Market Drivers
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Market forces are creating opportunities and significant potential in our core operating segments.
Water. The Western U.S. is suffering from well-documented water scarcity, and experts say that the world (particularly the Southwest U.S.) could see an extreme water crisis by 2025. Key problems in water resources stem from limited public access to new or additional sources of economic water, a limited clean water supply in major metropolitan regions, water storage challenges, and policies influencing resource utilization. Population growth relative to the decreasing availability of developable land and finite water supplies is impacting supply and demand, and access to water is a gating factor in economic development. As a holder of strategic water resources, we are well positioned to benefit from these trends.
Our wholly-owned subsidiary, Vidler Water Company, has established prominence in the market for new water supply development in the arid Southwest through operational expertise, "first-look" deal sourcing, a successful track record of completing transactions, strong sources of capital, and a respected reputation.
Land. Due to the historic decline in housing, combined with excessive borrowing by home builders and land developers, in select circumstances, we are presently acquiring developable land - and finished lots in particular - at attractive valuations - in some in instances, at discounts to replacement cost. Through our subsidiary, Union Community Partners, PICO Holdings provides liquidity to home builders, land developers and financial institutions at prices that are consistent with our stringent internal rate of return requirements.
Economic water.
Vidler has focused its efforts on those areas that have immediate and long term water needs (i.e., important current and significant future water imbalances) and on those projects that provide the most economic water supplies and, therefore, the most efficient use of our capital. Vidler is able to access these opportunities due in part to our proven track record of development along with strong, supportive relationships with those constituencies and communities that may be impacted.
Supply.
Currently, the majority of the water supply for the arid Southwest comes from the Colorado River. The balance is provided by other surface rights, such as rivers and lakes, groundwater (that is, water pumped from underground aquifers), and water previously stored in reservoirs or aquifers. A prolonged drought and rapid population growth in the past few years have left the Southwest with little available excess water supply. A vivid illustration of the effect of this situation is Lake Mead, a reservoir for Colorado River water situated in both Nevada and Arizona. Lake Mead supplies 90% of southern Nevada's water. Since 2000, the reservoir has dropped 110 feet, partly because the annual flow of Colorado River water into the lake since 2001 has been below its annual average in all but one year. In September 2007, the lake was at 49% capacity, potentially making the Las Vegas Valley's primary water intake inoperable.
In August 2005, the U.S. Department of the Interior published a study titled "Water 2025: Preventing Crises and Conflict in the West." The study included a map of the western and southwestern states and highlighted the potential water supply crises by 2025. Various areas were designated as having moderate, substantial, or highly likely water conflict potential (that is, areas where existing supplies are not adequate to meet water demands for people, agricultural use, and for the environment). Areas identified as having a highly likely or substantial conflict potential included western Nevada, southern Nevada, and the metropolitan Phoenix to Tucson region where current and future demand is outpacing historical supply. It is, therefore, no coincidence that starting over a decade ago, Vidler Water has concentrated our acquisition and development efforts on water assets in these water-short regions.
Population.
The long-term future demand for our water assets is driven by population growth relative to currently available economic water supplies in the southwestern United States.
The population growth rate in the Southwest has consistently been higher than the national rate for the past several years. According to the U.S. Census Bureau, in the six-and-one-quarter year period from April 1, 2000 to July 1, 2006, the population of Nevada grew by a total of 24.9% (497,272 people), Arizona grew by 20.2% (1,035,686 people), Colorado grew by 10.5% (452,116 people), Idaho grew by 13.3% (172,512 people), and California grew by 7.6% (2,585,901 people). This compares to a total national growth rate of 6.4% (17,976,578 people) over the same period.
The rate of population growth in the southwest slowed in 2007, but still appears to be robust and remains in excess of the national growth rate. According to the Census Bureau's annual estimate of state population changes for the years ended July 1, 2007 and 2006, Nevada's annual growth rate was 2.9% (2006: 3.5%), Arizona 2.8% (2006: 3.6%), Colorado 2.0% (2006: 1.9%), Idaho 2.4% (2006: 2.6%) and California 0.8% (2006: 0.8%). These statistics compare to the national total growth rate of 1% (2006: 1%)
In 2006, Nevada, the nation's fastest-growing state, published a study of its estimated population projection from 2006 to 2026. The Nevada State Demographer's Office estimates that Nevada will grow by over 73% (1,851,652 people) in that 20 year period. Of that total, over 1,500,000 people are expected to move to Clark County, which includes metropolitan Las Vegas, and over 250,000 people are expected to move to western Nevada including Carson City, Washoe County (where Reno is situated), and Lyon County.
Availability.
The development of our water assets is a long-term process. It requires significant capital and expertise. A total project - from acquisition, developing, permitting and sale - may take as long as five to seven years. Typically, in the regions in which we operate, new housing developments require an assured water supply (that is, confirmed acquisitions of water supplies for at least one hundred years) before a permit for the development will be issued. We believe that the long-term demand for our assets - and their economic value - is strongly supported by estimated population growth in excess of existing water supplies.
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