Business context and reporting period
Five Point Holdings, LLC filed an annual report for the fiscal year ended December 31, 2017. It develops large, mixed-use communities in California: Newhall Ranch, The San Francisco Shipyard and Candlestick Point, and Great Park Neighborhoods. Its primary business is preparing and selling residential and commercial land; it also earns management fees and has begun holding income-producing commercial property. The filing includes fourth-quarter data but reports principally on the full year.
Comparability with 2016 is limited: Five Point consolidated the San Francisco Venture and management company and acquired its Great Park investment on May 2, 2016, so 2016 includes only eight months of those operations. Great Park and the Gateway Commercial Venture are accounted for using the equity method; some segment figures therefore include venture results not included in consolidated revenue or assets.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $139.4 million | $39.4 million |
| Operating costs and expenses | $229.2 million | $142.5 million |
| Income (loss) before tax | $24.2 million | $(104.5) million |
| Net income (loss) | $24.2 million | $(96.6) million |
| Net income (loss) attributable to Five Point | $73.2 million | $(33.3) million |
| Basic / diluted Class A EPS | $1.33 / $0.18 | $(0.89) / $(0.89) |
| Cash from operating activities | $(58.1) million | $(124.6) million |
| Cash and cash equivalents at year-end | $848.5 million | $62.3 million |
| Debt carrying value at year-end | $560.6 million | $69.4 million |
Revenue rose mainly because of a San Francisco land sale to a related party and increased management-services revenue. The 2017 result included $105.6 million of other income from reducing the tax receivable agreement (TRA) payable, primarily due to the Tax Act’s corporate-rate reduction. Fourth-quarter revenue was $22.3 million; fourth-quarter net income attributable to Five Point was $95.3 million, including that TRA adjustment. The reported attributable income and EPS should therefore not be read as recurring operating performance. Consolidated costs exceeded revenue; the filing does not present a single consolidated operating margin that would be meaningful across its land-sale, management, and property activities.
Operating cash use improved year over year, partly reflecting $91.4 million of gross proceeds from the San Francisco land sale, while inventory and development spending remained significant. Investing activities used $55.9 million, including $106.5 million contributed to the Gateway Commercial Venture. Financing activities provided $900.2 million, principally from the IPO/private placement and $500 million of senior notes. The company said available cash and expected management-fee collections should meet cash needs for at least the next 12 months, while further capital may be needed to carry out its longer-term development plan.
The operating company issued $500 million of unsecured 7.875% senior notes due 2025. The revolving credit facility was increased to $125 million; no loans were drawn at year-end, and approximately $124 million was available after letters of credit. The company also had $102.7 million of related-party EB-5 reimbursement obligations, with principal payments due in 2019 and 2020, and a $65.1 million Macerich note whose repayment depends on the outcome of the mall venture. The Gateway Commercial Venture had $286.8 million of debt on its balance sheet; Five Point owns 75% but accounts for the venture under the equity method and provided specified, limited guaranties. No distributions on Five Point common shares had been declared or paid.
Material changes versus the prior comparable period
- Revenue increased 254% to $139.4 million, but the comparison is affected by the partial-year inclusion of acquired operations in 2016 and by the 2017 related-party land sale.
- The company completed its May 2017 IPO, raising $319.7 million net of underwriting discounts, and a concurrent $100 million private placement with a Lennar affiliate.
- In August 2017, a venture in which Five Point holds a 75% interest acquired the approximately $443 million Five Point Gateway Campus. Broadcom leases approximately 660,000 square feet under a 20-year triple-net lease.
- In November 2017, the company issued the $500 million senior notes, substantially increasing reported debt.
- Great Park recognized substantial land-sale activity: its venture closed sales for 1,007 homesites in 2017. The venture’s results are not consolidated as revenue in Five Point’s financial statements.
- Five Point commenced development at Newhall Ranch in October 2017. It also reached a settlement with several Newhall environmental and Native American petitioners, recording a $50.7 million liability for settlement obligations.
Outlook, risks, contingencies, and unusual items
Management expects to fund near-term needs with cash on hand and management-fee collections, and expects to have capital for planned horizontal development for several years. Longer-term development is dependent on land-sale cash flows, public financing and potential additional debt or equity financing; availability and terms are not assured. Management provided no specific earnings or revenue guidance.
- Entitlements and litigation: Newhall approvals remain challenged by two non-settling petitioners, including challenges to 2017 reapprovals. Outcomes and potential effects on timing, cost, or development scope remain uncertain.
- San Francisco Shipyard environmental transfer: Approximately 408 acres remain Navy-owned pending the FOST process. Additional sampling and investigations following allegations about a contractor’s sampling work may delay land transfers and development.
- Mall venture: The mall site had not been conveyed by year-end, and the company was evaluating the project’s viability and alternative site configurations. Termination could require repayment of the $65.1 million Macerich note, accrued interest and termination fees; the filing says the future plan and impact were uncertain.
- Concentration and related parties: Lennar and affiliates accounted for approximately $93.4 million, or 67%, of 2017 consolidated revenue. Lennar is also a major owner, homebuilder, service customer and counterparty; related-party transactions and governance conflicts merit attention.
- Development and environmental exposure: Costs, permits, litigation, contamination, water availability, construction delays, natural disasters and California-specific economic or regulatory conditions could affect development schedules, costs and returns.
- Tax and accounting: The company recorded a $105.6 million benefit from reducing its TRA payable after the Tax Act. The company estimated a further $20–$25 million retained-earnings increase on adopting the new revenue standard in 2018; actual adoption effects may differ.
- Other commitments: The Newhall settlement liability was $50.7 million, with estimated maximum monetary payments under the guaranty of $58.7 million. Reported contractual obligations totaled $1.06 billion, excluding the Macerich note and related accrued interest from that table.
The independent auditor issued an unqualified opinion on the financial statements. The company was newly public and, under the applicable transition relief, did not include management’s assessment or an auditor attestation on internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating results from the $105.6 million TRA adjustment and review the diluted EPS calculation, given the large noncontrolling interests.
- Reconcile consolidated cash, debt, available revolver capacity, debt maturities and the cash requirements of the development plan.
- Track the Macerich mall venture’s status, including potential termination, repayment exposure and any revised development plan.
- Monitor Navy sampling, FOST timing and remaining land transfers at the Shipyard, alongside the pending Newhall legal challenges and settlement spending.
- Assess related-party revenue concentration, Lennar’s influence, Great Park priority distributions and the terms of the TRA.
- Confirm actual revenue-standard adoption effects and whether the estimated $20–$25 million retained-earnings adjustment was realized.