Case Study: PICO Holdings Inc. (“PICO”) and their subsidiary Vidler Water Company (“Vidler”)
PICO Holdings, Inc. (“PICO”) is a publicly traded holding company. Its subsidiary is Vidler Water Company (“Vidler”), a water resource developer.
PICO’s Fish Springs Ranch project is one example of water driving investment in Farm & Ranch Real Estate. Fish Springs Ranch was purchased by Vidler to build a water production system for Commercial and Residential projects in Reno, Nevada. Creative financing structures are used to satisfy the requirements of local stakeholders. Water Developer business model is impacted by Commercial and Residential Real Estate development timelines.
Water Markets LLC has no relationship with PICO or Vidler.
In 2007, PICO announced the completed construction of a water development project where 8,000 acre feet per year is sourced from Fish Springs Ranch and supplied to new developments north of Reno, Nevada. It’s a typical example of a public-private (P3) groundwater infrastructure project. In this case the private-sector secures water rights, finances and builds the new infrastructure. Ultimately the project assets are deeded to the public-sector to operate and maintain as part of their existing water delivery system.
Water-Real Estate Nexus Investment Strategy
Vidler purchased Fish Springs Ranch, a 7,360 acre ranch with 12,984 acre-feet of permitted water rights in the Honey Lake Valley north of Reno, Nevada. The security of the permitted rights combined with the anticipated productivity of the water supply made Fish Springs Ranch an attractive investment for Vidler.
PICO 2007 Press Release:
Significant population growth is expected to continue in the Southwest. Long-term, this will drive the demand for new housing…exacerbated by demands for new supplies of water, which may not be available for all developable properties.
As such, we are also seeking to acquire well-located property that is prime for development in selected markets … We are particularly interested in opportunities where we can create additional value by utilizing Vidler’s expertise in developing new supplies of water.
Notice the Strategy is to Invest in Water through Real Estate
Significant population growth, strong housing demand, and low inventory are driving this investor’s interest in water markets. Notice the strategy is to invest in water by purchasing Farm and Ranch property nearby new growth and development. These kinds of water development projects are attractive investments and have the potential to bring in hundreds of millions of dollars to the investors over the long-term. In the short-term Vidler is responsible for the upfront costs and assumes all the risk until the project perfects, when the wet water begins to be delivered.
According to Gate City Capital Management, a shareholder in PICO, in a 2016 report to their investors:
Vidler owns a 51% stake in the Fish Springs Ranch and also has a preferred return entitling Vidler to collect the first $165 million in proceeds from water sales. In the mid-2000’s Vidler financed the construction of a 35-mile pipeline to transport the water at Fish Springs Ranch to the North Valleys, a set of communities about 10 minutes northwest of downtown Reno.
All politics are local and so is the negotiation of a water supply contract. A unique part of the Fish Springs Ranch project appears to make it the responsibility of the private-sector to sell water credits to developers, who will in turn dedicate the water to the local water utility presumably in exchange for a building permit. The rights are held in trust by the public-sector until commercial developers purchase the credits.
This type of project financing structure works well for all involved as long as the real estate market is strong. The utility is provided a schedule to ramp up volume payments only when it needs it and not before. For PICO Fish Springs Ranch water supply project, the sales will increase only as commercial and residential development projects ramp up.
This must have caused PICO some mid-term hurt considering the housing market crash happened only a few months after completion. Bad timing!
Water developers hit hard by the 2008 downturn
By 2011 the Fish Springs Ranch project was years behind schedule and PICO’s shareholders needed to be told that it was going to take time to realize perfection. The tone of the official guidance is bleak which shows the depressed mood of the stalled project which was caught in limbo. Buyer contracts were completed, financing secured, construction complete, and the water development project was stalling because the water was not actually being delivered yet.
According to SEC filings:
A prolonged continuation of the significant and sustained downturn that the homebuilding industry has experienced will materially adversely affect our business and results of operations.
We may not be able to realize the anticipated value of our real estate and water assets in our projected timeframe, if at all.
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.
Finally Crossing the Finish Line
The 2008 market crisis appears to have slowed the perfection of the Reno project by ten years. Now in 2018 they are very well positioned to provide water, nearly without any competition, to a fast growing area to the North Valleys of Reno, Nevada.
After a sharp downturn in construction activity following the Great Recession, the Reno area is undergoing a rapid economic expansion, as companies such as Tesla, Switch, eBay, and Amazon have all opened facilities. Following the construction of the pipeline, the Fish Springs Ranch now has a near-monopoly on the water supply to the North Valleys.
At the Company’s 2016 annual meeting, Vidler professionals noted they expect the current pace of residential and commercial construction to result in the sale of over 8,000 acre-feet of water rights in the North Valleys by the middle of 2018.