Bloggers Talk Governance Improvements & UCP Struggle

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 $662 million in assets and $426 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 11% of PICO. Other activists at (RPN) have taken to the Internet to advance the shareholder cause.

While the bloggers are pleased with the recent changes at PICO, they see a few loose ends to tie up. “First, our crack strategist strongly suggests that the Board designate Delaymond and Howie as consultants (and not Directors) as soon as possible. They can be retained until May 4, 2017 at their equivalent Director compensation. The Board will function better if the lame sloths . . . er, we mean ducks, are removed. Much like broken lovers living in the same house, mutually harmful mischief can result from the current arrangement (and we don’t mean that disturbingly rewarding phenomenon of hate sex). Additionally, Delaymond and Howie have proven themselves philosophically distinct (to put it diplomatically) from Daniel Silvers, Andrew Cates, Eric Speron and all other PICO shareholders.

“Second, we would appreciate the Board’s non-renomination of Michael “Desperado” Machado pursuant to Article 4 of the Bylaws. Desperado is a politician whom brings no crucial skills to the Board. Previously a lackey of John ‘The Juicer’ Hart, Desperado turned on his old benefactor to effectuate the termination without cause. The resulting $11 million termination payment due to Juicer was Desperado’s handiwork as one of two established members of the PICO Compensation Committee at the time the criminal Hart Compensation Agreement was promulgated. Desperado was Chair of the Corporate Governance and Nominating Committee when the soft declassification decision was made.

“If Desperado is not sent packing before that date, we believe that a PICO shareholder will run an alternative nominee in contest. By our count, nominations must be submitted by February 3, 2017 — and no earlier than January 4, 2017. Given the dynamics of cumulative voting, Desperado’s ouster will be a foregone conclusion.

“If no investor runs an alternative, RPN will lead the charge to have Desperado removed through the “More ‘Against’ Than ‘For’ Votes” provision — just as we removed Kenneth Slepicka in 2016. In our campaign, among many other tactics, we will be repeatedly reminding PICO shareholders that the $11 million termination payment made to Juicer in April, which amounted to $.50 per PICO share, was the direct work of Desperado Machado — as one of only two incumbent members of the Comp Committee at the time of promulgation.”

The bloggers highlight an astonishing fact. “Under the criminal Hart Compensation Scheme, which was jointly authored by Desperado Machado, Juicer earned roughly $55,000 per day. $55,000 per day of PICO shareholder money!”

Moving on to PICO subsidiary UCP, the bloggers note that the rise in interest rates will negatively affect its operations. “UCP has three tranches of variable rate debt, two of them are pegged to 30-day LIBOR. They are:

LIBOR + 3.5% (Due 2017) — $9,785 million
LIBOR + 3.75% (Due 2017) — $18,456 million
Variable Rate (Due 2017) — $4,581 million

Total variable rate debt is $32,882 million.

At December 31, 2015, 30-day LIBOR was 0.42950%. Today, 30-day LIBOR stands at .65%. The bloggers estimate that this increase will raise UCP’s annual interest costs going forward by about $100,000 pretax. “This ain’t a ton of money, but every bit counts when margins are low and earnings are scant. We estimate that such an increase would have theoretically reduced UCP’s 9-month 2016 pretax income by about 2%.”

“In late October 2016, UCP proposed to issue $200 million in Senior Notes due 2021. At that time, 5-year Treasuries carried a yield of about 1.3%. That yield is now 1.83% or 53 basis points higher. Since junk spreads have declined slightly, UCP would expect to pay about 50 basis points more today than it would have in late October. On $200 million in debt, this amounts to $1 million annually, pretax.”

The bloggers predict UCP’s next move. “We asked a while back if UCP had gone defensive. Today, we maintain that yes — UCP has gone defensive.”

“UCP is out of appealing choices. It has about $131 million in debt maturing between now and the end of 2017. UCP also has $49.1 million coming due for purchase or option contracts for 1,123 lots. Between debt and future real estate investments, UCP’s future expenditures amount to roughly $180 million.

“That’s a lot of money for a company that can’t borrow at a reasonable rate and earns no money. When UCP’s real estate inventory purchases are included, the firm is significantly cash flow negative.

“UCP’s real estate inventory spending declined to $23.1 million in first 9 months of 2016 versus $60.7 million in the same period 2015. In 3.5 years since its IPO, UCP’s equity capital has contracted from $218.5 million at September 30, 2013 to $216.5 million today.

To reiterate, in three years as a public company, while the homebuilder industry has thrived mightily, UCP has lost equity capital.”

The bloggers express gratitude to Daniel Silvers, Andrew Cates and Eric Speron for the shareholder-oriented changes implemented on December 1-2. “PICO owners are not accustomed to such treatment. Wow. It almost feels normal to own shares in PICO now.”