RPN Says Hart, Bogue in Suspicious Real Estate Deal

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 14% of PICO. Other activists at http://ReformPICONow.com/ (RPN) have taken to the Internet to advance the shareholder cause.

The bloggers have once again uncovered evidence that may indicate wrongdoing on the part of PICO CEO John Hart and UCP CEO Dustin Bogue.

The bloggers wrote, “We believe that John Hart and Dustin Bogue misappropriated PICO Holdings’ shareholder funds for the personal benefit of Mr. Bogue and to the detriment of PICO shareowners. We believe that what you are about to read amounts to willful misconduct that is materially and demonstrably injurious to PICO Holdings.

“We call on the Boards of both PICO and UCP to conduct a formal investigation into this matter, complete with independent forensic experts. We call on both Boards to pursue truth expeditiously and to communicate that truth to shareowners.

“A few months back, we analyzed UCP’s Registration Statement filed with the SEC on July 8, 2013. On page 180, we noticed something peculiar:

Release from Guarantee

“In 2012, we acquired 44 finished lots located in Fresno County in a project known as Red Hawk from a Fresno-based bank, or the Red Hawk Lender. The Red Hawk Lender acquired Red Hawk through a foreclosure proceeding related to a $9.4 million land acquisition and development loan it made to the prior owner of Red Hawk. The previous majority owners of Red Hawk, including Dustin L. Bogue, our President and Chief Executive Officer, had each personally guaranteed the full amount of the loan from the Red Hawk Lender. We acquired Red Hawk in an open market transaction conducted by the Red Hawk Lender. In connection with our acquisition of Red Hawk, the Red Hawk Lender released Mr. Bogue and the other guarantors from any and all liability relating to their personal guarantees.”

The bloggers investigated and discovered a lawsuit related to the Red Hawk Transaction. “The plaintiff, or the ‘Red Hawk Lender,’ is Premier Valley Bank. Mr. Bogue is one of several Defendants. The case number is 110-CV-176515. The case was filed in the Superior Court of Fresno in California.

The story begins in 2006. Mr. Bogue, Steven H. Costa, James W. Hoey, Debra J. Hoey, JS Land Company, Union Community Builders LLC, Union Community Holdings LLC, were principals in Red Hawk Community Partners, LLC, which owned the Red Hawk Community property, comprised of 45 unfinished lots at 12517 East Ashlan Avenue, in Sanger, California.

Premier Valley Bank underwrote the Defendants, including Mr. Bogue, a construction and development loan for $9.4 million to develop and sell the 45 unfinished lots of the Red Hawk Community. The loan was initiated on July 25, 2006 with a two-year term, to be repaid on July 25, 2008.

The Defendants, including Mr. Bogue, collateralized the loan by pledging the Red Hawk Property and providing unlimited personal guarantees. The Red Hawk Community also served as collateral.

A December 4, 2009 appraisal indicated a significant decline in the value of the Red Hawk Community to $4,430,000, which was $1,935,000 below the minimum value established by the Loan Agreement. Craig E. Sandall, Vice President of Premier Valley Bank, stated that the loan was placed in default. Premier Valley Bank started the foreclosure process on the Red Hawk Construction Deed of Trust.

The Defendants, including Mr. Bogue, failed to cure the default. In February 2010, Premier Valley Bank sued the Defendants, including Mr. Bogue, for Breach of Contract and Specific Performance. Premier Valley Bank sought $1,935,000 in damages plus attorney’s fees and other costs. David J. Weiland, Esq., of Dowling, Aaron & Keeler, Inc., represented Premier Valley Bank.

Premier Valley Bank foreclosed on the Red Hawk Community and subsequently purchased it at the foreclosure sale with a credit bid of $3.6 million. Premier Valley Bank was now the owner of the Red Hawk Community.

In July 2011, the Honorable Peter H. Kirwan, set a jury trial date for January 9, 2012. The trial was expected to last 4-5 days. The remaining Defendants, including Mr. Bogue, conducted discovery and prepared for trial. Simultaneously, the parties engaged in alternative dispute resolution, specifically mediation.

In November 2011, at the request of Mr. Weiland, attorney for Premier Valley Bank, Judge Kirwan vacated the trial date, as Mr. Bogue and Premier Valley Bank were making progress towards a settlement.

On July 26, 2012, the transaction in question took place. Premier Valley Bank sold the Red Hawk Community to BMCH LLC California, a subsidiary of UCP, which was then a subsidiary of PICO. The price and other terms were not disclosed.

According to the bloggers, “We procured this document with the help of expert real estate attorney, Jean Heinz, Esq., of Heinz & Feinberg, in San Diego, California. We asked Mrs. Feinberg if the price and terms of the transaction could be determined through other public documents. She responded in the negative, “They were very careful — see how the transfer tax is not disclosed.”

The bloggers find the evidence suspicious and demand an investigation of the Red Hawk transaction. They worry that PICO bailed out Mr. Bogue from his underwater personal guarantee attached to the Red Hawk Loan. “Banks are not in the business of giving away assets for free. We believe that Premier Valley Bank made Mr. Hart and PICO pay for the release of Mr. Bogue from the guarantee, thereby causing PICO to overpay for the Red Hawk Community. This would be a misappropriation of PICO’s shareholder funds.

The value of the Red Hawk Community deteriorated considerably from the 2009 appraisal presented in the case file, to when PICO purchased it in 2012. In 2009, the Red Hawk Community was appraised at $4.43 million. Residential real estate prices in Sanger dropped 30% between 2009 and 2012, so the Red Hawk Community would would have been worth only $3.1 million in 2012. If PICO and Mr. Hart paid more than $3.1 million in 2012, then the Red Hawk Community was purchased at a considerable premium to market.

The Red Hawk Community has probably destroyed millions of dollars in value for PICO and UCP shareholders; 35 homes have been sold between 2013 and 2016 — or about one per month. That is an abysmal absorption rate, as the industry average is over 2 per month — or double Red Hawk’s metric. In order to earn an economic profit, 44 homes should be sold in about 2 years — UCP has only sold 35 homes in 3 years!”

The bloggers want to know the answer to one important question: “How much did PICO pay for the Red Hawk Community in 2012?

Mr. Hart had a fiduciary duty to PICO shareholders to allocate capital at acceptable returns. He had a fiduciary duty to NOT purchase the Red Hawk Community if it could not produce an adequate return for owners.

Is Mr. Bogue fit to be CEO and a Director of a publicly-traded homebuilder, given that he went bust on a large real estate deal and, like a child running to mommy, got bailed out by a publicly-traded company with deep pockets?

“We call on the PICO Directors to conduct an investigation of the Red Hawk Community transaction, complete with independent forensic experts. We call on the PICO Directors to expeditiously seek the truth and communicate results frequently and clearly to the owners of the business.”