Five Point Holdings, LLC — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited; amounts below are in millions unless stated otherwise. Five Point develops master-planned communities in California, including Newhall Ranch, Candlestick Point and The San Francisco Shipyard, and Great Park Neighborhoods. Great Park and Gateway Commercial are unconsolidated ventures accounted for under the equity method.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $13.0 | $11.6 | $41.0 | $117.2 |
| Net loss | $(21.9) | $(10.3) | $(47.5) | $(57.7) |
| Net loss attributable to Five Point | $(10.0) | $(4.5) | $(20.4) | $(22.1) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(239.7) | $(29.2) |
- Q3 diluted loss per Class A share was $0.15, compared with $0.07 a year earlier; nine-month diluted loss per share was $0.33 versus $0.45.
- Cash and cash equivalents were $594.9 at September 30, down from $848.5 at December 31, 2017. Including restricted cash, period-end cash was $596.3.
- Consolidated notes payable, net, totaled $556.7, versus $560.6 at year-end. This included $500.0 of 7.875% senior notes due 2025 and a $65.1 Macerich note; the $5.0 settlement note was repaid in April. Estimated fair value of notes payable was $571.3.
- The $125.0 revolving credit facility was undrawn; $1.0 of letters of credit reduced stated available capacity to $124.0. The filing reports no material off-balance-sheet arrangements.
- Total assets were $2,958.9, including $1,628.1 of inventories and $542.9 of investments in unconsolidated entities. Total liabilities were $1,089.9, including a $168.0 tax receivable agreement liability.
- No income tax benefit was recorded on the losses, as valuation allowances offset the deferred tax benefits.
Material changes and drivers
- Nine-month revenue fell 65% year over year, principally because 2017 included a $91.4 related-party San Francisco land sale. The comparison also reflects large Great Park homesite sales in 2017 reported in segment results; Great Park is not consolidated.
- Consolidated equity earnings from unconsolidated entities shifted from $22.8 of earnings in Q3 2017 to a $4.0 loss in Q3 2018, mainly reflecting Great Park land sales in the prior-year quarter and none in Q3 2018. For the nine-month periods, equity earnings declined to $1.4 from $17.6.
- Operating cash use increased to $239.7 for the nine months, reflecting higher land-development spending at Newhall and the absence of the prior-year $91.2 net cash proceeds from the San Francisco land sale. The filing also cites $18.9 of interest paid on senior notes.
- SG&A declined to $83.8 for the nine months from $92.6, primarily due to lower Newhall expenses. Management-services costs increased to $20.5 from $7.9, largely due to amortization of the Great Park management-agreement intangible asset.
- Five Point adopted ASC 606 in 2018. It recognized certain estimated variable management fees over time and variable land-sale consideration at the sale date; prior-year comparisons were not recast. Adoption increased nine-month net income by $6.3 versus the amounts that would have been reported without ASC 606, while changing the timing and classification of revenue and assets.
Outlook, risks and contingencies
- Management expects to fund at least the next 12 months of cash needs using available cash and management-fee collections. It expects Newhall land deliveries to begin in late 2019; Candlestick Point and The San Francisco Shipyard are not expected to provide significant liquidity within 12 months. Management said it expects capital to fund planned horizontal development for several years, but may need additional financing if costs rise or plans change.
- At Newhall Ranch, the company continued development at Mission Village, approved for up to 4,055 homesites and about 1.6 million square feet of commercial space. Overall, Newhall Ranch is planned for approximately 21,500 homesites.
- At Candlestick Point, the company is evaluating alternatives to the planned retail project given changing retail conditions. The Retail Project Property had not been conveyed to the Mall Venture by September 30, 2018; failure to meet specified milestones could allow Macerich to terminate the venture and demand repayment of the $65.1 note plus certain fees. The related development plan and potential impact remained uncertain.
- Transfer of remaining San Francisco Shipyard land depends on the Navy’s environmental review. Allegations concerning a Navy contractor’s sampling work have prompted additional testing and could delay transfers or development. The company also faces related contamination and disclosure lawsuits; it said outcomes could not be predicted.
- Two non-settling petitioners’ challenge to Los Angeles County’s reapproval of Newhall projects remained pending after a September 2018 hearing; the company could not predict the outcome. Other previously described Newhall appeals had concluded without further appeal.
- The Newhall settlement liability was $36.5; remaining maximum monetary payments under the guaranty were estimated at $43.3, with the final payment due in 2026. Outstanding performance bonds were $73.5, San Francisco Venture guarantees for infrastructure and park obligations had a $197.8 maximum, and letters of credit totaled $2.4.
- Interest-rate sensitivity: $65.1 of consolidated debt bore floating rates; a 100-basis-point change would affect annual interest expense by approximately $0.7. The company had no derivative hedges.
Important facts for investors to verify
- Whether Newhall’s planned late-2019 homesite deliveries remain on schedule and whether development spending stays within available liquidity.
- How ASC 606 estimates for Great Park incentive compensation and land-sale variable consideration develop; these depend on assumptions about sales pace, pricing, costs and market conditions.
- Progress on the Candlestick retail-site alternatives, milestone obligations, and the repayment or termination exposure associated with the Macerich note.
- Timing and results of Navy resampling and land transfers at the Shipyard, and developments in the related lawsuits and Newhall challenge.
- Cash burn, land-sale timing, remaining credit-facility availability, and any changes to debt, guarantees, bonds or the tax receivable agreement liability.