Monday, July 8, 2013

PICO's UCP is One Step Closer to IPO

UCP, PICO's homebuilder and developer, took its next step in the IPO process by announcing terms on Monday to sell 7.75 million shares (more if the underwriters exercise their option to purchase additional shares) at a range of $15 to $17 per share.  For those unfamiliar with UCP, it was substantially formed by PICO in 2008 as the real estate crisis was hitting California where UCP is principally based.  PICO, through UCP, took advantage of the crash and picked up an inventory of lots through California and Washington, many of those lots were purchased in 2008 and 2009 at rock bottom prices.

Back in April, I wrote up a quick update after UCP filed an initial filing with little financial details.  I figured PICO was selling out, rather than looking to raise capital for further expansion.  While short-term, the sell out scenario would have resulted in a quicker pop to book value, the capital raise is a smart move long as UCP is going to need more capital in order to battle in the competitive homebuilder industry.  One of PICO three main businesses will now have a quotable market price making PICO a little more transparent and easier to value, and it gives UCP more flexibility to raise more capital on its own.

One additional quirk in the filings is the complicated organization structure.   The new public shareholders are going to have a 42.3% interest in the newly formed UCP, Inc., which primary asset will be a 42.3% stake in UCP, LLC.  PICO is going to maintain 57.7% of the economic interest in UCP through their UCP, LLC Series A Units (which are exchangeable for Class A common stock in UCP, Inc on a one-for-one basis) and also receives UCP, Inc. Class B common stock which have no economic interest, but square up the voting so that PICO has 57.7% of the voting rights.  Got all that?

I'm not a tax accountant (so this could be where those smarter than me comment below), but there appears to be some built in tax advantages to the structure as PICO exchanges UCP, LLC Series A Units for UCP, Inc shares some of the real estate assets in UCP, LLC will receive step up cost basis treatment, and through an agreement with UCP, 85% of this benefit will accrue to PICO.  Possibly also giving PICO incentive to pursue this route and simplify the structure?
Coming down to what all this all means for PICO shareholders.  A $16 share price (the midrange between $15 and $17) equates to a $293 million market capitalization for UCP.  PICO will own 57.7% of UCP for a market value of $169 million, versus $110 million in current book value, is an increase of $59 million book value (13% increase on PICO's $460 million book value).

I still have concerns around PICO management's lack of ownership, but CEO John Hart does have a lot of options expiring in a few years at significantly higher prices ($33.76, expire 12/12/2015), so that should give him motivation to increase the share price, but the incentives are still misaligned by the fact that he doesn't own much stock himself.  He's been at PICO since the mid-90s, makes $2 million a year, and only has ~$700,000 in stock.  But this IPO is a step in the right direction of making PICO simpler to understand which will hopefully unlock value for shareholders.

Disclosure: I own shares of PICO, no plans to buy UCP directly

1 comment:

  1. UCP made its trading debut today (7/18/13), priced at $15 raising $116 million, but traded down all day to close at $14. At $14, the market cap is about $256 million, making PICO's portion worth $147.5 million.