Bloggers Displeased by Unnecessary UCP Incentives

As originally appeared in the Troubled Company Reporter.

Activist bloggers at http://www.ReformPICONow.com note that UCP Director Peter H. Lori is out of compliance with the Director Stock Ownership Guidelines. The activist bloggers are displeased that PICO proposes to pay certain members of “management” a bonus for the monetization of the UCP stake.

According to the UCP Director Stock Ownership Guidelines, within three years of appointment, all UCP Directors must own equity equivalents equal to at least three times their annual cash retainer.

According to the activist bloggers, “UCP Director and Univision CFO Mr. Lori is out of compliance with those Guidelines. Mr. Lori’s third anniversary as a UCP Director passed in July of 2016. Based on the 2015 UCP Proxy Statement, the latest information available, Mr. Lori’s annual cash retainer was $85,000. Three times this amount is $255,000. Per Mr. Lori’s latest Form 4, he owns 23,273 shares and equity equivalents. With UCP shares currently selling for $9.90, Mr. Lori’s UCP position has a value of $230,000. Mr. Lori is about $25,000 short of compliance.

Mr. Lori received almost $2.4 million in total compensation at Univision last year. We find it concerning that a UCP Director with this level of wealth, who influences the stewardship of our enterprise, refuses to buy more shares in our company, which currently sell at a 15% discount to tangible book value.”

The bloggers say that Mr. Lori and the UCP Board cannot claim to be surprised. They say: “Mr. Lori cannot attribute his noncompliance to surprise. We first wrote about this issue almost a year ago, on April 8, 2016 in our post entitled ‘UCP Directors Cortney, Lori & Wade Nearly Noncompliant With Director Stock Ownership Guidelines.”

“This situation speaks poorly of UCP Chairman and Chair of the Compensation Committee, Michael Cortney. We hope Mr. Cortney will ensure that the 2016 UCP Proxy explains the parameters for the Stock Ownership Guidelines, both for Directors and Executives. As we have written about extensively, Mr. Cortney and UCP eliminated the Guidelines for Executives section last year — and failed to tell shareowners.

“Going back to Mr. Lori, if he does not want to purchase more UCP shares at 85% of net equity, and align his interests with other owners, he should resign from the Board. If Mr. Lori does not want to buy more shares and does not want to resign, then the other UCP Directors should remove him from the Board.”

The activist bloggers characterized UCP CFO James Pirrello’s communication on the Q4 earnings call as “deceptive” and “dishonest.” But the bloggers note that this is not the first time Mr. Pirrello has dispatched questionable communication with shareholders.

“While we are on the subject of dishonest and deceptive executive communication, let’s go back to the UCP Q3 earnings call. At the time, we noticed something strange in this exchange between Mr. Pirrello and Alan Ratner, builder analyst at Zelman & Associates.

On the Q3 call, Mr. Ratner astutely noted that the math in the UCP press release did not add up; real estate lots were missing. At the end of Q2 2016, UCP owned 4,919 lots. During Q3 2016, UCP delivered 199 lots. At the end of Q3 2016, UCP owned at 4,361 lots. So lots declined by 558 but deliveries were only 199. This meant 359 lots are missing — what gives? asked Mr. Ratner.

At first, Mr. Pirrello avoided the question by discussing the need for greater scale in certain markets and providing assurance that lots had not been moved off the balance sheet. But Mr. Ratner appropriately pressed on a second time. To which, Mr. Pirrello responded:

“Alan I wish I knew it off the top of my head. I’d like to get back to you on that and do the analysis.”

Mr. Ratner let the matter go and got off the line. Moving to the next questioner, Mr. Pirrello can be heard whispering, “I know where they are.”

“What’s the deal Jamie? Where are they? Don’t the owners of the business deserve to know? What are you hiding?”

The activist bloggers are upset that PICO proposes to pay certain members of “management” an incentive bonus for monetization of PICO’s 57% stake in UCP. The press release indicates that recipients of the bonus will be “management,” which the bloggers take to mean PICO’s CEO Max Webb and/or CFO John Perri.

The bloggers observe that Mr. Webb is paid $496,000 per year and Mr. Perri $440,000. “These executives are paid almost half a million dollars per year each to implement corporate strategy as laid out by the PICO Board. That strategy mandates the sale of assets and return of capital to owners. If UCP is sold outright, UCP will form its own committee, hire its own investment bankers and professionals, conduct its own sale process. The executives may be called upon to shoulder extra work in such a case, but we operate under the assumption that for $496,000 and $440,000 per year, shareholders can expect work that isn’t subject to special incentives. Perhaps we are old fashioned.”

The bloggers state that neither Mr. Webb nor Mr. Perri can influence the final sale price of UCP. “Large builders have highly sophisticated land buying operations. They employ professionals whose sole job is to buy land in specific markets. Such professionals employ a regimented and elaborate process for underwriting land. They start broad, looking at the community, its regulatory atmosphere, the local economy, population growth, household income. Then they narrow the analysis to the properties, the surrounding area, comparable transactions, the logistical access, proximity to employers and schools. Finally, they examine the lots, the sizes, the configurations, the infrastructure.”

“Then the builder analyzes how the parcels fit into its larger portfolio. Is this a contiguous acquisition or entry into a new market? Does the builder already have strong trade relations in the area? Is the builder familiar with local regulations and municipal authorities? The list goes on.

“All variables contribute to a purchase price, which is calculated based on strict criteria and fundamental analysis. There isn’t much a seller can do to cajole larger amounts of cash from a buyer. We aren’t talking about technology or patents or intangible human assets. We are talking about land. Of all goods and services that are traded in an economy, land is one of the most readily subject to valuation.

“As a result, we fail to see where Mr. Webb or Mr. Perri can shorten the timeline or bring PICO shareholders a higher price for this transaction.

“Want proof for our opinion that verbiage doesn’t influence builder valuation? Look no further than UCP’s stock price. It trades at a pathetic 85% of tangible net equity and at about 67% of our estimate of fair market value. This valuation persists in the face of desperate and deceptive efforts by Messrs. Bogue and Pirrello to talk up the stock. Zelman & Associates just published a report on UCP with the words in the title ‘Discount Justified.’

“Messrs. Bogue and Pirrello can’t convince the investing public to pay more for UCP. They can’t convince builder analysts to pay more for UCP. They can’t convince debt investors to lend money to UCP. How are they going to convince a sophisticated and experienced buyer to pay more for UCP? They can’t. And neither can Mr. Webb nor Mr. Perri. No one can.

“In a transaction, will Messrs. Webb and Perri have to work to bring such a deal to the finish line? Of course. But we go back to our fundamental question: what are they being paid half-million dollars a year for? Does half a mil just get a guy to his desk for 40 hours per week? Do shareowners have to pay for every service rendered, besides visits to the water cooler?”

The bloggers want PICO to look out for shareholder interests. They state, “We feel that Andrew Cates and the Comp Committee are underplaying PICO shareholder’s hand. The Comp Committee is not without leverage and, when executive demands for more money are beyond reason, it should push back. The chances of Mr. Webb walking out the PICO door and finding another CEO job at $500,000 per year are zero. Ditto for Mr. Perri. Any abrupt departure by either gentleman would mean an enormous drop in pay and prestige.”

“Further limiting their chances, Messrs. Webb and Perri are stained by the former PICO CEO John Hart’s Legacy. Both men worked at Mr. Hart’s side for many years. They turned a blind eye to abysmal corporate governance and shareholder abuse in the extreme for almost two decades each. ‘Willingness to ignore corruption and malfeasance’ does not appear on too many job applications. In fact, most employers seek the opposite character attribute.”

The bloggers “feel incentive compensation to monetize the UCP stake has gone way too far. If Messrs. Webb and Perri are demanding it, we feel they have crossed the line into inappropriate greed. If the Comp Committee is offering it, we feel it has crossed the line into supplication and neglect of shareholder capital.”

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 $662 million in assets and $426 million in shareholder equity. Amundi and River Road Asset Management LLC collectively own more than 16% of PICO. Other activists at http://ReformPICONow.com/ (RPN) have taken to the Internet to advance the shareholder cause.