PICO Annual Meeting – The Max Webb Show.

Leading up to the 2016 PICO Annual Meeting, shareholders were in a disgusted mood. The Legacy PICO Board had committed one shareholder abuse after another. PICO stock price bounced around all-time lows. RPN had just revealed that John “The Juicer” Hart and Kenneth “The Slug” Slepicka had perpetrated an undisclosed related transaction that made both men conflicted.

At the Annual Meeting, Juicer spread disinformation and deception and implied that a shareholder-led conspiracy stymied his ability to create value. Carlos “NACD-Decorated Horse Thief” Campbell spun a prolonged lie to PICO owners with a straight face, thereby earning the moniker we have bestowed upon him. Raymond “Delaymond” Marino pretended like everything was under control and everyone was focused on creating value for shareowners. Stellar corporate governance, imminent assets sales, return of capital – all in the offing, Delaymond assured us.

In summary, the 2016 PICO Annual Meeting was the epitome of the Principal – Agent Problem manifested in real life.

(Bloomberg recently reported that protestors in Venezuela have begun hurling containers of feces at government forces. Called “poopootov cocktails,” these projectiles are intended to disgust, insult and repel. It is a good thing such events were not reported before the 2016 PICO Annual Meeting; a fecally enterprising shareowner might have taken aim at Juicer.)

2017 – The Max Webb Show

The PICO 2017 Annual Meeting was polar opposite. There were no incompetent or self-interested Directors in the room. Assets have been sold. A micro return of capital has taken place and profuse promises (which we believe are earnest) have been made to return more. PICO stock has reached $17 per share. UCP and its prodigal CEO Dustin Bogue are poised to be someone else’s problem.

It wasn’t exactly an audience with the Dalai Lama. But the 2017 Annual Meeting consisted of good shareowners communicating with good Directors, and everyone had good thoughts and good intentions in mind.

PICO’s CEO Max Webb did 99% of the non-Vidler talking at the Annual Meeting – and some of the Vidler talking. He was composed, articulate and at ease with his new, elevated responsibility. Mr. Webb showed us why his continued presence at PICO benefits shareowners – although he is not coming cheap. Mr. Webb has mastery of both UCP and the Vidler assets and is clearly the best choice to lead the liquidation process. PICO is no ordinary liquidation.

Dorothy Timian-Palmer impressed everyone with her technical knowledge, as she always does. She adroitly fielded questions about Vidler’s water assets, with added commentary on the largest ones.

Corporate costs have come down since the last update a few months ago. Annual overhead was estimated at a $9.9 million run rate on the Q4 earnings call. This has been reduced to $9.1 million currently. Once UCP is transacted and certain Vidler projects are completed, Mr. Webb predicts general corporate expenses will come down still more.

The biggest disappointment of the 2017 Annual Meeting was the 9,993,802 PICO shares that approved the fusion the CEO/Chairman roles. We have articulated our opposition to this proposal. We feel it is structurally unsound, we don’t feel Mr. Webb earned the right to be Chairman and it rewards bad behavior. The flip side is that Daniel Silvers would have made an excellent Chairman. He has proven his shareholder orientation, he is unafraid in the Boardroom and he is unconflicted by compensation issues. Mr. Silvers also deserved the Chairman slot after leading the Palace Coup, which expelled the merchants from the temple.

Winston Churchill once said, “The best argument against democracy is a five minute conversation with the average voter.” We allocate the 9,993,802 “For” votes on this proposal into the same category.

Andrew “Andy” Shapiro appropriately asked the Board to be sensitive to base Executive Compensation as PICO is reduced in both size and complexity. We have been saying the same thing for a long time. Andy is right, but it will never happen – not in a million years.

Return Of Capital – Micro

It’s so small, you may have missed it. PICO returned capital to owners in Q1 2017. The 10-Q reveals that PICO bought back 13,400 shares at an average price of $13.70 per share, worth $184,000.

On the RPN Comment Board, many readers have been vocal about their desire for capital return. However, due to the Century/UCP negotiations, PICO was blacked out from repurchasing shares for the last several months. PICO has provided effusive assurances that more capital return is coming. Any such measure will be less effective with a $17 stock price, but most investors expect continued share buybacks and a Dutch Tender is probably in our future.

This brings us to an important question. How much capital does PICO have to return to owners? Let’s break it down.

PICO publicly stated on the Q4 earnings call that there was $20 million available for return of capital. At the close of the UCP deal, which is expected by the end of Q3, PICO will receive about $55 million in cash. Sixty one days after deal close, PICO can sell about 1.25 million Century shares. At the current price of $26 per Century share, such a transaction would yield another $32 million.

By the end of 2017, PICO could potentially return about $100 million to owners.

By the end of Q1 2018, PICO can sell the tag end of its Century position. At today’s price of $26, this sale of about 1.15 million shares would yield another $30 million. By Q1 2018, PICO could potentially return about $130 million to owners.


We don’t want to get too excited. And we don’t want to get you too excited. But a few shareholders speculate that PICO won’t be around in 2 years. These shareholders believe that with UCP jettisoned, a strong economy in Vidler’s markets and a continued positive outlook for water assets, “patient capital” will bid for the entire Vidler portfolio. These owners theorize that a patient investor will buy the whole Vidler enchilada, cut overhead and public company expenses, preserve the Vidler employee core, and patiently liquidate the water assets piecemeal.

Such a scenario makes greater sense with the high potential for corporate tax reform which, in one swoop, will reduce the value of PICO’s (and all corporate America’s) NOLs. With the NOLs suddenly worth less, an “Ownership Change,” as defined by Section 382 of the Tax Code, does not produce such a scary reduction in value.

We have no knowledge of such a scenario. It is one possible scenario for PICO’s future. There are many others.

In conclusion, this is a different PICO. Corruption and incompetence have been replaced by shareholder orientation and capability. As we have been saying for several months, the future for PICO owners looks bright.

Century – Locked And Loaded

On May 8, Century Communities announced that it will offer $300 million of Senior Notes due 2025. Century will use a portion of proceeds to repay its revolving credit facility and the remainder will go to “general corporate purposes, which may include among other things, working capital and acquisitions, including the previously announced merger transaction with UCP, Inc.”

Go Century!

Century Files Registration Statement. UCP – The Girl No One Wants To Dance With.

On May 5, Century Communities filed its Form S-4 Registration Statement with the SEC. The S-4 is the controlling document for Century’s pending absorption of UCP. We suggest that PICO Holdings and UCP shareowners take a glance at it. There are some informational curiosities. We highlight a few.

Century – Persistent Suitor (And Only Suitor)

“Background of the Merger” is the most interesting section. The narrative reveals that Century and UCP already danced a few tangos before the current deal was signed. In the Spring of 2015, two homebuilders independently approached UCP about an acquisition, one of them was Century.  In response, UCP decided to test the market. With the help of deal banker Citigroup Global Markets, UCP shopped itself to 12 potential acquirers, with 10 signing confidentiality agreements. Four potential buyers submitted indications of interest, two completed due diligence, and one, Century, submitted a non-binding acquisition proposal. The Century offer envisioned an exchange of cash and stock worth about $10.00 per UCP share.

We make two observations. First, this would have been a big acquisition for Century at the time. In Spring of 2015, Century’s balance sheet wasn’t that much bigger than UCP’s. According to Century’s 2014 10-K, assets were $676 million and equity was $365 million. At that time, UCP’s assets were $377 million and equity $211 million. An acquisition of UCP by Century would have increased assets by 56%.

Second, although the current deal price at $11.35 per share is 13.5% higher than that offered in Spring 2015, PICO/UCP investors are economically no better off. Between Spring 2015 and today, the S&P 500 has gone from roughly 2,100 to 2,400, a gain of about 14%, which is approximately equal to the gain in deal price. In other words, if UCP had been sold in 2015, UCP/PICO owners could have taken their proceeds and invested in the S&P 500 and gotten the same result as the current offer of $11.35 per share.

There is one major “could have been.” If PICO had gotten its UCP money in 2015, it could have bought back millions of PICO shares when the stock price Valeanted to single digits in early 2016. Assuming PICO bought its own shares at $10 in early 2016, it could have bought back 10 million shares with the $104 million it would have garnered from a 2015 UCP sale at $10 per share. From RPN’s lips to God’s ears.

The 2015 deal was never transacted and Century came back to UCP a year later. The narrative tells us that in Spring 2016, Century proposed a deal for UCP at $6.58 per share. In colonial times, such an offer would have been seen as an insult and would have resulted in a pistol duel at 20 paces.

In early 2017, with UCP approaching financial distress after the 2016 botched debt offering, the Board and its I-Bankers began to shop UCP. “Party A” responded but indicated it was occupied in the near term. We suspect “Party A” was either Lennar or Pulte Group, both geographically logical buyers of UCP. Lennar would have been in the middle of the largish WCI Communities acquisition and Pulte had just completed a decent-sized deal in Atlanta, plus was navigating considerable Boardroom tumult.

When Century was contacted early this year, the talks began easily. Century already knew UCP from their previous flirtations. But once the initial overture was made, progress advanced arduously – the narrative is 2-3 times longer than normal.

There were a lot of issues that prolonged and complicated negotiations. Most importantly, instead of two parties, this deal involved three: UCP, Century and PICO – each with its own law firm. There seems to be an inverse correlation between the number of lawyers and deal expediency – which proved true in this case. Second, UCP’s hand was considerably weakened by its lack of options regarding the $75 million October 2017 debt maturity. The narrative indicates that UCP sought desperately for better terms and a higher price, but was mostly unsuccessful.

California Assembly Bill No. 199, which proposes to raise costs on builders operating in that state, caused Century to hesitate. Century wanted a higher vote percentage from PICO in the case of an Intervening Event. UCP wanted Century to deal a smaller percentage of shares, to avoid the risk of a Century shareholder vote. UCP wanted freedom to address the October 2017 debt maturity, and Century was reluctant. PICO wanted liberty to deal its stake.  On and on it goes.

Once the Century process went live, Citigroup I-Bankers diligently peddled UCP in pursuit of the highest and best price. Citi contacted 16 potential counterparties. Five entered into confidentiality agreements and received access to UCP’s virtual data room. On April 6, “Party E” proposed an all-stock transaction at around $9.50 to $9.75 per share.

On April 7, “Party F” proposed to buy UCP for cash at $14.29 to $16.67 per share. However, Party F had not retained legal or financial advisors and required 2-3 months to complete due diligence. Ultimately, Party F’s far higher offer was declined due to its delayed start, prolonged timeline and Citi’s belief that Party F had limited experience with transactions in the United States. Given the October 2017 debt maturity, UCP did not have the luxury of time nor the freedom to play one party off against the other.

UCP tried to use the Party F offer to extract better terms from Century, but the bluff was called and the rest is history.

Today, Party F represents UCP/PICO shareowners’ best hope for a superior  price for our asset. Party F indicated it needed 2-3 months for proper due diligence; that was in early April. Assuming Party F is still interested in UCP, it should only need 1-2 months more before it is ready to propose a deal. Party F is a foreign buyer and likely has considerably lower profitability hurdle rates than Century. Fingers crossed.

RPN Miscalculates (Probably)

A few weeks back, we told you that we liked UCP at $11.20 per share. Our rationale was based on the assumption that Century made an opportunistic offer for UCP, which started the bidding. The Registration Statement clarifies that our assumption was wrong. It appears that UCP has made the rounds among suitors and has been found wanting. We do not attach a high probability to an alternative offer from Party F. Therefore, our investment thesis for UCP at $11.20 per share now appears to be a miscalculation.

On a few occasions, we predicted that UCP would sell in the $13-$15 range if put out to bid. That prognostication now also looks faulty.

Our miscalculation fortifies the importance of Benjamin Graham’s margin of safety. We were fortunate to read Mr. Graham’s work early in our business trajectory. In Security Analysis, Mr. Graham makes a statement to the effect that, when margin of safety is properly employed, even if events do not work out as well as the analyst expects, the result should still be more than satisfactory.

Barring a higher offer from Party F, it appears that we have been overly optimistic in our valuation of UCP – an error which we take seriously. However, coherent with Mr. Graham’s margin of safety concept, we were conservative enough in our purchase price so that we are still poised to earn a more than satisfactory result. We hope the same for all our readers.

Life Isn’t Fair(ness)

Citi’s Fairness Opinion corroborates what we have been saying about UCP for the past year. On a standalone operating basis, Citigroup’s bankers agree that UCP is only worth $7-$9 per share. Citi also supports our contention that the deal price is at the extreme low end compared with recent comparable transactions.

Given the low deal price and the considerable concessions UCP made in negotiations, it is clear that Century drove a hard bargain. Dale and Robert Francescon, the brothers that Co-CEO Century, have done well by their owners. If PICO marries off UCP for an $11.35 per share dowry, Century is almost guaranteed to create significant value for its owners. We admire the Francescon brothers’ style, but we don’t like the result from the other side of the table.

As we have said many times, Chairman Michael Cortney and CEO Dustin Bogue got into a pickle with their mismanagement of UCP’s debt profile, the botched Senior Notes refinancing and their poor stewardship of UCP over the last 4 years. UCP’s debt difficulties and lack of profitability provided them little freedom or bargaining power throughout this process.

Messrs. Cortney and Bogue have created zero value for owners in 4 years as stewards of UCP. The firm went public in July 2013 with about $220 million in equity capital. Four years later, it is being sold for $210 million. Other builders have accumulated considerable equity during this time and builder assets are being transacted at 1.2 – 1.5 times tangible book value.

Messrs. Cortney and Bogue have earned rich compensation, while UCP has been a value transfer machine, donating owner’s capital from our pockets to those of directors, executives, employees and contract employees. Much valuable real estate has been sold off at zero (or negative) profit to the owners of the business.

We understand that Mr. Bogue wanted to make a go of it. He wanted to see if he could turn UCP into the next D.R. Horton. Dr. John Douillard, in his book “Mind, Body and Sport,” which everyone with a heartbeat should read, said, “To accept limitation goes against the grain of human nature, which is always to seek higher achievement…”

We, as shareowners, take issue with four aspects of Mr. Bogue’s effort: his frequent unethical conduct, his high compensation, his inability to accept reality when the dream was clearly not coming to fruition and the extreme measure by which he destroyed value for owners.

In the near term, life is often not fair. It is not fair that Mr. Bogue will walk from this transaction with a $2 million dollar payday while Daniel Silvers, Andrew Cates and Eric Speron earned around $115,000 for their 300-pound benchpress equivalent in 2016 (actually, Mr. Speron worked for free). If life were fair, Mr. Bogue’s payout would be cut by 75% and these three Directors would have earned twice as much in 2016. But life and fairness do not always run parallel.

These PICO Directors will have to be content with the knowledge that they have done right by owners and the broader financial community, despite deserving more pay. They have placed PICO on firm corporate governance footing for shareholder value maximization. They have participated in the monetization of UCP – which was the only economically rational result for such a value destroying machine.

These men are in good company. At RPN, we know a little bit about donating resources for the benefit of a greater community.


UCP Issues Amended 10-K. Cortney, Bogue, Lori, Pirrello & Wade Feed At The Trough.

No Alternative Facts For Andy

Esteemed institutional investor, Andrew “Andy” Shapiro, portfolio manager of Lawndale Capital Management, released his PICO Holdings‘ voting intentions on May 1. See Mr. Shapiro’s voting selections and rationale here.

Great minds think alike and we are happy to report that, except for one small discrepancy, RPN’s card and Andy’s card are the same.

Andy has been a friend to PICO owners. He has asked insightful and penetrating questions at last year’s Annual Meeting and on the earnings calls. His inquiries have provided all investors with better information about PICO. When you see Andy at the Annual Meeting, thank him for his dedication to shareholders.

We encourage other investors to take an active role in their PICO investment and ask difficult questions of the PICO Board at the Annual Meeting. Andy can’t do it all, ya know.

UCP’s Amended 10-K & Amended Future

On April 28, UCP issued a 10-K/A, or an amended 10-K with the Securities Exchange Commission. Under SEC rules, the information contained in Items 10-14 of the 10-K must be provided to shareholders annually. Firms can provide this information in either the 10-K or the Proxy Statement, but if they elect the Proxy Statement, the 10-K must reference Items 10-14 and the Proxy Statement must be issued within 30 days of the 10-K.

Items 10-14 pertain to:

Item 10: Directors, Executive Officers and Corporate Governance
Item 11: Executive Compensation
Item 12: Security Ownership
Item 13: Relationships, Related Transactions and Director Independence|
Item 14: Accountant Fees and Services

Once UCP signed its deal with Century Communities, there was no need for an Annual Meeting and a 2017 Proxy Statement. But UCP was still required to provide Items 10-14 to the investing public. To comply with this requirement, UCP amended its 10-K to include Items 10-14.

The 10-K/A is rife with interesting information. As we implied earlier, UCP does not anticipate holding an Annual Meeting.  The next time shareholders will opine on anything related to UCP will be at a Special Meeting of Stockholders to vote on the Century-UCP deal – or any other deal that may arise (hopefully at a higher price).

Assuming UCP is acquired by someone, UCP will not adopt the corporate governance improvement proposals advanced by PICO and formalized in the March 29, 2017 Agreement. PICO’s nominee for the Board of UCP, Keith Locker, will not stand for election or occupy a UCP Board seat. UCP owners will not vote on Mr. Bogue’s pay or execute a symbolic protest vote against Kathleen Wade.

Both the Merger Agreement and the 10-K/A reveal that UCP can shop assets, provided that such assets represent less than 20% of the balance sheet or less than 20% or of earnings power or revenues. UCP doesn’t have any earnings power, so assets and revenues are the relevant categories here. This would appear to give UCP the right to sell off the operation in Washington State. UCP doesn’t break it out separately, but we are pretty sure it represents less than 20% of assets or revenues. UCP should test the market for its Washington State operation. The Century-UCP merger price can be adjusted if it is sold.

Of course, this should only be done with Century’s blessing. Given UCP’s bleak future as a standalone and the upcoming tidal wave of debt maturity, UCP’s first priority is to get sold to a stronger, more competently run, enterprise.

Amended (Augmented) Compensation

Although this 10-K/A is supposed to provide the same information as the Proxy Statement, it avoids all specifics about the UCP Compensation Committee and the Corporate Governance and Nominating Committee. There is information about the Audit Committee and the Special Committee (which was established to address PICO’s corporate governance proposals), but nothing about the CGN Committee or the Comp Committee. Recall that the dubiously configured Comp Committee, comprised of only Michael Cortney and Peter Lori, fortified CEO Dustin Bogue‘s Employment Agreement and golden parachute.

The lack of detail on the Comp Committee does not hide the ineptitude of Messrs. Cortney and Lori – both lackeys to Mr. Bogue. These gentlemen have dug unjustifiably into shareowners’ pockets once again.

The ethically challenged Messrs. C0rtney and Lori awarded Mr. Bogue probably the most undeserved bonus in homebuilder history. For 2016, Messrs. Cortney and Lori gifted Mr. Bogue a bonus of $182,639. He was also gifted $525,000 in stock awards. The man who we have labelled “America’s Worst Homebuilder CEO,” has been rewarded by his supplicants as if he created value in 2016. Shareholders will pay the price.

UCP’s dishonest communication with owners continues. In last year’s Proxy Statement, UCP revealed that it paid Mr. Bogue a “Bonus” of $200,000 – the merits of which we leave undiscussed. This year, Messrs. Cortney and Lori did not pay Mr. Bogue a “Bonus”; instead, they paid him “Non-Equity Incentive Plan Compensation.”

Hmmmmm. The $182,639 payment appears in the table entitled “Summary Compensation,” just like last year’s “Bonus.” Beneath this year’s figure of $182,639, we see the $200,000 payment from 2015, which was labelled “Bonus” back then. Yet somehow, last year’s “Bonus” is this year’s “Non-Equity Incentive Plan Compensation.”

Mr. Bogue was paid a shameful total compensation of $1,267,027 for 2016.

Clown Bogue Counting Money

Dustin Bogue – Doing What He Does Best

The 10-K/A indicates that CFO James Pirrello was paid “Non-Equity Incentive Plan Compensation,” in other words a Bonus, of $163,363. We are not sure how this Bonus is justified. Perhaps it was the “Core Earnings” of $.84 cents or the “6.5% Core ROE” Mr. Pirrello disingenuously highlighted in Q4.

More unfathomable is Mr. Pirrello’s $993,247 in total compensation for 2016.

Bogue & Pirrello Miss Targets

According to a description of their Employment Agreements in the 10-K/A, Messrs. Bogue and Pirrello were to receive 2016 Bonuses targeted at not less than 50% of their annual base salaries.

Mr. Bogue’s Bonus – excuse us, “Non-Equity Incentive Plan Compensation” – amounted to 37% of his annual base salary. Mr. Pirrello’s Non-Equity Incentive Plan Compensation was 44% of his base salary. Even the UCP Comp Committee’s supplicatively low standards were not met.

Cortney & Lori Pay Cortney & Lori

Messrs. Cortney and Lori, the only two members of the UCP Comp Committee for 2016, shamefully increased their own compensation in 2016, by an average of about $50,000 or more than 60%.

In 2015, Mr. Cortney paid himself $85,000 – an amount that was unjustified given UCP’s poor performance and wanting corporate governance. In 2016, Mr. Cortney raised his own compensation to $135,000, an increase of 59%.

In 2015, Mr. Lori paid himself $95,000. In 2016, Mr. Lori paid himself $135,000, an increase of 42%.

In 2015, Mrs. Wade was gifted $71,217 in 2015, but was bestowed $130,000 in 2016 compensation, an increase of a ridiculous 83%.

For 2016, Messrs. Cortney and Lori raised Director compensation by an average of 61%. Some people are incapable of doing the right thing.

What Have U[CP] Done For Me Lately?

One glaring omission from the 10-K/A is an explanation and clarification of the UCP Executive Stock Ownership Guidelines.

The 2015 Proxy Statement made these Guidelines clear: UCP Executives had to own five times their base salary in UCP equity. Mr. Bogue failed to comply with the Guidelines for much of the last two years.

Recall that those Guidelines mysteriously disappeared from the 2016 Proxy Statement. We have been asking Mr. Cortney, as Chair of the Comp Committee, to clarify for owners the fate of the Guidelines. Mr. Cortney has deceived owners and clarified nothing. It appears UCP shareholders will never know what happened to the Guidelines.

We guess this is how Mr. Cortney runs a Board – promulgate Guidelines and when those Guidelines become inconvenient, deceptively rescind them. When caught red handed, keep silent.

May 4 – Hammer Time

May 4 will be a big day for owners of PICO and UCP.

The PICO Annual Meeting will take place. We expect PICO to report Q1 results that morning. PICO will update owners on several matters, including the $11 million in Juicer Termination Payments and return of capital to owners. We might even get lucky and learn about the status of UCP monetization bonus.

On May 4, UCP will report Q1 results. UCP has historically released earnings in the morning and hosted an earnings call a few hours later. Given that Q1 earnings will be released after market close, we assume that UCP will not hold an earnings call. This is typical of firms about to be acquired. And in UCP’s case, it is appropriate: Messrs. Bogue and Pirrello have been paid handsomely for creating no value for owners through operations. They should appropriately devote all their time and energy to providing owners with value the only way they can: by selling the firm.

On May 4, Century Communities, UCP’s future groom, will also release Q1 earnings. Root for a big number from Century. There is no collar on the share exchange ratio.

Don’t sleep in on Thursday. It’s gonna be a big day!