Corporate Governance Changes to Benefit Shareholders

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.

On December 1 and 2, 2016, PICO and its homebuilder subsidiary, UCP, announced a flurry of changes. The bloggers make clear that they are pleased. “PICO shareholders put your hands together! After a year of struggle and battle, shareholder-oriented Directors Daniel Silvers, Andrew Cates and Eric Speron have finally laid the Boardroom foundation for value creation at PICO.

The day’s most dramatic news was the forced non-renomination of non-elected Chairman Raymond ‘Delaymond’ Marino and Hapless Howie Brownstein from the PICO Board. These gentlemen, both of whom we view as enemies of shareholders, will not stand for reelection at the 2017 Annual Meeting. Delaymond resigned his Chairmanship, effective immediately, and was replaced by PICO CEO Max Webb.

This result was not voluntary. Messrs. Silvers, Cates and Speron recognized the abuse suffered by shareholders at the hands of these men and took action. We salute these three Directors for their bold and decisive stroke in the name of good corporate governance.”

The bloggers are not as happy that Mr. Webb will be both CEO and Chairman. “PICO will hold a non-binding advisory vote on this matter at the 2017 Annual Meeting. For two reasons, RPN will vote against the combined CEO/Chairman role. First, unless the CEO has exceptional competency and integrity, we feel it is poor corporate governance. Second, we don’t feel Mr. Webb is Chairman material. The successive conspiratorial ascensions leave us queasy. That he worked almost 2 decades at the side of the corrupt and incompetent Juicer gives us pause. As a UCP Director, Mr. Webb participated in that Board’s surreptitious removal of the Officer Stock Ownership Guidelines from the proxy statement, with no notice or explanation to shareholders; this is not a ‘Chairmanly’ act.

So far, Mr. Webb is proving a fine CEO. But we will be voting against his continuation as Chairman. Although the vote is ‘nonbinding,’ we will ask the PICO Board to honor the shareholder voice.”

The bloggers are enthused about the forced departure of Raymond Marino. “On a net basis, Delaymond’s tenure was decidedly negative for owners. While much positive change was implemented under his watch, that change was the equivalent of tripping a coiled spring. Despite the wholesale improvements in governance, they neither individually nor collectively make up for $11 million, or almost $.50 per share, in lost value that we directly peg to Delaymond.”

“They believe that the removal of Mr. Brownstein will be positive for shareholders. “Hapless Howie Brownstein will finally create value for PICO owners: he will leave. RPN views Mr. Brownstein as an unadulterated enemy of owners. The origins of his appointment to the Board were unknown and we believe, likely sprung from Juicer. As a member of the Corporate Governance and Nominating Committee, he participated in the soft Board Declassification. As Audit Committee Chair, Hapless Howie is directly responsible for the inaction on PICOGate that cost us $11 million.”

Keeping their sense of humor, the bloggers compare their homepage to another famous publication. “Legend has it that once an athlete or team appears on the cover of Sports Illustrated, they are jinxed and can expect imminent bad luck. We ask readers to consider the fates of the individuals who have graced the ‘cover’ of RPN:

Eric Speron
Kristina Leslie
John Hart
Howard Brownstein
Raymond Marino

Four out of the 5 are gone or will be gone. We don’t know if there is correlation, but we like the results.”

The bloggers detail PICO’s Board Declassification. “The Central Square Settlement Agreement has been ripped up, Class I and Class II Directors tendered their resignations to effectuate their reelection in 2017 and the Annual Meeting has been scheduled for a more normal May 4, 2017 in Reno, Nevada. PICO will pay Central Square $25,000 for its related expenses. We salute both Kelly Cardwell at Central Square and the PICO Directors who negotiated this arrangement.”

The bloggers like the idea of Daniel Silvers as Lead Independent Director. “As a temporary check and balance on Mr. Webb’s combined CEO/Chairman role, Mr. Silvers was named Lead Independent Director. This will give Mr. Silvers a little bit of extra say in the Boardroom. It also makes the charge do or die for his reputation. Mr. Silvers is a young man with an impressive resume and a bright future. Up until now, his efforts have been hidden from view by the larger number of Directors, Delaymond’s obsession with control and the lack of high-profile action to his Board assignments.

That has all changed. Mr. Silvers’ near and intermediate-term reputation will flourish or flounder with the results he produces at PICO.”

PICO shareholders rejoice at the second asset sale. “PICO announced that Vidler has agreed to sell 50,000 Long Term Storage Credits in Arizona for $12.5 million, or $250 per credit. The transaction must be approved by the Arizona Water Bank Authority at a meeting on December 7, 2016. Assuming approval, PICO should get its dead presidents in Q1, 2017.

An observer of PICO notes that Vidler still owns 107,000 more Arizona Storage Credits. If sold for an identical $250 per credit, gross proceeds will be $26.75 million.”

The bloggers have a few suggestions for the new PICO Board. “First and most important, the new Board should reopen the PICOGate investigation as it relates to Juicer — for real this time. The Board should also open an independent inquiry into the Red Hawk Transaction. PICO has not written Juicer the $11 million check. Both issues can be resurrected and if an independent investigation turns up sufficient evidence to fire Juicer for cause, shareholders will save $11 million.

“Second, we do not like lame duck directors. Delaymond and Hapless Howie should resign and assume a consultant role, to be paid an amount equal to their director compensation. This will streamline decision-making at a Board that appears to agree on value creation measures. It will also obviate future decision bottlenecks and the potential for Boardroom mischief.

“Third, PICO should prepare to go activist at UCP. We stop short of calling the UCP Board ‘corrupt,’ but not by much. We have documented the UCP Board’s abuse of shareholders. We have recounted CEO Dustin Bogue‘s questionable conduct (like a 32% gross margin immediately preceding UCP’s IPO and his receipt of a personal bailout with PICO shareowner’s funds). Comp Committee Chair Michael C. Cortney surreptitiously removed the Officer Stock Ownership Guidelines from the 2016 Proxy Statement. We have overwhelmingly demonstrated how UCP is a value destruction machine, efficiently transferring wealth from shareholders to Directors, Executives and Employees. We have noted how UCP is considered by us and many others as America’s worst publicly traded homebuilder. And we have proven that UCP will sell in a change of control as a land play only — which means there is no point in waiting.

“We are more optimistic than ever about our Board and the prospects for value creation at PICO. Messrs. Silvers, Cates and Speron took a gamble and executed it flawlessly. We are grateful for their efforts.”