Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 033-36383
PICO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation) | 94-2723335 (IRS Employer Identification No.) |
7979 Ivanhoe Avenue, Suite 300 La Jolla, California 92037
(Address of principal executive offices, including zip code)
(858) 456-6022
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
On May 1, 2017, the registrant had 23,080,882 shares of common stock, $0.001 par value per share outstanding.
PICO Holdings, Inc.
Form 10-Q
For the Three Months Ended March 31, 2017
Table of Contents
Page No. | ||
Item 1: | ||
Item 2: | ||
Item 3: | ||
Item 4: | ||
Item 1: | ||
Item 1A: | ||
Item 2: | ||
Item 3: | ||
Item 4: | ||
Item 5: | ||
Item 6: | ||
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements (Unaudited)
PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets - Unaudited (In thousands, except par value) | |||||||
March 31, 2017 | December 31, 2016 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 52,827 | $ | 19,611 | |||
Investments ($22,853 and $25,071 measured at fair value at March 31, 2017 and December 31, 2016, respectively) | 24,166 | 26,383 | |||||
Real estate and tangible water assets, net | 45,170 | 57,691 | |||||
Intangible assets | 126,759 | 126,796 | |||||
Other assets | 3,794 | 4,624 | |||||
Assets held-for-sale | 435,567 | 440,689 | |||||
Total assets | $ | 688,283 | $ | 675,794 | |||
Liabilities and equity | |||||||
Deferred compensation | $ | 27,240 | $ | 27,322 | |||
Severance payable and other liabilities | 12,966 | 12,322 | |||||
Accounts payable and accrued expenses | 1,063 | 1,015 | |||||
Liabilities held-for-sale | 213,697 | 207,566 | |||||
Total liabilities | 254,966 | 248,225 | |||||
Commitments and contingencies | |||||||
Common stock, $0.001 par value; authorized 100,000 shares, 23,137 issued and 23,081 outstanding at March 31, 2017, and 23,125 issued and 23,070 outstanding at December 31, 2016 | 23 | 23 | |||||
Additional paid-in capital | 495,311 | 495,468 | |||||
Accumulated deficit | (168,588 | ) | (173,231 | ) | |||
Accumulated other comprehensive income | 6,087 | 6,661 | |||||
Treasury stock, at cost (common shares: 55 at March 31, 2017 and December 31, 2016, respectively) | (927 | ) | (927 | ) | |||
Total PICO Holdings, Inc. shareholders’ equity | 331,906 | 327,994 | |||||
Noncontrolling interest in subsidiaries | 101,411 | 99,575 | |||||
Total equity | 433,317 | 427,569 | |||||
Total liabilities and equity | $ | 688,283 | $ | 675,794 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited (In thousands, except per share data) | |||||||
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Revenues and other income: | |||||||
Sale of real estate and water assets | $ | 25,097 | $ | 98 | |||
Other income, net | 1,096 | 687 | |||||
Total revenues and other income | 26,193 | 785 | |||||
Cost of sales and expenses: | |||||||
Cost of real estate and water assets sold | 12,532 | 45 | |||||
General, administrative, and other | 4,090 | 5,082 | |||||
Depreciation and amortization | 98 | 359 | |||||
Total cost of sales and expenses | 16,720 | 5,486 | |||||
Income (loss) from continuing operations before income taxes | 9,473 | (4,701 | ) | ||||
Provision for federal and state income taxes | (180 | ) | (89 | ) | |||
Income (loss) from continuing operations | 9,293 | (4,790 | ) | ||||
Income (loss) from discontinued operations, net of tax | 3,887 | (203 | ) | ||||
Loss on sale or impairment loss on classification of assets as held-for-sale, net of tax | (7,146 | ) | (1,849 | ) | |||
Net loss from discontinued operations, net of tax | (3,259 | ) | (2,052 | ) | |||
Net income (loss) | 6,034 | (6,842 | ) | ||||
Net (income) loss attributable to noncontrolling interests | (1,391 | ) | 41 | ||||
Net income (loss) attributable to PICO Holdings, Inc. | $ | 4,643 | $ | (6,801 | ) | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited, Continued (In thousands, except per share data) | |||||||
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Other comprehensive income (loss): | |||||||
Net income (loss) | $ | 6,034 | $ | (6,842 | ) | ||
Other comprehensive income (loss), net of tax: | |||||||
Unrealized gain (loss) on securities, net of deferred income tax and reclassification adjustments | (590 | ) | 40 | ||||
Foreign currency translation | 16 | 9 | |||||
Total other comprehensive income (loss), net of tax | (574 | ) | 49 | ||||
Comprehensive income (loss) | 5,460 | (6,793 | ) | ||||
Comprehensive (income) loss attributable to noncontrolling interests | (1,391 | ) | 41 | ||||
Comprehensive income (loss) attributable to PICO Holdings, Inc. | $ | 4,069 | $ | (6,752 | ) | ||
Net income (loss) per common share – basic and diluted: | |||||||
Income (loss) from continuing operations | $ | 0.40 | $ | (0.21 | ) | ||
Loss from discontinued operations | (0.20 | ) | (0.08 | ) | |||
Net income (loss) per common share – basic and diluted | $ | 0.20 | $ | (0.29 | ) | ||
Weighted average shares outstanding | 23,072 | 23,038 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
PICO Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity - Unaudited
Three Months Ended March 31, 2017 and 2016
(In thousands)
Shares of Common Stock Issued | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Shares of Treasury Stock | Treasury Stock, at Cost | Noncontrolling Interest | Total | ||||||||||||||||||||||||||
Beginning balance, January 1, 2017 | 23,125 | $ | 23 | $ | 495,468 | $ | (173,231 | ) | $ | 6,661 | 55 | $ | (927 | ) | $ | 99,575 | $ | 427,569 | ||||||||||||||||
Stock-based compensation expense | 717 | 181 | 898 | |||||||||||||||||||||||||||||||
Exercise of restricted stock units | 25 | — | ||||||||||||||||||||||||||||||||
Withholding taxes paid on vested restricted stock units | (279 | ) | (121 | ) | (400 | ) | ||||||||||||||||||||||||||||
Changes in ownership of noncontrolling interest | (411 | ) | 411 | — | ||||||||||||||||||||||||||||||
Distribution to noncontrolling interest | (26 | ) | (26 | ) | ||||||||||||||||||||||||||||||
Purchases of treasury stock | 13 | (184 | ) | (184 | ) | |||||||||||||||||||||||||||||
Retirement of treasury stock | (13 | ) | (184 | ) | (13 | ) | 184 | — | ||||||||||||||||||||||||||
Net income | 4,643 | 1,391 | 6,034 | |||||||||||||||||||||||||||||||
Unrealized loss on investments, net of deferred income tax of $313 and reclassification adjustments of $740 | (590 | ) | (590 | ) | ||||||||||||||||||||||||||||||
Foreign currency translation | 16 | 16 | ||||||||||||||||||||||||||||||||
Ending balance, March 31, 2017 | 23,137 | $ | 23 | $ | 495,311 | $ | (168,588 | ) | $ | 6,087 | 55 | $ | (927 | ) | $ | 101,411 | $ | 433,317 | ||||||||||||||||
Shares of Common Stock Issued | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Shares of Treasury Stock | Treasury Stock, at Cost | Noncontrolling Interest | Total | ||||||||||||||||||||||||||
Beginning balance, January 1, 2016 | 23,116 | $ | 23 | $ | 494,207 | $ | (151,366 | ) | $ | 4,961 | 78 | $ | (1,413 | ) | $ | 87,592 | $ | 434,004 | ||||||||||||||||
Stock-based compensation expense | 455 | 51 | 506 | |||||||||||||||||||||||||||||||
Withholding taxes paid on vested restricted stock units | (25 | ) | (20 | ) | (45 | ) | ||||||||||||||||||||||||||||
Net loss | (6,801 | ) | (41 | ) | (6,842 | ) | ||||||||||||||||||||||||||||
Unrealized gain on investments, net of deferred income tax of $22 and reclassification adjustments of $5 | 40 | 40 | ||||||||||||||||||||||||||||||||
Foreign currency translation | 9 | 9 | ||||||||||||||||||||||||||||||||
Ending balance, March 31, 2016 | 23,116 | $ | 23 | $ | 494,637 | $ | (158,167 | ) | $ | 5,010 | 78 | $ | (1,413 | ) | $ | 87,582 | $ | 427,672 | ||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows - Unaudited (In thousands) | |||||||
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Operating activities: | |||||||
Cash provided by (used in) operating activities - continuing operations | $ | 23,155 | $ | (5,358 | ) | ||
Cash used in operating activities - discontinued operations | (4,131 | ) | (12,778 | ) | |||
Net cash provided by (used in) operating activities | 19,024 | (18,136 | ) | ||||
Investing activities: | |||||||
Purchases of investments | (427 | ) | (383 | ) | |||
Proceeds from sale of investments | 2,474 | 30 | |||||
Purchases of property, plant and equipment | (44 | ) | (39 | ) | |||
Proceeds from sale of property, plant and equipment | 258 | ||||||
Cash provided by (used in) investing activities - continuing operations | 2,261 | (392 | ) | ||||
Cash provided by (used in) investing activities - discontinued operations | 5,892 | (675 | ) | ||||
Net cash provided by (used in) investing activities | 8,153 | (1,067 | ) | ||||
Financing activities: | |||||||
Payment of withholding taxes on exercise of restricted stock units | (122 | ) | |||||
Purchases of treasury stock | (184 | ) | |||||
Cash used in financing activities - continuing operations | (306 | ) | — | ||||
Cash provided by (used in) financing activities - discontinued operations | (754 | ) | 2,307 | ||||
Net cash provided by (used in) financing activities | (1,060 | ) | 2,307 | ||||
Increase (decrease) in cash and cash equivalents | 26,117 | (16,896 | ) | ||||
Cash and cash equivalents, beginning of the period | 60,980 | 57,400 | |||||
Cash and cash equivalents, end of the period | 87,097 | 40,504 | |||||
Less cash and cash equivalents of discontinued operations at the end of the period | 34,270 | 30,321 | |||||
Cash and cash equivalents of continuing operations, end of the period | $ | 52,827 | $ | 10,183 | |||
Non-cash investing and financing activities: | |||||||
Unpaid liability incurred for development costs | $ | 395 | |||||
Issuance of common stock for vested restricted stock units | $ | 1,476 | $ | 98 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
PICO Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Footnote Index
Page No. | ||
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of PICO Holdings, Inc. and subsidiaries (collectively, the “Company” or “PICO”) have been prepared in accordance with the interim reporting requirements of Form 10-Q, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete consolidated financial statements.
In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation of the financial statements presented have been included and are of a normal recurring nature. Operating results presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
Use of Estimates in Preparation of Financial Statements:
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s condensed consolidated financial statements relate to the assessment of impairment losses, intangible assets, real estate and water assets, deferred income taxes, and stock-based compensation. It is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.
Discontinued Operations:
On April 10, 2017, our majority owned subsidiary, UCP, Inc. (“UCP”) entered into an agreement with Century Communities, Inc. (“Century”) whereby each outstanding share of UCP common stock will be converted into $5.32 in cash and 0.2309 of a newly issued share of Century common stock. The transaction is expected to close by the end of the third quarter of 2017 and is subject to customary closing conditions. The Company anticipates no longer having a controlling financial interest in UCP and will deconsolidate UCP’s assets, liabilities, and results of operations when the transaction closes. The assets and liabilities of UCP qualified as held-for-sale at March 31, 2017 and UCP’s results of operations have been classified as discontinued operations as of the earliest period presented. Consequently, prior periods presented have been recast from amounts previously reported to reflect UCP as discontinued operations. See Note 10 “Discontinued Operations” for additional information.
6
Recently Issued Accounting Pronouncements:
In March 2016, the FASB issued guidance on accounting for share-based payments to employees. The guidance clarifies income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company implemented this guidance during the three months ended March 31, 2017 and it did not have a material effect on the condensed consolidated financial statements.
2. Real Estate and Tangible Water Assets
The costs assigned to the various components of real estate and tangible water assets were as follows (in thousands):
March 31, 2017 | December 31, 2016 | ||||||
Real estate and improvements held and used, net of accumulated depreciation of $12,003 at March 31, 2017 and December 31, 2016, respectively | $ | 9,469 | $ | 9,469 | |||
Other real estate inventories completed or under development | 5,724 | 5,724 | |||||
Tangible water assets | 29,977 | 42,498 | |||||
Total real estate and tangible water assets | $ | 45,170 | $ | 57,691 | |||
3. Intangible Assets
The Company owns the following intangible assets, which primarily represent indefinite-lived intangible water assets (in thousands):
March 31, 2017 | December 31, 2016 | ||||||
Pipeline rights and water credits at Fish Springs Ranch | $ | 83,897 | $ | 83,897 | |||
Pipeline rights and water rights at Carson-Lyon | 25,569 | 25,569 | |||||
Other | 17,293 | 17,330 | |||||
Total intangible assets | $ | 126,759 | $ | 126,796 | |||
4. Investments
The cost and carrying value of available-for-sale investments were as follows (in thousands):
March 31, 2017 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Value | |||||||||||
Debt securities: corporate bonds | $ | 4,304 | $ | 101 | $ | (29 | ) | $ | 4,376 | ||||||
Marketable equity securities | 9,093 | 9,410 | (26 | ) | 18,477 | ||||||||||
Total | $ | 13,397 | $ | 9,511 | $ | (55 | ) | $ | 22,853 | ||||||
December 31, 2016 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Value | |||||||||||
Debt securities: corporate bonds | $ | 4,306 | $ | 82 | $ | (6 | ) | $ | 4,382 | ||||||
Marketable equity securities | 10,400 | 10,327 | (38 | ) | 20,689 | ||||||||||
Total | $ | 14,706 | $ | 10,409 | $ | (44 | ) | $ | 25,071 | ||||||
7
The amortized cost and carrying value of investments in debt securities, by contractual maturity, are shown below. Actual maturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
March 31, 2017 | December 31, 2016 | ||||||||||||||
Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
Due in one year or less | $ | 193 | $ | 192 | $ | 182 | $ | 183 | |||||||
Due after one year through five years | 4,111 | 4,184 | 4,124 | 4,199 | |||||||||||
Total | $ | 4,304 | $ | 4,376 | $ | 4,306 | $ | 4,382 | |||||||
Debt Securities
The Company owns corporate bonds and other debt securities, which are purchased based on the maturity and yield-to-maturity of the bond and an analysis of the fundamental characteristics of the issuer. At March 31, 2017 and December 31, 2016, there were unrealized losses on certain bonds in the portfolio. The Company does not consider those bonds to be other-than-temporarily impaired because the Company expects to hold, and will not be required to sell, these particular bonds, and expects to recover the entire amortized cost basis at maturity. There were no impairment losses recorded on debt securities during the three months ended March 31, 2017 and 2016.
Marketable Equity Securities
The Company’s investment in marketable equity securities at March 31, 2017 principally consisted of common stock of publicly traded small-capitalization companies in the U.S. and select foreign markets. At March 31, 2017, the Company reviewed its equity securities in an unrealized loss position and concluded certain securities were not other-than-temporarily impaired as the declines were not of sufficient duration and severity, and publicly-available financial information, collectively, did not indicate impairment. The primary cause of the losses on those securities was normal market volatility. No material impairment losses were recorded during the three months ended March 31, 2017 and 2016.
Other Investments
The Company held two investments at March 31, 2017 and December 31, 2016 that were not classified as available-for-sale.
Investment in Synthonics:
The Company owns a 18.2% voting interest in Synthonics, Inc. (“Synthonics”), a private company co-founded by a former member of the Company’s board of directors. During the year ended December 31, 2016, the Company recorded an impairment loss of $2.2 million on its investment in Synthonics as the estimated fair value was less than the carrying value. Such impairment loss reduced the carrying value to zero. The fair value approach relied primarily on Level 3 unobservable inputs, whereby the enterprise value was determined using book value multiples that included assumptions regarding an entity’s risks and uncertainties. The estimates were based upon assumptions believed to be reasonable, but which by their nature are uncertain and unpredictable.
Investment in Mindjet:
The Company owns a 19.3% voting interest in Mindjet, Inc. (“Mindjet”) a private management software company. At March 31, 2017 and December 31, 2016 the carrying value of the investment was approximately $1.3 million.
The carrying value of the Company’s investment in Mindjet is subject to impairment testing at each reporting period, or more frequently if facts and circumstances indicate the investment may be impaired. It is reasonably possible that circumstances may continue to deteriorate which could require the Company to record additional impairment losses on the remaining investment balances.
8
5. Disclosures About Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions at the measurement date. The level within the fair value hierarchy in which the fair value measurements are classified include measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).
Recurring Fair Value Measurements
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s policy is to recognize transfers between levels at the end of the reporting period. The following tables set forth the Company’s assets and liabilities that were measured at fair value, on a recurring basis, by level within the fair value hierarchy. There were no significant transfers between Level 1 and Level 2 during the three months ended March 31, 2017 or during the year ended December 31, 2016.
At March 31, 2017 (in thousands):
Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at March 31, 2017 | ||||||||||
Assets | |||||||||||||
Available-for-sale equity securities (1) | $ | 10,580 | $ | 7,897 | $ | 18,477 | |||||||
Available-for-sale debt securities (1) | 4,376 | 4,376 | |||||||||||
Total | $ | 14,956 | $ | 7,897 | $ | 22,853 | |||||||
At December 31, 2016 (in thousands):
Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at December 31, 2016 | ||||||||||
Assets | |||||||||||||
Available-for-sale equity securities (1) | $ | 12,545 | $ | 8,144 | $ | 20,689 | |||||||
Available-for-sale debt securities (1) | 4,382 | 4,382 | |||||||||||
Total | $ | 16,927 | $ | 8,144 | $ | 25,071 | |||||||
(1) Where there are quoted market prices that are readily available in an active market, securities are classified as Level 1 of the valuation hierarchy. Level 1 available-for-sale investments are valued using quoted market prices multiplied by the number of shares owned and debt securities are valued using a market quote in an active market. All Level 2 available-for-sale securities are one class because they all contain similar risks and are valued using market prices and include securities where the markets are not active, that is where there are few transactions, or the prices are not current or the prices vary considerably over time. Inputs include directly or indirectly observable inputs such as quoted prices. Level 3 available-for-sale securities would include securities where valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
9
Non-Recurring Fair Value Measurements
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.
There were no non-financial assets that were measured at fair-value, on a non-recurring basis for the three months ended March 31, 2017.
The Company’s non-financial assets that were measured at fair value, on a non-recurring basis, by level within the fair value hierarchy for the year ended December 31, 2016 (in thousands) are as follows:
Asset Description | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Loss | ||||||||
Oil and gas wells (1) | $ | — | $ | 201 | ||||||||
Investments in unconsolidated affiliates (2) | $ | — | $ | 2,170 | ||||||||
(1) The Company recorded an impairment loss to write down the value of capitalized development costs related to its oil and gas wells. The estimated fair value of the wells was determined using a discounted cash flow model. The loss was reported in the condensed consolidated statements of operations and comprehensive income or loss within impairment loss on intangible and long-lived assets and was included in the results of operations of the corporate segment.
(2) The Company had a non-recurring fair value measurement of an investment in an unconsolidated affiliate’s equity securities held at cost discussed in Note 4 “Investments.”
Estimated Fair Value of Financial Instruments Not Carried at Fair Value
As of March 31, 2017 and December 31, 2016, the fair values of cash and cash equivalents, accounts payable, and accounts receivable approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of certain of the Company’s investments in private companies cannot be reasonably estimated on a recurring basis. See Note 4 “Investments” for additional information.
6. Commitments and Contingencies
The Company leases some of its offices under non-cancelable operating leases that expire at various dates through 2020. Rent expense for office space was $102,000 and $171,000 for the three months ended March 31, 2017 and 2016, respectively.
Future minimum payments under all operating leases are as follows (in thousands):
Year ended December 31, | |||
2017 | $ | 174 | |
2018 | 166 | ||
2019 | 171 | ||
2020 | 73 | ||
2021 | — | ||
Thereafter | — | ||
Total | $ | 584 | |
10
Neither PICO nor its subsidiaries are parties to any potentially material pending legal proceedings.
The Company is subject to various litigation matters that arise in the ordinary course of its business. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such, are not meaningful indicators of the potential liability. The Company regularly reviews contingencies to determine the adequacy of accruals and related disclosures. The amount of ultimate loss may differ from these estimates, and it is possible that the financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.
Whether any losses finally determined in any claim, action, investigation, or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations, or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on the Company’s condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
7. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income are as follows (in thousands):
March 31, 2017 | December 31, 2016 | ||||||
Net unrealized gain on available-for-sale investments | $ | 6,146 | $ | 6,736 | |||
Foreign currency translation | (59 | ) | (75 | ) | |||
Accumulated other comprehensive income | $ | 6,087 | $ | 6,661 | |||
The unrealized gain on available-for-sale investments is net of a deferred income tax liability of $3.3 million at March 31, 2017 and $3.6 million at December 31, 2016.
The following table reports amounts that were reclassified from accumulated other comprehensive income or loss and included in earnings (in thousands):
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Beginning balance | $ | 6,661 | $ | 4,961 | |||
Unrealized gain reclassified and recognized in net loss, net of tax (1) | (481 | ) | (3 | ) | |||
Foreign exchange reclassified and recognized in net loss, net of tax (1) | 5 | 6 | |||||
Total reclassified and recognized in net income or loss, net of tax | (476 | ) | 3 | ||||
Unrealized gain (loss) on marketable securities, net of tax | (109 | ) | 43 | ||||
Accumulated currency, net of tax | 11 | 3 | |||||
Net change in other comprehensive income, net of tax | (574 | ) | 49 | ||||
Accumulated other comprehensive income | $ | 6,087 | $ | 5,010 | |||
(1) Amounts reclassified from this category are included in other income, net in the condensed consolidated statement of operations and comprehensive income or loss.
11
8. Related-Party Transactions
Severance Payments Due to Former CEO
The Company’s former CEO is entitled to the severance benefits set forth in Section 4(b) of his Amended and Restated Employment Agreement with the Company, dated March 11, 2016 and filed with the SEC on March 14, 2016. The majority of such benefits were expensed during 2016 and included severance payments of approximately $10.4 million, certain medical benefits, and immediate vesting of the outstanding Restricted Stock Units (“RSU”) and Performance Based Options (“PBO”) previously granted. In accordance with applicable regulations, payment of the benefits, stock settlement of the vested RSU, and distribution of deferred compensation balances discussed below, were completed in April of 2017.
Deferred Compensation
The Company has agreements with its executive management to defer compensation into Rabbi Trust accounts held in the name of the Company. The total value of the deferred compensation obligation for all participants at March 31, 2017 and December 31, 2016 was $27.2 million and $27.3 million, respectively. These totals include a fair value of $775,000 and $839,000 of the Company’s common stock, for each of the respective periods, with the balance in various publicly traded equities, bonds, and cash. In conjunction with the termination of the Company’s former CEO, assets with a value of $23.2 million at March 31, 2017 were distributed from the trust accounts in April 2017.
Deferred compensation expense included in general, administrative, and other costs in the accompanying condensed consolidated statements of operations and comprehensive income or loss for the three months ended March 31, 2017 and 2016 was a recovery of $82,000 and expense of $191,000, respectively.
Sale of Oil and Gas Assets
During the three months ended March 31, 2017, the Company sold the majority of its remaining oil and gas lease assets to the service agent the Company had contracted with to operate and manage such oil and gas operations. The Company received book value for the majority of the assets sold resulting in no significant gain or loss on the transaction. The service agent continues to provide management services to the Company in conjunction with the wind-down of the remaining operations.
12
9. Segment Reporting
PICO is a diversified holding company engaged in the following operating and reportable segments: Water Resource and Water Storage Operations and Corporate. The accounting policies of the reportable segments are the same as those described in the Company’s 2016 Annual Report on Form 10-K filed with the SEC, however, the majority of Company’s real estate segment has been reclassified to discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.
Management analyzes segments using the following information:
Segment assets (in thousands):
March 31, 2017 | December 31, 2016 | ||||||
Assets: | |||||||
Water resource and water storage operations | $ | 175,626 | $ | 186,055 | |||
Corporate | 77,090 | 49,050 | |||||
Assets held-for-sale | 435,567 | 440,689 | |||||
Total assets | $ | 688,283 | $ | 675,794 | |||
Segment revenues and loss before taxes (in thousands):
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Revenue and other income: | |||||||
Water resource and water storage operations | $ | 25,192 | $ | 181 | |||
Corporate | 1,001 | 604 | |||||
Total revenue and other income | $ | 26,193 | $ | 785 | |||
Income (loss) before income taxes: | |||||||
Water resource and water storage operations | $ | 10,513 | $ | (1,674 | ) | ||
Corporate | (1,040 | ) | (3,027 | ) | |||
Income (loss) from continuing operations before income taxes | $ | 9,473 | $ | (4,701 | ) | ||
13
10. Discontinued Operations and Assets and Liabilities Held-for-Sale
On April 10, 2017, UCP entered into an agreement with Century whereby each outstanding share of UCP common stock will be converted into $5.32 in cash and 0.2309 of a newly issued share of Century common stock. The Company anticipates owning approximately 9% of Century’s common stock outstanding at the close of the transaction and will classify such investment as available-for-sale in its consolidated financial statements. The transaction is expected to close by the end of the third quarter of 2017 and is subject to customary closing conditions. The common shares the Company will receive in the transaction are subject to an initial 60 day lock-up restriction. After the initial lock-up period, the Company is allowed to sell or transfer approximately 1.3 million of its Century shares every 50 days with the lock-up restrictions ending 210 days after the close.
As a result of the pending transaction, the Company will no longer have a controlling financial interest in UCP and will deconsolidate UCP when the transaction closes. The assets and liabilities of UCP qualified as held-for-sale at March 31, 2017 and have been classified as discontinued operations as of the earliest period presented. Consequently, prior periods presented have been recast from amounts previously reported to reflect the business as discontinued operations. The Company recorded an impairment loss of $7.1 million during the three months ended March 31, 2017, to write down the assets to their fair values as determined by the value of the transaction as of the date the transaction was announced. The final gain or loss is dependent on several variables which will not ultimately be known until the transaction closes (in thousands, except per share amounts):
Shares and Per Share Amounts | Totals | |||||
Shares of UCP owned by the Company | 10,402 | |||||
Cash expected to be received | $ | 5.32 | $ | 55,337 | ||
Shares of Century common stock expected to be received (0.2309 per share of UCP owned) | 2,402 | |||||
Value of Century common stock received (priced as of the announcement date) | $ | 26.10 | $ | 62,686 | ||
Total consideration expected to be received | $ | 118,023 | ||||
Carrying value of UCP at March 31, 2017 (reduced by $2.4 million in estimated tax distributions) | $ | (125,171 | ) | |||
Impairment loss on assets classified as held-for-sale | $ | (7,148 | ) | |||
Agribusiness:
In February 2017, the Company received the final $6 million that had been held in escrow for general indemnification claims related to the sale of its discontinued agribusiness operations. The Company guaranteed up to $8 million for any indemnification claims in excess of the $6 million general indemnification escrow pursuant to the terms of the sale. This guaranty will remain in force until July 31, 2020. The guaranty has been recorded at estimated fair value that reflects the Company’s expectation that no significant amounts will be paid out under the guaranty. However, any amounts paid by the Company in excess of the estimate will result in additional loss on the sale.
14
The following table presents the details of the Company’s results from discontinued operations included in the condensed consolidated statement of operations and comprehensive income or loss (in thousands):
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Revenue and other income from discontinued real estate operations: | |||||||
Sales of real estate | $ | 94,498 | $ | 68,225 | |||
Other | 448 | 27 | |||||
Total revenue and other income | 94,946 | 68,252 | |||||
Cost of sales and expenses from discontinued real estate operations: | |||||||
Cost of real estate sold | 77,128 | 56,521 | |||||
General, administrative, and other | 8,215 | 7,465 | |||||
Sales and marketing | 5,149 | 4,429 | |||||
Impairment loss on long-lived assets | 102 | — | |||||
Total cost of sales and expenses | 90,594 | 68,415 | |||||
Income (loss) before income taxes | 4,352 | (163 | ) | ||||
Provision for federal and state income taxes | 521 | ||||||
Net income (loss) from discontinued real estate operations | 3,831 | (163 | ) | ||||
Net income (loss) from discontinued agribusiness operations, net of tax | 56 | (40 | ) | ||||
Total income (loss) from discontinued operations, net of tax | 3,887 | (203 | ) | ||||
Impairment loss on assets classified as held-for-sale, net of tax | (7,148 | ) | |||||
Income (loss) on sale of discontinued agribusiness operations, net of tax | 2 | (1,849 | ) | ||||
Net loss from discontinued operations, net of tax | (3,259 | ) | (2,052 | ) | |||
Net (income) loss from discontinued operations attributable to noncontrolling interests | (1,391 | ) | 60 | ||||
Net loss from discontinued operations attributable to PICO Holdings, Inc. | $ | (4,650 | ) | $ | (1,992 | ) | |
The following table presents the details of the Company’s assets and liabilities classified as held-for-sale in the condensed consolidated balance sheets (in thousands):
March 31, 2017 | December 31, 2016 | ||||||
Real estate assets held-for-sale: | |||||||
Cash and cash equivalents | $ | 34,270 | $ | 40,931 | |||
Real estate | 389,379 | 373,207 | |||||
Accounts receivable | 3,677 | 5,628 | |||||
Other assets | 15,322 | 14,418 | |||||
Valuation allowance on assets held-for-sale | (7,148 | ) | |||||
Real estate assets held-for-sale | 435,500 | 434,184 | |||||
Agribusiness assets held-for-sale | 67 | 6,505 | |||||
Total assets held-for-sale | $ | 435,567 | $ | 440,689 | |||
Real estate liabilities held-for-sale: | |||||||
Debt, net | $ | 161,551 | $ | 160,994 | |||
Account payable and accrued expenses | 37,731 | 34,025 | |||||
Other liabilities | 14,415 | 12,271 | |||||
Real estate liabilities held-for-sale | 213,697 | 207,290 | |||||
Agribusiness liabilities held-for-sale | 276 | ||||||
Total liabilities held-for-sale | $ | 213,697 | $ | 207,566 | |||
15
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with the Unaudited Condensed Consolidated Financial Statements and accompanying Notes included elsewhere in this report, and the Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Note About “Forward-Looking Statements”
This Quarterly Report on Form 10-Q (including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section) contains “forward-looking statements,” as defined in Section 21E of the United States Securities Exchange Act of 1934, as amended, regarding our business, financial condition, results of operations, and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and other information concerning future matters. Words such as “may,” “will,” “could,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “target,” “projects,” “contemplates,” “predicts,” “potential,” “continue,” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report on Form 10-Q. Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on current expectations and assumptions. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and the actual results and outcomes could differ from what is expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the headings “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, in “Item 1A: Risk Factors” of Part II of this Quarterly Report on Form 10-Q, and in other filings made from time to time with the United States Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to (and we expressly disclaim any obligation to) revise or update any forward-looking statement, whether as a result of new information, subsequent events, or otherwise (except as may be required by law), in order to reflect any event or circumstance which may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K and other filings with the SEC.
Business Strategy and Goals
PICO Holdings, Inc. is a diversified holding company. In this Quarterly Report, PICO and its subsidiaries are collectively referred to as “PICO,” “the Company,” or by words such as “we” and “our.”
Our objective is to maximize long-term shareholder value. Currently, we believe the highest potential return to shareholders is from a return of capital. As we monetize assets, rather than reinvest the proceeds, we intend to return capital back to shareholders through a stock repurchase program or by other means such as special dividends.
As of March 31, 2017, our business was separated into the following segments:
• | Water Resource and Water Storage Operations; and |
• | Corporate. |
As of March 31, 2017, our major consolidated subsidiary was Vidler Water Company, Inc. (“Vidler”), a water resource and water storage business with assets and operations primarily in the southwestern United States, including Nevada, Arizona, Colorado and New Mexico.
16
Results of Operations — Three Months Ended March 31, 2017 and 2016
Overview of Economic Conditions, Other Recent Events, and Impact on Results of Operations
The economic environment and housing slow-down in the U.S. between 2007 and 2011 significantly decreased the rate of growth in the Southwest and the demand for our water assets in certain markets. Numerous factors can affect the performance of an individual market. However, we believe that trends in employment, housing inventory, interest rates, and home prices have a particularly significant impact. We expect that these market trends will have an impact on our operating performance. There has been a recovery and improvement in the housing markets from levels seen during the slow-down (with seasonal fluctuations) which has led to increased levels of real estate development activity, and we believe that the continuation of the housing recovery will lead to increased demand for our intangible and tangible water assets. Individual markets continue to experience varying results, as local home inventories, affordability, and employment factors strongly influence each local market and any deterioration in the markets in which we operate has the potential to cause additional impairment losses on our water assets.
The focus of our operations is building long-term shareholder value. Our revenues and results of operations fluctuate widely from period to period. For example, we recognize revenue from the sale of water assets when specific transactions close, and as a result, sales of water assets for any individual quarter are not necessarily indicative of revenues for future quarters or the full financial year.
Significant Transactions During the Three Months Ended March 31, 2017:
Discontinued Operations:
On April 10, 2017, our majority owned subsidiary, UCP, Inc. (“UCP”) entered into an agreement with Century Communities, Inc. (“Century”) whereby each outstanding share of UCP common stock will be converted into $5.32 in cash and 0.2309 of a newly issued share of Century common stock. The transaction is expected to close by the end of the third quarter of 2017 and is subject to customary closing conditions. As a result of the transaction, we expect to receive $55.3 million in cash and also approximately 9% of the outstanding common stock of Century. We will no longer have a controlling financial interest in, and will deconsolidated UCP when the transaction closes. The assets and liabilities of UCP qualified as held-for-sale at March 31, 2017 and have been classified as discontinued operations as of the earliest period presented. Consequently, prior periods presented have been recast from amounts previously reported to reflect our real estate business as discontinued operations. We recorded an impairment loss of $7.1 million during the three months ended March 31, 2017, to write down the assets to their fair values as determined by the transaction as of the announcement date. The final gain or loss is dependent on several variables which will not ultimately be known until the transaction closes. See Note 10 “Discontinued Operations” for additional information.
PICO Holdings, Inc. Shareholders’ Equity (in thousands):
March 31, 2017 | December 31, 2016 | Change | |||||||||
Shareholders’ equity | $ | 331,906 | $ | 327,994 | $ | 3,912 | |||||
Shareholders’ equity per share | $ | 14.38 | $ | 14.22 | $ | 0.16 | |||||
The increase in our shareholders’ equity was primarily due to the comprehensive income of $5.5 million during the three months ended March 31, 2017.
Total Assets and Liabilities (in thousands):
March 31, 2017 | December 31, 2016 | Change | |||||||||
Total assets | $ | 688,283 | $ | 675,794 | $ | 12,489 | |||||
Total liabilities | $ | 254,966 | $ | 248,225 | $ | 6,741 | |||||
Total assets increased during the three months ended March 31, 2017 primarily due to an increase in cash from the $25 million sale of our long-term storage credits which was offset by a decrease of $12.5 million in real estate and tangible water assets by the cost of such credits sold. Total liabilities increased during the three months ended March 31, 2017 primarily due to a variety of increases within liabilities held-for-sale.
17
Results of Operations
Our revenue during the three months ended March 31, 2017 was primarily the result of selling 100,000 long-term storage credits for $25 million.
During the three months ended March 31, 2017 we recorded $12.5 million in cost of real estate and water assets sold related to our sale of 100,000 water credits and $4.1 million in general and administrative costs. The decrease in general and administrative costs of $1 million quarter over quarter from March 31, 2016 to March 31, 2017 was due primarily to decreases in executive compensation.
We continued to record a full valuation allowance on our net deferred tax assets and as a result there were minimal income taxes reported during the three months ended March 31, 2017 and 2016.
Our discontinued operations included income from UCP offset by the loss recorded on the classification of such assets to discontinued operations.
We report comprehensive income or loss as well as net income or loss from the condensed consolidated statements of operations and comprehensive income or loss. Comprehensive income measures changes in equity, and includes unrealized items which are not recorded in the condensed consolidated statements of operations.
Water Resource and Water Storage Operations
Thousands of dollars | Three Months Ended March 31, | ||||||||||
2017 | 2016 | Change | |||||||||
Revenue and other income: | |||||||||||
Sale of real estate and water assets | $ | 25,097 | $ | 98 | $ | 24,999 | |||||
Other | 95 | 83 | 12 | ||||||||
Total revenue and other income | 25,192 | 181 | 25,011 | ||||||||
Cost of sales and expenses: | |||||||||||
Cost of real estate and water assets sold | 12,532 | 45 | 12,487 | ||||||||
Depreciation and amortization | 32 | 203 | (171 | ) | |||||||
Overhead expense | 1,654 | 1,282 | 372 | ||||||||
Project expense | 461 | 325 | 136 | ||||||||
Segment total expenses | 14,679 | 1,855 | 12,824 | ||||||||
Income (loss) before income taxes | $ | 10,513 | $ | (1,674 | ) | $ | 12,187 | ||||
Historically, our water resource and water storage segment revenue and results have been volatile and infrequent. Since the date a transaction closes generally determines the accounting period in which any sales revenue and cost of sales are recorded, our reported revenue and income in this segment fluctuate from period to period, depending on the dates when specific transactions close. Consequently, revenue in any one year is not necessarily indicative of likely revenue in future years.
Segment Revenue
We recorded the sale of 100,000 long-term storage credits during the three months ended March 31, 2017 which generated a gross margin of approximately $12.5 million, or 50%.
Segment Expenses
Overhead expenses consisted primarily of salaries and benefits, professional fees, office rent and insurance. Such expenses increased quarter-over-quarter primarily due to estimated Vidler management bonuses for the sale of our long term storage credits. Project expenses increased due to legal and consulting costs related to one of our water development projects in New Mexico.
18
Project expenses consisted of costs related to the ongoing maintenance of our assets and professional fees. Project costs are expensed as appropriate and fluctuate from period to period depending on activity in our various projects. In general, we expect project costs to decrease year-over-year as our assets are essentially fully developed. However, one-time unexpected costs could be incurred occasionally.
If we fail to generate revenue, incur additional expenses beyond expectations, continue to report operating losses, or if expected prices for our water assets fall, we could be required to record additional impairment losses on our real estate, tangible and intangible water assets owned in this segment.
Corporate
Thousands of dollars | Three Months Ended March 31, | ||||||||||
2017 | 2016 | Change | |||||||||
Revenue: | |||||||||||
Deferred compensation revenue | $ | 240 | $ | 131 | $ | 109 | |||||
Other | 761 | 473 | 288 | ||||||||
Total revenue and other income | 1,001 | 604 | 397 | ||||||||
Costs and expenses: | |||||||||||
Stock-based compensation expense | 481 | 387 | 94 | ||||||||
Deferred compensation expense (recovery) | (82 | ) | 191 | (273 | ) | ||||||
General, administrative, and other | 1,642 | 3,053 | (1,411 | ) | |||||||
Segment total expenses | 2,041 | 3,631 | (1,590 | ) | |||||||
Loss before income taxes | $ | (1,040 | ) | $ | (3,027 | ) | $ | 1,987 | |||
The corporate segment consists of cash, our investments in Mindjet and Synthonics, the assets and liabilities of the deferred compensation trusts held for the benefit of certain officers, and our oil and gas venture. Revenue includes sales from our oil and gas operations, and realized gains or losses on the sale or impairment of securities and vary considerably from year to year.
The expenses recorded in this segment primarily consist of parent company costs which are not allocated to our other segments, for example, salaries and benefits, directors’ fees, shareholder costs, rent for our head office, stock-based compensation expense, deferred compensation expense, and expenses related to the operations of our oil and gas venture, which consists primarily of our administrative service agreement for the management and administration of the oil and gas wells.
Corporate segment results can fluctuate due to one or more individually significant revenue or expense items which occur irregularly or change significantly from period to period, for example, realized gains or losses on the sale of investments. Consequently, the corporate segment results are not typically comparable from year to year.
Deferred Compensation Revenue and Expense
The participants in the deferred compensation plan bear the risk of the investment return on the deferred compensation assets, similar to a defined contribution plan such as a 401(k) plan. The investment income and realized gains or losses from the deferred compensation assets are recorded as revenue in the period that they are earned, and a corresponding and offsetting cost or benefit is recorded as deferred compensation expense or recovery. The change in net unrealized appreciation or depreciation in the deferred compensation assets is charged to compensation expense. Once the deferred compensation has been distributed, over the lifetime of the assets, the revenue and deferred compensation expense equal and there is no net effect on segment results.
Segment Revenue
Included in other income was revenue from our oil and gas operations that decreased to $67,000 from $389,000 for the three months ended March 31, 2017 and 2016, respectively. The decrease in revenue year-over-year was primarily due to the sale of the majority of our oil and gas assets last year.
19
Segment Expenses
General, administrative and other decreased during the three months ended March 31, 2017 primarily due to decreased salary and benefits from reductions in executive compensation and staffing at the corporate office, director compensation, legal fees and other costs related to general corporate matters and from reduced operating expenses as a result of selling the majority of our oil and gas assets last year.
Discontinued Operations
Thousands of dollars | Three Months Ended March 31, | ||||||
2017 | 2016 | ||||||
Real estate revenue and other income: | |||||||
Sale of real estate | $ | 94,498 | $ | 68,225 | |||
Other | 448 | 27 | |||||
Total real estate revenue and other income | 94,946 | 68,252 | |||||
Real estate cost of sales and expenses: | |||||||
Cost of real estate sold | 77,128 | 56,521 | |||||
Impairment loss on intangible and long-lived assets | 102 | ||||||
General, administrative, and other | 8,215 | 7,398 | |||||
Sales and marketing | 5,149 | 4,428 | |||||
Total real estate cost of sales and expenses | 90,594 | 68,347 | |||||
Real estate income (loss) before income taxes | 4,352 | (95 | ) | ||||
Agribusiness income (loss) before income taxes | 57 | (40 | ) | ||||
Segment income (loss) before income taxes | $ | 4,409 | $ | (135 | ) | ||
Liquidity and Capital Resources — Three Months Ended March 31, 2017 and 2016
Cash Flow
At March 31, 2017, our assets consisted primarily of tangible and intangible water assets, cash and cash equivalents, and investments in publicly-traded securities. Our liquid funds are generally held in money market funds.
Our cash and cash equivalents and available-for-sale investments held in each segment at March 31, 2017 were as follows:
• | Water resource and water storage operations segment held cash of $2.5 million. |
• | Corporate segment held cash of $50.4 million and marketable equity and debt securities with a market value of $22.9 million. The securities are held in deferred compensation rabbi trust accounts, which will be used to pay the related and offsetting deferred compensation liabilities. |
Our primary sources of funds include existing cash, the sale of tangible and intangible water resource assets, loans and debt or equity offerings. We are not subject to any debt covenants which limit our ability to obtain additional financing through debt or equity offerings.
We expect to receive $55.3 million in cash and shares of Century common stock valued at approximately $62.7 million (as of the date the transaction was announced) as a result of selling our interest in UCP. It is our intention to return a significant amount of such capital to shareholders as soon as practical via a share buyback, special dividend, or other transactions, with consideration of our working capital needs.
Our cash flows fluctuate depending on the capital requirements of our operating subsidiaries. The sale of and costs incurred to acquire and develop real estate and water assets are generally classified as operating activities in the condensed consolidated statement of cash flows. The cash flow profiles of our principal operating segments are as follows:
20
Water Resource and Water Storage Operations
A substantial portion of our revenue in this segment has come from sales of real estate and water assets including the $25 million sale that closed during the three months ended March 31, 2017. Our assets in this segment are typically long-term water resource development projects to support growth for particular communities in the southwestern U.S. The timing and amount of sales and cash flows depend on a number of factors which are difficult to project, and cannot be directly compared from one period to another. A significant portion of project expenses are incurred to maintain our assets in good standing
Corporate
In conjunction with terminating our former CEO, in April 2017, we paid severance, stock-settled the vested RSU, and distributed certain deferred compensation balances valued at approximately $23.2 million at March 31, 2017 to our former CEO. See Note 8, “Related-Party Transactions” for additional information.
We expect to continue to purchase shares of our common stock in the open market at opportunistic prices, utilizing our board approved amount of $50 million.
Consolidated Cash and Securities
Currently we have significant working capital reserves. At March 31, 2017, we had unrestricted and available cash and securities of $49.3 million, which could be used for general corporate purposes. At December 31, 2016, we had unrestricted and available cash and securities of $18.7 million.
In addition to our cash on hand at March 31, 2017, we expect to receive an estimated $55.3 million in cash from the sale of UCP and $3.9 million in remaining tax distributions from UCP payable during 2017.
At March 31, 2017, we forecasted that our net operating cash burn for continuing operations for the next 12 months was approximately $9.1 million which was comprised of expected expenditures of approximately $9.7 million offset by anticipated recurring revenue and other certain cash receipts of approximately $642,000.
Given our current cash balances we believe that we have sufficient resources to cover our cash needs for at least the next 12 months. In the long-term, we estimate that existing cash resources and cash from operations will provide us with adequate funding for future operations. However, if additional funding is needed, we could defer significant expenditures, sell assets, obtain a line of credit, or complete a debt or equity offering. Any additional equity offerings may be dilutive to our stockholders and any additional debt offerings may include operating covenants that could restrict our business.
21
Cash Flow
The following is a summary of our cash flows (in thousands):
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Cash provided by (used in): | |||||||
Operating activities - continuing operations | $ | 23,155 | $ | (5,358 | ) | ||
Operating activities - discontinued operations | (4,131 | ) | (12,778 | ) | |||
Total operating activities | 19,024 | (18,136 | ) | ||||
Investing activities - continuing operations | 2,261 | (392 | ) | ||||
Investing activities - discontinued operations | 5,892 | (675 | ) | ||||
Total investing activities | 8,153 | (1,067 | ) | ||||
Financing activities - continuing operations | (306 | ) | — | ||||
Financing activities - discontinued operations | (754 | ) | 2,307 | ||||
Total financing activities | (1,060 | ) | 2,307 | ||||
Increase (decrease) in cash and cash equivalents | $ | 26,117 | $ | (16,896 | ) | ||
Cash Flows From Operating Activities
We generated $25.2 million in cash from continuing operations for the first three months of 2017 primarily from the sale of 100,000 long term storage credits. We used cash of $3.2 million for overhead and various project expenses. Our discontinued operations generated $96.4 million during the first three months of 2017 from the sale of residential real estate and lots and used cash of $92.4 million in acquisition and development of real estate.
The principal operating cash outflows from continuing operations for the first three months of 2016 was $864,000 from sales of oil and gas and other operational income. We used cash of $5 million for overhead and various project expenses. Our discontinued agribusiness operations generated $68.2 million during the first three months of 2016 from the sale of residential real estate lots and used cash of $71.4 million in acquisition and development of real estate.
Cash Flows From Investing Activities
We generated $2.5 million in cash from the sale of various debt and equity securities during the three months ended March 31, 2017. We also received $6 million in cash when we received funds that had been held in escrow for general indemnification claims related to discontinued agribusiness operations. We did not have any significant cash flows from investing activities in our continuing operations or discontinued operations for the first three months of 2016.
Cash Flows From Financing Activities
There were no significant cash flows from financing activities in our continuing operations during the three months ended March 31, 2017 and 2016. Our discontinued operations received cash of $39.8 million during the three months ended March 31, 2017 provided from draws on its debt arrangements, which was used primarily to fund the acquisition and development of various real estate projects offset by payments of $39.4 million which was used to repay debt when certain real estate properties were sold.
During the three months ended March 31, 2016, our discontinued real estate operations generated net cash of $2.3 million primarily due to borrowings of $35.5 million provided by its debt arrangements offset by repayments of debt of $33.1 million.
Although we cannot accurately predict the effect of inflation on our operations, we do not believe that inflation has had a material impact on our net revenues or results of operations, or is likely to in the foreseeable future.
22
Off-Balance Sheet Arrangements
As of March 31, 2017, we had no off-balance sheet arrangements, other than those disclosed in this Form 10-Q, that have, or are reasonably likely to have, a material current or future effect on our consolidated financial condition, revenues or expenses, results of operations, liquidity, capital expenditure, or capital resources.
Aggregate Contractual Obligations:
The following table proves a summary of our contractual cash obligations and other commitments and contingencies as of March 31, 2017 (in thousands):
Payments Due by Period | |||||||||||||||
Contractual Obligations | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||
Operating leases | $ | 174 | $ | 410 | $ | 584 | |||||||||
Other(1) | 33,572 | 33,572 | |||||||||||||
Total | $ | 33,746 | $ | 410 | $ | 34,156 | |||||||||
(1) Amount represents accrued severance and deferred compensation paid to our former CEO in April 2017 as a result of his termination.
We had no liabilities or potential interest for unrecognized tax benefits associated with uncertain tax positions at March 31, 2017.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Our balance sheet includes a significant amount of assets and liabilities whose fair value is subject to market risk. Market risk is the risk of loss arising from adverse changes in market interest rates or prices. We currently have interest rate risk as it relates to investments in debt securities, and equity price risk as it relates to our marketable equity securities. The estimated fair value of our debt is based on cash flow models discounted at the then-current interest rates and an estimate of the then-current spread above those rates at which we could borrow, which are Level 3 inputs in the fair value hierarchy.
At March 31, 2017, we had $4.4 million of marketable debt securities and $18.5 million of marketable equity securities, and at December 31, 2016, we had $4.4 million of debt securities and $20.7 million of marketable equity securities, which were subject to market risk.
Our debt securities principally consist of bonds with short and medium terms to maturity. The deferred compensation accounts have held both investment-grade and below investment-grade bonds. In the deferred compensation accounts, we manage interest rate risk by matching the maturities of the bonds to the participant’s pre-selected payout schedule.
We use two models to report the sensitivity of our assets and liabilities subject to the above risks. For debt securities, we use duration modeling to calculate changes in fair value. The model calculates the price of a fixed maturity assuming a theoretical 100 basis point, or a 1% increase in interest rates and compares that to the current price of the security. At March 31, 2017 and March 31, 2016 the model did not calculate a material loss in fair value. For our marketable equity securities, we use a hypothetical 20% decrease in fair value to analyze the sensitivity. The hypothetical 20% decrease in fair value of our marketable equity securities would produce a loss in fair value of approximately $3.7 million at March 31, 2017 and 2016, that would reduce our unrealized appreciation in shareholders’ equity.
Actual results may differ from the hypothetical results assumed in this disclosure due to possible actions we may take to mitigate adverse changes in fair value, and because the fair value of securities may be affected by both factors related to the individual securities (e.g. credit concerns about a bond issuer) and general market conditions.
23
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II: Other Information
Item 1: Legal Proceedings
None.
Item 1A: Risk Factors
The following information sets out factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. You should carefully consider the following risks, together with other matters described in this Form 10-Q or incorporated herein by reference in evaluating our business and prospects. If any of the following risks occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our securities could decline, in some cases significantly.
The risk factors in this report have been revised to incorporate changes to our risk factors from those included in our Annual Report on Form 10-K for the year ended December 31, 2016. The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.
* If the conditions set forth in the Agreement and Plan of Merger between UCP and Century are not satisfied, the resulting merger may not be completed and UCP’s business could be impaired.
On April 10, 2017, UCP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Century. The completion of the transaction is subject to the satisfaction or waiver of certain conditions, including the adoption of the Merger Agreement by UCP’s stockholders and certain other customary conditions.
In the event UCP is unable to satisfy the conditions set forth in the Merger Agreement to obligate Century to effect the Merger, it could delay or prevent the completion of the Merger and could create uncertainty for UCP and its business could be adversely affected. In addition, in the event that the Merger is not consummated, UCP will be subject to significant costs, including legal, accounting and advisory fees related to the Merger, and the market price of UCP’s common stock may decline to the extent that the current market price of its common stock reflects a positive market assumption that the Merger will be completed.
General economic conditions could have a material adverse effect on our financial results, financial condition and the demand for and the fair value of our assets.
All of our businesses are sensitive to general economic conditions, whether internationally, nationally, or locally. General poor economic conditions and the resulting effect of non-existent or slow rates of growth in the markets in which we operate could have a material adverse effect on the demand for both our real estate and water assets. These poor economic conditions include higher unemployment, inflation, deflation, decreases in consumer demand, changes in buying patterns, a weakened dollar, higher consumer debt levels, and higher tax rates and other changes in tax laws or other economic factors that may affect commercial and residential real estate development.
24
Specifically, high national or regional unemployment may arrest or delay any significant recovery of the residential real estate markets in which we operate, which could adversely affect the demand for our real estate and water assets. Any prolonged lack of demand for our real estate and water assets could have a significant adverse effect on our revenues, results of operations, cash flows, and the return on our investment from these assets.
Our future revenue is uncertain and depends on a number of factors that may make our revenue, profitability, cash flows, and the fair value of our assets volatile.
Our future revenue and profitability related to our water resource and water storage operations will primarily be dependent on our ability to develop and sell or lease water assets. In light of the fact that our water resource and water storage operations represent a large percentage of our overall business at present, our long-term profitability and the fair value of the assets related to our water resource and water storage operations will be affected by various factors, including the drought in the southwest, regulatory approvals and permits associated with such assets, transportation arrangements, and changing technology. We may also encounter unforeseen technical or other difficulties which could result in cost increases with respect to our water resource and water storage development projects. Moreover, our profitability and the fair value of the assets related to our water resource and water storage operations is significantly affected by changes in the market price of water. Future sales and prices of water may fluctuate widely as demand is affected by climatic, economic, demographic and technological factors as well as the relative strength of the residential, commercial, financial, and industrial real estate markets. Additionally, to the extent that we possess junior or conditional water rights, during extreme climatic conditions, such as periods of low flow or drought, our water rights could be subordinated to superior water rights holders. The factors described above are not within our control.
Our future revenue, growth, and the demand for and the fair value of our assets related to our land development and homebuilding activities depends, in part, upon our ability to successfully identify and acquire attractive land parcels for development of single-family homes at reasonable prices. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land prices at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. If the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow and increase the fair value of our assets related to our land development and homebuilding business could be significantly limited, and our land development and homebuilding revenue and gross margin could remain static or decline and it could adversely affect the return on our investment from these assets.
One or more of the above factors in one or more of our operating segments could impact our revenue and profitability, negatively affect our financial condition and cash flows, cause our results of operations to be volatile, and could negatively impact our rate of return on our real estate and water assets and cause us to divest such assets for less than our intended return on our investment.
A downturn in the recent improvement that the homebuilding and land development industry has experienced would materially adversely affect our business, results of operations, and the demand for and the fair value of our assets.
The homebuilding industry experienced a significant and sustained downturn in recent years having been impacted by factors that include, but are not limited to, weak general economic and employment growth, a lack of consumer confidence, large supplies of resale and foreclosed homes, a significant number of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home, and tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home. These factors resulted in an industry-wide weakness in demand for new homes and caused a material adverse effect on the growth of the local economies and the homebuilding industry in the southwestern United States (“U.S.”) markets where a substantial amount of our real estate and water assets are located, including the states of Nevada, Arizona, California, Colorado, and New Mexico. However, in 2012, we noted a significant improvement in the housing market which led to increased levels of real estate development activity. The continuation of the recent improvement in residential and commercial real estate development process and activity is essential for our ability to generate operating income in our water resource and water storage, and land development and homebuilding businesses. We are unable to predict whether and to what extent this recovery will continue or its timing. Any future slow-down in real estate and homebuilding activity could adversely impact various development projects within the markets in which our real estate and water assets are located and this could materially affect the demand for and the fair value of these assets and our ability to monetize these assets. Declines and weak conditions in the U.S. housing market have reduced our revenues and created losses in our water resource and water storage, and land development and homebuilding businesses in prior years and could do so in the future.
25
We may not be able to realize the anticipated value of our real estate and water assets in our projected time frame, if at all.
We expect that the current rate of growth of the economy will continue to have an impact on real estate market fundamentals. Depending on how markets perform both in the short and long-term, the state of the economy, both nationally and locally in the markets where our assets are concentrated, could result in a decline in the value of our existing real estate and water assets, or result in our having to retain such assets for longer than we initially expected, which would negatively impact our rate of return on our real estate and water assets, cause us to divest such assets for less than our intended return on investment, or cause us to incur impairments on the book values of such assets to estimated fair value. Such events would adversely impact our financial condition, results of operations and cash flows.
The fair values of our real estate and water assets are linked to growth factors concerning the local markets in which our assets are concentrated and may be impacted by broader economic issues.
Both the demand and fair value of our real estate and water assets are significantly affected by the growth in population and the general state of the local economies where our real estate and water assets are located. These local economies may be affected by factors such as the local level of employment and the availability of financing and interest rates, where (1) our real estate and water assets are located, primarily in Arizona and northern Nevada, but also in Colorado and New Mexico and (2) our land development and homebuilding assets are located, primarily in California and also Washington, North Carolina, South Carolina and Tennessee. The unemployment rate in these states, as well as issues related to the credit markets, may prolong a slowdown of the local economies where our real estate and water assets are located. This could materially and adversely affect the demand for and the fair value of our real estate and water assets and, consequently, adversely affect our growth and revenues, results of operations, cash flows and the return on our investment from these assets.
The fair values of our real estate and water assets may decrease which could adversely affect our results of operations by impairments and write-downs.
The fair value of our water resource and water storage assets and our land and homebuilding assets depends on market conditions. We acquire water resources and land for expansion into new markets and for replacement of inventory and expansion within our current markets. The valuation of real estate and water assets is inherently subjective and based on the individual characteristics of each asset. Factors such as changes in regulatory requirements and applicable laws, political conditions, the condition of financial markets, local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainties. In addition, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. If population growth and, as a result, water and/or housing demand in our markets fails to meet our expectations when we acquired our real estate and water assets, our profitability may be adversely affected and we may not be able to recover our costs when we sell our real estate and water assets. We regularly review the value of our real estate and water assets. These reviews have resulted in significant impairments to our water resource assets and /or land development assets. Such impairments have adversely affected our results of operations and our financial condition in those years.
If future market conditions adversely impact the anticipated timing of and amount of sales of our real estate and water assets we may be required to record further significant impairments to the carrying value of our real estate and water assets which would adversely affect our results of operations and our financial condition.
* If the proposed merger between UCP and Century is consummated, the majority of our remaining assets and operations will consist of our existing water resource and water storage operations that are concentrated in a limited number of assets, making our cash flows, profitability and the fair value of those assets difficult to predicts and vulnerable to conditions and fluctuations in a limited number of local economies.
We anticipate that a significant amount of our water resource and water storage segment revenue, results of operations and cash flows will come from a limited number of assets, which primarily consist of our water resources in Nevada and Arizona and our water storage operations in Arizona. Our two most significant assets are our water storage operations in Arizona and our water resources to serve the northern valleys of Reno, Nevada. As a result of this concentration, our invested capital and results of operations will be vulnerable to the conditions and fluctuations in these local economies and potentially to changes in local government regulations.
26
Our Arizona Recharge Facility is one of the few private sector water storage sites in Arizona. At March 31, 2017, we had approximately 251,000 acre-feet of water stored at the facility. In addition, we had approximately 57,000 acre-feet of water stored in the Phoenix Active Management Area at March 31, 2017. We have not stored any water on behalf of any customers and as of March 31, 2017, had not generated any material revenue from the recharge facility. We cannot be certain that we will ultimately be able to sell all of the stored water at a price sufficient to provide an adequate economic profit, if at all.
We constructed a pipeline approximately 35 miles long to deliver water from Fish Springs Ranch to the northern valleys of Reno, Nevada. As of March 31, 2017, the total cost of the pipeline project, including our water credits (net of impairment losses incurred to date) carried on our balance sheet was approximately $83.9 million. To date, we have sold only a small amount of the water credits and we cannot provide any assurance that the sales prices we may obtain in the future will provide an adequate economic return, if at all. Any prolonged weak demand for new homes and residential development, and, as a result, for our assets in Nevada and Arizona, would have a material adverse effect on our future revenues, results of operations, cash flows, and the return on our investment from those assets. Demand for these water credits is anticipated to primarily come from both local and national developers planning to construct new projects in the northern valleys. The success of these projects is dependent on numerous factors beyond our control, including local government approvals, employment growth in the greater Reno area, and the ability of the developers to finance these projects.
We are subject to laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.
Our real estate operations are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements which apply to any given project site vary according to multiple factors, including the site’s location, its environmental conditions, the current and former uses of the site, the presence or absence of state- or federal-listed endangered or threatened plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations governing the permits and other approvals for our real estate projects and operations. Sometimes regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.
In addition, in cases where a state-listed or federally-listed endangered or threatened species is involved and related agency rule-making and litigation are ongoing, the outcome of such rule-making and litigation can be unpredictable and can result in unplanned or unforeseeable restrictions on, or the prohibition of, development and building activity in identified environmentally sensitive areas.
Our real estate operations are also subject to numerous other laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, water and waste disposal and use of open spaces. We are typically required to obtain permits, entitlements and approvals from local authorities to start and carry out residential development or home construction. Such permits, entitlements and approvals may, from time-to-time, be opposed or challenged by local governments or other interested parties, adding delays, costs and risks of non-approval to the process. Our obligation to comply with the laws and regulations under which we operate, and our need to ensure that our subcontractors and other agents comply with these laws and regulations may result in delays in construction and land development and may also cause us to incur substantial additional and unbudgeted costs.
We will face significant competition in marketing and selling new homes.
We have entered the homebuilding business by constructing, marketing and selling single-family homes on certain of our finished residential lots that we own in California, Washington, North Carolina, South Carolina and Tennessee. We aim to build homes only in those markets where we have identified that a sufficient demand exists for new homes. However, the homebuilding industry is highly competitive and we will be competing with a number of national and local homebuilders in selling homes to satisfy expected demand. These competitors, especially the national homebuilders, have greater resources and experience in this industry than we have. Such competition could result in lower than anticipated sales volumes and/or profit margins that are below our expectations. In addition, we will have to compete with the resale of existing homes, including foreclosed homes, which could also negatively affect the number and price of homes we are able to sell and the time our homes remain on the market.
27
We use leverage to finance a portion of the cost to acquire our land development assets and to construct homes.
We currently use, and expect to continue to use, debt to finance a portion of the cost of constructing our homes and acquiring and developing our lots. Such debt is primarily comprised of project-level secured acquisition, development and construction loans, with recourse limited to the securing collateral.
Incurring debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:
• | our cash flow from our land development and homebuilding operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of the maturity of such debt; |
• | our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing cost; |
• | we may be required to dedicate a portion of our cash flow from our land development and homebuilding operations to payments on our debt, thereby reducing funds available for the operations and capital expenditures; and |
• | the terms of any refinancing may not be as favorable as the terms of the debt being refinanced. |
If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional debt or additional equity financings which could dilute our interest in our land development and homebuilding business. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our land development and housing assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Defaults under our debt agreements used to finance a portion of the cost of constructing homes and acquiring and developing lots could have a material adverse effect on our land development and homebuilding business, prospects, liquidity, financial condition, results of operations, and the return on our investment from those assets.
We may be subject to significant warranty, construction defect and liability claims in the ordinary course of our homebuilding business.
As a homebuilder, we may be subject to home warranty and construction defect claims arising in the ordinary course of business. We may also be subject to liability claims for injuries that occur in the course of construction activities. Due to the inherent uncertainties in such claims, we cannot provide assurance that our insurance coverage or our subcontractors’ insurance and financial resources will be sufficient to meet any warranty, construction defect and liability claims we may receive in the future. If we are subject to claims beyond our insurance coverage, our profit from our homebuilding activities may be less than we expect and our financial condition and the return on our investment from those assets may be adversely affected.
We will be relying on the performance of our subcontractors to build horizontal infrastructure and homes according to our budget, timetable and quality.
We rely on subcontractors to perform the actual construction of horizontal infrastructure (in the cases where we are completing the development of entitled lots to finished lots) and of the homes we are building on certain of our finished lots. In certain cases, we will also rely on the subcontractor to select and obtain raw materials. Our subcontractors may fail to meet either our quality control or be unable to build and complete the horizontal infrastructure or homes in the expected timetable due to subcontractor related issues such as being unable to obtain sufficient materials or skilled labor, or due to external factors such as delays arising from severe weather conditions.
Any such failure by our subcontractors could lead to increases in construction costs and construction delays. Such increases could negatively impact the price and number of finished lots and homes we are able to sell.
28
Our homebuilding operations may be adversely impacted by the availability of and the demand for mortgage financing and any changes to the tax benefits associated with owning a home.
To successfully market and sell the homes we construct depends on the ability of home buyers to obtain mortgage financing for the purchase of these new homes. Current credit requirements for mortgage financing are significantly greater than in the past which makes it more difficult for a potential home buyer to obtain mortgage financing. In addition, any significant increase in interest rates from current rates may also lead to increased mortgage finance costs leading to a decline in demand and availability of mortgage financing. Any decline in the availability of mortgage financing may lead to a reduced demand for the homes we have already constructed, or intend to construct. Furthermore, the demand for homes in general, and the homes we intend to construct, may be affected by changes in federal and state income tax laws. Current federal, and many state, tax laws allow the deduction of, among other homeowner expenses, mortgage interest and property taxes against an individual’s taxable income. Any changes to the current tax laws which reduce or eliminate these deductions, or reduce or eliminate the exclusion of taxable gain from the sale of a principal residence, would likely lead to a greatly reduced demand for homes. This would lead to a materially adverse impact on the homebuilding business, and the fair value of those assets in general, and our revenues, cash flows, financial condition, and the return on our investment from those assets specifically.
* UCP has substantial indebtedness, which may exacerbate the adverse effect of any declines in UCP’s business, industry or the general economy and exposes UCP to the risk of default. UCP may be unable to service their debt.
As of March 31, 2017, UCP had approximately $161.6 million of outstanding debt. UCP’s substantial outstanding debt, and the limitations imposed on UCP by the instruments and agreements governing its outstanding indebtedness, could have significant adverse consequences, including the following:
• | UCP’s cash flow may be insufficient to meet its required principal and interest payments; |
• | UCP may use a substantial portion of their cash flows to make principal and interest payments and UCP may be unable to obtain additional financing as needed or on favorable terms, which could, among other things, have a material adverse effect on their ability to complete our development pipeline, capitalize upon emerging acquisition opportunities, fund working capital or capital expenditures, or meet their other business needs; |
• | UCP may be unable to refinance its debt at maturity or the refinancing terms may be less favorable than the terms of their original debt; |
• | UCP may be forced to dispose of one or more of their properties, possibly on unfavorable terms or in violation of certain covenants to which UCP may be subject; |
• | UCP may be required to maintain certain debt and coverage and other financial ratios at specified levels, which may limit their ability to obtain additional financing in the future, thereby reducing their financial flexibility to react to changes in their business; |
• | UCP’s vulnerability to general adverse economic and industry conditions may be increased; |
• | approximately $82.2 million of UCP’s debt bears interest at variable rates, which exposes it to increased interest expense in a rising interest rate environment; |
• | UCP may be at a competitive disadvantage relative to its competitors that have less debt; |
• | UCP’s flexibility in planning for, or reacting to, changes in their business and the markets in which UCP operates may be limited; and |
• | UCP may default on its debt by failure to make required payments or to comply with certain covenants, which could result in an event of default entitling a creditor to declare all amounts owed to it to be due and payable, and possibly entitling other creditors (due to cross-default or cross-acceleration provisions) to accelerate the maturity of amounts owed to such other creditors or, if such debt is secured, to foreclose on UCP’s assets that secure such obligation. |
In addition, in October 2014, UCP completed a private offering of $75 million in aggregate principal amount of 8.5% Senior Notes, which mature on October 21, 2017 (the “2017 Notes”). UCP’s ability to satisfy this maturity when it becomes due will depend on its future operating performance and financial results, which will be subject, in part, to factors beyond its control, including interest rates and general economic, financial and competitive conditions. UCP’s sources of capital to satisfy this maturity may include retained capital, the issuance of equity securities, debt financing and refinancing, and asset sales or a combination of any of the foregoing. However, no assurance can be given that any of these sources of capital will be available to UCP on favorable terms, or at all, or that such sources will enable UCP to be able to satisfy this maturity. Any refinancing of the 2017 Notes may be on terms less favorable than those applicable to the 2017 Notes. As a result, we can provide no assurance that UCP will be able to refinance or repay the 2017 Notes. UCP’s failure to refinance or repay the 2017 Notes at their stated maturity would have a material adverse impact on UCP’s financial condition, results of operations, cash flow, liquidity, the market price of its Class A common stock and its ability to achieve its objectives.
29
The occurrence of any one of these events could have a material adverse effect on our financial condition, liquidity, results of operations and/or business.
We may suffer uninsured losses or suffer material losses in excess of insurance limits.
We could suffer physical damage to any of our assets at one or more of our different businesses and liabilities resulting in losses that may not be fully recoverable by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered by our insurance policies or otherwise be subject to significant deductibles or limits. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in the affected asset(s) as well as anticipated future income from that asset. In addition, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles.
We may not receive all of the permitted water rights we expect from the water rights applications we have filed in Nevada and New Mexico.
We have filed certain water rights applications in Nevada and New Mexico. In Nevada this is primarily as part of the water teaming agreement with Lincoln County. We deploy the capital required to enable the filed applications to be converted into permitted water rights over time as and when we deem appropriate or as otherwise required. We only expend capital in those areas where our initial investigations lead us to believe that we can obtain a sufficient volume of water to provide an adequate economic return on the capital employed in the project. These capital expenditures largely consist of drilling and engineering costs for water production, costs of monitoring wells, legal and consulting costs for hearings with the State Engineer, and NEPA compliance costs. Until the State Engineer in the relevant state permits the water rights we are applying for, we cannot provide any assurance that we will be awarded all of the water that we expect based on the results of our drilling and our legal position and it may be a considerable period of time before we are able to ascertain the final volume of water rights, if any, that will be permitted by the State Engineers. Any significant reduction in the volume of water awarded to us from our original base expectation of the amount of water that may be permitted may result in the write down of capitalized costs which could adversely affect the return on our investment from those assets, our revenues, results of operations, and cash flows.
Variances in physical availability of water, along with environmental and legal restrictions and legal impediments, could impact profitability.
We value our water assets, in part, based upon the volume (as measured in acre-feet) of water we anticipate from water rights applications and our permitted water rights. The water and water rights held by us and the transferability of these rights to other uses, persons, and places of use are governed by the laws concerning water rights in the states of Arizona, Colorado, Nevada, and New Mexico. The volumes of water actually derived from the water rights applications or permitted rights may vary considerably based upon physical availability and may be further limited by applicable legal restrictions.
As a result, the volume of water anticipated from the water rights applications or permitted rights may not in every case represent a reliable, firm annual yield of water, but in some cases describe the face amount of the water right claims or management’s best estimate of such entitlement. Additionally, we may face legal restrictions on the sale or transfer of some of our water assets, which may affect their commercial value. If the volume of water yielded from our water rights applications is less than our expectations, or we are unable to transfer or sell our water assets, we may lose some or all of our anticipated returns, which may adversely affect our revenues, profitability and cash flows.
Purchasers of our real estate and water assets may default on their obligations to us and adversely affect our results of operations and cash flow.
In certain circumstances, we finance sales of real estate and water assets, and we secure such financing through deeds of trust on the property, which are only released once the financing has been fully paid off. Purchasers of our real estate and water assets may default on their financing obligations. Such defaults may have an adverse effect on our business, financial condition, and the results of operations and cash flows.
30
Our sale of water assets may be subject to environmental regulations which would impact our revenues, profitability, and cash flows.
The quality of the water assets we lease or sell may be subject to regulation by the United States Environmental Protection Agency acting pursuant to the United States Safe Drinking Water Act. While environmental regulations do not directly affect us, the regulations regarding the quality of water distributed affects our intended customers and may, therefore, depending on the quality of our water, impact the price and terms upon which we may in the future sell our water assets. If we need to reduce the price of our water assets in order to make a sale to our intended customers, our balance sheet, return on investment, results of operations and financial condition could suffer.
Our water asset sales may meet with political opposition in certain locations, thereby limiting our growth in these areas.
The water assets we hold and the transferability of these assets and rights to other uses, persons, or places of use are governed by the laws concerning water rights in the states of Arizona, Nevada, Colorado and New Mexico. Our sale of water assets is subject to the risks of delay associated with receiving all necessary regulatory approvals and permits. Additionally, the transfer of water resources from one use to another may affect the economic base or impact other issues of a community including development, and will, in some instances, be met with local opposition. Moreover, municipalities who will likely regulate the use of any water we might sell to them in order to manage growth, could create additional requirements that we must satisfy to sell and convey water assets.
If we are unable to effectively transfer, sell and convey water resources, our ability to monetize these assets will suffer and our return on investment, revenues and financial condition would decline.
If our businesses or investments otherwise fail or decline in value, our financial condition and the return on our investment could suffer.
Historically, we have acquired and invested in businesses and assets that we believed were undervalued or that would benefit from additional capital, restructuring of operations, strategic initiatives, or improved competitiveness through operational efficiencies. If any previously acquired business, investment or asset fails or its fair value declines, we could experience a material adverse effect on our business, financial condition, the results of operations and cash flows. If we are not successful managing our previous acquisitions and investments, our business, financial condition, results of operations and cash flows could be materially affected. Such business failures, declines in fair values, and/or failure to manage acquisitions or investments, could result in a negative return on equity. We could also lose part or all of our capital in these businesses and experience reductions in our net income, cash flows, assets and equity.
Future dispositions of our businesses, assets, operations and investments, if unsuccessful, could reduce the value of our common shares. Any future dispositions may result in significant changes in the composition of our assets and liabilities. Consequently, our financial condition, results of operations and the trading price of our common shares may be affected by factors different from those historically affecting our financial condition, results of operations and trading price at the present time.
We may need additional capital in the future to fund our business and financing may not be available on favorable terms, if at all, or without dilution to our shareholders.
We currently anticipate that our available capital resources and operating cash flows will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. However, we cannot provide any assurance that such resources will be sufficient to fund our business. We may raise additional funds through public or private debt, equity or hybrid securities financings, including, without limitation, through the issuance of securities. We currently have an effective shelf registration statement which allows us to sell up to $400 million of a variety of securities in one or more offerings in the public markets.
We may experience difficulty in raising necessary capital in view of the recent volatility in the capital markets and increases in the cost of finance. Increasingly stringent rating standards could make it more difficult for us to obtain financing. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing shareholders. Indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. The additional financing we may need may not be available to us, or on favorable terms. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations or otherwise execute our strategic plan would be significantly limited. In any such case, our business, operating results or financial condition could be materially adversely affected.
31
* Our ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if our Company undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in our equity ownership over a three year period), the ability to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset our post-change income may be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership. As of March 31, 2017, we had federal and state net operating loss carryforwards of approximately $125.1 million and $194.4 million, respectively, which, depending on our value at the time of any ownership changes, could be limited.
We may not be able to retain key management personnel we need to succeed, which could adversely affect our ability to successfully operate our businesses.
To run our day-to-day operations and to successfully manage our businesses we must, among other things, continue to retain key management. We rely on the services of a small team of key executive officers. If they depart, it could have a significant adverse effect upon our business. Also, increased competition for skilled management and staff employees in our businesses could cause us to experience significant increases in operating costs and reduced profitability.
Because our operations are diverse, analysts and investors may not be able to evaluate us adequately, which may negatively influence the price of our stock.
We are a diversified holding company with significant operations in different business segments. We own businesses that are unique, complex in nature, and difficult to understand. In particular, the water resource business is a developing industry in the United States with very little historical and comparable data, very complex valuation issues and a limited following of analysts. Because we are complex, analysts and investors may not be able to adequately evaluate our operations and enterprise as a going concern. This could cause analysts and investors to make inaccurate evaluations of our stock, or to overlook PICO in general. As a result, the trading volume and price of our stock could suffer and may be subject to excessive volatility.
* Fluctuations in the market price of our common stock may affect your ability to sell your shares.
The trading price of our common stock has historically been, and we expect will continue to be, subject to fluctuations. The market price of our common stock may be significantly impacted by:
• | UCP’s ability to consummate its merger with Century; |
• | quarterly variations in financial performance and condition of our various businesses; |
• | shortfalls in revenue or earnings from estimates forecast by securities analysts or others; |
• | changes in estimates by such analysts; |
• | the ability to monetize our assets, including assets related to our water resource and real estate businesses, for an adequate economic return; |
• | our competitors’ announcements of extraordinary events such as acquisitions; |
• | litigation; and |
• | general economic conditions and other matters described herein. |
Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earnings from sold operations, one time transactions, and impairment losses. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our common stock. Such fluctuations in the market price of our common stock could affect the value of your investment and your ability to sell your shares.
32
Litigation may harm our business or otherwise distract our management.
Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For example, lawsuits by employees, shareholders or customers could be very costly and substantially disrupt our business. Additionally, from time to time we or our subsidiaries will have disputes with companies or individuals which may result in litigation that could necessitate our management’s attention and require us to expend our resources. We may be unable to accurately assess our level of exposure to specific litigation and we cannot provide any assurance that we will always be able to resolve such disputes out of court or on terms favorable to us. We may be forced to resolve litigation in a manner not favorable to us, and such resolution could have a material adverse impact on our consolidated financial condition or results of operations.
We have been, and continue to be, the subject of stockholder activism efforts that could cause a material disruption to our business.
Certain investors have taken steps to involve themselves in the governance and strategic direction of our Company due to governance and strategic-related disagreements with us. While we have formally settled with certain of such activists, other investors could take steps to involve themselves in the governance and strategic direction of our Company. Such stockholder activism efforts could result in substantial costs and diversion of management’s attention and resources, harming our business and adversely affecting the market price of our common stock.
Our governing documents could prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.
Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of directors. For example, our bylaws require advance notice for stockholder proposals and nominations for election to our board of directors. We are also subject to the provisions of Section 1203 of the California General Corporation Law, which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction. All or any of these factors could limit the price that certain investors might be willing to pay in the future for shares of our common stock.
If equity analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts may publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Our business could be negatively impacted by cyber security threats.
In the ordinary course of our business, we use our data centers and our networks to store and access our proprietary business information. We face various cyber security threats, including cyber security attacks to our information technology infrastructure and attempts by others to gain access to our proprietary or sensitive information. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cyber security incidents. The result of these incidents could include disrupted operations, lost opportunities, misstated financial data, liability for stolen assets or information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage. Any remedial costs or other liabilities related to cyber security incidents may not be fully insured or indemnified by other means.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF HISTORIC FINANCIAL STATEMENTS, INCLUDING RESULTS OF OPERATIONS AND CASH FLOWS AND BALANCES, DIFFICULT OR NOT MEANINGFUL.
33
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes repurchases of our common stock made during the three months ended March 31, 2017:
Period | Total number of shares of common stock purchased | Average price paid per share of common stock (including commissions) | Total number of shares of common stock purchased as part of publicly announced plans of programs | Maximum dollar value of shares of common stock that may yet be purchased under the plans of programs (in thousands) (1) | ||||||||||
January 1 to January 31, 2017 | ||||||||||||||
February 1 to February 28, 2017 | ||||||||||||||
March 1 to March 31, 2017 | 13,400 | $ | 13.70 | 13,400 | $ | 49,816 | ||||||||
Total | 13,400 | $ | 13.70 | 13,400 | $ | 49,816 | ||||||||
(1) The stock repurchase program was announced on March 2, 2017. Our Board of Directors authorized up to $50 million to be used under this program and there is no set expiration date.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Mine Safety Disclosures
Not applicable.
Item 5: Other Information
None.
34
Item 6. Exhibits
Exhibit Number | Description | ||
2.1 | Asset Purchase Agreement dated July 13, 2015, by and between PICO Northstar Hallock, LLC and CHS Hallock, LLC. (1) | ||
3.1 | Amended and Restated Articles of Incorporation of PICO Holdings, Inc. (2) | ||
3.2 | Certificate of Amendment of Amended and Restated Articles of Incorporation of PICO Holdings, Inc. (5) | ||
3.3 | Amended and Restated By laws of PICO Holdings, Inc. (3) | ||
3.4 | Amendment to Amended and Restated Bylaws of PICO Holdings, Inc. (5) | ||
4.1 | Indenture, dated October 21, 2014, among UCP, Inc., the guarantors named therein, and Wilmington Trust, National Association, as trustee. (4) | ||
10.1 | Voting Support and Transfer Restriction Agreement, dated as of April 10, 2017, by and among Century Communities, Inc., Casa Acquisition Corp., PICO Holdings, Inc., and for the limited purposes set forth therein, UCP, Inc. (incorporated by reference to the Current Report on Form 8-K filed by Century Communities, Inc. on April 11, 2017, File No. 001-36491) | ||
10.2 | Agreement to Exchange, entered into as of April 10, 2017, by and among UCP, Inc., UCP, LLC and PICO Holdings, Inc. (incorporated by reference to the Current Report on Form 8-K filed by UCP, Inc. on April 11, 2017, File No. 001-36001) | ||
10.3 | Bandera Settlement Agreement. (6) | ||
10.4 | PICO Holdings, Inc. Nonemployee Director Compensation Policy. (7) | ||
10.5 | UCP Settlement Agreement. (8) | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). | ||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
(1) | Incorporated by reference to Form 8-K filed with the SEC on July 17, 2015. |
(2) | Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 7, 2007. |
(3) | Incorporated by reference to Form 8-K filed with the SEC on May 19, 2009. |
(4) | Incorporated by reference to Form 8-K filed with the SEC on October 24, 2014. |
(5) | Incorporated by reference to Form 8-K filed with the SEC on July 13, 2016. |
(6) | Incorporated by reference to Form 8-K filed with the SEC on January 30, 2017. |
(7) | Incorporated by reference to the Annual Report on Form 10-K filed with the SEC on March 30, 2017. |
(8) | Incorporated by reference to Form 8-K filed with the SEC on March 30, 2017. |
35
PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the United States Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PICO HOLDINGS, INC. | |||||
Date: | May 4, 2017 | By: /s/ John T. Perri | |||
John T. Perri | |||||
Chief Financial Officer and Secretary | |||||
(Principal Financial Officer and Authorized Signatory) | |||||
36