Acquisition of Citizens Homes

6 Months Ended

Jun. 30, 2015

Business Combinations [Abstract]

Acquisition of Citizens Homes

Acquisition of Citizens Homes

On April 10, 2014, the Company completed the acquisition of the assets and liabilities of Citizens used in the purchase of real estate and the construction and marketing of residential homes in North Carolina, South Carolina and Tennessee, pursuant to a purchase and sale agreement, dated March 25, 2014 between UCP, LLC and Citizens.

Contingent Consideration

The contingent consideration arrangement requires the Company to pay up to a maximum of $6 million of additional consideration based upon achievement of various pre-tax net income performance milestones of the new business (“performance milestones”) over a five year period commencing on April 1, 2014. Payout calculations are made based on calendar year performance except for the 6th payout calculation which will be calculated based on the achievement of performance milestones from January 1, 2019 through March 25, 2019. Payouts are to be made on an annual basis. The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between zero and $6 million. The fair value of the contingent consideration of $3.7 million at June 30, 2015 was estimated based on applying the income approach and a weighted probability of achievement of the performance milestones. The estimated fair value of the contingent consideration was calculated by using a Monte Carlo simulation model.

The measurement is based on significant inputs that are not observable in the market, which are defined as Level 3 inputs. Key assumptions include: (1) forecasted adjusted net income over the contingent consideration period, (2) risk-adjusted discount rate reflecting the risk inherent in the forecasted adjusted net income, (3) risk-free interest rates, (4) volatility of adjusted net income, and (5) UCP’s credit spread. The risk adjusted discount rate for adjusted net income was 12.7% plus the applicable risk-free rate resulting in a combined discount rate ranging from 12.5% to 13.5% over the contingent consideration period. The volatility rate of 22.3% and a credit spread of 9.17% were applied to forecast adjusted net income over the contingent consideration period.

The change in estimated fair value of the contingent consideration consisted of the following (in thousands):

Contingent Consideration - December 31, 2014	$	3,902
Fair value adjustment for the six months ended June 30, 2015	(165		)
Contingent consideration - June 30, 2015	$	3,737

Pro Forma Financial Information

The pro forma financial information in the table below summarizes the results of operations for the Company as though the acquisition was completed as of January 1, 2013. The pro forma financial information for all periods presented includes additional amortization charges from acquired intangible assets. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that UCP may achieve as a result of the acquisition, the costs to integrate the operations of the assets acquired, or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired real estate inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts.

The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition was completed as of January 1, 2013, or indicative of the results that will be attained in the future (in thousands, except per share data):

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2014
Total revenues and other income (1)	$	68,291	$	104,599
Net income (loss) attributable to PICO Holdings, Inc.	$	1,632	$	(11,293	)
Net income (loss) per common share – basic and diluted:	$	0.07	$	(0.50	)

⁽¹⁾ Balances have been adjusted for the recast of the results of the discontinued agribusiness segment operations. Refer to Note 12 “Discontinued Agribusiness Operations” for more details.

Pro forma net income or loss for three and six months ended June 30, 2014 were adjusted to exclude approximately $180,000 and $640,000 of acquisition-related costs incurred in these periods, respectively.