PICO Holdings' (PICO) CEO John Hart on Q2 2016 Results - Earnings Call Transcript

| About: PICO Holdings (PICO)

PICO Holdings, Inc. (NASDAQ:PICO)

Q2 2016 Earnings Conference Call

August 8, 2016 11:00 AM ET

Executives

Moira Conlon – Investor Relations

John Hart – President and Chief Executive Officer

Max Webb – Executive Vice President and Chief Financial Officer

Ray Marino – Independent Chairman

Analysts

Andrew Shapiro – Lawndale Capital Management

John Keller – Private Investor

Dan Mannes – Avondale

Niraj Gupta – GCI Partners

Operator

Good morning, and welcome to the PICO Holdings’ 2016 Second Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Moira Conlon, Investor Relations for PICO Holdings. Please go ahead.

Moira Conlon

Thank you, Nicole, and welcome to all of you who have joined us to discuss PICO Holdings’ financial results for the second quarter ended June 30, 2016. Our earnings release is available on our Investor website at investors.picoholdings.com under Press Releases.

I’m here today with John Hart, President and CEO of PICO Holdings; and Max Webb, Chief Financial Officer; and Ray Marino, Chairman of the Board. John, Max and Ray will provide prepared remarks and then will be available to answer your questions.

Before we begin, I would like to remind you that comments on today’s call will include forward-looking statements. Forward-looking statements can be identified by the use of words such as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate, or planned or the negative of these words and phrases or similar words and phrases.

Forward-looking statements by their nature involve estimates, projections, goals, forecasts and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events.

PICO Holdings expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in PICO Holdings expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based, except as required by law. Please refer to our SEC filings in our Investor Relations website for additional information.

With that, I would now like to turn the call over to John Hart.

John Hart

Thank you everyone for joining us today. Starting with today’s call, we plan to begin holding conference calls with investors on a quarterly basis when we report our results. While in the past we held conference calls periodically to announce significant news, both our new board members and our senior management agree their regular communications would be helpful to our investors. So with these quarterly calls, we hope to make head way on two fronts. The first is to help our investors better understand our strategy for creating shareholder value from our valuable assets that have significant upside potential and to make ourselves available to answer your questions.

The second is to ensure that our Board of Directors is committed to strong corporate governance. And to that end our Chairman of the Board, Raymond Marino, will report on board initiatives and goals.

Let me start by sharing what our new board members found compelling about PICO’s potential to enhance shareholder returns.

Starting with our water assets it is the undeniable truth that water is the most valuable economic resource in our operating region and our wholly-owned subsidiary, Vidler Water Company has a long and successful history of developing reliable water supplies in our arid part of the country. Since 1996 we have invested over $300 million in more than 20 resource development projects, and through 2016, we have realized approximately $180 million from the sale of just six of these 20 projects with weighted average IRRs in excess of 40%.

We believe this is just the beginning, and here's why. Northern Nevada is headed to the most explosive period of growth that this region has ever seen. There has been a significant resurgence of commercial activity in northern Nevada where high-tech companies like Tesla, Panasonic and Strike are moving operations from California to tax-friendly Nevada. In Northern Nevada employment growth is projected at 50,000 jobs over the next five years. Against this backdrop we have two very significant water assets to support development in this region. These include a 51% interest in the water rights of Fish Springs ranch and our Carson-Lyon water rights and infrastructure. This unprecedented growth requires new supplies of water, and Vidler has the most practical and economic supplies available.

Buyers of water rights which include residential and commercial developers and industrial users such as ore processors and power generators typically will not purchase water until they are reasonably certain that their projects will be approved. Therefore, the timing of monetization of our waters rights is subject to this approval process in addition to continued economic expansion. At our recent annual meeting of shareholders we presented a table based on our survey of residential developers in the North Valley's region of Reno which indicates their expected timing for final obtaining approvals.

According to our survey the demand for water rights within the next two years exceeds what we have available for importation, and again, this is residential only and does not include commercial or industrial demand which in combination would suggest future upward price momentum for water rights. As developers are working through the approval process, we accrue approximately $8 million annually in interest on our preferred capital for Fish Springs ranch which has the effect of increasing our future share of revenue from our water credits.

Looking to our long-term storage credits in Arizona, Lake Mead, which serves 20 million people in Arizona, Nevada, and California continues to hover at all-time record low levels. The lower Colorado River basin states of Arizona, Nevada, and California, along with the Bureau of Reclamation are negotiating a drought contingency proposal which will trigger a decrease to each state's allotment above the cut-backs agreed upon within the original shortage plan approved in 2007. Typically when actual cut-backs occur, the value of spot water increases significantly as commercial and industrial users scrambled to protect their investments that require water. We are currently in active discussions with an industrial user, a governmental agency, homeowners associations, and developers that are interested in buying our credits.

Now, I would like to turn briefly to our other significant asset, Homebuilder UCP. PICO is the majority shareholder of UCP with a 56.9% interest. UCP has made tremendous progress since its IPO in 2013.

In the first half of 2016, UCP delivered 364 homes generating home building revenue of $149.6 million. This compares to 69 homes and home building revenue of $25.2 million for the first half of 2013 when they went public. That translates into a 428% increase in homes delivered and a nearly five fold increase in revenue. In the most recent quarter, UCP reported continued revenue growth, margin expansion, and profitability. UCP is making outstanding progress in their transformation from a home building startup to a successful production builder by focusing on their stated priorities of, one, monetizing their deep land position through organic revenue growth; two, improving gross margins; three, controlling overhead and expenses; and four, maintaining strong liquidity.

We are excited about the momentum and future outlook for UCP given their strong growth, attractive market and current backlog. As with all of our assets the timing of monetization is a critical consideration. The current market valuations for small and mid cap home builders are below historical averages. However, should an opportunity to present itself to realize fair value for our present position in UCP, we would act on it.

That wraps up my overview, and now I turn the call over to Max who will cover our second quarter financial results.

Max Webb

Thank you, John. I will start by summarizing our financial results for the three and six months ended June 30, 2016. Shareholders equity attributable to PICO shareholders as of June 30, 2016, was $336 million, or $14.58 per share, a decline of $4.1 million for the quarter ended June 30, 2016 and a decline of $10.4 million for the six months ended June 30, 2016. For the quarter ended June 30, book value per share declined by $0.18, 1.2% decline, and for the six months ended June 30, book value per share declined by $0.46, a 3% decline.

The decline in shareholders equity is due primarily to the net loss of $3.4 million for the quarter and a net loss of $10.2 million for the six months ended June 30, 2016. The net loss can be broken down into our three continuing operating segments, water resource and water storage operations conducted by Vidler Water Company, our real estate operations which primarily consist of our 56.9% interest in UCP, Inc. and our corporate segment.

The net loss also includes the residual results of our discontinued agribusiness operations. Vidler did not generate any significant revenue from water sales in the three or six months ended June 30, 2016 and 2015, and this is reflected in their quarterly loss before taxes of $1.5 million versus $1.2 million for the prior year quarter and the six- month loss of $3.2 million versus $2.7 million for the prior year period.

UCP reported their second quarter financial results last week, and as noted earlier our real estate segment is comprised primarily of UCP's results. In summary, UCP generated net income before taxes of $1.8 million in the second quarter of 2016 compared to a net loss of $1.5 million in the prior year period.

This was achieved by UCP increasing its homebuilding revenue by 60.3% to $81.1 million versus $50.8 million in the comparable period, increasing its home building gross margin percentage to 18.2% compared to 17.1% a year ago and reducing general and administrative costs to 8.7% of revenue compared to 11.8% for the prior year period.

Our corporate segment's quarterly loss before taxes was $3.2 million as compared to a net loss before taxes of $23.4 million in the prior year period and a net loss before taxes of $6.2 million for the six months ended June 30, 2016, as compared to a net loss before taxes at $27.7 million in the prior year period.

The corporate segment primarily consists of the results of our oil and gas operations in Colorado and the results of deferred compensation counts which have no overall impact on book value per share and corporate overhead. We remain focused on efficiently managing our overhead expenses, and as of the first quarter of 2016, we had implemented cost reductions that will generate approximately $2.3 million in annual cost savings. In addition, during the second quarter, we implemented additional cost reduction measures that will reduce annual overhead expenses by a further $600,000. As of June 30, 2016, we had unrestricted cash and securities of almost $9 million.

We anticipate sales of sundry assets during the course of the next 12 months or so to provide working capital, and of course proceeds from any significant asset sales or transactions will be used to purchase shares or be returned to shareholders through other means.

With that, I will now turn the call over to our Chairman, Ray Marino.

Ray Marino

Thank you, Max. As John mentioned, in my brief remarks today I will provide an update on corporate governance on behalf of our board. As you know, our board has evolved substantially this year reflecting our commitment to forming a group of independent and highly qualified directors who bring a variety of perspectives and competencies that compliment and expand our full scope of talent. We now have six independent directors on the board who have a wealth of experience spanning finance, restructurings and turnarounds, valuing and selling businesses, real estate, partnerships, asset management, risk oversight, and strategic planning.

Last week, we announced Kenneth Slepicka stepped down from the board. We want to thank Ken for his service to the board and wish him well. In addition, PICO will continue to support Ken and his team at Synthonics since PICO is one of Synthonics' largest shareholders. Ken and his team have made great progress with Synthonics, and we look forward to seeing Synthonics continue to expand their technology and bring products to the market.

Concurrent with Ken's resignation, we reduced the number of seats on our board to seven. I can assure you that the seven of us are all deeply committed to delivering strong corporate governance for PICO. And we are working collaboratively with management on all issues related to creating value for our shareholders. As I said at our annual meeting of shareholders in July, it's not an easy situation to take on so many new board members. I was personally in John's role for the last 20 years of my career and ran two public companies. So I know firsthand what it's like to go through major board changes. It's a lot of work while you're also trying to run a company.

I want to thank John, Max, and the entire team at PICO for the considerable time they spent on boarding our new directors and getting us up to speed on all facets of the Company and its operations. I believe our board is nearing the point where we will have a good understanding of PICO's holdings, business strategy, management team, and potential value of its assets.

Strong corporate governance is the imperative of our board, so we plan to keep investors updated about the board's priorities and perspectives as we go forward.

With that, we would now like to open up the call for any questions you may have for John, Max, or me. Nicole, please go ahead.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Shapiro of Lawndale Capital Management. Please go ahead.

John Hart

Good morning, Andrew.

Andrew Shapiro

Sorry, can you hear me now?

John Hart

Yes.

Andrew Shapiro

You can hear me now. I was on mute. Sorry.

John Hart

No worries.

Andrew Shapiro

Okay. First question I have is for John, and then I have a follow-up for Ray regarding governance of the board. John, what quantity of water rights supplied by others do you estimate needs to be bought up before PICO's water rights are kind of next in the samba line to be sought after at prices that we desire to sell. I know you can sell them today but not at prices that at what we feel will be desirable down the road. What amount of water rights do you feel are first in line in front of ours before we can start getting the pricing that you thought that we should be getting for these water rights?

John Hart

Thank you for that question, Andy. I assume you're referring to the water rights…

Andrew Shapiro

I'm sorry, Fish Springs.

John Hart

Fish Springs Ranch

Andrew Shapiro

Yes, sorry.

John Hart

Well, TMWA, which is the local water utility has indicated in their water plan that the source of water to support growth in Northern Nevada for the North Valley specifically is Fish Springs Ranch. We are not aware that there are any significant quantities of water to support the current development that's anticipated. Also, we have not received bids for water at any price. As I said earlier, the developers typically will not make a commitment to purchase water until they're reasonably sure they're going to get their projects approved. And that process, as we mentioned if the shareholders meeting has been delayed because of the lack of staffing in the Planning Department since the result of the layoffs that occurred during the recession. But we're starting to see capacity at the Planning Departments improve and things are starting to move through that bottleneck. So again, based on our survey of developers and their belief, the timing of that approval process, we think within the next two years we should see some significant transactions for those water rights.

Andrew Shapiro

Well, John, just to clarify, between now and the next two years, the Planning Department is approving new projects to some people, right?

John Hart

If you recall on our survey, the first project to approve was supposed to be towards the end of this year, but the developer has modified its plan which is going to push it into next year. That's the first one in line that we're aware for approval. And remember, they need to have an identified source of waters they received their final permit.

Max Webb

And if you recall, that was the developer where the municipality asked them to increase density.

Andrew Shapiro

So there really aren't like a bunch of project, smaller projects that are being approved once a month anywhere in the area. So literally we are the first ones to be called for the very next project and the very next project is not until several months down the road.

John Hart

As far as we know, that's correct.

Andrew Shapiro

Okay. Governance question I have for Ray here, then I'll step back out into the queue. I do have other questions but I know there's probably others on the call. I wanted to know if there was an answer to the question I posed at the annual meeting, inquiring whether PICO's representation on the UCP board required PICO management, or could that representation on the board be yourself or Mr. Cates supported in some ways by PICO management?

Ray Marino

The determination of who represents PICO is basically in the hands of the PICO board. And we have not taken up that discussion at this point in time.

Andrew Shapiro

Okay. But it's free to be changed if and altered, shifted, if the board chooses to?

Ray Marino

Yes, if the PICO board so chooses, I mean, obviously we want to be – we believe that the current representatives are acceptable to the PICO board, but we just have not had any discussion on that front as of today.

Andrew Shapiro

No, I understand. I think there are some inherent conflicts of interest in light of the compensation agreements that exist with PICO management, et cetera, and hence I made that point clear, I think, to you and the board subsequent to the annual meeting. So I didn't know where you stood on all that.

John Hart

Right. I think we'll – once we go through those deliberations, we will probably announce what we decide to do or not do, and…

Andrew Shapiro

Excellent. I'll back out in the queue. I have more questions. Please come back to me.

John Hart

Thanks, Andrew.

Operator

[Operator Instructions] Our next question comes from John Keller of Private Investor. Please go ahead.

John Keller

Yes, with the [Audio Dip] – marked down to current level where the compensation for management team profits above the current market level, why – why do we write down the water assets? Why is the value destruction and other assets not taken into account? I don't think that the compensation committee has been very clear as to why this structure was put in place. Thank you.

Ray Marino

John, I apologize. The first part of your question cut out. So we did not hear its entirety. Would you mind repeating it for us?

John Keller

Sure, Ray. Why, with the management compensation plan, have assets been written down to their current level for the hurdle for which management receives 20%? It essentially ignores the value of destruction that was taken place and it ignores assets that have already been sold at considerable losses, like the agrobusiness. So I don't think the compensation committee has been very clear as to why the structure was constructed this way. Thank you.

Ray Marino

Okay. Let me start by saying that the new composition of the board and I would say all but one member of the board was not involved in the deliberations or negotiations regarding the new comp plan. The comp committee, as well as other committees of all, for the most part, been reconstituted with a majority of new members. We're going to continue to – I can't answer what was the motivation on the part of the comp committee, because I wasn't here, but this board has heard from shareholders during the courses of our various discussions with regards to the dissatisfaction with the current comp plan. And this new board will deliberate that and make a determination if there's anything that can be done. I mean at this point in time there's a binding agreement with the management team that's been duly authorized, approved by the previous board and executed. That's all I can really say right now, and as soon as we have an adequate response for shareholders, I will make sure that that gets communicated to the shareholders.

Operator

[Operator Instructions] Our next question comes from Dan Mannes of Avondale. Please go ahead.

Dan Mannes

Thanks. Good morning, John and Max.

Max Webb

Good morning, Dan.

John Hart

Good morning, Dan

Dan Mannes

Quick follow-up here actually on Andrew's question. You talked about I guess the queue in terms of approvals of new developments. The secondary question or the follow-up for me would be how many previous developments, I guess from the last boom period, are still out there and it still have approvals and obviously those have water rights that are sitting in front of you, even if there's not necessarily a lot of water around? Are there a ton of existing projects that have water rights and are still waiting to move forward?

John Hart

Several of the projects that were approved previously, remember the approvals are not indefinite. You have to proceed with development within a certain period of time. So several of those would have lapsed but there are developments that are occurring today. There are houses being built today, and those were projects that had preexisting water allocations from TMWA. And to be exact, if you go to our investor presentation deck, I believe there was a chart in there that gives that number. But the supply, if you remember some of the announcements that have come out in the press recently about the inventory of new lots and new home construction, there isn't much out there. Certainly not to support the current amount of job or population increases. So that's why I think the answer to that question is encompassed in our survey, that including all other projects, with these approvals. There's demand for more than the amount of water we have within the next two years.

Dan Mannes

Got it. And the second question I guess, the follow-up would be for Max. And maybe I missed this in your prepared comments. Can you talk about, number one, your cash position at quarter-end, how that compares to your prior period cash position? And rather than talking about the change, can you talk about what your actual 12 months expected cash burn is going to be at the corporate level?

Max Webb

Sure. I can't quite remember what our previous quarter cash position was, but it was broadly similar to the $9 million that we have at June 30. Right now, our annual cash burn, net cash burn is about $10.5 million. And then we would expect that to come down to about $9.5 million with other costs reductions that we've identified.

Dan Mannes

So with that in mind, what would have been the cash inflow to the corporate level in the last quarter if cash – if the actual cash position was flat?

Max Webb

There was cash from sundry sales, oil and gas revenue, obviously with cash outflows. So against that cash coming in, that revenue, and we received tax distributions from UCP.

Dan Mannes

And what are sundry sales? And are there more of those that are available?

Max Webb

Things like properties that are in the real estate operations, but are not owned by UCP.

Dan Mannes

And is there more of that that we can monetize? Because, I mean, the timeline in terms of major asset sales has obviously been extended. I think obviously everyone involved in the stock believes that ultimately they're going to occur in attractive levels, but you basically said that without sundry sales, I mean, you've got 12 months cash.

John Hart

Dan, that's a good question, particularly when you look at the timing and monetization, and even though value, because of the interest we earned, offsets the majority of the overhead cost, it doesn't resolve the cash flow issue. So we do have other assets that we can monetize to address the cash flow issue. And then the other issue, of course, is how much cash do you want to maintain versus how much capital do you want to return to shareholders. And obviously that's a dynamic process.

Dan Mannes

Understood. Thanks.

Operator

This concludes our question-and-answer session. I’d like to turn the conference back over to John Hart for any closing remarks.

Pardon me, this is the operator. We do have a follow-up question from Andrew Shapiro of Lawndale Capital Management. Please go ahead.

Andrew Shapiro

Thank you. I thought I was in the queue. I guess something happened here. Can you talk about if there's been any status changes or can you discuss the activities the company is doing on developing and enhancing the value of – in terms of, I guess, applications and where you stand with respect to water rights and credits in the other Northern Nevada, and I guess Las Vegas, if that's the other Nevada areas, new Vegas, as well as New Mexico and any other state?

John Hart

At present, we have no development activity in Northern Nevada, as the bulk of those assets are fully developed. There's ongoing work that you have to do to maintain those assets, the filings, et cetera. So a bulk of the assets that would require further development are in the Southern Nevada market, and those would be the Lincoln/Vidler applications and the rights we own there. We are not doing any development activity at this time as our focus is on assets that can be monetized within the next five years.

Clearly, though, those are significant assets. The market in Las Vegas and Clark County and Lincoln County is just now starting to recover. Over time, we would expect to see an increase in a need for those water assets that we have. But until we see a significant pickup in the market there, we're not really investing capital to move it on to the next stage.

Andrew Shapiro

Okay. And then in the other states, Arizona, New Mexico, Colorado, et cetera, where we have – I think, mentioned that there are applications or other activities in order to entitle or to perfect our water rights?

John Hart

The only other market where we would have any potential ongoing expense would be in New Mexico, and there's some permitting process that we go through there, but that's not very significant, either. So at this time there really isn't any material development activities in the water resource operations. We are always investigating new opportunities, and we are aware of potential future opportunities. But our focus right now is – and we typically go through these cycles of investment monetization, but as we said numerous times, the cycle for monetization has been greatly extended from the great recession, and our priority is really to focus on monetization, particularly now that the market is starting to recover quite aggressively in Northern Nevada. If you will recall, we thought most of this water would have been sold in prior to 2008 because of development at that time. So it’s been a much longer hold period than we ever anticipated. And that’s our focus today is to take advantage of the current activity that we see in these markets to monetize.

Andrew Shapiro

Right. I appreciate it and I just want to clarify. When you responded to these questions you were referring to that the company wasn’t engaging or investing in further costs right now in those areas. But the company has spent, over the last several years, a bunch of costs making application and seeking entitlement. Are there in any of these parcels, milestones or other I don’t – the right word isn’t windfall, because we would have paid for it, but are there other milestones or other potential grants and enhancement to our asset values in these states and regions from investments that this company has already made that you know about or it’s a matter of time?

John Hart

I would say the biggest potential enhancement to value is from the existing developed assets just because of the supply/demand dynamics in those markets. As far as any windfall from development activity I really wouldn’t anticipate that. I think what you are referring to is we had a number of hearings to resolve some decisions made by the state engineer in Nevada that were resolved in our favor. We had some similar situations in New Mexico, and we have one ongoing, which it’s too early to anticipate which direction that will go, but that’s a small asset.

So there are no development activities ongoing that I would expect to see any significant value creation from. Again, I think given what we’re seeing, both in our Arizona market and our Nevada market, the most likely increase in value would come from higher prices for those particular assets.

Andrew Shapiro

Okay. And when you do this, we’ll call it first monetization, which seems to be at Fish Springs, when that money comes in initially, because PICO fronted the money on that pipeline, and that’s considered a loan into the JV and the moneys get paid back on the loan first, first off am I correct in that assumption? The moneys are getting paid back on the loan so PICO is getting 100 cents on the dollar initially?

John Hart

That is correct.

Andrew Shapiro

Okay. When that money comes in because it’s a payback on the loan, I don’t know if it’s a question for Ray, is this being treated in any way, or is this a gain in any way or just cash flow, meaning we’ve got to pay off that loan, or that loan gets paid off before we start utilization of the sizable NOLs at PICO?

Ray Marino

No. The Fish Springs is an LLC, so it will be a pass-through there will be – I would guess taxable gains, obviously that remains to be seen. And then portions, some or all of that the NOLs could be utilized against those gains.

Andrew Shapiro

Okay. So you get the income effect on 50% or so, and we get the cash flow effect on a 100% on a monetization. Is that right?

John Hart

Let me ask you a question, Andrew. Are you asking the characterization of the cash distribution based on the priorities in the partnership and the first priority to payback interests and how that would treated, whether is income or cash flow?

Andrew Shapiro

Okay. We make a sale, $20 million comes in. It sounds from what I’ve read in your answers to this question, $20 million comes in that would be a gain I guess now that Ray has pointed out that would be a gain to the LLC. That would be a percentage of which passes through to PICO on its ownership interest and is shielded from tax using the NOL. But because that is, we’ll call it first sale, seems like 100% of the proceeds that come into the LLC will be used to paydown either accrued interest and/or principal on the pipeline loan and PICO would benefit from 100% of the proceeds and I guess 50% of the taxable income utilization on the NOL.

John Hart

You’re asking some complex questions, Andy. And with respect to Fish Springs, I’m not sure that’s entirely accurate. But I think from a cash flow perspective, with that question, the first I think it’s now about $170 million would come up to PICO.

Andrew Shapiro

Okay.

John Hart

Or more accurately to Vidler.

Andrew Shapiro

Okay. Excellent and then a backup question here for Ray on the governance side. The reincorporation proposal into Delaware did not pass for a variety of reasons, some of which we probably also highlighted. Is there an update and what are the board’s plans on improving a future reincorporation proposal to be more shareholder-friendly to warrant enough support to pass that measure?

Ray Marino

It will definitely be a topic of discussion in future meetings. It’s not on the agenda for this upcoming meeting because we have a lot of other things that were dealing with including our first face to face with UCP’s management, but I think it certainly will be considered we don’t anticipate doing a special meeting or anything. We will just do it in the normal course and at this time, there’s a favorable trends with regards to our 382 limitation calculations. We’ll delve into that in more detail when we can. Once our tax advisors finish their analysis and management at the board have a chance to examine the implications of those calculations.

Andrew Shapiro

Sure. And I guess with the passage of time unless the shareholder base.

Ray Marino

Right.

Andrew Shapiro

Its materially that will actually widen your cushion. At the annual meeting you spoke of preferring implementation of a quicker de-staggering the board, so that all directors are elected annually more immediately, but that such action would require to modify the agreement with Central Square. Have such discussions that all been pursued towards a quicker implementation and working out something mutually acceptable with Central Square.

Ray Marino

We would like to declassify sooner. Yes, it would take a modification Central Square agreement. I can tell you that we have not I mean we’ve had very, very top level discussions with Central Square and I’ve had the ability to meet with Kelly Cardwell. And start creating relationship there, so I would say that no, there hasn’t been a specific conversation about renegotiating that point.

I think it’s an item that we’ve expressed interest in, the shareholders have spoken loud and clear about it, and we would certainly like to kick off that discussion at the appropriate time in the near future. But as of right now that has not been put on the table.

Andrew Shapiro

Okay. And lastly, the Synthotics investment, investigation all that, that you issued a press release on to provide guidance as to what the board had looked into and determined and decided. Is that investigation or that looking back by the new board into what has gone on in the past, is that all done, or is there additional investigation or research being done by some or all of the board members?

Ray Marino

I would say for the most part the investigative process is completed. At the upcoming board meeting we will have a final run through of our findings, and when appropriate I would imagine probably – within the next 10 to 15 days we’ll provide an update on those findings. I can tell you today that there’s been no wrong doing on the part of the parties mentioned in our 14A, and we still stand by that report, but we will basically make an announcement of the final conclusions that we’ve reached based on our investigation.

Andrew Shapiro

Great. Thank you on that. Lastly, I guess this is for John or Ray what are the upcoming either conferences, investor presentations, what are your – other than the upcoming next quarter’s conference call, steps to be taken to I guess improve communications, tell the company’s story, have people better appreciate the embedded value in the water assets in particular?

Ray Marino

Well, we’re going to – as we stated at the annual meeting, we want to have more conversations like this. I think this morning’s calls have been very good, very positive. I appreciate everyone participating in the call, and we appreciate your questions. I think that we’ll continue to have the management team enlighten our shareholders and other interested parties about developments as they unfold. But it is a dynamic process. Anyone that has been involved in real estate development knows that.

And we’ve been careful to point out that while all of the tea leaves look very favorable about what’s going on in the Northern Nevada market, growth comes with challenges, and those challenges are having enough skilled labor both to be hired by the prospective employers in the area and enough skilled labor just to build the homes and buildings that are anticipated. So Reno is going through not atypical growing pains that many other cities like it have experienced in the past.

So we’re optimistic, but we are also cautiously watching the market very carefully. And broader general economic trends have a bearing on that as well. So obviously, certain announcements play favorable. Amazon continues to have a very stronghold on the online buying market. The Tesla factory opened about a week and a half ago. So Panasonics made an announcement. There’s been other favorable announcements out of the Reno market. All of this is in the public domain, and we monitor it just like you do. So I think we’ll continue to push management to provide updates, and we’ll give it to the shareholders in real-time as soon as we feel comfortable disclosing it and that we’ve had a chance to make sure we vetted the information and believe it to be reliable.

John Hart

I think also, shareholder communication is an evolving process. In the early days, for some of the shareholders who were involved at that time, they will remember that we had very little disclosure on our water assets. And we were so nervous about people finding out about the water business, because we thought it was just such a spectacular business, we didn’t want to create competitors.

Then we went through a period where we had one shareholder, a large institution that owned 11% of the company and Max and I would call them up and the comment we always got, why are you calling us? But today you’re in a very different era, and an understanding on the board’s part and management’s part of how much communication shareholders want, what type of communication. We’ve changed our communication with shareholders significantly in the past 12 months, and as Ray said that will continue to evolve but we better understand what type of communication and how often shareholders would like to have it.

Operator

Our next question comes from Niraj Gupta of GCI Partners. Please go ahead.

Niraj Gupta

Thank you and good morning. I apologize. I got on the call a little bit late. I’m not sure if you mentioned this at the beginning of the call, John, but maybe you could provide a little bit further color on your comments on Arizona, the structural deficit and I guess more specifically to the extent you can, the magnitude/nature of the discussions that you’re having down there. I think you are specifically referencing monetization of a portion of the storage credits with some commercial users. Thank you.

Max Webb

The overall background, if you look historically at how the Colorado River was allocated amongst the various states, particularly the lower basin states, we now know that the allocation decision was made during a period of high flow for the river, above average flow. So the river was over allocated. So the structural deficit refers to the fact that more water has been allocated than actually exists in normal flow years in the Colorado River. The negotiations that are taking place are an attempt to resolve that issue, and regardless of the outcome, it’s going to result in a cut-back of supplies and in particular, to Arizona. Nevada has a very small allocation from the Colorado River, and of course California was over allocated. I think its 1.4 million acre feet. That’s part of that structural deficit.

As there’s more discussion about the solutions, people are becoming much more aware of the potential dangers of water shortages. I think that’s probably what’s been driving the traffic we’ve seen. Specifically, we’re in discussions with a number of HOAs who need these supplies to continue to irrigate their common areas, their parks, landscaping, et cetera. There are – we’ve talked to two industrial users, one in particular is trying to get a final permit for their project that would need these credits to offset their water usage.

We are talking to real estate developers that can use their credits as replacement or in lieu of permanent supplies to help them get their permits rather. I think the activities being driven by the publicity and the greater awareness of not just the potential problems but the real shortages that exist today in these markets.

Niraj Gupta

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Hart for any closing remarks.

John Hart

Thank you. In closing, we are working diligently to both enhance the value of our assets and to opportunistically monetize them. The timetable for selling our water storage rights depends on residential, commercial, and industrial demand, which we believe is just beginning to unfold.

Regarding UCP as I mentioned the current market valuations for small and mid cap home builders are not favorable but value is being enhanced at UCP by four consecutive quarters of profitability and continued growth in margin improvement. However, should an opportunity present itself to realize fair value for our position in UCP, we would act on it. As we monetize assets we are committed to returning capital to shareholders. Thank you. And we look forward to speaking with you next quarter.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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