UCP - UCP Inc.

[GregS]

Central Square Management has a new letter to the Board at PICO.  Re UCP:

 

1. Undertake a formal sale process for UCP – As detailed in our prior letters, UCP has valuable

assets that another homebuilder in need of quality lots could better utilize. We believe a well marketed

sale process would lead to a value realization for UCP in excess of its current book

value (approximately $11.00/share). In fact, based on our extensive analysis, we believe the fair

market value of UCP is closer to $14.00 per share (or more than double its current share price), as

UCP purchased substantial amounts of land between 2008-2011, which presumably has

appreciated relative to its cost basis. Given UCP’s lack of scale, we believe a formal sale process

is the most appropriate and effective method to close the gap between market trading price and

fair market value. However, we strongly advocate that any such process should reflect the

premise that receipt of liquid consideration will be key to ensuring PICO has the flexibility to

determine the use of the proceeds from any such transaction.

 

http://www.sec.gov/Archives/edgar/data/830122/000092189515002251/ex991to13da210308002_100915.pdf

[GregS]

Earnings out today:

 

Third Quarter 2015 Highlights Compared to Third Quarter 2014:

Revenue from homebuilding operations increased 100% to $70.3 million

New homes deliveries grew 82% to 202 units

Net new home orders improved 111.8% to 216 units

Backlog on a dollar basis expanded to $121 million, compared to $38.9 million

Adjusted homebuilding gross margin of 21.1%, compared to 16.5%

Selling, general and administrative expense as a percentage of total revenue improved 450 basis points to 13.9%, compared to 18.4%

Average selling communities of 28, compared to 27

 

UCP earned $0.20 per share.  They were lower on ASP and revenues than I expected, but much better on margins.  Homebuilding gross margin was 18.9%, G&A and sales and marketing expense decreased over Q2 as a percentage of revenues, and G&A decreased on an absolute dollar basis over Q2.  The company had made great strides with their costs and have now reached a level of sales that is profitable.

 

For next quarter, management says they expect GM to be lower by 100-150 bps.  If they can continue to hold the line on costs, they should be profitable again next quarter.  They also said they anticipate some land sales, but declined to give guidance due to the opportunistic nature of that business.

[SI]

Good to see the company confident enough to provide some forward guidance for the 1st on SGA(7.5%), GM(18% in 2016 and better in Q4) and profitability.

[Gregmal]

Anyone following this? Nice beat today, company bought back an impressive amount of stock, and PICO seems pressured to monetize their stake in this. Still trading at a 20%+ discount to book. With the business seemingly now on solid footing, its hard to see this staying public much longer.

[Gregmal]

On the PICO call this week interim CEO made the following remarks regarding the UCP stake:

 

Overall, we are very pleased to see that UCP is striving to improve its return on equity and assets as they manage their existing land bank and their land acquisitions. Although UCP did not go forward in the 200 million notes offering as pricing exceeded that threshold, they appeared to have several distinct strategies including using internal cash generated from operations and various shorter term credit facilities to repay their senior notes due in October 2017. These strategies are detailed in the third quarter filings and earnings call.

 

In light of these factors, the PICO board is commenced the process for assessing all of its options with the respect to the company’s investment in UCP.

 

Seems all but a certainty this is going to be sold in the next couple months.

 

 

 

 

[maybe4less]

The company is no longer trading at much of a discount to book value. However, last week, the company announced changes to management's employment agreements. The changes basically give management bigger payouts and more protections in the event they are terminated after a change in control.

 

But I don't see management having to give up anything in the revised agreements to get those benefits.

 

Is the company getting all its ducks in a row for a near-term sale of the company? Certainly the activists who are now in charge at Pico have been wanting a sale of UCP all along.

[Gregmal]

Was in this up until about a month ago. The reality here is that with this at BV, there are better companies to be involved with.

 

I've seen the "changes to employment contracts" thing done plenty of times when a Board or senior management feels threatened by a future sale/shakeup. IMO it's not really reflective of something being on the brink of happening. Rather just something that gets done so people sleep better at night.

[maybe4less]

Fair points. However, I think the dynamics are a little different than the typical case given how explicit Pico has been about their desire to liquidate.

[Gregmal]

I'd agree. That's actually why I got into this. Right around the time Juicer got the boot at PICO. And while now PICO seems to be on the same page in terms of its designated purpose, UCP seems, at least on the surface to be somewhat standoffish. Just my opinion but at a discount to book, this is pretty easy money. Once near book, you're pretty much betting on an outright sale; as outside of that this just isnt a very well run company in a cut throat business.