Discontinued Agribusiness Operations


Thousands of dollars	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2016			2015
Revenue and other income (loss):
Sales of canola oil and meal				$	39,432					$	9,600					$	82,267
Other				(106		)				18						(50		)
Total revenue and other income				39,326						9,618						82,217

Cost of goods sold:
Cost of canola oil and meal sold				38,424						8,738						79,763
Depreciation				1,950						18						4,360
Other direct costs of production				2,519						1,155						5,938
Total cost of goods sold				42,893						9,911						90,061

Depreciation																95
Impairment loss on intangible and long-lived assets				1,875												1,875
Interest				1,439						428						3,259
Plant costs and overhead	$	40		3,601			$	18		9,504			$	102		16,447
Segment total expenses	40			49,808			18			19,843			102			111,737
Loss before income taxes	$	(40	)	$	(10,482	)	$	(18	)	$	(10,225	)	$	(102	)	$	(29,520	)

We sold substantially all of the assets used in our agribusiness operations in 2015 and as a result, we no longer operate an agribusiness segment. We have classified our agribusiness operations as a discontinued agribusiness operation in the accompanying condensed consolidated financial statements. Although there are outstanding issues to resolve with respect to this sale, as of ~~March 31,~~September 30, 2016, we do not expect to record any other significant expenses related to the operations or sale of our discontinued agribusiness operations. However, any future adjustments to the sale price, including resolution of possible indemnification obligations above our initial expectations, and any other costs and expenses incurred in connection with the disposition of the business will be reported within our discontinued agribusiness operations.

~~Segment Revenue, Gross Margin, and Loss Before Income Taxes~~

We did not report any revenue or significant operating expenses for the three months ended March 31, 2016 as we did not have any agribusiness operations during the period. As a result, our net loss decreased significantly year-over-year as compared to the $10.5 million loss recorded for the first quarter of 2015.

During the three months ended March 31, 2015, we recorded an impairment loss of $1.9 million to write down the value of certain real estate in Oklahoma and associated capitalized development costs to their estimated fair value. We had no such impairments during the three months ended March 31, 2016.

Liquidity and Capital Resources — ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2016 and 2015

Cash Flow

At ~~March 31,~~September 30, 2016, our assets consisted primarily of real estate and tangible and intangible water assets, cash and cash equivalents, and investments in publicly-traded securities. Our liquid funds are generally held in money market funds.

Our cash and cash equivalents and available-for-sale investments held in each segment at ~~March 31,~~September 30, 2016 were as follows:



•	Water resource and water storage operations segment held cash of ~~$43,000.~~$373,000.
•	Real estate operations segment held cash of ~~$29.8~~$27.6 million.
•	Corporate segment held cash of ~~$10.1~~$9.9 million and marketable equity and debt securities with a market value of ~~$18.5~~$20.5 million and $4.4 million, respectively. ~~Included in those totals are $2.4 million in cash, $18 million in equities, and $4.4 million in debt~~The securities ~~that~~ are held in deferred compensation rabbi trusts accounts that will be used to pay the related and offsetting deferred compensation liabilities although such assets could be used to pay creditors if needed. We expect to distribute a portion of the deferred compensation balance in April 2017 having a value of approximately $22.8 million at September 30, 2016. See Note 12, “Subsequent Events” for additional information.
•	Discontinued agribusiness operations segment held cash of ~~$553,000.~~$438,000.

Our primary sources of funds include existing cash, the sale of tangible and intangible water resource assets, loans and debt or equity offerings, and sales of our businesses. We are not subject to any debt covenants which limit our ability to obtain additional financing through debt or equity offerings. Debt covenants and restrictions in UCP limit us from transferring cash from those operations for use elsewhere in our Company. However, we expect to receive required cash distributions from UCP for minimum tax payments due as the underlying partnership generates taxable income. Regardless, cash flows from the majority of our real estate operations are restricted for use in those operations.

Our cash flows fluctuate depending on the capital requirements of our operating subsidiaries. The sale of and costs incurred to acquire and develop real estate and water assets are generally classified as operating activities in the condensed consolidated statement of cash flows. The cash flow profiles of our principal operating segments are as follows:

Water Resource and Water Storage Operations

A substantial portion of our revenue in this segment has come from sales of real estate and water assets. The assets are typically long-term water resource development projects to support growth for particular communities in the southwestern U.S. The timing and amount of sales and cash flows depend on a number of factors which are difficult to project, and cannot be directly compared from one period to another. Our project expenses are generally discretionary in nature.

Real Estate Operations

We are a homebuilder and developer in California, Washington State, North Carolina, South Carolina, and Tennessee. We finance additional acquisitions, development and construction costs from our existing cash, proceeds of the sale of existing lots and homes, and/or through external financing.

Certain of our debt agreements in our real estate operations contain various significant financial covenants, with each of which we were in compliance with at ~~March 31,~~September 30, 2016, as follows:

1) Certain of our real estate debt include provisions that require minimum loan-to-value ratios. During the term of the loan, the lender may require us to obtain a third-party written appraisal of the underlying real estate collateral. If the appraised fair value of the collateral securing the loan is below the specified minimum, we may be required to make principal payments in order to maintain the required loan-to-value ratios. As of ~~March 31,~~September 30, 2016, the lenders have not requested, and we have not obtained, any such appraisals.

2) UCP’s senior notes limit its ability to, among other things, incur or guarantee additional unsecured and secured indebtedness (provided that UCP may incur indebtedness so long as UCP’s ratio of indebtedness to its consolidated tangible assets (on a pro forma basis) would be equal to or less than 45% and provided that the aggregate amount of secured debt may not exceed the greater of $75 million or 30% of UCP’s consolidated tangible assets); pay dividends and make certain investments and other restricted payments; acquire unimproved real property in excess of $75 million per fiscal year or in excess of $150 million over the term of the notes, except to the extent funded with subordinated obligations or the proceeds of equity issuances; create or incur certain liens; transfer or sell certain assets; and merge or consolidate with other companies or transfer or sell all or substantially all of UCP’s consolidated assets. Additionally, the notes require UCP to maintain at least $50 million of consolidated tangible assets not subject to liens securing indebtedness; maintain a minimum net worth of $175 million; maintain a minimum of $15 million of unrestricted cash and/or cash equivalents; and not permit decreases in the amount of consolidated tangible assets by more than $25 million in any fiscal year or more than $50 million at any time.

UCP is actively considering three primary alternatives to meet their obligations with respect to the senior notes that mature in October 2017. UCP may seek to extend the maturity of the senior notes or refinance the senior notes with new senior notes, including the option to arrange new senior notes in the public or private capital markets if conditions are favorable. UCP may also seek to refinance the senior notes on a leverage neutral basis, by seeking to increase the amount of borrowings available under their acquisition, development and construction loans, which are secured by their real estate inventories. Finally, UCP’s cash position, which they believe we will continue to grow prior to maturity of the senior notes, may be used to meet a portion of their obligations with respect to the senior notes. Alternatively, UCP may choose to combine some or all of these, or other, potential sources of capital to meet their obligations with respect to the senior notes. UCP’s determination of how to meet their obligations with respect to the senior notes and their success in so doing, will depend upon various factors, including general market conditions, conditions in the credit markets, UCP’s financial position, operating performance, the value of UCP’s land inventories and prospects.

Corporate

On October 10, 2016, John R. Hart’s employment as President and Chief Executive Officer of the Company was terminated, effective as of October 12, 2016. As a result, we will accrue $10.4 million in severance benefits and vacation differential, remaining stock-based compensation, and any related expenses in the fourth quarter of 2016. In accordance with applicable regulations, we will be required to pay such severance benefits and vacation differential, stock settle the vested RSU, and distribute Mr. Hart’s deferred compensation balance (which was valued at approximately $22.8 million as of September 30, 2016), no earlier than six months and a day after the effective date of the termination. See Note 12, “Subsequent Events,” for additional information.

Our corporate segment generated a modest amount of cash flow from the sale of oil and gas production from our wells in Colorado. During October 2016, we sold a majority of these assets for gross proceeds of $10.2 million. After certain holdbacks and consideration of liabilities assumed by the buyer, we received $9.2 million in cash with the potential to receive an additional $587,000 if and when certain title defects are corrected. See Note 12, “Subsequent Events” for additional information. We do not expect to reinvest the proceeds or fund any additional capital into our oil and gas operations and expect to be completely out of the oil and gas business within six to nine months as we attempt to sell the remaining wells and leases.

Due to the depressed prices of oil and gas, we recorded impairment losses on our oil and gas assets during the nine months ended September 30, 2016 and September 30, 2015. It is reasonably possible that we will continue reporting operating and impairment losses from our oil and gas operations and remaining assets, although the remaining carrying value of such assets is immaterial.

Discontinued Agribusiness Operations

During the third quarter of 2015, we sold our agribusiness operations. After repayment of outstanding debt and selling and other related costs of the transaction, we received net proceeds of $18.4 million. From these net proceeds we were required to deposit $6 million in escrow to secure general indemnification obligations, with any balance remaining after payment of indemnification claims released in January 2017, and $4.2 million in escrow for specified operational matters (the “operational escrow”). To date, no material claims have been made against the general indemnification.

Specified amounts of the operational escrow related to proposed amendments to two environmental permits. We resolved the air quality issue and had the $2.4 million escrowed amount released to us in October 2015. However, during the ~~three~~nine months ended ~~March 31,~~September 30, 2016, we were notified that the relevant regulatory authorities had not approved the waste water permit at the levels required under the sale agreement. Consequently, the remaining $1.8 million operational escrow amount was released to CHS Inc. (“CHS”) in full satisfaction of the matter resulting in us recording the amount as additional loss on the sale of our discontinued operations for the ~~three~~nine months ended ~~March 31,~~September 30, 2016.

We have also guaranteed up to $8 million for any indemnification claims in excess of the $6 million general indemnification escrow pursuant to the terms of a guaranty agreement by and between us and CHS, which was executed at the closing. This guaranty will remain in force for five years from the date of sale.

~~Corporate~~

Our corporate segment generates a modest amount of cash flow from the sale of oil and gas production from our wells in Colorado. We do not expect to fund any additional capital into our oil and gas operations. Due to the depressed prices of oil and gas, we recorded an impairment loss on our oil and gas assets during the three months ended March 31, 2015. We did not record any such impairment during the three months ended March 31, 2016. However, it is reasonably possible that we will continue reporting operating and impairment losses from our oil and gas operations if oil and gas prices do not sufficiently recover.

Consolidated Cash and Securities

At ~~March 31,~~September 30, 2016, we had unrestricted and available cash ~~of $6.9 million~~ and ~~available-for-sale equity~~ securities of ~~$547,000,~~$9.7 million, which could be used for general corporate purposes. At December 31, 2015, we had unrestricted and available cash ~~of $12.5 million~~ and ~~available-for-sale equity~~ securities of ~~$540,000.~~$13.1 million.

We estimate that we have sufficient cash and available-for-sale investments to cover our cash needs for at least the next 12 months. In the long-term, we estimate that existing cash resources and cash from operations will provide us with adequate funding for future operations. However, if additional funding is needed, we could defer significant expenditures, sell assets, obtain a line of credit, or complete debt or equity offerings. Any additional equity offerings may be dilutive to our stockholders and any additional debt offerings may include operating covenants that could restrict our business.

Cash Flow

The following is a summary of our cash flows (in thousands):


	Three Months Ended March 31,						Nine Months Ended September 30,
	2016			2015			2016			2015
Cash provided by (used in):
Operating activities - continuing operations	$	(17,748	)	$	(17,515	)	$	(17,798	)	$	(58,060	)
Operating activities - discontinued agribusiness operations	(387		)	(1,734		)	(508		)	(17,462		)
Total operating activities	(18,135		)	(19,249		)	(18,306		)	(75,522		)

Investing activities - continuing operations	(1,064		)	3,537			(727		)	4,696
Investing activities - discontinued agribusiness operations	(3		)	(2,935		)	8			100,098
Total investing activities	(1,067		)	602			(719		)	104,794

Financing activities	2,307			3,640			16			(50,323		)
Decrease in cash and cash equivalents	$	(16,895	)	$	(15,007	)	$	(19,009	)	$	(21,051	)

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended ~~March 31,~~September 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II: Other Information

Item 1: Legal Proceedings

None.

Item 1A: Risk Factors

The following information sets out factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. You should carefully consider the following risks, together with other matters described in this Form 10-Q or incorporated herein by reference in evaluating our business and prospects. If any of the following risks occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our securities could decline, in some cases significantly.

The risk factors in this report have been revised to incorporate changes to our risk factors from those included in our Annual Report on Form 10-K for the year ended December 31, 2015. The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC.

General economic conditions could have a material adverse effect on our financial results, financial condition and the demand for and the fair value of our assets.

All of our businesses are sensitive to general economic conditions, whether internationally, nationally, or locally. General poor economic conditions and the resulting effect of non-existent or slow rates of growth in the markets in which we operate could have a material adverse effect on the demand for both our real estate and water assets. These poor economic conditions include higher unemployment, inflation, deflation, decreases in consumer demand, changes in buying patterns, a weakened dollar, higher consumer debt levels, and higher tax rates and other changes in tax laws or other economic factors that may affect commercial and residential real estate development.

Specifically, high national or regional unemployment may arrest or delay any significant recovery of the residential real estate markets in which we operate, which could adversely affect the demand for our real estate and water assets. Any prolonged lack of demand for our real estate and water assets could have a significant adverse effect on our revenues, results of operations, cash flows, and the return on our investment from these assets.

Our future revenue is uncertain and depends on a number of factors that may make our revenue, profitability, cash flows, and the fair value of our assets volatile.

Our future revenue and profitability related to our water resource and water storage operations will primarily be dependent on our ability to develop and sell or lease water assets. In light of the fact that our water resource and water storage operations represent a large percentage of our overall business at present, our long-term profitability and the fair value of the assets related to our water resource and water storage operations will be affected by various factors, including the drought in the southwest, regulatory approvals and permits associated with such assets, transportation arrangements, and changing technology. We may also encounter unforeseen technical or other difficulties which could result in cost increases with respect to our water resource and water storage development projects. Moreover, our profitability and the fair value of the assets related to our water resource and water storage operations is significantly affected by changes in the market price of water. Future sales and prices of water may fluctuate widely as demand is affected by climatic, economic, demographic and technological factors as well as the relative strength of the residential, commercial, financial, and industrial real estate markets. Additionally, to the extent that we possess junior or conditional water rights, during extreme climatic conditions, such as periods of low flow or drought, our water rights could be subordinated to superior water rights holders. The factors described above are not within our control.

Our future revenue, growth, and the demand for and the fair value of our assets related to our land development and homebuilding activities depends, in part, upon our ability to successfully identify and acquire attractive land parcels for development of single-family homes at reasonable prices. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land prices at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. If the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow and increase the fair value of our assets related to our land development and homebuilding business could be significantly limited, and our land development and homebuilding revenue and gross margin could remain static or decline and it could adversely affect the return on our investment from these assets.

One or more of the above factors in one or more of our operating segments could impact our revenue and profitability, negatively affect our financial condition and cash flows, cause our results of operations to be volatile, and could negatively impact our rate of return on our real estate and water assets and cause us to divest such assets for less than our intended return on our investment.

A downturn in the recent improvement that the homebuilding and land development industry has experienced would materially adversely affect our business, results of operations, and the demand for and the fair value of our assets.

The homebuilding industry experienced a significant and sustained downturn in recent years having been impacted by factors that include, but are not limited to, weak general economic and employment growth, a lack of consumer confidence, large supplies of resale and foreclosed homes, a significant number of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home and tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home. These factors resulted in an industry-wide weakness in demand for new homes and caused a material adverse effect on the growth of the local economies and the homebuilding industry in the southwestern United States (“U.S.”) markets where a substantial amount of our real estate and water assets are located, including the states of Nevada, Arizona, California, Colorado, and New Mexico. However, in 2012, we noted a significant improvement in the housing market which led to increased levels of real estate development activity. The continuation of the recent improvement in residential and commercial real estate development process and activity is essential for our ability to generate operating income in our water resource and water storage, and land development and homebuilding businesses. We are unable to predict whether and to what extent this recovery will continue or its timing. Any future slow-down in real estate and homebuilding activity could adversely impact various development projects within the markets in which our real estate and water assets are located and this could materially affect the demand for and the fair value of these assets and our ability to monetize these assets. Declines and weak conditions in the U.S. housing market have reduced our revenues and created losses in our water resource and water storage, and land development and homebuilding businesses in prior years and could do so in the future.

We may not be able to realize the anticipated value of our real estate and water assets in our projected time frame, if at all.

We expect that the current rate of growth of the economy will continue to have an impact on real estate market fundamentals. Depending on how markets perform both in the short and long-term, the state of the economy, both nationally and locally in the markets where our assets are concentrated, could result in a decline in the value of our existing real estate and water assets, or result in our having to retain such assets for longer than we initially expected, which would negatively impact our rate of return on our real estate and water assets, cause us to divest such assets for less than our intended return on investment, or cause us to incur impairments on the book values of such assets to estimated fair value. Such events would adversely impact our financial condition, results of operations and cash flows.

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.

Both the demand and fair value of our real estate and water assets are significantly affected by the growth in population and the general state of the local economies where our real estate and water assets are located. These local economies may be affected by factors such as the local level of employment and the availability of financing and interest rates, where (1) our real estate and water assets are located, primarily in Arizona and northern Nevada, but also in Colorado and New Mexico and (2) our land development and homebuilding assets are located, primarily in California and also Washington, North Carolina, South Carolina and Tennessee. The unemployment rate in these states, as well as issues related to the credit markets, may prolong a slowdown of the local economies where our real estate and water assets are located. This could materially and adversely affect the demand for and the fair value of our real estate and water assets and, consequently, adversely affect our growth and revenues, results of operations, cash flows and the return on our investment from these assets.

The fair values of our real estate and water assets may decrease which could adversely affect our results of operations by impairments and write-downs.

The fair value of our water resource and water storage assets and our land and homebuilding assets depends on market conditions. We acquire water resources and land for expansion into new markets and for replacement of inventory and expansion within our current markets. The valuation of real estate and water assets is inherently subjective and based on the individual characteristics of each asset. Factors such as changes in regulatory requirements and applicable laws, political conditions, the condition of financial markets, local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainties. In addition, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. If population growth and, as a result, water and/or housing demand in our markets fails to meet our expectations when we acquired our real estate and water assets, our profitability may be adversely affected and we may not be able to recover our costs when we sell our real estate and water assets. We regularly review the value of our real estate and water assets. These reviews have resulted in significant impairments to our water resource assets and /or land development assets. Such impairments have adversely affected our results of operations and our financial condition in those years.

If future market conditions adversely impact the anticipated timing of and amount of sales of our real estate and water assets we may be required to record further significant impairments to the carrying value of our real estate and water assets which would adversely affect our results of operations and our financial condition.

* Our water resource and water storage operations are concentrated in a limited number of assets, making our profitability and the fair value of those assets vulnerable to conditions and fluctuations in a limited number of local economies.

We anticipate that a significant amount of our water resource and water storage segment revenue, results of operations and cash flows will come from a limited number of assets, which primarily consist of our water resources in Nevada and Arizona and our water storage operations in Arizona. Water resources in this region are scarce and we may not be successful in continuing to develop additional water assets. If we are unable to develop additional water assets, our revenues will be derived from a limited number of assets, primarily located in Arizona and Nevada. Our two most significant assets are our water storage operations in Arizona and our water resources to serve the northern valleys of Reno, Nevada. As a result of this concentration, our invested capital and results of operations will be vulnerable to the conditions and fluctuations in these local economies and potentially to changes in local government regulations.

Our Arizona Recharge Facility is one of the few private sector water storage sites in Arizona. We have approximately 251,000 acre-feet of water stored at the facility. In addition, we have approximately 157,000 acre-feet of water stored in the Phoenix Active Management Area. We have not stored any water on behalf of any customers and have not generated any material revenue from the recharge facility or from the water stored in the Phoenix Active Management Area. We believe that the best economic return on the assets arises from storing water when surplus water is available and selling this water in periods when water is in more limited supply. However, we cannot be certain that we will ultimately be able to sell the stored water at a price sufficient to provide an adequate economic profit, if at all.

We constructed a pipeline approximately 35 miles long to deliver water from Fish Springs Ranch to the northern valleys of Reno, Nevada. As of ~~March 31,~~September 30, 2016, the total cost of the pipeline project, including our water credits, (net of impairment losses incurred to date) carried on our balance sheet is approximately $83.9 million. To date, we have sold only a small amount of the water credits and we cannot provide any assurance that the sales prices we may obtain in the future will provide an adequate economic return, if at all. Furthermore, we believe the principal buyers of this water are likely real estate developers who are contending with the effects of the current weak demand that exists for new homes and residential development in this area. Any prolonged weak demand for new homes and residential development, and, as a result, for our assets in Nevada and Arizona, would have a material adverse effect on our future revenues, results of operations, cash flows, and the return on our investment from those assets.

We are subject to laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.

Our real estate operations are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements which apply to any given project site vary according to multiple factors, including the site’s location, its environmental conditions, the current and former uses of the site, the presence or absence of state- or federal-listed endangered or threatened plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations governing the permits and other approvals for our real estate projects and operations. Sometimes regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.

In addition, in cases where a state-listed or federally-listed endangered or threatened species is involved and related agency rule-making and litigation are ongoing, the outcome of such rule-making and litigation can be unpredictable and can result in unplanned or unforeseeable restrictions on, or the prohibition of, development and building activity in identified environmentally sensitive areas.

Our real estate operations are also subject to numerous other laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, water and waste disposal and use of open spaces. We are typically required to obtain permits, entitlements and approvals from local authorities to start and carry out residential development or home construction. Such permits, entitlements and approvals may, from time-to-time, be opposed or challenged by local governments or other interested parties, adding delays, costs and risks of non-approval to the process. Our obligation to comply with the laws and regulations under which we operate, and our need to ensure that our subcontractors and other agents comply with these laws and regulations may result in delays in construction and land development and may also cause us to incur substantial additional and unbudgeted costs.

We will face significant competition in marketing and selling new homes.

We have entered the homebuilding business by constructing, marketing and selling single-family homes on certain of our finished residential lots that we own in California, Washington, North Carolina, South Carolina and Tennessee. We aim to build homes only in those markets where we have identified that a sufficient demand exists for new homes. However, the homebuilding industry is highly competitive and we will be competing with a number of national and local homebuilders in selling homes to satisfy expected demand. These competitors, especially the national homebuilders, have greater resources and experience in this industry than we have. Such competition could result in lower than anticipated sales volumes and/or profit margins that are below our expectations. In addition, we will have to compete with the resale of existing homes, including foreclosed homes, which could also negatively affect the number and price of homes we are able to sell and the time our homes remain on the market.

We use leverage to finance a portion of the cost to acquire our land development assets and to construct homes.

We currently use, and expect to continue to use, debt to finance a portion of the cost of constructing our homes and acquiring and developing our lots. Such indebtedness is primarily comprised of project-level secured acquisition, development and construction loans, with recourse limited to the securing collateral.

Incurring debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:

our cash flow from our land development and homebuilding operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of the maturity of such debt;

our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing cost;

we may be required to dedicate a portion of our cash flow from our land development and homebuilding operations to payments on our debt, thereby reducing funds available for the operations and capital expenditures; and

the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.

If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional debt or additional equity financings which could dilute our interest in our land development and homebuilding business. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our land development and housing assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Defaults under our debt agreements used to finance a portion of the cost of constructing homes and acquiring and developing lots could have a material adverse effect on our land development and homebuilding business, prospects, liquidity, financial condition, results of operations, and the return on our investment from those assets.

We may be subject to significant warranty, construction defect and liability claims in the ordinary course of our homebuilding business.

As a homebuilder, we may be subject to home warranty and construction defect claims arising in the ordinary course of business. We may also be subject to liability claims for injuries that occur in the course of construction activities. Due to the inherent uncertainties in such claims, we cannot provide assurance that our insurance coverage or our subcontractors’ insurance and financial resources will be sufficient to meet any warranty, construction defect and liability claims we may receive in the future. If we are subject to claims beyond our insurance coverage, our profit from our homebuilding activities may be less than we expect and our financial condition and the return on our investment from those assets may be adversely affected.

We will be relying on the performance of our subcontractors to build horizontal infrastructure and homes according to our budget, timetable and quality.

We rely on subcontractors to perform the actual construction of horizontal infrastructure (in the cases where we are completing the development of entitled lots to finished lots) and of the homes we are building on certain of our finished lots. In certain cases, we will also rely on the subcontractor to select and obtain raw materials. Our subcontractors may fail to meet either our quality control or be unable to build and complete the horizontal infrastructure or homes in the expected timetable due to subcontractor related issues such as being unable to obtain sufficient materials or skilled labor, or due to external factors such as delays arising from severe weather conditions.

Any such failure by our subcontractors could lead to increases in construction costs and construction delays. Such increases could negatively impact the price and number of finished lots and homes we are able to sell.

Our homebuilding operations may be adversely impacted by the availability of and the demand for mortgage financing and any changes to the tax benefits associated with owning a home.

To successfully market and sell the homes we construct depends on the ability of home buyers to obtain mortgage financing for the purchase of these new homes. Current credit requirements for mortgage financing are significantly greater than in the past which makes it more difficult for a potential home buyer to obtain mortgage financing. In addition, any significant increase in interest rates from current rates may also lead to increased mortgage finance costs leading to a decline in demand and availability of mortgage financing. Any decline in the availability of mortgage financing may lead to a reduced demand for the homes we have already constructed, or intend to construct. Furthermore, the demand for homes in general, and the homes we intend to construct, may be affected by changes in federal and state income tax laws. Current federal, and many state, tax laws allow the deduction of, among other homeowner expenses, mortgage interest and property taxes against an individual’s taxable income. Any changes to the current tax laws which reduce or eliminate these deductions, or reduce or eliminate the exclusion of taxable gain from the sale of a principal residence, would likely lead to a greatly reduced demand for homes. This would lead to a materially adverse impact on the homebuilding business, and the fair value of those assets in general, and our revenues, cash flows, financial condition, and the return on our investment from those assets specifically.

* UCP has substantial indebtedness, which may exacerbate the adverse effect of any declines in UCP’s business, industry or the general economy and exposes UCP to the risk of default. UCP may be unable to service their indebtedness.

As of ~~March 31,~~September 30, 2016, UCP had approximately ~~$158.6~~$157.8 million of outstanding debt. UCP’s substantial outstanding indebtedness, and the limitations imposed on UCP by the instruments and agreements governing its outstanding indebtedness, could have significant adverse consequences, including the following:

UCP’s cash flow may be insufficient to meet its required principal and interest payments;

UCP may use a substantial portion of their cash flows to make principal and interest payments and UCP may be unable to obtain additional financing as needed or on favorable terms, which could, among other things, have a material adverse effect on their ability to complete our development pipeline, capitalize upon emerging acquisition opportunities, fund working capital or capital expenditures, or meet their other business needs;

UCP may be unable to refinance its indebtedness at maturity or the refinancing terms may be less favorable than the terms of their original indebtedness;

UCP may be forced to dispose of one or more of their properties, possibly on unfavorable terms or in violation of certain covenants to which UCP may be subject;

UCP may be required to maintain certain debt and coverage and other financial ratios at specified levels, which may limit their ability to obtain additional financing in the future, thereby reducing their financial flexibility to react to changes in their business;

UCP’s vulnerability to general adverse economic and industry conditions may be increased;

approximately ~~$79.5~~$78.2 million of UCP’s indebtedness bears interest at variable rates, which exposes it to increased interest expense in a rising interest rate environment;

UCP may be at a competitive disadvantage relative to its competitors that have less indebtedness;

UCP’s flexibility in planning for, or reacting to, changes in their business and the markets in which UCP operates may be limited; and

UCP may default on its indebtedness by failure to make required payments or to comply with certain covenants, which could result in an event of default entitling a creditor to declare all amounts owed to it to be due and payable, and possibly entitling other creditors (due to cross-default or cross-acceleration provisions) to accelerate the maturity of amounts owed to such other creditors or, if such indebtedness is secured, to foreclose on UCP’s assets that secure such obligation.

The occurrence of any one of these events could have a material adverse effect on our financial condition, liquidity, results of operations and/or business.

We may suffer uninsured losses or suffer material losses in excess of insurance limits.

We could suffer physical damage to any of our assets at one or more of our different businesses and liabilities resulting in losses that may not be fully recoverable by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered by our insurance policies or otherwise be subject to significant deductibles or limits. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in the affected asset(s) as well as anticipated future income from that asset. In addition, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles.

We may not receive all of the permitted water rights we expect from the water rights applications we have filed in Nevada and New Mexico.

We have filed certain water rights applications in Nevada and New Mexico. In Nevada this is primarily as part of the water teaming agreement with Lincoln County. We deploy the capital required to enable the filed applications to be converted into permitted water rights over time as and when we deem appropriate or as otherwise required. We only expend capital in those areas where our initial investigations lead us to believe that we can obtain a sufficient volume of water to provide an adequate economic return on the capital employed in the project. These capital expenditures largely consist of drilling and engineering costs for water production, costs of monitoring wells, legal and consulting costs for hearings with the State Engineer, and NEPA compliance costs. Until the State Engineer in the relevant state permits the water rights we are applying for, we cannot provide any assurance that we will be awarded all of the water that we expect based on the results of our drilling and our legal position and it may be a considerable period of time before we are able to ascertain the final volume of water rights, if any, that will be permitted by the State Engineers. Any significant reduction in the volume of water awarded to us from our original base expectation of the amount of water that may be permitted may result in the write down of capitalized costs which could adversely affect the return on our investment from those assets, our revenues, results of operations, and cash flows.

Variances in physical availability of water, along with environmental and legal restrictions and legal impediments, could impact profitability.

We value our water assets, in part, based upon the volume (as measured in acre-feet) of water we anticipate from water rights applications and our permitted water rights. The water and water rights held by us and the transferability of these rights to other uses, persons, and places of use are governed by the laws concerning water rights in the states of Arizona, Colorado, Nevada, and New Mexico. The volumes of water actually derived from the water rights applications or permitted rights may vary considerably based upon physical availability and may be further limited by applicable legal restrictions.

As a result, the volume of water anticipated from the water rights applications or permitted rights may not in every case represent a reliable, firm annual yield of water, but in some cases describe the face amount of the water right claims or management’s best estimate of such entitlement. Additionally, we may face legal restrictions on the sale or transfer of some of our water assets, which may affect their commercial value. If the volume of water yielded from our water rights applications is less than our expectations, or we are unable to transfer or sell our water assets, we may lose some or all of our anticipated returns, which may adversely affect our revenues, profitability and cash flows.

Purchasers of our real estate and water assets may default on their obligations to us and adversely affect our results of operations and cash flow.

In certain circumstances, we finance sales of real estate and water assets, and we secure such financing through deeds of trust on the property, which are only released once the financing has been fully paid off. Purchasers of our real estate and water assets may default on their financing obligations. Such defaults may have an adverse effect on our business, financial condition, and the results of operations and cash flows.

Our sale of water assets may be subject to environmental regulations which would impact our revenues, profitability, and cash flows.

The quality of the water assets we lease or sell may be subject to regulation by the United States Environmental Protection Agency acting pursuant to the United States Safe Drinking Water Act. While environmental regulations do not directly affect us, the regulations regarding the quality of water distributed affects our intended customers and may, therefore, depending on the quality of our water, impact the price and terms upon which we may in the future sell our water assets. If we need to reduce the price of our water assets in order to make a sale to our intended customers, our balance sheet, return on investment, results of operations and financial condition could suffer.

Our water asset sales may meet with political opposition in certain locations, thereby limiting our growth in these areas.

The water assets we hold and the transferability of these assets and rights to other uses, persons, or places of use are governed by the laws concerning water rights in the states of Arizona, Nevada, Colorado and New Mexico. Our sale of water assets is subject to the risks of delay associated with receiving all necessary regulatory approvals and permits. Additionally, the transfer of water resources from one use to another may affect the economic base or impact other issues of a community including development, and will, in some instances, be met with local opposition. Moreover, municipalities who will likely regulate the use of any water we might sell to them in order to manage growth, could create additional requirements that we must satisfy to sell and convey water assets.

If we are unable to effectively transfer, sell and convey water resources, our ability to monetize these assets will suffer and our return on investment, revenues and financial condition would decline.

If our businesses or investments otherwise fail or decline in value, our financial condition and the return on our investment could suffer.

Historically, we have acquired and invested in businesses and assets that we believed were undervalued or that would benefit from additional capital, restructuring of operations, strategic initiatives, or improved competitiveness through operational efficiencies. If any previously acquired business, investment or asset fails or its fair value declines, we could experience a material adverse effect on our business, financial condition, the results of operations and cash flows. If we are not successful managing our previous acquisitions and investments, our business, financial condition, results of operations and cash flows could be materially affected. Such business failures, declines in fair values, and/or failure to manage acquisitions or investments, could result in a negative return on equity. We could also lose part or all of our capital in these businesses and experience reductions in our net income, cash flows, assets and equity.

Future dispositions of our businesses, assets, operations and investments, if unsuccessful, could reduce the value of our common shares. Any future dispositions may result in significant changes in the composition of our assets and liabilities. Consequently, our financial condition, results of operations and the trading price of our common shares may be affected by factors different from those historically affecting our financial condition, results of operations and trading price at the present time.

We may need additional capital in the future to fund our business and financing may not be available on favorable terms, if at all, or without dilution to our shareholders.

We currently anticipate that our available capital resources and operating cash flows will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. However, we cannot provide any assurance that such resources will be sufficient to fund our business. We may raise additional funds through public or private debt, equity or hybrid securities financings, including, without limitation, through the issuance of securities. We currently have an effective shelf registration statement which allows us to sell up to $400 million of a variety of securities in one or more offerings in the public markets.

We may experience difficulty in raising necessary capital in view of the recent volatility in the capital markets and increases in the cost of finance. Increasingly stringent rating standards could make it more difficult for us to obtain financing. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing shareholders. Indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. The additional financing we may need may not be available to us, or on favorable terms. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations or otherwise execute our strategic plan would be significantly limited. In any such case, our business, operating results or financial condition could be materially adversely affected.

* Our ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if our Company undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in our equity ownership over a three year period), the ability to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset our post-change income may be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership. As of ~~March 31,~~September 30, 2016, we had federal and state net operating loss carryforwards of approximately ~~$139.3~~$139.6 million and ~~$190.3~~$193.4 million, respectively, which, depending on our value at the time of any ownership changes, could be limited.

* We may not be able to retain key management personnel we need to succeed, which could adversely affect our ability to successfully operate our businesses.

To run our day-to-day operations and to successfully manage our businesses we must, among other things, continue to ~~attract and~~ retain key management. We rely on the services of a small team of key executive officers. If they depart, it could have a significant adverse effect upon our business. ~~Mr. Hart, our CEO, is key to the implementation of our strategic focus, and our ability to successfully execute our current strategy is dependent upon our ability to retain his services.~~ Also, increased competition for skilled management and staff employees in our businesses could cause us to experience significant increases in operating costs and reduced profitability.

Because our operations are diverse, analysts and investors may not be able to evaluate us adequately, which may negatively influence the price of our stock.

We are a diversified holding company with significant operations in different business segments. We own businesses that are unique, complex in nature, and difficult to understand. In particular, the water resource business is a developing industry in the United States with very little historical and comparable data, very complex valuation issues and a limited following of analysts. Because we are complex, analysts and investors may not be able to adequately evaluate our operations and enterprise as a going concern. This could cause analysts and investors to make inaccurate evaluations of our stock, or to overlook PICO in general. As a result, the trading volume and price of our stock could suffer and may be subject to excessive volatility.

Fluctuations in the market price of our common stock may affect your ability to sell your shares.

The trading price of our common stock has historically been, and we expect will continue to be, subject to fluctuations. The market price of our common stock may be significantly impacted by:

quarterly variations in financial performance and condition of our various businesses;

shortfalls in revenue or earnings from estimates forecast by securities analysts or others;

changes in estimates by such analysts;

the ability to monetize our assets, including assets related to our water resource and real estate businesses, for an adequate economic return;

our competitors’ announcements of extraordinary events such as acquisitions;

litigation; and

general economic conditions and other matters described herein.

Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earnings from sold operations, one time transactions, and impairment losses. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our common stock. Such fluctuations in the market price of our common stock could affect the value of your investment and your ability to sell your shares.

Litigation may harm our business or otherwise distract our management.

Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For example, lawsuits by employees, shareholders or customers could be very costly and substantially disrupt our business. Additionally, from time to time we or our subsidiaries will have disputes with companies or individuals which may result in litigation that could necessitate our management’s attention and require us to expend our resources. We may be unable to accurately assess our level of exposure to specific litigation and we cannot provide any assurance that we will always be able to resolve such disputes out of court or on terms favorable to us. We may be forced to resolve litigation in a manner not favorable to us, and such resolution could have a material adverse impact on our consolidated financial condition or results of operations.

* We ~~were~~have been, and continue to be, the subject of stockholder activism efforts that could ~~resurface in the future and~~ cause a material disruption to our business.

Certain investors ~~had~~have taken steps to involve themselves in the governance and strategic direction of our ~~company~~Company due to governance and strategic-related disagreements with us. For example, certain shareholders sought to solicit shareholder consents to call a special meeting of our shareholders to, among other things, remove directors. In addition, we had received communications from other investors regarding the governance and strategic direction of our company. While we have formally settled with certain of such activists, other investors could take steps to involve themselves in the governance and strategic direction of our ~~Company, which~~Company. For example, we have received communications from River Road Asset Management, LLC regarding various governance and strategic matters. Such stockholder activism efforts could result in substantial costs and diversion of management’s attention and resources, harming our business and adversely affecting the market price of our common stock.

Our governing documents could prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.

Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of directors. For example, our bylaws require advance notice for stockholder proposals and nominations for election to our board of directors. We are also subject to the provisions of Section 1203 of the California General Corporation Law, which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction. All or any of these factors could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

If equity analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Our business could be negatively impacted by cyber security threats.

In the ordinary course of our business, we use our data centers and our networks to store and access our proprietary business information. We face various cyber security threats, including cyber security attacks to our information technology infrastructure and attempts by others to gain access to our proprietary or sensitive information. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cyber security incidents. The result of these incidents could include disrupted operations, lost opportunities, misstated financial data, liability for stolen assets or information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage. Any remedial costs or other liabilities related to cyber security incidents may not be fully insured or indemnified by other means.

THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF HISTORIC FINANCIAL STATEMENTS, INCLUDING RESULTS OF OPERATIONS AND CASH FLOWS AND BALANCES, DIFFICULT OR NOT MEANINGFUL.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

See Note 6 “Debt” in Notes to Condensed Consolidated Financial Statements for a discussion of working capital restrictions and other limitations upon the payment of dividends, which information is incorporated by reference into this Item 2 of Part II.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None.

Item 6. Exhibits



Exhibit Number			Description
2.1			Asset Purchase Agreement dated July 13, 2015, by and between PICO Northstar Hallock, LLC and CHS Hallock, LLC. ⁽¹⁾
3.1			Amended and Restated Articles of Incorporation of PICO Holdings, Inc. ⁽²⁾
3.2			Certificate of Amendment of Amended and Restated ~~By-laws~~Articles of Incorporation of PICO Holdings, Inc.⁽⁵⁾
3.3			Amended and Restated By laws of PICO Holdings, Inc.⁽³⁾
3.4			Amendment to Amended and Restated Bylaws of PICO Holdings, Inc. ⁽⁵⁾
4.1			Indenture, dated October 21, 2014, among UCP, Inc., the guarantors named therein, and Wilmington Trust, National Association, as trustee. ⁽⁴⁾
~~10.1~~			~~Amended and Restated Employment Agreement, dated March 11, 2016, by and between PICO Holdings, Inc. and John R. Hart.~~ ⁽⁵⁾
~~10.2~~			~~Amended and Restated Severance Agreement, dated March 11, 2016, by and between PICO Holdings, Inc. and Maxim C.W. Webb.~~ ⁽⁵⁾
~~10.3~~			~~Amended and Restated Severance Agreement, dated March 11, 2016, by and between PICO Holdings, Inc. and John T. Perri.~~ ⁽⁵⁾
~~10.4~~			~~PICO Holdings, Inc. Executive Bonus Plan.~~ ⁽⁵⁾
~~10.5~~			Settlement Agreement with Central Square Management LLC, Central Square Capital LP, Central Square Capital Master LP, Central Square GP LLC, Central Square GP II LLC, and Kelly Cardwell dated March 18, 2016. ⁽⁶⁾
~~10.6~~			~~Settlement Agreement with Leder Holdings, LLC, LH Brokerage, LLC, Leder Holdings Opportunity Fund LLC and Sean M. Leder dated March 22, 2016.~~ ⁽⁷⁾
31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document



⁽¹⁾	Incorporated by reference to Form 8-K filed with the SEC on July 17, 2015.
⁽²⁾	Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 7, 2007.
⁽³⁾	Incorporated by reference to Form 8-K filed with the SEC on May 19, 2009.
⁽⁴⁾	Incorporated by reference to Form 8-K filed with the SEC on October 24, 2014.
⁽⁵⁾	Incorporated by reference to Form ~~10-K filed with the SEC on March 14, 2016.~~
⁽⁶⁾	~~Incorporated by reference to Form~~ 8-K filed with the SEC on ~~March 18, 2016.~~
⁽⁷⁾	~~Incorporated by reference to Form 8-K filed with the SEC on March 22,~~July 13, 2016.

PICO HOLDINGS, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the United States Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		PICO HOLDINGS, INC.


Date:	~~May 6,~~November 1, 2016	By: /s/ ~~Maxim C. W. Webb~~John T. Perri
		~~Maxim C. W. Webb~~John T. Perri
		~~Executive Vice President,~~ Chief Financial Officer ~~Treasurer, and Secretary~~
		(Principal Financial Officer and Authorized Signatory)

4448



Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨



		Page No.

Part I: Financial Information

Item 1:	Condensed Consolidated Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2016 and December 31, 2015	1

	Condensed Consolidated Statements of Operations and Comprehensive Income or Loss for the Three and Nine Months Ended ~~March 31,~~September 30, 2016 and 2015	2

	Condensed Consolidated Statements of Equity for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2016 and 2015	4

	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2016 and 2015	5

	Notes to the Condensed Consolidated Financial Statements	6

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921

Item 3:	Quantitative and Qualitative Disclosure About Market Risk	3135

Item 4:	Controls and Procedures	3236

Part II: Other Information

Item 1:	Legal Proceedings	3236

Item 1A:	Risk Factors	3236

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	4145

Item 3:	Defaults Upon Senior Securities	4146

Item 4:	Mine Safety Disclosures	4146

Item 5:	Other Information	4246

Item 6:	Exhibits	4347

Signatures		4448

PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets - Unaudited (In thousands, except par value)	PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets - Unaudited (In thousands, except par value)						PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets - Unaudited (In thousands, except par value)

	March 31, 2016			December 31, 2015			September 30, 2016			December 31, 2015
Assets
Cash and cash equivalents	$	39,952		$	56,462		$	37,953		$	56,462
Investments ($22,942 and $22,590 measured at fair value at March 31, 2016 and December 31, 2015, respectively)	26,424			26,072
Investments ($24,870 and $22,590 measured at fair value at September 30, 2016 and December 31, 2015, respectively)							28,352			26,072
Real estate and tangible water assets, net	434,619			424,235			439,401			424,235
Intangible assets, net	127,228			126,533			126,919			126,533
Other assets	19,234			19,990			16,996			19,990
Assets held-for-sale	6,577			8,793			10,900			8,793
Total assets	$	654,034		$	662,085		$	660,521		$	662,085

Liabilities and equity
Debt	$	158,584		$	155,966		$	157,785		$	155,966
Accounts payable and accrued expenses	29,634			34,458			36,553			34,458
Deferred compensation	25,683			25,493			26,744			25,493
Other liabilities	12,185			11,556			13,193			11,556
Liabilities held-for-sale	276			608			903			608
Total liabilities	226,362			228,081			235,178			228,081

Commitments and contingencies

Common stock, $0.001 par value; authorized 100,000 shares, 23,116 issued and 23,038 outstanding at March 31, 2016 and December 31, 2015	23			23
Common stock, $0.001 par value; authorized 100,000 shares, 23,125 issued and 23,070 outstanding at September 30, 2016, and 23,116 issued and 23,038 outstanding at December 31, 2015							23			23
Additional paid-in capital	494,637			494,207			493,744			494,207
Accumulated deficit	(158,167		)	(151,366		)	(164,466		)	(151,366		)
Accumulated other comprehensive income	5,010			4,961			6,502			4,961
Treasury stock, at cost (common shares: 78 at March 31, 2016 and December 31, 2015)	(1,413		)	(1,413		)
Treasury stock, at cost (common shares: 55 and 78 at September 30, 2016 and December 31, 2015, respectively)							(927		)	(1,413		)
Total PICO Holdings, Inc. shareholders’ equity	340,090			346,412			334,876			346,412
Noncontrolling interest in subsidiaries	87,582			87,592			90,467			87,592
Total equity	427,672			434,004			425,343			434,004
Total liabilities and equity	$	654,034		$	662,085		$	660,521		$	662,085

PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited (In thousands, except per share data)	PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited (In thousands, except per share data)						PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited (In thousands, except per share data)

	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2016			2015
Revenues and other income:
Sale of real estate and water assets	$	68,323		$	43,610		$	95,816		$	77,044		$	247,009		$	175,718
Impairment loss on investment in unconsolidated affiliate																(20,696		)
Other income, net	714			1,714			892			1,047			2,445			3,501
Total revenues and other income	69,037			45,324			96,708			78,091			249,454			158,523

Cost of sales and expenses:
Cost of real estate and water assets sold	56,566			36,333			78,977			60,626			202,157			142,566
General, administrative, and other	12,323			12,296			10,098			10,168			34,867			33,661
Sales and marketing	4,429			4,198			4,963			4,818			14,061			13,373
Impairment loss on intangible and long-lived assets				1,089			4,615			727			7,012			2,090
Depreciation and amortization	514			491			302			653			1,193			1,649
Total cost of sales and expenses	73,832			54,407			98,955			76,992			259,290			193,339
Loss from continuing operations before income taxes and equity in loss of unconsolidated affiliates	(4,795		)	(9,083		)
Income (loss) from continuing operations before income taxes and equity in loss of unconsolidated affiliates							(2,247		)	1,099			(9,836		)	(34,816		)
Benefit (provision) for federal and state income taxes	(158		)	239			406			(22		)	372			2,949
Equity in loss of unconsolidated affiliate				(483		)				(1,942		)				(3,422		)
Loss from continuing operations	(4,953		)	(9,327		)	(1,841		)	(865		)	(9,464		)	(35,289		)
Loss from discontinued agribusiness operations, net of tax	(40		)	(10,482		)	(18		)	(10,225		)	(102		)	(29,520		)
Loss on sale of discontinued agribusiness operations, net of tax	(1,849		)
Income (loss) on sale of discontinued agribusiness operations, net of tax							2			(1,348		)	(1,858		)	(18,251		)
Net loss from discontinued agribusiness operations, net of tax	(1,889		)	(10,482		)	(16		)	(11,573		)	(1,960		)	(47,771		)
Net loss	(6,842		)	(19,809		)	(1,857		)	(12,438		)	(11,424		)	(83,060		)
Net loss attributable to noncontrolling interests	41			2,984
Net (income) loss attributable to noncontrolling interests							(1,043		)	(1,654		)	(1,676		)	2,373
Net loss attributable to PICO Holdings, Inc.	$	(6,801	)	$	(16,825	)	$	(2,900	)	$	(14,092	)	$	(13,100	)	$	(80,687	)

PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited, Continued (In thousands, except per share data)	PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited, Continued (In thousands, except per share data)						PICO Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income or Loss - Unaudited, Continued (In thousands, except per share data)

	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2016			2015
Other comprehensive loss:
Net loss	$	(6,842	)	$	(19,809	)	$	(1,857	)	$	(12,438	)	$	(11,424	)	$	(83,060	)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities, net of deferred income tax and reclassification adjustments	40			(51		)
Unrealized gain on securities, net of deferred income tax and reclassification adjustments							954			12			1,484			295
Foreign currency translation	9			9			31			(48		)	57			(85		)
Total other comprehensive income (loss), net of tax	49			(42		)	985			(36		)	1,541			210
Comprehensive loss	(6,793		)	(19,851		)	(872		)	(12,474		)	(9,883		)	(82,850		)
Comprehensive loss attributable to noncontrolling interests	41			2,984
Comprehensive (income) loss attributable to noncontrolling interests							(1,043		)	(1,654		)	(1,676		)	2,373
Comprehensive loss attributable to PICO Holdings, Inc.	$	(6,752	)	$	(16,867	)	$	(1,915	)	$	(14,128	)	$	(11,559	)	$	(80,477	)

Net loss per common share – basic and diluted:
Loss from continuing operations	$	(0.21	)	$	(0.32	)	$	(0.13	)	$	(0.11	)	$	(0.48	)	$	(1.51	)
Loss from discontinued agribusiness operations	(0.08		)	(0.41		)				(0.50		)	(0.09		)	(2.00		)
Net loss per common share – basic and diluted	$	(0.29	)	$	(0.73	)	$	(0.13	)	$	(0.61	)	$	(0.57	)	$	(3.51	)
Weighted average shares outstanding	23,038			23,005			23,068			23,017			23,049			23,010



California (State or other jurisdiction of incorporation)	94-2723335 (IRS Employer Identification No.)



	Shares of Common Stock Issued	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Shares of Treasury Stock		Treasury Stock, at Cost			Noncontrolling Interest			Total
Beginning balance, January 1, 2016	23,116	$	23	$	494,207		$	(151,366	)	$	4,961	78		$	(1,413	)	$	87,592		$	434,004
Stock-based compensation expense				1,730													320			2,050
Exercise of restricted stock units	9																			—
Withholding taxes paid on vested restricted stock units at UCP, Inc.				(26		)											(20		)	(46		)
Changes in ownership of noncontrolling interest				(1,898		)											1,899			1
Acquisition of interests held by noncontrolling owners																	(1,000		)	(1,000		)
Distribution of treasury stock to deferred compensation plan participants				(269		)						(23	)	486						217
Net loss							(13,100		)								1,676			(11,424		)
Unrealized gain on investments, net of deferred income tax of $799 and reclassification adjustments of $278										1,484										1,484
Foreign currency translation										57										57
Ending balance, September 30, 2016	23,125	$	23	$	493,744		$	(164,466	)	$	6,502	55		$	(927	)	$	90,467		$	425,343



	Shares of Common Stock Issued	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Shares of Treasury Stock	Treasury Stock, at Cost			Noncontrolling Interest			Total
Beginning balance, January 1, 2016	23,116	$	23	$	494,207		$	(151,366	)	$	4,961	78	$	(1,413	)	$	87,592		$	434,004
Stock-based compensation expense				455												51			506
Withholding taxes paid on vested restricted stock units at UCP, Inc.				(25		)										(20		)	(45		)
Net loss							(6,801		)							(41		)	(6,842		)
Unrealized gain on investments, net of deferred income tax of $22 and reclassification adjustments of $5										40									40
Foreign currency translation										9									9
Ending balance, March 31, 2016	23,116	$	23	$	494,637		$	(158,167	)	$	5,010	78	$	(1,413	)	$	87,582		$	427,672



		Page No.
1. Basis of Presentation and Summary of Significant Accounting Policies		6
2. Real Estate and Tangible Water Assets		87
3. Intangible Assets and Goodwill		8
4. Investments		9
5. Disclosures About Fair Value		11
6. Debt		14
7. Commitments and Contingencies		15
8. Accumulated Other Comprehensive Income		1516
9. Related-Party Transactions		16
10. Segment Reporting		17
11. Discontinued Agribusiness Operations and Other Assets Held for Sale		18
12. Subsequent Events		20


March 31, 2016	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value
September 30, 2016										Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value
Debt securities: corporate bonds	$	4,454	$	71	$	(116	)	$	4,409	$	4,331	$	91	$	(22	)	$	4,400
Marketable equity securities	10,633		8,023		(123		)	18,533		10,463		10,052		(45		)	20,470
Total available-for-sale investments	$	15,087	$	8,094	$	(239	)	$	22,942	$	14,794	$	10,143	$	(67	)	$	24,870


	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2016		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2016
Assets
Available-for-sale equity securities⁽¹⁾	$	9,399	$	9,134			$	18,533	$	12,611	$	7,859			$	20,470
Available-for-sale debt securities⁽¹⁾	4,409						4,409		4,400						4,400
Total	$	13,808	$	9,134			$	22,942	$	17,011	$	7,859			$	24,870
Liabilities
Contingent Consideration ⁽²⁾					$	2,715	$	2,715
Contingent consideration ⁽²⁾													$	307	$	307



Asset Description	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		Total Loss
Goodwill ⁽¹⁾			$	—	$	4,223
Real estate and development costs ⁽²⁾			$	5,645	$	2,397
Real estate and development costs ⁽³⁾			$	1,066	$	191
Oil and gas wells ⁽⁴⁾			$	—	$	201


Year ended December 31,
2016	$	1,222	$	372
2017	1,495		1,230
2018	1,343		936
2019	584		413
2020	213		213
Thereafter	18		18
Total	$	4,875	$	3,182



•	Water Resource and Water Storage Operations;
•	Real Estate Operations;
•	Corporate; and
•	Discontinued Agribusiness Operations.



•	Vidler Water Company, Inc. (“Vidler”) which acquires and develops water resources and water storage operations in the southwestern United States, with assets and operations in Nevada, Arizona, Colorado and New Mexico; and
•	UCP, Inc. (“UCP”), a 56.9% owned subsidiary which is a homebuilder and land developer in markets located in California, Washington State, North Carolina, South Carolina and Tennessee.


	March 31, 2016				December 31, 2015
	Carrying Value		Voting Interest		Carrying Value		Voting Interest		Carrying Value		Voting Interest
Investment in Synthonics	$	2,170	18.3	%	$	2,170	18.3	%	$	2,170	18.2	%
Investment in Mindjet	1,312		19.3	%	1,312		19.3	%	1,312		19.3	%
Total	$	3,482			$	3,482			$	3,482


Thousands of dollars	Three Months Ended March 31,									Three Months Ended September 30,								Nine Months Ended September 30,
	2016			2015			Change			2016			2015		Change			2016			2015			Change
Revenue and other income:
Sale of real estate and water assets	$	98		$	87		$	11		$	476		$	3,373	$	(2,897	)	$	607		$	3,797		$	(3,190	)
Other	63			123			(60		)	77			95		(18		)	206			394			(188		)
Total revenue and other income	161			210			(49		)	553			3,468		(2,915		)	813			4,191			(3,378		)

Cost of sales and expenses:
Cost of real estate and water assets sold	45			49			(4		)	252			946		(694		)	316			1,197			(881		)
Depreciation and amortization	203			262			(59		)	37			256		(219		)	316			781			(465		)
Overhead expense	1,281			1,174			107			1,040			1,079		(39		)	3,345			3,339			6
Project expense	325			217			108			253			353		(100		)	1,099			781			318
Segment total expenses	1,854			1,702			152			1,582			2,634		(1,052		)	5,076			6,098			(1,022		)
Loss before income taxes	$	(1,693	)	$	(1,492	)	$	(201	)	$	(1,029	)	$	834	$	(1,863	)	$	(4,263	)	$	(1,907	)	$	(2,356	)


Thousands of dollars	Three Months Ended March 31,									Three Months Ended September 30,							Nine Months Ended September 30,
	2016			2015			Change			2016		2015		Change			2016		2015			Change
Revenue and other income:
Sale of real estate	$	68,225		$	43,523		$	24,702		$	95,340	$	73,672	$	21,668		$	246,403	$	171,921		$	74,482
Other	47			157			(110		)	227		105		122			328		322			6
Total revenue and other income	68,272			43,680			24,592			95,567		73,777		21,790			246,731		172,243			74,488

Cost of sales and expenses:
Cost of real estate sold	56,521			36,284			20,237			78,725		59,680		19,045			201,841		141,369			60,472
Impairment loss on intangible and long-lived assets										4,414				4,414			6,811		274			6,537
General, administrative, and other	7,398			6,979			419			4,699		5,566		(867		)	19,418		19,016			402
Sales and marketing	4,428			4,196			232			4,853		4,692		161			13,948		13,245			703
Segment total expenses	68,347			47,459			20,888			92,691		69,938		22,753			242,018		173,904			68,114
Loss before income taxes	$	(75	)	$	(3,779	)	$	3,704
Income (loss) before income taxes										$	2,876	$	3,839	$	(963	)	$	4,713	$	(1,661	)	$	6,374


	As of March 31, 2016			As of September 30, 2016
	Owned	Controlled⁽¹⁾	Total	Owned	Controlled⁽¹⁾	Total
West	3,761	407	4,168	3,879	303	4,182
Southeast	861	320	1,181	1,041	820	1,861
Total	4,622	727	5,349	4,920	1,123	6,043



•	~~certain costs related to intangible water rights in the Tule Desert groundwater basin and the Dry Lake Valley (both part of the Lincoln County, Nevada agreement); and~~
•	~~certain costs for water resource development in Nevada and New Mexico.~~



	As of December 31, 2015
	Owned	Controlled⁽¹⁾	Total
West	3,869	415	4,284
Southeast	882	712	1,594
Total	4,751	1,127	5,878