankers at JMP Securities to monetize the Vidler portfolio.

One of the PICO Board’s stated objectives was to preserve optionality. It achieved that goal. When the second tranche of Century Communities shares was unexpectedly block traded, the PICO Board was able to return this slug of capital by writing one check. This is nice.

But RPN calculates that greater value would have been created if PICO bought in as many shares as possible at $16 – a situation which persisted in April/May and August/September, then returned the leftovers in a Special Dividend.

RPN wonders if there would there have been much difference if PICO bought back a million shares in May and issued a $4 Special Dividend? Or bought back 3 million shares in April and issued a $3 Special Dividend?

We never wanted PICO to shout “share buyback” from the rooftops. We wrote multiple times that we desired the opposite. But PICO could have repurchased shares quietly in either Q2 or Q3 at great prices.

Upon hearing this opinion, one PICO owner said, “I don’t know why they didn’t do that. If PICO is sold in the next year, the benefits of the Special Dividend exist only at the margin.”

Despite all the secrecy and suspense, the PICO result is as T.S. Elliot wrote: “The world ends not with a bang but a whimper.”

RPN Valuation Exercise

Announcement of the $5 Special Dividend brings us to an important question: what is PICO worth going forward?

We estimate that post-November 20, PICO will have $35-$40 million in cash on the balance sheet. PICO’s going-forward annual burn rate is probably about $7 million. As RPN went to press, PICO shares were trading at around $19.75 per share. Subtracting the $5 dividend indicates that investors value the remaining assets in PICO at about $14.75. Subtracting out the cash of around $1.50 per share indicates investors value the Vidler portfolio at about $13.25 per share – call it $13 bucks for ease. Given that PICO has no debt and there will be no tax paid on a monetization, Mr. Market believes that the Vidler portfolio is worth about $300 million ($13 per share x 23 million shares = $299 million).

Deal Of The Century (Communities)

The $5 Special Dividend was made viable by the unexpected block trade consummated between PICO, Century Communities (purchaser of UCP) and the buyer(s) of the second tranche of approximately 1.15 million CCS shares.

Recall that under the UCP Merger Agreement, PICO was permitted to sell about 1.25 million CCS shares 61 days after the Merger, but could not sell the second tranche of about 1.15 million CCS shares until early 2018. However, much to our surprise, a buyer(s) materialized and CCS approved a sale of the second tranche several months early.

As PICO shareowners express gratitude on Thanksgiving, they can add this confluence of events, which made possible the $5 Special Dividend.

Follow The Money

Cash is fungible, so it is impossible for outsiders to track the Executive Bonus implications of the Special Dividend. Is it being paid out of the Arizona Long Term Storage Credits proceeds? Are 100% of the LTSC proceeds included in the Special Dividend? If the answers are “yes” and “yes,” then PICO CEO Max Webb and CFO John Perri, plus some Vidler employees, stand to receive a Bonus in 2017.

For 2017, the Mendell Energy oil and gas properties were sold for $10.2 million, near historical cost, but about $8 million above carrying value. The Arizona Long Term Storage Credits were sold about $12.5 million above historical cost. UCP was sold several million dollars below both historical cost and carrying value.

The Bonus won’t be a whole lot. The Gross Gain from the LTSCs was about $12.5 million, but that amount must be netted against Administrative Expenses. Both the oil and gas properties and UCP were sold at less than historical cost, so these transactions are ineligible for Bonus Calculation inclusion. Our best guess is the Bonus Pool for 2017 may sum to $300,000.

Speaking of Bonuses, when PICO first announced the Revised Compensation Agreements, the press release stated that Executive Bonuses were reduced from the original Juicer Version.

“Not so fast,” said RPN. It all depends on which assets are sold for what prices. Thus far, our caution has proven warranted.

Recall that the Juicer Bonus Pool calculation was mostly similar to the current one, except the former used carrying value as the starting point, whereas the current version uses historical cost. Shareholders revolted against the Juicer version because many of the assets had been written down, which would have given Juicer & Co. a benefit from their past incompetence.

The final result remains to be seen. Is the current Bonus Calculation is better for owners than the Juicer Calculation? We repeat our familiar refrain: no one knows. It all depends on which assets are sold for what prices.

5 Years Of Burn?

Don’t call your broker with a “Sell” order just yet. There should be more capital coming.

If our calculations are correct, once the $5 Special Dividend is paid, PICO will retain about $35-$40 million in cash in the bank account. Given an annual burn rate we estimate at about $7 million, this seems like a lot. It is 5 years worth of corporate expenses.

When informed about this, one PICO owner said, “Wow. That’s a lot. I did not realize they held on to so much.”

We are not sure what the PICO Board plans from here. But, if history is any guide, we are pretty certain about one thing: there will be no action for a while and there will be no transparency.

RPN Gives Thanks

We do our share of griping and complaining and second-guessing. That is our self-appointed job. Underneath it all, is a sentiment of gratitude for those who have made value maximization at PICO a reality. We thank Daniel Silvers and Andrew Cates, who fought value destroyers who were dressed in creator clothing. Mr. Cates departed PICO before receiving adequate compensation for his efforts. We thank Eric Speron for playing a strongly supportive role. Thus far, Messrs. Webb and Perri have been very good stewards of the PICO enterprise, providing greater clarity to owners and moving deals forward.

In conclusion, this group of value advocates, with strong support from an active shareholder base, has turned a PICO situation that was utterly miserable into an opportunity for value realization.

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!!!!