UCP Surrenders to Corporate Governance Improvements

As originally appeared in the Troubled Company Reporter.

Activist bloggers at http://www.ReformPICONow.com observe that perennial destroyer of shareholder value, UCP, has surrendered to PICO’s demands for improvements to corporate governance. The bloggers predict that “UCP, as it is currently conceived, will survive either another 7 months if the debt maturity goes sideways or another year (barring a surprise offer or other unanticipated transaction). Either way, value destruction at UCP will end sometime soon and shareowners may finally realize an acceptable return on their investment.

UCP produced the bold headline: ‘UCP Announces Expansion Of Board And Strengthened Corporate Governance.’

The blogger said, “We find UCP’s tone amusing — as if UCP sought to improve corporate governance all along. The potential corporate governance improvements at UCP were not self-imposed. They are the result of PICO taking off the kid gloves.”

“But what should investors expect from UCP? The last few months have seen numerous dishonest communications from Chairman Michael Cortney, CEO Dustin Bogue and CFO James Pirrello.”

The activist bloggers outline the proposals to be voted upon at the upcoming UCP Annual Meeting. “UCP will expand the Board from 6 to 7 Directors. Kathleen Wade, incumbent Director up for reelection this year, will keep her seat. Filling the open slot will be PICO’s nominee Keith Locker.

The result is guaranteed as Director election at UCP requires a majority of votes, which PICO, with its almost 57% voting power, will meet by itself.

The blogger said, “We got this one wrong in a few different posts. We didn’t envision a scenario in which Mrs. Wade kept her seat. This unfortunate result means that one of 4 UCP Directors focused on entrenchment and destruction of shareholder value gets more time to do more of the same.

“Mr. Locker will be named to the UCP Corporate Governance and Nominating Committee. Eric Speron will be appointed to the Compensation Committee, an addition that is long, long overdue.

The UCP Comp Committee, comprised only of Mr. Cortney and UCP Director Peter H. Lori, has been guilty of several offenses against shareowners. This dubiously configured Comp Committee without any explanation, removed the Officer Stock Ownership Guidelines from the Proxy Statement. CEO Bogue received the most undeserved salary increase in the homebuilder industry. And Mr. Bogue received Golden Parachute fortification as PICO sought to earn an adequate return on its investment.

Now that all the dubious and abusive compensation machinations are complete, Messrs. Cortney and Lori are willing to accept a non-corrupt additional member. The rotten Cortney and Lori apples don’t fall far from the diseased Juicerian tree.”

The bloggers criticize the intransigence of the UCP Directors. “Messrs. Cortney, Bogue, Lori and Mrs. Wade occupy a shameful place in corporate America. These four value-destroying charlatans continue to hold two shareholder bases hostage. Despite the fact that UCP has destroyed millions of dollars in value since its July 2013 IPO, these self-interested Directors refuse to maximize value for two sets of owners and sell the firm.

“We understand this unethical choice. As we have said, Messrs. Cortney, Bogue and Mrs. Wade will never occupy their respective positions ever again. Therefore, they cling to the prestige and compensation of their current positions as if they were drowning men and women reaching for a life raft.

According to the Settlement Agreement with PICO, UCP agrees to include 5 Proposals, along with its positive recommendation, in its 2017 Proxy Statement.

First, UCP will pursue hard declassification, starting at the 2018 Annual meeting. All Directors and potential Directors with terms expiring after 2018 have signed resignation letters to facilitate the hard declassification next year.

Second, shareholders with 25% or more voting power of UCP Common Stock may call a Special Meeting. This provision pertains only to UCP holders of Common Stock, which thereby excludes PICO, which owns Class B Common Stock and Series A Units. PICO had sought a 10% threshold.

Third, stockholders will be allowed to act by written consent.

Fourth, Directors may be removed without cause, the size of the Board may be changed and vacancies on the Board may be filled by a 75% supermajority vote (for as long as PICO or another shareholder owns 35% or more voting power). In other words, PICO plus 18.4%. PICO had sought a 66 2/3% threshold.

Fifth, Stockholders may amend the Bylaws by a 75% supermajority vote (for as long as PICO or another shareholder owns 35% or more voting power). In other words, PICO plus 18.4%. PICO had sought a 66 2/3% threshold.

UCP refused to honor PICO’s request to adopt cumulative voting for Directors.

To pass, each proposal needs a ‘For’ vote from a majority of the roughly 8 million Class A shares (about 4 million ‘For’ votes).

PICO agrees to vote ‘For’ all 5 Proposals. Going forward, PICO agrees to vote its securities in such a manner that at least 3 UCP Directors at all times will be ‘Independent.’

At the request of readers, the activist bloggers calculate “2016 economic earnings” for UCP. They write: “Many RPN readers enjoyed our expose’ of UCP’s Q4 earnings presentation. We entertained them by uncovering the dishonesty and desperation of Messrs. Bogue and Pirrello, both of whom futilely attempted to inflate UCP’s earnings to the investing public.

“A few readers asked us about economic earnings, so we provide our version. First, a few notes. UCP does not disclose cash interest paid. We use interest incurred, which is likely higher, but not by much.

“Like all builders, UCP capitalizes and expenses interest on debt, provided that real estate inventory balance exceeds debt balance. When capitalized interest is expensed, it is lumped in with cost of goods sold. Our “Incremental Interest Expense” figure is the interest incurred above and beyond what UCP expensed in cost of goods sold.

We always include routine depreciation and amortization, stock options and other forms of noncash employee compensation in our calculation of economic earnings. Although such P&L debits do not have immediate cash consequences, assets wear out and must be replaced. Equity equivalents granted to managers have an economic cost to owners. This inclusion may skew from cash earnings, but it is perfectly coherent with economic earnings.

Recall that Messrs. Bogue and Pirrello told UCP owners, with straight faces, that ‘Core Earnings’ were $.84 cents per share and ‘Core ROE’ was 6.5%. We laughed at their desperate attempt to artificially inflate UCP’s results in order to compensate for dismal performance, as measured by any and all relevant metrics. These men have a tendency to communicate dishonesty to owners and they are incompetent managers in the extreme. Below we show UCP’s economic earnings and compare it with the deceptive figures futilely championed by Messrs. Bogue and Pirrello:

Item RPN Economic Earnings
—- ———————
Reported Pretax Earnings $9,163
Goodwill Writedown $4,223
Abandonment/Impairment $3,112
Contingent Consideration ($2,347)
Valuation Allowance –
Cash Tax Payment to PICO ($4,830)
Incremental Interest Expense ($4,385)
Total UCP Economic Income $4,936
Earnings Per Share $.26
Return on Avg. Equity ($222M) 2.2%

Messrs. Bogue and Pirrello deceptively claimed credit for $.84 cents per share in earnings. Recall that they conveniently ‘forgot’ to adjust for the contingent commission reduction and the cash tax payment to PICO.

“We calculate $.26 cents per share, or 69% less that the dubious figure provided by Messrs. Bogue and Pirrello. Recall that Messrs. Bogue and Pirrello disingenuously told us that ‘Core ROE’ was 6.5%, while we calculate an economic ROE of 2.2%, which is less than a 10-year Treasury bond.

“Monetization of PICO’s stake in UCP is now in sight. But it could be a long way off. In the meantime, both shareholder bases of UCP and PICO will incur significant risk and value destruction as 4 Directors — Messrs. Cortney, Bogue and Lori and Mrs. Wade — whom we characterize as dishonest and inept, continue their pursuit of self-interest in the extreme.”

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 $676 million in assets and $428 million in shareholder equity as of December 31, 2016. Amundi and River Road Asset Management LLC collectively own more than 16% of PICO. Other activists at http://ReformPICONow.com/ (RPN) have taken to the Internet to advance the shareholder cause.