RPN Says UCP Begins Financial Decline

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.

On October 14, UCP made four related announcements in an 8-K filing with the SEC. The bloggers at RPN analyze the disclosures. First, the bloggers note that UCP reported a surprising drop in deliveries. According to the bloggers, “UCP reported that deliveries for Q3 declined from 202 to 199. This is highly unusual and we know of no other homebuilder that reported lower deliveries year on year. Pulte Group, KB Homes and Lennar reported increases in home deliveries of 16%, 11% and 7% respectively.”

“Second, UCP shocked homebuilder observers with its announcement that it would writedown all the goodwill from the Citizens acquisition. WTF? A goodwill writedown? In the homebuilding industry?

“In 2016? We didn’t think a goodwill writedown was possible in the homebuilder industry in 2016.

“We know of no other homebuilder that has written down goodwill – for the last several years. Homebuilding is on a tear. Demand is high and growing. Prices for both real estate and homes are rising. Margins are expanding. The industry is turning in fantastic results. How in the world could UCP botch its only acquisition so badly that it writes down 30% of the purchase price?”

The writedown is especially surprising given the markets involved. The Citizens acquisition gave UCP a presence in Charlotte and Raleigh, North Carolina, Myrtle Beach, South Carolina and Nashville, Tennessee. These are some of the best homebuilder markets in the country.

According to the bloggers, there have been dozens of acquisitions in the homebuilder industry over the last 5 years. Very few have involved goodwill. “Of those where goodwill was booked, we don’t know of a single one that has experienced a writedown. UCP’s acquisition of Citizens is the only transaction with that ignominious distinction.”

“Not surprisingly, in 2014, Mr. Bogue’s base salary was increased by about $100,000 or 25%. 2014 was also the year of the empire-building Citizens acquisition. Sounds like once again, Mr. Bogue wins and investors lose.”

Third, UCP announced that subsequent to June 30, 2016, it purchased 270 residential lots for $7.7 million and acquired purchase contracts on 1,247 residential lots for an exercise price of $31.9 million. UCP has not gone defensive, as the bloggers previously speculated.

Fourth, UCP announced that it proposed a private Senior Note offering, with a 2021 maturity. “UCP intended to use the New 2021 Senior Notes to repay the 8.5% Senior Notes due 2017, to pay upcoming smaller maturities and for general corporate purposes. Since UCP generates almost no cash, we assume this offering would have helped pay for the aforementioned optioned lots.

The situation grew sketchy on October 17, just 3 days after the initial press release. UCP announced that it was terminating its pursuit of the $25 million secured revolver. Jamie Pirrello, UCP CFO, said that due to the imminent $200 million Senior Note offering, the subsequent repayment of outstanding borrowings and $11.8 million that would be available for additional borrowing, UCP’s ‘business plan does not require, at this time, the additional liquidity that would be provided by the potential $25 million facility.’

In an 8-K filed with the SEC, UCP announced that it had pulled its 2021 Senior Note offering, ‘in light of challenged market conditions.’

In other words, it got pulled because UCP either couldn’t sell it at all or UCP couldn’t sell it at a rate that would preserve earnings. But it didn’t get sold.

As of June 30, UCP had almost $16 million in debt maturities due in 2016. And for 2017, in addition to the $75 million in Senior Notes that come due in October, UCP also has an additional $54 million in maturities. Total maturities between June 30, 2016 and the end of 2017: about $145 million.

“Show us a homebuilder that can’t borrow. And we’ll show you a homebuilder whose employees will be running for the exits. We’ll show you a homebuilder with a shrinking balance sheet and income statement. We’ll show you a homebuilder who is calling its investment bankers to drum up purchase offers — fast.”